| ISLE OF CAPRI CASINOS INC ITEM 1A RISK FACTORS 36 ITEM 1A RISK FACTORS Risk Factors We face significant competition from other gaming operations that could have a material adverse effect on our future operations |
| We face intense competition in the markets in which we operate |
| We have numerous competitors, including land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American-owned lands and at racing and pari-mutuel operations |
| Several of our competitors have substantially better name recognition, marketing and financial resources than we do |
| Legalized gaming is currently permitted in various forms throughout the United States |
| Certain states have recently legalized, and other states are currently considering legalizing, casino gaming in designated areas |
| There is no limit on the number of gaming licenses that may be granted in several of the markets in which we operate |
| As a result, new licenses could be awarded to gaming facilities in such markets, which could have an adverse effect on our operating results |
| Expansion of existing gaming facilities and the development of new gaming facilities in our current markets will increase competition for our existing and future operations |
| In addition, many Native American tribes conduct casino gaming on Native American-owned lands throughout the United States |
| Such facilities have the advantages of being land-based and exempt from certain state and federal taxes and operational restrictions imposed by state gaming authorities |
| Some Native American tribes are either in the process of establishing or expanding, or are considering the establishment or expansion of, gaming in Oklahoma, Texas, Louisiana, Florida, Alabama, Kansas, Colorado, Mississippi and Iowa |
| The establishment or expansion of new gaming facilities and casinos on Native American-owned lands will increase competition for our existing and future gaming facilities in proximity to Native American owned lands |
| We also compete with other forms of legalized gaming and entertainment such as online computer gambling, bingo, pull tab games, card parlors, sports books, “cruise-to-nowhere” operations, pari-mutuel or telephonic betting on horse racing and dog racing, state-sponsored lotteries, jai-alai, video lottery terminals and video poker terminals and, in the future, may compete with gaming at other venues |
| Our existing gaming facilities compete directly with other gaming properties in Louisiana, Mississippi, Missouri, Iowa and Colorado |
| We also compete with gaming operators in other gaming jurisdictions such as Atlantic City, New Jersey and Las Vegas, Nevada |
| Our existing casinos attract a significant number of their customers from Houston, Texas; Mobile, Alabama; Jackson, Mississippi; Memphis, Tennessee; Little Rock, Arkansas and Denver, Colorado |
| Our continued success depends upon drawing customers from each of these geographic markets |
| Legalization of gaming in jurisdictions closer to these geographic markets than the jurisdictions in which our facilities are located would have a material adverse effect on our operating results |
| We expect competition to increase as new gaming operators enter our markets, existing competitors expand their operations, gaming activities expand in existing jurisdictions and gaming is legalized in new jurisdictions |
| We cannot predict with any certainty the effects of existing and future competition on our operating results |
| We are subject to extensive regulation from gaming authorities that could adversely affect us |
| As owners and operators of gaming facilities, we are subject to extensive state and local regulation |
| State and local authorities require us and our subsidiaries to demonstrate suitability to obtain and retain various licenses and require that we have registrations, permits and approvals to conduct gaming operations |
| The regulatory authorities in the jurisdictions in which we operate may limit, condition, suspend or revoke a license to conduct gaming operations or prevent us from owning the securities of 36 _________________________________________________________________ any of our gaming subsidiaries |
| Substantial fines or forfeiture of assets for violations of gaming laws or regulations may be levied against us, our subsidiaries and the persons involved |
| The suspension or revocation of any of our licenses or the levy on us or our subsidiaries of a substantial fine would have a material adverse effect on our business |
| To date, we have demonstrated suitability to obtain and have obtained all governmental licenses, registrations, permits and approvals necessary for us to operate our existing gaming facilities |
| However, like all gaming operators in the jurisdictions in which we operate, we must periodically apply to renew our gaming licenses |
| We cannot assure you that we will be able to obtain such renewals |
| In addition, regulatory authorities in certain jurisdictions must approve, in advance, any restrictions on transfers of, agreements not to encumber or pledges of equity securities issued by a corporation that is registered as an intermediary company with such state, or that holds a gaming license |
| If these restrictions are not approved in advance, they will be invalid |
| On January 4, 2006, a Florida statute became effective allowing Pompano Park and three other pari-mutuel facilities in Broward County to offer slot machine gaming to patrons at these facilities |
| The Florida Department of Business and Professional Regulation is administering the law and is now implementing rules and regulations for the operation of the slot machines |
