SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1995
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-9516
American Real Estate Partners, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3398766
- ------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 South Bedford Road, Mt. Kisco, NY 10549
- ------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including (914) 242-7700
area code)
- ------------------------------------- ------------------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No_____
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page No.
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994..............................1-2
Consolidated Statements of Earnings -
Three Months Ended March 31, 1995 and 1994........................3
Consolidated Statement of Partners' Equity -
Three Months Ended March 31, 1995.................................4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994........................5-6
Notes to Consolidated
Financial Statements..............................................7-12
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.........................................12-16
PART II. OTHER INFORMATION.......................................16-17
PAGE
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
The financial information contained herein is unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. All such adjustments are of a normal
recurring nature.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995 1994
----------- ------------
(unaudited)
ASSETS
Real estate leased to others:
Accounted for under the financing
method $308,984,512 $314,260,786
Accounted for under the operating
method, net of
accumulated depreciation 116,988,349 123,438,444
Cash and cash equivalents 41,823,338 18,615,572
Hotel operating properties,
net of accumulated depreciation 13,502,479 13,654,442
Mortgages receivable 8,234,837 8,301,090
Construction in progress 9,840,742 6,681,333
Receivables and other assets 5,959,988 5,373,553
Debt placement costs,
net of accumulated amortization 1,854,595 2,130,003
Property held for sale 412,717 412,717
TOTAL $507,601,557 $492,867,940
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31,
1995 1994
(unaudited)
LIABILITIES
Mortgages payable $173,144,748 $174,095,697
Senior indebtedness 45,231,106 45,231,106
Accounts payable, accrued expenses
and other liabilities 8,862,372 6,496,410
Deferred income 3,636,488 3,637,398
Construction loan payable 5,260,138 2,393,954
Distributions payable 1,754,185 1,776,482
----------- -----------
Total liabilities 237,889,037 233,631,047
Commitments and Contingencies
(Notes 1 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-in-
kind redeemable; 4,200,000
authorized, 1,975,640 subscribed 19,756,400 -
Less: Subscriptions receivable (19,756,400) -
----------- ------------
- -
----------- ------------
Depositary units; 26,850,000
authorized; 13,812,800 outstanding
as of March 31, 1995 and
December 31, 1994 275,306,542 265,039,380
11,853,840 subscribed 88,903,800 -
Less: Subscriptions receivable (88,903,800) -
275,306,542 265,039,380
----------- -----------
General partner 5,589,843 5,381,378
Treasury units at cost:
1,037,200 depositary units as
of March 31, 1995 and
December 31, 1994 (11,183,865) (11,183,865)
------------ -----------
Total partners' equity (Note 8) 269,712,520 259,236,893
------------ -----------
TOTAL $507,601,557 $492,867,940
============ ============
See notes to consolidated financial statements
PAGE
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Three Months Ended March 31,
-----------------------------
l995 l994
--------------- ------------
Revenues:
Interest income:
Financing leases $ 7,735,873 $ 8,260,204
Other 598,909 405,345
Rental income 4,680,581 4,425,268
Hotel operating income 3,183,552 2,852,119
16,198,915 15,942,936
--------- ----------
Expenses:
Interest expense 5,256,353 6,085,874
Depreciation and amortization 1,251,968 1,160,901
General and administrative
expenses 655,178 617,165
Property expenses 950,975 958,062
Hotel operating expenses 1,930,107 1,890,350
--------- ----------
10,044,581 10,712,352
--------- ----------
Earnings before property
transactions 6,154,334 5,230,584
Gain on sales and disposition
of real estate 4,321,293 1,364,321
Provision for loss on real estate - (75,000)
-------- ---------
NET EARNINGS $10,475,627 $ 6,519,905
=========== ===========
Net earnings attributable to:
Limited partners $10,267,162 $ 6,390,159
General partner 208,465 129,746
--------- ---------
$10,475,627 $ 6,519,905
=========== ===========
Net earnings per limited
partnership unit (Note 9) $ .48 $ .46
=========== ===========
Weighted average limited partnership
units outstanding and equivalent
partnership units subscribed 25,413,177 13,812,800
=========== ===========
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
Three Months Ended March 31, 1995
(unaudited)
General Limited Partners' Equity Total
Partner`s Depositary Preferred Held in Partners'
Equity Units Units Treasury Equity
--------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance -
December 31, 1994 $5,381,378 $265,039,380 $ - $(11,183,865) $259,236,893
Net earnings 208,465 10,267,162 - - 10,475,627
Rights offering - 88,903,800 19,756,400 - 108,660,200
Subscription
receivable - (88,903,800) (19,756,400) - (108,660,200)
--------- ---------------- ------------ ------------- -------------
Balance -
March 31, 1995 $5,589,843 $275,306,542 $ - $(11,183,865) $269,712,520
========== ================= ============ ============= ============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
