|
|
|
.
Hotels & Casino Resorts Ability to Continue as a Going Concern Report of Independent Auditors - Ernst & Young |
Form 10-K for Trump Hotels & Casino Resorts
Inc.
30-Mar-2004
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section contains forward-looking statements that involve risks and uncertainties, many of which are beyond our ability to control or predict. Our actual results may differ substantially from the results discussed in the forward-looking statements. The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company and the related notes thereto. Terms not defined herein shall have the meanings ascribed to them elsewhere in the Form 10-K. The following constitute cautionary statements under the Private Securities Litigation Reform Act of 1995. Factors That May Affect Our Future Results We have substantial indebtedness and interest expense which limit our capital expenditures. Our company has substantial indebtedness and associated interest expense. At December 31, 2003, THCR's consolidated long-term debt was approximately $1.8 billion and its ratio of debt to capital was 331 to 1. Of such indebtedness, $1.3 billion is represented by the TAC Notes and approximately $494 million is represented by the TCH Notes. The TAC Notes are guaranteed by Trump Taj Mahal Associates and by Trump Plaza Associates, and are secured by substantially all of the fixed and other assets of such entities on a priority basis. The TCH Notes are guaranteed by Marina Associates, Trump Indiana and Trump 29 Services and are secured by substantially all of the fixed and other assets of such entities on a priority basis. The TAC Notes and the TCH Notes were issued pursuant to separate indentures, are not cross-collateralized and have separate and distinct Events of Default. Management believes that this indebtedness and associated interest expense hinders the Company's ability to reinvest in the maintenance of its owned properties at desired levels. See the "Report of Independent Auditors." Trump AC has an interest payment due on May 1, 2004 of approximately $73.1 million and cannot ensure that it will have sufficient funds on hand to make the interest payment within the 30-day grace period. Interest on the TAC Notes (approximately $73.1 million, semi-annually) is payable on May 1 and November 1 of each year. THCR anticipates, but cannot ensure, that Trump AC will have sufficient funds on hand from operations to provide for the May 1, 2004 installment of interest then due and payable on the TAC Notes within the 30-day grace period provided for under the indentures governing the TAC Notes. It is an Event of Default under the indentures pursuant to which the TAC Notes were issued if the interest thereon is not paid within 30 days of the due date. Upon the occurrence of an Event of Default, the Trustee may, and upon the request of the holders of 25% of the outstanding TAC Notes, is required to, declare the entire unpaid amount of the TAC Notes to be immediately due and payable. If such an Event of Default were to occur and the TAC Notes were to be accelerated, Trump AC would not be able to pay such indebtedness. In such event, Trump AC would likely seek to restructure the TAC Notes. The TAC Notes are not guaranteed by THCR or by TCH, and the assets of TCH do not secure the TAC Notes. An Event of Default under the TAC Notes is not an event of default under the indentures pursuant to which the TCH Notes were issued. The ability of Trump AC and its subsidiaries to pay interest on the TAC Notes depends primarily on the ability of its subsidiaries to generate cash flows sufficient for such purposes. The ability of Trump AC to borrow funds for such purpose is also restricted. See the "Report of Independent Auditors." The rate of interest payable on the TCH Notes will increase on March 15, 2004, thereby increasing TCH's interest expense. The interest rate on the TCH Notes will increase by 0.5% per annum if TCH's First Priority Leverage Ratio for any fiscal year, commencing with the year ended December 31, 2003, exceeds 4.8 to 1.0, and by 1.0% per annum if the First Priority Leverage Ratio exceeds 5.3 to 1.0. The First Priority Leverage Ratio for the year ended December 31, 2003 resulted in an increase in the interest rates on the TCH Notes of 1.0%. Such increase is effective from and after March 15, 2004 to March 14, 2005, at which point the rates of interest payable on the TCH Notes would be restored to their original levels, unless the First Priority Leverage Ratio computation for fiscal 2004 results in an increase. The estimated impact on interest expense for such period will be approximately $4,900,000. This will further constrain the ability of TCH to improve its properties, particularly Trump Marina in the intensely competitive marina district of Atlantic City. See "Financial Condition; Liquidity and Capital Resources; TCH Notes." We are pursuing the Potential Recapitalization which is intended to reduce debt and provide capital, the completion of which cannot be assured. Recently, we announced the Potential Recapitalization to attempt to reduce our high levels of indebtedness and interest expense and infuse equity capital into the Company. See "Business; Recent Events." The Potential Recapitalization depends upon the occurrence of several events, including:
