<PAGE>
As filed with the Securities and Exchange Commission on August 6, 1997
Registration No. 333-31561
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------
AMERICAN REAL ESTATE PARTNERS, L.P.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3398766
(State of Organization) (IRS Employer Identification Number)
------------------
100 SOUTH BEDFORD ROAD
MT. KISCO, NY 10549
(914) 242-7700
(Address and Telephone Number of Registrant's Principal Executive Office)
------------------
JOHN P. SALDARELLI
AMERICAN REAL ESTATE PARTNERS, L.P.
100 South Bedford Road
Mt. Kisco, NY 10549
(914) 242-7700
(Name, Address and Telephone Number of Agent for Service)
------------------
Copies to:
CRAIG S. MEDWICK, ESQ.
G. DAVID BRINTON, ESQ.
Rogers & Wells
200 Park Avenue
New York, New York 10166
------------------
<PAGE>
Approximate date of commencement of proposed sale to the public: With
respect to the Depositary Units (as defined herein) and the Preferred Units (as
defined herein) to be issued upon exercise of the Rights (as defined herein),
as soon as practicable after this Registration Statement has been declared
effective and with respect to the Depositary Units issuable upon conversion of
the Preferred Units and the Preferred Units which may be issued from time to
time as distributions on the Preferred Units, from time to time after this
Registration Statement has been declared effective.
------------------
If the only securities being registered on this form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PROSPECTUS
AMERICAN REAL ESTATE PARTNERS, L.P.
Subscription Rights, Expiring September 11, 1997, to Purchase Depositary
Units Representing Limited Partner Interests and 5% Cumulative Pay-in-Kind
Redeemable Preferred Units Representing Limited Partner Interests
-----------------
American Real Estate Partners, L.P., a Delaware limited partnership
("AREP" or the "Partnership"), is distributing at no cost to holders of record
as of the close of business on August 8, 1997 (the "Record Date") of depositary
units representing limited partner interests in the Partnership (the
"Depositary Units") one transferable subscription right (each, a "Right") for
each five Depositary Units held. Each Right entitles the holder thereof
("Rights Holders") to purchase, at any time prior to 5:00 p.m., New York City
time, on September 11, 1997 (as such date may be extended by the Partnership as
herein provided, the "Expiration Date"), at a subscription price of $52 (the
"Subscription Price"), the following securities (the "Basic Subscription
Right"): (i) four Depositary Units and (ii) one 5% cumulative pay-in-kind
redeemable preferred unit (the "Preferred Unit"), each representing a limited
partner interest in the Partnership. The Subscription Price is allocable $42 to
the Depositary Units and $10 to the Preferred Unit. The portion of the
Subscription Price allocable to the Depositary Units represents a discount to
the last reported sales price for the Depositary Units on the New York Stock
Exchange, Inc. (the "NYSE") which was $11.875 on August 4, 1997. The portion of
the Subscription Price allocable to the Preferred Unit represents the
liquidation preference of the Preferred Unit of $10; the last reported sales
price on the NYSE for the Preferred Units was $7.50 on July 29, 1997. Each
Rights Holder who exercises any portion of his Basic Subscription Rights (an
"Exercising Rights Holder") will be entitled to exercise an over-subscription
privilege (the "Over-Subscription Privilege") for all or any portion of the
Depositary Units and Preferred Units that are not purchased through the
exercise of Basic Subscription Rights. If all Basic Subscription Rights are
exercised, there will be no Over-Subscription Privilege. There is no limit on
the number of Depositary Units and Preferred Units that Exercising Rights
Holders may seek to subscribe for pursuant to the Over-Subscription Privilege.
The available Preferred Units and Depositary Units will be allocated pro rata
(according to the aggregate number of Basic Subscription Rights exercised)
among those Rights Holders who exercise the Over-Subscription Privilege. The
Depositary Units and Preferred Units purchased through the exercise of Basic
Subscription Rights and the Over-Subscription Privilege must be purchased as a
unit consisting of four Depositary Units and one Preferred Unit and may not be
subscribed for separately. See "The Offering."
Exercising Rights Holders will have no right to modify or rescind a
purchase after the Subscription Agent has received a completed Subscription
Certificate. Except for the Guarantor (defined below), all Exercising Rights
Holders must remit payment in full with their completed Subscription
Certificate for all Depositary Units and Preferred Units subscribed for through
the exercise of Basic Subscription Rights and the Over-Subscription Privilege.
See "The Offering -- Payment for Securities."
High Coast Limited Partnership, a Delaware limited partnership (the
"Guarantor") whose general partner is American Property Investors, Inc. (the
"General Partner"), the general partner of the Partnership, has agreed, subject
to certain conditions contained in the Subscription Guaranty Agreement (as
defined herein), (i) to subscribe for and purchase 11,116,568 Depositary Units
and 2,779,142 Preferred Units through the exercise of its Basic Subscription
Rights and (ii) to subscribe for all other Depositary Units and Preferred Units
pursuant to the Over-Subscription Privilege, and, subject to proration as
described above, to purchase such additional Depositary Units and Preferred
Units (the "Subscription Guaranty"). Therefore, assuming the conditions in the
Subscription Guaranty Agreement are satisfied, the Partnership is assured of
receiving an amount equal to the amount it would have raised had all Basic
Subscription Rights been exercised in full, approximately $267,800,000 assuming
the issuance of 5,150,000 Rights (the "Guaranteed Amount"). No fee is being
paid to the Guarantor for the Subscription Guaranty, although any Units (as
defined herein) held by the Guarantor will be subject to a registration rights
agreement. The Guarantor may purchase Rights during the Offering. See "The
Offering -- Subscription Guaranty."
<PAGE>
Each Preferred Unit has a liquidation preference of $10.00 and entitles
the holder thereof to receive distributions thereon, payable solely in
additional Preferred Units, at the rate of 5% per annum of the liquidation
preference (which is equal to $.50 per annum per Preferred Unit) payable
annually on March 31 of each year (each, a "Payment Date"). The Preferred Units
are subject to (i) redemption at the option of the Partnership on any Payment
Date commencing with the Payment Date on March 31, 2000 and (ii) mandatory
redemption by the Partnership on March 31, 2010. The redemption price is
payable at the option of the Partnership either in all cash or by issuance of
additional Depositary Units in an amount equal to the redemption price. See
"Description of Securities -- The Preferred Units -- Redemption." Holders of
Preferred Units and Depositary Units may incur taxable income each year even
though no cash is distributed. See "Description of Securities" and "Income Tax
Considerations."
The Rights are freely transferable and will be listed on the NYSE under the
symbol "ACP.RT." There can be no assurance, however, that a market for the
Rights will develop. The Depositary Units currently outstanding are, and those
issued on exercise of the Rights will be, listed on the NYSE under the symbol
"ACP." The Preferred Units currently outstanding are, and those issued on
exercise of the Rights will be, listed on the NYSE under the symbol "ACP.Pr."
-----------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 13 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
Subscription Proceeds to
Price Partnership(1)(2)
Per Unit .................................. $52.00 $52.00
Total(3) .................................. $267,800,000 $267,800,000
- --------------------------------------------------------------------------------
(Footnotes on following page)
August 7, 1997
<PAGE>
(Footnotes from prior page)
- ------------
(1) Before deducting offering expenses of the Partnership estimated to be
$600,000.
(2) No underwriting discounts or commissions will be paid in connection with
the offering.
(3) Assumes issuance and exercise of 5,150,000 Rights. The number of Rights
actually issued may vary due to rounding. See "The Offering -- Terms of
the Offer."
---------------------
AVAILABLE INFORMATION
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports and other information
filed by the Partnership may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Office of the Commission: Jacob K.
Javits Federal Building, 26 Federal Plaza, New York, New York 10278. Copies of
such material may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a site on the world-wide-web at
http://www.sec.gov that contains reports and other information regarding the
Partnership. The Depositary Units and Preferred Units of the Partnership are
listed on the NYSE. Reports and other information concerning the Partnership
may be inspected at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
The Partnership has filed with the Commission a Registration Statement
(the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. This
Prospectus omits certain information included in such Registration Statement.
For further information about the Partnership and the securities offered
hereby, reference is hereby made to such Registration Statement and to the
exhibits filed as part thereof. The Registration Statement may be examined
without charge, and copies thereof may be obtained upon payment of a prescribed
fee, at the principal office of the Commission in Washington, D.C.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Partnership with the Commission are
incorporated in and made a part of this Prospectus by reference:
(1) the Partnership's annual report on Form 10-K for the year ended
December 31, 1996;
(2) the Partnership's quarterly report on Form 10-Q for the quarterly
period ended March 31, 1997; and
(3) the Partnership's Current Report on Form 8-K dated July 24, 1997.
All documents filed by the Partnership pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of the offering made hereby (the "Offering") shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained in this Prospectus, or contained in any
other document incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Partnership will furnish without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by reference
(other than exhibits to such documents unless such exhibits are specifically
incorporated by reference into such documents). Written or telephone requests
for such copies should be directed to the Partnership, 100 South Bedford Road,
Mt. Kisco, New York 10549, (914) 242-7700 or (800) 255-2737.
2
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Partnership's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus.
As used in this Prospectus, unless the context otherwise indicates, "AREP"
or the "Partnership" means American Real Estate Partners, L.P. and its direct
and indirect subsidiaries. All references in this Prospectus to "Unitholders"
shall refer to holders of Depositary Units and holders of Preferred Units,
unless the context otherwise indicates. All references in this Prospectus to
"Units" shall refer to the Depositary Units and the Preferred Units, unless the
context otherwise indicates. All references in this Prospectus to the aggregate
number of Rights, Depositary Units and Preferred Units issued and to numbers
derived therefrom are based on the assumption that 5,150,000 Rights are issued.
The number of Rights actually issued is subject to change based on the number
of Depositary Units held by each record holder or beneficial owner due to
rounding (described below).
The Partnership and Purpose of the Offering
AREP was formed under the laws of the State of Delaware on February 17,
1987 and its general partner is American Property Investors, Inc. (the "General
Partner"), a Delaware corporation which is wholly owned by Carl C. Icahn
("Icahn"). AREP's business is conducted through a subsidiary limited
partnership, American Real Estate Holdings Limited Partnership (the
"Subsidiary"), in which AREP owns a 99% limited partnership interest. The
General Partner also acts as the general partner for the Subsidiary. The
General Partner has a 1% general partnership interest in each of AREP and the
Subsidiary, and, upon completion of the offering made hereby, the General
Partner will contribute additional capital to the Partnership in the amount
necessary to maintain its 1% general partner interest in AREP.
AREP is primarily engaged in the business of acquiring and managing real
estate and activities related thereto. Historically, the properties owned by
AREP have been primarily office, retail, industrial, residential and hotel
properties. As of June 30, 1997, AREP owned 218 separate real estate assets
primarily consisting of fee and leasehold interests in 35 states. On August 16,
1996, an amendment (the "Amendment") to AREP's Amended and Restated Limited
Partnership Agreement (the "Partnership Agreement") became effective which
permits AREP to make non-real estate related investments.
The Partnership is seeking to raise funds in the offering to increase its
available liquidity so that it will be in a better position to take advantage
of investment opportunities and to further diversify its portfolio.
Additionally, the Partnership may determine to reduce the debt of certain
properties where the interest rate is considered to be in excess of current
market rates. In light of AREP's view of current market conditions and the rise
in the trading price of AREP's Depositary Units, AREP believes that this is an
opportune time to raise additional capital. The Partnership believes that the
strengthening of the real estate market and the stock market over recent years
has permitted AREP and others to sell properties at increasingly favorable
prices. However, AREP believes the markets may be due for a downward correction
which could result in purchasing opportunities from sellers who may seek to
liquidate assets when their expected returns decrease; also, the trading prices
of securities issued by such companies could decline, providing additional
investment opportunities. In the real estate markets, which historically have
been cyclical, this may be especially true due to the unprecedented high volume
of securities issued by real estate operating companies. This may present
opportunities for companies with strong cash positions to acquire large
portfolios of assets at possible discounts to their implicit values and for the
acquisition or recapitalization of operating companies, including those with
significant real estate assets.
The types of investments AREP will pursue include residential/commercial
development, acquiring debt or equity securities of companies which may be
undergoing restructuring and subperforming properties that may require active
asset management and significant capital improvements. These investments may
not be readily
3
<PAGE>
financeable and may not generate immediate positive cash flow for the
Partnership. As such, they require AREP to maintain a strong capital base in
order to react quickly to these market opportunities as well as to allow AREP
the financial strength to develop or reposition these assets.
AREP believes that the Partnership will benefit from diversification of
its real estate portfolio. By the end of the year 2000, net leases representing
approximately 23% of AREP's net annual rentals from its portfolio will be due
for renewal, and by the end of the year 2002, net leases representing
approximately 41% of AREP's net annual rentals will be due for renewal. Since
most of the Partnership's properties are net-leased to single corporate
tenants, it may be difficult and time consuming to re-lease or sell those
properties that existing tenants decline to re-let or purchase and that AREP
may be required to incur expenditures to renovate such properties for new
tenants. In addition, AREP 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, AREP could experience
an adverse impact on net cash flow from such properties in the future.
In selecting future real estate investments, AREP intends to focus on
assets that it believes are undervalued in the real estate market, which
investments may require substantial liquidity to maintain a competitive
advantage. Despite the substantial capital pursuing real estate opportunities,
AREP believes that there are still opportunities available to acquire
investments that are undervalued. This may include commercial properties,
residential and commercial development projects, land, non-performing loans and
the securities of entities which own, manage or develop significant real estate
assets, including limited partnership units and securities issued by real estate
investment trusts ("REITS"). To further these investment objectives, AREP may
consider the acquisition or seek effective control of land development companies
and other real estate operating companies which may have a significant inventory
of quality assets under development, as well as experienced personnel. This may
enhance AREP's ability to further diversify its portfolio of properties and gain
access to additional operating and development capabilities. Such acquisitions
may include those from affiliates of the General Partner, provided the terms
thereof are fair and reasonable and are approved by the Audit Committee of the
Board of Directors of the General Partner (the "Audit Committee"). See "Risk
Factors -- Substantial Fees to General Partner and its Affiliates" and "Use of
Proceeds -- Fees to the General Partner and its Affiliates."
