Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

March 20, 2006 21:59 ET

Gateway Casinos Income Fund Reports 2005 Results; Continues Strong Growth in Revenue and Distributable Cash

BURNABY, BRITISH COLUMBIA--(CCNMatthews - March 20, 2006) - Gateway Casinos Income Fund (TSX:GCI.UN) -

Attention Business/Financial Editors:

(Gateway Casinos Income Fund will hold a conference call to discuss its results for the three months and year ended December 31, 2005, on Tuesday, March 21, 2006 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-877-667-7774 or 416-695-5259. A replay will be available until April 20, 2006 at: 1-888-509-0082 or 416-695-5275.)

Gateway Casinos Income Fund (the "Fund") is pleased to announce its results for the year ended December 31, 2005, which continued the trend of strong growth experienced since its initial public offering.

For the year ended December 31, 2005 the Fund's consolidated revenue increased 6.5% from the previous year, rising from $96.6 million in 2004 to $102.7 million in 2005. As discussed previously, the 2004 revenue included $3.0 million from the temporary operation of the Villa Hotel from its acquisition on June 30, 2004 to its closure on October 31, 2004. When this amount is excluded from our 2004 revenue, revenue in 2005 increased 10% on a year-over-year basis.

For 2005, the Fund generated EBITDA of $42.5 million, which is an increase of 4.7% from EBITDA of $40.6 million in 2004. Included in the 2004 figure is EBITDA of $0.3 million from the operations of the Villa. Excluding this, the Fund's EBITDA increased 5.5% in 2005.

After interest, amortization and other income and expenses, net earnings for 2005 were $35.8 million, compared to net earning of $32.8 million in 2004. If we exclude the unrealized gain or loss of from a mark-to-market adjustment on an outstanding interest rate swap contract, net earnings for 2005 were $35.6 million, compared to $34.3 million in 2004.

"2005 was another strong year of performance for the Fund," said Dave Gadhia, Chief Executive Officer of Gateway Casinos G.P. Ltd. "Despite the changes in the competitive landscape with the opening of three new or expanded facilities in the Greater Vancouver area, revenue at the Burnaby Casino grew by almost 15%, with most of that coming from increased slot machine revenue from the expansion that we opened in December 2004. Our Lake City Casinos also performed very well, with revenue up 7% over 2004. And at the Palace Casino in Edmonton, we saw our revenue increase by almost 5% in 2005, despite the impact of the smoking ban implemented on July 1, 2005. We commend all of our team for these tremendous results."

Distributable Cash

During the year, the Fund generated distributable cash of $38.8 million, or $1.4687 per unit and made distributions for the year of $1.3550 per unit. This represents an increase in distributable cash of 3% over 2004.

Update on the Burnaby Redevelopment

As previously announced, the redevelopment of the Burnaby Casino continues to be on schedule for a proposed spring 2008 opening for the new casino. Site preparation and piling contract were awarded in December 2005 and work began in January 2006. Currently the excavation and site preparation work is ongoing and is expected to be complete in March 2006. Piling work will begin immediately thereafter.

The tender process for selection of the general contractor began on February 9, 2006 and is expected to take six to eight weeks, after which a general contract will be awarded.

About the Fund

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

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



Gateway Casinos Income Fund

Consolidated Financial Statements
December 31, 2005 and 2004
(expressed in thousands of dollars)


Auditors' Report

To the Unitholders of Gateway Casinos Income Fund

We have audited the consolidated balance sheets of Gateway Casinos Income Fund (the "Fund") as at December 31, 2005 and 2004 and the consolidated statements of earnings and cumulative earnings and cash flows for the years then ended. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

(signed) "PricewaterhouseCoopers LLP"

Chartered Accountants

Vancouver, British Columbia

February 24, 2006



Gateway Casinos Income Fund
Consolidated Balance Sheets
As at December 31, 2005 and 2004
-------------------------------------------------------------------

(expressed in thousands of dollars)

2005 2004
$ $

Assets

Current assets
Cash and cash equivalents 22,631 20,171
Accounts receivable 596 806
Facility development fund
receivable (note 6) 65 1,117
Due from related parties (note 16) 662 834
Inventory 185 195
Prepaid expenses 515 865
Prepaid employee compensation (note 15) 145 89
Current portion of prepaid rent
(note 7) 804 804
----------------------------

25,603 24,881

Prepaid rent (note 7) 4,957 5,761

Property and equipment (notes 7 and 8) 18,891 20,358

Deferred financing costs 687 845

Deferred development costs (note 19) 4,225 247

Goodwill 17,182 17,182

Intangible assets (note 9) 17,123 18,257

Secured loans (notes 10 and 13) 121,508 121,508
----------------------------

210,176 209,039
----------------------------
----------------------------

Liabilities

Current liabilities
Gaming revenue payable to BCLC and
AGLC 7,336 5,883
Accounts payable and accrued
liabilities 6,798 6,530
Mortgages payable (note 11) - 7,713
Distribution payable to unitholders
(note 5) 3,434 3,598
----------------------------

17,568 23,724

Interest rate swap contract (note 17) 1,297 1,461

Long-term debt (note 12) 48,400 40,900

Class A Partnership Units (note 13) 121,508 121,508
----------------------------

188,773 187,593
----------------------------

Unitholders' Equity

Issuance of trust units - net of
issue costs (note 14) 22,993 22,993

Cumulative earnings 105,196 69,443

Cumulative distributions declared (106,786) (70,990)
----------------------------

21,403 21,446
----------------------------

210,176 209,039
----------------------------
----------------------------

Organization and nature of operations (note 1)

Basis of presentation (note 2)

Commitments (note 18)

Approved by the Board of Trustees of Gateway Casinos Income Fund

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

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


Gateway Casinos Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
For the years ended December 31, 2005 and 2004
-------------------------------------------------------------------

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

2005 2004
$ $
Revenue
Table games 28,651 28,174
Slot machines and other electronic
games 66,383 58,996
Food and beverage 5,806 4,673
Hotel - 3,029
Other (note 16(b)) 1,887 1,688
----------------------------

102,727 96,560
----------------------------

Expenses
Corporate and general
administration (note 16(c)) 4,443 4,268
Cost of food and beverage services 2,516 1,935
Hotel operating - 2,719
Human resources 42,165 37,763
Marketing and promotions 3,510 2,016
Occupancy 3,127 3,085
Operating 4,512 4,216
----------------------------

60,273 56,002
----------------------------

Earnings before the following 42,454 40,558

Interest income on secured loans
(note 10) 9,721 13,803
Income allocation on Class A
Partnership Units (note 13) (9,733) (13,820)
Interest expense - net (2,995) (2,211)
Unrealized mark-to-market gain
(loss) on interest rate swap (note 17) 164 (1,461)
Amortization
Property and equipment (1,873) (1,967)
Intangible assets (1,134) (1,134)
Prepaid rent (note 7) (804) (804)
Deferred financing costs (255) (134)
Gain on the sale of assets 208 -
----------------------------

Net earnings for the year 35,753 32,830

Cumulative earnings - Beginning
of year 69,443 36,613
----------------------------

Cumulative earnings - End of year 105,196 69,443
----------------------------
----------------------------

Basic and fully diluted earnings
per unit 1.35 1.24
----------------------------
----------------------------

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

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


Gateway Casinos Income Fund
Consolidated Statements of Cash Flows
For the years ended December 31, 2005 and 2004
-------------------------------------------------------------------

(expressed in thousands of dollars)

2005 2004
$ $

Cash flows from operating
activities
Net earnings for the year 35,753 32,830
Items not affecting cash
Long-term incentive plan
compensation 1,300 1,627
Unrealized mark-to-market (gain)
loss on interest rate swap (164) 1,461
Amortization of property and
equipment 1,873 1,967
Amortization of intangible assets 1,134 1,134
Amortization of prepaid rent 804 804
Amortization of deferred financing
costs 255 134
Gain on sale of assets (208) -
----------------------------

40,747 39,957
Funding of long-term incentive plan (1,202) (960)
Changes in non-cash working capital
items 2,197 3,770
----------------------------

41,742 42,767
----------------------------

Cash flows from investing
activities
Purchase of property and equipment (832) (6,111)
Facility development funds received
for property and equipment
purchases (note 6) 1,414 4,420
Proceeds on sale of asset 212 260
Acquisition of hotel operations -
net of cash acquired (note 4) - (16,288)
Repayment of secured loans (note 10) - 105,672
Development costs (3,978) (247)
----------------------------

(3,184) 87,706
----------------------------

Cash flows from financing activities
Distributions paid (35,960) (35,030)
Proceeds from issuance of
long-term debt 7,500 40,000
Repayment of mortgage payable (7,713) -
Repayment of long-term debt - (21,252)
Due from related parties - net 172 (734)
Loan advanced by related party - net - (424)
Redemption of Class A Partnership
Units (note 13) - (105,672)
Financing costs (97) (979)
----------------------------

(36,098) (124,091)
----------------------------

Increase in cash and cash
equivalents 2,460 6,382

Cash and cash equivalents -
Beginning of year 20,171 13,789
----------------------------

Cash and cash equivalents - End
of year 22,631 20,171
----------------------------
----------------------------

Supplemental cash flow information
Interest paid 3,417 1,372
----------------------------
----------------------------

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


Gateway Casinos Income Fund
Notes to Consolidated Financial Statements
December 31, 2005 and 2004

(tabular amounts 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 in Greater Vancouver, British Columbia, the four Lake City Casinos in the Thompson/Okanagan region of British Columbia and the Palace Casino in Edmonton, Alberta. In 2004, the Fund acquired the net assets of Villa Hotels Ltd. in Burnaby, B.C. (note 4), which it operated from July to October 2004 and is currently redeveloping.

Nature of operations

The Burnaby Casino and the Lake City Casinos are operated pursuant to Casino Operational Services Agreements ("COSAs") between the Partnership and the British Columbia Lottery Corporation ("BCLC"). The Palace Casino is operated pursuant to a Casino Facility License, a Casino Gaming Retailer Agreement, and a Video Lottery Retailer Agreement between the Partnership and the Alberta Gaming and Liquor Commission ("AGLC"). The COSAs for the Burnaby Casino and the Lake City Casinos provide for a 10-year term commencing in 2001 (except for the Penticton Casino, which commenced in 2000), with an option to extend for an additional 10 years, subject to certain conditions. The Casino Facility License from the AGLC has a one-year term that expires on October 31, 2006 and has been renewed annually since 1996. During the year, the AGLC advised casino operators that it was implementing a new licensing arrangement whereby all licenses would be issued for a term of three years, subject to annual ownership reviews. The Fund has been advised that its license will be renewed for three years once the current license expires. Prior to 1996, the Palace Casino (from its opening in 1989) operated under casino support agreements with individual charities. The other agreements with the AGLC have no specified term and are effective until terminated, at the AGLC's discretion or for certain specified reasons. The Partnership earns gaming revenues based on an agreed percentage of the total win from table games, slot machines and other electronic games as consideration for providing operational services to the BCLC and AGLC.

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

2 Basis of presentation

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Fund, the Trust, the Partnership and its general partner, Gateway Casinos G.P. Inc. ("Gateway GP"), and the Lake City Limited Partnership and its general partner, Lake City Casinos Limited. Intercompany transaction and balances have been eliminated.

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 consolidated financial statements reflect the following significant accounting policies:

Revenue recognition

Revenues from table games, slot machines and other electronic games consist of the Fund's share of the gaming win pursuant to its operating agreements with the BCLC and the AGLC and are recognized based on the daily net gaming win at each of the Fund's casinos. Revenues from hotel and food and beverage operations are recognized as the related goods and services are provided or sold.

Use of estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. While management believes that these estimates and assumptions are reasonable, actual results could vary significantly.

Cash and cash equivalents

Cash and cash equivalents include highly liquid investments with a maturity, at the date of purchase, of three months or less.

Property and equipment

Property and equipment are recorded at cost less amortization and facilities development funding from the BCLC. Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability is assessed by management by comparing the carrying amount to the estimated future net cash flows that the assets are expected to generate. Where the carrying value exceeds estimated net cash flows, the assets are written down to fair value.

Amortization is provided for over the estimated useful lives of the assets on a straight-line basis at the following annual rates:



Buildings 4%
Furniture and other equipment 20% - 40%
Computer equipment 40%
Leasehold improvements terms of the leases


Goodwill

Goodwill is recorded at cost and is not amortized. The Fund tests goodwill annually for impairment, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Any excess of carrying value over fair value will be charged to income in the period in which the impairment is determined.

Intangible assets

Intangible assets represent the fair value at date of acquisition attributable to casino operating agreements or licenses acquired through the acquisition of operating casinos. Intangible assets are amortized on a straight-line basis over 20 years which is the term of the related agreement or license, including any extension option.

Management reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability is assessed by management by comparing the carrying amount to the estimated future net cash flows that the assets are expected to generate. Where the carrying value exceeds estimated future net cash flows, the assets are written down to fair value.

Facility development fund recoveries

The Fund receives facilities development funding pursuant to the Burnaby and Lake City COSAs for eligible capital and operating expenditures.

Reimbursements of eligible capital and operating expenditures from the facility development fund ("FDF") are recorded as a reduction in the cost of the related assets or operating expenses, respectively, based on when the expenditures are incurred and the amount of funds accumulated in the related FDF account held in trust. If there are not sufficient funds available for reimbursement when the expenditures are incurred, the cost of the related asset or operating expense is not reduced until funds are available.

Marketing fund

Under the Burnaby COSA, the Fund is required to pay the BCLC an amount equal to 0.75% of the Burnaby Casino gaming win for future BCLC marketing programs. These amounts are treated as an expense in the period incurred.

Deferred financing costs

Deferred financing costs include expenditures incurred in connection with obtaining long-term debt. These costs are deferred and amortized over the term of the related financing.

Deferred development costs

Deferred development costs include expenditures incurred in connection with the development of facilities, including direct construction and development costs, and interest and overhead charges directly attributable to the development activities. If a project is abandoned, all related deferred costs are written off.

Income taxes

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 of the Fund, an amount equal to all income of the Fund, together with the non-taxable portion of any net capital gain realized by the Fund, will be distributed by the Fund to its unitholders on an annual basis. As a result, the Fund will generally not be liable for income taxes. Income tax obligations related to the distributions by the Fund are the obligations of the unitholders.

Hedge accounting

Effective January 1, 2004, the Fund adopted CICA Accounting Guideline 13, "Hedging Relationships" ("AcG-13"). AcG-13 establishes certain conditions for when hedge accounting may be applied, including the identification, designation, documentation and effectiveness of hedging relationships.