The Company and DLJMB have proposed certain key terms of the Potential Recapitalization to the Noteholder Committee which may be different than the terms of a consummated recapitalization plan, if any. Certain Possible Consequences of the Potential Recapitalization If the parties can agree on the terms of a Potential Recapitalization, they will likely seek to implement it through a series of steps, any one of which may not be successful, including the restructuring of the TAC Notes and TCH Notes which may, given the number of holders of the Notes, be effected through a court approved plan of reorganization. In any such proceeding, the Company would propose, and now anticipates that trade creditors would be paid in full. There is no assurance that any such plan would be approved by the requisite vote of stakeholders. It is also possible that, if a Company sponsored plan is not agreed upon, bondholders may propose any number of alternative plans, some of which may involve Noteholders seeking to foreclose on their collateral. Pursuant to any plan, Noteholders may receive new notes, cash, other property, equity securities, or a combination of any of these. Any such new notes may be secured or unsecured, senior or subordinated, and have payment and other terms substantially different from the TAC Notes or TCH Notes. If the Potential Recapitalization is approved and implemented, it should result in a substantial deleveraging of the Company and reduction in its debt service. If the plan is approved and implemented, the holders of Common Stock of THCR prior to the transaction, including Mr. Trump (on account of his existing shares), are likely to have their existing interests substantially diluted and the value of that interest may be less than now. Further, DLJMB will own a majority equity interest in the Company (likely at the THCR or THCR Holdings level), and will be in a position to control the Company, subject to agreed upon contractual limitations, if any. Even if the plan is approved and implemented, and facilitates the desired expansion and development of the Company's properties, the change may not lead to the hoped for increase in the volume and profitability of the Company's business. Alternatives to the Potential Recapitalization If the Potential Recapitalization or other recapitalization plan is not consummated, the Company will continue to consider alternatives to optimize stakeholder return, reduce its consolidated indebtedness and improve its capital structure, including the alternatives described above and others. There is no assurance that any such alternatives will be achieved. Our ability to raise capital through refinancing is subject to a variety of risks and uncertainties. If the Potential Recapitalization is not consummated, the ability of Trump AC and TCH to pay the principal amount of their public debt at maturity (whether scheduled or by acceleration thereof) is primarily dependent upon their ability to obtain refinancing. There is no assurance that the general state of the economy, the status of the capital markets generally, or the receptiveness of the capital markets to the gaming industry or to THCR and its subsidiaries will be conducive to refinancing debt at any given time or on more favorable terms. On February 12, 2004, the date of announcement of the Potential Recapitalization, Moody's downgraded the debt ratings of the TAC Notes and TCH Notes and Standard & Poor's downgraded the debt rating of the TCH Notes and placed the TAC Notes on credit watch. These rating downgrades and any future rating downgrades could impair the Company's ability to raise debt financing for any purpose if it determined to do so. Restrictions contained in the indentures governing our public indebtedness impose limits on our ability to pursue certain business strategies. The respective indentures governing the TAC Notes and the TCH Notes contain operating and financial restrictions that limit our discretion on various business matters. These restrictions include covenants limiting Trump AC's and TCH's ability to:
The Borgata has adversely affected us and may continue to do so in the long term. In July 2003, the Borgata Casino Hotel and Spa, or the Borgata, opened in Atlantic City's marina district. The Borgata has approximately 2,000 rooms and suites, an approximate 135,000 square-foot casino, restaurants, retail shops, a spa and pool and entertainment venues. Since its opening, the Borgata has not grown the Atlantic City market to the extent as had been originally anticipated and, along with a sluggish economy and adverse weather conditions, has adversely affected the results of the Trump Atlantic City Properties, especially the nearby Trump Marina, compared to the same period in the prior year. Borgata's effect may be temporary and attributable to the desire of gaming patrons to visit a new casino. It is possible, however, that its adverse effect, coupled with increased competition in the region generally, will be long term. While we believe that the opening of the Borgata will attract additional visitors to Atlantic City in the long term, especially to the marina district where Trump Marina is situated, it is possible that the Borgata could have an adverse effect on the long-term business and operations of the Trump Atlantic City Properties and impair Trump AC's and TCH's ability to service the TAC Notes and TCH Notes, respectively. Also, the Borgata has recently announced its intention to expand its casino gaming square footage. To the extent that the Trump Atlantic City Properties, especially Trump Marina, do not have the financial resources to make capital expenditures to improve their properties, this adverse affect may be more acute. See "Financial Condition; Liquidity and Capital Resources." New York has enacted gaming legislation which may harm us, and other states may do so in the future. We do not know how these initiatives will affect us. In October 2001, the New York State legislature passed extensive legislation that could adversely affect us. The legislation permits three new casinos in western New York, one in Niagara Falls, one in Buffalo and one on land owned by the Seneca Indian Nation, all of which would be owned by the