Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

November 08, 2005 16:05 ET

Gateway Casinos Income Fund Reports Third Quarter Results; Operations Continue Their Strong Performance

BURNABY, BRITISH COLUMBIA--(CCNMatthews - Nov. 8, 2005) -

(Gateway Casinos Income Fund (TSX:GCI.UN) will hold a conference call to discuss third quarter 2005 results on Wednesday, November 9, 2005 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 November 23, 2005 at: 1.888.509.0082 or 416.695.5275.)

Gateway Casinos Income Fund (the "Fund") is pleased to release its results for the third quarter of 2005.

For the three months ended September 30, 2005, the Fund generated EBITDA of $11.3 million on revenue of $25.5 million, bringing our year to date EBITDA to $32.6 million on revenues of $76.6 million. This resulted in the Fund generating distributable cash of $10.5 million, or $0.399 per unit, for the third quarter and $29.9 million, or $1.130 per unit, for the nine months ended September 30, 2005. In recognition of the continued strong performance of our operations, the Trustees of the Fund approved an increase in our monthly distribution from $0.11 per unit to $0.115 per unit, beginning with the distribution for September 2005. Including this increase, distributions for the quarter were $0.335 per unit, and totaled $0.995 for the first nine months of the year.

EBITDA of $11.3 million for the third quarter of 2005 compares favourably to EBITDA of $11.0 million on revenues of $26.1 million in the same period of 2004, as well as to EBITDA of $11.0 million on revenue of $25.9 million in the second quarter of this year. EBITDA margin for the third quarter of 2005 was 44.3%, compared to 42.2% in the third quarter of 2004 and 42.4% in the second quarter of this year. Year to date EBITDA of $32.6 million,an EBITDA margin of 42.6%, compares to EBITDA of $32.0 million on revenues of $72.3 million, for an EBITDA margin of 44.3% in the same period in 2004.

Total revenue for the third quarter of 2004 includes $2.3 million in revenue generated from the operations of the Villa Hotel in Burnaby, which was shut down in October 2004 in anticipation of the redevelopment of the Burnaby Casino. Excluding this revenue, total revenue in the third quarter of 2005 was 7.6% higher than in the third quarter of 2004. On the same basis, revenue for the nine months ended September 30, 2005 is up by 9.5% from the same period in 2004.

Expenses for the third quarter of 2005 were lower than expenses in the third quarter of 2004 by approximately $845,000, or 5.6%. However, the 2004 expenses include $1.9 million from the hotel operations. Excluding these, expenses for the third quarter of 2005 are 8.2% higher than 2004. Year to date expenses were $3.7 million, or 9.3%, higher than in 2004. However, excluding the expenses from the hotel operations, expenses for the first nine months of 2005 were 14.8% higher than 2004. These increases reflect higher wages and marketing cost, as discussed further in the Management Discussion and Analysis below.

"The third quarter of 2005 was again a strong period for the Fund," commented Dave Gadhia, President of Gateway Casinos G.P. Inc. "All of our operations performed well during the quarter, but we are especially pleased with the results from the Palace Casino, where a smoking ban was implemented on July 1, 2005 that impacted all restaurants, bars, casinos and bingo halls in the city. Although we had anticipated that revenue could fall by as much as 15% right away, third quarter revenue at the Palace Casino is down only 6% from the same period in 2004 and 10% from the average revenue of the first two quarters of this year. Also, it appears as if we are already beginning to see revenues recover."

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.


GATEWAY CASINOS INCOME FUND

MANAGEMENT'S DISCUSSION & ANALYSIS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 November 8, 2005, and should be read in conjunction with the unaudited interim consolidated financial statements of Gateway Casinos Income Fund (the "Fund") for the nine months ended September 30, 2005 (the "Quarterly Financial Statements"), the audited consolidated financial statements of the Fund for the year ended December 31, 2004 (the "2004 Financial Statements"), as well as the accompanying notes to both, and the management's discussion and analysis for the year ended December 31, 2004, dated March 17, 2005 (the "2004 MD&A"). The Quarterly Financial Statements are reported in Canadian dollars and have been prepared in accordance with Canadian generally accepted accounting principles for interim financial statements.

Forward-looking statements

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

Structure of the Fund

The structure of the Fund has not changed from that presented in the 2004 MD&A. The Fund had 26,417,687 units outstanding as at September 30, 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.

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 September 30, 2005, is listed in the table below.



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

Gateway
Casino - Burnaby Burnaby, BC 679(1) 32

Lake City Casinos
Kamloops Kamloops, BC 300 8
Kelowna Kelowna, BC 342(2) 12
Penticton Penticton, BC 224 10
Vernon Vernon, BC 210 8

Palace Casino Edmonton, AB 705(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 during 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, bringing
the total number of slots machines and electronic games to 706.
(4) The Palace Casino also operates a 6-table poker room.


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

Economic and industry factors affecting the Western Canadian gaming market are substantially unchanged from those presented in the 2004 MD&A, with the exception of an increase in the license terms for Casino Facility Licenses ("CFL") in Alberta.

Historically, CFLs for all casinos in Alberta had a term of one year from the date of issue. During the third quarter of 2005, the AGLC informed operators in the province that, unless there are compliance issues or extenuating circumstances, all renewals of CFLs would now be for a term of three years, with annual ownership and due diligence reviews to be performed by the AGLC. The Palace Casino's current CFL expires on October 31, 2006, at which time the new term would apply to its renewal.



Financial Performance

-------------------------------------------------------
2005 2004 2003
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------
Revenue
Table games
revenue 6,916 7,043 7,517 7,495 6,921 6,587 7,171 7,536
Slot machines
and other
electronic
games
revenue 16,959 16,839 15,684 14,729 15,182 14,733 14,352 14,406
Hotel
revenue - - - 692 2,337 - - -
Other
revenue 1,641 1,982 2,025 1,351 1,622 1,732 1,656 1,514
-------------------------------------------------------
Total
Revenue 25,516 25,864 25,226 24,267 26,062 23,052 23,179 23,456

Expenses 14,207 14,897 14,899 15,740 15,052 13,232 11,979 12,529
-------------------------------------------------------
EBITDA(1) 11,309 10,967 10,327 8,527 11,010 9,820 11,200 10,927
-------------------------------------------------------
-------------------------------------------------------

Net earnings 10,175 8,194 8,668 6,249 8,044 8,558 9,979 10,032
-------------------------------------------------------
-------------------------------------------------------
Basic and
diluted
earnings
per unit 0.39 0.31 0.33 0.24 0.30 0.32 0.38 0.38
-------------------------------------------------------
-------------------------------------------------------

Distributable
Cash 10,536 9,956 9,367 9,299 9,105 8,902 10,159 9,226
-------------------------------------------------------
-------------------------------------------------------

Per unit 0.399 0.377 0.355 0.351 0.345 0.337 0.385 0.349
-------------------------------------------------------
-------------------------------------------------------
(1) EBITDA is not a defined term under Canadian generally accepted
accounting principles. See discussion under "EBITDA" and
Net Earnings"


Results of Operations

Revenue

Gateway's revenue is primarily earned through fees paid by the 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. During the period July 1, 2004 through October 31, 2004 Gateway also operated the Radisson Villa Hotel in Burnaby, BC. The hotel was acquired on June 30, 2004 as part of the redevelopment of the Burnaby Casino and its operations were shut down on October 31, 2004 in anticipation of the project.