| We cannot assure you how restrictive the aforementioned rules will be drafted or that we will receive all necessary approvals to commence slot operations |
| From time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations in the jurisdictions in which we operate |
| In addition, from time to time, certain anti-gaming groups have attacked constitutional amendments or legislation that would limit our ability to continue to operate in those jurisdictions in which these constitutional amendments or legislation have been adopted |
| For example, in November 2004, voters in the State of Florida amended the state’s constitution to allow the voters of Miami-Dade and Broward counties (Broward County is the location of the Pompano Park Racetrack) to decide whether to approve slot machines in racetracks and jai alai frontons in their respective counties |
| Broward County voters passed their local referendum and Miami-Dade County voters rejected their referendum in March 2005 |
| An appeal challenging the validity of signatures needed to place the Florida constitutional amendment on the ballot is pending following the granting of summary judgment against the plaintiffs in a lower court dismissing the challenge |
| If the constitutional amendment were ultimately found to be invalid, our right to operate slot machines at Pompano Park would be eliminated |
| We cannot assure you as to the outcome of this litigation |
| Any expansion of gaming or restriction on or prohibition of our gaming operations could have a material adverse effect on our operating results |
| We are subject to the possibility of an increase in gaming taxes, which would increase our costs |
| State and local authorities raise a significant amount of revenue through taxes and fees on gaming activities |
| We believe that the prospect of significant revenue is one of the primary reasons that jurisdictions permit legalized gaming |
| As a result, gaming companies are typically subject to significant taxes and fees in addition to normal federal, state, local and provincial income taxes, and such taxes and fees are subject to increase at any time |
| We pay substantial taxes and fees with respect to our operations |
| From time to time, federal, state, local and provincial legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry |
| In addition, poor economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes |
| Some of the states in which we own or operate casinos 37 _________________________________________________________________ continue to experience budget shortfalls and, as a result, may increase gaming taxes to raise more revenue |
| It is not possible to determine with certainty the likelihood of changes in tax laws or in the administration of such laws |
| Such changes, if adopted, could have a material adverse effect on our business, financial condition and results of operations |
| We are subject to non-gaming regulation that could adversely affect us |
| Several of our riverboats must comply with US Coast Guard requirements as to boat design, on-board facilities, equipment, personnel and safety and must hold US Coast Guard Certificates of Documentation and Inspection |
| The US Coast Guard requirements also set limits on the operation of the riverboats and mandate licensing of certain personnel involved with the operation of the riverboats |
| Loss of a riverboat’s Certificate of Documentation and Inspection could preclude its use as a riverboat casiNodtta Each of our riverboats is inspected annually and, every five years, is subject to dry-docking for inspection of its hull, which could result in a temporary loss of service |
| We are required to have third parties periodically inspect and certify all of our casino barges for stability and single compartment flooding integrity |
| Our casino barges must also meet local fire safety standards |
| We would incur additional costs if any of our gaming facilities were not in compliance with one or more of these regulations |
| We are also subject to certain federal, state and local environmental laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, the Clean Water Act, the Resource Conservation Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act and the Oil Pollution Act of 1990 |
| Under various federal, state and local laws and regulations, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances or wastes located on its property, regardless of whether or not the present owner or operator knows of, or is responsible for, the presence of such substances or wastes |
| We have not identified any issues associated with our properties that could reasonably be expected to have an adverse effect on us or the results of our operations |
| However, several of our properties are located in industrial areas or were used for industrial purposes for many years |
| As a consequence, it is possible that historical or neighboring activities have affected one or more of our properties and that, as a result, environmental issues could arise in the future, the precise nature of which we cannot now predict |
| The coverage and attendant compliance costs associated with these laws, regulations and ordinances may result in future additional costs |
| Regulations adopted by the Financial Crimes Enforcement Network of the US Treasury Department require us to report currency transactions in excess of dlra10cmam000 occurring within a gaming day, including identification of the patron by name and social security number |
| US Treasury Department regulations also require us to report certain suspicious activity, including any transaction that exceeds dlra5cmam000 if we know, suspect or have reason to believe that the transaction involves funds from illegal activity or is designed to evade federal regulations or reporting requirements |
