Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

November 09, 2006 21:03 ET

CORRECTION FROM SOURCE: Gateway Casinos Income Fund Reports Record Third Quarter Financial Results

BURNABY, BRITISH COLUMBIA--(CCNMatthews - Nov. 9, 2006) - The following release corrects and replaces the release issued on November 9, 2006 at 5:13 PM ET. The figures in the Financial Performance table in the MD&A, Q3, 2006, Expenses read 23,407 is replaced with 23,425 and EBITDA read 16,024 is replaced with 16,006.

Gateway Casinos Income Fund (the "Fund" or "Gateway") (TSX:GCI.UN), one of the largest casino operators in Western Canada, today reported its financial results for the three- and nine-month periods ended September 30, 2006.

Q3 2006 Highlights

- Total revenue increased to $39.4 million, from $25.5 million in Q3 2005

- Strong revenue growth at Burnaby, Cascades and Lake City facilities

- EBITDA(1) increased to $16.0 million, compared with $11.3 million in Q3 2005

- The Fund generated distributable cash(1) of $14.8 million, or $0.476 per unit, and declared distributions totaling $11.1 million, or $0.3585 per unit

Consolidated revenue for the third quarter of 2006 increased 54.5% to $39.4 million, compared with $25.5 million in the third quarter of 2005. The majority of the increase reflects the impact of the acquisition of the Cascades Langley Casino and Hotel ("Cascades"), which contributed $10.6 million in revenue for the third quarter. The increase is also attributable to the continued growth of slot machine revenue at the Fund's Burnaby and Lake City Casinos. Revenue growth was partially offset by a strike at the Palace Casino in Edmonton, which began on September 9, 2006.

"Our operations generally performed strongly during the third quarter, resulting in continued organic growth in our key financial measures," said Dave Gadhia, CEO of Gateway Casinos G.P. Inc. "We are especially pleased with the performance of Cascades, as third-quarter revenue was almost 10% ahead of our original projections. It was also another solid quarter for our Lake City and Burnaby facilities, which recorded strong year-over-year revenue increases. While we are disappointed we have not reached an agreement to settle the strike at the Palace Casino, we are pleased with how the casino has performed to date and continue to believe our contingency plan will largely mitigate any impact to the Fund's earnings."

For the three months ended September 30, 2006, the Fund generated EBITDA of $16.0 million, or 40.6% of revenue, compared with $11.3 million, or 44.3% of revenue, in the third quarter of 2005. After amortization and net interest expense, the Fund generated net earnings of $11.7 million, or $0.38 per basic unit, in the third quarter. This compares with net earnings of $10.2 million, or $0.39 per basic unit, in the same period last year.

During the quarter, the Fund generated distributable cash of $14.8 million, or $0.476 per unit, and paid distributions of $11.1 million or $0.3585 per unit, representing 75.3% of cash available for distributions.

For the nine months ended September 30, 2006, consolidated revenue increased 29.8% to $99.4 million, compared with $76.6 million for the comparable period last year. For the fiscal year to date, the Fund's net earnings were $31.6 million, an increase of 17% compared with the $27.0 million recorded in the same period last year.

(1) EBITDA and distributable cash are non-GAAP measures. Readers are directed to the Fund's Management Discussion and Analysis for definitions and cautionary statements.

Federal Finance Department's Proposed Tax on Income Trust Distributions

On October 31, 2006 the Government of Canada (Department of Finance) announced a proposal to tax the distributions of income trusts, effectively treating income trusts as corporations for tax purposes. The proposed tax would be effective on January 1, 2007 for income trusts created after October 31, 2006. For all existing income trusts, including the Fund, the tax would not be effective until January 1, 2011, providing a four-year transition period. Although full details are not yet available, the proposal indicated that, beginning in 2011, existing income trusts would face a tax of 31.5% on distributions. Distributions paid to unitholders would then be treated as dividends in the hands of unitholders and subject to the dividend tax rules. If this plan is implemented it may have an impact on cash available for distribution. In addition, it may adversely impact the marketability of the Fund's units and, therefore, the ability of the Fund to undertake future financings and acquisitions.

"Despite this, it is unfortunate that the Conservative government has chosen to introduce such a draconian measure to deal with the perceived issues created by the income trust structure, after campaigning on a promise of not taxing income trusts," said Mr. Gadhia. "Many people and businesses made investment decisions on the basis of this promise. If it was the government's primary intention to stem the tide of income trust conversions in the Canadian market, as it appears to have been, there were a number of alternatives available to them that would not have had the dramatic impact on the savings of the millions of Canadians that rely on income trusts to supplement their income and provide for their retirement. Management and the Board of the Fund strongly recommend that all individual unitholders contact their local Member of Parliament to express their displeasure at the government's decision."

"It is important for all of our unitholders to understand that, although the tax proposal has negatively impacted the market value of the Fund's units, it does not change our business model or our growth plans," said Mr. Gadhia. "The Fund continues to be a strong cash generator with sound business fundamentals and will experience growth from the expected increase in demand for gaming and from the redevelopment of the Burnaby Casino and expansions of three of the four Lake City Casinos. The proposed tax changes do not impact these plans, as debt facilities are in place to finance these projects and we have no near-term need to obtain additional equity capital."

The Trustees of the Fund and senior management will continue to monitor this development and assess the longer-term implications to the Fund.

Notice of Conference Call

Management of Gateway Casinos Income Fund will host a conference call on Friday, November 10, 2006 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern) to discuss third quarter 2006 results. The call can be accessed by dialing 1-877-888-7019 or 416-695-5259. A replay will be available until November 17, 2006 at: 1-888-509-0081 or 416-695-5275 (access code: 634549). The call will also be webcast and will be accessible by going to either www.gatewaycasinosincomefund.com or www.InvestorCalendar.com.

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 and Cascades Langley Casino and Hotel 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 AND NINE MONTHS ENDED SEPTEMBER 30, 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 November 9, 2006, and should be read in conjunction with the unaudited interim consolidated financial statements of Gateway Casinos Income Fund (the "Fund") for the three and nine months ended September 30, 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 ("GAAP")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 31,110,362 units outstanding as at September 30, 2006 and as at the date of this management's discussion and analysis. On May 19, 2006, the Fund issued 4,692,675 units in connection with the acquisition of the Cascades Langley Casino and Hotel ("Cascades Casino") discussed below.

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 seven casinos in Western Canada; six in British Columbia and one in Alberta. The location of each casino and the number of slot machines and table games at September 30, 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
Cascades Casino Langley, B.C. 539(1) 26(2)
Lake City Casinos
Kamloops Kamloops, B.C. 300 8
Kelowna Kelowna, B.C. 342 10
Penticton Penticton, B.C. 228(3) 9(4)
Vernon Vernon, B.C. 210 8

Palace Casino Edmonton, AB 706(5) 31(6)

(1) On September 14th, Cascades Casino added 17 slot machines.
(2) The Cascades Casino also operates an 8-table poker room.
(3) Four additional slot machines were added to the Penticton Casino
on August 29th.
(4) Two poker tables were introduced at the Penticton Casino in the second
quarter of 2006.
(5) 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.
(6) 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 payout 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.

Acquisition of Cascades Langley Casino and Hotel

On April 18, 2006, the Partnership, Gateway Casinos Inc. ("GCI") and Gateway Langley Holdings Ltd. ("GLHL") entered into an Acquisition Agreement to sell substantially all of the operating assets related to the Cascades Langley Casino and Hotel to the Partnership (the "Acquisition"). The transaction was initially valued at approximately $106.3 million and closed on May 19, 2006. The purchase price was satisfied through the issue of 4,692,675 units of the Fund and $32.6 million in cash from the net proceeds of an offering by the Fund (the "Offering") of 5.35% Convertible Extendible Unsecured Subordinated Debentures (the "Debentures"). Under Canadian GAAP, where equity is issued in connection with an acquisition, the acquirer must value the units on the basis of the quoted market price of the units two days before and after the acquisition was announced. Using this methodology, for accounting purposes the units issued have been valued at $16.82 per unit, compared to the value of $15.70 per unit used for the determination of the purchase price, resulting in a value of $112.7 million for accounting purposes.

The agreement provides for an adjustment to the purchase price in early 2007, based on the actual distributable cash (see definition of Distributable Cash) generated by Cascades in the 12 months ended December 31, 2006. If the actual distributable cash is less than the estimated distributable cash of $10.8 million, 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. 676,910 of the units issued to GCI, and any future cash distributions thereon, are being held in escrow until settlement of the purchase price adjustment.