Three months Nine months
ended ended
C$ in thousands September 30, % September 30, %
2005 2004 change 2005 2004 change
----------------------------------------------
Table games
revenue 6,916 6,921 21,476 20,679
Slot machines
and other
electronic
games revenue 16,959 15,182 49,481 44,266
Hotel revenue - 2,337 - 2,337
Other revenue 1,641 1,622 5,648 5,011
--------------- -------------
25,516 26,062 (2.1%) 76,605 72,293 6.0%
--------------- -------------
--------------- -------------


Total revenue in the third quarter of 2005 was down $546,000, or 2.1% from the same period in 2004. However, this decrease is solely due to the revenue generated from the hotel operations. Excluding this, revenue for the third quarter of 2005 was approximately $1.8 million, or 7.6% higher than the revenue generated in the third quarter of 2004. Total revenue for the first nine months of 2005 was approximately $6.7 million, or 9.5%, higher than in the same period of 2004, excluding the hotel revenue.

The following table compares our total revenue in the third quarter of 2005 with each of the six previous quarters.




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

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


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

Expenses

Total expenses for the third quarter were $14.2 million, bringing
expenses for the first nine months of 2005 to $44.0 million, or 57.4%
of revenue.



Three months Nine months
ended ended
C$ in thousands September 30, % September 30, %
2005 2004 change 2005 2004 change
----------------------------------------------
Corporate and general
Administration 686 1,186 3,331 3,409
Cost of food &
beverage services 504 490 1,649 1,400
Human resources 10,460 9,168 31,103 27,130
Marketing and
promotions 870 488 2,494 1,379
Occupancy 780 699 2,252 2,275
Operating 907 1,096 3,173 2,745
Hotel operating costs - 1,925 - 1,925
--------------- --------------
14,207 15,052 (5.6%) 44,002 40,263 9.3%
--------------- --------------
--------------- -------------

Percentage of
total revenue 55.7% 57.8% 57.4% 55.7%
--------------- --------------
--------------- --------------


Total expenses for the third quarter of 2005 were $845,000, or 5.6%, lower than for the third quarter of 2004. However, the 2004 expenses included $1.9 million of expenses from the Burnaby hotel operations. Excluding these, third quarter 2005 expenses are approximately $1.1 million, or 8.2%, higher than in expenses in the same period of 2004. On a year-to-date basis, excluding hotel operating expenses, total expenses in 2005 are approximately $5.7 million, or 14.8%, higher than in the first nine months of 2004.

The increase from 2004 is mainly attributable to increases in human resources costs and marketing and promotions. The increased human resources costs are due primarily to the following issues:

1. Increased wages at the Burnaby Casino, related to the June 2004 increase in operating hours to 24 hours per day;

2. Scheduled wage increases at all casinos;

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

4. Accounting for the compensation expense from the Fund's long-term incentive plan.

As was discussed in the 2004 MD&A, the Fund finalized the terms of its long-term incentive plan during 2004 and adjusted its accounting accordingly. The Fund now accounts for contributions beginning in the year the contribution was earned, with the expense being recorded as part of human resources cost. Beginning in 2005 we are accruing this expense on a quarterly basis. Adjusting for this, total expenses in the third quarter of 2004 would have been:



Three months Nine months
ended ended
C$ in thousands September 30, % September 30, %
2005 2004 change 2005 2004 change
----------------------------------------------
----------------------------------------------
Total expenses as
reported 14,207 15,052 44,002 40,263
Hotel operating
expenses - (1,925) - (1,925)
Compensation expense
recorded in 2004 - - - (576)
Portion of 2004
compensation expense
attributable to
the second quarter
of 2004 - 246 - 739
----------------------- --------------------
14,207 13,373 6.2% 44,002 38,501 14.3%
----------------------- --------------------
----------------------- --------------------

Percentage of total
revenue(1) 55.7% 56.4% 57.4% 55.0%
----------------------- --------------------
----------------------- --------------------
(1) Excluding hotel revenue in 2004.


The remaining increases in human resources costs are discussed in the Operating Segments discussion below.

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 BC. This charge came into effect for the Burnaby Casino on December 16, 2004. The increased costs are also related to increased marketing costs for our BC operations related to marketing initiatives around the new BC Gold players club recently rolled out by BCLC. Both of these issues are discussed in more detail in the Operating Segments discussion below.

The following table compares the expenses of the third quarter of 2005 with each of the last six quarters.



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

Corporate
and
general
administration 686 1,431 1,214 859 1,186 1,138 1,086
Cost of
food &
beverage
services 504 564 581 535 490 451 459
Human
resources 10,460 10,362 10,281 10,633 9,168 9,535 8,427
Marketing
and
promotions 870 779 844 637 488 575 316
Occupancy 780 758 715 811 699 784 791
Operating 907 1,003 1,264 1,471 1,096 749 900
Hotel
operating
costs - - - 794 1,925 - -
--------------------------------------------------------
14,207 14,897 14,899 15,740 15,052 13,232 11,979
--------------------------------------------------------
--------------------------------------------------------

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


Corporate and general administration for the third quarter of 2005 has been reduced by reallocations of costs related to the previous quarters. Reflecting these in the quarter to which the costs were incurred, corporate general and administration was:



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

Corporate general and
administration as reported 686 1,431 1,214

Reclassification of costs related to
Burnaby redevelopment 43 (22) (21)
Reclassification of wages to human
resources costs 156 (78) (78)
Additional recovery of Q2 expenses
under related party management
agreement 84 (84) -

----------------------------------
Adjusted corporate general and
administration 969 1,247 1,115
----------------------------------
----------------------------------


The remaining decrease relates to a higher recovery of costs under the management agreement with Gateway Casinos Inc. ("GCI") for managing its casino operations. As discussed in note 18(C) to the 2004 Financial Statements (see also "Transactions with Related Parties"), the Fund provides management services to GCI for a fee equal to its share of administration expenses, based on proportionate revenues. With the recent opening of the GCI's Cascades Casino in Langley, their proportionate share of costs has increased, resulting in a greater cost recovery to the Fund.

As discussed above, the majority of the 2004 compensation expense for the LTIP was recorded in the fourth quarter of 2004. Additionally, we recorded a catch-up adjustment related to the 2003 LTIP awards. Adjusting for these, quarterly expenses were:



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

Total
expenses
as
reported 14,207 14,897 14,899 15,740 15,052 13,231 11,979

Less back
compensation
expense as
reported - - - (1,051) - (576) -
Add
quarterly
compensation
expense - - - 247 246 247 246
--------------------------------------------------------
Adjusted
total
expenses 14,207 14,897 14,899 14,936 15,298 12,902 12,225
--------------------------------------------------------

Corporate
general
and
administration
(from
above) 283 (184) (99) - - - -
Less hotel
operating
costs - - - (794) (1,925) - -
--------------------------------------------------------
14,490 14,713 14,800 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 loss on interest rate swap contract ("EBITDA") of $11.3 million for the third quarter of 2005, resulting in an EBITDA margin of 44.4%. This brings year to date EBITDA to $32.6 million, or 42.6%. This compares to EBITDA of $11.0 million for the third quarter of 2004 and $32.0 million for the first nine months of 2004, with EBITDA margins of 42.2% and 44.3%, respectively, and an EBITDA margin of 42.0% for all of 2004.