4 Acquisition of Radisson Hotel Burnaby

On June 30, 2004, the Partnership acquired the net assets of Villa Hotels Ltd. in Burnaby, B.C. (Villa Hotel), which operated as the Radisson Hotel Burnaby, for total consideration of $24,177,000 including costs of the transaction. The purchased assets include the current premises of the Burnaby Casino. The acquisition has been accounted for by the purchase method and the results of the acquired business have been included in the consolidated results of the Fund from the date of acquisition. The allocation of net assets acquired, at fair value, was as follows:



$

Cash and cash equivalents 24
Other current assets 308
Property and equipment 16,548
Goodwill 7,395
Current liabilities (98)
------------

Net assets acquired 24,177
Mortgages assumed (note 11) (7,865)
------------

Net cash consideration 16,312
------------
------------


5 Distributions to unitholders

During the years ended December 31, 2005 and 2004, the Fund declared distributions to its unitholders of $35,796,000, or $1.3550 per unit, and $34,375,000, or $1.3012 per unit, respectively. The amounts of these distributions are as follows:



Amount Per unit
$ $

Year ended December 31, 2005
January 31 2,906 0.110
February 28 2,906 0.110
March 31 2,906 0.110
April 30 2,906 0.110
May 31 2,906 0.110
June 30 2,906 0.110
July 31 2,906 0.110
August 31 2,906 0.110
September 30 3,038 0.115
October 31 3,038 0.115
November 30 3,038 0.115
December 31 3,434 0.130
---------------------------

35,796 1.3550
---------------------------
---------------------------

Amount Per unit
$ $

Year ended December 31, 2004
January 31 2,774 0.105
February 29 2,774 0.105
March 31 2,774 0.105
April 30 2,774 0.105
May 31 2,774 0.105
June 30 2,774 0.105
July 31 2,774 0.105
August 31 2,774 0.105
September 30 2,774 0.105
October 31 2,905 0.110
November 30 2,906 0.110
December 31 3,598 0.136
---------------------------

34,375 1.301
---------------------------
---------------------------


During December 2005, the Fund declared a distribution of $3,434,000 (2004 - $3,598,000) to unitholders of record on December 30, 2005 (2004 - December 31, 2004), which was paid subsequent to year-end and is reported as a current liability at December 31, 2005.

6 Trusts funds and liabilities

Cash floats

Under the terms of the COSAs, cash floats of $6,450,000 (2004 - $6,450,000) for the casinos located in British Columbia are provided by the BCLC. These funds are used in the operations of the Fund but are not reflected in these financial statements. The Fund has provided the BCLC with letters of credit totalling $6,450,000 as security for the cash floats provided.

Facility development fund

The COSAs provide that a facility development fee, equal to 3% of the total win from table games and slot machines at the casinos located in British Columbia, shall be deposited into an FDF account from which the casino may draw, as reimbursement for eligible capital and operating expenditures, subject to the approval of the BCLC.

The FDF funds are held in trust by the Fund and have not been reflected in these financial statements.

The COSAs require that separate FDF accounts be maintained for the Burnaby Casino and for the Lake City Casinos.

a) Burnaby Casino

The activity during the year and balance of cash held in trust for reimbursement of eligible expenditures are as follows:



2005 2004
$ $

Balance - Beginning of year 2,850 3,405

Additions from gaming revenue 4,508 3,887
Funds transferred to Gateway
Casinos Inc. - (78)
Funds released
Capital (1,233) (4,010)
Operating - (354)
---------------------------

Balance - End of year 6,125 2,850
---------------------------
---------------------------


On November 28, 2002, the opening balance of the FDF account maintained for the Burnaby Casino included $78,000 of FDF additions from gaming revenue earned by casinos operated by Gateway Casinos Inc. ("GCI"). During the year ended December 31, 2004, the funds were repaid to GCI.

During year ended December 31, 2005, the Fund incurred eligible expenditures at the Burnaby Casino of $242,000 (2004 - $5,123,000) related to property and equipment additions and $nil (2004 - $230,000) related to operating costs.

The eligible capital and operating expenditures that have not yet been reimbursed at December 31, 2005 of $65,000 (2004 - $1,117,000) are recorded as receivable.

b) Lake City Casinos

The Lake City Casinos have incurred approved eligible expenditures in excess of FDF funds available for reimbursement. In accordance with generally accepted accounting principles, the amount receivable on account of reimbursement of the excess eligible expenditures is not recorded as an asset of the Fund in these financial statements. Reimbursements are made, and recognized in these financial statements, as FDF funds are accumulated.

The activity during the year and balance of unrecovered eligible expenditures are as follows:



2005 2004
------------------------------ ----------
Capital Operating Total Total
$ $ $ $

Balance - Beginning of
year - 7,982 7,982 11,030

Eligible expenditures
incurred 181 63 244 471
Reimbursement from FDF
funds (181) (3,542) (3,723) (3,519)
------------------------------------------

Balance - End of year - 4,503 4,503 7,982
------------------------------------------
------------------------------------------


The $4,503,000 of unrecovered eligible operating expenditures at December 31, 2005 (2004 - $7,982,000) relates to the approximate capital cost of leased casino premises and other eligible expenses incurred in prior years. Recovery of these amounts is recorded as a reduction of occupancy and operating costs, as appropriate, when funds are received.

Progressive jackpot funds

Progressive jackpot funds are held in trust by the Fund and have not been reflected in these financial statements. The progressive jackpot liability represents the potential payout to progressive jackpot winners. Revenues in these financial statements are recorded net of amounts related to the progressive jackpot. The progressive jackpot funds held in trust by the Fund at December 31, 2005 are $273,000 (2004 - $800,000).

7 Prepaid rent

During 2001, the Palace Casino was expanded and renovated at a total cost of approximately $12 million (including additions to furniture and equipment). As compensation for a portion of the costs of the renovation, the lease of the casino premises was amended to reflect a reimbursement through the reduction of casino rent. The casino building is leased for a 15-year term commencing September 2001 and rent payments include a fixed amount plus contingent rent based on revenues.

The lease was amended to reflect that the Fund is not required to make rent payments exceeding a minimum guaranteed rent amount until a notional amount of $8.5 million plus interest at 8.5% is recovered by the Fund from the landlord, subject to the limitation that the recovery period shall not extend past March 1, 2013. As a result, $8.5 million of expansion and renovation costs were reclassified on the balance sheet from property and equipment to prepaid rent. The Fund is amortizing the prepaid rent of $8.5 million to rent expense on a straight-line basis over the term of the lease.

The activity during the year and balance of prepaid rent are as follows:



2005 2004
$ $

Balance - Beginning of year 6,565 7,369

Amortization (804) (804)
---------------------------

Balance - End of year 5,761 6,565
---------------------------
---------------------------

Current portion 804 804
Long-term portion 4,957 5,761
---------------------------

Balance - End of year 5,761 6,565
---------------------------
---------------------------


The reimbursable portion of the rent is as follows:



2005 2004
$ $

Balance - Beginning of year 8,139 8,491

Notional interest accumulated
during the year 675 712
Reimbursement through reduction of
casino rent during the year (1,089) (1,064)
---------------------------

Balance - End of year 7,725 8,139
---------------------------
---------------------------


8 Property and equipment



2005
--------------------------------------

Accumulated
Cost amortization Net
$ $ $
Land 3,620 - 3,620
Buildings 12,669 178 12,491
Furniture and other equipment 2,083 1,421 662
Computer equipment 535 435 100
Leasehold improvements 5,696 3,678 2,018
--------------------------------------

24,603 5,712 18,891
--------------------------------------
--------------------------------------

2004
--------------------------------------

Accumulated
Cost amortization Net
$ $ $
Land 3,620 - 3,620
Buildings 12,669 175 12,494
Furniture and other equipment 1,848 896 952
Computer equipment 370 270 100
Leasehold improvements 5,692 2,500 3,192
--------------------------------------

24,199 3,841 20,358
--------------------------------------
--------------------------------------


The COSAs for the Burnaby Casino and the Lake City Casinos and the Casino Facility License for the Palace Casino provide that certain gaming equipment is the property of the BCLC and AGLC, respectively. Accordingly, any costs related to gaming equipment provided by and owned by the BCLC and AGLC have not been included in these financial statements.

Also see note 7.

9 Intangible assets



2005 2004
$ $

Cost 20,623 20,623
Accumulated amortization (3,500) (2,366)
---------------------------

Net 17,123 18,257
---------------------------
---------------------------


10 Secured loans

In connection with the Fund's acquisition of the casino operations on November 28, 2002, the Trust issued $227,180,000 of secured loans to certain wholly owned subsidiaries of GCI (collectively the "Vendors"). The secured loans bear interest at 8.0% per annum, payable monthly in arrears, and are secured by the Class A Partnership Units held by the Vendors (representing 100% of the Class A Partnership Units outstanding), all distributions on account of such units, and all redemption proceeds of such units. The secured loans mature on November 28, 2032 and are payable in full at maturity. If and whenever any Vendor redeems Class A Partnership Units owned by the Vendor, the Vendor will pay the redemption amount as a repayment of the secured loan without penalty. In no event may a Vendor redeem any Class A Partnership Units without the consent of the Trust. The loan agreement also provides for the borrower to make optional prepayments, subject to certain conditions.

During the year ended December 31, 2005, repayments of $nil (2004 - $105,672,000) were made and interest on the secured loans was $9,721,000 (2004 - $13,803,000).

11 Mortgages payable

In connection with the acquisition of the Radisson Hotel Burnaby (note 4), the Partnership assumed two mortgages due October 31, 2005 and December 1, 2005, respectively, with a total outstanding balance of $7,865,000. The mortgage due October 31, 2005 bore interest at 7.59% per annum and was repayable in monthly blended payments of principal and interest of $37,709. The mortgage due December 1, 2005 bore interest at 7.70% and was repayable in monthly blended payments of principal and interest of $37,823.

During the year ended December 31, 2005, both mortgages were repaid in full.

12 Long-term debt



2005 2004
$ $

Promissory note (a) 900 900
Long-term notes (b) 47,500 40,000
---------------------------

48,400 40,900
---------------------------
---------------------------


a) Promissory note

The promissory note is unsecured and is payable in 120 equal monthly instalments of $7,500 plus interest at prime plus 1.5%, beginning January 1, 2006.

b) Long-term notes

On August 4, 2004, the Partnership and its general partner, Gateway GP, completed a private placement of long-term notes payable. Under the terms of the agreement, Gateway GP issued $40 million of notes, which bear interest at 6.565%, payable quarterly in arrears, and mature on August 4, 2011.

In addition to the notes issued on closing, the lender provided an uncommitted shelf facility of up to US$45.6 million (or the Canadian dollar equivalent) whereby the Partnership and/or Gateway GP can, subject to acceptance by the lender, issue additional notes with terms of between five years and seven years, bearing interest at rates to be determined at the time of issue based on then current market factors.

On October 31, 2005, Gateway GP drew $7,500,000 of notes from the shelf facility, which bear interest at 5.39%, payable quarterly in arrears, and mature on October 31, 2012. Funds were used primarily to repay the mortgages due on October 31, 2005 and December 1, 2005 (see note 11).

During year ended December 31, 2005, the Fund incurred interest expense of $2,797,000 (2004 - $1,095,000) in relation to the long-term notes.

c) Credit facilities

On June 30, 2004, in connection with the acquisition of the Radisson Hotel Burnaby (note 4), the Partnership renegotiated a credit facility with the Bank of Montreal to provide for a total of $70 million in two facilities (the "Credit Facilities"). On closing, the Partnership drew $16,660,000 to fund the cash payment of the acquisition.

All amounts payable under the credit facilities were repaid during the year ended December 31, 2004 from the proceeds of the issue of long-term notes.

During the year ended December 31, 2005, the Fund renegotiated the Credit Facilities to increase the total available under the facilities to $90 million, comprising the following:

i) Facility A is a committed, revolving evergreen facility providing a maximum of $20 million. The funds are available for general corporate purposes, including the issue of letters of credit. As at December 31, 2005, the Fund had letters of credit outstanding against this facility of $12,581,929.

ii) Facility B is a $70 million construction facility for the redevelopment of the Burnaby Casino, subject to fulfillment of standard conditions for construction financing. As at December 31, 2005, no amounts had been drawn against this facility.

Both facilities can be drawn as prime-based loans or Bankers' Acceptances ("BA"), which bear interest at prime plus 0% to 0.50% or BA rates plus 0.875% to 1.50%, respectively, based on the ratio of debt to EBITDA on a quarterly basis. Interest on Facility B will be capitalized until completion of the redevelopment. Thereafter, Facility B will be amortized over a 10-year period, with the outstanding amount due in full at maturity. The outstanding amount of Facility B must be permanently reduced to a maximum of $35 million by June 29, 2007.

The Credit Facilities mature on June 29, 2007 and can be extended at the Partnership's request for additional 364-day periods, subject to a maximum maturity date of three years prior to the maturity of the COSA for the Burnaby Casino. Currently, the Burnaby COSA matures in February 2011; however, the BCLC has indicated that it will enter into a new 10-year COSA, with an option to renew for an additional 10 years, on opening of the redeveloped Burnaby Casino.

The Credit Facilities and the long-term notes are secured by general security agreements, providing a first charge over all assets of the Partnership, and guarantees of certain subsidiaries of the Fund.

13 Class A Partnership Units

In connection with the Fund's acquisition of casino operations on November 28, 2002, the Partnership issued Class A Partnership Units with a stated capital of $227,180,000 to the Vendors.

The Class A Partnership Units entitle the holder thereof to:

a) a preferential, non-cumulative allocation of accrued income and distributable cash over all other partnership interests in the Partnership, equal to 8.01% per annum of the capital attributed to Class A Partnership Units;

b) a preference over all other interests in the Partnership, on distributions of capital and accrued income in the event of a liquidation, dissolution or winding-up or other distribution of the assets of the Partnership for the purpose of winding up its affairs, after payment of or other proper division of all of the liabilities of the Partnership, to a maximum of the capital attributed to the Class A Partnership Units, together with accrued income;

c) redeem Class A Partnership Units from time to time at the redemption price equal to the capital attributed to the Class A Partnership Units plus any accrued but unpaid income to the date of redemption. In no event may a holder redeem any Class A Partnership Units without the consent of the Trust; and

d) vote on amendments to the Limited Partnership Agreement which add, change or remove the rights, privileges, restrictions or conditions attached to the Class A Partnership Units or create a new class of units equal or superior to the Class A Partnership Units or as required by law, but in all other circumstances, the Class A Partnership Units will be non-voting.

The Class A Partnership Units, as well as all distributions and redemptions of the units, have been pledged as security for the secured loans (note 10).

The Class A Partnership Units have the attributes of a liability and have been reflected as such in these consolidated financial statements.

During the year ended December 31, 2004, the Partnership redeemed $105,671,500 Class A Partnership Units. During the year ended December 31, 2005, the Partnership allocated income of $9,733,000 (2004 - $13,820,000) to the Class A Partnership Units.

Redemption of Class A Partnership Units and repayment of secured loans

The Fund entered into underwriting agreements with syndicates of underwriters in connection with secondary offerings of 4,000,000 units and 6,567,150 units of the Fund owned by the shareholders of GCI. These transactions closed on February 10, 2004 and September 17, 2004, respectively. The Fund did not receive any of the proceeds from the offerings.

Upon completion of these transactions, the shareholders of GCI paid a total of $105,671,500 to the Vendors as partial repayment of certain loans outstanding between the Vendors and the selling unitholders. In accordance with the terms of the secured loans, the Vendors were required to repay the $105,671,500 to the Trust as a partial repayment of the secured loans. The Trust used the proceeds from the repayment of the secured loans to subscribe for additional Class B Units of the Partnership and the Partnership used the proceeds from the issue of Class B Units to redeem $105,671,500 of Class A Partnership Units held by the Vendors.