| Substantial penalties can be imposed against us if we fail to comply with these regulations |
| We are also subject to a variety of other local rules and regulations, including zoning, environmental, construction and land-use laws and regulations governing the serving of alcoholic beverages |
| Penalties can be imposed against us if we fail to comply with these regulations |
| The imposition of a substantial penalty or the loss of service of a gaming facility for a significant period of time would have a material adverse affect on our business |
| Our substantial indebtedness could adversely affect our financial health and restrict our operations |
| 38 _________________________________________________________________ We have a significant amount of indebtedness |
| As of April 30, 2006, we had dlra1dtta2 billion of total debt outstanding |
| Our significant indebtedness could have important consequences, such as: · limiting our ability to obtain additional financing to fund our working capital requirements, capital expenditures, debt service, general corporate or other obligations; · limiting our ability to use operating cash flow in other areas of our business because we must dedicate a significant portion of these funds to make principal and interest payments on our indebtedness; · increasing our interest expense if there is a rise in interest rates, because a portion of our borrowings under our senior secured credit facility are subject to interest rate periods with short-term durations (typically 30 to 180 days) that require ongoing refunding at the then current rates of interest; · causing our failure to comply with the financial and restrictive covenants contained in the indenture and agreements governing the 7prca senior subordinated notes due 2014, the 9prca senior subordinated notes due 2012, our senior secured credit facility and our other indebtedness, which could cause a default under those instruments and which, if not cured or waived, could have a material adverse effect on us; · placing us at a competitive disadvantage to our competitors who are not as highly leveraged; and · increasing our vulnerability to and limiting our ability to react to changing market conditions, changes in our industry and economic downturns |
| Any of the factors listed above could have a material adverse effect on our business, financial condition and results of operations |
| In addition, as of April 30, 2006, we had the capacity to issue additional indebtedness, including the ability to incur additional indebtedness under all of our lines of credit, of approximately dlra433dtta4 million, of which, approximately dlra72dtta2 million of these lines of credit were used to support letters of credit |
| Our capacity to issue additional indebtedness is subject to the limitations imposed by the covenants in our senior secured credit facility and the indentures governing our notes |
| The indenture governing our notes and our senior secured credit facility contain financial and other restrictive covenants, but will not fully prohibit us from incurring additional debt |
| If new debt is added to our current level of indebtedness, related risks that we now face could increase |
| We have made and will need to make significant capital expenditures at our existing facilities to remain competitive with current and future competitors in our markets |
| Our senior secured credit facility and the indentures governing our notes contain operating and financial restrictions that may limit our ability to obtain the financing to make these capital expenditures |
| Our agreements governing our indebtedness, among other things, limit our ability to: · borrow money; · make capital expenditures; · use assets as security in other transactions; · make restricted payments or restricted investments; · incur contingent obligations; and · sell assets and enter into leases and transactions with affiliates |
| We may not be able to successfully expand to new locations or recover our investment in new locations which would adversely affect our operations and available resources |
| 39 _________________________________________________________________ We regularly evaluate and pursue new gaming acquisition and development opportunities in existing and new gaming markets including Waterloo, Iowa; Pompano Beach, Florida; Coventry, England; west Harrison County, Mississippi; Pittsburgh, Pennsylvania; Singapore and Rosemont, Illinois |
| To the extent that we elect to pursue any new gaming acquisition or development opportunity, our ability to benefit from our investment will depend on many factors, including: · our ability to successfully identify attractive acquisition and development opportunities; · our ability to successfully operate any developed or acquired properties; · our ability to attract and retain competent management and employees for the new locations; · our ability to secure required federal, state and local licenses, permits and approvals, which in some jurisdictions are limited in number and subject to intense competition; · the availability of adequate financing on acceptable terms |
| Therefore, we cannot be sure that we will be able to recover our investments in any new gaming development opportunities or acquired facilities, or successfully expand to additional locations |
| We may experience construction delays during our expansion or development projects which could adversely affect our operations |
| We also evaluate other expansion opportunities as they become available and we may in the future engage in additional construction projects |