Pursuant to the Amendment, AREP, while continuing to pursue suitable
investments in the real estate markets as mentioned above, may invest a portion
of its funds in securities of issuers that are not necessarily engaged as one
of their primary activities in the ownership, development or management of real
estate. Such investments may include equity and debt securities of domestic and
foreign issuers. The investment objective of AREP with respect to such
investments will be to purchase undervalued securities, so as to maximize total
return consisting of current income and/or capital appreciation. Undervalued
securities are those which AREP believes may have greater inherent value than
indicated by their then current trading price and/or may lend themselves to
"activist" shareholder involvement. The equity securities in which AREP may
invest may include common stocks, preferred stocks and securities convertible
into common stocks, as well as warrants to purchase such securities. The debt
securities in which AREP may invest may include bonds, debentures, notes,
mortgage-related securities and municipal obligations. Certain of such
securities may include lower rated securities which may provide the potential
for higher yields and therefore may entail higher risk. AREP will conduct its
investment activities in such a manner so as not to be deemed an investment
company under the Investment Company Act of 1940 (the "1940 Act").
Recently, AREP invested approximately $42.8 million to purchase certain
mortgage notes issued by Stratosphere Corporation ("Stratosphere") having a
face value of $55 million. In addition, an affiliate of Icahn currently owns
approximately $39 million face value of such Stratosphere mortgage notes.
Stratosphere owns and operates the Stratosphere Tower, Casino & Hotel in Las
Vegas, Nevada and has filed a voluntary proceeding for reorganization pursuant
to Chapter 11 of the United States Bankruptcy Code. Such affiliate of Icahn and
AREP together submitted a proposal for the restructuring of Stratosphere which
would involve additional investments in Stratosphere by AREP and such affiliate
of Icahn. AREP and the affiliate of Icahn understand that the Board of
Directors of Stratosphere is in favor of the proposal and intends to work with
AREP and the affiliate of Icahn
4
<PAGE>
towards the negotiation of definitive documentation. In addition, AREP is
investigating possible tender offers for real estate operating companies which,
together with the possible additional investment in Stratosphere, could involve
investments of over $200 million by AREP in the foreseeable future. However, no
assurances can be made that such transactions will be pursued or that such
investments will be made. See "Recent Events -- Investment in Stratosphere
Corporation."
In keeping with its overall investment strategy, the Partnership may
acquire assets that are not generating positive cash flow. While this may
impact cash flow in the near term and there can be no assurance that any asset
acquired by the Partnership will increase in value or generate positive cash
flow, AREP intends to focus on assets that it believes may provide
opportunities for long-term growth and diversification of its portfolio.
The determination of which assets are to be acquired will be within the
sole discretion of the General Partner. Other than a portion of the potential
additional investment in Stratosphere described herein, no assets have as yet
been identified for acquisition nor has the Partnership entered into
negotiations or agreements relating to the acquisition of any assets with the
proceeds of the Offering.
Icahn, in his capacity as majority Unitholder through High Coast Limited
Partnership, a Delaware limited partnership (the "Guarantor"), will not receive
any additional benefit with respect to distributions and allocations of profits
and losses not shared on a pro rata basis by all other Unitholders. In
addition, Icahn has confirmed to AREP that neither he nor any of his affiliates
will receive any fees from AREP in consideration for services rendered in
connection with non-real estate related investments by AREP. The General
Partner and its affiliates may, however, realize substantial fees and other
income from transactions involving the Partnership's investments in real estate
as described herein. AREP may determine to make investments in certain assets
in which Icahn or his affiliates have independent investments; in addition,
AREP may enter into other transactions with the General Partner, Icahn or their
affiliates, including, without limitation, buying and selling assets from or to
the General Partner, Icahn or their affiliates, and participating in joint
venture investments in assets with the General Partner, Icahn or their
affiliates, whether real estate or non-real estate related, provided the terms
of all such transactions are fair and reasonable to AREP. See "Use of Proceeds
- -- Fees to the General Partner and its Affiliates" and "Risk Factors --
Substantial Fees to General Partner and its Affiliates."
In addition to the factors described above, the Offering seeks, in part,
to give Unitholders the right to purchase additional Depositary Units and
Preferred Units at a total price below market without incurring any commission
charge and, in part, to provide the Partnership, through the issuance of
additional Preferred Units, with a relatively inexpensive source of financing.
The Preferred Units also have the further quality, at least initially, of not
being dilutive to those Unitholders who choose not to exercise their Rights
(although the Preferred Units could, if the Audit Committee of the Board of
Directors of the General Partner determined it was in the best interests of the
Partnership at the time, be redeemed at a later time for Depositary Units). In
structuring the Offering, the General Partner considered that the Preferred
Units have been trading at a discount to their liquidation preference, may not
be as attractive to investors as the Depositary Units and might reduce
Unitholder participation in the Offering, but determined that the benefit to
the Partnership and ultimately Unitholders of raising approximately an
additional $51,500,000 for investment through the issuance of the additional
Preferred Units together with the offering of the additional Depositary Units
outweighed any potential negative impact that might arise as a consequence of
including the Preferred Units as part of the Offering. Moreover, in an attempt
to at least partially compensate those Unitholders who decline to participate
in the Offering, the General Partner has structured the Rights as transferable
to afford non-participating Unitholders the potential of receiving a cash
payment upon sale of such Rights. See "Purpose of the Offering -- Benefits to
the Partnership and Unitholders."
5
<PAGE>
The Offering
Terms of the Offer
The Partnership is issuing to holders of record (the "Record Date
Holders") as of the close of business on August 8, 1997 (the "Record Date") of
depositary units representing its limited partner interests ("Depositary
Units") one transferable subscription right (each, a "Right") for each five
Depositary Units held. Each Right entitles the holder thereof (the "Rights
Holder") to purchase, at any time prior to 5:00 p.m., New York City time, on
September 11, 1997 (as such date may be extended by the Partnership as herein
provided, the "Expiration Date"), at a subscription price of $52 (the
"Subscription Price") the following securities: (i) four Depositary Units and
(ii) one 5% cumulative pay-in-kind redeemable preferred unit (the "Preferred
Unit"), each representing a limited partner interest in the Partnership. The
number of Rights to be issued to a Record Date Holder of a number of Depositary
Units not divisible by five is determined by multiplying the number of
Depositary Units held by such Record Date Holder on the Record Date by .2 and
then rounding up to the nearest whole number if the fractional amount is
greater than or equal to .5 and rounding down to the nearest whole number if
the fractional amount is less than .5. In the case of Depositary Units held of
record by any firm that is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or a
commercial bank or a trust company or other person that holds Depositary Units
as nominee for more than one beneficial owner (each, a "Nominee Holder"), the
number of Rights issued to such Nominee Holder will be adjusted to permit
rounding up of the Rights to be received by the beneficial owners for whom it
is the holder of record only if such Nominee Holder provides to the Partnership
on or before the close of business on September 8, 1997 written representation
of the number of Rights required for such rounding.
The subscription period shall commence on August 13, 1997 and will end on
the Expiration Date. The Rights are evidenced by subscription certificates (the
"Subscription Certificates") which will be mailed to Record Date Holders on
August 13, 1997, except as discussed below under "Sale of API Nominee Corp.
Rights" and "Foreign Restrictions."
The right of a Rights Holder to acquire during the subscription period at
the Subscription Price four Depositary Units and one Preferred Unit is
hereinafter referred to as a "Basic Subscription Right." The Depositary Units
and Preferred Units purchased through the exercise of Basic Subscription Rights
must be purchased as a unit consisting of four Depositary Units and one
Preferred Unit and may not be subscribed for separately. All Rights may be
exercised immediately upon receipt and until 5:00 p.m., New York City time, on
the Expiration Date. Rights Holders exercising any of their Basic Subscription
Rights are hereinafter referred to as "Exercising Rights Holders."
Securities Offered
Each Right entitles the Rights Holder to purchase four Depositary Units
and one Preferred Unit at a Subscription Price equal to $52. The Subscription
Price is allocable $42 to the Depositary Units and $10 to the Preferred Unit.
The portion of the Subscription Price allocable to the Depositary Units
represents a discount to the last reported sales price of $11.875 for the
Depositary Units on the NYSE on August 4, 1997. The portion of the Subscription
Price allocable to the Preferred Unit represents the liquidation preference of
the Preferred Unit of $10; the last reported sales price on the NYSE for the
Preferred Units was $7.50 on July 29, 1997. The Depositary Units have been
priced at a discount to the market price to attempt to make the Depositary
Units attractive to investors. The discount may result in a reduction in the
market price of the Depositary Units, however, the Partnership cannot predict
what impact, if any, such discount will have on the market price of the
Depositary Units.
The Depositary Units currently trade on the NYSE under the symbol "ACP."
The Preferred Units currently trade on the NYSE under the symbol "ACP.Pr."
Each Preferred Unit has a liquidation preference of $10.00 and entitles
the holder thereof to receive distributions thereon, payable solely in
additional Preferred Units, at the rate of 5% per annum of the liquidation
6
<PAGE>
preference (which is equal to $.50 per annum per Preferred Unit), payable
annually on March 31 of each year (each, a "Payment Date"). On any Payment Date
commencing with the Payment Date on March 31, 2000, the Partnership, with the
approval of the Audit Committee of the Board of Directors of the General
Partner (the "Audit Committee"), 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. Upon any
redemption of the Preferred Units, the redemption price may be paid either all
in cash or all in Depositary Units but not in a combination thereof. See
"Description of Securities -- The Preferred Units -- Redemption." On March 31,
2010, the Partnership must redeem all, but not less than all, of the Preferred
Units on the same terms as any optional redemption. Holders of Preferred Units
will be allocated taxable income each year equal to the accrual of
distributions, even though no cash has been distributed during the year. See
"Income Tax Considerations."
As of August 6, 1997, there were 25,666,640 Depositary Units and 2,178,143
Preferred Units outstanding. After giving effect to the Offering, there will be
approximately 46,266,640 Depositary Units and 7,328,143 Preferred Units
outstanding.
Over-Subscription Privilege
If less than all of the Basic Subscription Rights are exercised, each
Exercising Rights Holder will be entitled to subscribe for all or any portion
of the Depositary Units and Preferred Units which were not otherwise subscribed
for by other Rights Holders (the "Over-Subscription Privilege"). The Depositary
Units and Preferred Units purchased pursuant to the Over-Subscription Privilege
must be purchased as a unit consisting of four Depositary Units and one
Preferred Unit and may not be subscribed for separately. The available
Depositary Units and Preferred Units will be allocated pro rata (according to
the aggregate number of Basic Subscription Rights exercised) among those
Exercising Rights Holders who exercise the Over-Subscription Privilege. In the
event a Rights Holder exercising the Over-Subscription Privilege is allocated
less than the number of Depositary Units and Preferred Units such Holder
subscribed for, excess subscription payments will be promptly refunded. See
"The Offering -- Payment for Securities." If all Basic Subscription Rights are
exercised in full, the Over-Subscription Privilege will not be available.
Subscription Guaranty
The Guarantor, which, as of the date of this Prospectus, together with its
affiliates, holds 13,895,712 Depositary Units (54.1%) and 1,920,945 Preferred
Units (88.2%), has agreed, subject to certain conditions contained in the
Subscription Guaranty Agreement (as defined herein), (i) to subscribe for and
purchase 11,116,568 Depositary Units and 2,779,142 Preferred Units through the
exercise of its Basic Subscription Rights and (ii) to subscribe for all other
Depositary Units and Preferred Units pursuant to the Over-Subscription
Privilege, and, subject to proration as described above, to purchase such
additional Depositary Units and Preferred Units (the "Subscription Guaranty").
As a result, assuming the conditions in the Subscription Guaranty Agreement are
satisfied, the Partnership is assured of receiving gross proceeds from the
Offering in an amount equal to the amount it would have raised had all Basic
Subscription Rights been exercised in full, approximately $267,800,000 assuming
the issuance of 5,150,000 Rights (the "Guaranteed Amount"). The Guarantor will
receive certain registration rights with respect to its Units for providing the
Subscription Guaranty but will not otherwise be compensated. See "The Offering
- -- Subscription Guaranty -- Registration Rights Agreement." The terms of such
Subscription Guaranty and the registration rights were reviewed and approved by
the Audit Committee.
The Guarantor may purchase Rights in the Offering, in accordance with
applicable securities laws, solely with the intention of exercising such
Rights. Any Depositary Units and Preferred Units purchased pursuant to the
exercise of any such Rights will be acquired for investment purposes only. See
"The Offering -- Subscription Guaranty -- Purchase of Rights by Guarantor."
If no Rights are exercised by Rights Holders other than the Guarantor,
upon completion of the Offering, the Guarantor would beneficially own
34,495,712 Depositary Units or approximately 74.6% of the then outstanding
Depositary Units and 7,070,945 Preferred Units or approximately 96.5% of the
then outstanding Preferred Units.
7
<PAGE>
Exercising Rights
Rights will be evidenced by Subscription Certificates (see Appendix A) and
may be exercised by completing a Subscription Certificate and delivering it,
together with full payment, either by means of a notice of guaranteed delivery
(see Appendix B) or a check to Registrar and Transfer Company (the
"Subscription Agent") at the address set forth under "The Offering --
Subscription Agent." An example demonstrating the exercise of Rights, including
the Over-Subscription Privilege, is set forth under "The Offering -- Example of
Exercise of Rights and the Over-Subscription Privilege."
Except for the Guarantor, all Exercising Rights Holders must remit payment
in full with their completed Subscription Certificate for all Depositary Units
and Preferred Units subscribed for through the exercise of Basic Subscription
Rights and the Over-Subscription Privilege. See "The Offering -- Payment for
Securities." Exercising Rights Holders will have no right to modify or rescind
a purchase after the Subscription Agent has received a completed Subscription
Certificate.
Sales of Rights
The Rights are freely transferable until the close of business on the last
Business Day (as defined herein) prior to the Expiration Date. The Rights will
be listed on the NYSE under the symbol "ACP.RT." Although there can be no
assurance that a market for the Rights will develop, trading in the Rights on
the NYSE may be conducted until the close of trading on the last Business Day
prior to the Expiration Date. Trading of the Rights on the NYSE will be
conducted on a when issued basis from August 11, 1997 through August 13, 1997,
and on a regular way basis from August 14, 1997 through the last Business Day
prior to the Expiration Date. Rights Holders are urged to obtain a recent
trading price for the Rights on the NYSE from their broker, bank, financial
adviser or the financial press. The Partnership is not responsible if Rights
cannot be sold and has not guaranteed any minimum sales price for the Rights.