------------------------------
1995 1994
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $10,475,627 $ 6,519,905
Adjustments to reconcile earnings
to net cash provided by
operating activities:
Depreciation and amortization 1,251,968 1,160,901
Amortization of deferred income (6,554) (6,554)
Gain on sales and
disposition of real estate (4,321,293) (1,364,321)
Provision for loss on real estate - 75,000
Changes in:
Decrease in deferred income (910) (913)
Increase in receivables
and other assets (462,496) (607,280)
Increase in accounts payable
and accrued expenses 2,365,965 1,167,089
--------------- -------------
Net cash provided by operating activities 9,302,307 6,943,827
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from the sale and
disposition of real estate 8,123,505 1,024,371
Principal payments received on leases
accounted for under the financing method 1,795,290 1,636,386
Principal receipts on mortgages receivable 72,807 66,569
Capitalized expenditures for real estate (311,844) (104,953)
Net balloon payments of mortgages receivable - 1,392,650
Construction in progress (3,159,409) -
--------------- -------------
Net cash provided by
investing activities 6,520,349 4,015,023
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to partners (22,297) (1,767,032)
Mortgages payable:
Increase in mortgages payable 9,800,000 82,931
Increase in construction loan payable 2,866,184 -
Periodic principal payments (2,315,517) (2,316,740)
Balloon payments (2,935,835) (1,814,617)
Debt placement costs (7,425) (216,096)
--------------- -------------
Net cash provided by (used in)
financing activities 7,385,110 (6,031,554)
--------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 23,207,766 4,927,296
CASH AND CASH EQUIVALENTS, beginning of
period 18,615,572 14,932,560
--------------- -------------
CASH AND CASH EQUIVALENTS, end of
period $41,823,338 $ 19,859,856
=============== =============
</TABLE>
Continued.....
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) - continued
Three Months Ended March 31,
----------------------------
1995 1994
------------- -------------
SUPPLEMENTAL INFORMATION:
Cash payments for interest $4,170,806 $ 4,805,586
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Property acquired in satisfaction of
mortgages:
Addition to property accounted for
under the financing method $ - $ -
Addition to property
under the operating method - 6,660,065
Addition to mortgages payable - -
Decrease in mortgages receivable - (9,083,588)
Decrease in deferred income - 2,122,993
Addition to property held for sale - 300,530
$ - $ -
=========== ==============
Reclassification of real estate:
To property accounted
for under the operating method $ - $ -
From property accounted for
under the financing method - (2,438,378)
From property accounted for
under the operating method - -
To properties held for sale - 2,438,378
From construction in progress - -
$ - $ -
=========== ==============
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
The accompanying consolidated financial statements, footnotes and
discussions should be read in conjunction with the consolidated
financial statements, related footnotes and discussions contained
in the Company's annual report on Form 10-K for the year ended
December 31, 1994.
The results of operations for the three months ended March 31, 1995
are not necessarily indicative of the results to be expected for
the full year.
2. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
From the commencement of the Exchange through March 31, 1995, the
Company (i) sold or disposed of an aggregate of 129 properties of
the Predecessor Partnerships for an aggregate amount of
approximately $59,477,000 net of associated indebtedness which
encumbered such properties at the consummation of the Exchange and
(ii) refinanced 25 Predecessor Partnerships' properties with an
aggregate appraised value, net of the amount of the refinanced
debt, of approximately $44,431,000 for a sum total of approximately
$103,908,000. Aggregate appraised values attributable to such
properties for purposes of the Exchange were approximately
$92,710,000. Fifteen acquisitions have been made since the
commencement of the Exchange, including two joint ventures entered
into in 1994 to develop two apartment complexes, for an aggregate
investment of approximately $52,000,000. Reinvestment incentive
fees of approximately $354,000 have previously been paid to the
General Partner, and approximately $113,000 are payable to the
General Partner for the 1994 acquisitions, including two joint
venture investments upon completion of the projects (see note 5).
No properties were acquired during the three months ended March 31,
1995.
3. COMMITMENTS AND CONTINGENCIES
a. On July 31, 1992, Chipwich, Inc. ("Chipwich") parent of Peltz
Food Corporation, a tenant in a property owned by the Company,
filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Federal Bankruptcy Code. Chipwich
then filed a motion for rejection of the lease and pursuant to an
order of the Bankruptcy Court, the lease was rejected on September
29, 1992. There is a guarantor of the lease and the Company is
currently proceeding to enforce all obligations under such guaranty
including settlement of an unsecured proof of claim filed by the
Company. At March 31, 1995, the property has a carrying value of
approximately $928,000 and is encumbered by a nonrecourse mortgage
payable of approximately $309,000. Based on the existence of the
guaranty, the Company believes that the carrying value of the asset
is fairly stated at March 31, 1995.