14 Trust units

The Declaration of Trust authorizes the Fund to issue an unlimited number of units in one class. Each unit is transferable and represents an equal undivided beneficial interest in any distribution from the Fund and in any net assets of the Fund in the event of termination or winding-up of the Fund.

Units are redeemable at any time at the option of the holder at amounts related to market prices of the units at the time. In the case of unitholders who hold units entitling them to more than 10% of the votes that may be cast to appoint Fund Trustees (a "Significant Interest") and who receive prior approval from the BCLC and AGLC, or unitholders who do not hold a Significant Interest, the redemption price will be paid in cash, subject to a maximum of $50,000 in cash redemptions by the Fund in any one month (provided that the Fund's Trustees may at their sole discretion waive the $50,000 limitation). Where unitholders are not entitled to cash redemptions, the redemption price will be paid and satisfied by way of an in specie distribution of securities or assets held by the Fund, subject to any applicable regulatory approvals.

On November 28, 2002, the Fund issued 10,567,000 units at a price of $10.00 per unit pursuant to its initial public offering, together with a concurrent issue of 15,850,687 units to the shareholders of GCI at a price of $10.00 per unit pursuant to a private placement. Expenses of the offering amounted to $9,451,000 and were charged against unitholders' equity.



Units Amount
$

Units issued on November 28, 2002
Initial public offering 10,567,000 105,670
Private placement 15,850,687 158,507
Expenses of offering - (9,451)
---------------------------

26,417,687 254,726
Reduction to reflect excess of
consideration paid over historical
book values - (231,733)
---------------------------

Balance as at December 31, 2005
and 2004 26,417,687 22,993
---------------------------
---------------------------


Due to the related party nature of the Fund's acquisition of the assets of the Burnaby Casino, Lake City Casinos and the Palace Casino, the value of unitholders' equity has been reduced by the excess of the consideration paid over the historical book values of the net assets acquired.

15 Long-term incentive plan

The Fund has adopted a long-term incentive plan (the "Plan") to provide full-time employees, officers and trustees/directors of the Fund with compensation opportunities that will enhance the ability of the Fund to attract, retain and motivate key personnel and reward officers and employees for significant performance and cash growth. Bonuses, in the form of units of the Fund, will be provided to eligible participants on an annual basis where the Distributable Cash (as defined in the Plan) of the Fund exceeds specified threshold amounts.

If distributable cash per unit exceeds the threshold amounts, a percentage of the distributable cash (the "Participation Rate") is contributed by the Fund into a long-term incentive pool. The funds in the pool are used to purchase units of the Fund in the open market, to be provided to eligible employees as bonus compensation. Threshold amounts and participation rates are as follows:



Participation
Distributable cash per unit rate

Greater than $1.20 per unit, but less than $1.25 10%
Greater than or equal to $1.25, but less than $1.30 15%
Greater than or equal to $1.30 20%


The Plan, including the designation of eligible employees and allocation of the long-term incentive pool, is administered by the Compensation and Corporate Governance Committee of the Fund. The Plan provides for units of the Fund to vest for the benefit of the employees as follows:



60% immediately upon grant
20% one year after grant
20% two years after grant


Contributions to the Plan are recorded as prepaid employee compensation and are charged to earnings based on the vesting provisions of the Plan using the graded amortization method. The expected contribution relating to 2005 is $1,527,000 (2004 - $1,202,000), of which $911,000 (2004 - $756,000) has been expensed in the year. An additional $389,000 (2004 - $871,000) was expensed in 2005 relating to prior years contributions.

16 Related party transactions and amounts

As at December 31, 2005, the Fund had a net amount receivable from GCI and the Vendors of $662,000 (2004 - $834,000), comprising the following:



2005 2004
$ $

Income allocations on Class A
Partnership Units (note 13) (827) (824)
Net operating costs (a) 274 128
Interest receivable on the secured
loans (note 10) 826 823
ATM fees (b) 27 25
Administration fee (c) 362 388
Costs related to secondary
offerings (note 13) - 294
---------------------------

Net amount receivable 662 834
---------------------------
---------------------------


a) The shareholders of GCI collectively hold approximately 20% of the outstanding units of the Fund at December 31, 2005. The Partnership, GCI and the Vendors incurred costs on behalf of each other in the normal course of business. During the year ended December 31, 2005, net total costs of $1,712,000 were incurred by the Partnership on behalf of GCI and the Vendors (2004 - $228,000).

The net balance due from related parties as at December 31, 2005 includes $274,000 (2004 - $128,000) of operating costs incurred by the Partnership on the related parties' behalf.

b) The Partnership has entered into a contract with a subsidiary of GCI for Automated Teller Machine ("ATM") services at the Burnaby Casino. The Partnership receives a flat fee of $750,000 (prior to January 1, 2005 - $500,000) per annum, payable in equal monthly instalments. During the year ended December 31, 2005, the Partnership earned a fee of $750,000, which is included in other revenue (2004 - $500,000).

Effective November 5, 2003, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Palace Casino. The Partnership receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the year ended December 31, 2005, the Partnership earned a fee of $455,000 (2004 - $390,000), which is included in other revenue.

Effective February 17, 2004, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Kamloops Casino. The Partnership receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During the year ended December 31, 2005, the Partnership earned a fee of $325,000 (2004 - $147,000), which is included in other revenue.

c) The Fund provides management and administrative services to GCI. 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 $2,607,000 (2004 - $1,563,000) to GCI for the year ended December 31, 2005, which is recorded as a reduction of administration expenses.

d) The Fund leased its corporate office space from a company controlled by the Chairman and former Chief Executive Officer of Gateway GP under a lease agreement dated November 28, 2002. The lease included use of the office space, as well as provision of certain office equipment and reception. The Fund paid a monthly rent of $15,400 plus operating costs. The lease was terminated on May 1, 2005 and the Fund incurred lease expense of $178,000 (2004 - $273,000) during this period.

Subsequently, the lease was assigned to the Fund and on May 1, 2005, a company controlled by the Chairman and former Chief Executive Officer of Gateway GP 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 expires July 31, 2008 and the Fund received leasing income of $28,000 during the period from May 1, 2005 to December 31, 2005 which is recorded as a reduction of occupancy costs.

17 Financial instruments

Fair value of financial instruments

The fair values of cash and cash equivalents, accounts receivable, FDF receivable, due from related parties, gaming revenue payable to BCLC and AGLC, accounts payable and accrued liabilities, and distribution payable to unitholders approximate their carrying values due to the relatively short-term nature of these instruments. The fair value of the Fund's long-term debt is $50,146,000 (2004 - $40,000,000).

The fair value of the secured loans and the Class A Partnership Units is not practicable to determine given the many factors, terms and conditions that would influence such a determination. Any distributions on or redemptions of the Class A Partnership Units are, pursuant to the terms of the secured loans, offset by interest received or repayments of the secured loans. Therefore, the financial exposures of the two instruments are offset accordingly.

Interest rate swap

In connection with its initial public offering, the Fund entered into an interest rate swap contract to manage the interest rate risk on $21,500,000 of the amount outstanding under the revolving credit facility at that time. The Fund applied hedge accounting to the interest rate swap contract, which resulted in the hedging settlement gains and losses being included in net income in the same period as the hedged interest expense on the revolving credit facility. Upon repayment of the outstanding amounts under the credit facilities during 2004, the interest rate swap contract no longer qualified for hedge accounting. Accordingly, the Fund recorded the market value of the contract on its balance sheet. On December 14, 2004, the Fund terminated the existing interest rate swap contract and rolled the imbedded loss into a new forward-start interest rate swap agreement with an effective date in February 2005. The Fund has elected to not apply hedge accounting to this contract and has recorded the fair value on its balance sheet at December 31, 2005 and 2004. Changes in the market value of the contract are recorded on the consolidated statement of earnings as unrealized mark-to-market gains or losses on interest rate swap.

The Fund enters into interest rate swap contracts with approved creditworthy counterparties to manage the Fund's exposure to interest rate risk. The Fund does not hold or issue derivative financial instruments for trading or speculative purposes.

As at December 31, 2005, the Fund had one interest rate swap contract outstanding, as follows:



2005
--------------------------------------------
Notional
amount Maturity date Fair value
$ $
Interest rate
swap contract 18,884,000 September 1, 2011 (1,297)
--------------------------------------------
--------------------------------------------


2004
--------------------------------------------
Notional
amount Maturity date Fair value
$ $
Interest rate
swap contract - September 1, 2011 (1,461)
--------------------------------------------
--------------------------------------------


The fair value of the interest rate swap reflects the estimated amount the Fund would have to pay if it were to unwind the contract at the reporting date.

18 Commitments

Operating lease commitments

The Fund leases certain office equipment and office space as well as its casino locations other than the Burnaby Casino. At December 31, 2005, future minimum operating lease payments were as follows:



$

Year ending December 31
2006 2,717
2007 2,718
2008 2,321
2009 1,599
2010 and beyond 6,624
-----------

15,979
-----------
-----------


The above table includes only the minimum guaranteed rent payments in respect of the Palace Casino (note 7).

19 Segmented information

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



2005 2004
$ $

Revenue
Burnaby Casino 46,216 40,291
Lake City Casinos 33,857 31,612
Palace Casino 22,654 21,628
Villa Hotel - 3,029
---------------------------

102,727 96,560
---------------------------
---------------------------

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 25,357 24,534
Lake City Casinos 14,802 14,017
Palace Casino 8,042 7,592
Villa Hotel - 310
---------------------------

48,201 46,453
Long-term incentive plan
compensation expense (1,300) (1,627)
Corporate and general
administration (4,447) (4,268)
---------------------------

42,454 40,558
---------------------------

Amortization
Burnaby Casino (384) (205)
Lake City Casinos (2,310) (2,277)
Palace Casino (1,300) (1,289)
Villa Hotel - (200)
---------------------------

(3,994) (3,971)
Interest income on secured loans 9,721 13,803
Income allocation on Class A
Partnership Units (9,733) (13,820)
Unrealized mark-to-market gain
(loss) on interest rate swap 164 (1,461)
Amortization of corporate assets (72) (68)
Interest expense - net (2,995) (2,211)
Gain on sale of assets 208 -
---------------------------

(6,701) (7,728)
---------------------------

Net earnings for the year 35,753 32,830
---------------------------
---------------------------

Property and equipment additions (1)
Burnaby Casino 378 5,228
Lake City Casinos 280 492
Palace Casino 88 162
Corporate 86 107
Villa Hotel - 16,670
---------------------------

832 22,659
---------------------------
---------------------------

(1) Excluding recoveries from FDF.


Segment assets



2005
------------------------------------------------
Lake
Burnaby City Palace Villa
Casino Casinos Casino Hotel Total
$ $ $ $ $
Property and
equipment 179 611 1,783 16,198 18,771
------------------------------------------------
------------------------------------------------

Deferred
development
costs (1) 4,225 - - - 4,225
------------------------------------------------
------------------------------------------------

Goodwill - 9,526 261 7,395 17,182
------------------------------------------------
------------------------------------------------

Intangible assets - 17,123 - - 17,123
------------------------------------------------
------------------------------------------------

Total segment
assets 23,203 32,903 15,470 23,594 95,170
-------------------------------------
-------------------------------------

Other unallocated
assets 115,006
----------

Total assets 210,176
----------
----------


2004
------------------------------------------------
Lake
Burnaby City Palace Villa
Casino Casinos Casino Hotel Total
$ $ $ $ $
Property and
equipment 164 1,688 2,192 16,210 20,254
------------------------------------------------
------------------------------------------------

Deferred
development
costs (1) 247 - - - 247
------------------------------------------------
------------------------------------------------

Goodwill - 9,526 261 7,395 17,182
------------------------------------------------
------------------------------------------------

Intangible assets - 18,257 - - 18,257
------------------------------------------------
------------------------------------------------

Total segment
assets 27,056 34,488 16,000 23,683 101,227
-------------------------------------
-------------------------------------

Other unallocated
assets 107,812
----------

Total assets 209,039
----------
----------

(1) Development costs relate to the redevelopment of the Villa Hotel
and adjoining Burnaby casino. The development costs have been
allocated based on the budgeted split upon completion of the
project. Included in these costs is $158,000 of capitalized
interest.


GATEWAY CASINOS INCOME FUND
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2005


Management's Discussion and Analysis

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

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 Fund was launched on November 28, 2002, when it completed its initial public offering and indirectly acquired the operating assets of the Burnaby Casino in Greater Vancouver, British Columbia, the four Lake City Casinos in the Thompson/Okanagan region of British Columbia and the Palace Casino in Edmonton, Alberta, from wholly owned subsidiaries of Gateway Casinos Inc. ("GCI").

The casinos are operated by the Gateway Casinos Limited Partnership ("Gateway" or "the Partnership"), through operating agreements and licenses with the British Columbia Lottery Corporation ("BCLC") and the Alberta Gaming and Liquor Commission ("AGLC"). The Fund is, indirectly, a limited partner in Gateway, and holds all of the voting rights with respect to its operations. The Fund makes monthly cash distributions to its unitholders based on Gateway's operating results.

On November 28, 2002, Gateway acquired the operating assets of the Burnaby Casino, the four Lake City Casinos, and the Palace Casino for total consideration of $275,539,000, consisting of Class A Units of the Partnership with a stated capital of $227,180,000 and promissory notes of $48,359,000. Concurrent with the acquisition, the Fund issued 10,567,000 units at a price of $10 per unit pursuant to its initial public offering and a further 15,850,687 units at a price of $10 per unit to the shareholders of GCI (the "GCI Shareholders"). Net proceeds of the offerings totaled $254,726,000, after deducting offering expenses of $9,451,000. The proceeds were used to subscribe for 2,550,269 units of Gateway Trust (the "Trust") and $229,524,000 of Trust Notes bearing interest at 8.0% per annum. In turn, the Trust subscribed for Class B units of the Partnership with a stated capital of $24,847,000 and advanced secured loans of $227,180,000 to the GCI subsidiaries (the "Secured Loans"). The Secured Loans bear interest at 8% per annum and are secured by all the Class A Units of the Partnership and the proceeds from any distributions or redemptions of these units. After the completion of these transactions, the GCI Shareholders held 60% of the outstanding units of the Fund.

During the year ended December 31, 2004, the GCI Shareholders reduced their collective ownership of the Fund to 20% of the issued and outstanding units through secondary offerings on February 10, 2004 and September 17, 2004. In conjunction with these sales, the GCI Shareholders paid $105,671,500 to one of the subsidiaries of GCI as partial repayment of certain outstanding loans. In accordance with the terms of the Secured Loans, the subsidiary of GCI was required to pay the same amount to the Trust as a partial repayment of the Secured Loan. The Trust used these funds to subscribe for additional Class B units of the Partnership, and the Partnership used the funds to redeem Class A units held by the subsidiary of GCI. The net impact to the consolidated structure of the Fund was a reduction of $105,671,500 in both the Secured Loans and the Class A units of the Partnership.