For purposes of this Prospectus, a "Business Day" means any day on which
trading is conducted on the NYSE.
Sale of API Nominee Corp. Rights
Pursuant to an exchange offer which was consummated on July 1, 1987 (the
"Exchange"), AREP acquired the real estate and other assets of 13 limited
partnerships (the "Predecessor Partnerships"). In connection with the Exchange,
the Depositary Units of certain non-consenting investors in the Predecessor
Partnerships issued in connection with the Exchange were registered in the name
of API Nominee Corp. (the "Nominee Corp."). As of August 6, 1997, Nominee Corp.
held 46,120 Depositary Units. Unless such non-consenting investors execute and
return their transfer applications and the certificates evidencing their
interests in the Predecessor Partnerships issued in connection with the
Exchange, thereby becoming holders of record of the Depositary Units held by
Nominee Corp., prior to the Record Date, Nominee Corp. shall use its reasonable
efforts to sell the Rights issued to Nominee Corp. and the proceeds from such
sale, if any, will be held in escrow by Nominee Corp. Neither the General
Partner nor the Guarantor intends to purchase Rights from Nominee Corp.
Foreign Restrictions
Subscription Certificates will not be mailed to Record Date Holders with
record addresses outside the United States (for these purposes, the United
States includes its territories and possessions and the District of Columbia)
("Foreign Record Date Unitholders"). The Rights to which such Subscription
Certificates relate will be held by the Subscription Agent for such Foreign
Record Date Unitholders' accounts until instructions are received to exercise,
sell or transfer the Rights. If no instructions have been received by 12:00
noon, New York City time, three Business Days prior to the Expiration Date, the
Subscription Agent will use its reasonable efforts to sell the Rights of those
Foreign Record Date Unitholders. The net proceeds, if any, from the sale of
those Rights will be remitted to the Foreign Record Date Unitholders.
8
<PAGE>
Important Dates to Remember
<TABLE>
<CAPTION>
Event Date
- ----- ----
<S> <C>
Record Date .................................... August 8, 1997
Subscription Period ........................... August 13, 1997 to September 11, 1997
Expiration Date .............................. September 11, 1997 (unless extended)
Last Date by which Nominee Holders
must notify Partnership for Rounding
Purposes .................................... September 8, 1997
Last Guaranteed Transfer Date .................. September 8, 1997 (unless extended)
Payment for Depositary Units and Preferred Units
and Notice of Guaranteed Delivery Due ......... September 11, 1997 (unless extended)
Subscription Certificates due pursuant
to Notice of Guaranteed Delivery ............ September 18, 1997 (unless extended)
</TABLE>
Additional information regarding the pertinent dates related to the
Offering can be found on pages 23 through 31 herein, and additional information
regarding the Offering may be obtained from the Partnership at (800) 255-2737
or the Subscription Agent at (800) 368-5948.
Risk Factors
Each Rights Holder who subscribes for the purchase of Depositary Units and
Preferred Units pursuant to the Offering described in this Prospectus shall be
deemed to have applied for admission as a limited partner of the Partnership
with respect to the Units acquired and to have agreed to be bound by all of the
terms and conditions of the Partnership Agreement, as from time to time in
effect. See "Description of Partnership Agreement." Prospective purchasers of
Units should carefully consider the matters discussed under "Risk Factors"
prior to any investment in the Partnership. Such matters include, among others:
Potential Substantial Dilution. Upon completion of the Offering, holders
of Depositary Units who do not exercise their Basic Subscription Rights in full
will own a smaller proportional interest in the Partnership. The only way for a
Unitholder to avoid potential substantial dilution is to exercise all of its
Basic Subscription Rights.
Increased Control of the Partnership by Icahn. As of the date of this
Prospectus, the Guarantor beneficially owns approximately 54.1% of the
outstanding Depositary Units and approximately 88.2% of the outstanding
Preferred Units. If no Rights are exercised by Rights Holders other than the
Guarantor, the Guarantor would beneficially own approximately 74.6% of the then
outstanding Depositary Units and approximately 96.5% of the then outstanding
Preferred Units thereby increasing the Guarantor's control over substantially
all matters to be determined by the Unitholders. The affirmative vote of
Unitholders holding more than 75% of the total number of Depositary Units then
outstanding, including Depositary Units held by the General Partner and its
affiliates, is required to remove the General Partner. Thus, the General
Partner cannot be removed without the consent of Icahn. Moreover, the
affirmative vote of the General Partner and Unitholders owning more than 50% of
the total number of all outstanding Depositary Units then held by Unitholders,
including the Guarantor, is required to approve certain extraordinary actions
taken by the Partnership. Accordingly, Icahn, through the Guarantor, has
effective control over the taking of these actions by the Partnership.
Risks Associated with Purchase of the Preferred Units. The Preferred Units
call for distributions to be paid in kind. Holders of Preferred Units will not
receive any payment from the Partnership in respect thereof unless such
securities are redeemed for cash in accordance with the terms thereof and
will have no voting rights or be entitled to participate in any decisions
regarding the management of the Partnership except in certain limited
circumstances. The Preferred Units have no preemptive rights or anti-dilution
protection and they may be
9
<PAGE>
redeemed at the option of the Partnership on any Payment Date commencing with
the Payment Date on March 31, 2000 for a price payable either in cash or
Depositary Units. The Preferred Units have traded and, as of the date of this
Prospectus are trading, at a discount to their $10 liquidation value. While no
prediction can be made as to the effect, if any, that market sales of
Depositary Units issued in redemption of Preferred Units, or the availability
of such Depositary Units for sale, will have on the market price of the
Depositary Units, sales of substantial amounts of the Depositary Units received
upon redemption of the Preferred Units in the public market could adversely
affect prevailing market prices.
Broad General Partner Discretion in Use of Proceeds; Unspecified
Investments. Other than a portion of the potential additional investment in
Stratosphere described herein, no properties or other investments have as yet
been identified for acquisition by the Partnership with the proceeds of the
Offering and the determination of which properties or investments are to be
acquired will be within the sole control of the General Partner. See "Recent
Events -- Investment in Stratosphere Corporation."
Substantial Fees to the General Partner and its Affiliates. In connection
with the real estate investments of the Partnership, affiliates of the General
Partner may realize substantial fees, commissions and other income from
transactions involving the purchase, operation, management, development,
financing and sale of the Partnership's properties, subject to certain
limitations on properties acquired from the Predecessor Partnerships. The
Partnership may also enter into real estate management or other arrangements
with the General Partner or its affiliates. In addition, subject to the terms
of the Partnership Agreement, the General Partner has absolute discretion to
act on behalf of the Partnership with respect to all transactions with
affiliates, and such transactions may not be the result of arm's-length
negotiations. See "-- Use of Proceeds" below for a further description of the
fees payable to the General Partner and its affiliates.
Certain Tax Considerations. Favorable tax treatment of the Partnership and
the Subsidiary depends, in large part, on the classification of the Partnership
and the Subsidiary as partnerships for federal income tax purposes. Based on
certain representations by the General Partner, counsel to the Partnership is
of the opinion that, under current law, the Partnership and the Subsidiary will
continue to be classified as partnerships for federal income tax purposes.
However, this opinion of counsel is not binding on the Internal Revenue Service
(the "IRS") or any court and the IRS may challenge the classification of the
Partnership or the Subsidiary as a partnership. The law is not entirely clear
as to the proper method of allocation of income and loss in the case of the
issuance by a partnership of units having the characteristics of the Depositary
Units and Preferred Units. The Partnership Agreement provides that income will
be accrued to the Preferred Units as a "guaranteed payment" under Section
707(c) of the Internal Revenue Code of 1986, as amended (the "Code"), based on
the accrual of the liquidation preference. There is no assurance that the IRS
will continue to respect this treatment for tax purposes. In addition, certain
aspects of the allocation of taxable income and loss between existing holders
of Depositary Units and holders of Depositary Units issued upon exercise of
Rights are not entirely clear and may be subject to challenge by the IRS. Each
Depositary Unitholder will be taxed on the Unitholder's allocable share of the
Partnership's taxable income and gains and, with respect to the Preferred
Unitholders, accrued guaranteed payments, whether or not any cash is
distributed to the Unitholder. See "Risk Factors -- Certain Tax Considerations
- -- Tax Liabilities in Excess of Cash Distributions" and "Income Tax
Considerations -- Certain Federal Income Tax Considerations Relating to the
Partnership and Unitholders -- Allocation of Income and Loss."
Risks Associated with Real Estate Related Investments. The Partnership's
investment in properties will be subject to risks which may be beyond its
control, such as fluctuations in occupancy rates and operating expenses, as
well as defaults by tenants, including tenants filing for bankruptcy
protection. These in turn may be adversely affected by general and local
economic conditions, adverse use of adjacent or neighboring real estate, zoning
laws, over-supply of available properties, reduced employment in areas of
Partnership investments, reduced costs of operating competing properties,
increasing real property tax rates and environmental compliance requirements.
Risks Associated with Non-Real Estate Related Investments. The investment
objective of AREP with respect to non-real estate related investments is to
purchase undervalued securities, which may include, for
10
<PAGE>
example, high yield and neglected securities. As a result, AREP's investments
may be subject to significant amounts of business, financial, market and other
risks. See "Purpose of the Offering -- Investment Strategies."
Additional Considerations. The Partnership may utilize leverage in
connection with its investments which may have the effect of increasing the
risks of such investments. In recent years the Partnership has made no
distributions on its Depositary Units and has applied available cash flow toward
its operations, repayment of maturing indebtedness, tenant requirements, other
capital expenditures and the creation of cash reserves for contingencies facing
AREP, including environmental matters and scheduled lease expirations. For a
further discussion of these and certain other considerations, investors should
carefully review "Risk Factors" below.
Use of Proceeds
General. The General Partner has determined that it is in the best
interests of AREP and its Unitholders to increase the Partnership's available
liquidity so that AREP will be in a better position to take advantage of
investment opportunities and to further diversify its portfolio. Additionally,
the Partnership may elect to reduce the debt of certain properties where the
interest rate is considered to be in excess of current market rates. With the
proceeds from the Offering (estimated to be approximately $267,200,000 after
payment of offering expenses which are estimated to be approximately $600,000),
AREP intends to pursue investments involving raw-land development, debt or
equity securities of companies that may be undergoing restructuring and
properties that may require active asset management and significant capital
improvements, along with other investments described in this Prospectus. These
investments may not be readily financeable and may not generate immediate
positive cash flow for the Partnership. As such, they require AREP to maintain
a strong capital base to react quickly to these market opportunities as well as
to allow AREP the financial strength to develop or reposition these assets. See
"Purpose of the Offering" and "Use of Proceeds."
Substantial Fees to the General Partner and its Affiliates. The General
Partner and its affiliates may realize substantial fees in connection with the
acquisition, sale, financing, development and management of new properties
acquired by AREP. As development and other new properties are acquired,
developed, constructed, operated, leased and financed, the General Partner or
its affiliates may perform acquisition functions, including the review,
verification and analysis of data and documentation with respect to potential
acquisitions, and perform development and construction oversight and other land
development services, property management and leasing services, either on a
day-to-day basis or on an asset management basis, and may perform other
services and be entitled to fees and reimbursement of expenses relating
thereto, provided that, in accordance with the Partnership Agreement, the terms
of such transactions are fair and reasonable to AREP and are customary to the
industry. It is not possible to state precisely what role, if any, the General
Partner or any of its affiliates may have in the acquisition, development or
management of any new investments. Consequently, it is not possible to state
the amount of the income, fees or commissions the General Partner or its
affiliates might be paid in connection with the investment of the Offering
proceeds since the amount thereof is dependent upon the specific circumstances
of each investment, including the nature of the services provided, the location
of the investment and the amount customarily paid in such locality for such
services. However, Unitholders may expect that, subject to the specific
circumstances surrounding each transaction and the overall fairness and
reasonableness thereof to AREP, the fees charged by the General Partner and its
affiliates for the services described below generally will be within the ranges
set forth below:
o Property Management and Asset Management Services. To the extent that
AREP acquires any properties requiring active management (e.g., operating
properties that are not net-leased) or asset management services,
including on site services, it may enter into management or other
arrangements with the General Partner or its affiliates. Generally, it is
contemplated that under property management arrangements, the entity
managing the property would receive a property management fee (generally
3% to 6% of gross rentals for direct management, depending upon the
location) and under asset management arrangements, the entity managing the
asset would receive an asset management fee (generally .5% to 1% of the
appraised value of the asset for asset management services, depending upon
the location) in payment for its services and reimbursement for costs
incurred.
11
<PAGE>
o Brokerage and Leasing Commissions. AREP also may pay affiliates of the
General Partner real estate brokerage and leasing commissions (which
generally may range from 2% to 6% of the purchase price or rentals
depending on location; this range may be somewhat higher for problem
properties or lesser-valued properties).
o Lending Arrangements. The General Partner or its affiliates may lend
money to, or arrange loans for, AREP. Fees payable to the General Partner
or its affiliates in connection with such activities include mortgage
brokerage fees (generally .5% to 3% of the loan amount), mortgage
origination fees (generally .5% to 1.5% of the loan amount) and loan
servicing fees (generally .10% to .12% of the loan amount), as well as
interest on any amounts loaned by the General Partner or its affiliates to
AREP.
o Development and Construction Services. The General Partner or its
affiliates may also receive fees for development services, generally 1% to
4% of development costs, and general contracting services or construction
management services, generally 4% to 6% of construction costs.
As discussed herein, Icahn has confirmed to AREP that neither he nor any
of his affiliates will receive any fees from AREP in consideration for services
rendered in connection with non-real estate related investments by AREP.
Further, the General Partner and its affiliates may not receive duplicative
fees. AREP may determine to make investments in certain assets in which Icahn
or his affiliates have independent investments; in addition, AREP may enter
into other transactions with the General Partner, Icahn or their affiliates,
including, without limitation, buying and selling assets from or to the General
Partner, Icahn or their affiliates, and participating in joint venture
investments in assets with the General Partner, Icahn or their affiliates,
whether real estate or non-real estate related, provided the terms of all such
transactions are fair and reasonable to AREP. See "Risk Factors" and "Use of
Proceeds" for further information regarding the fees available to the General
Partner and its affiliates from properties acquired with the proceeds of the
Offering.