7
<PAGE>
b. On January 26, 1993, Be-Mac Transport Company, Inc. ("Be-
Mac"), a tenant in a property owned by the Company, filed a
voluntary petition for reorganization pursuant to the provisions of
Chapter 11 of the Federal Bankruptcy Code. Be-Mac then filed a
motion for rejection of the lease and pursuant to an order of the
Bankruptcy Court, the lease was rejected on February 24, 1993.
There was a guarantor of the lease and the Company settled its
unsecured proof of claim for $377,000. As a result, $377,000 of
"Other income" will be recognized in the three and six month
periods ending June 30, 1995. The Company re-let the property
effective March 1, 1994 at an annual rental of $120,000. At March
31, 1995, the property has a carrying value of approximately
$943,000 and is unencumbered by any mortgage.
c. On March 31, 1995, the Company held a mortgage note receivable
in the principal amount of approximately $463,000 which is in
default. The mortgage encumbers four properties together with a
collateral assignment of ground leases and rents. The properties
are tenanted by Gino's and Foodarama. The mortgage had been taken
back by a Predecessor Partnership in connection with the sale of
these properties. The tenants remained current in their lease
obligations. As of March 31, 1995, the Company has commenced
foreclosure actions on the four properties as follows: two each in
Pennsylvania and New Jersey. No gain or loss is anticipated upon
foreclosure because the estimated fair value of the properties
exceeds their carrying value.
d. Lockheed Missile & Space Company, Inc. ("Lockheed"), a tenant
of the Company's leasehold property in Palo Alto, California, has
entered into a consent decree with the California Department of
Toxic Substances Control ("CDTS") to undertake certain
environmental remediation at this property. Lockheed has estimated
that the environmental remediation costs may be up to approximately
$14,000,000. In a non-binding determination by the CDTS, Lockheed
was found responsible for approximately 75% of such costs and the
balance was allocated to other parties. The Company was allocated
no responsibility for any such costs.
Lockheed has served a notice that it may exercise its statutory
right to have its liability reassessed in a binding arbitration
proceeding. In connection with this notice, Lockheed has stated
that it will attempt to have allocated to the Company and to the
Company's ground-lessor (which may claim a right of indemnity
against the Company) approximately 9% and 17%, respectively, of the
total remediation costs. The Company believes that it has no
liability for any of such costs and in any proceeding in which such
liability is asserted against it, the Company will vigorously
contest such liability. In the event any of such liability is
8
<PAGE>
allocated to the Company, it will seek indemnification from
Lockheed in accordance with its lease.
e. On January 25, 1995, the Grand Union Company, a tenant leasing
eight properties owned by the Company, filed a prepackaged
voluntary petition for reorganization pursuant to the provisions of
Chapter 11 of the Federal Bankruptcy Code. These eight properties'
annual rentals total approximately $1,450,000 (including two
properties which are sub-let, representing approximately $58,000 in
annual rentals). The tenant is current in its obligations under
the leases with the exception of approximately $60,000 representing
pre-petition real estate taxes on six of the eight properties. The
tenant has not yet determined whether it will exercise its right to
reject or affirm the leases pertaining to seven of the properties
which will require an order of the Bankruptcy Court. At March 31,
1995, the carrying value of these seven properties is approximately
$11,404,000. One of these properties is encumbered by a
nonrecourse mortgage payable of approximately $4,737,000. As
relates to the eighth property, the tenant entered a Motion for
Order in the Bankruptcy Court on May 9, 1995, which will be
considered on May 18, 1995, authorizing the tenant to reject the
lease on this property effective July 31, 1995. The annual rent
for this property is approximately $103,000, and its carrying value
at March 31, 1995 is approximately $1,059,000 and it is
unencumbered by any mortgage.
f. The Company, on March 27, 1995, executed a contract for the
purchase of approximately 248 acres of partially improved land
located in Armonk, New York. The purchase price is $3,000,000 and
the Company paid a non-refundable deposit of $150,000 at the
execution of the contract. The Company intends to construct
approximately 45 to 50 single-family detached luxury homes subject
to subdivision and other required approvals.
4. PROPERTY HELD FOR SALE
At March 31, 1995, the Company owned four properties that were
being actively marketed for sale. At March 31, 1995, these
properties have been stated at the lower of their carrying value or
net realizable value. The aggregate net realizable value of the
properties is estimated to be approximately $413,000.
5. SIGNIFICANT PROPERTY TRANSACTIONS
a. The Company entered into two joint ventures in June 1994 with
unaffiliated co-venturers for the purpose of developing luxury
garden apartment complexes. Both of these joint ventures have been
consolidated in the accompanying financial statements.
9
<PAGE>
1. The first joint venture, formed as an Alabama Limited
Liability Company, is developing a 240 unit multi-family project
situated on approximately twenty acres, currently owned by the
joint venture, located in Hoover, Alabama, a suburb of Birmingham.