The following chart outlines the structure of the fund as at December 31, 2005 and as at the date of this MD&A. To view the chart, please click on the following link: http://www.ccnmatthews.com/docs/gcicharta.jpg.

Fund Units

The Fund had 26,417,687 units outstanding as at December 31, 2004 and 2005, and as at the date of this management's discussion and analysis. There are no securities outstanding that are convertible into, or exercisable or exchangeable for, units of the Fund.

Relationship Between the Class A Units of the Partnership & Secured Loans

The Class A Units of the Partnership, which are described in note 13 to the Audited Financial Statements, entitle the holder to a preferential allocation of income and distributable cash equal to 8.01% per year of the stated capital of the Class A Units. All of the Class A units are held by subsidiaries of GCI, and, along with all distributions from and redemptions of the units, are pledged as security for the Secured Loans advanced by the Trust.

Since the Fund's inception, the stated capital of the Class A units and the amount outstanding under the Secured Loans have been equal. This effectively balances the cash the Partnership pays out on the preferential distribution on the Class A Units with the interest the subsidiaries of GCI pay to the Trust on the Secured Loans, so that all the distributable cash generated by the Partnership is available for distribution to unitholders of the Fund.

Under the terms of the Partnership Agreement, the Partnership may redeem the Class A Units in the event that the Trust subscribes for additional Class B Units of the Partnership. If the Secured Loans are repaid in part or in full, the Trust can use these proceeds to subscribe for additional Class B Units of the Partnership, which can in turn redeem Class A Units. In this way, the Fund can ensure that the stated capital of the Class A Units is equal to the amount of the outstanding Secured Loans and maintain the balance between the distributions on the Class A Units and the interest on the Secured Loans.

General

Gateway operates six casinos in Western Canada; five in British Columbia and one in Alberta. The location of each casino and the number of slot machines and table games at December 31, 2005, is listed in the table below.



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

Gateway Casino - Burnaby Burnaby, BC 679(1) 32
Lake City Casinos
Kamloops Kamloops, BC 300 8
Kelowna Kelowna, BC 342(2) 11
Penticton Penticton, BC 225 10
Vernon Vernon, BC 210 8

Palace Casino Edmonton, AB 711(3) 31(4)
(1) On December 16, 2004 Gateway opened an expansion of the Burnaby
Casino, increasing the number of slot machines from 300 to 679.
(2) The Sega Royal Ascot electronic horseracing game was removed from
the Kelowna Casino in May 2005 and replaced with 12 slot machines.
A further 21 slot machines were installed in July 2005 and an
additional 10 slot machines were installed in August 2005.
(3) During 2004 the Palace Casino operated 672 slot machines, 23 Sega
Royal Ascot terminals and 10 VLTS. In February 2005 the number of
Sega Royal Ascot terminals was reduced to 11 and the number of slot
machines was increased to 684. In October 2005 the remaining 11 Sega
Royal Ascot terminals were replaced with 12 slot machines.
(4) The Palace Casino also operates a 7-table poker room.


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

Western Canadian Casino Market

In Western Canada, the provincial governments have developed a casino model where they contract third-party operators, like Gateway, to oversee the day-to-day operations of casinos.

Under this model, the operators provide the facilities, the furniture and fixtures, the labour, security, surveillance and administration required to ensure the casinos operate efficiently. In return, they are paid a fee equal to a percentage of the revenue generated at each casino. This fee differs between provinces, as shown below:



British
Columbia Alberta

Slot machines and other electronic games 25% 15%
Table games 40% 50%


In both BC and Alberta, the provincial governments decide which games and products will be available, set the rules of play (including the pay out on slot machines and other electronic games), determine the procedures by which the casinos must be operated, and monitor the operations. They also provide and maintain all of the gaming equipment, including the slot machines. In BC, this is the responsibility of the BCLC and in Alberta, the AGLC.

Alberta

The gaming market in Alberta is relatively mature. The province has a total of 17 casinos and three racing entertainment centers (also known as racinos) and provides video lottery terminals ("VLTs") at over 1,000 locations. According to the AGLC, there are currently a total of 8,665 slot machines and approximately 6,000 VLTs in the province. The number of slot machines had increased from 6,513 as at March 31, 2004, due to the opening of one new casino and expansions at a number of existing casinos.

There are currently five full-service casinos, one racing entertainment centre and 217 VLT retailers in the Greater Edmonton region, serving a population of approximately 945,000. At December 31, 2005, these facilities had a total of 3,428 slot machines and 1,174 VLTs.

Although relatively mature, the Edmonton market is seeing some growth in facilities. During 2005, Casino Edmonton completed an expansion of its facilities and now offers 771 slot machines, 10 VLTs, 22 table games and a 14-table poker room, as well as a variety of food & beverage and entertainment options. In addition, there are two new casinos and one additional expansion, which are at various stages of development.

The new Celebrations Casino and Hotel is located in the northeast section of Greater Edmonton, approximately eight kilometers from the city centre, and is connected to an existing hotel. When completed, the casino is expected to have 600 slot machines, 31 table games, a dinner theatre and food and beverage facilities. The projected opening date for this casino is late fall of 2006.

The River Cree Resort and Casino will be located on the lands of the Enoch Cree First Nation, located west of the City of Edmonton. The development 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 casino is expected to open in the fall of 2006.

In addition to these new facilities, the Baccarat Casino (operated by GCI), located in downtown Edmonton, has received approval from the AGLC to build a new facility to replace the existing casino. The project is currently in the rezoning process and, when complete, will have 700 slot machines (up from 328), approximately 40 gaming tables, a 10-table poker room and various food and beverage options, including an entertainment lounge. The new facility will also includes an underground parkade.

On July 1, 2005, the City of Edmonton implemented a smoking ban on all public places, including casinos, bingo halls, bars and pubs. As discussed in more detail in the Operations section below, this affected the revenues at the Fund's Palace Casino, but to a lesser degree than had been projected. Similar or greater affects were recorded at bingo parlours and other casinos in the City. As the River Cree Resort and Casino will not be located within the Edmonton city limits, it will not be subject to the smoking ban. This puts casinos within the City at a competitive disadvantage. However, during negotiations with the City of Edmonton for city and utility services to the casino, the River Cree Resort and Casino has agreed to restrict smoking to approximately 30% of the casino floor area. This will mitigate the disadvantage somewhat. (Please see the Outlook section for a more detailed discussion on the expected impact of the River Cree Resort and Casino's opening on the Palace Casino.)

British Columbia

In contrast to Alberta, BC's casino market is relatively immature. However, it is currently in the middle of a strong growth phase designed to make it more competitive with other Canadian and US gaming jurisdictions.

As discussed in the MD&A for the year ended December 31, 2004 (the "2004 MD&A"), the BCLC began to make changes to the product offerings in existing BC casinos in early 2003, and followed this up by introducing of a new casino model for the Greater Vancouver Regional District (the "GVRD"). This model calls for a smaller number of larger facilities, which provide more entertainment options to customers, and is designed to allow BC casinos to complete more effectively with casinos in Alberta and Washington State.

During 2005 we saw a number of changes to the competitive landscape in the GVRD:

1. The opening of the Edgewater Casino in downtown Vancouver in February 2005.

This casino was created by combining two small, pre-existing Vancouver casino operations (one of which had been dormant for a number of years) and is the first casino in the City to operate slot machines, effectively ending a 10-year ban. The casino operates 600 slot machines and 48 table games, plus a four-table poker room and a deli-style restaurant.

2. The opening of the Cascades Casino(operated by GCI)in Langley, BC in May 2005

This casino provides approximately 35,000 square feet of gaming space and operates 530 slot machines, 24 table games, and an eight-table poker room. The casino provides various food and beverage options, including a buffet restaurant and a center bar, as well as a 420-seat show lounge. In addition, it is connected to a 77-room hotel and a 25,000 square foot convention center. The Cascades Casino is the only full service casino on the south side of the Fraser River and services a combined population of just under 1,000,000 people.

3. The opening of the expanded Coquitlam Casino

The expansion of the Coquitlam Casino, now known as the Boulevard Casino, opened in mid-November 2005. The facility now operates 950 slot machines and 56 table games, as well as a 12-table poker room and high-limit gaming area. The facility also offers a 1,600-stall covered parkade and several food & beverage options, including a lounge that features nightly entertainment, a full-service restaurant and a deli. The second phase of the expansion is currently under construction and, when open, will provide a 1,200-seat theatre and meeting and conference facilities.

There were also three smaller casinos in the GVRD that were closed.

1. The Grand Casino, which was a tables-only facility in the City of Vancouver, was closed in November 2004 and consolidated with a dormant operating agreement to form the Edgewater Casino.

2. The Mandarin Casino (operated by GCI), which was a tables-only facility in Vancouver's Chinatown, was shut down concurrently with the opening of the Cascades Casino in May 2005.

3. The Royal Towers Casino (operated by GCI), which operated 169 slot machines and 24 tables games, was shut down in November 2005.

With these changes, there are now seven casinos and one racino operating in the GVRD. The location of these facilities and the number of games being operated by each are provided in the following table:



--------------------------------------------------------------------
Municipality # Slots # Tables Poker
--------------------------------------------------------------------
Lower Mainland:
--------------------------------------------------------------------

--------------------------------------------------------------------
Edgewater Vancouver 600 45 4
--------------------------------------------------------------------
Holiday Inn Vancouver - 32 6
--------------------------------------------------------------------
River Rock Richmond 918 85 25
--------------------------------------------------------------------
Burnaby Burnaby 679 34 -
--------------------------------------------------------------------
Boulevard Coquitlam 950 58 12
--------------------------------------------------------------------
Royal City Star New Westminster 341 18 -
--------------------------------------------------------------------
Cascades Langley 530 28 8
--------------------------------------------------------------------
Fraser Downs Surrey 420 - -
--------------------------------------------------------------------
Source: BCLC


In addition to the new facilities opened in 2005, three projects are currently under development, which are, in order of projected opening:

1. Hastings Racecourse slot machine installation

The Hastings Racecourse in Vancouver has been granted approval for the installation of between 600 and 900 slot machines at the existing racetrack. While rezoning approval was granted in July 2004; however the project has yet to receive its development permit. Additionally, the area residents have recently launched a claim against the City of Vancouver, contending that the process the City followed in approving the rezoning was flawed and did not include sufficient public input. This claim was heard from March 6 to 8, 2006 but no result is yet known. We believe it is unlikely that a development permit will be issued prior to its outcome. Although no formal target opening date has been announced, the company that owns the property has stated that construction will take approximately six months to complete after receiving a development permit. Current expectations are that the project will not open until sometime in the second quarter 2007.

2. New casino in Queensborough area (50% owned by GCI)of New Westminster, BC

A new 100,000 square foot casino is currently under development in the Queensborough area of New Westminster, BC, which sits on the eastern border of the City of Richmond. The new facility will operate 600 slot machines and 60 table games, as well as a 14-table poker room and a high-limit area. In addition, the casino will provide several food and beverage options on the gaming floor and will be connected to an interactive sports bar and a high-end Chinese restaurant. Construction began in December 2005 and the facility is projected to open in the fall of 2007.

3. Redevelopment of the Burnaby Casino

The Fund is currently redeveloping the Burnaby Casino into a state-of-the art facility. The new casino will operate up to 1,000 slot machines and 60 table games, a 16-table poker room and a high-limit gaming area, a significant expansion of the food and beverage and liquor services currently being offered at the Burnaby Casino. The project will also offer a stand-alone full-service restaurant, a 200-room hotel and a 25,000 square foot convention centre. It is scheduled to open in the spring of 2008. Please see the Outlook section for a further discussion of this project.

Once these projects are complete, the GVRD will be home to six full-service casinos and two racinos, which will operate approximately 5,500 slot machines. The following map shows the locations of these facilities. To view map, please click on the following link: http://www.ccnmatthews.com/docs/gcimap.jpg.

Although there are no plans for additional casinos in the province, the BCLC expanded the number of Community Gaming Centers ("CGCs") during 2005. CGCs are smaller scale gaming facilities that provide both bingo and slot machines, and are generally located in communities that are too small to support a full-service casino. CGCs allow for the introduction of between 25 and 100 slot machines into existing bingo halls.

To date, CGCs have opened in Dawson Creek, Williams Lake, Kamloops and Kelowna and applications have been approved for Campbell River, Courtenay and Fort Nelson. The facilities in Kamloops and Kelowna were opened in March 2005 and operate 50 and 65 slot machines, respectively.



Financial Performance

Selected Annual Information
---------------------------
(C$ in thousands, except per unit figures)

Year Year
ended ended
December December December December
31, 2005 31, 2004 31, 2005 31,2004
----------------- -----------------

Revenue Total assets 210,176 209,039
-----------------
-----------------
Table games 28,651 28,174
Slot machines Total
and other long-term
electronic financial
games 66,383 58,996 liabilities 171,205 163,869
Hotel revenue - 3,029
Unitholders'
Other 7,693 6,361 equity 21,403 21,446
----------------- -----------------
-----------------
102,727 96,560

Expenses 60,273 56,002
-----------------
EBITDA 42,454 40,558
-----------------
-----------------

Net earnings 35,753 32,830
-----------------
-----------------
Basic and
fully-diluted
earnings per unit 1.35 1.24
-----------------
-----------------
Distributable
cash generated,
per unit 1.4687 1.4235
-----------------
-----------------
Distributions
declared, per unit 1.3550 1.3012
-----------------
-----------------


Results of Operations

Revenue

Gateway's revenue is primarily earned through fees paid by the BCLC for operating the five BC casinos and by the AGLC for operating the Palace Casino. We also generate revenue by providing related casino services such as food and beverage, parking, foreign exchange services, and automated teller machines.



Three months Twelve months
C$ in thousands ended December 31, ended December 31,
% %
2005 2004 change 2005 2004 change
---------------------------------------------
Table games
revenue 7,175 7,495 28,651 28,174
Slot machines and
other electronic
games revenue 16,902 14,729 66,383 58,996
Hotel revenue - 692 - 3,029
Other revenue 2,044 1,351 7,693 6,361
-------------- ---------------
26,121 24,267 7.7% 102,727 96,560 6.4%
-------------- ---------------
-------------- ---------------


In 2005, our consolidated revenue totaled $102.8 million, which is 6.4% higher than in 2004. However, the 2004 consolidated revenue included $3.0 million generated by the operations of the Villa Hotel. Gateway operating this hotel from its acquisition on June 30, 2004 to October 31, 2004 when it was closed in anticipation of the redevelopment of the Burnaby Casino. Excluding this, total revenue for 2005 was approximately $9.3 million, or 9.8%, higher than during 2004.