12
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Partnership and
its business before exercising any Rights. This Prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"). All forward-looking statements
included in this Prospectus are based on information available to the
Partnership on the date hereof and assumptions which the Partnership believes
are reasonable and the Partnership assumes no obligation to update any such
forward-looking statements. These forward-looking statements involve risks and
uncertainties. The Partnership's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. In evaluating the Partnership's business, prospective
investors should consider carefully the following factors in addition to the
other information set forth in this Prospectus.
Potential Substantial Dilution
Upon completion of the Offering contemplated hereby, holders of Depositary
Units who do not exercise their Basic Subscription Rights in full will own a
smaller proportional interest in the Partnership than would be the case if the
Offering had not been made, thereby reducing such holders' influence on matters
on which holders of Depositary Units are entitled to vote. Therefore, the only
way to avoid potential substantial dilution is for a Unitholder to exercise all
of its Basic Subscription Rights. See "-- Risks Associated with Purchase of the
Preferred Units." In addition, the Depositary Units have been priced at a
discount to the market price to attempt to make the Depositary Units attractive
to investors. The discount may result in a reduction in the market price of the
Depositary Units, however, the Partnership cannot predict what impact, if any,
the discount will have on the market price of the Depositary Units.
Control of the Partnership by Icahn
High Coast Limited Partnership (the "Guarantor") is a Delaware limited
partnership. The general partner of the Guarantor is American Property
Investors, Inc. ("API"), a Delaware corporation wholly owned by Icahn and the
general partner of the Partnership. The limited partners of the Guarantor are
ACF Industries, Incorporated ("ACF"), a New Jersey corporation, and Tortoise
Corp. ("Tortoise"), a New York corporation. Both ACF and Tortoise are
controlled by Icahn.
The Guarantor may purchase Rights in the Offering, in accordance with
applicable securities laws, solely with the intention of exercising such Rights
to purchase Depositary Units and Preferred Units for investment purposes. The
purchase and exercise of additional Rights will increase the Guarantor's pro
rata allocation of Depositary Units and Preferred Units in the
Over-Subscription Privilege if the number of Depositary Units and Preferred
Units subscribed for by Rights Holders (including the Guarantor) exercising the
Over-Subscription Privilege exceeds the number available.
As of the date hereof, Icahn beneficially owns 54.1% of the outstanding
Depositary Units and 88.2% of the outstanding Preferred Units. Upon completion
of the offering contemplated hereby, Icahn (through the Guarantor) will,
assuming no other Rights Holder exercises his Basic Subscription Rights,
acquire up to 20,600,000 additional Depositary Units (for a total of 74.6% of
the Depositary Units outstanding after giving effect to the Offering) and up to
5,150,000 additional Preferred Units (for a total of 96.5% of the Preferred
Units outstanding after giving effect to the Offering).
Under the Partnership Agreement, all decisions concerning the management
of the Partnership, including selection of the Partnership's investments and
the payment of distributions on the Depositary Units and the Preferred Units,
are made by the General Partner, which is wholly owned by Icahn. Unitholders
have no right or power to take part in the management of the Partnership. The
affirmative vote of Unitholders holding more than 75% of the total number of
all Depositary Units then outstanding, including Depositary Units held by the
General Partner and its affiliates, is required to remove the General Partner.
Thus, since Icahn, through the Guarantor, holds approximately 54.1% of the
Depositary Units outstanding, the General Partner will not be able to be
13
<PAGE>
removed pursuant the terms of the Partnership Agreement without Icahn's
consent. Moreover, under the Partnership Agreement, the affirmative vote of the
General Partner and Unitholders owning more than 50% of the total number of all
outstanding Depositary Units then held by Unitholders, including the Guarantor,
is required to approve, among other things, selling or otherwise disposing of
all or substantially all of the Partnership's assets in a single sale or in a
related series of multiple sales, dissolving the Partnership or electing to
continue the Partnership in certain instances, electing a successor general
partner, making certain amendments to the Partnership Agreement or causing the
Partnership, in its capacity as sole limited partner of the Subsidiary, to
consent to certain proposals submitted for the approval of the limited partners
of the Subsidiary. Accordingly, as the Guarantor holds, and, upon completion of
the Offering will continue to hold, in excess of 50% of the Depositary Units
outstanding, Icahn, through the Guarantor, has effective control over such
approval rights.
Trading Price of Depositary Units and Preferred Units
The trading price of the Depositary Units has increased substantially in
recent periods. On August 4, 1997, the last sales price of the Depositary
Units, as reported by the New York Stock Exchange Composite Tape (as reported
by The Wall Street Journal) was $11.875 while the highest sales price of the
Depositary units for the year ended December 31, 1996 was $9.375. Therefore,
while the Partnership intends to price the Depositary Units at a discount to
the current market price, there can be no assurance that the market price of
the Depositary Units will not decrease to historical levels thereby reducing or
eliminating any such discount.
The portion of the Subscription Price allocable to the Preferred Unit
represents the liquidation preference of the Preferred Unit of $10; the last
reported sales price on the NYSE for the Preferred Units was $7.50 on July 29,
1997. Therefore, the Preferred Units issued upon exercise of the Rights will be
subject to an immediate and substantial decrease in value from the allocable
portion of the Subscription Price. There can be no assurance that the trading
price of the Preferred Units will increase or will not further decrease in
future periods.
Registration Rights Granted to the Guarantor May Adversely Impact Market Price
In consideration of the Subscription Guaranty, the Guarantor has been
granted three demand and unlimited piggyback registration rights with respect
to all Units owned by it, including those Units to be acquired in the Offering.
These registration rights are set forth in a Registration Rights Agreement
dated the date hereof (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, the Partnership has agreed to pay any expenses
incurred in connection with a registration requested under the Registration
Rights Agreement. No prediction can be made as to the effect, if any, that
market sales of Units or the availability of Units for sale will have on the
market price of the Units prevailing from time to time. Nevertheless, sales of
substantial amounts of Units in the public market could adversely affect
prevailing market prices.
Risks Associated with Purchase of the Preferred Units
The Preferred Units offered hereby involve certain risks to investors,
including those mentioned above and the following:
Payment-In-Kind. The Preferred Units, by their terms, call for
distributions to be paid in kind as permitted under the partnership laws of the
State of Delaware. Consequently, holders of the Preferred Units will not
receive any payment from the Partnership in respect thereof unless such
securities are redeemed in accordance with the terms thereof.
No Anti-Dilution Protection. The Preferred Units have no preemptive rights
or anti-dilution protection. The Board of Directors of the General Partner has
the power, without any further action by the Unitholders, to issue additional
Units with such designations, preferences and relative, participating or other
special rights, powers and duties, including rights, powers and duties senior
to existing classes of Depositary Units or Preferred Units.
Limited Voting Rights. Under the Partnership Agreement, the holders of
Preferred Units will have no voting rights and will not be entitled to
participate in any decisions regarding the management of the Partnership except
that in the event that a distribution, which is to be paid in kind, is not made
to the holders of Preferred
14
<PAGE>
Units on any two Payment Dates (which Payment Dates need not be consecutive),
the holders of more than 50% of all outstanding Preferred Units, voting as a
class, shall be entitled to appoint two nominees for the Board of Directors of
the General Partner. Once elected, the nominees will be appointed to the Board
of Directors of the General Partner by Icahn. As directors, the nominees will,
in addition to their other duties, be specifically charged with reviewing all
future distributions to holders of Preferred Units. Such directors shall serve
until the full distributions accumulated on all outstanding Preferred Units
have been declared and paid or set aside for payment. Since the Guarantor
currently owns 88.2% of all outstanding Preferred Units, Icahn, through the
Guarantor, has effective control over any such appointment. In addition, Icahn,
as sole shareholder of the General Partner, effectively controls any decisions
with regard to whether distributions are made to the holders of Preferred
Units.
Redemption. The Preferred Units are subject to (i) redemption at the
option of the Partnership on any Payment Date commencing with the Payment Date
on March 31, 2000 and (ii) mandatory redemption by the Partnership on March 31,
2010. The redemption price is payable at the option of the Partnership either
in all cash or by issuance of additional Depositary Units in an amount equal to
the redemption price. While no prediction can be made as to the effect, if any,
that market sales of Depositary Units issued in redemption of the Preferred
Units, or the availability of such Depositary Units for sale, will have on the
market price of the Depositary Units, sales of substantial amounts of the
Depositary Units received upon redemption of the Preferred Units in the public
market could adversely affect prevailing market prices. See "Description of
Securities -- The Preferred Units -- Redemption." In addition, potential
investors should refer to "Risk Factors -- Certain Tax Considerations -- Tax
Liabilities in Excess of Cash Distributions" for further information regarding
the tax consequences of holding Preferred Units.
Broad General Partner Discretion in Use of Proceeds; Unspecified Investments
Other than a portion of the potential additional investment in
Stratosphere described herein, the Partnership currently has not identified any
specific investments for acquisition with the proceeds of the Offering and has
no specific use planned for a substantial portion of the net proceeds from the
Offering. As a consequence, the General Partner will have sole discretion to
allocate the proceeds to the purchase of assets which the other Unitholders
will have no opportunity to evaluate and may not deem desirable, and there can
be no assurance that the proceeds can or will yield a return. See "Recent
Events -- Investment in Stratosphere Corporation."
In evaluating potential acquisitions, the cash flow generated by an asset
will be a consideration but the Partnership may acquire properties or
securities that are not generating positive cash flow. This may impact cash
flow in the near term and there can be no assurance that any property or
security acquired by the Partnership will increase in value or generate
positive cash flow.
Substantial Fees to General Partner and its Affiliates
In connection with the real estate investments of the Partnership, the
General Partner and its affiliates may realize substantial fees, commissions
and other income from transactions involving the purchase, operation,
management, financing and sale of the Partnership's properties, subject to
certain limitations relating to properties acquired from the Predecessor
Partnerships in the Exchange. Some of such amounts may be paid regardless of
the overall profitability of the Partnership and whether any distributions have
been made to Unitholders. As new properties are acquired, developed,
constructed, operated, leased, financed and sold, the General Partner or its
affiliates may perform acquisition functions, development and construction
oversight and other land development services, property management and leasing
services, either on a day-to-day basis or on an asset management basis, and
other services and be entitled to fees and reimbursement of expenses relating
thereto, including property management fees, real estate brokerage and leasing
commissions, fees for financing either provided or arranged by the General
Partner and its affiliates, development fees, general contracting fees and
construction management fees. The terms of any transactions between AREP and
the General Partner or its affiliates must be fair and reasonable to AREP and
customary to the industry. However, the amount of any such income, fees or
commissions that the General Partner or its affiliates can expect to receive as
a result of the investment of proceeds of this Offering is not generally
determinable since the receipt and amount of such income, fees and commissions
will depend on the circumstances of each investment. Prospective investors
should refer to the more
15
<PAGE>
detailed discussion of the fees available to the General Partner and its
affiliates contained in "Use of Proceeds", including the probable ranges of
such fees and a further discussion of the reasons such fees are not currently
determinable.
Subject to the terms of the Partnership Agreement, the General Partner has
absolute discretion to act on behalf of the Partnership with respect to all
transactions with affiliates, and such transactions may not be the result of
arm's-length negotiations. The Audit Committee, which consists of members of
the Board of Directors of the General Partner not affiliated with the General
Partner except by virtue of such directorship, meets on an annual basis, or
more often if necessary, to review and approve any conflicts of interest which
may arise. The General Partner and its affiliates may not receive duplicative
fees. See "Use of Proceeds -- Fees to the General Partner and its Affiliates."
Management by Persons not Solely Devoted to AREP
Certain of the individuals who conduct the affairs of the General Partner,
and indirectly those of the Partnership, are and will in the future be
committed to the management of other entities that own real estate and make
investments and may be engaged in other business activities. Accordingly, such
individuals will not be devoting all of their professional time to the
management of the Partnership, and conflicts may arise between the interests of
the Partnership and the other entities or business activities in which such
individuals are involved. Affiliates of the General Partner are also engaged in
real estate and other business activities that may compete directly with the
Partnership. Conflicts of interest may arise in the future as such affiliates
and the Partnership may compete for the same assets, purchasers and sellers of
assets, lessees or financings.
Option Plan for Officers and Employees
AREP has adopted a Nonqualified Unit Option Plan (the "Plan") under which
options to purchase an aggregate of 1,416,910 Units may be granted to officers
and key employees of the General Partner and AREP who provide services to AREP.
To date, no options have been granted under the Plan.
Leveraged Investments
The Partnership generally intends to use leverage in connection with the
acquisition of certain assets. While the use of leverage increases the amount
of funds available for investment and the aggregate amount of depreciation
available to the Partnership, it also increases the risk of loss. As a result
of the use of leverage, a relatively slight decrease in revenues of a property
may materially and adversely affect the economic operation of the property. The
Partnership is not limited in the amount of leverage it may use with respect to
a particular property and may, under appropriate circumstances, finance 100% of
the purchase price of a property.
In connection with the acquisition of a property, the Partnership will
evaluate the financing of a property, the funds likely to be required to
service its debt and any eventual refinancing, the existing revenue levels
generated by such property and the revenue levels expected to be generated in
the future. There can be no assurance, however, that the property will meet its
debt service requirements, or that the Partnership will be able to refinance
such debt when and if necessary. Should the Partnership's revenues and
reserves, if any, be insufficient to service any of its debt, the Partnership
will be required to seek additional funds or suffer foreclosure. There can be
no assurance that additional funds will be available to the Partnership, nor
that, if a property is sold, the proceeds of the sale will be sufficient to pay
the balance due on the mortgage loan or other outstanding indebtedness to which
a property is subject. Foreclosure on any property could result in tax
liability to the Unitholders, without distribution of any cash proceeds to pay
such liability.
Use of borrowed funds to leverage acquisitions of securities can
exaggerate the effect of any increase or decrease in market value. Such
borrowings would be subject to interest costs which may not be recovered by
appreciation in value of the securities purchased.
Elimination of Distributions to Holders of Depositary Units
Over the recent years, the General Partner has decreased and, finally,
suspended the Partnership's distributions to holders of Depositary Units. On
March 26, 1997, AREP announced that no distributions on the Depositary Units
are expected to be made in 1997. The Partnership intends to continue to apply
available cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash
reserves for contingencies facing AREP, including environmental matters and
scheduled lease expirations.