The Company, which owns a seventy percent (70%) majority interest
in the joint venture, contributed $1,750,000 in June 1994 and the
co-venturer contributed $250,000. As of March 31, 1995, $250,000
representing the minority interest of the co-venturer has been
included in "Accounts payable, accrued expenses, and other
liabilities" in the accompanying financial statements. The co-
venturer will be credited with $500,000 of additional capital in
lieu of receiving a general contractor's fee. Distributions will
be made in proportion to ownership interests. Construction
financing has been obtained by the joint venture in the amount of
$8,760,000, which can be increased by $100,000, and is guaranteed
by the co-venturer and personally by its principals. The Company
has approved approximately $290,000 of additional improvements and
upgrades. Such additional costs will be funded by partners'
capital contributions in accordance with their pro rata partnership
interests. The development costs are expected to total
approximately $11,650,000. As of March 31, 1995, approximately
$7,831,000 of development costs have been incurred, including the
acquisition of land valued at approximately $1,138,000.
Construction loan funding at March 31, 1995 is approximately
$4,616,000. The first units were completed and available for
occupancy in February 1995 and project completion is scheduled for
August 1995. An affiliate of the Company's co-venturer will manage
the property.
A reinvestment incentive fee of approximately $40,000 will be due
the general partner upon completion of the project (see note 2).
2. The second joint venture, a Delaware limited partnership,
is developing a 288 unit multi-family project situated on
approximately thirty-three acres in Cary, North Carolina (Raleigh-
Durham area). The Company, which owns a ninety percent (90%)
majority interest in the partnership, has contributed approximately
$4,022,000 as of March 31, 1995 and is a limited partner. The
Company has fulfilled its contribution obligation. The co-venturer
is the general partner and has a limited partner interest. The
Company is entitled to a cumulative annual preferred return of 12%
on its investment before cash distributions are made in proportion
to ownership interests. Construction financing has been obtained
by the joint venture in the amount of $12,205,000 and is guaranteed
by the joint venture general partner and personally by its
principals. The development costs are expected to total
approximately $16,100,000. As of March 31, 1995, approximately
$4,748,000 of development costs have been incurred, including the
10
<PAGE>
acquisition of land valued at $1,600,000. Construction loan funding
at March 31, 1995 is approximately $646,000. The first units are
expected to be available for occupancy on or about July 1995 and
project completion is scheduled for February 1996. An affiliate of
the Company's co-venturer will manage the property.
A reinvestment incentive fee of approximately $70,000 will be due
the Company's general partner upon completion of the project (see
note 2).
b. On February 1, 1995, the Penske Corp. exercised its purchase
option on three properties leased from the Company (two in New
Jersey and one in New York). The selling price was approximately
$4,535,000 and a gain of approximately $1,011,000 was recognized in
the three months ended March 31, 1995. Each property was
encumbered by first and second mortgages which totalled
approximately $1,162,000 and which were paid from the sales
proceeds.
c. On March 24, 1995, the Company sold the property tenanted by
Pace Membership Warehouse, Inc. in Taylor, Michigan. The selling
price was $9,300,000 and a gain of approximately $3,310,000 was
recognized in the three months ended March 31, 1995. The property
was encumbered by a nonrecourse mortgage payable of approximately
$4,346,000 which the purchaser assumed.
6. MORTGAGES PAYABLE
On July 25, 1994 the Company obtained financing on the two
apartment complexes located in Lexington, Kentucky. The two
nonrecourse mortgage loans in the amount of $5,500,000 and
$4,500,000 for Stoney Falls and Stoney Brooke Apartments,
respectively, bear interest at 8.375% and mature in ten years when
balloon payments totalling approximately $8,150,000 will be due.
Under the terms of the loans, $100,000 was initially funded on each
loan with the balance funded in January 1995. Debt placement costs
of approximately $250,000 have been incurred. Annual debt service
on the two loans is approximately $956,000.
7. DISTRIBUTIONS PAYABLE
Distributions payable represent amounts accrued and unpaid due to
non-consenting investors ("Non-consents"). Non-consents are those
investors who have not yet exchanged their limited partnership
interests in the various Predecessor Partnerships for limited
partnership units of American Real Estate Partners, L.P.
11
<PAGE>
8. RIGHTS OFFERING
A registration statement on Form S-3 relating to the Rights
Offering (Registration No. 33-54767) was filed with the Securities
and Exchange Commission and declared effective February 23, 1995.
On March 1, 1995, the Company issued to record holders of its
Depositary Units one transferable subscription right (a "Right"),
for each seven Depositary Units of the Company held on February 24,
1995, the record date. The Rights entitled the holders thereof
(the "Rights Holders") to acquire during the subscription period at
a subscription price of $55, six Depositary Units and one 5%
cumulative pay-in-kind redeemable preferred unit representing a
limited partner interest ("Preferred Units"). The subscription
period commenced on March 1, 1995 and expired at the close of
business on March 30, 1995.