If we adjust for the impacts of the accounting for compensation expense in 2004, EBITDA in the third quarter of 2004 would have been $10.8 million, or 41.3%, and $31.9 million, or 44.1%, for the first nine months. The EBITDA margin for all of 2004 would have been 42.7%.



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

Revenue 25,516 25,864 25,226 24,267 26,062 23,052 23,179

Adjusted
total
expenses 14,490 14,713 14,800 14,936 15,298 12,902 12,225
--------------------------------------------------------
Adjusted
EBITDA 11,026 11,151 10,426 9,331 10,764 10,150 10,954
--------------------------------------------------------
--------------------------------------------------------

Adjusted
EBITDA
margin 43.2% 43.1% 41.3% 38.5% 41.3% 44.0% 47.3%
--------------------------------------------------------
--------------------------------------------------------


After amortization and net interest expense, the Fund generated net earnings of $10.2 million, or $0.39 per unit, for the third quarter and $27.0 million, or $1.02 per unit, for the first nine months of the year. This compares to $8.0 million, or $0.30 per unit, in the third quarter of 2004 and $26.6 million, or $1.01 per unit, for the first nine months.

The reconciliation between EBITDA and net earnings is:



C$ in thousands Three months ended Nine months ended
September 30, September 30,

2005 2004 2005 2004
------------------------------------------
EBITDA as reported 11,309 11,010 32,603 32,030

Interest income on
secured loans 2,450 3,563 7,271 11,359
Income allocation on
Class A Partnership
Units (2,453) (3,567) (7,280) (11,373)
Interest expense,
net (821) (927) (2,331) (1,550)
Unrealized gain
(loss) on interest
rate swap contracts 493 (964) (424) (964)
Gain on sale of
assets 207 - 207 -
Amortization (1,010) (1,071) (3,010) (2,921)
-------------------------------------------
Net Earnings 10,175 8,044 27,036 26,581
-------------------------------------------
-------------------------------------------


The increased interest expense in 2005 is due to the increased debt associated with the purchase of the Villa Hotel on June 30, 2004. In connection with the acquisition, the Fund assumed mortgages of $7.8 million and issued $40 million of seven year notes (see notes 11 and 12 to the 2004 Financial Statements). After repayment of the amounts then outstanding under the Fund's credit facilities, total debt increased from $22.0 million to $48.5 million.

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, the 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 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 $493,000 in the third quarter of 2005, compared to a non-cash loss of $964,000 in 2004, and a total non-cash loss of $424,000 for the first nine months of 2005, compared to a non-cash loss of $964,000 in 2004.

Operating Segments

The Partnership has three primary operating segments based on geographic markets. These are the Burnaby Casino, the Lake City Casinos and the Palace Casino. 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 only, as all aspects of the hotel's operations were shut down on October 31, 2004 in anticipation of 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 7 of the Quarterly Financial Statements and note 21 to the 2004 Financial Statements for additional information.

Although the Consolidated Statement of Earnings for the nine months ended September 30, 2005 includes corporate and general administrative expenses,interest income on secured loans, income allocation on Class A Partnership Units, interest expense and unrealized loss on interest rate swap contract in determining net earnings, these items are not expenses of any one operating segment, and have not been included in the following discussion.



Burnaby Casino

Three months Nine months
ended ended
C$ in thousands September 30, % September 30, %

2005 2004 change 2005 2004 change
----------------------------------------------
Table games revenue 4,090 4,128 13,110 12,817
Slot machine revenue 6,827 5,008 19,985 16,100
Food & beverage
revenue 129 - 384 -
Other revenue 216 276 948 985
----------------------------------------------
11,262 9,412 19.7% 34,427 29,902 15.1%
----------------------------------------------

Operating expenses
Human resources 3,872 3,058 11,258 8,723
Occupancy 94 84 290 516
Food & beverage 48 - 161 -
Other operating
Expenses 1,102 790 3,494 2,148
----------------------------------------------
5,116 3,932 30.1% 15,203 11,387 33.5%
----------------------------------------------

Operating earnings
before amortization 6,146 5,480 19,224 18,514
--------------- -------------
--------------- -------------


On December 16, 2004 the expansion of the Burnaby Casino was opened, which increased the number of slot machines from 300 to 679 and introduced integrated voucher system (or "IVS") technology, allowing for cashless play. In January 2005 we opened a bar service within the expanded Burnaby Casino.

The expansion of the facility is the primary reason for the increased gaming revenue from 2004, on both a quarterly and a year-to-date basis. The expansion also allowed the Burnaby Casino to recover from the loss of slot machine revenue with the opening of the River Rock Casino in June 2004.

Total expenses for the third quarter of 2005 were approximately $1.2 million higher than during the same period in 2004, resulting in a rise in expenses as a percentage of revenue from 41.5% in 2004 to 45.4% in 2005. This is primarily driven by a $814,000 increase in human resources costs and a $303,000 increase in marketing expenses. For the first nine months of 2005, total expenses are up approximately 33.5% primarily for the same reasons, with increases of $2.5 million in human resources and $944,000 in marketing.

The year-over-year increase in human resources costs is the result of both operational changes made during 2004 and the impact of the facility expansion. As was discussed in detail in the 2004 MD&A, there were a variety of operational changes throughout 2004 that resulted in increased wages, starting in mid-2004. These included:

- The introduction of the game of craps in June 2004, which is more labour intensive than other table games;

- The June 2004 increase in operating hours from 21 hours per day to 24 hours per day, and;

- Planned wage increases

In addition, the expansion of the casino adds approximately $2.5 million in annual labour costs, or $625,000 per quarter.

The increased marketing costs result largely from the imposition of a joint marketing charge by the BCLC for all new or expanded facilities in BC. This additional charge, which came into effect upon the opening of the expanded facility, is equal to 0.75% of net win generated by the casino, or $280,000 for the second quarter of 2005, and is to increase to 1.5% of net win in May 2006. 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 to report them as prepaid expenses to be recognized at a later date when the marketing has started.

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

The following table compares the Burnaby Casino's results for the third quarter of 2005 with the each of the previous six quarters.



C$ in
thousands Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
--------------------------------------------------------
Revenue
Table
games
revenue 4,090 4,363 4,657 4,875 4,128 4,095 4,594
Slot
machine
revenue 6,827 6,724 6,434 5,343 5,008 5,401 5,691
Food &
beverage
revenue 129 133 122 - - - -
Other
revenue 216 295 437 171 276 336 373
--------------------------------------------------------
11,262 11,515 11,650 10,389 9,412 9,832 10,658
--------------------------------------------------------

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

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


Slot machine revenue continued to increase during the third quarter, with average win per day per machine for the third quarter up slightly over the second quarter. Counter to this, table games revenue was down $273,000 from the second quarter, which resulted directly from a 6.5% decrease in the amount of cash wagered in the quarter. We are unable to pinpoint any exact, specific cause for this reduction in play, however it could be a result of the unusually dry summer experienced in the Vancouver area. Results for October show cash played returning to levels experienced previously.