Based on the results of Cascades to September 30, 2006, management believes that the distributable cash generated by Cascades in the full calendar year of 2006 will be in excess of the estimated $10.8 million and will likely be higher than the amount necessary for the purchase price to be increased by the maximum of $10.63 million. The final adjustment will be determined based on the audited results of Cascades for 2006.

The acquisition provided the Fund with a number of key benefits. These included:

- Immediate accretion to distributable cash;

On closing of the Acquisition the Board of Trustees of the Fund approved an increase in the Fund's monthly distribution to $0.1195 per unit from $0.115 per unit;

- Enhanced geographic and operational diversification;

Cascades is located within the GVRD but is approximately 40 km east of the Burnaby Casino. As a result, Cascades principal target market is in the Fraser Valley region, as opposed to the Burnaby Casino's principal targeted markets of the City of Vancouver and the suburban cities of the GVRD adjacent to the City of Vancouver. In addition, Cascades has new food and beverage operations as well as hotel, entertainment and convention centre amenities, which will provide operational diversity to the Burnaby Casino.

- Future growth in distributable cash as the operations continue to mature;

Management believes that Cascades provides for potential growth in distributable cash as the operations continue to mature. Since the Cascades Casino opened in May 2005 in its new market, operating results have improved as local market awareness of the entertainment experience has increased. In addition, based upon management's experience with the other casinos that they have opened or extensively renovated, operational results typically require a period of approximately 12 to 18 months to reach maturity. Management also believes that hotel and convention centre operations typically have a longer period to maturity than casino operations; and

- An attractive acquisition opportunity with minimal integration risk, as Cascades has been operated by Gateway's management team since inception.

As part of the transaction, GCI indirectly retained the right to receive approximately $27.4 million from the British Columbia Lottery Corporation (the "BCLC") under its Facility Development Commission ("FDC") program relating to costs incurred in connection with the construction and development of Cascades. In consideration, the Partnership has agreed to assign the FDC receivable from the BCLC to GCI by way of a note payable equal to the amount of the FDC receivable. The note is unsecured and is repayable as, and when, the Partnership receives a recovery of the FDC receivable from Cascades, subject to the Partnership's preferential right to recover any eligible maintenance capital expenditures at Cascades prior to repayment under the note. Due to its contingent nature, the note is not reflected on the Fund's balance sheet.

GCI also agreed to fund the completion of the construction of a 500-stall parkade. The total cost of the project is estimated at approximately $9.0 million, of which approximately $4.6 million had been incurred at closing. This project is estimated to be 100% eligible for recovery under FDC and the Partnership has agreed to assign the related FDC receivable to GCI, by way of a similar note payable as with the construction FDC receivable.

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, divided into the win.



Financial Performance
Summary of Quarterly Results
(C$ in thousands except per unit figures.)

--------------------- --------------------------- ------
2006 2005 2004
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
--------------------- --------------------------- ------
Revenue
Table games
revenue 9,314 8,656 7,116 7,175 6,916 7,043 7,517 7,495
Slot machines
and other
electronic
games 25,134 20,982 17,027 16,902 16,959 16,839 15,684 14,729
Hotel revenue 420 214 - - - - - 692
Other revenue 4,563 3,454 2,570 2,044 1,641 1,982 2,025 1,351
--------------------- --------------------------- ------
Total revenue 39,431 33,306 26,713 26,121 25,516 25,864 25,226 24,267

Expenses 23,425 20,439 15,992 16,271 14,207 14,897 14,899 15,740
--------------------- --------------------------- ------
EBITDA(1) 16,006 12,867 10,721 9,850 11,309 10,967 10,327 8,527
--------------------- --------------------------- ------
--------------------- --------------------------- ------

Net earnings 11,661 10,759 9,197 8,716 10,175 8,194 8,668 6,249
--------------------- --------------------------- ------
--------------------- --------------------------- ------
Basic earnings
per unit 0.38 0.38 0.35 0.33 0.39 0.31 0.33 0.24
--------------------- --------------------------- ------
--------------------- --------------------------- ------
Diluted earnings
per unit 0.37 0.37 0.35 0.33 0.39 0.31 0.33 0.24
--------------------- --------------------------- ------
--------------------- --------------------------- ------

Distributable
Cash(2) 14,800 11,553 10,263 8,940 10,536 9,956 9,367 9,299
--------------------- --------------------------- ------
--------------------- --------------------------- ------
Per unit 0.476 0.404 0.389 0.338 0.399 0.377 0.355 0.351
--------------------- --------------------------- ------

(1) EBITDA is not a defined term under Canadian GAAP. See discussion under
"EBITDA" and "Net Earnings".

(2) For definition of Distributable Cash see Liquidity section below.


Results of Operations

The Fund's results of operations include the results of the Burnaby Casino, the Lake City Casinos and the Palace Casino from the Fund's inception, and the results of Cascades Casino from its acquisition date of May 19, 2006.

Revenue

Gateway's revenue is primarily earned through fees paid by the British Columbia Lottery Corporation (BCLC) for operating the six 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 ended Nine months ended
C$ in thousands September 30, September 30,
% %
2006 2005 change 2006 2005 change
------------------------- -------------------------
Table games revenue 9,314 6,916 25,086 21,476
Slot machines and
other electronic games 25,134 16,959 63,143 49,481
Hotel revenue 420 - 634 -
Other revenue 4,563 1,641 10,586 5,648
------------------ -----------------
39,431 25,516 54.5% 99,449 76,605 29.8%
------------------ -----------------


Total revenue in the third quarter of 2006 was up $13.9 million, or 54.5% from the same period in 2005. The majority of the increase was due to a full quarter contribution from Cascades of $10.5 million, as well as continued growth of slot machine revenue in Burnaby and Lake City, which increased $2.4 million, or 16%, over the same quarter in 2005. This was partially offset by the strike that commenced at Palace Casino on September 9, 2006, which caused total revenue for the quarter at the Palace Casino to be down 6.6% compared to the third quarter last year. A full discussion of the impact of the strike at the Palace Casino has been included in the Operating Segments section.

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



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

Table Games Revenue 9,314 8,656 7,116 7,175 6,916 7,043 7,517
Slot machines and other
electronic games
revenue 25,134 20,982 17,027 16,902 16,959 16,839 15,684
Hotel Revenue 420 214 - - - - -
Other Revenue 4,563 3,454 2,570 2,044 1,641 1,982 2,025
-------------------- ---------------------------
39,431 33,306 26,713 26,121 25,516 25,864 25,226
-------------------- ---------------------------


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



Expenses

Three months ended Nine months ended
C$ in thousands September 30, % September 30, %
2006 2005 change 2006 2005 change
---------------------------------------------------

Corporate and
general administration 1,575 686 4,338 3,331
Cost of food &
beverage services 2,754 504 4,711 1,649
Human resources 14,260 10,460 37,952 31,103
Marketing and
promotions 1,332 870 4,526 2,494
Occupancy 979 780 2,569 2,252
Hotel operating
expenses 216 - 329 -
Casino operating
expenses 2,309 907 5,430 3,173
----------------- ----------------
23,425 14,207 64.9% 59,855 44,002 36.0%
----------------- ----------------

Percentage of
total revenue 59.4% 57.8% 60.2% 57.4%
----------------- ----------------


Total expenses for the third quarter were $9.2 million higher than the same quarter in 2005, of which $6.5 million were incurred at Cascades. Excluding Cascades, total expenses increased by $2.7 million, or 19% compared to third quarter of 2005. This represents 58.5% of revenue in Q3 of 2006 versus 57.8% compared to the same period in 2005.

Human resources increased by $3.8 million of which $3.1 million was incurred at Cascades. The remaining increase resulted from additional food & beverage operations, scheduled wage increases and the impact of higher activity than the third quarter of 2005. These costs were slightly offset by a reduction in the human resources cost at Palace due to the strike that commenced on September 9th. This is discussed further in our Operating Segments section below.

Excluding costs at Cascades, the net increase of $230,000 in marketing and promotions expenses is primarily due to an increase in the joint marketing fee paid to the BCLC, which rose from 0.75% of the win from the Burnaby Casino to 1.5% beginning April 1, 2006, as well as expenses related to the BC Gold Card player points program that began in Q1 2006. As discussed in our 2005 MD&A, 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. The increase in marketing and promotions expenses was offset by a one-time joint marketing fee reimbursement from BCLC of $906,000 related to amounts collected in the prior year from the Burnaby Casino, Cascades and the Lake City Casinos.

The following table compares the expenses of the third quarter of 2006 with each of the last six quarters.