The Preferred Units have certain rights and designations, generally
as follows. Each Preferred Unit will have a liquidation preference
of $10.00 and will entitle the holder thereof to receive
distributions thereon, payable solely in additional Preferred
Units, at the rate of $.50 per Preferred Unit per annum (which is
equal to a rate of 5% of the liquidation preference thereof),
payable annually on March 31 of each year (each, a "Payment Date"),
commencing March 31, 1996. On any Payment Date commencing with the
Payment Date on March 31, 2000, the Company, with the approval of
the Audit Committee of the Board of Directors of the General
Partner may opt to redeem all, but not less than all, of the
Preferred Units for a price, payable either in all cash or by
issuance of additional Depositary Units, equal to the liquidation
preference of the Preferred Units, plus any accrued but unpaid
distributions thereon. On March 31, 2010, the Company must redeem
all, but not less than all, of the Preferred Units on the same
terms as any optional redemption.
1,975,640 Rights were issued in the Rights Offering of which
418,307 were exercised. 190,554 Depositary Units and 31,759
Preferred Units were subscribed for through the exercise of the
Over-Subscription Privilege by Rights Holders other than High Coast
Limited Partnership ("High Coast"), a Delaware limited partnership.
High Coast acted as guarantor for the Rights Offering and is an
affiliate of Carl C. Icahn, ("Icahn"), the Chairman of American
Property Investors, Inc., ("API"), the general partner of the
Company. API is also the general partner of the guarantor and the
two limited partners are affiliates of and are controlled by Icahn.
Pursuant to its subscription guaranty, High Coast oversubscribed
for a total of 9,343,998 Depositary Units and 1,557,333 Preferred
Units. As a result, the Rights Offering was fully subscribed. The
12
<PAGE>
proceeds due the Company, after deduction of expenses of
approximately $1.2 million incurred by the Company in connection
with the Rights Offering, are approximately $107.5 million.
In addition, in accordance with the terms of the Company's and its
subsidiary's partnership agreements, API is required to contribute
$2,206,242 in order to maintain its aggregate 1.99% general
partnership interest.
On April 12, 1995, the Company received $108,660,200, the gross
proceeds of the Rights Offering, from its subscription agent and
$2,206,242 from API. The Company issued 1,975,640 Preferred Units
and an additional 11,853,840 Depositary Units. Trading in the
Preferred Units commenced March 31, 1995 on the New York Stock
Exchange ("NYSE") under the symbol "ACP PR". The Depositary Units
trade on the NYSE under the symbol "ACP".
As a result of the Rights Offering, High Coast now owns 1,720,688
Preferred Units and a total of 11,689,896 Depositary Units which
includes 1,330,368 and 35,400 Depositary Units previously owned by
API and an affiliate, respectively.
9. EARNINGS PER SHARE
Net earnings per limited partnership unit and equivalent
partnership units subscribed are computed using the weighted
average number of units and equivalent units outstanding during the
period. The earnings per share calculation assumes the Depositary
and Preferred Units subscribed for in the Rights Offering were
outstanding at the beginning of the year. With respect to the
first quarter 1995 calculation, net income has been increased by
approximately $2,100,000, in accordance with the modified treasury
stock method. The dilutive effect of preferred units and the pro
rata quarterly portion of the annual pay-in-kind distribution to
preferred unitholders has been included in the earnings per share
calculation, as calculated under the effective yield method, as
equivalent depositary units. There is no significant difference
between primary and fully diluted per share amounts. (See note 8).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
Historically, substantially all of the Company's real estate assets
have been net leased to single corporate tenants under long-term
leases. With certain exceptions, these tenants are required to pay
13
<PAGE>
all expenses relating to the leased property and therefore the
Company is not typically responsible for payment of expenses, such
as maintenance, utilities, taxes and insurance associated with such
properties. The Company has experienced an increase in its
property expenses in recent years, due principally to tenant
bankruptcies and defaults as well as the acquisition of operating
properties.
Economic conditions in recent years led the General Partner to
reexamine the Company's cash needs and investment opportunities.
Tenant defaults and lease expirations caused rental revenues to
decrease and property management and operating expenses to increase
and led to expenditures to re-let. In addition, the availability
of acceptable financing to refinance maturing debt obligations
including the Company's Senior Unsecured Debt became increasingly
scarce. Consequently the General Partner determined it was
necessary to conserve cash and establish reserves from time to
time. As a result, there was insufficient cash flow from
operations to pay distributions to unitholders and such
distributions were reduced and finally suspended.