16
<PAGE>
Certain Tax Considerations
There are tax considerations associated with the ownership and exercise of
the Rights. These principally relate to uncertainties as to whether the
Internal Revenue Service ("IRS") will agree with (i) the Partnership's
treatment of Preferred Units as equity, (ii) the amount and character of income
to holders of Preferred Units to reflect the accrual of liquidation preference
and (iii) the revaluation of the Partnership's properties upon issuance of new
Depositary Units and Preferred Units. See "Income Tax Considerations -- Certain
Federal Income Tax Considerations Relating to the Rights" and "Income Tax
Considerations -- Certain Federal Income Tax Considerations Relating to the
Partnership and Unitholders." Counsel to the Partnership has issued its opinion
as to the tax classification of the Partnership and the Subsidiary and the
classification of the Preferred Units as partnership interests for federal
income tax purposes. Counsel is unable to opine as to certain issues relating
to the Partnership's tax allocations, deduction of certain expenses and the
Unitholders' treatment of interest expense on any debt incurred to purchase
Preferred Units. See "Income Tax Considerations -- Legal Opinion."
In addition, there are tax considerations and certain risks associated
with an investment in the Partnership. These include:
Partnership Classification. Favorable tax treatment of the Partnership and
the Subsidiary depends, in large part, on the classification of the Partnership
and the Subsidiary as partnerships for federal income tax purposes. Counsel to
the Partnership is of the opinion that, under current law, the Partnership and
the Subsidiary will continue to be classified as partnerships for federal
income tax purposes. However, the opinion of counsel is not binding upon the
IRS or any court and the IRS may challenge the classification of the
Partnership or the Subsidiary as a partnership. Counsel's opinion is based, in
part, upon representations of the General Partner as to the sources of gross
income of the Partnership.
The Partnership will cease to be taxed as a partnership for federal income
tax purposes for taxable years beginning after December 31, 1997 unless, for
each year, at least 90% of the gross income of the Partnership and the
Subsidiary consists of certain qualifying income. The General Partner expects
that the Partnership will satisfy the 90% gross income requirement so as to
continue to be classified as a partnership. In addition, for taxable years
beginning before 1998, the Partnership will cease to be classified as a
partnership if it enters into a substantial new line of business and it fails
to satisfy the 90% gross income test. The General Partner has represented to
counsel that the Partnership has satisfied the 90% gross income test since its
formation in 1987. See "Income Tax Considerations -- Certain Federal Income Tax
Considerations Relating to the Partnership and Unitholders -- Partnership
Classification."
If either of the Partnership or the Subsidiary were to be reclassified as
an association taxable as a corporation for any year, such partnership would be
taxable on its profits at the applicable corporate income tax rates; income,
losses and credits would not be passed through to the Unitholders; and any
distributions to the Unitholders would be taxable as dividends (to the extent
of the current or accumulated earnings and profits of the Partnership or the
Subsidiary, as applicable) or treated as a return of capital to the extent of
the holder's basis in his Units. The cost of paying federal and possibly state
income taxes would be a significant liability to the Partnership or the
Subsidiary and would reduce any cash available for distribution to the
Unitholders.
Allocation of Partnership Income and Loss. The law is not entirely clear
as to the proper method of allocation of income and loss in the case of the
issuance by a partnership of units having the characteristics of the Preferred
Units. The Partnership Agreement provides that income will be accrued to the
Preferred Units as a "guaranteed payment" under Section 707(c) of the Internal
Revenue Code of 1986, as amended (the "Code") based on the accrual of the
liquidation preference. See "Income Tax Considerations -- Certain Federal
Income Tax Considerations Relating to the Partnership and Unitholders --
Allocation of Income and Loss." There is no assurance that the IRS will respect
this treatment for tax purposes or will agree with the Partnership's
determination of the amount of the guaranteed payment. In addition, certain
aspects of the allocation of taxable income and loss between existing
Depositary Unitholders and holders of Depositary Units issued upon exercise of
Rights are not entirely clear and may be subject to challenge by the IRS. See
"Income Tax Considerations -- Certain Federal Income Tax Considerations
Relating to the Partnership and Unitholders -- Allocation of Income and Loss."
If the IRS were to dispute the Partnership's allocation of income or losses,
the result would be an increase in the income or reduction of losses to some
Unitholders and a decrease in income or increase in losses of other
17
<PAGE>
Unitholders for the taxable years involved. Affected Unitholders may be
required to amend their personal tax returns in the event of such adjustments.
Any costs of such amendment or the payment of additional taxes and interest or
penalties would be the sole responsibility of the affected Unitholder.
Tax Liabilities in Excess of Cash Distributions. Each Unitholder will be
taxed on the Unitholder's allocable share of the Partnership's taxable income
and gains and accrued guaranteed payments, whether or not any cash is
distributed to the Unitholder. For example, sales of properties and other
investments may result in taxable income to the Partnership without resulting
cash distributions being made to Unitholders, and therefore, Unitholders may
have taxable income without the current receipt of cash if the Partnership
continues to not make cash distributions while generating taxable income from
operations or from the sale of properties. Consequently, a Unitholder's tax
liability with respect to his share of Partnership taxable income may exceed
cash actually distributed to him in a given taxable year. The Partnership has
had net taxable income but has not made cash distributions in recent years.
Consequently, a Depositary Unitholder has had net taxable income attributable
to the Partnership for those tax years but has not received cash distributions.
This situation may continue in the future. In addition, holders of Preferred
Units generally will not receive cash distributions unless the Preferred Units
are redeemed for cash. Such holders will have taxable income and a tax
liability associated with Preferred Units without receiving corresponding
distributions of cash from the Partnership with which to pay the tax. See
"Income Tax Considerations -- Legal Opinion."
Liability of Limited Partners
The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some states. For example, if it were determined that the Partnership had
been conducting business in any state without compliance with the applicable
limited partnership statute, or that the right or the exercise of the right by
holders of limited partner interests as a group to remove or replace the
General Partner, or to make certain amendments to the Partnership Agreement,
constituted participation in "control" of the Partnership's business, then the
holders of limited partner interests could be held liable for the Partnership's
obligations to the same extent as a general partner. See "Description of
Partnership Agreement -- Liability of General Partner and Unitholders" for a
discussion of the limitations on liability and the implications thereof to a
Unitholder.
Competition
Competition in leasing and selling properties remains strong as current
economic and real estate conditions have made it more difficult for AREP to
re-let upon favorable terms properties vacated by tenants. Many of AREP's
tenants have rights to renew at prior rental rates. AREP's experience is that
tenants will renew below market leases and permit leases that are less
marketable or at above market rents to expire, making it difficult for AREP to
re-let or sell on favorable terms properties vacated by tenants. The real
estate market continues to be weak in certain areas of the country,
particularly in the retail category. The ongoing corporate consolidations have
contributed to increasing vacancy rates and oversupply for retail tenants. Net
leases representing approximately 29% of AREP's net annual rentals from its
portfolio are with tenants in the retail sector, some of which are experiencing
cash flow difficulties and restructurings.
Competition for investments of the type AREP intends to pursue has been
increasing in recent years, including that from a number of investment funds
and REITS that have raised additional capital for such investments, resulting
in, among other things, higher prices for such investments. Such investments
have become more competitive to source and the increased competition may have
an adverse impact on the spreads and AREP's ability to find quality assets at
appropriate yields.
Risks Associated with Real Estate Investments
General. The Partnership's investment in properties will be subject to
risks which may be beyond its control, such as fluctuations in occupancy rates
and operating expenses, as well as defaults by tenants, including tenants
filing for bankruptcy protection. These in turn may be adversely affected by
general and local economic conditions, adverse use of adjacent or neighboring
real estate, zoning laws, over-supply of available properties, reduced
employment in areas of Partnership investments, reduced costs of operating
competing properties,
18
<PAGE>
increasing real property tax rates and environmental compliance requirements.
Since certain costs of real estate ownership (principally debt service, real
estate taxes and insurance) do not generally decrease with decreases in
occupancy rates, the cost of operating a property may exceed its income.
Most of the Partnership's real estate assets continue to be net-leased to
single corporate tenants, and as these leases expire and the properties are
re-let, there can be no assurance that the terms of the leases will be as
favorable. By the end of the year 2000, net leases representing approximately
23% of AREP's net annual rentals from its portfolio will be due for renewal,
and by the end of the year 2002, 41% of such rentals will be due for renewal.
To the extent that such leases are not renewed, the Partnership may be required
to expend a significant amount of management time and capital expense in
attempting to re-let and sell the unleased properties. In addition, AREP 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. See "Purpose of the Offering" and "Use of Proceeds" for further
details.
Development Properties. The Partnership expects to invest in undeveloped
land and certain development properties. Undeveloped land and development
properties involve more risk than properties on which development has been
completed. Undeveloped land and development properties do not generate any
operating revenue while costs are incurred to develop the properties. In
addition, undeveloped land and development properties incur expenditures prior
to completion, including property taxes and development costs. Also,
construction may not be completed within budget or as scheduled or projected
rental levels or sales prices may not be achieved and other unpredictable
contingencies beyond the control of the Partnership could occur. The
Partnership will not be able to recoup any of such costs until such time as
these properties, or parcels thereof, are either disposed of or developed into
income-producing assets. Accordingly, the greater the length of time it takes
to develop or dispose of these properties, or such parcels, the greater will be
the costs incurred by the Partnership without the benefit of income from these
properties, which may adversely affect the ability of the Partnership to
successfully develop such properties. Furthermore, the ultimate disposition
price of these properties may be less than the costs incurred by the
Partnership with respect thereto.
Financing Restrictions. Many financial institutions have continued to
limit their real estate lending activities and continue to be more conservative
with respect to the loans they are willing to make. For example, banks and
other financial institutions continue to limit the types of properties they are
willing to finance, have been performing greater levels of due diligence which
increases the time and expense of obtaining financing and are requiring larger
equity positions.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous substances
released on or in its property. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
release of such hazardous substances. If any such substances were found in or
on any property invested in by AREP, AREP could be exposed to liability and be
required to incur substantial remediation costs. The presence of such
substances or the failure to undertake proper remediation may adversely affect
the ability to finance, refinance or dispose of such property. AREP will
generally require that properties in which AREP invests have been subject to a
Phase I environmental audit, which involves record review, visual site
assessment and personnel interviews, but does not involve invasive procedures
such as air and soil sampling or groundwater analysis. There can be no
assurance, however, that these audits will reveal all potential liabilities or
that future property uses or conditions or changes in applicable environmental
laws and regulations or activities at nearby properties will not result in the
creation of environmental liabilities with respect to a property.
Risks Associated With Non-Real Estate Related Investments
The investment objective of AREP with respect to non-real estate related
investments is to purchase undervalued securities, so as to maximize total
returns consisting of current income and/or capital appreciation. Undervalued
securities are those which AREP believes may have greater inherent value than
indicated by their then current trading price and/or may lend themselves to
"activist" shareholder involvement. These securities may be undervalued due to
market inefficiencies, may relate to opportunities wherein economic or market
trends have not been identified and reflected in market value, or may include
those in complex or not readily followed securities.
19
<PAGE>
Since AREP will concentrate on undervalued securities, which may include,
for example, high yield securities and neglected securities, AREP's investments
may be subject to significant amounts of business, financial, market and other
risks. There can be no assurance that AREP will correctly evaluate such
investments and their attendant risks or that such investments will be
profitable to AREP. The proportion of the Partnership's assets invested in each
type of security or any single issuer or industry will not be limited. In
addition, the securities in which AREP may invest are subject to the following
inherent risks:
Equity Securities. Equity securities fluctuate in value, often based on
factors unrelated to the issuer of the securities, and such fluctuations can be
pronounced.
Fixed-Income Securities. Even though interest-bearing securities are
investments which may promise a stable stream of income, the prices of such
securities generally are inversely affected by changes in interest rates and,
therefore, are subject to the risk of market price fluctuations. The value of
fixed-income securities also may be affected by changes in the credit rating or
financial condition of the issuer.
Lower Rated Securities. AREP may invest a portion of its funds in higher
yielding (and, therefore, higher risk) securities (commonly known as junk
bonds). Such investments generally may be subject to certain risks with respect
to the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated debt securities. The secondary market for these
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for AREP to sell certain securities
or could result in lower prices.
Foreign Securities. Foreign securities markets generally are not as
developed or efficient as those in the United States. Securities of some
foreign issuers are less liquid and more volatile than securities of comparable
U.S. issuers. Similarly, volume and liquidity in most foreign securities
markets are less than in the United States and, at times, volatility of price
can be greater than in the United States. Since foreign securities often are
purchased with and payable in currencies of foreign countries, the value of
these assets measured in U.S. dollars may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations.
Use of Leverage. Use of borrowed funds to leverage acquisitions can
exaggerate the effect of any increase or decrease in market value. Such
borrowings would be subject to interest costs which may not be recovered by
appreciation in value of the securities purchased.
Use of Derivatives. While to date AREP has not done so, AREP may use
derivatives ("Derivatives"), which are financial instruments which derive their
performance, at least in part, from the performance of an underlying asset,
index or interest rate, such as options and mortgage-related securities. While
Derivatives can be used effectively in furtherance of AREP's investment
objectives such as by providing a hedging technique, under certain market
conditions they can increase the volatility or decrease the liquidity of AREP's
assets.
20
<PAGE>
THE PARTNERSHIP
AREP is primarily engaged in the business of acquiring and managing real
estate and activities related thereto. Such acquisitions may be accomplished by
purchasing assets outright or by acquiring securities of entities which hold
significant real estate related assets. Historically, the properties owned by
AREP have been primarily office, retail, industrial, residential and hotel
properties. Most of the real estate assets currently owned by AREP were
acquired from the Predecessor Partnerships and such assets generally are
net-leased to single, corporate tenants. As of June 30, 1997, AREP owned 218
separate real estate assets primarily consisting of fee and leasehold interests
in 35 states.