As can be seen, total expenses increased by approximately $250,000 from the second quarter, with all of that increase coming from human resources expenses. However, as discussed above, during the third quarter we reclassified certain casino-related wages from corporate and administration expenses to human resources, all of which were related to the Burnaby Casino. If we reflect these adjustments in the proper quarters, human resources costs for the Burnaby Casino would have been:



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

Human resources expenses as reported 3,872 3,615 3,771

Reclassification to wages to human
resources costs (156) 78 78
----------------------------------
Adjusted human resources costs 3,716 3,693 3,849
----------------------------------
----------------------------------


If you factor in these adjusted human resources figures, then total expenses for the quarter are consistent with the second quarter of this year.



Lake City Casinos

Three months Nine months
ended ended
C$ in thousands September 30, % September 30, %

2005 2004 change 2005 2004 change
----------------------------------------------

Revenue
Table games revenue 1,140 1,076 3,114 3,013
Slot machines revenue 7,579 7,399 21,290 20,265
Food & beverage
revenue 208 176 553 489
Other revenue 83 69 428 298
----------------------- --------------------
9,010 8,720 3.3% 25,385 24,065 5.5%
----------------------- --------------------

Operating expenses
Human resources 3,980 3,876 11,831 11,166
Occupancy 369 309 1,007 856
Food & beverage 127 110 352 293
Other operating
Expenses 847 715 2,398 1,970
FDF expense recovery (721) (695) (1,967)(1,841)
----------------------- --------------------
4,602 4,315 6.7% 13,621 12,444 9.5%
----------------------- --------------------

Operating earnings
before amortization 4,408 4,405 11,764 11,621
--------------- -------------
--------------- -------------


Revenue at the Lake City Casinos for the third quarter of 2005 was up approximately 3.3% from the same period of 2004, bringing year to date revenue for the Lake City Casinos to $25.4 million, which is an increase of 5.5% over 2004. Most of the year-to-date growth came from an increase in slot machine revenue, reflecting the continuation of a general growth trend that we recorded throughout 2004.

During the second quarter of this year, the Sega Royal Ascot electronic racing machine was removed from the Kelowna Casino and was replaced by 12 slot machines, bringing the total number of machines in the casino to 311. During July 2005 a further 21 machines were installed, and an additional 10 machines were installed in August, bringing the total to 342.

Total expenses for the second quarter were $4.6 million, or 51.1% of revenue, compared to $4.3 million, or 49.5% of revenue, in the second quarter of 2004. As in the first half of 2005, the higher expenses in the third quarter are mainly due to higher human resources and other operating expenses. The increase in human resources expenses is generally due to the impact of 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, and was recorded in the first quarter of 2005.

The increase in other operating expenses for the quarter are primarily related to the increased activity in the casinos during the current year and higher marketing and promotion expenses. This results from increased marketing expenses related to marketing to BC Gold members and other promotion initiatives.

The following table compares the Lake City Casinos' results for the third quarter of 2005 with each of the last six quarters. Results for the second and third quarter of 2005 are higher than the first quarter of 2005, which is consistent with the seasonality of the operations.



C$ in
thousands Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
--------------------------------------------------------
Revenue
Table
games
revenue 1,140 1,014 960 966 1,076 975 962
Slot
machines
revenue 7,579 7,183 6,528 6,546 7,399 6,723 6,143
Food &
beverage
revenue 208 178 166 159 176 166 147
Other
revenue 83 226 120 (124) 69 182 47
--------------------------------------------------------
9,010 8,601 7,774 7,547 8,720 8,046 7,299
--------------------------------------------------------

Operating
expenses
Human
resources 3,980 3,951 3,900 3,913 3,876 3,745 3,544
Occupancy 369 338 300 374 309 277 270
Food &
beverage 127 114 111 104 110 97 86
Other
operating
expenses 847 764 786 933 715 638 615
FDF
expense
recovery (721) (663) (582) (175) (695) (612) (533)
--------------------------------------------------------
4,602 4,504 4,515 5,149 4,315 4,145 3,982
--------------------------------------------------------

Operating
earnings
before
amortization 4,408 4,097 3,259 2,398 4,405 3,901 3,317
--------------------------------------------------------
--------------------------------------------------------


During March 2005, community gaming facilities were opened in Kamloops and Kelowna, each with 50 slot machines. As discussed in the 2004 MD&A, these machines differ from the slot machine offerings in the Lake City Casinos, mostly in lower denomination and potential payout. We have not seen any impact on the revenue at the Lake City Casinos in Kamloops and Kelowna to date.

During March the BCLC began converting slot machines in the Kamloops and Kelowna Casinos to integrated voucher system (or "IVS") technology. As discussed in the 2004 MD&A, this technology allows for cashless play using bar-coded tickets that can be used in other slot machines (also know as "ticket-in-ticket-out" play) or cashed out at self-service redemption machines. 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 20 slot machines in the Vernon Casino to IVS and have scheduled up to 50% of its slot machines to be converted by the end of the current year.





Palace Casino

Three months Nine months
ended ended
C$ in thousands September 30, % September 30, %

2005 2004 change 2005 2004 change
----------------------------------------------

Revenue
Table Games revenue 1,687 1,718 5,253 4,849
Slot machines and
other electronic
games revenue 2,553 2,774 8,206 7,901
Food & beverage
revenue 909 999 3,011 2,925
Other revenue 95 107 323 320
----------------------- --------------------
5,244 5,598 (6.3%) 16,793 15,995 5.0%
----------------------- --------------------

Operating expenses
Human resources 2,360 2,234 7,086 6,665
Occupancy 316 311 955 903
Food & beverage 328 381 1,136 1,114
Other operating
expenses 551 594 1,742 1,705
----------------------- --------------------
3,555 3,520 (1.0%) 10,919 10,387 5.1%
----------------------- --------------------

Operating earnings
before amortization 1,689 2,078 5,874 5,608
--------------- -------------
--------------- -------------


Total revenue in the third quarter of 2005 was down 6.3% from the same period last year due to the impact on a smoking ban that came into effect on July 1, 2005 in the City of Edmonton, affecting all bars, lounges bingo halls and casinos. Based on experience in other jurisdictions where a similar ban was implemented, we previously indicated that revenue at the Palace Casinos could be immediately impacted by up to 15%, with this recovering to pre-ban levels within nine to 12 months of the ban's implementation. We are very pleased with how the Palace Casino has weathered the ban so far.

The main impact of the ban has been a decrease in revenue from slot machines and other electronic games, which is down 8% in the third quarter of 2005 from the same period in 2004. However, we have seen a recovery in recent months. On a monthly basis, slot machine and electronic revenue is down from 2004 as follows:


% change from 2004

July (5.5%)
August (11.7%)
September (6.7%)
October (7.3%)
----------


As discussed in the previous quarter, the impact of the ban on July's results may have been masked by the increased activity at the casino from Edmonton hosting the World Master Games during the month, which brought 20,000 people above the age of 35 into the city.

In contrast to this, table games revenue is consistent with the previous year. In fact, actual drop (the amount of money wagered by players) in the third quarter is up approximately 19.5% from the same period last year. However, this increased drop has been offset by a lower win percentage in the current quarter. Although fluctuations in win percentage are normal occurrences in the gaming industry, figures from the AGLC show that drop from table games at all casinos in Edmonton has increased 10% since July 1, but revenue has decreased by 5%. We will continue to monitor the table games revenue in the coming months to see if this trend continues and to determine strategies to mitigate its impact.