By the end of the year 2000, net leases representing approximately
26% of the Company's net annual rentals from its portfolio will be
due for renewal, and by the end of the year 2002, net leases
representing approximately 40% of the Company's net annual rentals
will be due for renewal. Since most of the Company's properties are
net-leased to single, corporate tenants, it is expected that it may
be difficult and time-consuming to re-lease or sell those
properties that existing tenants decline to re-let or purchase and
the Company may be required to incur expenditures to renovate such
properties for new tenants. In addition, the Company may become
responsible for the payment of certain operating expenses,
including maintenance, utilities, taxes, insurance and
environmental compliance costs associated with such properties,
which are presently the responsibility of the tenant. As a result,
the Company could experience an adverse impact on net cash flow
from such properties.
As a consequence of the foregoing, the Company decided to raise
funds through the Rights Offering to increase its assets available
for investment, take advantage of real estate investment
opportunities, further diversify its portfolio and mitigate against
the impact of potential lease expirations. The Rights Offering was
successfully completed during April 1995 and net proceeds of
approximately $107.5 million were raised for investment purposes.
In order to enhance the Company's investment portfolio (and
ultimately its asset values and cash flow prospects), the Company
14
<PAGE>
is seeking to acquire investments in undervalued properties. Such
properties may not be generating a positive cash flow in the near
term; however, the General Partner believes that the acquisition of
properties requiring some degree of management or development
activity have the greatest potential for growth, both in terms of
capital appreciation and the generation of cash flow.
Expenses relating to environmental clean-up have not had a material
effect on the earnings, capital expenditures, or competitive
position of the Company. Management believes that substantially
all such costs would be the responsibility of the tenants pursuant
to lease terms. While most tenants have assumed responsibility for
the environmental conditions existing on their leased property,
there can be no assurance that the Company will not be deemed to be
a responsible party or that the tenant will bear the costs of
remediation. Also, as the Company acquires more operating
properties, its exposure to environmental clean-up costs may
increase. The Company recently has undertaken to have certain of
its properties subjected to Phase I Environmental Site Assessments
by a third-party consultant. Based on the results of these Phase
I Environmental Site Assessments, the environmental consultant has
recommended that limited Phase II Environmental Site Investigations
be conducted. At the conclusion of the Company's Phase I
Environmental Site Assessments, the Company will seek to
coordinate with the tenants to attempt to ensure that they
undertake any required investigation and/or remediation. As no Phase II
Environmental Site Investigations have been conducted by the consultant,
there can be no accurate estimation of the need for or extent of any
required remediation, or the costs thereof.
Results of Operations
- ---------------------
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1994
Gross revenues increased by approximately $256,000, or 1.6%, during
the three months ended March 31, 1995 as compared to the same
period in 1994. This increase reflects approximate increases of
$331,000, or 11.6%, in hotel operating income, $255,000, or 5.8%,
in rental income, and $194,000, or 47.8%, in other interest income,
partially offset by a decrease of approximately $524,000, or 6.3%,
in financing lease income. The hotel operating revenues were
generated by two hotels formerly leased to Integra, A Hotel and
Restaurant Company. The Company has been operating these hotel
properties through a third party management company since August 7,
1992. The increase in rental income is primarily attributable to
the two apartment complexes in Lexington, Kentucky, acquired in
15
<PAGE>
1993 and increases in rents from a property formerly occupied by
Amdura Corp. The increase in other interest income is primarily
due to an increase in the Company's short-term cash investments as
well as an increase in the interest rates earned thereon. The
decrease in financing lease income is primarily attributable to
normal lease amortization and property sales. Due to the seasonal
nature of the hotel properties, the hotel revenues for the three
months ended March 31, 1995 are disproportionately higher than
those expected for subsequent quarters of 1995.
Expenses decreased by approximately $668,000, or 6.2%, during the
three months ended March 31, 1995 compared to the same period in
1994. This decrease reflects a decrease of approximately $830,000,
or 13.6%, in interest expense, partially offset by increases of
approximately $91,000, or 7.8%, in depreciation and amortization,
$38,000, or 6.2%, in general and administrative expenses and
$40,000, or 2.1% in hotel operating expenses. The decrease in
interest expense is primarily attributable to normal loan
amortization and reductions due to certain loan refinancings and
repayments of maturing balloon debt obligations, including the
Senior Unsecured Debt.
Earnings before property transactions increased during the three
months ended March 31, 1995 by approximately $924,000, or 17.7% as
compared to the same period in 1994. Gain on property transactions
increased by approximately $2,957,000 during the three months ended
March 31, 1995 as compared to the same period in 1994, due to the
size and number of transactions. During the three months ended
March 31, 1995, the Company did not record a provision for loss
on real estate as compared to a $75,000 provision in the comparable
period of 1994.
Net earnings for the three months ended March 31, 1995 increased by
approximately $3,956,000 as compared to the three months ended
March 31, 1994. This increase was primarily due to increases in
gain from the sale of real estate. Due to the seasonal nature of
the Company's two hotel properties previously mentioned, results of
hotel operations for the three months ended March 31, 1995 are expected
to be significantly higher than subsequent quarters of 1995.