C$ in thousands Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
------------------------ ------------------------------
Corporate and
general
administration 1,575 1,649 1,114 1,112 686 1,431 1,214
Cost of food &
beverage services 2,754 1,136 821 867 504 564 581
Human resources 14,260 13,041 10,650 11,062 10,460 10,362 10,281
Marketing and
promotions 1,332 1,958 1,236 1,017 870 779 844
Occupancy 979 822 770 875 780 758 715
Hotel operating
expenses 216 113 - - - - -
Casino operating
expenses 2,309 1,720 1,401 1,338 907 1,003 1,264
------------------------ ------------------------------
23,425 20,439 15,992 16,271 14,207 14,897 14,899
-------------------------------------------------------
Percentage of
total revenue 59.4% 61.4% 59.9% 62.3% 55.7% 57.6% 59.0%
-------------------------------------------------------


Total expenses in the third quarter of 2006 were approximately $3.0 million higher than the second quarter of 2006. The majority of this increase came from a full quarter of operations from Cascades, which incurred $6.6 million in total expenses in the quarter versus $3.5 million for the period from May 19 to June 30, 2006. Excluding the incremental expenses from Cascades, total expenses decreased by 1% from the second quarter of 2006, as shown in the table below.



Q3/06 Q2/06(1)
Total Total
Q3/06 Q3/06 Expenses Expenses
Total Cascades Excluding Excluding %
Expenses Only Cascades Cascades change
-------------------------------------------------------
Corporate and
general
administration 1,575 114 1,461 1,535
Cost of food &
beverage services 2,754 1,846 908 892
Human resources 14,260 3,120 11,140 10,906
Marketing and
promotions 1,332 342 990 1,609
Occupancy 979 201 778 752
Hotel operating
expenses 216 216 - -
Casino operating
expenses 2,309 774 1,535 1,275
----------------------------------------------
23,425 6,613 16,812 16,969 -0.93%
----------------------------------------------

(1) Figures as presented in the second quarter MD&A of 2006.


Excluding Cascades, the net decrease in marketing and promotions is due to the one-time joint marketing fee reimbursement from BCLC mentioned above. The rise in casino operating expenses is discussed below in our Operating Segments section.

EBITDA and Net Earnings

EBITDA is not a defined term under Canadian GAAP, 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 gain or loss on interest rate swap contract ("EBITDA") of $16.0 million for the third quarter of 2006, resulting in an EBITDA margin of 40.6%. This is slightly below the 44.3% achieved in the third quarter of 2005 and the 41.3% recorded for fiscal 2005 due mainly to the inclusion of Cascades, which operates at a lower overall margin than the Burnaby Casino due to the non-gaming amenities provided at Cascades.

After amortization and net interest expense, the Fund generated net earnings of $11.7 million, or $0.38 per unit, for the third quarter. This compares to $10.2 million, or $0.39 per unit, in the third quarter of 2005.

The reconciliation between EBITDA and net earnings is:



C$ in thousands Three months ended Nine months ended
2006 2005 2006 2005
------------------------- ------------------------

EBITDA 16,006 11,309 39,594 32,603

Interest income
on secured loans 3,806 2,450 9,069 7,271
Income allocation on
Class A Partnership
Units (3,812) (2,453) (9,081) (7,280)
Interest expense, net (1,222) (821) (2,844) (2,331)
Unrealized loss on
interest rate swap
contracts (562) 493 223 (424)
Gain (Loss) on sale
of property and
equipment - 207 (147) 207
Amortization (2,555) (1,010) (5,197) (3,010)
------------------------- ------------------------
Net Earnings 11,661 10,175 31,617 27,036
------------------------- ------------------------


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

The reduction in the per unit amount in the third quarter of 2006 was primarily due to the impact of the unrealized loss on interest rate swaps during the quarter. This non-cash item is the result of revaluing the interest rate swaps at the end of each quarter based on the then current interest rates. The change in interest rates over the period resulted in a $1.1 million swing from the third quarter of 2005 to the third quarter of 2006. Had the Fund reported a similar gain in the third quarter of 2006, versus an unrealized loss of $562,000, net earnings per unit would have been approximately $0.51 per unit.

Operating Segments

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

Although the Consolidated Statements of Earnings for the three and nine months ended September 30, 2006 include corporate and general administration expenses, interest income on secured loans, income allocation on Class A Partnership Units, interest expense, unrealized gain/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 ended Nine months ended
C$ in thousands Sept 30, % Sept 30, %
2006 2005 Change 2006 2005 Change
------------------------- -------------------------

Revenue
Table games revenue 4,131 4,090 12,852 13,110
Slot machine revenue 7,937 6,827 22,893 19,985
Food & beverage revenue 677 129 1,998 384
Other revenue 294 216 738 948
------------------------- -------------------------
13,039 11,262 15.8% 38,481 34,427 11.8%
------------------------- -------------------------

Operating expenses
Human resources 4,247 3,872 12,421 11,258
Occupancy 105 94 318 290
Food & beverage 317 48 917 161
Other operating
expenses 1,287 1,102 4,153 3,494
------------------------- -------------------------
5,956 5,116 16.4% 17,809 15,203 17.1%
------------------------- -------------------------

Operating earnings
before amortization 7,083 6,146 20,672 19,224
---------------- -----------------
---------------- ----------------


Total revenue at the Burnaby Casino in the third quarter of 2006 increased $1.8 million or 15.8%, over the same period in 2005. This was due primarily to increased slot machine revenue of $1.1 million, which reflected the continuation of a general growth trend that the Fund experienced throughout 2005. Table games revenue was comparable to the same quarter last year and had almost identical drop and hold percentage. Food and beverage revenue increased by $548,000 over the same quarter last year as a result of taking over the operation of the food and beverage services in October 2005 that were formally operated by a third party.

Total expenses for the third quarter of 2006 were approximately $839,000 higher than the same quarter last year. Human resources costs rose by $374,000 over third quarter of 2005 due to wages related to the food & beverage operations, scheduled wage increases that came into effect January 1, 2006 and the impact of the higher casino activity. The additional food & beverage operations added $222,000 in human resources costs in the third quarter of 2006.

Other operating expenses had a net increase of $185,000. This was due primarily to an increase in the BCLC joint marketing fee from 0.75% to 1.5%, on April 1, 2006, which amounted to an increase in expenses of $310,000. Additionally, the cost of the BCLC Gold Card player points amounted to $179,000 and we incurred other marketing and costs associated with the higher activity level compared to third quarter of 2005. Offsetting these costs was a one-time BCLC joint marketing fee reimbursement of $480,000.

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



C$ in thousands
Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
-------------------- ----------------------------
Revenue
Table games revenue 4,131 4,448 4,273 4,107 4,090 4,363 4,658
Slot machine revenue 7,937 7,766 7,190 7,053 6,827 6,724 6,434
Food & beverage
revenue 677 669 652 635 129 133 122
Other revenue 294 215 229 (6) 216 295 437
-------------------- ----------------------------
13,039 13,098 12,344 11,789 11,262 11,515 11,651
-------------------- ----------------------------

Operating expenses
Human resources 4,247 4,158 4,017 4,039 3,872 3,615 3,771
Occupancy 105 105 108 156 94 95 101
Food & beverage 317 314 286 330 48 55 57
Other operating
expenses 1,287 1,646 1,220 1,129 1,102 1,096 1,299
-------------------- ----------------------------
5,956 6,223 5,631 5,654 5,116 4,861 5,228
-------------------- ----------------------------

Operating earnings
before amortization 7,083 6,875 6,713 6,135 6,146 6,654 6,423
-------------------- ----------------------------
-------------------- ----------------------------


Slot machine revenue increased slightly during the third quarter of 2006, with average win per day per machine for the quarter up 1.1% over the second quarter of 2006. Table games revenue decreased by $317,000 over the second quarter of 2006, which reflected a 3.5% decrease in table drop while maintaining the same win percentage. The decrease in table drop can be attributed to the operation of a seasonal casino at the Pacific National Exhibition (PNE) during the last two weeks in August of each year, similar to what the casino experienced last year.

Total expenses in the third quarter of 2006 were $267,000 lower than the second quarter of 2006. Excluding a $480,000 one-time BCLC marketing fee reimbursement, other operating expenses were $121,000 higher than the second quarter of 2006 due in part to higher activity levels.

Operating earnings for the third quarter of 2006 came in at 54.3% of revenues, compared with 52.5% in the second quarter of 2006 and 54.9% for third quarter of 2005.