AREP's primary real estate investment strategy in recent periods has been
to seek to acquire undervalued assets including residential development
projects, land parcels for future residential and commercial development,
commercial properties, non-performing loans and securities of entities which
own, manage or develop significant real estate assets, including limited
partnership units and securities issued by real estate investment trusts. In
addition to holding real property, AREP may consider the acquisition or seek
effective control of land development companies and other real estate operating
companies which may have significant assets under development and may enhance
its ability to develop and manage AREP's properties. AREP may originate or
purchase mortgage loans including non-performing mortgage loans. AREP will
normally acquire non-performing mortgage loans with a view to acquiring title
to or control over the underlying properties. AREP also may retain purchase
money mortgages in connection with its sale of portfolio properties, with such
terms as the General Partner deems appropriate at the time of sale. Certain of
AREP's investments may be owned by special purpose subsidiaries formed by AREP
or by joint ventures (including joint ventures with affiliates of the General
Partner).
In August 1996, AREP amended the Partnership Agreement to permit non-real
estate investments which, while AREP continues to seek undervalued investment
opportunities in the real estate market, will permit it to take advantage of
investment opportunities it believes exist outside of the real estate market in
order to seek to maximize Unitholder value and further diversify its assets.
Investments in non-real estate assets will consist of equity and debt
securities of domestic and foreign issuers that are not necessarily engaged as
one of their primary activities in the ownership, development or management of
real estate, and may include, for example, lower rated securities which may
provide the potential for higher yields and therefore may entail higher risk.
AREP will conduct these activities in such a manner so as not to be deemed an
investment company under the 1940 Act. Generally, this means that no more than
40% of AREP's total assets will be invested in securities. In addition, AREP
will structure its investments so as to continue to be taxed as a partnership
rather than as a corporation under the applicable publicly-traded partnership
rules of the Internal Revenue Code.
All decisions with respect to the improvement, expansion, acquisition,
disposition, development, management, financing or refinancing of properties or
other investments are at the sole discretion of the General Partner. Where
opportunities exist, AREP may make such investments with the proceeds of the
Offering or with sale or refinancing proceeds which AREP retains for
reinvestment rather than distributing to Unitholders. See "Description of
Partnership Agreement -- Distributions of Cash Flow to Depositary Unitholders
- -- Distributions from Sales and Refinancings."
AREP was organized in the State of Delaware on February 17, 1987. Its
principal business address is 100 South Bedford Road, Mt. Kisco, New York 10549
and its telephone number is (914) 242-7700. AREP's general partner is American
Property Investors, Inc. (the "General Partner"), a Delaware corporation which
is wholly owned by Carl C. Icahn ("Icahn"). AREP conducts its business through
a subsidiary limited partnership, American Real Estate Holdings Limited
Partnership (the "Subsidiary"). AREP owns a 99% limited partnership interest in
the Subsidiary. The General Partner acts as the general partner of the
Subsidiary and has a 1% general partnership interest in both AREP and the
Subsidiary.
Recent Events
Environmental Litigation. Lockheed Missile and Space Company ("Lockheed"),
a tenant of AREP's leasehold property in Palo Alto, California, has entered
into a consent decree with the California Department of Toxic Substances
("CDTS") to undertake certain environmental remediation at this property.
Lockheed has estimated
21
<PAGE>
that the environmental remediation costs may be up to approximately
$14,000,000. In a non-binding determination by CDTS, Lockheed was found
responsible for approximately 75% of such costs and the balance was allocated
to other parties. AREP was allocated no responsibility for any such costs.
Lockheed has served a notice that it intends to exercise its statutory
right to have its liability reassessed in a binding arbitration proceeding.
AREP understands that Lockheed may attempt to have allocated to AREP and to
AREP's ground-lessor (which may claim a right of indemnity against AREP)
approximately 9% and 17%, respectively, of the total remediation costs. AREP
believes that it has no liability for any of such costs and, in any proceeding
in which such liability is asserted against AREP, AREP intends to contest such
liability vigorously. In the event any of such liability is allocated to AREP,
AREP intends to seek indemnification for any such liability from Lockheed in
accordance with its lease. In April 1995 Lockheed began ground water
remediation at the leasehold property.
Investment in Stratosphere Corporation. In June 1997, AREP invested
approximately $42.8 million to purchase approximately $55 million face value of
14 1/4% First Mortgage Notes, due May 15, 2002, issued by the Stratosphere
Corporation ("Stratosphere"), which has approximately $203 million of such
notes outstanding. In addition, an affiliate of Icahn currently owns
approximately $39 million face value of the Stratosphere First Mortgage Notes.
Stratosphere owns and operates the Stratosphere Tower, Casino & Hotel, a
destination resort complex located in Las Vegas, Nevada containing a 97,000
square foot casino and 1,444 hotel rooms and suites and other attractions.
Stratosphere and its wholly-owned subsidiary, Stratosphere Gaming Corp., filed
voluntary petitions on January 27, 1997, for Chapter 11 Reorganization pursuant
to the United States Bankruptcy Code. Stratosphere and its subsidiary are
acting as debtors in possession on behalf of their respective bankrupt estates
and are authorized as such to operate their business subject to bankruptcy
court supervision. Stratosphere did not make the required November 15, 1996
interest payment due on the First Mortgage Notes and does not intend to accrue
any interest on this debt subsequent to the bankruptcy filing until a plan of
reorganization is confirmed by the bankruptcy court.
An affiliate of Icahn and AREP together submitted a proposal for the
restructuring of Stratosphere which would involve additional investments in
Stratosphere by AREP and such affiliate of Icahn. Under the proposal, each
holder of the Stratosphere First Mortgage Notes (the "Original Notes") will
have the right to participate in a rights offering by Stratosphere to purchase
units consisting of new mortgage notes and common stock of Stratosphere. The
aggregate amount sought to be raised in the proposed offering is $200 million.
AREP and the affiliate have proposed to purchase their pro rata portion of the
Stratosphere units and any units not otherwise purchased by other noteholders
in the offering. The proceeds of the offering would be used, among other
things, to pay certain claims of Stratosphere's creditors upon consummation of
a plan of reorganization. Holders of the Original Notes would be entitled to
receive their pro rata portion of $100 million of offering proceeds in
satisfaction of their claims. The proposal also contemplates that, if the
proposal is accepted and approved, but the offering never consummated (except
for the failure of AREP and the affiliate to perform their obligations), AREP
and the affiliate would be entitled to receive a $2 million termination fee.
AREP understands that Stratosphere has been experiencing negative cash flow and
there can be no assurance that any plan of reorganization of Stratosphere out
of bankruptcy will prove to be successful or that Stratosphere will generate
positive cash flow in the future.
AREP and the affiliate of Icahn understand that the Board of Directors of
Stratosphere is in favor of the proposal for the reorganization of Stratosphere
and its wholly-owned subsidiary. As currently contemplated, the proposal would
involve a net additional expenditure by AREP of up to approximately $75
million, depending on the percentage of Stratosphere noteholders that
participate in Stratosphere's proposed rights offering. Stratosphere's Board of
Directors has conveyed its intention to work with AREP and the affiliate of
Icahn towards the negotiation of definitive documentation, including a plan of
reorganization. The consummation of any such plan of reorganization would be
subject to a number of conditions, including the completion of plan related
documentation, confirmation by the bankruptcy court, the receipt of all
necessary regulatory approvals and other customary closing conditions.
AREP anticipates that if such transaction is pursued and consummated AREP
and the affiliate of Icahn would enter into a joint venture regarding the
Stratosphere investment. Such joint venture would be managed by the affiliate
of Icahn on terms fair and reasonable to AREP, and AREP's investment would be
structured under applicable regulatory requirements.
22
<PAGE>
Icahn Named Chairman of Marvel Entertainment. On June 20, 1997, Carl C.
Icahn was named Chairman of the Board of Directors of Marvel Entertainment
Group Inc. ("Marvel"), a leading creator, publisher and distributor of youth
entertainment products for domestic and international markets. Marvel is listed
on the NYSE under the symbol "MRV."
THE OFFERING
Terms of the Offer
For the purposes of this Prospectus, the Partnership has assumed 5,150,000
Rights will be issued and the aggregate number of Depositary Units and
Preferred Units have been computed accordingly. However, there can be no
assurance that 5,150,000 Rights will be issued, due to mathematical rounding
computations. Each Record Date Holder is being issued one Right for each five
Depositary Units owned on the Record Date. The number of Rights issued to a
Record Date Holder of a number of Depositary Units not divisible by five is
determined by multiplying the number of Depositary Units held by such Record
Date Holder on the Record Date by .2 and then rounding up to the nearest whole
number if the fractional amount is greater than or equal to .5 and rounding
down to the nearest whole number if the fractional amount is less than .5. In
the case of Depositary Units held of record by any firm that is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., or a commercial bank or a trust company or other
person that holds Depositary Units as nominee for more than one beneficial
owner (each, a "Nominee Holder"), the number of Rights issued to such Nominee
Holder will be adjusted to permit rounding up of the Rights to be received by
the beneficial owners for whom it is the holder of record only if such Nominee
Holder provides to the Partnership on or before the close of business on
September 8, 1997 written representation of the number of Rights required for
such rounding. No fractional Rights will be issued in this Offering. The Rights
entitle the holders thereof to acquire at the Subscription Price four
Depositary Units and one Preferred Unit for each Right held. The Rights are
evidenced by Subscription Certificates, which will be mailed to Record Date
Holders other than Foreign Record Date Unitholders.
Completed Subscription Certificates may be delivered to the Subscription
Agent (described below) at any time during the Subscription Period, which
commences August 13, 1997 and ends at 5:00 p.m., New York City time, on
September 11, 1997, unless extended by the Partnership. All Rights may be
exercised immediately upon receipt and until 5:00 p.m., New York City time, on
the Expiration Date (as defined herein).
Rights may be exercised by completing a Subscription Certificate and
delivering it, together with payment in full, either by means of a notice of
guaranteed delivery or a check, to the Subscription Agent. If the Rights Holder
chooses to send a Subscription Certificate, such certificate must be
accompanied by payment in full. The method by which Rights may be exercised and
Depositary Units and Preferred Units paid for is set forth under " -- Exercise
of Rights" and "-- Payment for Securities" below. An example demonstrating the
exercise of Rights, including the Over-Subscription Privilege, is set forth
under "The Offering -- Example of Exercise of Rights and the Over-Subscription
Privilege."
The Rights are freely transferable and will be listed on the NYSE. There
can be no assurance, however, that a market for the Rights will develop. See
"-- Sale of Rights."
The Partnership does not have the right to withdraw this Offering after
the Rights have been distributed.
Subscription Price
The Subscription Price for Depositary Units and Preferred Units subscribed
for through the exercise of Basic Subscription Rights and the Over-Subscription
Privilege will be $52, of which $42 is allocable to the Depositary Units and
$10 is allocable to the Preferred Unit.
No Modification or Revocation
ONCE A HOLDER OF RIGHTS HAS PROPERLY EXERCISED ITS BASIC SUBSCRIPTION
RIGHTS AND THE OVER-SUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE MODIFIED
OR REVOKED.
23
<PAGE>
Expiration of Offering
This Offering will expire at 5:00 p.m., New York City time, on September
11, 1997, unless extended by the Partnership (the "Expiration Date"). Rights
will expire on the Expiration Date and thereafter may not be exercised.
Subscription Agent
The Subscription Agent is Registrar and Transfer Company, a New York
corporation. The Subscription Agent is not affiliated with either the
Partnership or Icahn. The Subscription Agent will receive for its
administration, processing, invoicing and other services as subscription agent,
a fee estimated to be approximately $30,000, including reimbursement for all
out-of-pocket expenses related to this Offering. Questions regarding the
Subscription Certificates should be directed to the Subscription Agent at (800)
368-5948; Rights Holders may also consult their brokers or nominees. Signed
Subscription Certificates (see Appendix A) should be sent by mail, hand,
express mail or overnight courier, together with payment of the Subscription
Price in full to Registrar and Transfer Company, 10 Commerce Drive, Cranford,
New Jersey 07016, Attention: Reorg. Department. See "-- Payment for
Securities."
Any questions or requests for assistance may be directed to the
Subscription Agent at (800) 368-5948 or the Partnership at (800) 255-2737.
Over-Subscription Privilege
If less than all of the Basic Subscription Rights are exercised,
Depositary Units and Preferred Units not subscribed for by Exercising Rights
Holders will be offered, by means of the Over-Subscription Privilege, to
Exercising Rights Holders who wish to acquire additional Depositary Units and
Preferred Units. The Over- Subscription Privilege may be exercised by any
Rights Holder who exercised any of his Basic Subscription Rights. Depositary
Units and Preferred Units purchased pursuant to the Over-Subscription Privilege
must be purchased as a unit consisting of four Depositary Units and one
Preferred Unit and may not be subscribed for separately. Rights Holders should
indicate, on the Subscription Certificate which they submit with respect to the
exercise of their Basic Subscription Rights, how many additional Units they are
willing to acquire pursuant to the Over-Subscription Privilege. If all Basic
Subscription Rights are exercised, the Over-Subscription Privilege will not be
available.
The available Depositary Units and Preferred Units will be allocated pro
rata among those who oversubscribed according to the aggregate number of Basic
Subscription Rights exercised. The percentage of remaining Depositary Units and
Preferred Units each Rights Holder may acquire may be rounded up or down to
result in delivery of whole Depositary Units and Preferred Units. The
allocation process may involve a series of allocations in order to assure that
the total number of Depositary Units and Preferred Units available pursuant to
the Over- Subscription Privilege is distributed on a pro rata basis. In the
event a Rights Holder exercising the Over- Subscription Privilege is allocated
less than the number of Depositary Units and Preferred Units than such Holder
subscribed for, excess subscription payments will be promptly refunded. See "--
Payment for Securities" below. An example demonstrating the exercise of Rights,
including the Over-Subscription Privilege, is set forth under "The Offering --
Example of Exercise of Rights and the Over-Subscription Privilege."
Subscription Guaranty
The Guarantor. The Guarantor is a Delaware limited partnership. The
general partner of the Guarantor is API. The limited partners of the Guarantor
are ACF, a company primarily engaged in the full service leasing, selling and
manufacture of special purpose covered hopper and tank railcars, and Tortoise,
a wholly-owned subsidiary of ACF through which ACF from time to time conducts
certain of its investment activities, including the acquisition of debt and
equity securities of companies engaged in businesses related or unrelated to
ACF's. Both ACF and Tortoise are controlled by Icahn. ACF, or an affiliate
thereof, has agreed to make a cash contribution to the Guarantor in an amount
sufficient to permit the Guarantor to exercise all Rights issued to it and to
fulfill its obligations under the Subscription Guaranty.