Capital Resources And Liquidity
- -------------------------------
Generally, the cash needs of the Company for day-to-day operations
have been satisfied from cash flow generated from current
operations. The cash flow generated from day-to-day operations
16
<PAGE>
(before payment of maturing debt obligations) has decreased in
recent years, although it improved in 1994 and is expected to
continue to improve in 1995 due to among other things the
acquisition and foreclosure of certain operating properties and the
repayment of debt. The Company has had to apply a larger portion
of its cash flow to the repayment of maturing debt obligations.
Cash flow from day-to-day operations represents net cash provided
by operating activities (excluding working capital changes and non-
recurring other income) plus principal payments received on
financing leases as well as principal receipts on mortgages
receivable reduced by periodic principal payments on mortgage debt.
The Company may not be able to re-let certain of its properties at
current rentals. As previously discussed, net leases representing
approximately 40% of the Company's net annual rentals will be due
for renewal by the end of the year 2002. In 1995, seventeen leases
covering twenty-six properties and representing approximately $996,000
in annual rentals are scheduled to expire. The Company anticipates
that thirteen of these twenty-six properties originally representing
approximately $656,000 in annual rental income have been or will be
re-let or renewed for approximately $671,000 in annual rentals.
Thirteen properties, with an approximate annual rental income of
$340,000, will be marketed for sale or lease when the current lease
terms expire.
In 1994, the General Partner determined that it was necessary to
conserve cash and increase reserves from time to time in order to
meet maturing debt obligations and its capital expenditure
requirements. On March 16, 1995, the Board of Directors of the
General Partner announced that a distribution for the fiscal
quarter ended March 31, 1995 would not be made. In making its
announcement, the Company noted that, consistent with previously
announced estimates, net operating cash flow in 1994 was only
break-even, after payment of periodic principal payments and
maturing debt obligations, capital expenditures and the creation of
additional cash reserves.
17
<PAGE>
There were no distributions due to Unitholders for the three months
ended March 31, 1995. Distributions paid during the three months
ended March 31, 1995 totalled approximately $22,000, representing
distributions due to Unitholders who exchanged their limited
partner interests during 1995. There were no distributions due to
Unitholders for the three months ended March 31, 1994.
Distributions paid during the three months ended March 31, 1994
totalled approximately $1.8 million, representing distributions due
to Unitholders for the fourth quarter of 1993 and to Unitholders
who exchanged their limited partner interests during 1994.
During the three months ended March 31, 1995 the Company generated
approximately $6.9 million in cash flow from day-to-day operations.
During the comparable period of 1994, the Company generated
approximately $5.8 million in cash flow from day-to-day operations.
Capital expenditures for real estate, excluding new acquisitions,
were approximately $310,000 during the three months ended March 31,
1995. During the comparable period of 1994, there were
approximately $100,000 of such expenditures.
In 1995 and 1996, the Company has approximately $11.3 million of
principal payments due each year on its Senior Unsecured Debt and
approximately $5.7 million and $16.9 million of maturing balloon
mortgages due, respectively. During the three months ended March
31, 1995, approximately $2.9 million of balloon mortgages were
repaid out of the Company's cash flow. During the comparable
period of 1994, approximately $1.8 million of balloon mortgages
were repaid out of the Company's cash flow. The Company will seek
to refinance a portion of these maturing mortgages, although it
does not expect to refinance all of them and may be required to
repay them from cash flow and increase reserves from time to time,
thereby reducing cash flow otherwise available for other uses.
During the three months ended March 31, 1995, net cash flow after
payment of maturing debt obligations and capital expenditures was
approximately $3.7 million which has been added to the Company's
cash reserves. Such reserves are approximately $16.7 million at
March 31, 1995. Due to certain timing issues and payments due on
maturing debt obligations, including the annual installment on the
Company's Senior Unsecured Debt, cash flow for the second quarter of
1995 is expected to be negative, thereby requiring the use of
reserves. As a result, the Company does not anticipate the payment
of cash distributions to holders of Depositary Units in the near
future.
18
<PAGE>
The Company has significant maturing debt requirements under the
Note Agreements. As of March 31, 1995, the Company has $45,231,106
of Senior Unsecured Debt outstanding. Pursuant to the Note
Agreements, the Company is required to make semi-annual interest
payments and annual principal payments. The interest rate charged
on the Senior Unsecured Debt is 9.6% per annum. Under the terms of
the Note Agreements, the Company deferred and capitalized 2%
annually of its interest payment through May 1993. In May 1994,
the Company repaid $10 million of its outstanding Senior Unsecured
Debt under the Note Agreements and principal payments of
approximately $11,308,000 are due annually from 1995 through the
final payment date of May 27, 1998. As of March 31, 1995, the
Company was in compliance with the terms of the Note Agreements.