Total expenses for the third quarter of 2005 were $3.6 million, compared to $3.5 million in the third quarter of 2004. Although we have reduced expenses in total dollars, they grew as a percentage of revenue, from 62.9% in the third quarter of 2004 to 67.8% in the third quarter of 2005. This is due to the decrease in revenue in the third quarter of 2005, as total expenses were consistent with the third quarter of 2004. However, human resources costs increased $126,000 from the third quarter of 2004, which resulted from two factors. Firstly, as discussed previously, scheduled wage increases came into effect at the casino in November 2004. Secondly, although table games revenue was flat, the increased drop resulted in increased labour requirements, as a significant component of our labour costs comes from the table games.
Increased human resources costs were offset by reduction in other expenses.

The following table compares the Palace Casino's results for the third quarter of 2005 with each of the last six quarters.



C$ in
thousands Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04
--------------------------------------------------------
Revenue
Table
games
revenue 1,687 1,665 1,901 1,653 1,718 1,517 1,614
Slot
machines
and other
electronic
games
revenue 2,553 2,933 2,721 2,841 2,774 2,609 2,518
Food &
beverage
revenue 909 1,030 1,073 1,097 999 942 984
Other
revenue 95 120 106 42 107 107 106
--------------------------------------------------------
5,244 5,748 5,801 5,633 5,598 5,175 5,222
--------------------------------------------------------

Operating
expenses
Human
resources 2,360 2,410 2,317 2,256 2,234 2,256 2,175
Occupancy 316 325 314 346 311 297 295
Food &
beverage 328 394 414 414 381 354 379
Other
operating
expenses 551 586 604 633 594 564 547
--------------------------------------------------------
3,555 3,715 3,649 3,649 3,520 3,471 3,396
--------------------------------------------------------

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


As can be seen from the table above, total revenue in the third quarter fell approximately $500,000 from the previous quarter, with most of this coming from slot machines and other electronic games. The reduction in revenue from slot machines and other electronic games is a direct result of the implementation of the smoking ban in Edmonton. Compared to the average of the first two quarters of 2005, revenue from slot machines and other electronic games is down approximately 9.7%. On a monthly basis, revenue is down from the average monthly revenue in the first half of 2005 as follows:



% change from monthly
average in H1/2005

July (7.4%)
August (9.9%)
September (11.9%)
October (5.8%)
----------


The decrease in food & beverage revenue is a direct result of the decrease in slot machine revenue.

Expenses are also down from the second quarter, however not by the same percentage as the revenue decrease. Similarly to the year-over-year situation, this is mainly due to the labour costs related to the increased drop on table games.

On October 30, 2005 the collective agreement with the employees of the Palace casino expired and negotiations have begun on a new contract. Historically, employees of the Palace Casino have been members of the Palace Casino Staff Association (the "PCSA"), which the Partnership had voluntarily recognized as the sole bargaining agent for the employees, giving it the majority of the rights of a union under the Alberta Labour Act. As disclosed previously, in November 2003, certain employees voted to merge the PCSA with the United Food and Commercial Workers Union (the "UFCW") and the UFCW applied for successor rights to the Alberta Labour Relations Board (the "ALRB"). Proceedings with respect to circumstances surrounding the vote and the application of the UFCW were heard by the ALRB in November 2003, based on the separate complaints of the Partnership and certain employees of the Palace Casino. In May 2004 the ALRB provided its decision in support of the UFCW, however the Partnership and certain employees of the Palace Casino each filed for a judicial review of the ALRB's decision on the basis that the Board erred in its assessment of the facts in making its decision. The judicial review was not successful and in December 2004 the Partnership filed an appeal with the Alberta Court of Appeal. Prior to the appeal being heard, the Partnership withdrew its application for appeal and terminated its voluntary recognition of the PCSA/UFCW. During the third quarter of 2005 the UFCW applied to the ALRB to be the certified bargaining agent for the employees of the Palace Casino and the employees voted in favour.

Although the employees are now represented by the UFCW, management believes that it has a strong relationship with the employees and negotiations can be concluded without any work stoppage at the casino. However, in the event that this cannot be achieved, the AGLC allows operators to run the casino on reduced hours, operating all slot machines and a reduced number of table games using employees who wish to continue to work, replacement workers and management staff. Although we cannot estimate with any degree of certainty what the impact of a work stoppage might be on the Palace Casino's results, the casino would only be operated on days and at times that are traditionally busy, thereby mitigating any potential downside.

Outlook

There were no significant changes to the competitive landscape in BC and Alberta during the third quarter of 2005, however we continue to closely monitor the following developments, as they have potential for short-term impacts on the Burnaby Casino.

1. The expansion of the Coquitlam Casino, which we had anticipated would be completed during the third quarter of 2005, is now scheduled to open midway through the fourth quarter of this year. The expansion will increase the number of slot machines and electronic games to 1,000 from the current 450, as well as open a 1,600 stall parkade. A second phase of the project, which is expected to open in the second half of 2006, will see the addition of an 1,100 seat theatre.

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

Both of these operations are relatively close to our Burnaby location and will increase the available gaming supply in our market. As we have discussed in the past, Gateway has developed a two-stage response to these threats, with the first being the recent expansion of the Burnaby Casino.

As discussed in detail in the 2004 MD&A, the second stage involves building a new facility for the Burnaby Casino on the site of the Radisson Hotel Burnaby purchased by Gateway last summer. This phase involves demolishing the low-rise portion of the existing hotel and building a new 100,000 square foot casino, full-service restaurant, a new lobby for the hotel and a convention center, as well as upgrading the existing 200 rooms in the tower portion of the hotel. The new casino will house up to 1,000 slot machines, 60 table games, an 18-table poker room, a high-limit gaming area, an entertainment lounge and central bar, and the necessary back-of-house amenities. Upon opening the new facility, the existing casino will be converted back into 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.

The total construction budget for the project is approximately $105 million, bringing the total cost of the project to approximately $130 million including the purchase of the hotel. This figure includes both a contingency allowance and an allowance for further cost increases from continued escalation in the construction industry. We expect that approximately 80% - 85% of this will be eligible for additional compensation from the Facility Development Fund, however final determination of this will be made be the BCLC once a detailed budget is submitted and approved.

Demolition of the low-rise portion of the existing hotel has now been completed. Fourth and final reading of the rezoning bylaw for the new development is expected to be received during the fourth quarter of 2005, and it is anticipated that earthworks will begin on the site before the end of the year. We are anticipating that the general contract for the construction of the first phase of the new facility will be awarded early in 2006, with construction of the casino building to begin within the first quarter of 2006.

Liquidity

Distributable Cash

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

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

Costs incurred for the redevelopment of the Burnaby Casino have been excluded from the calculation of distributable cash, as they have been funded to date using the excess proceeds from the issue of the long-term notes in August 2004 and recoveries from the Facility Development Fund. As we expect that 100% of the costs of the redevelopment project will be funded through bank debt, 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 three and nine months to September 30, 2005 and 2004 was as follows:



C$ in thousands Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------------------------------------------

Cash flows from
operating activities
before changes in
non-cash working
capital items 10,485 10,079 30,263 30,466

Maintenance capital
expenditures(1) (79) (426) (372) (1,385)
FDF reimbursement
received for
property and
equipment
purchases(2) 1 215 1 223
Payments made on
Kamloops Casino
renovation loan - (77) - (405)
Payments on
long-term debt, net (82) (76) (245) (76)
Sale of property and
equipment 211 - 211 -
---------------------------------------------

Distributable cash
for the period 10,536 9,715 29,858 28,823
---------------------------------------------
---------------------------------------------
Per unit 0.399 0.368 1.130 1.091
---------------------------------------------
---------------------------------------------
(1) Maintenance capital expenditures include only those costs related
to ongoing operation of existing casinos and exclude costs
associated with expansions and new developments that are funded
by debt.
(2) Excludes FDF reimbursements received for costs associated with
expansions and new developments that are funded by debt.