Seneca Indian Nation. The legislation also permits up to three casinos in the Catskills in Ulster and Sullivan counties, also to be owned by Native American tribes. In addition, the legislation allows slot machines to be placed in Indian-owned casinos. Video lottery terminals, or VLTs, could be installed at five horse racing tracks across the State of New York and, if local governments approve, at certain other tracks. On January 28, 2004, Saratoga Gaming and Raceway in upstate New York opened a gaming facility featuring approximately 1,300 VLTs, and on February 18, 2004, Finger Lakes Gaming and Racetrack in upstate New York also opened a gaming facility featuring approximately 1,000 VLTs. In March 2004, New York State's third racino at Buffalo Raceway in Hamburg opened with 990 VLTs. MGM Mirage, a major casino gaming company, has announced that it has an understanding with the NYRA to manage VLTs at the Aqueduct horseracing track in metropolitan New York, subject to certain conditions. Finally, the law provides for New York joining the Powerball lottery that operates in 26 states with large jackpots. The net effect of these facilities and other items, when operational, on Atlantic City, including the Trump Atlantic City Properties, cannot be predicted. We believe, however, that a substantial amount of existing and potential new gaming customers could patronize such facilities instead of Atlantic City, at least occasionally. Pennsylvania and Maryland are among the other states currently contemplating some form of gaming legislation. Legislative proposals introduced in Pennsylvania would potentially allow for a wide range of gaming activities, including riverboat gaming, slot machines at racetracks, VLTs at liquor stores and the formation of a gaming commission. Maryland's proposed legislation would authorize VLTs at some of Maryland's racing facilities. The results of the recent gubernatorial elections in Pennsylvania and Maryland have increased the likelihood of gaming legislation in such states. Since our market is primarily a drive-to market, legalized gaming in New York, Pennsylvania, Maryland or one or more states neighboring or within close proximity to New Jersey could have a material adverse effect on the Atlantic City gaming market overall, including the Trump Atlantic City Properties. A downturn in the regional economy and high energy and gasoline prices and adverse winter weather conditions could negatively impact our financial performance. A majority of our net revenues and operating income are generated by the Trump Atlantic City Properties. Moderate or severe economic downturns or adverse conditions in the Atlantic City and regional markets and surrounding areas may negatively affect our operations. During periods of economic contraction, our revenues may decrease while some of our costs remain fixed, resulting in decreased earnings. This is because gaming and other leisure activities we offer are discretionary expenditures and participation in such activities may decline during economic downturns because consumers have less disposable income. Even an uncertain economic outlook may adversely affect consumer spending in our gaming operations and related facilities, as consumers spend less in anticipation of a potential economic downturn. Furthermore, other uncertainties, including national and global economic conditions, terrorist attacks or other global events, could adversely affect consumer spending, increase gasoline prices and, perhaps, adversely affect our operations. We use significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, any substantial increases in the cost of electricity and natural gas in the United States, and specifically the North East, could negatively impact our operating results. The extent of any impact is subject to the magnitude and duration of the energy price increases and could be material. Also, a majority of our patrons drive to our property. Rising gasoline prices could reduce automobile travel and decrease the number of patrons at our properties. In addition, adverse winter weather conditions reduce automobile travel. As a result, our business, assets, financial condition and results of operations could be adversely affected by a weakening of regional economic conditions, high gasoline prices and/or adverse winter weather conditions. We may incur losses that would not be covered by insurance and the cost of insurance has increased. Although we maintain insurance which is customary and, we believe, appropriate for our business, we cannot assure you that insurance will be available or adequate to cover all losses and damage to which our business or our assets might be subjected. In connection with insurance renewals subsequent to September 11, 2001, the availability of insurance coverage for certain types of damages or occurrences has been diminished substantially. Consequently, we are self-insured for certain risks and levels of risk. The lack of insurance for certain types or levels of risk could expose us to significant losses in the event that an uninsured catastrophe occurred. Any uninsured losses may decrease our future operating income, require us to find replacements or repairs and reduce funds otherwise available to upgrade our property or pay expenses. Taxation of the gaming industry, already significant, may increase in the future which would reduce our profitability. The casino industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. We, as well as other gaming companies, are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes. New Jersey taxes annual gaming revenues at the rate of 8.0% and levies an annual investment alternative tax of 2.5% on annual gaming revenue. This 2.5% obligation, however, can be satisfied by purchasing