On a quarterly basis, revenue was:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Table games
revenue 7,175 6,916 7,043 7,517 7,495 6,921 6,587 7,171
Slot machines
and other
electronic
games
revenue 16,902 16,959 16,839 15,684 14,729 15,182 14,733 14,352
Other
revenue 2,044 1,641 1,982 2,025 1,351 1,622 1,732 1,656
-------------------------------------------------------
Revenue from
gaming
operations 26,121 25,516 25,864 25,226 23,575 23,725 23,052 23,179
Hotel
revenue - - - - 692 2,337 - -
-------------------------------------------------------
Total
revenue 26,121 25,516 25,864 25,226 24,267 26,062 23,052 23,179
-------------------------------------------------------
-------------------------------------------------------


The increases in our 2005 quarterly gaming revenue, compared to 2004, are primarily related to the expansion of the Burnaby Casino, which opened on December 16, 2004, and the introduction of integrated voucher system ("IVS"), or ticket-in-ticket-out, technology at the Burnaby Casino and Lake City Casinos. Additionally, other income grew with the introduction of bar service at the Burnaby Casino in early 2005, the decision to take over restaurant operations at the Burnaby Casino in October 2005 and the introduction of food & beverage and liquor service at the Penticton Casino in mid-November 2005. Collectively, these initiatives generated incremental revenue of $565,000 during Q4/05.

Revenues are discussed in more detail in the Operating Segments discussion below.

Expenses

During 2005, our expenses totaled $60.3 million, or 58.7%, of total revenue, compared to $56.0 million, or 58.0%, of revenue in 2004. Total expenses comprised the following:



Three months Twelve months
C$ in thousands ended December 31, ended December 31,
% %
2005 2004 change 2005 2004 change
---------------------------------------------

Corporate and general
administration 1,112 859 4,443 4,268
Cost of food &
beverage services 867 535 2,516 1,935
Human resources 11,062 10,633 42,165 37,763
Marketing and
promotions 1,017 637 3,510 2,016
Occupancy 875 811 3,127 3,085
Operating 1,338 1,471 4,512 4,216
Hotel operating costs - 794 - 2,719
-------------- ---------------
16,271 15,740 3.6% 60,273 56,002 7.6%
-------------- ---------------
-------------- ---------------

Percentage of
total revenue 62.3% 64.9% 58.7% 58.0%
-------------- ---------------
-------------- ---------------


Our 2004 expenses included $2.7 million related to the Villa Hotel operations. Excluding this, 2005 expenses are $7.0 million, or 13.1%, higher than in 2004.

The 2005 increase is mainly attributable to increases in human resources costs, marketing and promotions and food and beverage services.

The increases in human resources costs are due primarily to:

1. Scheduled wage increases at all casinos;

2. A full year of increased wages at the Burnaby Casino from the increase in operating hours to 24 hours per day in June 2004, compared to half a year in 2004; and

3. Additional wages related to the December 2004 expansion of the Burnaby Casino.

The increased marketing and promotions expenses are due primarily to a joint marketing charge imposed by the BCLC on all new and expanded casinos in the GVRD. This charge came into effect for the Burnaby Casino on December 16, 2004. The increased costs are also related to marketing initiatives around the new BC Gold players club, which the BCLC recently rolled out. Both of these issues are discussed in more detail in the Operating Segments discussion below.

Expenses on a quarterly basis were:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Corporate
and general
adminis-
tration 1,112 686 1,431 1,214 859 1,186 1,137 1,086
Cost of food
& beverage
services 867 504 564 581 535 490 451 459
Human
resources 11,062 10,460 10,362 10,281 10,633 9,168 9,535 8,427
Marketing
and
promotions 1,017 870 779 844 637 488 575 316
Occupancy 874 780 758 715 811 699 784 791
Operating 1,338 907 1,003 1,264 1,471 1,096 749 900
Hotel
operating
costs - - - - 794 1,925 - -
-------------------------------------------------------
16,270 14,207 14,897 14,899 15,740 15,052 13,231 11,979
-------------------------------------------------------
-------------------------------------------------------

Percentage
of total
revenue 62.3% 55.7% 57.6% 59.0% 64.9% 57.8% 57.4% 51.7%
-------------------------------------------------------
-------------------------------------------------------


Corporate and general administration expense in the fourth quarter of 2005 was $426,000 higher than incurred in the third quarter of 2005. However, costs in the third quarter had been reduced by the reallocations of costs related to the previous quarters. If these costs are reflected in the quarter in which they were incurred, corporate general and administration was:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Corporate
general and
administration
as reported 1,112 686 1,431 1,214 859 1,186 1,137 1,086
Reclassifi-
cation
of costs
related to
Burnaby
redevelopment - 43 (22) (21) - - - -
Reclassif-
ication
of wages to
human
resources - 156 (78) (78) (76) (67) (49) (45)
Additional
recovery of
Q2 expenses
under
related
party
management
agreement - 84 (84) - - - - -
-------------------------------------------------------
Adjusted
corporate
general and
adminis-
tration 1,112 969 1,247 1,115 783 1119 1,089 1,041
-------------------------------------------------------
-------------------------------------------------------


The increase in our quarterly human resources costs, compared to 2004, is mainly due to the reasons presented above in the preceding discussion of annual expenses. However, human resources costs also rose between the third and fourth quarters of 2005. This was related to the increased food and beverage operations at the Burnaby Casino and the Penticton Casino, as explained in the revenue section above. Human resources costs for both food and beverage operations totaled approximately $280,000 in the fourth quarter.

As discussed in the 2004 MD&A, the Fund finalized the terms of its long-term incentive plan ("LTIP") during 2004 and adjusted its accounting accordingly. The Fund now accounts for LTIP contributions at the beginning of the year when the contribution is earned, with the expense being recorded as part of human resources cost. During 2004 the change in accounting led to an adjustment being recorded in the fourth quarter of 2004, which related to previous periods. Beginning in 2005 we are accruing the expense on a quarterly basis. For the first three quarters of the year, we expense and estimated amount based on the previous year's actual contribution. The accrual is adjusted in the fourth quarter to reflect the current year's actual contribution amount.

Finally, human resources costs for the fourth quarter include an adjustment of $90,000 to the statutory holiday pay accrual, which relates to the second and third quarters.

Adjusting for these items, the quarterly human resources costs would have been:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Total human
resources
expenses as
reported 11,062 10,460 10,362 10,281 10,633 9,168 9,535 8,427
LTIP expense
as reported (350) (248) (386) (293)(1,051) - (576) -
Adjusted
quarterly
compensation
expense 320 319 319 319 247 246 247 246
Reclassifi-
cation
of wages
from
corporate
general and
adminis-
tration - (156) 78 78 76 67 49 45
Adjustment
to stat pay
accrual (90) 45 45 - - - - -
-------------------------------------------------------
10,942 10,420 10,418 10,385 9,905 9,481 9,255 8,718
Incremental
wages from
food &
beverage
operations (280) - - - - - - -
-------------------------------------------------------
10,662 10,420 10,418 10,385 9,905 9,481 9,255 8,718
-------------------------------------------------------
-------------------------------------------------------


During the fourth quarter of 2005, total operating expenses were $431,000 higher than during the preceding quarter. Of this, $238,000 is due to a lower FDF expense recovery at the Lake City Casinos in the fourth quarter, due to the recovery of maintenance capital items. The remaining $193,000 is mainly due to timing differences in the purchases of casino supplies and other consumables.

After adjusting total expenses for all of the above quarterly items, quarterly expenses would have been:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Total
expenses as
reported 16,270 14,207 14,897 14,899 15,740 15,052 13,231 11,979
LTIP expense
as reported (350) (248) (386) (293)(1,051) - (576) -
Quarterly
LTIP expense
based on
actual
contrib-
utions 320 319 319 319 247 246 247 246
Quarterly
adjustments
to corporate
and general
administration
(net of
reclassifi-
cation
to human
resources) - 127 (106) (21) - - - -
Adjustment
to stat pay
accrual (90) 45 45 - - - - -
-------------------------------------------------------
Adjusted
total
expenses 16,150 14,450 14,769 14,904 14,936 15,298 12,902 12,225
Hotel
operating
costs - - - - (794)(1,925) - -
Incremental
F&B wages (280) - - - - - - -
-------------------------------------------------------
15,870 14,450 14,769 14,904 14,142 13,373 12,902 12,225
-------------------------------------------------------
-------------------------------------------------------


EBITDA and Net Earnings

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

The Fund generated earnings before gain on sale of assets, interest, income allocation on Class A units, amortization and unrealized gain on interest rate swap contract ("EBITDA") of $42.5 million for the year ended December 31, 2005. EBITDA margin for the year was 41.3%. This compares to EBITDA of $40.5 million, and an EBITDA margin of 42.0%, in 2004.

If we adjust for the impacts of the accounting for compensation and other expense items discussed above, and exclude hotel revenues and expenses generated in 2004, EBITDA would have been 43.7% of revenues in 2004 and 41.6% of revenues in 2005. On a quarterly basis, EBITDA would have been:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Adjusted
total
revenue 26,121 25,516 25,864 25,226 23,575 23,725 23,052 23,179

Adjusted
total
expenses 15,871 14,450 14,769 14,904 14,142 13,373 12,902 12,225
-------------------------------------------------------
Adjusted
EBITDA 10,250 11,066 11,095 10,322 9,433 10,352 10,150 10,954
-------------------------------------------------------
-------------------------------------------------------

Adjusted
EBITDA
margin 39.24% 43.4% 42.9% 40.9% 40.0% 43.6% 44.0% 47.3%
-------------------------------------------------------
-------------------------------------------------------


After amortization and net interest expense, the Fund generated net earnings of $35.8 million, or $1.35 per unit, for 2005, compared to net earnings of $32.8 million, or $1.24 per unit, for 2004.

The reconciliation between EBITDA and net earnings is:



Twelve months
ended
C$ in thousands December 31,

2005 2004
---------------------

EBITDA as reported 42,454 40,558

Interest income on secured loans 9,721 13,803
Income allocation on Class A
Partnership Units (9,733) (13,820)
Interest expense, net (2,995) (2,211)
Unrealized gain (loss) on interest
rate swap contracts 164 (1,461)
Gain on sale of assets 208 -
Amortization (4,066) (4,039)
---------------------

Net Earnings 35,753 32,830
---------------------
---------------------


As discussed above in "Structure of the Fund", the Secured Loans and Class A Partnership Units were reduced by $105.7 million during 2004 in connection with the GCI Shareholders reducing their collective ownership of the Fund to 20% (see "Capital Resources - Secured Loans and Class A Partnership Units" for more information). This resulted in a reduction in interest income earned on the Secured Loans in 2005, which was completely offset by a decrease in the income allocation on Class A Partnership Units.

During 2005, interest expense incurred increased by approximately $0.8 million over 2004, due entirely to an increase in long-term debt from $22.0 million to $48.4 million following the purchase of the Villa Hotel. As the purchase took place on June 30, 2004, the 2004 results include increased interest for only half a year.

Also in 2004, the Fund adopted new guidelines for hedge accounting in accordance with the CICA's Accounting Guideline 13, "Hedging Relationships" (which has since been replaced by Section 3865 of the CICA Handbook). In connection with the repayment of the outstanding amounts on the credit line in June 2004, the then outstanding interest rate hedge no longer qualified for hedge accounting and the Fund had to report this contract on its balance sheet at its fair value at the end of each quarter, with changes to the fair value being reported on the income statement. In December 2004, the interest rate swap contract was renegotiated to align the payments with the projected payments under the construction loan for the Burnaby Casino redevelopment, significantly reducing the net cash impact to the Fund. However, we have elected not to apply hedge accounting to the renegotiated contract and it must be marked-to-market each quarter. This resulted in a non-cash gain of $164,000 in 2005 and loss of $1,461,000 in 2004.



Summary of Quarterly Results
----------------------------
(C$ in thousands, except per unit figures)

-------------------------------------------------------
2005 2004
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------
Revenue
Table games
revenue 7,175 6,916 7,043 7,517 7,495 6,921 6,587 7,171
Slot
machines
and other
electronic
games
revenue 16,902 16,959 16,839 15,684 14,729 15,182 14,733 14,352
Hotel
revenue - - - - 692 2,337 - -
Other
revenue 2,044 1,641 1,982 2,025 1,351 1,622 1,732 1,656
-------------------------------------------------------
Total
revenue 26,121 25,516 25,864 25,226 24,267 26,062 23,052 23,179

Expenses 16,271 14,207 14,897 14,899 15,740 15,052 13,232 11,979
-------------------------------------------------------
EBITDA(1) 9,850 11,309 10,967 10,327 8,527 11,010 9,820 11,200
-------------------------------------------------------
-------------------------------------------------------

Net earnings 8,716 10,175 8,194 8,668 6,249 8,044 8,558 9,979
-------------------------------------------------------
-------------------------------------------------------
Basic and
diluted
earnings
per unit 0.33 0.39 0.31 0.33 0.24 0.30 0.32 0.38
-------------------------------------------------------
-------------------------------------------------------

Distributable
Cash(2) 8,940 10,536 9,956 9,367 9,299 9,105 9,047 10,159
-------------------------------------------------------
-------------------------------------------------------

Per unit 0.338 0.399 0.377 0.355 0.351 0.345 0.343 0.385
-------------------------------------------------------
-------------------------------------------------------
(1) EBITDA is not a defined term under Canadian generally accepted
accounting principles. See discussion under "EBITDA" and
"Net Earnings".

(2) Distributable cash is not a defined term under Canadian generally
accepted accounting principles nor does it have a standard,
agreed upon meaning. As such, the Fund's distributable cash may
not be directly comparable to distributable cash reported by
other income funds or similar issuers.


Operating Segments

The Partnership has three primary operating segments based on geographic markets. These are the Burnaby Casino, the Lake City Casinos and the Palace Casino. During the third quarter of 2004, the Partnership also operated the Radisson Villa Hotel in Burnaby, after acquiring it on June 30, 2004. These operations were temporary, as the hotel was shut down on October 31, 2004 in anticipation of its partial demolition in connection with the redevelopment of the Burnaby Casino. Operations of the hotel have not been included in this discussion of operating segments. Readers can refer to note 19, Segmented Information, to the 2005 Audited Financial Statements for additional information.

Although the Consolidated Statement of Earnings for the year ended December 31, 2005 includes corporate and general administration expenses, interest income on secured loans, income allocation on Class A Partnership Units, interest expense, gain on sale of assets and unrealized gain on interest rate swap contract in determining net earnings, these items are not income or expenses of any one operating segment, and have not been included in the following discussion. The compensation expense related to the long-term incentive plan of $1,278,000 in 2005 and $1,627,000 in 2004 is also not included, for similar reasons.

Burnaby Casino



Three months ended Year ended
C$ in thousands December 31, December 31,
% %
2005 2004 change 2005 2004 change
---------------------------------------------
Revenue
Table games revenue 4,107 4,875 17,217 17,693
Slot machine revenue 7,053 5,343 27,038 21,443
Food & beverage
revenue 635 4 1,019 4
Other revenue (6) 171 942 1,155
---------------------------------------------
11,789 10,389 13.5% 46,216 40,291 14.7%
---------------------------------------------

Operating expenses
Human resources 4,039 3,412 15,297 12,135
Occupancy 156 89 446 605
Food & beverage 330 10 490 10
Other operating
expenses 1,135 867 4,626 3,017
---------------------------------------------
5,660 4,368 29.6% 20,859 15,757 32.4%
---------------------------------------------

Operating earnings
before amortization 6,129 6,021 1.8% 25,357 24,534 3.4%
-------------- ---------------
-------------- ---------------


During the year ended December 31, 2005, total revenues at the Burnaby Casino rose by $5.9 million compared to the same period in 2004. This was due primarily to increased slot machine revenue. On December 16, 2004, the expansion of the Burnaby Casino was opened, which increased the facility's number of slot machines from 300 to 679 and introduced IVS technology, allowing for cashless play. The facility's expansion is the primary reason for increased gaming revenue during 2005, on both a quarterly and an annual basis. The expansion also enabled the Burnaby Casino to recover from a temporary loss of slot machine revenue, which declined following the opening of the River Rock Casino in June 2004.