Distributions were made on a monthly basis in 2005 as follows:


Distribution
per unit Payment Date
----------------------------------
January 2005 0.11 February 28, 2005
February 2005 0.11 June 30, 2005
March 2005 0.11 April 29, 2005
April 2005 0.11 May 31, 2005
May 2005 0.11 June 30, 2005
June 2005 0.11 July 29, 2005
July 2005 0.11 August 31, 2005
August 2005 0.11 September 30, 2005
September 2005 0.115 October 31, 2005
------------
$ 0.995
------------
------------


On October 17, 2005 the Fund announced an increase in its monthly distribution to $0.115 per unit beginning with the distribution for the month of September 2005.

Contractual Obligations

The Fund had the following contractual obligations for long-term debt outstanding at November 8, 2005.



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

Long-term debt
Promissory note 900 90 180 180 450
Credit Facilities
Long term notes 40,000 - - - 40,000
Mortgages 7,468 7,468 - - -
Lease obligations(1) 14,107 1,663 5,091 2,228 5,125
----------------------------------------------
62,475 9,221 5,271 2,408 45,575
----------------------------------------------
----------------------------------------------
(1) for the Partnership's casino locations, as well as certain
office equipment and office space


Capital Resources

Capital Expenditures

Capital expenditures for the three months ended September 30, 2005 totaled $83,000, bringing the total for the first nine months of 2005 to $606,000. Of that, $235,000 were additional costs incurred in the first half of 2005 on the Burnaby Expansion and were virtually all recovered from FDF in the third quarter. Of the remaining $371,000, approximately $239,000 was incurred at the Burnaby Casino and the Lake City Casinos, the majority of which is eligible for additional compensation under the FDF. Burnaby expenditures will be recovered by the end of the year, when the expenditures are approved by the BCLC. The Lake City expenditures are an addition to the balance of unrecovered expenditures as at December 31, 2004 and will be recovered in due course. The Fund applies FDF recoveries to these expenditures on a first-in-first-out basis. The balance of unrecovered eligible expenditures for the Lake City Casinos as at September 30, 2005 was:



C$ in thousands

Balance as at December 31, 2005 11,030
Eligible expense incurred in 2005 126
FDF recoveries in 2005 (2,786)

----------

Balance as at September 30, 2005 8,370
----------
----------


During the first nine months of 2005 the Fund received $1,232,000 in FDF compensation, of which $1,006,000 was related to expenditures in 2004 and 2005 for the Burnaby expansion.

Other than the planned redevelopment of the Burnaby Casino, there are currently no commitments for capital expenditures in 2005. We anticipate that the maintenance capital expenditures required in 2005 will approximate the total expenditures incurred during 2004.

Bank Credit Facilities

In April 2005 the Partnership successfully completed negotiations to increase the available amount under its bank credit facility to $90 million from $70 million. As with the previous arrangements, the amount is available to the Partnership in two facilities. Facility A provides for a maximum of $15 million (increased from $10 million), available to the Partnership as a revolving facility. Facility B is a $75 million construction facility for the redevelopment of the Burnaby Casino (increased from $60 million). All other terms and conditions remained the same.

As at September 30, 2005, approximately $12 million of the amount available under Facility A had been utilized to provide letters of credit to the BCLC as required under the COSAs for the Burnaby Casino and the Lake City Casinos. The remainder of Facility A will be used to fund the costs of the Burnaby redevelopment prior to accessing the construction loan.

As discussed in the MD&A for the second quarter of 2005, the construction costs for the Burnaby redevelopment increased from an estimated $85 million to $105 million during the year, due largely to the current state of the construction industry in BC. To fund the increased budget, we have begun negotiations with the bank to further increase our existing credit facilities. Although we do not anticipate that we will complete the proposed increase until the first quarter of 2006, we are confident that the funding will be available.

Long-Term Notes Shelf Facility

In addition to the long-term notes issued on August 4, 2004, Gateway 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 C$7.5 million in 7 year notes under the shelf facility. These notes mature on October 31, 2012 and bear interest at 5.39% per annum, payable quarterly in arrears. The funds from this issue will be used to repay the outstanding mortgages that were assumed by Gateway when we purchased the Villa Hotel in June 2004, as they mature. On October 31, 2005, Gateway repaid mortgage principal of $3,355,000 that bore interest at 7.59% per annum, payable monthly The remaining mortgage of approximately $4.1 million, which bears interest at 7.70% per annum, payable monthly, will be repaid at its maturity December 1, 2005.

Transactions with Related Parties

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

1. The Fund provides management and administrative services to Gateway Casinos Inc. ("GCI") with respect to its casino operations. Under the terms of a management agreement, the Fund charges a fee to GCI equivalent to GCI's proportionate share of management and administrative expenses. 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 $1,961,000 to GCI for the nine months ended September 30, 2005 (2004 - $945,000), which is recorded in the Quarterly Financial Statements as a reduction of administration expenses.

2. The Partnership has 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. The vault cash is provided by the subsidiary of GCI. The partnership receives a flat fee per annum, payable in equal monthly instalments. During the first quarter of 2005 the Partnership renegotiated the contract and increased the annual fee to $750,000 per annum, from $500,000 per annum, to reflect the increased transaction volume from the expanded operations. During the nine months ended September 30, 2005 the Partnership earned a fee of $562,500 (2004 - $375,000), which is included in other revenue.

3. Effective November 5, 2003, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Palace Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During nine months ended September 30, 2005 the Partnership earned a fee of $315,000 (2004 - $291,000), which is included in other revenue.

4. Effective February 17, 2004, the Partnership entered into a contract with a subsidiary of GCI for ATM services at the Kamloops Casino. The Partnership provides all required services, including providing the vault cash, and receives a fee per ATM transaction equal to the fee per ATM transaction received by the subsidiary of GCI. During nine months ended September 30, 2005 the Partnership earned a fee of $159,000 (2004 - $17,000), which is included in other revenue.

5. Prior to May 1, 2005, the Fund leased its corporate office space from a company (the "Lessor Company") controlled by the Chairman and Chief Executive Officer of Gateway Casinos G.P. Inc. ("Gateway GP") under a lease agreement dated November 28, 2002. The lease includes use of the office space, as well as provision of certain office equipment and reception. The lease expires July 31, 2008 and the monthly rent is $15,400 plus operating costs. During the nine months ended September 30, 2005 the Fund paid a total of $118,000 under this lease (2004 - $234,000).