certain bonds or making certain investments in the amount of 1.25% of annual gaming revenues. In July 2002, New Jersey passed the New Jersey Business Tax Reform Act, which, among other things, suspended the use of the net operating loss carryforwards for two years and introduced a new alternative minimum assessment under the New Jersey corporate business tax based on gross receipts or gross profits. Future changes in New Jersey's taxation of gaming companies cannot be predicted and any such changes could adversely affect our profitability. From time to time, and as was the case in the second quarter of 2002 in Indiana, various state and federal legislators have proposed changes in tax laws that affect the gaming industry. In connection with permitting dockside gaming which we believe is advantageous, the Indiana state legislature passed legislation effective July 1, 2002 that increased the gaming tax rates in Indiana. If a casino elects to become a dockside operations, the gaming tax rate structure changes from a flat tax rate of 22.5% to a graduated scale with a maximum tax rate of 35.0%, depending on gaming revenues levels. Trump Indiana became a dockside operation in August 2002. On July 1, 2003, the New Jersey legislature passed a law that increases the taxation of New Jersey casinos. The new law imposes a 4.25% tax on complimentaries (i.e., free rooms, food, beverages and entertainment given to patrons), an increase in the hotel tax of $3.00 per day on each occupied room, and increases the parking fee tax from $1.50 to $3.00 per car per day. In addition, each casino is charged a profits tax based on 7.5% of each casino's 2002 adjusted net income, defined as net income plus management fees) subject to a minimum tax of at least $350,000. The tax is assessed during the period from July 1 to June 30 consistent with the fiscal year of the State of New Jersey. For the year ended December 31, 2003, THCR has recorded a charge to income tax expense on the statement of operations for $525,000 related to the profits tax. Future changes in state taxation of casino gaming companies in jurisdictions in which we operate cannot be predicted, and any such changes could adversely affect our profitability. Our success depends, in part, on the availability of qualified management and personnel and on our ability to retain such employees. Certain of our employees are required to be licensed by, or registered with, the New Jersey Casino Control Commission, or the CCC, the Indiana Gaming Commission, or the IGC, and/or the National Indian Gaming Commission, or the NIGC, depending upon the nature of their employment. Casino employees are subject to more stringent licensing requirements than non-casino employees, and are required to meet applicable standards pertaining to such matters as financial responsibility, good character, ability, casino training, experience and in-state residency. These regulations have resulted in significant competition for eligible employees. As a result, it may be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies in our jurisdiction and nationwide. A failure to attract or retain qualified management and personnel at all levels or the loss of our key executives could have a material adverse effect on our financial condition and results of operations. Our right to use the "Trump" name is subject to certain limitations. Subject to certain limitations, THCR has the exclusive right to use the "Trump" name and Mr. Trump's likeness in connection with gaming and related activities pursuant to the Trademark License Agreement. THCR's rights under the Trademark License Agreement are secured by a security interest in the names "Trump," "Donald Trump" and "Donald J. Trump" and variations thereof (collectively, the Trump Names) and related intellectual property rights (collectively, the Marks) for use in connection with casino services, pursuant to a security agreement. THCR, in turn, allows its subsidiaries to use the Trump Names under various parol licenses which do not create an enforceable license in favor of these subsidiaries. If there were a default under the Trademark License Agreement or the security agreement, THCR would have rights, subject to applicable state law, to enforce the rights and remedies contained in the security agreement. THCR's subsidiaries would not have any such rights. In the event of a foreclosure sale of the Marks, the net amount realized in such sale by THCR might not yield the full amount of damages that THCR could sustain as a result of the default. In addition, the existence of rights of others to use the Trump Names, including pursuant to any security interests in trademarks for non-gaming hotels, could adversely affect the ability of THCR to realize the benefits of the security agreement. See "Business; Certain Agreements; Trademark License Agreement." Gaming is a regulated industry and changes in the law could have a material adverse effect on our positions. Gaming in New Jersey and Indiana and at Trump 29 is regulated extensively by federal and state regulatory bodies, including the CCC, the IGC, the NIGC and state and federal taxing, law enforcement and liquor control agencies. See "Business; Governmental and Gaming Regulation." Our company and its various officers and other qualifiers have received the licenses, permits and authorizations required to operate our properties. Failure to maintain or obtain the requisite casino licenses would have a material adverse effect on us. Our licenses to operate Trump Marina, Trump Plaza and Trump Taj Majal were consolidated and renewed by the CCC until June 2007. See "Business; Governmental and Gaming Regulations; Operating Licenses." In June 1996, the IGC granted Trump Indiana, Inc. a riverboat owner's license