Offsetting the increased slot machine revenue was a decrease in table games revenue of $476,000 for the year. This is entirely related to a year-over-year decrease of $768,000 experienced in the fourth quarter of 2005. Although the expansion of the Coquitlam Casino opened in mid-November 2005, this is unrelated to the decrease. Total drop, which is the total amount that customers bought in on the table games, was consistent across the quarters. The hold percentage, or the amount retained by the casino, however, fell. Had the Burnaby Casino realized the same hold percentage on blackjack and mini baccarat in the fourth quarter of 2005 as in 2004, table games revenue in the fourth quarter would have been higher by $547,000.



Q4/05 Q4/04
--------------------------------

Total drop $58.7 million $58.4 million
Hold percentage 17.2% 20.2%


The decrease in hold percentage was primarily related to a drop in the hold percentages in both blackjack and baccarat, which fell half a percentage point and five and a half percentage points, respectively. These two games account for approximately 75% of the total drop in table games. The lower hold percentage for baccarat appears to be related to a change or progression in the player base to a more sophisticated player. It also appears to be an industry wide issue, as all BC casinos have experienced this to some extent, with casinos that serve large table games markets impacted to a higher degree.

To counter these effects, changes were made to both games. In December 2005, all of our blackjack tables were converted to "Lucky Lady" blackjack, which combines traditional blackjack with an optional bonus and typically improves the hold percent over traditional blackjack. Additionally, one of our baccarat tables was replaced with a seven spot table, versus the nine spot tables historically used in the Burnaby Casino. This allows for a faster speed of play, which increases revenue. During the first quarter of 2006 so far, we have seen a positive impact from both of these changes and are examining the possibility of replacing all of our baccarat tables with seven-spot tables.

2005 revenue also included food & beverage revenue at the Burnaby Casino for the first time. Prior to 2005, food and beverage services at the Burnaby Casino did not include alcoholic drinks and were operated by an unrelated third party. Gateway received only a small monthly lease payment which was netted against expenses. In January 2005, Gateway was granted a liquor license for the Burnaby Casino and opened a bar service. In October 2005, Gateway took over the operation of the remaining food and beverage services from the third party operator. As a result, the Burnaby Casino reported both food and beverage revenue and expenses for 2005.

Total expenses for 2005 were $5.1 million, or 32.4%, higher than in 2004. This is mostly due to the increased costs of the expanded operations (primarily increased human resources and operating expenses), increased marketing costs and the costs associated with the new food and beverage operations.

Human resources costs for 2005 were $3.2 million, or 26.1%, higher than incurred in 2004. Approximately $2.6 million of this increase is related directly to the expansion of the Burnaby Casino, which opened at the end of 2004. The balance is due to:

- planned wage increases;

- a full year of increased wages at the Burnaby Casino after increasing operating hours to 24 hours per day in June 2004, compared to half a year in 2004.

Other operating costs were approximately $1.6 million higher than during 2004, due mainly to increased marketing costs. This resulted largely from the BCLC's imposition of a joint marketing charge on all new or expanded facilities in the GVRD. This additional charge, which came into effect upon the opening of the expanded Burnaby facility, is equal to 0.75% of net win generated by the casino, and is to increase to 1.5% of net win in May 2006. The total joint marketing expense for 2005 was $1.1 million for the Burnaby Casino.

These funds, as well as those paid by other operators, are put into a joint marketing fund held by the BCLC to promote BC's casino industry, both within and outside the province. A committee that includes representation from casino operators will administer the funds and the marketing initiatives. The Burnaby Casino is the only one of the Fund's casinos that contributes to this fund. Although the BCLC has not yet begun the associated marketing activities, the Fund has chosen to account for these expenses on a conservative basis as expenses of the period incurred, rather than reporting them as prepaid expenses to be recognized at a later date when the marketing has started.

The remaining increase in marketing costs is due to a variety of initiatives, including a new campaign targeting BC Gold members. BC Gold is a province-wide players club, which the BCLC rolled out during the last part of 2004. It provides operators with access to BC Gold members for direct marketing purposes.

The following table presents the Burnaby Casino's results for the four quarters of 2005 and 2004:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Revenue
Table games
revenue 4,107 4,090 4,363 4,657 4,875 4,128 4,095 4,594
Slot machine
revenue 7,053 6,827 6,724 6,434 5,343 5,008 5,401 5,691
Food &
beverage
revenue 635 129 133 122 - - - -
Other
revenue (6) 216 295 437 171 276 336 373
-------------------------------------------------------
11,789 11,262 11,515 11,650 10,389 9,412 9,832 10,658
-------------------------------------------------------

Operating
expenses
Human
resources 4,039 3,872 3,615 3,771 3,412 3,058 2,959 2,706
Occupancy 156 94 95 101 89 84 208 224
Food &
beverage 330 48 55 57 - - - -
Other
operating
expenses 1,129 1,102 1,096 1,299 867 790 751 609
-------------------------------------------------------
5,654 5,116 4,861 5,228 4,368 3,932 3,918 3,539
-------------------------------------------------------

Operating
earnings
before
amortization 6,135 6,146 6,654 6,422 6,021 5,480 5,914 7,119
-------------------------------------------------------
-------------------------------------------------------


Slot machine revenue continued to increase during the fourth quarter, with average win per day per machine up slightly over the third quarter, despite the November opening of the expanded Coquitlam Casino. Although table games revenue decreased in the third quarter, due to a decrease in total drop, results for the fourth quarter shows cash played returning to prior levels, although the hold percentage fell, as discussed above.

As discussed earlier in this MD&A, we reclassified certain casino-related wages from corporate and administration expenses to human resources, all of which were related to the Burnaby Casino. If these adjustments are reflected in the proper quarters, human resources costs for the Burnaby Casino would have been:



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

Human resources
expenses as
reported 4,039 3,872 3,615 3,771 15,297
Reclassification
to wages to
human resources
costs (156) 78 78
------------------------------------------------
Adjusted human
resources
expenses 4,039 3,716 3,693 3,849 15,297
------------------------------------------------


Of the $323,000 increase in human resources costs in the fourth quarter, $164,000 is due to the incremental wages associated with our operation of the food and beverage services. The remaining increase is mainly related to a number of smaller items, including:

- the cost related to the statutory holidays over the Christmas season, as the casino is open 365 days a year;

- additional training in the quarter;

- additional employee hours in the quarter

The comparatively low operating margin in the fourth quarter of 2005 is a direct result of the low table games revenue discussed above. As this was caused by hold levels, not drop, and labour requirements are determined by gaming volume, table games wages as a percentage of table games revenue was higher than in previous quarters.

Lake City Casinos



Three Months ended Year ended
C$ in thousands December 31, December 31,
% %
2005 2004 change 2005 2004 change
--------------------- ----------------------
Revenue
Table games revenue 975 966 4,089 3,979
Slot machines and
other electronic
games revenue 7,209 6,546 28,498 26,811
Food & beverage
revenue 280 159 833 648
Other revenue 7 (124) 436 174
--------------------- ----------------------
8,471 7,547 12.2% 33,856 31,612 7.1%
--------------------- ----------------------

Operating expenses
Human resources 4,241 3,913 16,072 15,080
Occupancy 387 374 1,394 1,230
Food & beverage 147 104 499 397
Other operating
expenses 1,141 933 3,538 2,903
FDF expense recovery (483) (175) (2,449) (2,015)
--------------------- ----------------------
5,433 5,149 5.5% 19,054 17,595 8.3%
--------------------- ----------------------

Operating earnings
before amortization 3,038 2,398 26.7% 14,802 14,017 5.6%
-------------- ---------------
-------------- ---------------


Results at the Lake City Casinos continued their strong growth trend in 2005. Revenue for the fourth quarter of 2005 was up by approximately 12.2% from the same period in 2004. This brought year-to-date revenue to $33.9 million, an increase of 7.1% over 2004. Most of the year-to-date growth came from an increase in slot machine revenue, reflecting the continuation of the general growth trend that we recorded throughout 2004.

During the second quarter of 2005, the Sega Royal Ascot electronic racing machine was removed from the Kelowna Casino and replaced with 12 slot machines. During July 2005 a further 21 machines were installed at the Kelowna Casino and in August an additional 10 machines were installed, bringing the total to 342.

During March of 2005, the BCLC began converting slot machines at our Kamloops and Kelowna Casinos to IVS. The conversion of 270 machines at the Kelowna Casino was completed during the second quarter and the conversion of 180 machines in the Kamloops Casino was completed during the third quarter. Additionally, the BCLC converted 97 slot machines in the Vernon Casino to IVS in the fourth quarter of 2005 and have scheduled up to 81% of its slot machines to be converted by the end of the first quarter of 2006. Since year-end, the Penticton Casino has had 14 slot machines converted, with an additional 72 machines expected to be converted by the end of the first quarter of 2006.

Fourth quarter revenue also includes approximately $60,000 related to the introduction of liquor service at the Penticton Casino in December 2005. The new service added incremental labour costs of approximately $50,000. Gateway has also received approval to serve liquor in the Kelowna Casino and service began on March 5, 2006.

Total expenses in fourth quarter of 2005 were approximately 5.5% higher than during the same period in 2004, bringing expenses for the year to $19.1 million. This is an increase of approximately $1.4 million, or 8.3%, over 2004. If the FDF recovery of previous years' expenses is excluded from the total, expenses for 2005 were $21.5 million, approximately $1.9 million higher than the $19.6 million incurred in 2004.

The increased expenses we recorded in 2005 are mainly due to higher human resources costs and other operating expenses. The rise in human resources expenses, compared to 2004, is generally due to a new collective agreement signed at the beginning of this year. On September 5, 2004, the collective agreement covering the majority of the Lake City Casino employees, excluding managers, supervisors and surveillance staff, expired. Negotiations were ongoing throughout the fourth quarter of 2004 and on January 27, 2005 the employees ratified a new three-year collective agreement that provided for annual increases of 2.4% per year. This is equal to the rate of inflation for the province of B.C. for the year ended November 30, 2004 and was retroactive to the expiry of the previous contract. Additionally, a total of $181, 000 was paid in signing bonuses upon ratification, which was recorded in the first quarter of 2005. Increases for the second year of the contract were effective on September 5, 2005, resulting in an increase of approximately $56,000 in quarterly wages during the fourth quarter.

The rise in other operating expenses for the quarter is primarily related to increased activity at our casinos and higher marketing and promotion expenses, which related to marketing campaigns targeted to BC Gold members, and other promotional initiatives. Additionally, with the introduction of IVS, the BCLC requires that the casinos provide complimentary beverages, which was implemented at the Kamloops and Vernon Casinos in September 2005.

The following table compares our results for each quarter of 2005.



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------
Revenue
Table games
revenue 975 1,140 1,014 960 966 1,076 975 962
Slot
machines
revenue 7,209 7,579 7,183 6,528 6,546 7,399 6,723 6,143
Food &
beverage
revenue 280 208 178 166 159 176 166 147

Other
revenue 7 83 226 120 (124) 69 182 47
-------------------------------------------------------
8,471 9,010 8,601 7,774 7,547 8,720 8,046 7,299
-------------------------------------------------------

Operating
expenses
Human
resources 4,241 3,980 3,951 3,900 3,913 3,876 3,745 3,546
Occupancy 387 369 338 300 374 309 277 270
Food &
beverage 147 127 114 111 104 110 97 86
Other
operating
expenses 1,141 847 764 786 933 715 640 615

FDF expense
recovery (483) (721) (663) (582) (175) (695) (612) (533)
-------------------------------------------------------
5,433 4,602 4,504 4,515 5,149 4,315 4,147 3,984
-------------------------------------------------------

Operating
earnings
before
amortization 3,038 4,408 4,097 3,259 2,398 4,405 3,899 3,315
-------------------------------------------------------
-------------------------------------------------------


The quarterly fluctuations in gaming revenue are consistent with the historical operations of the Lake City Casinos. The fourth quarter of the year is typically slower than the second and third quarter, as visitor levels in the Okanagan region rise during the summer.

Total expenses for the fourth quarter of 2005, before FDF expense recovery, were $593,000 higher than during the previous quarter. Of this, $261,000 is due to higher human resources costs. As discussed above, the addition of liquor service at the Penticton Casino during the quarter added approximately $50,000 in human resources costs and scheduled wage increase added $56,000. The balance is mainly due to an adjustment to the statutory holiday pay accrual from previous quarters, as discussed above for the consolidated expenses. Adjusting for these, quarterly human resources costs would have been:



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Human
resources
costs as
reported 4,241 3,980 3,951 3,900 3,913 3,876 3,745 3,546
Adjustment
to stat pay
accrual (90) 45 45 - - - - -
-------------------------------------------------------
Adjusted
human
resources
costs 4,151 4,025 3,996 3,900 3,913 3,876 3,745 3,546

Incremental
wages from
liquor
service (50) - - - - - - -
Scheduled
wage
increase (56) - - - - - - -
-------------------------------------------------------
4,045 4,025 3,996 3,900 3,913 3,876 3,745 3,546
-------------------------------------------------------
-------------------------------------------------------


Other operating expenses in the fourth quarter were approximately $294,000 higher than during the third quarter of 2005, due to a number of small items. The largest of these items was the implementation of complementary non-alcoholic beverages at the Kamloops and Vernon Casinos on September 15, 2005, which is a requirement of the BCLC in connection with the conversion of slot machines to IVS technology. This change resulted in an additional $74,000 of expenses in the fourth quarter of 2005.

The remaining increase relates primarily to an increase in the level of advertising and promotion activity in the four quarter, which is consistent with previous years. As the fourth quarter and first quarter of the year are the slowest periods, we increase the amount of marketing and promotion activity to drive additional traffic.

During September 2004, a community gaming centre was opened in Kamloops and in Kelowna, each with 50 slot machines each. In March 2005, Kelowna's community gaming centre received 15 more slots bringing their total to 65. As discussed in the 2004 MD&A, these machines differ from the slot machine offerings at the Lake City Casinos, mostly in lower denomination and potential payout. To date, the community gaming centres have not had any impact on revenue at the Lake City Casinos in Kamloops and Kelowna.