The Note Agreements contain certain covenants restricting the
activities of the Company. Under the Note Agreements, the Company
must maintain a specified level of net annual rentals from
unencumbered properties (as defined in the Note Agreements) and is
restricted, in certain respects, in its ability to create liens and
incur debts. Investment by the Company in certain types of assets
that may be regarded as non-income producing, such as land or non-
performing loans, is restricted under the Note Agreements. The
holders of the Senior Unsecured Debt have agreed, however, to waive
this restriction with respect to any capital raised by the Company
in the Rights Offering.
The Note Agreements contain certain prepayment penalties which the
Company would be required to pay if it extinguishes any portion of
the outstanding principal prior to its annual due date. The Note
Agreements require that such prepayment consist of 100% of the
principal amount to be prepaid plus a premium based on a formula
described therein. As of May 9, 1995 the premium required in order
to prepay the Note Agreement in full would have been approximately
$2,950,000. Subject to negotiating favorable terms the Company may
prepay in full the Senior Unsecured Debt. Prepayment would release
the Company from certain covenants which restrict its operating and
investment activities, including, among others, covenants relating
to the level of net annual rentals from unencumbered properties and
the ability to create liens and incur additional debt.
Sales proceeds from the sale or disposal of portfolio properties
totalled approximately $8.1 million in the three months ended March
31, 1995. During the comparable period of 1994, sales proceeds
totalled approximately $2.4 million, including $1.4 million of net
proceeds from a balloon payment of a mortgage receivable. During
the three months ended March 31, 1995, the Company received
$9.8 million of mortgage proceeds from the financing of its two
19
<PAGE>
apartment complexes located in Lexington, Kentucky. The Company
intends to use property sales, financing and refinancing proceeds
for new investments. In addition, the Company successfully
completed its Rights Offering in April 1995 and net proceeds of
approximately $107.5 million were raised for investment purposes.
The Company entered into two joint ventures with unaffiliated co-
venturers in June 1994 for the purpose of developing luxury garden
apartment complexes in Hoover, Alabama, and Cary, North Carolina.
In the year ended December 31, 1994, the Company invested
approximately $5,500,000 in these joint ventures. During the three
months ended March 31, 1995, the Company invested approximately an
additional $300,000. There were no such investments during the
comparable period of 1994.
The Company's cash and cash equivalents increased by approximately
$23.2 million during the first quarter of 1995 primarily
due to sales proceeds of approximately $8.1 million, financing
proceeds of approximately $9.8 million, cash flow from day-to-day
operations of approximately $6.9 million offset by approximately
$2.9 million of maturing balloon debt repayments.
The Company announced in 1987 its intention to purchase up to one
million Units. On June 16, 1993 the Company announced it had
increased the unit repurchase program to 1,250,000 units. As of
March 31, 1995, the Company had purchased 1,037,200 Units at an
aggregate cost of approximately $11,184,000, and the Company may
from time to time acquire additional Units.
Part II. Other information
-------
Item 1. Legal Proceedings
-----------------
In August 1994, three class action complaints against the Company
were filed with the Delaware Court of Chancery, New Castle County,
in connection with the Rights Offering, Allan Haymes, I.R.A v.
American Real Estate Partners, L.P., American Property Investors,
Inc. and Carl C. Icahn and Steven Yavers v. American Real Estate
Partners, L.P., American Property Investors, Inc. and Carl C. Icahn
and Wilbert Schoomer v. American Real Estate Partners, L.P,
American Property Investors, Inc. and Carl C. Icahn (the
"Complaints"). The Complaints have all been consolidated. The
Complaints claim defendants have breached fiduciary and common law
duties owed to plaintiffs and plaintiffs' class by self dealing and
failing to disclose all relevant facts regarding the Rights
Offering, and seek declaratory and injunctive relief declaring the
action is properly maintainable as a class action, declaring the
defendants have breached their fiduciary and other duties,
20
<PAGE>
enjoining the Rights Offering, ordering defendants to account for
all damages suffered by the class for alleged acts and transactions
and awarding further relief as the court deems appropriate. On
April 7, 1995, defendants moved to dismiss the consolidated
complaint as moot.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - none
(b) Reports on Form 8-K. The Company filed a report on Form
8-K with the Securities and Exchange Commission on March 16, 1995
to report that the Company had released its earnings for the fourth
quarter and fiscal year ended December 31, 1994 and also to report
that no distribution would be made for the fiscal quarter ended
March 31, 1995.
(c) Financial Data Schedule is attached hereto as Exhibit
EX-27.
EXHIBIT INDEX
Exhibit Description
------- -----------
EX-27 Financial Data Schedule
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc.
General Partner
--------------------------------
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: May 15, 1995
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
American Real Estate Partners, L.P.
By: American Property Investors, Inc.
General Partner
/s/ John P. Saldarelli
John P. Saldarelli
Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: May 15, 1995
18
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