for the ownership and operation of a gaming vessel at Buffington Harbor, which was renewed in June 2003 and expires in June 2004. Although we believe the IGC will renew the license, no assurance can be given as to such renewal or as to what license conditions, if any, may be imposed by the IGC in connection with such renewal. Gaming at Trump 29 is regulated extensively by federal, state and tribal regulatory bodies, including the NIGC, the Bureau of Indian Affairs, the Tribal Gaming Authority and, to a lesser extent, by the California Gambling Control Commission. If new gaming regulations are adopted by the jurisdictions in which we operate, such regulations could impose restriction or costs that could have a significant adverse effect on us. From time to time, various proposals have been introduced by the legislatures of New Jersey and Indiana that, if enacted, could adversely affect the tax, regulatory, operations or other aspects of the gaming industry and us. We cannot make assurances that legislation of this type will not be enacted in the future. Critical Accounting Policies The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management periodically evaluates the Company's policies and the estimates and assumptions related to such policies. The Trump Casino Properties operate in a highly regulated industry and are subject to regulations that describe and regulate operating and internal control procedures. The Company believes its most critical accounting policies and significant estimates are described below. Revenue Recognition and Allowance for Doubtful Accounts The majority of the Company's revenue is from gaming activities, and the majority of such revenue is derived from cash, which by nature does not require complex estimations. The Company does extend credit to customers on a discretionary basis to certain qualified patrons. Credit play as a percentage of total dollars wagered has been approximately 20% for the past three years. The Trump Casino Properties establish credit limits based upon the particular patron's creditworthiness, as determined by an examination of various factors including a credit check of the patron, checking the patron's personal checking account balance, and checking the patron's credit limits and indebtedness at other casinos. The Company maintains an allowance for doubtful accounts for those customers whose checks have been unable to be deposited due to non-sufficient funds. This allowance is based on a specific review of customer accounts as well as a review of the history of write-offs of returned markers. Management believes that the reserve recorded is reasonable; however, these estimates could change in the near term based on actual collection experience with each returned marker. Long-lived Assets Management has determined that the Company's policy associated with its long-lived assets and the related estimates is critical to the preparation of the consolidated financial statements. The Company has a significant investment in long-lived property and equipment. Management estimates that the undiscounted future cash flows expected to result from the use of these assets exceed the current carrying value of these assets. Any adverse change to the estimate of these undiscounted cash flows could necessitate an impairment charge that would adversely affect operating results. Management estimates the useful lives for the Company's assets based on historical experience and the estimates of assets' commercial lives. Should the actual useful life of a class of assets differ from the estimated useful life, an impairment charge would be recorded. Management reviews useful lives and obsolescence and assesses commercial viability of the Company's assets periodically. Self-Insurance Reserves Self-insurance reserves represent the estimated amounts of uninsured claims related to employee health medical costs, workers' compensation, and personal injury claims that have occurred in the normal course of business. These reserves are established by management based upon specific review of open claims, with consideration of incurred but not reported claims as of the balance sheet date. The costs of the ultimate disposition of these claims may differ from these reserve numbers. Recent Accounting Pronouncements In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002. The effect of adoption had no impact on our financial results. Effective January 1, 2003, we adopted the Financial Accounting Standards Board's ("FASB") Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN 45"). The interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including roll-forward of the entity's product warranty liabilities. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified consideration. Adoption of this Interpretation has no material impact on our consolidated financial position, consolidated results of operations or liquidity. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities") and how to determine when and which business enterprise (the "primary beneficiary") should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities ("SPEs") created prior to February 1, 2003-the company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003; (ii) Non-SPEs created prior to February 1, 2003-the company is required to adopt FIN 46-R at the end if the first interim or annual reporting period ending after March 15, 2004; (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003-the provisions of FIN 46 were applicable for variable interests in entities obtained after January 1, 2003. The adoption of the provisions applicable to SPEs and all other variable interests obtained after January 1, 2003 did not have a material impact on our consolidated financial position, consolidated results of operations, or liquidity. We are currently evaluating the impact of adopting FIN 46-R applicable to Non-SPEs created prior to February 1, 2003 but does not expect a material impact. Financial Condition Liquidity and Capital Resources The Company has incurred recurring operating losses, which totaled $25.3 million, $12.0 million, and $87.3 million during the years ended December 31, 2001, 2002, and 2003, respectively, and has a working capital deficit of $46.9 million at December 31, 2003. The recurring operating losses are primarily the result of substantial debt service obligations on outstanding indebtedness. In 2004, the Company's debt service obligation is approximately $225 million. Additionally, the Company has experienced increased competition and other challenges in its markets. Due to these factors, the Company has not been able to reinvest in the maintenance of its owned properties at desired levels or expand its operations. Furthermore, the Company does not currently have any short-term borrowing capacity available. Although the Company anticipates that it will have sufficient funds on hand to provide for the scheduled debt service obligations on its outstanding indebtedness during 2004, there can be no assurances such funds will be available. As a result of these factors, management has reviewed various financing alternatives. On February 12, 2004, the Company announced that it has entered into an exclusivity agreement with DLJMB in connection with a proposed $400 million equity investment by DLJMB to sponsor a comprehensive recapitalization of the Company. On the same date as the announcement of the Potential Recapitalization, certain credit agencies downgraded certain of the Company's indebtedness. The Potential Recapitalization is contingent upon a variety of factors. No assurances can be made that the Potential Recapitalization will occur, or if it does occur, that it will occur on terms acceptable to the Company to allow the Company to meet its obligations as they become due. Additionally, management has implemented programs to obtain cash flow savings and will continue to attempt to implement such programs in the upcoming year if the Potential Recapitalization does not occur. These programs include labor savings through increased automation of the Company's slot machine product on the gaming floor and the further reduction of planned capital expenditures and maintenance programs. However, there can be no assurances that these programs would be successful for any protracted period of time. Accordingly, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty or the Potential Recapitalization. See "Business; Recent Events." Cash flows from operating activities of the Trump Casino Properties are our primary source of liquidity. To a lesser extent, we rely on capital lease financing for our capital resource needs. Our ability to borrow funds for our liquidity needs is severely restricted by covenants in the various indentures governing the public debt issues of our subsidiaries and by already high levels of indebtedness and related interest expense. Sources of our short-term and long-term liquidity include primarily: (i) table win, (ii) slot win, (iii) room occupancy, (iv) food and beverage sales and (v) miscellaneous items, less promotional expenses. Although we expect to have sufficient liquidity from the operating activities of the Trump Casino Properties and other sources of liquidity to meet our short-term obligations, there can be no assurances in this regard. Our cash flows from operating activities declined from $73.2 million in 2002 to $45.2 million in 2003. A variety of factors, including a decrease or change in the demand for our services, could have a material adverse effect on our liquidity and our ability to service our debt obligations. See "Factors That May Affect Our Future Results." The Trump Atlantic City Properties also compete with other Atlantic City casino/hotels based on the quality of customer service, the array of games offered, the attractiveness of a casino/hotel and the extent and quality of the facilities and amenities. In July 2003, the Borgata opened in Atlantic City's marina district. The Borgata has adversely affected the revenues of the Trump Atlantic City Properties, especially Trump Marina. In addition, some of our Atlantic City competitors have recently completed substantial renovations designed to improve their competitive position. Furthermore, alternatives to casino style gambling, such as VLTs, are increasing in the northeast region of the country from which we attract most of our customers. See "Factors That May Affect Our Future Results." Because we have substantial indebtedness and related interest expense,
we have not been able to refurbish our properties to desired levels or
to pursue various capital expansion plans, such as the addition of more
hotel rooms. In the recent past, we have experienced increased competition
and other challenges in our markets, including increased capital spending
by our competitors and increased taxes, which have contributed to our reduced
operating results. For these reasons, we have explored various strategies
to favorably resolve this situation for all of the Company's constituencies,
including the possible sale of certain assets of the Company's subsidiaries,
a restructuring of our indebtedness through out-of-court or in-court proceedings,
refinancing of indebtedness, attracting substantial new equity investment
and analyzing various other restructuring and reinvestment scenarios. Recently,
we announced our plans to pursue a comprehensive recapitalization plan
that, if consummated, is intended to decrease our interest expense and
improve our liquidity and capital resources. See "Business; Recent Events",
