"This is the first Commission enforcement action addressing the abuse of pro forma earnings figures," said Stephen M. Cutler, Director of the Commission's Division of Enforcement. "In this case, the method of presenting the pro forma numbers and the positive spin the Company put on them were materially misleading. The case starkly illustrates how pro forma numbers can be used deceptively and the mischief that they can cause.",p> Trump Hotels consented to the issuance of the Commission's order without admitting or denying the Commission's findings. The Commission also found that Trump Hotels, through the conduct of its chief executive officer, its chief financial officer and its treasurer, violated the antifraud provisions of the Securities Exchange Act by knowingly or recklessly issuing a materially misleading press release.
"This case demonstrates the risks involved in mishandling pro forma reporting," said Wayne M. Carlin, Regional Director of the Commission's Northeast Regional Office. "Enforcement action can result if a company fails to disclose information necessary to assure that investors will not be misled by the pro forma numbers." Specifically, as set forth in the Order, which is available on the Commission's website, the Commission found that:
- On Oct. 25, 1999, Trump Hotels issued a press release announcing its quarterly results. The release used net income and earnings-per-share (EPS) figures that differed from net income and EPS calculated in conformity with generally accepted accounting principles (GAAP), in that the figures expressly excluded a one-time charge. The earnings release was fraudulent because it created the false and misleading impression that the Company had exceeded earnings expectations primarily through operational improvements, when in fact it had not.
- The release expressly stated that net income and EPS figures excluded a $81.4 million one-time charge. Although neither the earnings release nor the accompanying financial data used the term pro forma, the net income and EPS figures used in the release were pro forma numbers because they differed from such figures calculated in conformity with GAAP by excluding the one-time charge. By stating that this one-time charge was excluded from its stated net income, the Company implied that no other significant one-time items were included in that figure.
- Contrary to the implication in the release, however, the stated net income included an undisclosed one-time gain of $17.2 million. The gain was the result of the termination, in September 1999, of the All Star Café's lease of restaurant space at the Trump Taj Mahal Casino Resort in Atlantic City. Trump Hotels, through various subsidiaries, owns and operates the Taj Mahal and other casino resorts. The Company's executive offices are in New York City, and its business and financial operations are centered in Atlantic City.
- Not only was there no mention of the one-time gain in the text of the release, but the financial data included in the release gave no indication of it, because all revenue items were reflected in a single line item.
- The misleading impression created by the reference to the exclusion of the one-time charge and the undisclosed inclusion of the one-time gain was reinforced by the comparison in the earnings release of the stated earnings-per-share figure with analysts' earnings estimates and by statements in the release that the Company been successful in improving its operating performance. Using the non-GAAP, pro forma figures, the release announced that the Company's quarterly earnings exceeded analysts' expectations, stating:
- Net income increased to $ 14.0 million, or $ 0.63 per share, before a one-time Trump World's Fair charge, compared to $ 5.3 million or $ 0.24 per share in 1998. [Trump Hotels'] earnings per share of $ 0.63 exceeded First Call estimates of $ 0.54.
- In fact, had the one-time gain been excluded from the quarterly pro forma results as well as the one-time charge, those results would have reflected a decline in revenues and net income and would have failed to meet analysts' expectations. The undisclosed one-time gain was thus material, because it represented the difference between positive trends in revenues and earnings and negative trends in revenues and earnings, and the difference between exceeding analysts' expectations and falling short of them.
- On Oct. 25, the day the earnings release was issued, the price of the Company's stock rose 7.8 percent; subsequently, analysts learned of the one-time gain. On Oct. 28, the day on which an analysts' report and a news article revealing the impact of the one-time gain were published, the stock price fell approximately 6 percent.
For information about the use and interpretation of pro forma financial information, see the cautionary advice for companies and their advisors at http://www.sec.gov/news/headlines/proforma-fin.htm and the investor alert recently issued by the Commission at http://www.sec.gov/investor/pubs/proforma12-4.htm.