Palace Casino



Three Months ended Year ended
C$ in thousands December 31, December 31,
% %
2005 2004 change 2005 2004 change
--------------------- ----------------------
Revenue
Table games revenue 2,092 1,653 7,345 6,502
Slot machines and
other electronic
games revenue 2,641 2,841 10,847 10,742
Food & beverage
revenue 1,039 1,098 4,050 4,023
Other revenue 89 42 412 362
--------------------- ----------------------
5,861 5,634 4.0% 22,654 21,629 4.7%
--------------------- ----------------------

Operating expenses
Human resources 2,410 2,256 9,497 8,921
Occupancy 332 346 1,287 1,249
Food & beverage 390 414 1,526 1,528
Other operating
expenses 561 634 2,302 2,339
--------------------- ----------------------
3,693 3,650 1.2% 14,612 14,037 4.1%
--------------------- ----------------------

Operating earnings
before amortization 2,168 1,984 9.3% 8,042 7,592 5.9%
--------------------- ----------------------
--------------------- ----------------------


During 2005, total revenue at the Palace Casino grew by 4.7% over 2004. The increase was achieved despite a smoking ban which came into effect on July 1, 2005 in the City Edmonton, affecting all bars, lounges, bingo halls and casinos. Based on our experience in other jurisdictions, where similar bans were implemented, we believed revenue at the Palace Casinos could be immediately impacted by up to 15%, with a recovery to pre-ban levels occurring within nine to 12 months. We are very pleased with how the Palace Casino has weathered the ban so far.

The ban's main impact has been a decrease in revenue from slot machines and other electronic games. While 2005 revenue from slot machines and other electronic games was up 1% compared to 2004, it fell by 8% during the second quarter of 2005 and by 7% in the fourth quarter of 2005, compared to the same periods in 2004. However, we continue to see a month-over-month recovery as we move forward. Compared to 2004 monthly decreases in slot machine and other electronic games revenue were as follows:



% change from 2004

July (5.5%)
August (11.7%)
September (6.7%)
October (7.3%)
November (7.3%)
December (6.7%)


As Edmonton hosted the World Master Games during July, the ban's impact on that month's results may be masked by a related increase in activity at the casino. The event brought 20,000 people over the age of 35 into the city.

In contrast to slot machines and other electronic games revenue, table games revenue rose by 13% in 2005 and by 26.6% during the fourth quarter. In fact, actual drop (the amount of money wagered by players) in the fourth quarter grew by approximately 18.9% compared to the same period last year. Win percentage also grew during the fourth quarter, rising by 12% over the same period last year. As no operational changes were made to the Palace Casino during 2005 that would account for these increases, management believes that they are due to the normal fluctuations experienced in the gaming industry on table games.

During 2005, total expenses at the Palace Casino were approximately 4.1% higher than during 2004; however, expenses as a percentage of revenue, are comparable at 64.5% for 2005 and 64.9%, for 2004. Both quarter over quarter and year over year increases were primarily due to scheduled wages increases and higher labour costs associated with a rise in table game play and poker activities in 2005.

The following table compares the Palace Casino's quarterly results for 2005 and 2004.



C$ in
thousands Q4/05 Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
-------------------------------------------------------

Revenue

Table games
revenue 2,092 1,687 1,665 1,901 1,653 1,718 1,517 1,614
Slot
machines
and other
electronic
games
revenue 2,641 2,553 2,933 2,721 2,841 2,774 2,609 2,518

Food &
beverage
revenue 1,039 909 1,030 1,073 1,097 999 942 984
Other
revenue 89 95 120 106 42 107 107 106
-------------------------------------------------------

5,861 5,244 5,748 5,801 5,633 5,598 5,175 5,222
-------------------------------------------------------

Operating
expenses

Human
resources 2,410 2,360 2,410 2,317 2,256 2,234 2,256 2,175

Occupancy 332 316 325 314 346 311 297 295

Food &
beverage 390 328 394 414 414 381 354 379

Other
operating
expenses 561 551 586 604 633 594 564 547
-------------------------------------------------------

3,693 3,555 3,715 3,649 3,649 3,520 3,471 3,396
-------------------------------------------------------

Operating
earnings
before
amortization 2,168 1,689 2,033 2,152 1,984 2,078 1,704 1,826
-------------------------------------------------------
-------------------------------------------------------


Outlook

BC Operations

Operational Changes

Since beginning the first quarter of 2006, the BCLC has introduced a number of new revenue-building initiatives in BC casinos. In January 2006 it enhanced the BC Gold Card, the recently launched player loyalty program, to include a points for play program. Members receive 1 BC Gold point for every dollar played in slot machines. 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.

In February 2006 the BCLC launched a wide-area progressive slot machine program across all BC casinos. Each casino operates a bank of slot machines that are interconnected. Play on these machines contributes to a province-wide progressive jackpot, which provides various levels of random bonuses. The top bonus jackpot is guaranteed to be a minimum of $100,000 and can be as high as $200,000. Although progressive bonuses are common at most casinos in North America, and very popular with slot machine players, this is the first time that such a program has been introduced in BC. To date it has proven very popular.

In March 2006 the BCLC introduced "Squeeze Play" mini baccarat, which Gateway has implemented in the Burnaby Casino's high limit area. "Squeeze Play" differs from traditional baccarat in that players are allowed to hold their cards and "squeeze" their hand (or slowly look at their cards, adding an additional layer of suspense to the game). This version of the game is very popular in Asian casinos and is expected to attract a large following in the GVRD.

All of these initiatives are expected to have a positive impact on revenue at our BC casinos in 2006.

Market Developments

As discussed earlier in this MD&A, some new and expanded casino operations that opened in the GVRD during 2005, although the pace of change was not as strong as in 2004. Looking forward, we expect to see additional growth in the market from the following projects:

1. The installation of 600 slot machines at the Hastings Racecourse in Vancouver, which was previously expected in the fourth quarter of 2005, has been delayed. Although no specific opening date has been given, it is anticipated that the slots will be ready for play sometime in the second quarter of 2006.

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

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

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

Redevelopment of the Burnaby Casino

The redevelopment of the Burnaby Casino will see a new facility built on the site of the Radisson Hotel Burnaby, which Gateway purchased last summer. Situated across the street from the current facility, the project includes a new 100,000 square foot casino, a full-service restaurant, a new lobby for the hotel and a convention center, as well as upgrades to the existing 200 rooms located in the tower portion of the hotel. The new casino will house up to 1,000 slot machines and up to 60 table games, a 16-table poker room, a high-limit gaming area, and the necessary back-of-house amenities. The casino will also expand on the food and beverage alternatives currently offered at the Burnaby Casino by providing a number of quick serve food choices, an entertainment lounge with bar and a central bar on the main floor of the casino. Once the new facility is opened, the existing casino will be converted back into a parkade, with an additional level and a half of parking constructed. This structure will be connected to the new casino by a covered overhead walkway, allowing easy and comfortable access to the casino.

The total construction budget for the project is approximately $105 million. This includes both a contingency allowance and an allowance for further cost increases which may result from the continued escalation of demand within BC's construction industry. We expect that approximately 80% of the project's total cost will be eligible for compensation from the Facility Development Fund. However a final determination will be made by BCLC once a detailed budget is submitted and approved.

Despite BC's current construction challenges, the redevelopment of the Burnaby Casino remains on track for a proposed spring 2008 opening. The tender process for selection of the general contractor began in February 2006, in accordance with the planned schedule. On February 9, 2006, after an extensive interview process, Gateway submitted tender packages to,and has received confirmation of intent to bid from two of the largest construction companies in Canada, which operate nationwide. The tender process takes six to eight weeks and a general contract is expected to be awarded by early April, 2006.

The general contract will fix a majority of the project's construction costs, with additional construction costs subject to fixed price contracts in the near future. This will result in approximately 70% of the project's total development costs being fixed. The remaining costs primarily represent items such as furniture and fixtures, interior finishing, pre-opening costs, etc., which are not generally subject to the substantial cost increases currently being seen in the construction industry.

In order to begin the actual development work prior to selection of a general contractor, Gateway awarded the contracts for site preparation and piling in December 2005, with work beginning in January 2006. Currently, the excavation and site preparation work is ongoing and expected to be complete in March 2006. Piling work will begin immediately thereafter.

GVRD Market Saturation

The growth in casino supply in the GVRD during 2004 and 2005 has led many people to speculate that the market has become saturated. We do not agree,for a number of reasons.

Firstly, it is important to recognize that this has been, and will continue to be, a process closely managed by the BCLC, which receives the largest share of the revenue generated at casinos. The BCLC determines where a new casino will be located and how many gaming devices will be offered at that casino. The recent and planned growth in casinos is simply the execution of a plan developed by the BCLC in 2003, which is designed to bring BC's casino industry into line with other Canadian provinces.

Historically, BC has had one of the lowest per capita gaming spends of all of the provinces. According to a study prepared by KPMG, which examined Canadian gaming revenue during the year ended March 31, 2002,BC's average spend per capita at casinos was $202, compared to the national average of $229 excluding VLTs and $466 including VLTs. While this gap narrowed for the year ended March 31, 2004, as shown in the chart below, there is still a sizeable difference in the province's average gaming spend. Including all forms of gaming, BC's gaming spend was $394 per adult. In comparison, the Canadian average was $501, and per capita spending nearing $700 in Alberta and Saskatchewan. We believe that this gap is supply driven, and continues to exist today, despite the gaming supply that has been added in the GVRD since March 2004.

To view the chart, please click on the following link: http://www.ccnmatthews.com/docs/gcigraph.jpg.

In recognition of BC's shortfall in gaming supply, the BCLC undertook an estimate of the potential gaming market in late 2002. Based on gaming parameters from other, more mature Canadian gaming jurisdictions market demand at that time was estimated to be at least $700 million per year. In response, the BCLC developed a new casino model for the GVRD, which envisioned offering a fewer number of larger casinos. In addition to providing more non-gaming entertainment options, these facilities were specifically designed to provide sufficient gaming supply to meet unfulfilled demand. All of the projects that have been developed since then, as well as those that are currently under development, were identified at that time, with casino operators subsequently working to execute the planned growth.

The BCLC has also specifically stated in its Service Plan for 2005 to 2008 that its goal is to grow casino revenue and improve the quality of the product with fewer, better locations sized to the market. As the BCLC provides the slot machines for all casinos, which is a substantial capital cost, and as it ultimately refunds casino operators for a majority of their capital costs out of the FDF, we believe it is not in the BCLC's interest to permit more gaming supply than necessary to meet demand. To do so would not generate substantial additional casino revenues and reduce the BCLC's overall return.

Recently, one of the foremost independent gaming experts in Canada estimated that market demand for casinos in the GVRD has grown to approximately $850 million per year. While we believe this is conservative, and place demand at closer to $1.0 billion per year, it is more than sufficient for all of the current and planned facilities to generate strong revenue.

Although there has been growth in the number of slot machines in the GVRD since 2003, it started from a very low number. Today approximately 3,800 slot machines are in operation, compared to approximately 1,000 slot machines in 2003, serving a population of approximately 2.1 million people. By 2008, when all the projects under development are complete, we estimate that the number of slot machines will have risen to approximately 5,500. However, even this does not represent a level that is out of line with other Canadian gaming jurisdictions. The following table compares the number of adults per slot machine in other Canadian cities with the projection for the GVRD in 2008.



-----------------------------------------
Number of
adults per
slot machine
and other
electronic
games
-----------------------------------------

-----------------------------------------
Ottawa / Hull 270
-----------------------------------------
Montreal 890
-----------------------------------------
Edmonton 260
-----------------------------------------
Calgary 400
-----------------------------------------
Winnipeg 320
-----------------------------------------
Regina 180
-----------------------------------------

-----------------------------------------
Projected GVRD 300
-----------------------------------------
Source: HLT Advisory Inc. and company estimates


As can be seen, once the current developments are completed, the ratio of adults to slot machines for the GVRD is well within the range currently seen in other cities. More importantly, since a higher number represents a lower number of slot machines for a given population number, the GVRD will be comparatively less saturated than Ottawa/Hull, Edmonton and Regina are today.

Potential Redevelopment of the Lake City Casinos

During the last half of 2005, Gateway began to investigate the redevelopment of some of its Lake City Casinos in the Thompson / Okanagan region of BC. As one of the fastest growing regions in Canada, this market has enabled the Lake City Casinos to generate steadily growing revenues during the last few years and we believe it continues to represent a strong growth opportunity. However, capitalizing on this opportunity will likely require expanded or new facilities for our Kamloops, Kelowna and Vernon Casinos.

In February 2006, Gateway entered into an agreement, subject to due diligence, to purchase 1.25 acres of land in Kamloops, adjacent to our current casino. Preliminary plans envision building a new 30,000 to 35,000 square foot casino on this property, almost doubling the size of our current facility. In Kelowna we are currently evaluating an expansion of the existing casino at the Grand Okanagan Lakeside Resort. This would enable us to increase the number of slot machines available and add enhanced food and beverage facilities and live entertainment.

All of these plans are in the preliminary evaluation stage only. Any redevelopment is subject to approval by the BCLC and the relevant municipal government. Additional details will be made available as the plans mature.

Alberta Operation

Operational Changes

As discussed earlier in this MD&A, the City of Edmonton implemented a smoking ban on July 1, 2005, which impacted all bars, casinos and bingo halls. The ban's affect on the Palace Casino was less than we had anticipated, with a faster than expected recovery occurring over the second half of 2005. We believe the smoking ban will have little impact on our 2006 revenue and that we will see a full recovery early in the year.

During 2006 the AGLC is expected to introduce ticket-in-ticket-out technology into Alberta casinos. This will begin with a 90-day test implementation of 100 slot machines at the Palace Casino beginning at the end of March. If the test is successful, the AGLC will begin rolling out the technology to all casinos in June. We anticipate that all of the Palace's slot machines will be converted by the end of June. This will both reduce labour expenses related to slot machine operations and increase slot machine play by reducing downtime related to jackpot payouts, bill jams and other issues associated with cash play.

Market Developments

As discussed earlier, 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 north east of Edmonton's city centre, outside of the Palace Casino's primary market area.

The River Cree Resort and Casino, which is scheduled for completion in the fall of 2006, will be located on the Enoch Cree Nation reserve on the northwest outskirts of Edmonton, less than 10 kilometres from the Palace Casino. As the casino will provide 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 provide the Palace Casino with a strong competitive advantage over this facility, and we would not expect a 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. Under agreement with the City of Edmonton in relation to the provision of city services to the casino, the River Cree have agreed to restrict smoking to approximately 30% of their facility, but this does provide an advantage over other casinos in Edmonton. This could potentially lead to a permanent loss of customers at the Palace Casino, which, although we cannot estimate with any certainty at this time, we expect could be up to 15%.

Liquidity

Distributable Cash

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

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

Costs incurred for the redevelopment of the Burnaby Casino, including capitalized interest, have been excluded from the calculation of distributable cash. As we expect that 100% of the costs of the redevelopment project will be funded through bank debt or FDF recoveries, these costs have not and will not be included in our calculation of distributable cash. FDF received in the year to date relating to the redevelopment and last year's expansion of the Burnaby Casino have also been excluded, as those costs were not included in distributable cash in 2004 (see 2004 MD&A).