"Business; The Atlantic City Marketplace" and "Business; Competition."
Summary of the Company's Public Indebtedness TAC Notes. Trump AC's debt consists primarily of the TAC Notes. The TAC Notes bear interest at the rate of 11.25% per annum, payable on May 1st and November 1st of each year, and mature on May 1, 2006. The TAC Notes are redeemable in whole or in part, at any time upon not less than 30 but not more than 60 days notice. If redeemed at any time during the twelve-month period prior to May 1, 2004, the redemption price of the TAC Notes is 101.875% of the outstanding principal amount, plus accrued interest. If any of the TAC Notes are redeemed on or after May 1, 2004, the redemption price is 100.0% of the outstanding principal amount of the TAC Notes redeemed, plus accrued interest. As of December 31, 2003, $1.3 billion principal amount of TAC Notes were outstanding. THCR anticipates, but cannot ensure, that Trump AC will have sufficient funds from operations on hand to provide for the May 1, 2004 installment of interest then due and payable on the TAC Notes within the 30-day grace period provided under the indentures governing the TAC Notes. See the "Report of Independent Auditors." The TAC Notes are secured on a senior basis by substantially all of the real and personal property owned or leased by Plaza Associates and Taj Associates. The obligations evidenced by the TAC Notes are jointly and severally guaranteed by Taj Associates, Plaza Associates and Trump AC and all future subsidiaries of Trump AC (other than Trump AC Funding, Inc.). The TAC Notes are not guaranteed by THCR or TCH or any of TCH's subsidiaries, and none of such entities are obligated to, or are in a position to, provide funds to Trump AC or its subsidiaries for any purpose, other than certain amounts payable under the Casino Services Agreement. TCH Notes. On March 25, 2003, TCH and Trump Casino Funding, Inc., or TCF, consummated an offering of $475.0 million aggregate principal amount of two new mortgage notes, consisting of $425.0 million principal amount of first priority mortgage notes due March 15, 2010, bearing interest at a rate of 11.625% per year payable in cash, sold at a price of 94.832% of their face amount for an effective yield of 12.75% (or the TCH First Priority Mortgage Notes), and $50.0 million principal amount of second priority mortgage notes due September 15, 2010, bearing interest at a rate of 11.625% per year payable in cash, plus 6.0% through the issuance of payable-in-kind notes (or the TCH Second Priority Mortgage Notes, and together with the TCH First Priority Mortgage Notes, the TCH Notes). In connection with this offering, Donald J. Trump purchased in a concurrent private offering, $15.0 million aggregate principal amount of additional TCH Second Priority Mortgage Notes at the same purchase price at which the initial purchasers purchased the TCH Second Priority Mortgage Notes. Except in connection with a public or private equity offering, the TCH Notes are not redeemable until March 15, 2007. In addition, until March 15, 2006, TCH and TCF may redeem up to 35.0% of the aggregate principal amount of the TCH First Priority Mortgage Notes and the TCH Second Priority Mortgage Notes with the net proceeds of one or more public of private offerings. The TCH Second Priority Mortgage Notes are not redeemable while the TCH First Priority Mortgage Notes are outstanding. For the twelve-month period commencing March 15, 2007, the TCH Notes are redeemable at 108.719% of their outstanding principal amount. For the twelve-month period commencing March 15, 2008, the redemption price decreases to 104.359% of the outstanding principal amount. For the twelve-month period commencing March 15, 2009, the redemption price is 100.0% of the outstanding principal amount. If there is a "Change of Control" (as defined in the indentures) of TCH, the holders of the TCH Notes will have the right to sell the TCH Notes to TCH and TCF at 101.0% of their face amount, plus accrued interest. The interest rate on the TCH First Priority Mortgage Notes will increase by 0.5% per annum if TCH's First Priority Leverage Ratio for any fiscal year, commencing with the year ended December 31, 2003, exceeds 4.8 to 1.0, and by 1.0% per annum if the First Priority Leverage Ratio exceeds 5.3 to 1.0. Similarly, the rate of interest payable in cash on the TCH Second Priority Mortgage Notes will increase by 0.5% per annum or 1.0% per annum if the First Priority Leverage Ratio for any fiscal year, commencing with the year ended December 31, 2003, exceeds 4.8 to 1.0 or 5.3 to 1.0, respectively. For these purposes, the term "First Priority Leverage Ratio" for any year is defined generally as the ratio of (a) the total outstanding principal amount of the TCH First Priority Mortgage Notes (plus other indebtedness, if any, ranking pari passu with the TCH First Priority Mortgage Notes) as of December 31, of such year to (b) the Consolidated EBITDA of TCH without duplication, the sum of consolidated net income, plus consolidated income tax expense, plus consolidated depreciation and amortization expense, plus consolidated fixed charges and non-cash charges related to regulatory write downs for the year. The First Priority Leverage Ratio for the year ended December 31, 2003 resulted in an increase in the interest rates on the TCH Notes of 1.0%. Such increase is effective from and after March 15, 2004 to March 14, 2005, at which point the rates of interest payable on the TCH Notes would be restored to their original levels, unless the First Priority Leverage Ratio computation for fiscal 2004 results in an increase. The estimated impact on interest expense for the next year, and perhaps thereafter, will be approximately $4,900,000. TCH's obligation to pay additional cash interest will constrain its liquidity. The TCH Notes are not guaranteed by THCR or by Trump AC or by any subsidiaries of Trump AC, and none of such entities is obligated to, or is in a position to, provide funds to TCH for any purpose. Miscellaneous. In addition, the ability of (i) Plaza Associates and Taj Associates (through Trump AC) and (ii) Marina Associates (through TCH) to make payments, dividends or distributions to THCR Holdings may be restricted by the CCC and/or the IGC. Similarly, the ability of Trump Indiana, Inc. (through TCH) to make payments of dividends or distributions to THCR Holdings may be restricted by the IGC. Contractual Obligations and Commercial Commitments. The following tables set forth summaries of our obligations and commitments