Cascades Langley Casino & Hotel



Three months ended For the period
C$ in thousands Sept 30, % May 19 to Sept 30, %
2006 2006
Actual Projected Change Actual Projected Change
-------------------------- ------------------------

Revenue
Table games revenue 2,600 2,866 4,015 4,205
Slot machines revenue 5,844 4,733 8,502 6,927
Food & beverage
revenue 1,336 1,430 2,035 1,670
Hotel 420 569 634 1,226
Other revenue 354 - 467 100
-------------------------- ------------------------
10,554 9,598 9.9% 15,653 14,128 10.8%
-------------------------- ------------------------

Operating expenses
Human resources 3,120 3,198 5,256 5,214
Occupancy 201 240 271 330
Food & beverage 1,846 1,690 2,089 1,918
Hotel expenses 216 239 329 347
Other expenses 1,116 1,345 1,910 2,049
-------------------------- ------------------------
6,499 6,712 -3.2% 9,855 9,858 0.0%
-------------------------- ------------------------

Operating earnings
before amortization 4,055 2,886 5,798 4,270
------------------- ------------------
------------------- ------------------


Reported results for Cascades represent the 135-day period from acquisition on May 19, 2006 to September 30, 2006. Projected results are based on the 2006 budgeted figures for Cascades on which the initial purchase price was determined.

Overall, operations of the Cascades facility have continued to exceed projections since they were acquired by the Partnership. Total revenue exceeded projected revenue by 9.9% in the quarter and 10.8% since acquisition, driven by strong casino revenues. Table games were below projections but slot machine revenue exceeded expectations by $1.1 million, or 23.5%, in the third quarter and $1.5 million, or 22.7%, since acquisition. Average win per machine per day for the third quarter was $484, compared to an initially projected rate of $388 per machine per day. Since acquisition, average win per machine per day has been $477, compared to an expected rate of $387 per machine per day.

Hotel and food and beverage revenue were generally in line with expectations. For the third quarter, the hotel achieved an average occupancy rate of 54.4% and average room rate of $109, compared to occupancy of 60% and an average room rate of $106 during the previous quarter.

Operating expenses for the period were $212,000 lower than expectations due to the one-time BCLC marketing fee reimbursement of $270,000. Excluding this credit, operating expenses would have totaled $6.7 million, which is comparable to expectations for the quarter. For the 135-day period, excluding this credit, total operating expenses would have been $10.1 million or 2.7% higher than expectations, which was due mainly to higher activity levels in the casino.

Since the opening of the facility in May 2005, the high-limit table games section and the craps table had significantly underperformed expectations. As discussed in our MD&A for the second quarter of 2006, during July the high-limit area was converted into a specialty poker games area with Four Card Poker, Three Card Poker, Texas Shootout Poker and Pai Gow Poker. Additionally, the craps table was removed and as of the end of September, we have completed renovations and added 17 slot machines, bringing the total number of machines at Cascades to 539.

The additional parking provided by the new 500-stall parkade will allow for the reopening of the 420-seat Summit Theatre and maximization of the convention centre, both of which will provide increased traffic for the casino. With the immediate success of the casino and the lack of sufficient parking, the theatre was used only on a limited basis. Once the parkade is completed in December 2006, Cascades will run regular live entertainment designed to bring in additional customers.

Lake City Casinos



Three months ended Nine months ended
C$ in thousands September 30, September 30,
% %
2006 2005 change 2006 2005 change
---------------------------- -------------------------
Revenue
Table games
revenue 1,197 1,140 3,243 3,114
Slot machines
revenue 8,877 7,579 24,220 21,290
Food & beverage
revenue 643 208 1,589 553
Other revenue 221 83 509 428
--------------------------- --------------------------
10,938 9,010 21.4% 29,561 25,385 16.4%
--------------------------- --------------------------

Operating expenses
Human resources 4,253 3,980 12,178 11,831
Occupancy 385 369 1,077 1,007
Food & beverage 277 127 702 352
Other operating
expenses 1,064 847 3,333 2,398
FDC expense recovery (604) (721) (1,606) (1,967)
--------------------------- --------------------------
5,375 4,602 16.8% 15,684 13,621 15.1%
--------------------------- --------------------------

Operating earnings
before amortization 5,563 4,408 13,877 11,764
------------------- -------------------
------------------- -------------------


Revenue at the Lake City Casinos for the third quarter of 2006 was up approximately 21.4% 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 experienced throughout 2004 and 2005. On June 1, 2006, Penticton opened a 2-table poker area that operates four days per week. Beginning in July, the poker tables also opened for occasional poker tournaments on weekdays, which will run to mid-November. Poker contributed revenue of $10,000 for the month of June and $51,000 for the third quarter. Poker revenue is expected to increase as the players improve their confidence and experience with the game. The rise in other revenue is consistent with increased activity at the casinos and the associated fees from banking machine services, parking and foreign exchange conversions.

The food & beverage revenue and expenses increased by $435,000 and $150,000, respectively, over the third quarter of 2005, resulting from the takeover of an existing restaurant and liquor service at the Penticton Casino previously operated by a third party. In addition, during the first quarter of 2006 the Kelowna Casino obtained a license to serve liquor on the gaming floor.

The rise in other operating costs for the quarter is related to $160,000 of costs associated with the BC Gold Card player points program and $130,000 in promotion and complimentary costs. Additionally, the overall rise in operating costs reflects increased supplies costs associated with the integrated voucher system (or "IVS") technology plus related training costs. These were partially offset by a one-time BCLC marketing fee reimbursement of $155,000.

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



C$ in thousands
Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
----------------------- -----------------------------
Revenue
Table games
revenue 1,197 1,044 1,002 975 1,140 1,014 960
Slot machines
revenue 8,877 8,055 7,288 7,209 7,579 7,183 6,528
Food & beverage
revenue 643 533 413 280 208 178 166
Other revenue 221 151 136 7 83 226 120
----------------------- -----------------------------
10,938 9,783 8,839 8,471 9,010 8,601 7,774
----------------------- -----------------------------

Operating expenses
Human resources 4,253 4,039 3,886 4,241 3,980 3,951 3,900
Occupancy 385 334 358 387 369 338 300
Food & beverage 277 241 184 147 127 114 111
Other operating
expenses 1,064 1,193 1,075 1,141 847 764 786
FDC expense
recovery (604) (662) (340) (483) (721) (663) (582)
----------------------- -----------------------------
5,375 5,145 5,163 5,433 4,602 4,504 4,515
----------------------- -----------------------------

Operating
earnings before
amortization 5,563 4,638 3,676 3,038 4,408 4,097 3,259
----------------------- -----------------------------
----------------------- -----------------------------


Total revenue increased by $1.2 million or 11.8% over the second quarter of 2006. The majority of the increases came from a rise in slot machine revenue, which increased by $822,000 or 10.2%, while table revenue contributed an additional $153,000 or 14.7%. This is consistent with the peak summer months at the Lake City Casinos.

Total operating expenses in the third quarter of 2006 were comparable to the second quarter of 2006 if the one-time BCLC marketing fee reimbursement is excluded. Without the BCLC reimbursement, other operating expenses would have been $1.2 million, which is comparable to the previous quarter. The rise in human resources expenses was due to higher labour costs associated with the seasonally high level of casino operations and the addition of 2 poker tables at Penticton in June 2006.

Overall operating earnings were $925,000 or 19.9% higher than second quarter of 2006. Excluding the one-time BCLC marketing fee reimbursement, operating earnings for the Lake City Casinos would have been $770,000 or 17% higher than the second quarter of 2006.

During the third quarter of 2006, the BCLC continued the conversion of slot machines in Penticton to IVS technology and completed the conversion of 8 machines and added 4 new slot IVS machines in the concession/bar area. By the end of September 2006, 196 of 228 slot machines had been converted, reaching an 86% conversion rate. In Vernon, an additional 12 machines were converted by the BCLC bringing the total to 177 of 210 machines. Kelowna had 18 machines converted in the quarter and converted a total of 291 of 342 machines by September 30, 2006. Kamloops had an additional 10 slot machines converted during the third quarter bringing them to a total of 251 IVS machines out of 300 machines.

Palace Casino



Three months ended Nine months ended
C$ in thousands Sept 30, % Sept 30, %
2006 2005 change 2006 2005 change
---------------------------- -------------------------
Revenue
Table Games
revenue 1,400 1,687 4,989 5,253
Slot machines
and other
electronic
games revenue 2,525 2,553 7,576 8,206
Food & beverage
revenue 865 909 2,788 3,011
Other revenue 110 95 401 323
--------------------------- --------------------------
4,900 5,244 -6.6% 15,754 16,793 -6.2%
--------------------------- --------------------------

Operating expenses
Human resources 2,268 2,360 6,975 7,086
Occupancy 288 316 904 955
Food & beverage 314 328 1,003 1,136
Other operating
expenses 776 551 2,164 1,742
--------------------------- --------------------------
3,646 3,555 2.6% 11,046 10,919 1.2%
--------------------------- --------------------------

Operating earnings
before amortization 1,254 1,689 4,708 5,874
------------------- -------------------
------------------- -------------------


Total revenue in the third quarter of 2006 was down 6.6% from the same period last year due mainly to the impact of a strike that commenced on September 9, 2006. Although revenue in the first half of 2006 was down due to the impact of a smoking ban implemented in the City of Edmonton on July 1, 2005, results had essentially returned to pre-ban levels prior to the strike.