24
<PAGE>
The Guarantor which holds 13,895,712 Depositary Units, representing
approximately 54.1% of the outstanding Depositary Units, and 1,920,945
Preferred Units, representing approximately 88.2% of the outstanding Preferred
Units, has agreed, subject to certain conditions contained in the Subscription
Guaranty Agreement, (i) to subscribe for and purchase 11,116,568 Depositary
Units and 2,779,142 Preferred Units through the exercise of its Basic
Subscription Rights and (ii) to subscribe for all other Depositary Units and
Preferred Units pursuant to the Over-Subscription Privilege, and, subject to
proration as described above, to purchase such additional Depositary Units and
Preferred Units. If no Rights are exercised by Rights Holders other than the
Guarantor, the Guarantor would beneficially own 34,495,712 Depositary Units (or
approximately 74.6% of the then outstanding Depositary Units) and 7,070,945
Preferred Units (or approximately 96.5% of the then outstanding Preferred
Units). The Guarantor will receive certain registration rights with respect to
its Units for providing the Subscription Guaranty but will not otherwise be
compensated. See "-- Registration Rights Agreement." The terms of such
Subscription Guaranty and the registration rights were reviewed and approved by
the Audit Committee. In approving the terms of the Subscription Guaranty, the
Audit Committee considered, among other things, the nature and terms of the
securities being offered pursuant to the Offering and the possibility that the
Guarantor may increase its ownership in the Partnership at a discount to the
market price. The Audit Committee concluded that given the business
opportunities available to the Partnership and its related requirement for cash
to take full advantage of such opportunities, as well as the uncertainty of
market conditions which might impact the success of the Offering were the
Subscription Guaranty not in place and the fact that the Subscription Guaranty
does not permit the Guarantor to acquire Units in the Offering except on the
same terms upon which other Unitholders may acquire Units, the overall benefits
to be received by the Partnership as a result of the Subscription Guaranty
warranted approval of such arrangement. The members of the Audit Committee are
Alfred D. Kingsley, William A. Leidesdorf and Jack G. Wasserman. Messrs.
Kingsley, Leidesdorf and Wasserman are not otherwise affiliated with the
General Partner or any of its affiliates, including the Guarantor and Icahn.
As a result of the Subscription Guaranty, assuming the conditions in the
Subscription Guaranty Agreement are satisfied, the Partnership is assured of
receiving an amount equal to the amount that would have been raised had all
Basic Subscription Rights been exercised in full, approximately $267,800,000
assuming the issuance of 5,150,500 Rights (the "Guaranteed Amount").
The Partnership has been advised by the Guarantor that the Guarantor
intends to acquire Units in connection with the Offering solely for investment
purposes.
Subscription Guaranty Agreement. Upon the terms and subject to the
conditions contained in a Subscription Guaranty Agreement, dated the date
hereof (the "Subscription Guaranty Agreement"), the Guarantor has agreed (i) to
subscribe for and purchase 11,116,568 Depositary Units and 2,779,142 Preferred
Units through the exercise of its Basic Subscription Rights and (ii) to
subscribe for all other Depositary Units and Preferred Units pursuant to the
Over-Subscription Privilege (the "Unsubscribed Units"), and, subject to
proration as described above, to purchase such additional Depositary Units and
Preferred Units.
The Subscription Guaranty Agreement provides that the obligation of the
Guarantor to pay for and accept delivery of the Unsubscribed Units is subject
to certain conditions, including, without limitation, the conditions that (i)
no stop order suspending the effectiveness of the Registration Statement is in
effect, (ii) no proceedings for such purpose have been instituted by the
Commission, (iii) the Partnership has not been advised by the Commission that
it intends to instigate an action or proceeding against the Partnership, either
administrative or judicial for the purpose of issuing a stop order suspending
the effectiveness of the Registration Statement, (iv) the Partnership shall not
have terminated the Offering, (v) no war or other crisis or adverse change in
the financial markets (as described in the Subscription Guaranty Agreement)
shall have occurred, which, in the sole judgment of the Guarantor, make it
impracticable or inadvisable to proceed with the Offering or the fulfillment of
the Guarantor's obligations under the Subscription Guaranty Agreement and (vi)
certain legal matters are approved by counsel to the Guarantor. The Guarantor
is obligated to take and pay for all of the Unsubscribed Units if any are
purchased pursuant to the Subscription Guaranty Agreement.
Delivery and payment for the Unsubscribed Units purchased by the Guarantor
shall be on the third Business Day after written notice is given by the
Partnership or the Subscription Agent to the Guarantor of the number and
aggregate purchase price of the Unsubscribed Units the Guarantor is obligated
to purchase pursuant to the exercise of the Over-Subscription Privilege.
25
<PAGE>
No fee is being paid to the Guarantor for the Subscription Guaranty,
although any Units held by the Guarantor will be subject to certain
registration rights. See "-- Registration Rights Agreement." In addition, the
Partnership has agreed to reimburse the Guarantor for certain of its
accountable expenses in connection with the Offering in the event the
Subscription Guaranty Agreement is terminated in accordance with its terms.
The Partnership and the Guarantor have agreed to indemnify each other
against certain liabilities, including liabilities under the federal securities
laws.
Purchase of Rights by Guarantor. The Guarantor may purchase Rights in the
Offering, in accordance with applicable securities laws, solely with the
intention of exercising such Rights to purchase Depositary Units and Preferred
Units for investment purposes. The purchase and exercise of additional Rights
will increase the Guarantor's pro rata allocation of Depositary Units and
Preferred Units in the Over-Subscription Privilege if the number of Depositary
Units and Preferred Units subscribed for by Rights Holders (including the
Guarantor) exercising the Over-Subscription Privilege exceeds the number
available.
Registration Rights Agreement. Pursuant to the Registration Rights
Agreement, the Guarantor has been granted three demand and unlimited piggyback
registration rights with respect to all Units owned by it, including those
Units to be acquired in the Offering. The Partnership has agreed to pay any
expenses incurred in connection with a registration requested under the
Registration Rights Agreement. No prediction can be made as to the effect, if
any, that market sales of Units or the availability of Units for sale will have
on the market price of the Units prevailing from time to time. Nevertheless,
sales of substantial amounts of Units in the public market could adversely
affect prevailing market prices.
Sale of Rights
The Rights are transferable until the close of business on the last
Business Day prior to the Expiration Date. The Rights will be listed on the
NYSE under the symbol "ACP.RT" and may be sold over the NYSE through the usual
investment channels. Although there can be no assurance that a market for the
Rights will develop, trading in the Rights on the NYSE may be conducted until
the close of trading on the last Business Day prior to the Expiration Date.
Trading of the Rights on the NYSE will be conducted on a when issued basis from
August 11, 1997 through August 13, 1997, and on a regular way basis from August
14, 1997 through the last Business Day prior to the Expiration Date. Rights
Holders are urged to obtain a recent trading price for the Rights on the NYSE
from their broker, bank, financial adviser or the financial press. The
Partnership is not responsible if Rights cannot be sold and has not guaranteed
any minimum sales price for the Rights.
In addition, the Rights evidenced by a single Subscription Certificate may
be transferred in whole or in part by delivering to the Subscription Agent a
Subscription Certificate properly endorsed for transfer, with instructions to
register such portion of the Rights evidenced thereby in the name of the
transferee and to issue a new Subscription Certificate to the transferee
evidencing such transferred Rights. If less than all the Rights evidenced by a
Subscription Certificate are transferred, a new Subscription Certificate
evidencing the balance of the Rights will be issued to the transferring Rights
Holder or, if the transferring Rights Holder so instructs, to an additional
transferee. Transfers will require a signature guarantee by a participant in a
medallion guarantee program acceptable to the Subscription Agent.
Rights Holders wishing to transfer all or a portion of their Rights as
provided in the immediately preceding paragraph, should allow up to three
Business Days prior to the Expiration Date (the "Guaranteed Transfer Date") for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to any retained Rights; and (iii) the Rights evidenced
by such new Subscription Certificate to be exercised or sold by the recipients
thereof. Neither the Partnership nor the Subscription Agent shall have any
liability to a transferee or transferor of Rights if Subscription Certificates
are not received on or prior to the Guaranteed Transfer Date.
Except for the fees charged by the Subscription Agent (which will be paid
by the Partnership as described above), all commissions, fees and other
expenses (including brokerage commissions and transfer taxes) incurred in
connection with the purchase, sale or exercise of Rights will be for the
account of the transferor of the Rights, and none of such commissions, fees or
expenses will be paid by the Partnership or the Subscription Agent.
26
<PAGE>
The Rights will be eligible for transfer through, and the exercise of the
Basic Subscription Rights (but not the Over-Subscription Privilege) may be
effected through, the facilities of The Depository Trust Company ("DTC");
Rights exercised through DTC are referred to as "DTC Exercised Rights." The
holder of a DTC Exercised Right may participate in the Over-Subscription
Privilege in respect of such DTC Exercised Right by properly executing and
delivering to the Subscription Agent, at or prior to 5:00 p.m., New York City
time, on the Expiration Date, a Nominee Holder Over-Subscription Form (see
Appendix C), together with payment of the Subscription Price for the number of
Depositary Units and Preferred Units for which the Over-Subscription Privilege
is to be exercised. Copies of the Nominee Holder Over-Subscription Form may be
obtained from the Subscription Agent.
Exercise of Rights
Rights may be exercised by filling in and signing the reverse side of the
Subscription Certificate which accompanies this Prospectus and mailing it in
the envelope provided, or otherwise delivering the completed and signed
Subscription Certificate to the Subscription Agent, together with full payment
of the Subscription Price for the Depositary Units and the Preferred Units as
described below under "-- Payment for Securities." Completed Subscription
Certificates must be received by the Subscription Agent at the address set
forth above. An example demonstrating the exercise of Rights, including the
Over-Subscription Privilege, is set forth under "The Offering -- Example of
Exercise of Rights and the Over-Subscription Privilege." Rights may also be
exercised through an Exercising Rights Holder's broker or dealer, who may
charge such Exercising Rights Holder a servicing fee.
Nominees who hold Depositary Units for the account of others, such as
brokers, trustees or depositories for securities, should notify the respective
beneficial owners of such Depositary Units as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
the Rights. If the beneficial owner so instructs, the nominee should complete
the Subscription Certificate and submit it to the Subscription Agent with the
proper payment. In addition, beneficial owners of Depositary Units or Rights
held through such a nominee should contact the nominee and request the nominee
to effect transactions in accordance with the beneficial owner's instructions.
Exercise of Over-Subscription Privilege
Any Exercising Rights Holder may participate in the Over-Subscription
Privilege, if it is granted, by indicating on their Subscription Certificate
the number of Depositary Units and Preferred Units he is willing to acquire
pursuant thereto. There is no limit on the number of Depositary Units and
Preferred Units that Exercising Rights Holders may seek to subscribe for
pursuant to the Over-Subscription Privilege. However, the Depositary Units and
Preferred Units purchased pursuant to the exercise of the Over-Subscription
Privilege must be purchased as a unit consisting of four Depositary Units and
one Preferred Unit and may not be subscribed for separately. The number of
Depositary Units and Preferred Units issued to each Rights Holder participating
in the Over-Subscription Privilege will be allocated as described above under
"-- Over-Subscription Privilege." An example demonstrating the exercise of
Rights, including the Over-Subscription Privilege, is set forth under "The
Offering -- Example of Exercise of Rights and the Over-Subscription Privilege."
Banks, brokers and other nominee holders of Rights will be required to
certify to the Partnership, before the Over-Subscription Privilege may be
exercised as to any particular beneficial owner, as to the aggregate number of
Basic Subscription Rights exercised and the aggregate amount of Depositary
Units and Preferred Units subscribed for pursuant to the Over-Subscription
Privilege by such beneficial owner and that such beneficial owner exercised its
Basic Subscription Rights.
Example of Exercise of Rights and the Over-Subscription Privilege
If you owned 500 Depositary Units you would receive 100 Rights entitling
you to subscribe for up to 400 Depositary Units and 100 Preferred Units. If you
exercised any or all of your 100 Rights, you would be entitled to participate
in the Over-Subscription Privilege.
27
<PAGE>
Assume, for example, that you decided to exercise all of the Rights
granted to you and also purchase an additional 1,200 Depositary Units and 300
Preferred Units pursuant to exercise of your Over-Subscription Privilege. You
would indicate on your subscription certificate, a form of which is attached
hereto as Appendix A, in Section I, Item A "Basic Subscription Rights" that you
were exercising 100 Rights to acquire 100 Units and in Item B
"Over-Subscription Privilege," that you were requesting an additional 300
Units. It is important to note when completing your subscription certificate to
keep the following points in mind:
o You must subscribe for Depositary Units and Preferred Units as a Unit.
Depositary Units and Preferred Units may not be separately subscribed for.
o Each Unit consists of four (4) Depositary Units and one (1) Preferred
Unit. No fractional Depositary Units or Preferred Units will be issued in
connection with the Offering. Therefore, in determining how many Units you
wish to subscribe for, please keep in mind that the number of Depositary
Units you desire to buy (whether pursuant to exercise of your Basic
Subscription Rights or the Over-Subscription Privilege) must be divisible
by four (4).
In calculating the amount of the payment to be tendered along with the
executed subscription certificate, as per Item C, include the total Subscription
Price payable for both the number of Units subscribed for through the exercise
of Basic Subscription Rights and the number of Units subscribed for through the
exercise of the Over- Subscription Privilege. In the above example this would
equal 100 Units times the Subscription Price for the Basic Subscription Rights
exercised plus 300 Units times the Subscription Price for the exercise of the
Over-Subscription Privilege for a total payment of $20,800. You will receive a
pro rata allocation of such amount determined by the number of Basic
Subscription Rights you exercised. Any excess funds paid by you will be returned
to you promptly. Certificates representing the Depositary Units and Preferred
Units purchased by you will be mailed promptly following the closing of the
Offering. See "-- Payment for Securities" below.
The foregoing example is for illustrative purposes only, Exercising Rights
Holders participating in the Over-Subscription Privilege are entitled to
purchase as many additional Units as they desire (subject to proration), which
may be more or less than the number of Units such Exercising Rights Holder
acquired pursuant to exercise of its Basic Subscription Rights.
Payment for Securities
Delivery and payment for the Unsubscribed Units purchased by the Guarantor
shall be made on the fifth Business Day after written notice is given by the
Partnership or the Subscription Agent to the Guarantor of the number and
aggregate purchase price of the Unsubscribed Units the Guarantor is obligated
to purchase pursuant to the exercise of the Over-Subscription Privilege.