as of December 31, 2003 to make future payments under contracts, such as
debt and lease agreements, and under contingent commitments:
Effects of Transactions with Related and Certain Other Parties. Affiliate party transactions are governed by the terms of our public debt indentures and by a stockholder settlement agreement entered into in January 2002, which generally require that such transactions be on terms as favorable as would be obtainable from an unaffiliated party, and require the approval of a majority of the independent directors of THCR for certain affiliated transactions. Trump and certain affiliates have engaged in certain related party transactions with respect to THCR and its subsidiaries. See "Executive Compensation; Compensation Committee Interlocks and Insider Participation" and "Certain Related Party Transactions." Results of Operations The following tables include selected data of Taj Associates, Plaza Associates, Trump Indiana and Trump Marina for the years ended December 31, 2003, 2002 and 2001, respectively. |
Taj Plaza Trump Trump THCR Associates Associates Indiana Marina Consolidated* ------------ ------------ -------- ------- --------------- (in millions) Revenues: Gaming $ 511.9 $ 313.2 $ 134.8 $ 258.4 $ 1,218.3 Management Fee � � � � 3.9 Other 105.3 68.4 8.3 60.6 242.7 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Gross Revenue 617.2 381.6 143.1 319.0 1,464.9 Less: Promotional Allowance 129.9 90.2 14.7 68.6 303.5 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Net Revenue 487.3 291.4 128.4 250.4 1,161.4 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Cost and Expenses: Gaming 232.0 147.9 68.3 122.6 570.8 Other 34.5 21.5 6.5 14.5 77.0 General & Administrative 104.0 66.5 36.6 66.6 279.8 Depreciation & Amortization 44.4 20.1 7.3 22.5 94.4 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Total Costs and Expenses 414.9 256.0 118.7 226.2 1,022.0 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Income from Operations 72.4 35.4 9.7 24.2 139.4 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Non-Operating Income (Expense) 0.3 0.4 0.4 0.1 1.5 Interest Expense (98.3 ) (59.7 ) (7.0 ) (52.4 ) (228.5 ) Gain (Loss) on Debt Refinancing � � (1.8 ) 9.7 2.9 -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Total Non-Operating Expense, Net (98.0 ) (59.3 ) (8.4 ) (42.6 ) (224.1 ) -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Loss in Joint Venture � � (2.4 ) � (2.4 ) -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Income Taxes (2.4 ) (1.5 ) � (1.4 ) (5.3 ) -- --------- - -- --------- - -- ----- - - ----- - -- ------------ - Loss Before Minority Interest $ (28.0 ) $ (25.4 ) $ (1.1 ) $ (19.8 ) $ (92.4 ) -- --------- - -- --------- - -- ----- - - ----- - Minority Interest 5.1 -- ------------ - Net Loss $ (87.3 ) -- ------------ - * Intercompany eliminations and expenses of THCR, THCR
Holdings, Trump AC, TCH and THCR Management are not separately shown.
Year Ended December 31, 2002
* Intercompany eliminations and expenses of THCR, THCR Holdings, Trump AC and THCR Management are not separately shown.
Year Ended December 31, 2001
* Intercompany eliminations and expenses of THCR, THCR
Holdings, Trump AC and THCR Management are not separately shown.
Trump Hotels & Casino Resorts, Inc. Results of Operations Comparison of Years Ended December 31, 2003, 2002 and 2001 (in millions, except statistical data)
2003
2003
2003
2003
2003
Number of Guest Rooms 1,250
904
300
728
3,182
2002
2002
2002
2002
2002
Number of Guest Rooms 1,250
904
300
728
3,182
2001
2001
2001
2001
2001
Number of Guest Rooms
1,250
904
300
728
3,182
(1) "Table Game Revenues" is defined as the total amount wagered by table game patrons (the "Table Game Drop"), less the amounts paid back to such patrons by the casino for winning wagers. (2) "Table Game Drop" is defined as the total amount wagered by table game patrons. (3) "Table Win Percentage" is defined as the ratio, expressed as a percentage, of Table Game Revenues to Table Game Drop. (4) "Slot Revenues" is defined as the total amount wagered by slot patrons (the "Slot Handle"), less the amount paid back to slot patrons by the casino for winning pulls. (5) "Slot Handle" is defined as the total amount wagered by slot patrons. (6) "Slot Win Percentage" is defined as the ratio, expressed as a percentage, of Slot Revenues to Slot Handle. |
Contact
Trump Hotels & Casino Resorts Inc 1000 Boardwalk at Virginia Ave Atlantic City, NJ 08401 Phone: (609) 449-6515 Web Site: http://www.trump.com/ |
Also See: | Debt-heavy, Trump Hotels & Casino Resorts Seeks to Recapitalize; Reports 2003 Full Year Net Loss of $87.3 million Compared to a Net Loss of $12.0 million for Full Year 2002 / February 2004 |
Donald Trump Says Atlantic City, N.J., Casino Layoffs Are 'Just Seasonal' / September 2003 | |
Trump Hotels & Casino Resorts Reports Net Loss for the Year Ended December 31, 2001 of $1.15 per Share; Reiterates Need to Restructure Terms of $1.7 billion in Public Debt / Feb 2002 |