6. Effective May 1, 2005 the Fund renegotiated its office lease and other arrangements with the Lessor Company. Under the renegotiated arrangements, head leases on the Fund's corporate offices were assigned by the Lessor Company to Gateway GP and Gateway GP agreed to sublease approximately 1,950 square feet of space to the Lessor Company for monthly rent of $3,500, inclusive of common area costs and GST, and to provide the Lessor Company with reception services for an additional $350 per month, plus GST. These transactions represents a flow-through of the Fund's cost. There is no profit or loss to the Fund. In conjunction with the renegotiation, Gateway GP purchased certain office equipment, previously provided for its use by the Lessor Company, for a total cost of $45,000, which represented the current price for similar used equipment in like condition.

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, B.C. 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 12 to 18 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.

Changes in Accounting Policies

Effective January 1, 2005, the Fund adopted new guidelines for consolidation in accordance with the CICA's Accounting Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"). AcG-15 establishes a new principles-based consolidation framework that consists of two general consolidation models - the "voting interest model" and the "variable interest model". AcG-15 limits the use of the voting interests model (the traditional consolidation framework) to situations where the holders of equity interests have made a substantive investment in the equity of the entity that is truly at risk and allows the holders to make significant decisions that affect the success of the entity. If an enterprise cannot apply the voting interests model, it means the entity is a variable interest entity ("VIE") and the variable interests consolidation model applies. Under this model, an assessment is made whether an enterprise controls an entity based on the enterprise's participation in its risks and rewards. If an enterprise holds interests in the entity that expose the entity to the majority of the entity's risks, the enterprise must consolidate. If the risks are sufficiently dispersed such that no single party has such an exposure, the enterprise that holds the majority of the entity's rewards must consolidate. If no one holds the majority of the entity's rewards, no one should consolidate the entity.

The Fund has analyzed all the of entities that it controls, directly or indirectly, or in which it has an economic interest to determine which consolidation model to apply and whether the entities must be consolidated by the Fund. Management has determined that no changes are required to its consolidation principles from what has been used in the past.

Additional Information

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

Gateway Casinos Income Fund

Consolidated Financial Statements

3rd Quarter Report 2005

For the nine months ended September 30, 2005

(Unaudited - expressed in thousands of dollars)

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS


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

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

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



Gateway Casinos Income Fund
Consolidated Balance Sheets
--------------------------------------------------------------------
(Unaudited - expressed in thousands of dollars)

September 30, December 31,
2005 2004
$ $
Assets

Current assets
Cash and cash equivalents 20,828 20,171
Accounts receivable 506 806
Facility development fund receivable 97 1,117
Due from related parties 580 834
Inventory 181 195
Prepaid expenses 828 865
Prepaid employee compensation 233 89
Current portion of prepaid rent 804 804
-------------------------------------

24,057 24,881

Prepaid rent 5,158 5,761

Property and equipment 19,359 20,358

Deferred financing cost 712 845

Deferred development costs 2,945 247

Goodwill 17,182 17,182

Intangible assets 17,406 18,257

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

208,327 209,039
-------------------------------------
-------------------------------------

Liabilities

Current liabilities
Gaming revenue payable to BCLC and AGLC 5,849 5,883
Accounts payable and accrued liabilities 5,482 6,530
Mortgages payable (note 8) 7,468 7,713
Distribution payable to unitholders - 3,598
-------------------------------------

18,799 23,724

Interest rate swap contract 1,885 1,461

Long-term debt (note 6) 40,900 40,900

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

183,092 187,593
-------------------------------------

Unitholders' Equity

Issuance of trust units 22,993 22,993

Cumulative earnings 96,479 69,443

Cumulative distributions declared (94,237) (70,990)
-------------------------------------

25,235 21,446
-------------------------------------

208,327 209,039
-------------------------------------
-------------------------------------

Organization and nature of operations (note 1)

Basis of presentation (note 2)

Subsequent event (note 8)

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


Gateway Casinos Income Fund
Consolidated Statements of Earnings and Cumulative Earnings
--------------------------------------------------------------------
(Unaudited - expressed in thousands of dollars, except per unit
and number of unit figures)

Three-month Nine-month
period ended period ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
$ $ $ $

Revenue
Table games 6,916 6,921 21,476 20,679
Slot machines
and other
electronic games 16,959 15,182 49,481 44,266
Food and beverage
services 1,246 1,169 3,948 3,408
Hotel - 2,337 - 2,337
Other 395 453 1,700 1,603
-----------------------------------------------

25,516 26,062 76,605 72,293
-----------------------------------------------

Expenses
Corporate and
general
administration 686 1,186 3,331 3,409
Cost of food and
beverage services 504 490 1,649 1,400
Human resources 10,460 9,168 31,103 27,130
Marketing and
promotions 870 488 2,494 1,379
Occupancy 780 699 2,252 2,275
Operating 907 1,096 3,173 2,745
Hotel operating
costs - 1,925 - 1,925
-----------------------------------------------

14,207 15,052 44,002 40,263
-----------------------------------------------

Earnings before
the following 11,309 11,010 32,603 32,030

Interest income
on secured loans 2,450 3,563 7,271 11,359
Income allocation
on Class A
Partnership Units (2,453) (3,567) (7,280) (11,373)
Interest expense, net (821) (927) (2,331) (1,550)
Unrealized mark-to-
market gain (loss)
on interest rate swap 493 (964) (424) (964)
Gain on sale of assets 207 - 207 -
Amortization
Property and equipment (466) (513) (1,366) (1,394)
Intangible assets (284) (284) (851) (851)
Prepaid rent (201) (201) (603) (603)
Deferred financing
costs (59) (73) (190) (73)
-----------------------------------------------

Net earnings for
the period 10,175 8,044 27,036 26,581

Unitholders' equity -
Beginning of period 23,778 27,659 21,446 22,991
Distributions
declared during
the period (8,718) (8,322) (23,247) (22,192)
-----------------------------------------------

Unitholders' equity -
End of period 25,235 27,381 25,235 27,380
-----------------------------------------------
-----------------------------------------------

Basic and fully
diluted earnings
per unit 0.39 0.30 1.02 1.01
-----------------------------------------------
-----------------------------------------------

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

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


Gateway Casinos Income Fund
Consolidated Statements of Cash Flows
--------------------------------------------------------------------
(Unaudited - expressed in thousands of dollars, except per unit
and number of unit figures)

Three-month Nine-month
period ended period ended
September September September September
30, 2005 30, 2004 30, 2005 30, 2004
$ $ $ $
Cash flows
from operating
activities
Net earnings
for the period 10,175 8,044 27,036 26,581
Items not
affecting cash
Unrealized mark-to-
market (gain)
loss on interest
rate swap (493) 964 424 964
Gain on sale
of assets (207) - (207) -
Amortization
of property
and equipment 466 513 1,366 1,394
Amortization
of intangible
assets 284 284 851 851
Amortization
of prepaid rent 201 201 603 603
Amortization
of deferred
financing costs 59 73 190 73
-----------------------------------------------
10,485 10,079 30,263 30,466

Changes in non-cash
working capital items 1,142 724 (827) 260
-----------------------------------------------

11,627 10,803 29,436 30,726
-----------------------------------------------
Cash flows from
investing activities
Purchase of property
and equipment (83) (426) (606) (1,385)
Facility development
funds received for
property and
equipment purchases
and development costs 378 215 1,233 223
Development costs (1,492) - (2,699) -
Sale of property
and equipment 207 - 211 -
Repayment of
secured loans - 65,672 - 105,672
Acquisition of
Radisson Hotel
Burnaby, net of
cash received - (6) - (16,280)