Since the strike began, the Palace Casino has continued to operate, although on a reduced basis. During peak periods on Friday and Saturday, the casino operates 15 table games, two poker tables, and approximately 628 slot machines and electronic games on both floors of the facility and provides full operation of the Booker's Steakhouse restaurant. During non-peak periods, the casino operates on the main floor only and provides 411 slot machines and electronic games, up to 15 table games and two poker tables. The casino continues to offer live entertainment on weekends.

For the pre-strike months of July and August, table games revenue were down 6.9% compared to the same months in 2005 due entirely to significant wins of a single high-limit player which is consistent with the fluctuations of table games. Slot revenue for the same period was 9.7% higher than July and August of 2005, which was reflected in the 8.5% rise in win per day per machine during these months. When comparing September to same month last year, table revenue was down 36.7% and slot revenue was down 23.5%. Since the beginning of the strike, total revenue at the Palace Casino is down approximately 45% from the same period of last year.

Expenses for the months of July and August were 5.6% higher than comparable months in 2005. Since the beginning of the strike, labour expenses decreased approximately 25% from the same period of last year and the Fund expects to see further reductions in labour expenses as casino management continues to improve the efficiency of the reduced operations.

Although the term of the strike and the financial impact to the Fund cannot be estimated with any certainty at this time, as the Palace casino represents only 13% of consolidated revenue and 11% of consolidated EBITDA, management believes that its contingency plan will largely mitigate any potential impact to the Fund's EBITDA and net earnings, and does not anticipate any changes to its monthly distributions.

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



C$ in thousands

Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05
----------------------- -----------------------------
Revenue
Table games
revenue 1,400 1,748 1,841 2,092 1,687 1,665 1,901
Slot machines
and other
electronic games
revenue 2,525 2,503 2,549 2,641 2,553 2,933 2,721
Food & beverage
revenue 865 921 1,002 1,039 909 1,030 1,073
Other revenue 110 153 138 89 95 120 106
----------------------- -----------------------------
4,900 5,325 5,530 5,861 5,244 5,748 5,801
----------------------- -----------------------------

Operating expenses
Human resources 2,268 2,335 2,373 2,410 2,360 2,410 2,317
Occupancy 288 313 303 332 316 325 314
Food & beverage 314 338 351 390 328 394 414
Other operating
expenses 776 706 682 561 551 586 604
----------------------- -----------------------------
3,646 3,692 3,709 3,693 3,555 3,715 3,649
----------------------- -----------------------------

Operating
earnings before
amortization 1,254 1,633 1,821 2,168 1,689 2,033 2,152
----------------------- -----------------------------
----------------------- -----------------------------


Third quarter revenue at Palace Casino decreased by 8% from the second quarter of 2006 due primarily to the strike in September. In the months of July and August, table drop was 4% higher then the average drop of the previous three months and was trending upwards while the win percentage was comparable, excluding the impact of the single high-limit player mentioned previously. In July and August of 2006, average win per day per machine increased to $282 from an average of $254 in the second quarter of 2006. As discussed above, September's table and slot revenues were negatively impacted by the strike.

Overall expenses for July and August were on average 2.8% higher then the second quarter of 2006, which included $36,000 of legal costs associated with union negotiations. As mentioned, expenses for September did not decrease by the same percentage as our revenue due to minimum operating requirements required to maintain customer service and security and to strike-specific costs.

During the second quarter of 2006, AGLC selected the Palace Casino as a test site for the conversion of 100 slot machines to ticket-in ticket-out technology ("TITO"), which is similar to the IVS technology being used in BC. The test started on March 28, 2006 and was conducted for a 90-day period concluding June 28, 2006. In early July, the AGLC confirmed the success of the test and completed conversion and replacement of all 696 slot machines for the Palace Casino by the end of August.

Outlook

There were no significant changes to the competitive landscape in British Columbia and Alberta during the first nine months of 2006. However, the Fund continues to expect additional growth in the market from the following projects:

1. The introduction of 600 slot machines at the Hastings Racecourse in Vancouver. Although previously expected in the fourth quarter of 2005, this was delayed due to a legal action against the City of Vancouver by area residents. During the third quarter of 2006, the legal action was dismissed; however, area residents have appealed this ruling. Timing of the installation of slot machines is dependent on timing of the outcome of the latest appeal.

2. The second phase of the expansion of the Boulevard Casino in Coquitlam, which opened on September 16, includes a 1,200-seat theater, plus meeting and convention space.

3. The opening of the River Cree Resort and Casino, and the Century Casino and Hotel in Edmonton, Alberta in the fourth quarter of 2006.

4. The opening of a new 100,000 square foot casino in the Queensborough area of New Westminster. 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. This will replace an existing casino operating on a riverboat in New Westminster, which operates 362 slot machines and 18 table games. The completion date for the new facility is targeted for the fourth quarter of 2007.

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

The Hastings Racecourse is located relatively close to the Burnaby Casino and may impact our slot machine revenue. However, management believes that the level of service and other amenities at the current Burnaby Casino are highly competitive to what Hastings Racecourse will offer once open. The new Burnaby Casino will provide a much higher level of entertainment. The new Queensborough Casino is not expected to impact the Burnaby Casino, as they generally draw patrons from different market areas.

Burnaby Casino Redevelopment

As we have discussed in the past, the Fund is currently developing a new facility for the Burnaby Casino across the street from the current casino on the site of the former Radisson Hotel, purchased in 2004. The new Burnaby facility includes a 100,000 square foot casino, a full-service restaurant, a new lobby for the hotel and a convention centre, 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, an 18-table poker room, 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 80% 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 & kitchen, interior finishings for the hotel guest rooms, 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 approximately 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. The Fund estimates that approximately 80% of the total budget of $150 million, including the cost of the acquisition of the Villa Hotel, will be eligible for recovery under FDC. Subsequent to the end of the quarter the Fund submitted its budget, allocated amongst the various project components, to the BCLC to determine the costs eligible for FDC. Once approved, which is expected during the fourth quarter, the actual percentage eligible will be determined.

Site preparation work was completed in December 2005 and piling began in March 2006. PCL began concrete forming work in May 2006 and is currently working on the parking levels under the main casino building and the foundations for the convention centre. The project is currently on time and on budget and management does not expect any material changes in either the timeframe or budget from the redevelopment.

Potential redevelopments of the Lake City Casinos

As discussed in the Fund's first quarter report, management is currently considering relocations or expansions to the Lake City Casinos. The existing Lake City Casinos were opened in 1998 through 2000, with the Kamloops Casino 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 approximately 2% per annum. The Fund believes it is an opportune time to address longer term needs and intends to make an investment in the area to capitalize on growth opportunities in these markets, ensuring its long-term commitment to each of the communities. The strategic 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. The preliminary capital cost for all three projects is estimated to be approximately $50 million which management anticipates will be 100% eligible for FDC.

Kelowna Casino

The Kelowna Casino is located in the Grand Okanagan Resort and Conference Centre. The 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. Preliminary plans envision expanding the casino to approximately 40,000 square feet, which will allow for 600 slot machines and 16 table games, as well as a 6-table poker room, a small entertainment stage and a full service restaurant.

Management is working with the owners of the Grand Okanagan to develop the expansion plans.

Once final agreements are in place, development and construction of the new space is expected to take 18 to 24 months.

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 build a new 35,000-sq ft freestanding casino with up to 450 slot machines, 10 tables and a 6-table poker room on a 1.24 acre site immediately to the north of the hotel. 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 land for the new casino was acquired in late September for $2.85 million.

The Fund is currently evaluating designers for this project and expects to award a design contract within the fourth quarter of 2006. Development and construction of the new casino is expected to take between 18 and 24 months.

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 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.

During the third quarter of 2006, the Fund finalized negotiations and entered into a long-term lease for the property. The lease has an initial term of ten years, commencing on the date that the building is complete, and provides for two renewal terms of five years each. The project is expected to take between 16 and 18 months to complete.

Palace Casino

As discussed in previous reports, two new casinos are currently being developed in the Edmonton area. Of these, only the River Cree Resort and Casino is likely to impact Gateway's operations at the Palace Casino. The Celebrations Casino and Hotel will be located northeast of Edmonton's city centre, outside of the Palace Casino's primary market area.

