Gateway Casinos Income Fund
TSX : GCI.UN

Gateway Casinos Income Fund

April 03, 2006 15:45 ET

Gateway Casinos Income Fund Announces Acquisition of Cascades Casino, $35 Million Bought Public Offering of Extendible Convertible Debentures and Increase in Distributions

BURNABY, BRITISH COLUMBIA--(CCNMatthews - April 3, 2006) -

NOT FOR DISTRIBUTION TO US NEWSWIRE SERVICE OR FOR DISSEMINATION IN THE UNITED STATES

Gateway Casinos Income Fund (the "Fund") (TSX:GCI.UN) is pleased to announce that its operating entity, Gateway Casinos Limited Partnership ("Gateway") has entered into a letter of intent with a subsidiary of Gateway Casinos Inc. ("GCI"), a private company, to acquire all of the operating assets of the Cascades Langley Casino and Hotel ("Cascades") in the Vancouver suburb of Langley, British Columbia. The transaction is valued at approximately $106.3 million. The purchase price will be satisfied through the issue of 4,692,689 units of the Fund and approximately $32.6 million in cash. The cash portion of the purchase price will be provided from the net proceeds of a $35 million bought public offering of 5.35% extendible convertible debentures.

"The acquisition of the Cascades Langley Casino and Hotel presents a tremendous opportunity for the Fund to grow and diversify our operations at a price that is immediately accretive to unitholders," said Dave Gadhia, Chief Executive Officer of Gateway Casinos G.P. Inc. "Since opening last spring under private ownership, Cascades has exceeded expectations and we believe it will continue to generate strong performance going forward. We believe we will see strong growth in distributable cash as the operations of Cascades continue to mature, which should provide even greater accretion to our unitholders in the future."

About the Acquisition

The Cascades Langley Casino and Hotel includes the Cascades Casino and the Coast Langley City Hotel and Convention Centre. The Cascades Casino, which opened in May 2005, is a new 50,000 square foot state-of-the-art gaming facility and entertainment complex with 530 slot machines, 24 table games and an 8-table poker room. The Casino also provides full food and beverage service, as well as the potential for a wide variety of live entertainment options at its 420-seat Summit Theatre.

The Coast Langley City Hotel and Convention Centre, which opened in June 2005, is a 77-room, three and a half star hotel with an adjoining 25,000 square foot convention centre with a ballroom and a variety of meeting spaces. The convention centre is operated under a management agreement on behalf of its owner, the City of Langley, and all the net earnings flow to the owner of Cascades.

The Fund believes that the acquisition will result in immediate accretion to its unitholders. For the twelve months ended December 31, 2006, Cascades is expected to generate estimated distributable cash of approximately $9.0 million, after deducting the interest expense associated with the $35 million principal amount of 5.35% extendible convertible debentures. The Fund will receive that portion of the distributable cash generated from the closing date to December 31, 2006. Based on the year-to-date results of Cascades in 2006, management believes that its actual 2006 results will exceed these estimates. Management also believes that Cascades has strong growth potential over the next two to three years as the operations continue to mature.

The acquisition should provide the Fund with a number of key benefits. These include:

- Immediate accretion to distributable cash;

- Enhanced geographic and operational diversification;

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

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

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

The number of units to be issued initially in connection with the acquisition was fixed based on the estimate of accretion in distributable cash and will be issued at a price of $15.70 per unit. This price is equal to the 10-day volume weighted average price of the units as of the close of market on March 28, 2006. Under the terms of the agreement, 676,910 units issued to GCI in connection with the acquisition, plus all distributions paid on those units from the closing of the acquisition, will be placed in escrow pending the determination of the final purchase price.

On closing, GCI will indirectly retain the right to receive approximately $27.4 million from the British Columbia Lottery Corporation (the "BCLC") under its Facility Development Fund ("FDF") program relating to costs incurred in connection with the construction and development of the Cascades Casino. FDF funds are used to provide additional compensation to casino operators in B.C. equal to eligible expenditures related to the development and improvement of casinos in the province. This arrangement will have no impact on the distributable cash of the Fund or the estimated (or actual) distributable cash of Cascades.

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

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

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

The more detailed considerations and recommendations of the Special Committee will be provided to unitholders in an information circular to be sent to unitholders in connection with an annual and special meeting of unitholders to be held on May 17, 2006. The acquisition is subject to approval by a majority vote of the disinterested unitholders of the Fund attending in person or by proxy at the special meeting. The Special Committee and the Board of Trustees of the Fund have unanimously approved the acquisition and are recommending that it be approved by the disinterested unitholders.

The acquisition is also subject to the execution of a definitive agreement, closing of the extendible convertible debenture offering and receipt of all necessary regulatory approvals and third-party consents.

Upon closing of the acquisition, the Fund will have 31,110,376 units issued and outstanding.

Public Offering of Extendible Convertible Debentures

The Fund has entered into an agreement with a syndicate of underwriters, led by BMO Nesbitt Burns Inc. and including CIBC World Markets Inc., to sell $35 million principal amount of extendible convertible debentures (the "Debentures"). The Debentures will have an initial maturity date of June 30, 2006 (the "Initial Maturity Date") which will be extended to June 30, 2011 (the "Final Maturity Date") upon the closing of the acquisition. The Debentures will have a coupon of 5.35% per annum, payable semi-annually in arrears on the last day of June and December in each year, commencing December 31, 2006.

The Debentures will be convertible at the option of the holder into units of the Fund at any time after the Initial Maturity Date and prior to the earlier of (i) the Final Maturity Date, and (ii) the last business day immediately preceding the date fixed for redemption, at a conversion price of approximately $19.10 per unit (representing 52.3560 units per $1,000 principal amount).

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

The Debentures will be offered by way of a short-form prospectus to be filed in all provinces of Canada. Closing of the offering is expected to occur on or about April 25, 2006.

In consideration for the service provided by the underwriters, the Fund has agreed to pay the underwriters a fee equal to 4% of the gross proceeds of the offering.

Increase in Distributions on Closing

The Trustees of the Fund have also approved an increase in the Fund's monthly distribution to unitholders by $0.0045 per unit to $0.1195 per unit per month following the closing of the acquisitions.

About the Fund

The Fund is an unincorporated, open-ended limited purpose trust established under the laws of British Columbia. The Fund currently 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.

Forward-looking statements

This press release contains 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 press release 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.

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.

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

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