-----------------------------------------------

(990) 65,455 (1,861) 88,230
-----------------------------------------------
Cash flows from
financing activities
Distributions paid (8,718) (8,322) (26,846) (26,445)
Due from related
parties, net 435 10 243 (202)
Mortgage proceeds
(payments) (82) 76 (245) 7,789
Long-term debt
proceeds (repayments) - 2,540 - 11,035
Loan repayments to
related party - (77) - (405)
Redemption of Class
A Partnership Units - (65,672) - (105,672)
Deferred financing costs - (511) (70) (942)
-----------------------------------------------

(8,365) (72,108) (26,918) (114,842)
-----------------------------------------------

Decrease in cash
and cash equivalents 2,272 4,150 657 4,114

Cash and cash
equivalents -
Beginning of period 18,556 13,753 20,171 13,789
-----------------------------------------------

Cash and cash
equivalents -
End of period 20,828 17,903 20,828 17,903
-----------------------------------------------
-----------------------------------------------

Supplemental cash
flow information
Interest paid 892 468 2,562 1,172
-----------------------------------------------
-----------------------------------------------

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


Gateway Casinos Income Fund
Notes to Consolidated Financial Statements
June 30, 2005
--------------------------------------------------------------------
(Unaudited - 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. During 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.

On November 28, 2002, the Fund issued 10,567,000 units at a price of $10.00 per unit pursuant to an initial public offering and a further 15,850,687 units at a price of $10.00 per unit to the shareholders of Gateway Casinos Inc. ("GCI") for total net proceeds of $254,726,000 after deducting expenses of the offering of $9,451,000.

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 renew 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. Prior to 1996, the Palace Casino (from its opening in 1989) operated under casino support agreements with individual charities. The other agreements with the AGLC have no specified term and are effective until terminated, at the AGLC's discretion or for certain specified reasons. The Partnership earns gaming revenues based on an agreed percentage of the total win from table games, slot machines and other electronic games as consideration for providing operational services to the BCLC and AGLC.

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

2 Basis of presentation

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

These interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements for the Fund for the year ended December 31, 2004.

3 Significant accounting policies

These interim consolidated financial statements follow the same accounting principles and methods of their application as the annual audited consolidated financial statements of the Fund, with the following exception:

Consolidation

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

4 Acquisition of Radisson Hotel Burnaby

On June 30, 2004, the Partnership acquired the net assets of Villa Hotels Ltd. in Burnaby, B.C., 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 until the shutdown of the hotel on October 31, 2004. 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 (7,865)
-------------

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


5 Distributions to unitholders

During the nine month period ended September 30, 2005, the Fund declared distributions to its unitholders of $23,248,000 or $0.88 per unit. Subsequent to the end of the period, the Fund declared a distribution of $3,038,000, or $0.115 per unit, related to the operations of September 2005. The amounts and record dates of these distributions are as follows:



Record Date Amount Per unit
$ $

Declared during the period
February 25 2,906 .11
March 25 2,906 .11
April 26 2,906 .11
May 26 2,906 .11
June 24 2,906 .11
July 26 2,906 .11
August 26 2,906 .11
September 26 2,906 .11
---------------------------
23,248 .88


Declared subsequent to the period,
related to the period
October 26 3,038 .115
---------------------------

26,286 .995
---------------------------
---------------------------


6 Credit facilities

During the second quarter of 2005, the Fund renegotiated its bank facilities to increase the available amount to $90 million from $70 million. As with the previous arrangements, the amount is available to the Partnership in two facilities. Facility A provides for a maximum of $15 million (increased from $10 million), available to the Fund as a revolving facility. Facility B is a $75 million construction facility for the redevelopment of the Burnaby Casino (increased from $60 million). All other terms and conditions remained the same.

As at September 30, 2005, approximately $12 million of the amount available under Facility A had been utilized to provide letters of credit to the BCLC as required under the COSAs for the Burnaby Casino and the Lake City Casinos.

7 Segmented information

The Fund has four reporting segments: the Burnaby Casino, the Lake City Casinos, the Palace Casino and the Villa Hotel. The Villa Hotel was acquired on June 30, 2004 and shut down on October 31, 2004 pending redevelopment, therefore there were no revenue or expenses for this segment in the periods reported below. All business of the Fund is conducted in Canada.



Three-month period ended Nine-month period ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
$ $ $ $

Revenue
Burnaby
Casino 11,262 9,412 34,427 29,902
Lake City
Casinos 9,010 8,720 25,385 24,065
Palace
Casino 5,244 5,593 16,793 15,989
Villa Hotel - 2,337 - 2,337
------------------------------------------------------

25,516 26,062 76,605 72,293
------------------------------------------------------
------------------------------------------------------

Earnings before
corporate and
general
administration,
long-term incentive
plan compensation
expense,
interest, income
allocation on
Class A
Partnership Units,
unrealized
mark-to-market
gain (loss) on
interest rate
swap and
amortization,
gain on sale
of assets
Burnaby
Casino 6,146 5,480 19,224 18,514
Lake City
Casinos 4,408 4,405 11,764 11,621
Palace
Casino 1,689 1,899 5,874 5,468
Villa Hotel - 412 - 412
------------------------------------------------------
12,243 12,196 36,862 36,015

Long-term
incentive plan
compensation
expense (248) - (928) -
Corporate
and general
administration (686) (1,186) (3,331) (3,985)
------------------------------------------------------

Earnings before
the following 11,309 11,010 32,603 32,030
------------------------------------------------------

Amortization
Burnaby
Casino (90) (105) (278) (137)
Lake City
Casinos (577) (588) (1,715) (1,741)
Palace
Casino (323) (322) (967) (953)
Villa Hotel - (28) - (28)
------------------------------------------------------
(990) (1,043) (2,960) (2,859)

Interest income
on secured
loans 2,450 3,563 7,271 11,359
Income
allocation
on Class A
Partnership
Units (2,453) (3,567) (7,280) (11,373)
Unrealized
mark-to-market
gain (loss)
on interest
rate swap 493 (964) (424) (964)
Gain on sale
of assets 207 - 207 -
Amortization
on corporate
assets (20) (28) (50) (62)
Interest
expense - net (821) (927) (2,331) (1,550)
------------------------------------------------------

(1,134) (2,966) (5,567) (5,449)
------------------------------------------------------

Net earnings 10,175 8,044 27,036 26,581
------------------------------------------------------
------------------------------------------------------


8 Subsequent event

On October 31, 2005 Gateway G.P. Inc. issued C$7.5 million in 7 year notes under its outstanding long-term notes shelf facility. These notes mature on October 31, 2012 and bear interest at 5.39% per annum, payable quarterly in arrears. The Fund intends to use the proceeds of this issue to repay the outstanding mortgages that were assumed in the purchase of the Radisson Hotel Burnaby (note 4) in June 2004, as they mature. On October 31, 2005, Gateway repaid mortgage principal of $3,355,000 that bore interest at 7.59% per annum, payable monthly The Fund intends to repay the remaining mortgage of approximately $4.1 million, which bears interest at 7.70% per annum, payable monthly, will be repaid at its maturity on December 1, 2005.


Contact Information