The new River Cree Resort and Casino, which opened on October 26, 2006, includes a 255-room, four-star Marriott hotel, an ice sports complex, a convention centre and a 62,000 square foot casino with 600 slot machines and 40 table games. The resort is located on the Enoch Cree Nation reserve on the northwest outskirts of Edmonton, less than 10 kilometres from the Palace Casino. As the casino provides essentially the same gaming products as the Palace Casino, we believe that, all things being equal, our strategic location within the West Edmonton Mall, our high levels of customer service and our established reputation and position in the market would provide the Palace Casino with a strong competitive advantage that would mitigate or prevent any significant long term impact. However, the River Cree Resort and Casino is located on native land and is therefore not subject to the smoking ban implemented in the City of Edmonton. While the River Cree have agreed to restrict smoking to approximately 30% of their facility, under an agreement with the City that relates to the provision of services to the casino, they enjoy an advantage over other casinos in Edmonton. This could lead to a permanent loss of customers at the Palace Casino, which we estimate may be up to 15%.

As disclosed on September 11, 2006, the employees of the Palace Casino, who are represented by Local 401 of the United Food & Commercial Workers Union (the "UFCW"), began a strike at the Palace Casino on September 9, 2006. As discussed in the Operating Segments section, the Palace Casino has been operating on a reduced basis since that date. Management has had regular discussions with the UFCW since the strike began, however, no formal negotiations have taken place and none are planned at this time.

The main issue is wages and benefits. Despite the fact that Palace Casino employees are among the highest paid casino workers in the Edmonton market, the UFCW's latest proposal calls for wage increases in excess of 22% over 3 years.

Management has proposed a three-year agreement that includes market place wage adjustments to a substantial number of employees in the first year, ranging between 3.9% and 27.7%. All other employees receive a 3% increase, with those at the top of the grid receiving 4%. The proposal also calls for 3% annual increases across the board in each of years two and three, with those at the top of grid level receiving 4%. In addition to this, our progressive wage grid provides for supplementary increases for hours worked that provide additional increases of 4% to 9%, depending on position. Overall, management's proposal provides wage increases that are in line with current Alberta wage settlements in the private sector that are running at an average of 3.2% per year over the contract terms. We believe that this is a fair offer that will allow our employees to continue to be among the highest paid casino employees in the market, while at the same time reflecting current market realities, including the recent impact to the Palace Casino's revenue from the smoking ban and the expected impact from the recent opening of the River Cree Casino.

Although the term of the strike and the financial impact to the Fund cannot be estimated with any certainty at this time, as the Palace Casino represents only 13% of consolidated revenue and 11% of consolidated EBITDA, management believes that its contingency plan will largely mitigate any potential impact to the Fund's EBITDA and net earnings, and does not anticipate any changes to its monthly distributions.

Proposed Tax on Income Trusts

On October 31, 2006 the Government of Canada (Department of Finance) announced a proposal to tax the distributions of income trusts, effectively treating income trusts as corporations for tax purposes. For the Fund, the proposed tax would be effective on January 1, 2011, providing a four-year transition period. Under the proposed rules, distributions would first be taxed at the Fund level, at a rate that is currently set at 31.5%. The net amount would then be paid to unitholders, where it would be treated as dividends and subject to the dividend tax rules. If this plan is implemented it may have an impact on the Fund's cash available for distribution. In addition, it may adversely impact the marketability of the Fund's units and, therefore, the ability of the Fund to undertake future financings and acquisitions.

Management is currently considering the proposal and the potential impact it may have on the Fund and its unitholders. However, the proposed changes do not impact the Fund's business model or current growth plans. The Fund continues to generate strong cash flow and has sound business fundamentals. In addition, the Fund will experience growth from the expected increase in demand for gaming and from the redevelopment of the Burnaby Casino and expansions of three of the four Lake City Casinos. The proposed tax changes do not impact these plans, as debt facilities are in place to finance these projects and the Fund has no near-term need to obtain additional equity capital.

Liquidity

Distributable Cash

Distributable cash is not a defined term under Canadian GAAP, 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 net of non-cash working capital items, less required principal payments on debt, less maintenance capital expenditures, net of recoveries from the FDC, plus proceeds from sales of assets, less any reserves determined by the Trustees to be reasonable and necessary for the operations of the Fund.

On August 4, 2006, the Canadian Securities Administrators ("CSA") issued Staff Notice 52-306, which clarified the CSA's expectations about the presentation of distributable cash of income trusts. The Fund's calculation was generally consistent with the CSA's position, with one minor exception. The CSA recommended that the calculation of distributable cash be reconciled to the most comparable GAAP measure, which they determined to be cash flow from operations after changes in net working capital items. The Fund's calculation has historically been reconciled to cash flow from operations before changes in non-cash working capital items. During the third quarter the Fund modified its definition of distributable cash to be consistent with the CSA's recommendations. This change does not impact the calculation of the Fund's distributable cash, as changes in non-cash working capital items are now added back or subtracted, as appropriate, in determining distributable cash.

Consistent with previous periods, costs incurred for the redevelopment of the Burnaby Casino and the potential Lake City redevelopment 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 FDC received will also be excluded in the calculation.

Distributable cash for the three and nine months ended September 30, 2006 and September 30, 2005 was as follows:



Three months ended Nine months ended
C$ in thousands September 30, September 30,
2006 2005 2006 2005
$ $ $ $
Cash flows from
operating activities 17,623 11,627 38,341 29,436

Changes in non-cash
working capital items (2,757) (1,142) (1,451) 827
Maintenance capital
expenditures(1) (322) (79) (1,371) (372)
FDC reimbursement
received for property
equipment purchases(2) 256 1 662 1
Payments on long-term
debt, net - (82) - (245)
Proceeds on Sale of
property and equipment - 211 61 211
--------------------------- ----------------------

Distributable cash
for the period 14,800 10,536 36,242 29,858
--------------------------- ----------------------
--------------------------- ----------------------
Per unit 0.476 0.399 1.268 1.130
--------------------------- ----------------------
--------------------------- ----------------------

(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 FDC 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 0.1150 February, 2006
February, 2006 0.1150 March, 2006
March, 2006 0.1150 April, 2006
April, 2006 0.1150 May, 2006
May, 2006 0.1150 June, 2006
June, 2006 0.1195 July, 2006
July, 2006 0.1195 August, 2006
August, 2006 0.1195 September, 2006
September, 2006 0.1195 October, 2006
--------------
$ 1.0530
--------------
--------------


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

Contractual Obligations

The Fund had the following contractual obligations outstanding at September 30, 2006.



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

Long-term debt
Promissory note 900 - 180 180 540
Credit Facilities
Long term notes 47,500 - - - 47,500
Lease obligations(1) 13,986 2,720 5,072 2,702 3,492
----------------------------------------
62,386 2,720 5,252 2,882 51,532
----------------------------------------
----------------------------------------

(1) for the Partnership's casino locations, as well as certain office
equipment and office space


Letters of Credit

As of September 30, 2006, the Fund had $17.2 million in letters of credit outstanding of which $15.0 million relates to BCLC.

Capital Resources

Capital Expenditures

Capital expenditure for the three months ended September 30, 2006 totaled $7.9 million, bringing the total for the first nine months of 2006 to $15.4 million. Of that, $11.2 million were costs associated with the redevelopment of the Burnaby casino in the first nine months of 2006, $2.8 million represents the purchase of land for the redevelopment of the Kamloops Casino and the remaining $1.4 million represents maintenance capital expenditures for Gateway's operations.

During the first nine months of 2006 the Fund received $663,000 in FDC compensation, all of which related to the capital expenditures of Lake City. The fund applies FDC recoveries to these expenditures on a first-in-first-out basis. The balance of unrecovered eligible expenditures for the Lake City Casinos at September 30, 2006 was:



C$ in thousands

Balance as at December 31, 2005 4,503
Eligible expense incurred in 2006 807
FDC Capital recoveries in 2006 (663)
FDC Expense recoveries in 2006 (2,426)
-------
Balance as at June 30, 2006 2,221
-------
-------


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 of $832,000 incurred during 2005, the majority of which we anticipate will be eligible for recovery under FDC.

Accelerated Facility Development Commission (AFDC)

Subsequent to the end of the third quarter, 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 initiative provides for an additional FDC amount equal to 2% of the gross win from the redeveloped casino property on projects approved by the BCLC after July 1, 2006, which 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.

The AFDC will apply to both the Burnaby redevelopment and the potential Lake City redevelopments. Although the Burnaby redevelopment was approved prior to July 1, 2006, the Fund has received confirmation that the project is eligible for AFDC. Accordingly, beginning with the opening of the new casino in late spring 2008, the Fund will receive total FDC for Burnaby equal to 5% of the gross win from the new casino. Once all approved eligible costs have been recovered, FDC will accumulate at a rate of 3% of gross revenue, to be applied against future eligible approved expenditures. Management anticipates that the implementation of AFDC will reduce the recovery period on the Burnaby redevelopment by approximately five years.