Distributable cash for the years ended December 31, 2005 and 2004 was as follows:



C$ in thousands Year ended
December 31,
2005 2004

Cash flows from operating activities before
changes in non-cash working capital items 40,747 39,957

Maintenance capital expenditures(1) (601) (1,214)
FDF reimbursement received for property
and equipment purchases 182 641
Payments made on Kamloops Casino renovation loan - (424)
Proceeds on sale of property and equipment 212 -
Payments on long-term debt, net (7,713) (152)
Proceeds from issuance of long term debt 7,500 -
Long term incentive plan contributions (1,527) (1,202)
------------------

Distributable cash for the period 38,799 37,606
------------------
------------------
Per unit 1.4687 1.4235
------------------
------------------
(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.


Distributions were made on a monthly basis as follows:



Distribution
per unit Payment Date
-----------------------------------
January 2005 $ 0.110 February 29, 2005
February 2005 0.110 March 31, 2005
March 2005 0.110 April 30, 2005
April 2005 0.110 May 31, 2005
May 2005 0.110 June 30, 2005
June 2005 0.110 July 31, 2005
July 2005 0.110 August 31, 2005
August 2005 0.110 September 30, 2005
September 2005 0.1150 October 31, 2005
October 2005 0.1150 November 30, 2005
November 2005 0.1150 December 31, 2005
December 2005 0.1300(1) January 31, 2006
------------
$ 1.3550
------------
------------
(1) The December distribution included a regular monthly distribution
of $0.115 per unit plus a special, year-end distribution of
$0.0150 per unit


The recent increase to our monthly distribution during 2005 extends our track record of cash distribution performance, which has seen our monthly distribution target rise from $0.10 per unit per month at our inception to $0.105 cents in September 2003, $0.11 in November 2004, and, beginning with September's distribution, $0.115 per unit.

To view the graph, please click on the following link: http://www.ccnmatthews.com/docs/gcigraph2.jpg.

We have also made special year-end distributions in each of the last three years. The special year-end distribution reflects our conservative approach to managing the Fund. Management regularly reviews the underlying fundamentals of the casino operations and makes recommendations to the Board of Trustees about the level of monthly distributions. It is our policy to increase the amount of regular distributions only when there has been a sustainable increase in Gateway's operations. To this end, we wanted to be reasonably certain that the increases in our results recorded through the year were not anomalies and that the full effect of the changes in the BC market had been determined, such that we would be able to sustain the higher level of distributions. The result was that we retained excess distributable cash within the Fund during each year, which was passed on to our unitholders through the special distribution in December.

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

Contractual Obligations

The following contractual obligations were outstanding at December 31, 2005:



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

Long-term debt
Promissory note(1) 900 90 180 180 450
Long term notes 47,500 - - - 47,500
Lease obligations(2) 15,979 2,717 5,039 2,691 5,532
--------------------------------------------
64,379 2,807 5,219 2,871 53,482
--------------------------------------------
(1) repayable in 120 equal monthly payments of $7,500 beginning
January 1, 2006
(2) for the Partnership's casino locations, as well as certain
office equipment and office space


Issue of Long-Term Notes and Shelf Facility

On August 4, 2004, the Partnership and its general partner, Gateway Casinos G.P. Inc. ("Gateway GP") completed a private placement of long-term notes payable. Under the terms of the agreement, Gateway GP issued $40 million of notes, which bear interest at 6.565%, payable quarterly in arrears, and mature on August 4, 2011. Proceeds from the offering were used to repay $37,460,000 outstanding under the Partnership's credit facility and for certain costs incurred on the redevelopment of the Burnaby Casino in 2004. The remaining amount is available to fund expenditures related to the redevelopment of the Burnaby Casino.

In addition to the long-term notes issued on August 4, 2004, Gateway had arranged an uncommitted shelf facility of up to US$45.6 million (or the Canadian dollar equivalent) whereby the Partnership and/or Gateway GP can, subject to acceptance by the lender, issue additional notes with terms of between five years and seven years, bearing interest at rates to be determined at the time of issue based on then-current market factors.

On October 31, 2005, Gateway GP issued an additional $7,500,000 of notes under the shelf facility, which bear interest at 5.39%, payable quarterly in arrears, and mature on October 31, 2012. Funds were used primarily to repay the mortgages due on October 31, 2005 and December 1, 2005.

Full details of the long-term notes are provided in note 12(b) to the Audited Financial Statements.

Bank Credit Facility

During the year ended December 31, 2005, the Fund renegotiated the Credit Facilities to increase the total available under the facilities to $90 million, comprising the following:

i) Facility A is a committed, revolving evergreen facility providing a maximum of $20 million. The Funds are available for general corporate purposes, including the issue of letters of credits. As at December 31, 2005, the Fund had letters of credit outstanding against this facility of $12.6 million.

ii) Facility B is a $70 million construction facility for the development of the Burnaby Casino, subject to fulfillment of standard conditions precedent for construction financing. As at December 31, 2005, no amounts had been drawn against this facility.

Both facilities can be drawn as prime-based loans or Bankers Acceptance ("BA"), which bear interest at prime plus 0% to 0.50% or BA rates plus 0.875% to 1.50%, respectively, based on the ratio of Debt to EBITDA on a quarterly basis. Interest on Facility B will be capitalized until completion of the redevelopment. Thereafter, Facility B will be amortized over a 10-year period, with the outstanding amount due in full at maturity. The outstanding amount of Facility B must be permanently reduced to a maximum of $35 million by June 29, 2007.

The Credit Facilities mature on June 29, 2007 and can be extended at the Partnership's request for additional 364-day periods, subject to a maximum maturity date of three years prior to the maturity of the Casino Operational Services Agreement (COSA) for the Burnaby Casino. Currently, the Burnaby COSA matures on February, 2011, however the British Columbia Lottery Corporation has indicated that it will enter into a new 10-year COSA, with an option to renew for an additional 10 years, upon the opening of the new Burnaby Casino.

Full details of the Credit Facilities are provided in note 12(c) to the Audited Financial Statements.

The current amount available under the construction facility is not sufficient to fully fund the redevelopment of the Burnaby Casino, based on the current construction budget. We are currently negotiating with Gateway's lenders to increase the credit facilities to fund the full amount of the Burnaby redevelopment, as well as the potential Lake City expansions/redevelopments discussed above. Although negotiations have progressed to our satisfaction to date, no agreement will be concluded until after the general contract for the Burnaby redevelopment is awarded. We anticipate concluding negotiations shortly thereafter.

Interest Rate Risk

The Partnership is subject to interest rate risk on its Credit Facilities, as the interest payable is based on a floating rate of interest. The Fund manages exposure to this risk through the use of interest rate swaps with approved creditworthy counterparties. The Fund does not hold or issue derivative financial instruments for trading or speculative purposes.

As at December 31, 2005, the Fund had one interest rate swap contract outstanding, as follows:



Notional
C$ in thousands amount Maturity date Fair value

Interest rate swap contract 18,884 September 1, 2011 (1,297)


The term of the interest rate swap began on February 1, 2005 and the notional amount increases on a monthly basis to match the expected draws on Facility B of the Credit Facility at the time of the contract. Under the terms of the swap contract, the Fund pays interest to the counterparty equal to a fixed rate of 5.17% per annum on the notional amount, payable monthly in arrears, and receives interest equal to a floating rate on the notional amount. Management will attempt to match the term of the floating rate payment to that of the floating rate on the Credit Facility. The net effect of this contract is to fix the rate of interest on the Credit Facility over the term of the swap contract at a rate approximating 5.17% per annum, plus the applicable rate premium in accordance with the terms of the Credit Facility.

We have chosen not to apply hedge accounting under CICA Accounting Guideline AcG - 13 - "Hedging Relationships" to the interest rate swap. Accordingly, the contract is "marked-to-market" at each balance sheet date and any changes in the fair value are reported as a gain or loss on the income statement. The fair value of the interest rate swap is reported on the balance sheet as a long-term liability. Monthly payments on the interest rate swap are recorded as a reduction in the long-term liability. Under this method the interest expense reported on the income statement will reflect only the amounts paid under the terms of the Credit Facility, and not the net cash amount at the effective fixed rate.

The fair value of the interest rate swap reflects the estimated amount the Fund would have to pay if it were to unwind the contract at the reporting date.

As the swap contract was entered into to hedge the interest rate risk or the construction financing for Burnaby, the net interest payments under the contract are capitalized as a cost of the project.

Capital Resources

Capital Expenditures

Capital expenditures for the year totaled $4,812,000. Of this, approximately $231,000 were costs associated with the expansion of the existing Burnaby Casino in 2004 and $4.0 million was related to the redevelopment of the Burnaby Casino. The remaining $601,000 represents maintenance capital expenditures for Gateway's operations.

Funds used for the redevelopment and expansion of the Burnaby Casino in 2005 were derived from excess distributable cash generated during the year. Although Gateway had available credit under Facility A of the Credit Facilities to fund these expenditures, it was decided to use the excess distributable cash rather than incur interest expense on borrowed funds. The available amount under Facility A can be drawn at any time to recover these funds. We anticipate drawing on the facility within the first quarter of 2006 to both recover the excess distributable cash used and to fund additional costs on the Burnaby redevelopment.

Currently, with the exception of the redevelopment of the Burnaby Casino discussed earlier, there are no commitments for capital expenditures in 2006 other than for maintenance capital expenditures. Management anticipates that the amount of maintenance capital expenditures required in 2006 will approximate the expenditures incurred in 2005.

Facility Development Funds

Gateway's agreements with the BCLC include a provision for additional compensation equal to eligible capital and operating expenses from a Facility Development Fund ("FDF") equal to 3% of the total net win generated at the five B.C. casinos. This additional compensation is in addition to the fee paid for operating the casinos. Accumulated funds are held in trust in accounts managed by Gateway and additional compensation is issued from these accounts.

Of the total capital expenditures for the year, approximately $408,000 was determined to be eligible for reimbursement from the FDF funds, including all of the costs of the expansion of the Burnaby Casino. Those capital expenditures that were not eligible for reimbursement primarily represent costs incurred at the Fund's corporate office and at the Palace Casino in Alberta.

Costs accumulated for the redevelopment of the Burnaby Casino remain to be examined for eligibility and the Fund is confident that a significant share of costs associated with the Casino and Convention portions of the development will be eligible. Once the general contract for the project has been awarded, the final development budget and our projected costs eligible for FDF will be submitted to the BCLC for their approval.

During the year ended December 31, 2005, the Partnership received a total of $1.4 million for capital expenditures, of which $1.2 million was related to the expansion of the Burnaby Casino. The remaining amount was a recovery of maintenance capital expenditures at the Lake City Casinos.

In addition to the FDF reimbursements for capital expenditures, the Fund received approximately $3.5 million in reimbursement of prior years' operating costs at the Lake City Casinos.



Year ended
December 31,
C$ in thousands 2005
-----------

Total FDF funds generated during the year 8,231
-----------
-----------

Reimbursements:
Capital 1,414
Operating 3,542
-----------
4,956
-----------
-----------


Details of the FDF balances can be found in note 6 to the Audited Financial Statements.

Secured Loans and Class A Partnership Units

February 2004 Secondary Offering

On February 10, 2004, the GCI Shareholders completed the sale of 4,000,000 units of the Fund, reducing their ownership of the Fund to approximately 45%. The Fund did not receive any of the proceeds of the offering.

In connection with this transaction, $40,000,000 of the outstanding Secured Loans was repaid to the Trust. The Trust used the proceeds from the repayment of the secured loans to subscribe for additional Class B Units of the Partnership and the Partnership used the proceeds from the issue of Class B Units to redeem $40,000,000 of Class A Units held by the Vendors.

September 2004 Secondary Offering

On September 17, 2004, the GCI Shareholders completed the sale of 6,567,150 units of the Fund, reducing their ownership of the Fund to 20%. The Fund did not receive any of the proceeds of the offering.

In connection with this transaction, $65,671,500 of the outstanding Secured Loans was repaid to the Trust. The Trust used the proceeds from the repayment of the secured loans to subscribe for additional Class B Units of the Partnership and the Partnership used the proceeds from the issue of Class B Units to redeem $65,671,500 of Class A Units held by the Vendors.

As a condition of approval for the sale, the GCI Shareholders provided the provincial gaming regulators with a commitment to maintain their collective ownership of the Fund at a minimum of 20% of the issued and outstanding units, and the Fund provided the regulators with a commitment that it would offer a sufficient number of units from any future treasury offering to the GCI shareholders to enable them to maintain their 20% ownership, and that it would not proceed with any offering if the GCI Shareholders do not subscribe for and take up the required number of units.

Transactions with Related Parties

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

1. The Partnership, GCI and the Vendors incurred costs on behalf of each other in the normal course of business. During the year ended December 31, 2005, the net of total costs incurred were $1,712,000 by the Partnership on behalf of GCI and the Vendors (2004 - $228,000 incurred by the Partnership on behalf of GCI and the Vendors). The net balance due from related parties as at December 31, 2005 includes $274,000 (2004 - $128,000) of operating costs incurred by the Partnership on the related party's behalf.

2. The Fund provides management and administrative services to 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 $2,607,000 (2004 - $1,563,000) to GCI for the year ended December 31, 2005, which is recorded in the Audited Financial Statements as a reduction of administration expenses.

3. 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 installments. During the year ended December 31, 2005 the Partnership earned a fee of $750,000 (prior to January 1, 2005 - $500,000), which is included in other revenue.

4. 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 year ended December 31, 2005, the Partnership earned a fee of $455,000 (2004 - $390,000), which is included in other revenue.

5. 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 year ended December 31, 2005, the Partnership earned a fee of $325,000 (2004 - $147,000), which is included in other revenue.

6. The Fund leased its corporate office space from a company controlled by the Chairman and former Chief Executive Officer of Gateway Casinos G.P. Inc. under a lease agreement dated November 28, 2002. The lease included use of the office space, as well as provision of certain office equipment and reception. The Fund paid a monthly rent of $15,400 plus operating costs. The lease was terminated on May 1, 2005 and Fund incurred lease expense of $178,000 (2004 - $273,000) during this period.

7. 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 expires July 31, 2008 and the Fund received leasing income of $28,000 during the period from May 1, 2005 to December 31, 2005, which is recorded as a reduction of the occupancy costs.

Right of First Offer and Pre-emptive Right

In connection with the acquisition of the operations of the Burnaby Casino, the Lake City Casinos and the Palace Casinos on November 28, 2002, the Partnership entered into an agreement with GCI where the Partnership acquired a right of first offer on all of GCI's then existing and future operations pertaining or relating to the gaming industry, with the exception of GCI's management contract for the Casino of the Rockies in Cranbrook, BC GCI is at various stages of redevelopment on a number of the projects, including the new Cascades Casino in Langley, and has stated that it intends to offer the redeveloped operations to the Fund once they are completed and have reached a level of maturity in earnings. Management of the Fund estimates that this will be twelve to eighteen months from opening of each facility.

The agreement also provides the Partnership with a pre-emptive right over any acquisition opportunities pertaining or relating to the gaming industry identified by GCI.

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.

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was conducted as of December 31, 2005, by and under the supervision of our management, including the Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as defined in Multilateral Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports that we file or submit under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules.

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.

Contact Information