| The anticipated costs and construction periods are based upon budgets, conceptual design documents and construction schedule estimates prepared by us in consultation with our architects and contractors |
| Construction projects entail significant risks, which can substantially increase costs or delay completion of a project |
| Such risks include shortages of materials or skilled labor, unforeseen engineering, environmental or geological problems, work stoppages, weather interference and unanticipated cost increases |
| In addition, difficulties or delays in obtaining any of the requisite licenses, permits or authorizations from regulatory authorities can increase the cost or delay the completion of an expansion or development |
| Significant budget overruns or delays with respect to expansion and development projects could adversely affect our results of operations |
| If our key personnel leave us, our business will be significantly adversely affected |
| Our continued success will depend, among other things, on the efforts and skills of a few key executive officers and the experience of our property managers as well as our ability to attract and retain additional highly qualified personnel with gaming industry experience and qualifications to obtain the requisite licenses |
| We do not maintain “key man” life insurance for any of our employees |
| There is no assurance that we would be able to attract and hire suitable replacements for any of our key employees |
| We need qualified executives, managers and skilled employees with gaming industry experience to continue to successfully operate our business |
| We believe a shortage of skilled labor in the gaming industry may make it increasingly difficult and expensive to attract and retain qualified employees |
| We expect that increased competition in the gaming industry will intensify this problem |
| 40 _________________________________________________________________ Inclement weather and other conditions could seriously disrupt our business, financial condition and results of operations |
| Dockside and riverboat facilities are subject to risks in addition to those associated with land-based casinos, including loss of service due to casualty, mechanical failure, extended or extraordinary maintenance, flood, hurricane or other severe weather |
| Our riverboats and barges face additional risks from the movement of vessels on waterways |
| Reduced patronage and the loss of a dockside or riverboat casino from service for any period of time could adversely affect our results of operations |
| For example, as a result of hurricanes Katrina and Rita, we closed the Isle-Biloxi from August 28, 2005 to December 26, 2005 and the Isle-Lake Charles from September 22, 2005 to October 8, 2005 |
| While our business interruption insurance provided sufficient coverage for those losses, we cannot be assured that the proceeds from any future claim will be sufficient to compensate us if one or more of our casinos experience a closure |
| In fiscal 2007, as a result of hurricane claims in the Gulf Coast region over the past several years, we have experienced a significant increase in property and business interruption premiums |
| Access to a number of our facilities may also be affected by road conditions, such as construction and traffic |
| In addition, severe weather such as high winds and blizzards occasionally limits access to our facilities in Colorado |
| Energy and fuel price increases may adversely affect our costs of operations and our revenues Our casino properties use significant amounts of electricity, natural gas and other forms of energy |
| While no shortages of energy have been experienced, substantial increases in the cost of electricity in the United States will negatively affect our results of operations |
| In addition, energy and fuel price increases in cities that constitute a significant source of customers for our properties could result in a decline in disposable income of potential customers and a corresponding decrease in visitation to our properties, which would negatively impact our revenues |
| The extent of the impact is subject to the magnitude and duration of the energy and fuel price increases, but this impact could be material |
| A downturn in general economic conditions may adversely affect our results of operations |
| Our business operations are subject to changes in international, national and local economic conditions, including changes in the economy related to future security alerts in connection with threatened or actual terrorist attacks and related to the war with Iraq, which may affect our customers’ willingness to travel |
| A recession or downturn in the general economy, or in a region constituting a significant source of customers for our properties, could result in fewer customers visiting our properties, which would adversely affect our results of operations |
| We have international operations that are subject to different risks than our domestic operations |
| In the United Kingdom and the Bahamas, we are subject to certain additional risks, including difficulty in staffing and managing foreign subsidiary operations, foreign currency fluctuations, dependence on foreign economies, political issues, adverse tax consequences and uncertainty in regulatory reform in the United Kingdom |
| In addition, in the Bahamas current gaming regulation preclude residence from participating in gaming activities |
| Therefore, disruptions in tourism traffic such as airline and other means of transportation and hotel accommodations can have an adverse impact in our gaming operations |