Bank Credit Facilities

On May 1, 2006, the Partnership 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 the Partnership'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. Management is currently negotiating to increase the Partnership's long term note shelf facility to meet this requirement.

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 Partnership 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 FDC. Mandatory principal payments will cease once the Fund's debt to EBITDA ratio falls below 2.5:1.

Subsequent to the end of the quarter, the Partnership finalized the formal loan agreement and drew $13.5 million under the construction facility. $9.0 million of this was used to repay amounts drawn against the Partnership's previous revolving credit facility to fund development costs incurred during the year. The Fund also drew $2.85 million from the revolving loan facility to pay for the purchase of the Kamloops land. 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 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 as 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 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 $872,000 (2005 - $1,961,000) to GCI for the nine months ended September 30, 2006 which is recorded in the Quarterly Financial Statements as a reduction of administration expenses. The decrease of the fee, compared to the prior year, is due to the vend-in of Cascades on May 19, 2006 and higher management and administrative expenses related to the start-up of Cascades in 2005.

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 nine months ended September 30, 2006 the Partnership earned a fee of $562,500 (2005 - $562,500), 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 nine months ended September 30, 2006, the Partnership earned a fee of $69,000 (2005 - $80,000), 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 nine months ended September 30, 2006, the Partnership earned a fee of $187,000 (2005 - $162,000), which is included in other revenue.

5. In connection with the acquisition of Cascades Langley Casino and Hotel on May 19, 2006, the Partnership entered into a contract with a subsidiary of GCI for ATM services at Cascades. 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 period of May 19, 2006 to September 30, 2006, the Partnership earned a fee of $356,000, which is included in other revenue.

6. 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.

7. In connection with the acquisition of Cascades, the Partnership agreed to assign the FDC receivable from the BCLC to GCI by way of a note payable equal to the amount of the FDC receivable. The note is unsecured and is repayable as, and when, the Partnership receives a recovery of the FDC receivable from Cascades, subject to the Partnership's preferential right to recover any eligible maintenance capital at Cascades prior to repayment under the note. From the date of acquisition of May 19, 2006 to the end of the second quarter, the Partnership collected $1.2 million in FDC recovery, of which 100% was paid to GCI.

8. In connection with the acquisition of Cascades, GCI agreed to fund the completion of the construction of a 500 stall parkade at Cascades. From the date of acquisition of May 19, 2006 to the end of the third quarter, the Partnership incurred $3.5 million of expenditures related to the construction of the parkade. During the third quarter, GCI continued to fund these construction costs and any receivable amounts at the end of the quarter is included in due from related parties on the balance sheet of the Fund. Subsequent to the end of the quarter, GCI made an additional reimbursement to the Partnership for these costs and provided an advance for estimated future costs.

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

3rd Quarter Report 2006

For the nine months ended September, 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
--------------------------------------------------------------------------
(Unaudited - expressed in thousands of dollars, except per unit and number
of units figures)
September 30, December 31,
2006 2005
$ $

Assets

Current assets
Cash and cash equivalents 29,617 22,631
Accounts receivable 1,513 596
Facility development fund receivable 121 65
Due from related parties 201 662
Inventory 312 185
Prepaid expenses 1,350 515
Prepaid employee compensation 308 145
Current portion of prepaid rent 804 804
------------ ---------------
34,226 25,603

Prepaid rent 5,348 4,957
Property and equipment 69,993 18,891
Deferred financing costs 1,767 687
Deferred development costs 20,040 4,225
Goodwill 17,182 17,182
Intangible assets 71,604 17,123
Secured loans 188,783 121,508
------------ ---------------
408,943 210,176
------------ ---------------
------------ ---------------

Liabilities

Current liabilities
Gaming revenue payable to BCLC and AGLC 8,765 7,336
Accounts payable and accrued liabilities 12,165 6,798
Distribution payable to unitholders - 3,434
------------ ---------------
20,930 17,568

Interest rate swap contract 1,073 1,297
Convertible debenture (note 6) 33,345 -
Long-term debt 57,400 48,400
Class A Partnership Units 188,783 121,508
------------ ---------------
301,531 188,773
------------ ---------------

Unitholders' Equity
Issuance of trust units - net of issue costs 101,923 22,993
Equity portion of Convertible Debenture (note 6) 1,806 -
Cumulative earnings 136,813 105,196
Cumulative distributions declared (133,130) (106,786)
------------ ---------------
107,412 21,403
------------ ---------------
408,943 210,176
------------ ---------------
------------ ---------------

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

Approved by the Board of Trustees of Gateway Casinos Income Fund

------------------------ Trustee ------------------------ Trustee

The accompanying notes are an integral 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 period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
$ $ $ $

Revenue
Table games 9,314 6,916 25,086 21,476
Slot machines
and other
electronic games 25,134 16,959 63,143 49,481
Food and beverage 3,521 1,246 8,411 3,948
Hotel revenue 420 - 634 -
Other 1,042 395 2,175 1,700
------------------------------------------------------

39,431 25,516 99,449 76,605
------------------------------------------------------

Expenses
Corporate and
general
administration 1,575 686 4,338 3,331
Cost of food and
beverage services 2,754 504 4,711 1,649
Human resources 14,260 10,460 37,952 31,103
Marketing and
promotions 1,332 870 4,526 2,494
Occupancy 979 780 2,569 2,252
Hotel operating
expenses 216 - 329 -
Casino operating
expenses 2,309 907 5,430 3,173
------------------------------------------------------

23,425 14,207 59,855 44,002
------------------------------------------------------

Earnings before
the following 16,006 11,309 39,594 32,603

Interest income on
secured loans 3,806 2,450 9,069 7,271
Income allocation
on Class A
Partnership Units (3,812) (2,453) (9,081) (7,280)
Interest
expense - net (1,222) (821) (2,844) (2,331)
Unrealized mark-to-
market gain (loss)
on interest
rate swap (562) 493 223 (424)
Gain (loss) on
sale of property
and equipment - 207 (147) 207
Amortization
Property and
equipment (1,166) (466) (2,383) (1,366)
Intangible assets (1,037) (284) (1,887) (851)
Prepaid rent (201) (201) (603) (603)
Deferred financing
costs (151) (59) (324) (190)
------------------------------------------------------

Net earnings for
the period 11,661 10,175 31,617 27,036

Cumulative
earnings - Beginning
of period 109,962 23,778 105,196 21,446
Distributions
declared during
the period (note 7) (11,154) (8,718) (26,344) (23,247)
------------------------------------------------------

Cumulative earnings -
End of period 110,469 25,235 110,469 25,235
------------------------------------------------------
------------------------------------------------------

Basic earnings
per unit .38 .39 1.10 1.02
------------------------------------------------------
------------------------------------------------------

Diluted earnings
per unit .37 .39 1.09 1.02
------------------------------------------------------
------------------------------------------------------

Weighted average
number of units 31,110,362 26,417,687 28,738,241 26,417,687
------------------------------------------------------
------------------------------------------------------

The accompanying notes are an integral 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 period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
$ $ $ $

Cash flows from
operating activities
Net earnings for
the period 11,661 10,175 31,617 27,036
Items not affecting
cash
Unrealized
mark-to-market
(gain) loss on
interest
rate swap 562 (493) (223) 424
Amortization of
property and
equipment 1,166 466 2,383 1,366
Amortization of
intangible assets 1,037 284 1,887 851
Amortization of
prepaid rent 201 201 603 603
Amortization of
deferred
financing costs 151 59 324 190
Interest accretion
on convertible
debenture 88 - 152 -
Loss on sale of
property and
equipment - (207) 147 (207)
------------------------------------------------------
14,866 10,485 36,980 30,263

Changes in
non-cash working
capital items 2,757 1,142 1,451 (827)
------------------------------------------------------

17,623 11,627 38,341 29,436

Cash flows from
investing activities
Purchase of property
and equipment (3,176) (83) (4,232) (606)
Facility development
funds received for
property and
equipment purchases 256 378 663 1,233
Proceeds on sale
of asset - 207 61 211
Issue of
secured loans - - (67,275) -
Acquisition of
Cascades assets,
net of cash received (5) - (108,865) -
Development costs (5,271) (1,492) (11,192) (2,699)
------------------------------------------------------

(8,196) (990) (190,840) (1,861)
------------------------------------------------------

Cash flows from
financing activities
Distributions paid (11,153) (8,718) (29,778) (26,846)
Mortgage payments - (82) - (245)
Due to
(from) related
parties - net (9,482) 435 462 243
Long-term
debt issued 7,000 - 9,000 -
Issuance of
convertible
debenture - - 33,600 -
Issuance of
fund units - - 78,930 -
Issuance of
Class A units
of the Fund - - 67,275 -
Financing costs - - (4) (70)
------------------------------------------------------

(13,635) (8,365) 159,485 (26,918)
------------------------------------------------------

Decrease in
cash and cash
equivalents (4,208) 2,272 6,986 657

Cash and cash
equivalents -
Beginning
of period 33,825 18,556 22,631 20,171
------------------------------------------------------

Cash and cash
equivalents -
End of period 29,617 20,828 29,617 20,828
------------------------------------------------------
------------------------------------------------------

Supplemental cash
flow information
Interest paid 879 892 2,673 2,562
------------------------------------------------------
------------------------------------------------------

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


Gateway Casinos Income Fund

Notes to Consolidated Financial Statements

September 2006

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

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 and the Cascades Langley Casino and Hotel 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., which it operated from July to October 2004 and is currently redeveloping. The Cascades Langley Casino and Hotel was acquired by the Partnership on May 19, 2006 (note 4).

Nature of operations

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 provides for a 10-year term commencing on May 4, 2005 with an option to extend for an additional 10 years, subject to certain conditions. The Casino Facility License ("CFL") from the AGLC has a three-year term that expires on October 19, 2009. Prior to the issue of the current license, the Palace Casino operated under a CFL with a one-year term, which had been renewed annually since 1996. 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 ("GAAP") 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 GAAP 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. Acquisition of Cascades Langley Hotel and Casino

Acquisitions are accounted for using the purchase method, whereby the purchase price is allocated to the fair value of assets and liabilities at the acquisition date, and the results of operations included in the consolidated financial statements from the date of acquisition. To the extent that certain acquisition agreements provide for contingent consideration based on future financial performance, these payments, if any, will be treated as additional costs of the purchase.

On April 18, 2006, the Partnership, Gateway Casinos Inc. ("GCI") and Gateway Langley Holdings Ltd. ("GLHL") entered into an Acquisition Agreement to sell substantially all of the operating assets related to the Cascades Langley Casino and Hotel to the Partnership (the "Acquisition"). The transaction was valued at approximately $106.3 million and closed on May 19, 2006. The purchase price was satisfied through the issue of 4,692,675 units of the Fund and $32.6 million in cash from the net proceeds of an offering by the Fund (the "Offering") of 5.35% Convertible Extendible Unsecured Subordinated Debentures (the "Debentures"). Under Canadian GAAP, where equity is issued in connection with an acquisition, the acquirer must value the units on the basis of the quoted market price of the units two days before and after the acquisition was announced. Using this methodology, for accounting purposes the units issued have been valued at $16.82 per unit, compared to the preliminary value of $15.70 per unit used in the prospectus, resulting in a transaction value for accounting purposes of $112.7 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 of $10.8 million, 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.

On closing, GCI indirectly retained the right to receive approximately $27.4 million from the British Columbia Lottery Corporation (the "BCLC") under its Facility Development Commission ("FDC") program relating to costs incurred in connection with the construction and development of the Cascades Langley Casino and Hotel. GCI has also agreed to fund the construction of a 500 stall parkade at a total cost of approximately $9.0 million. In consideration, the Partnership has agreed to assign the FDC receivable from the BCLC to GCI by way of an unsecured note payable. The note is repayable as and when the Partnership receives a recovery from FDC relating to the costs incurred in constructing and developing the Cascades Langley Casino and Hotel, subject to the partnership's preferential right to recover its eligible maintenance capital expenditures in priority to repayment of the note. Due to it's contingent nature, the note payable is not reflected on the Fund's balance sheet.

The net assets acquired by the Partnership at fair value are:



Cash and cash equivalents 3,850
Accounts receivable 399
Inventory 102
Prepaid expenses 96
Property and equipment 54,785
Intangible assets 56,363
Prepaid lease 1,012
Gaming revenue payable to BCLC (1,080)
Accounts payable and accrued liabilities (2,817)
---------

Total purchase price (includes costs of acquisition) 112,710
---------
---------


The allocation of the purchase price may be adjusted pending completion of the Fund's analysis of the purchase price and will be finalized for the year-end audited statements.

The intangible assets represent the value ascribed to the Casino Operational Services Agreement for the Cascades Casino, and will be amortized over the remaining term of the agreement, including the term of the renewal option which will be nineteen years.

5. 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 construction 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 (EBITDA is defined by the Fund as earnings before gain/loss on sale of assets, interest, income allocation on Class A units, amortization and unrealized gain on interest rate swap contract) 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 FDC. Mandatory principal payments will cease once the Fund's debt to EBITDA ratio falls below 2.5:1.

Subsequent to the end of September, formal loan documentation was completed and the Fund drew $13.5 million under the construction facility, of which $9.0 million was used to repay advances under the previously existing revolving term facility to finance construction costs of the Burnaby redevelopment.

6. Issue of Convertible Debentures

On April 25, 2006, the Fund issued $35 million of extendible convertible debentures. The maturity date of the debentures initially was June 30, 2006 and was automatically extended to June 30, 2011 upon closing of the Acquisition.

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.

7. Distributions to unitholders

During the nine month period ended September 30, 2006, the Fund declared distributions to its unitholders of $26,344 or $ 0.934 per unit. Subsequent to the end of the period, the Fund declared a distribution of $3,718 or $0.1195 per unit, related to the operations of September 2006. The amounts and record dates of these distributions are as follows:



Amount Per unit
$ $

Declared during the period
February 24 3,038 0.1150
March 24 3,038 0.1150
April 24 3,038 0.1150
May 25 3,038 0.1150
June 23 3,038 0.1150
July 25 3,718 0.1195
August 25 3,718 0.1195
September 25 3,718 0.1195
-------------------

26,344 0.9335
-------------------
-------------------


Amount Per unit
$ $

Declared subsequent to the period,
related to the period October 25 3,718 0.1195
-------------------

3,718 0.1195
-------------------
-------------------


8. Segmented information

The Fund has four reporting segments: the Burnaby Casino, Cascades Langley Casino and Hotel, 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 period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
$ $ $ $

Revenue
Burnaby Casino 13,039 11,262 38,481 34,427
Cascades Langley
Casino and Hotel 10,554 - 15,653 -
Lake City Casinos 10,938 9,010 29,561 25,385
Palace Casino 4,900 5,244 15,754 16,793
-------------------------- ---------------------------

39,431 25,516 99,449 76,605
-------------------------- ---------------------------
-------------------------- ---------------------------

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 7,083 6,146 20,672 19,224
Cascades Langley
Casino and Hotel 4,055 - 5,798 -
Lake City Casinos 5,563 4,408 13,877 11,764
Palace Casino 1,254 1,689 4,708 5,874
-------------------------- ---------------------------
17,955 12,243 45,055 36,862

Long-term
incentive plan
compensation
expense (374) (248) (1,123) (928)
Corporate and
general
administration (1,575) (686) (4,338) (3,331)
-------------------------- ---------------------------

16,006 11,309 39,594 32,603

Amortization
Burnaby Casino (99) (90) (298) (278)
Cascades Langley
Casino and Hotel (1,459) - (2,074) -
Lake City Casinos (579) (577) (1,703) (1,715)
Palace Casino (297) (323) (908) (967)
-------------------------- ---------------------------
(2,434) (990) (4,983) (2,960)

Interest income
on secured loans 3,806 2,450 9,069 7,271
Income allocation
on Class A
Partnership Units (3,812) (2,453) (9,081) (7,280)
Unrealized
mark-to-market gain
(loss) on interest
rate swap (562) 493 223 (424)
Amortization of
corporate
property and
equipment (39) (20) (98) (50)
Amortization of
deferred
finance costs (82) - (116) -
Interest
expense - net (1,222) (821) (2,828) (2,331)
Income tax
expense,
prior year - - (16) -
Gain on sale
of property
and equipment - 207 (147) 207
-------------------------- ---------------------------

(4,345) (1,134) (7,977) (5,567)
-------------------------- ---------------------------

Net earnings
for the period 11,661 10,175 31,617 27,036
-------------------------- ---------------------------
-------------------------- ---------------------------

Property and
equipment
additions(1)
Burnaby Casino 11 20 138 298
Cascades Langley
Casino and Hotel 24 - 24 -
Lake City Casinos 3,064 45 3,598 176
Palace Casino 31 2 177 61
Corporate 46 16 295 71
-------------------------- ---------------------------

3,176 83 4,232 606
-------------------------- ---------------------------
-------------------------- ---------------------------

(1) Excluding recoveries from FDC.



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