Payment for Depositary Units and Preferred Units subscribed for pursuant to the
exercise of Basic Subscription Rights and the Over-Subscription Privilege by
other Exercising Rights Holders must be tendered to the Subscription Agent
along with a properly executed Subscription Certificate on or prior to the
Expiration Date. Exercising Rights Holders must choose one of the following
methods of payment:
1. An Exercising Rights Holder can send the Subscription Certificate
together with payment in full for the Depositary Units and Preferred Units
subscribed for through exercise of their Basic Subscription Rights and the
maximum number of Depositary Units and Preferred Units the Exercising
Rights Holder wishes to subscribe for pursuant to the Over-Subscription
Privilege to the Subscription Agent based upon the Subscription Price of
$52. Subscriptions will be accepted when payment, together with the
executed Subscription Certificate, is received by the Subscription Agent at
10 Commerce Drive, Cranford, New Jersey 07016, Attention: Reorg.
Department; such payment and Subscription Certificates must be received by
the Subscription Agent no later than 5:00 p.m., New York City time, on the
Expiration Date. The Subscription Agent will deposit all checks received by
it for the purchase of Depositary Units and Preferred Units into a
segregated interest-bearing account of the Partnership (the interest from
which will belong to the Partnership) pending proration and distribution of
the Depositary Units and Preferred Units. A PAYMENT PURSUANT TO THIS METHOD
MUST BE IN U.S. DOLLARS BY MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN
THE UNITED STATES, MUST BE PAYABLE TO REGISTRAR AND
28
<PAGE>
TRANSFER COMPANY, AS SUBSCRIPTION AGENT FOR AMERICAN REAL ESTATE PARTNERS,
L.P., AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED AND BE RECEIVED BY 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
2. Alternatively, a subscription will be accepted by the Subscription
Agent if, prior to 5:00 p.m., New York City time, on the Expiration Date,
the Subscription Agent has received a Notice of Guaranteed Delivery (see
Appendix B) by facsimile (telecopy) or otherwise from a bank, a trust
company or a NYSE member guaranteeing delivery of (i) payment of the full
Subscription Price for the Depositary Units and the Preferred Units
subscribed for through exercise of the Basic Subscription Right and any
additional Depositary Units and the Preferred Units subscribed for pursuant
to the Over-Subscription Privilege, and (ii) a properly completed and
executed Subscription Certificate. The Subscription Agent will not honor a
Notice of Guaranteed Delivery unless a properly completed and executed
Subscription Certificate and full payment for the Depositary Units and the
Preferred Units is received by the Subscription Agent by the close of
business on the fifth Business Day after the Expiration Date (the "Protect
Period").
Within seven Business Days following the Protect Period, the Subscription
Agent will send to each Exercising Rights Holder (or, if the Depositary Units
are held by a Nominee Holder, to such Nominee Holder) certificates representing
the Depositary Units and the Preferred Units purchased pursuant to exercise of
the Basic Subscription Rights and, if applicable, the Over-Subscription
Privilege along with a letter explaining the allocation of Depositary Units and
the Preferred Units pursuant to the Over-Subscription Privilege. Any excess
payment to be refunded by the Partnership to a Rights Holder who is not
allocated the full amount of Depositary Units and Preferred Units subscribed
for pursuant to the Over-Subscription Privilege will be mailed by the
Subscription Agent within seven Business Days after the Protect Period. All
payments by a Rights Holder must be in United States dollars by money order or
check drawn on a bank located in the United States and payable to Registrar and
Transfer Company, as Subscription Agent for American Real Estate Partners, L.P.
Whichever of the two methods described above is used, issuance and
delivery of certificates for the Depositary Units and the Preferred Units
purchased are subject to collection of checks and actual payment.
If an Exercising Rights Holder who acquires Depositary Units and Preferred
Units through the exercise of its Basic Subscription Rights or pursuant to the
Over-Subscription Privilege does not make payment of any amounts due, the
Partnership and the Subscription Agent reserve the right to take any or all of
the following actions: (i) find other holders of Depositary Units or Rights for
such subscribed and unpaid for Depositary Units and Preferred Units; (ii) apply
any payment actually received by it toward the purchase of the greatest whole
number of Depositary Units and Preferred Units which could be acquired by such
holder upon exercise of its Basic Subscription Rights and/or pursuant to the
Over-Subscription Privilege; and/or (iii) exercise any and all other rights or
remedies to which it may be entitled, including, without limitation, the right
to set-off against payments actually received by it with respect to such
subscribed Depositary Units and Preferred Units.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE PARTNERSHIP WILL BE AT THE ELECTION AND RISK OF THE
RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY
TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE
AT LEAST FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY,
OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK OR MONEY
ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Partnership whose
determinations will be final and binding. The Partnership in its sole
discretion may waive any defect or irregularity or permit a defect or
irregularity to be corrected within such time as it may determine, or reject
the purported exercise of any Right. Subscriptions will not be deemed to have
been
29
<PAGE>
received or accepted until all irregularities have been waived or cured within
such time as the Partnership determines in its sole discretion. The Partnership
will not be under any duty to give notification of any defect or irregularity
in connection with the submission of Subscription Certificates or incur any
liability for failure to give such notification.
Sale of API Nominee Corp. Rights
Pursuant to the Exchange, the Partnership acquired the real estate and
other assets of the Predecessor Partnerships. In connection with the Exchange,
the Depositary Units of certain non-consenting investors in the Predecessor
Partnerships issued in connection with the Exchange were registered in the name
of Nominee Corp. As of August 6, 1997, Nominee Corp. held 46,120 Depositary
Units. Unless such non-consenting investors execute and return their transfer
applications and the certificates evidencing their interests in the Predecessor
Partnerships issued in connection with the Exchange, thereby becoming holders
of record of the Depositary Units held by Nominee Corp., prior to the Record
Date, Nominee Corp shall use its reasonable efforts to sell the Rights issued
to Nominee Corp. and the proceeds from such sale, if any, will be held in
escrow by Nominee Corp. Neither the General Partner nor the Guarantor intends
to purchase Rights from Nominee Corp.
Foreign Record Date Unitholders
Subscription Certificates will not be mailed to Foreign Record Date
Unitholders. The Rights to which such Subscription Certificates relate will be
held by the Subscription Agent for such Foreign Record Date Unitholders'
accounts until instructions are received to exercise, sell or transfer the
Rights. If no instructions have been received by 12:00 noon, New York City
time, three Business Days prior to the Expiration Date, the Subscription Agent
will use its best efforts to sell the Rights of those Foreign Record Date
Unitholders. The net proceeds, if any, from the sale of those Rights by the
Subscription Agent will be remitted to the Foreign Record Date Unitholder.
PURPOSE OF THE OFFERING
General. The Partnership is seeking to raise funds in the offering to
increase its available liquidity so that it will be in a better position to
take advantage of investment opportunities and to further diversify its
portfolio. Additionally, the Partnership may determine to reduce the debt of
certain properties where the interest rate is considered to be in excess of
current market rates. In light of AREP's view of current market conditions and
the rise in the trading price of AREP's Depositary Units, AREP believes that
this is an opportune time to raise additional capital.
The General Partner believes that the strengthening of the real estate
market and the stock market over recent years has permitted AREP and others to
sell properties at increasingly favorable prices. However, AREP believes the
markets may be due for a downward correction which could result in purchasing
opportunities from sellers who may seek to liquidate assets when their expected
returns decrease; also, the trading prices of the securities issued by such
companies could decline, providing additional investment opportunities. In the
real estate markets, which historically have been cyclical, this may be
especially true due to the unprecedented high volume of securities issued by
real estate operating companies. This may present opportunities for companies
with strong cash positions to acquire large portfolios of assets at possible
discounts to their implicit values and for the acquisition or recapitalization
of operating companies, including those with significant real estate assets.
AREP believes that the Partnership will benefit from diversification of
its real estate portfolio. By the end of the year 2000, net leases representing
approximately 23% of AREP's net annual rentals from its portfolio will be due
for renewal, and by the end of the year 2002, net leases representing
approximately 41% of AREP's net annual rentals will be due for renewal. Since
most of AREP's properties are net-leased to single corporate tenants, it may be
difficult and time consuming to re-lease or sell those properties that existing
tenants decline to re-let or purchase and that AREP may be required to incur
expenditures to renovate such properties for new tenants. In addition, AREP 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, AREP could experience an adverse impact on net cash flow
from such properties in the future.
30
<PAGE>
The types of investments AREP will pursue include residential/commercial
development, acquiring debt or equity securities of companies which may be
undergoing restructuring and subperforming properties that may require active
asset management and significant capital improvements. These investments may
not be readily financeable and may not generate immediate positive cash flow
for the Partnership. As such, they require AREP to maintain a strong capital
base in order to react quickly to these market opportunities as well as to
allow AREP the financial strength to develop or reposition these assets.
Investment Strategies. In selecting future real estate investments, AREP
intends to focus on assets that it believes are undervalued in the real estate
market, which investments may require substantial liquidity to maintain a
competitive advantage. Despite the substantial capital pursuing real estate
opportunities, management believes that there are still opportunities available
to acquire investments that are undervalued. This may include commercial
properties, residential and commercial development projects, land,
non-performing loans and the securities of entities which own, manage or
develop significant real estate assets, including limited partnership units and
securities issued by real estate investment trusts ("REITS"). Management
believes that, in the current market, investments requiring some degree of
active management or development activity have the greatest potential for
growth, both in terms of capital appreciation and the generation of cash flow.
In order to further these investment objectives, AREP may consider the
acquisition or seek effective control of land development companies and other
real estate operating companies which may have a significant inventory of
quality assets under development, as well as experienced personnel. This may
enhance AREP's ability to further diversify its portfolio of properties and
gain access to additional operating and development capabilities. Such
acquisitions may include those from affiliates of the General Partner, provided
the terms thereof are fair and reasonable and are approved by the Audit
Committee. See "Risk Factors -- Substantial Fees to General Partner and its
Affiliates" and "Use of Proceeds -- Fees to the General Partner and its
Affiliates."
Other real estate investment opportunities AREP may pursue include
entering into joint venture arrangements or providing financing to developers
for the purpose of developing single-family homes, luxury garden apartments or
commercial properties. The loans may provide for a contractual rate of interest
to be paid as well as providing for a participation in the profits of the
development and/or an equity participation. Additionally, AREP will seek to
acquire underperforming properties through outright purchase or the purchase of
the debt or securities of such entities. For example, AREP may elect to
establish an ownership position by first acquiring debt secured by targeted
assets and then negotiate for the ownership or effective control of some or all
of the underlying equity in such assets. AREP may also seek to establish a
favorable economic and negotiating position through the acquisition of other
rights or interests that provide it with leverage in negotiating the
acquisition of targeted assets. AREP will also seek to acquire assets that are
not in financial distress but due to the particular circumstances of their
ownership, use or location, present substantial opportunities for development
or long-term growth. AREP may also consider acquiring additional net-leased
properties at appropriate yields or to effectuate tax-free exchanges.
AREP may continue to purchase real estate limited partnership interests by
pursuing negotiated agreements or commencing tender offers. The illiquidity of
many of these securities and their "informal" trading market enable entities
such as AREP to purchase them at what may be significant discounts to the value
of their underlying real estate in many instances.
While AREP believes opportunities in real estate acquisitions continue to
remain available, such acquisition opportunities for value-added investors are
becoming more competitive to source and the increased competition may have some
impact on the spreads and the ability to find quality assets at appropriate
yields. Pursuant to the Amendment, AREP, while continuing to pursue suitable
investments in the real estate markets as mentioned above, may invest a portion
of its funds in securities of issuers that are not necessarily engaged as one
of their primary activities in the ownership, development or management of real
estate. Such investments may include equity and debt securities of domestic and
foreign issuers. The investment objective of AREP with respect to such
investments will be to purchase undervalued securities, so as to maximize total
return consisting of current income and/or capital appreciation. Undervalued
securities are those which AREP believes may have greater inherent value than
indicated by their then current trading price and/or may lend themselves to
"activist" shareholder involvement. These securities may be undervalued for
various reasons including market inefficiencies, economic or market trends
which have not been identified and reflected in market value, complex or not
readily
31
<PAGE>
followed securities. Less favorable financial reports, lowered credit ratings,
revised industry forecasts or sudden legal complications may result in market
inefficiencies and undervalued situations. As is the case with real estate
related investments, with respect to non-real estate related investments AREP
may determine to establish an ownership position through the purchase of debt
or equity securities of such entities and then negotiate for the ownership or
effective control of some or all of the underlying equity in such assets. AREP
will conduct its investment activities in such a manner so as not to be deemed
an investment company under the 1940 Act.
The equity securities in which AREP may invest may include common stocks,
preferred stocks and securities convertible into common stocks, as well as
warrants to purchase such securities. The debt securities in which AREP may
invest may include bonds, debentures, notes, mortgage-related securities and
municipal obligations. Certain of such securities may include lower rated
securities which may provide the potential for higher yields and therefore may
entail higher risk.
Recently, AREP invested approximately $42.8 million to purchase certain
mortgage notes issued by Stratosphere having a face value of $55 million. In
addition, an affiliate of Icahn currently owns approximately $39 million face
value of such Stratosphere mortgage notes. Stratosphere owns and operates the
Stratosphere Tower, Casino & Hotel in Las Vegas, Nevada and has filed a
voluntary proceeding for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code. Such affiliate of Icahn and AREP together submitted a
proposal for the restructuring of Stratosphere which would involve additional
investments in Stratosphere by AREP and such affiliate of Icahn. AREP and the
affiliate of Icahn understand that the Board of Directors of Stratosphere is in
favor of the proposal and intends to work with AREP and the affiliate of Icahn
towards the negotiation of definitive documentation. In addition, AREP is
investigating possible tender offers for real estate operating companies which,
together with the possible additional investment in Stratosphere, could involve
investments of over $200 million by AREP in the foreseeable future. However, no
assurances can be made that such transactions will be pursued or that such
investments will be made. See "Recent Events -- Investment in Stratosphere
Corporation."
In keeping with its overall investment strategy, the Partnership may
acquire assets that are not generating positive cash flow. While this may
impact cash flow in the near term and there can be no assurance that any asset
acquired by the Partnership will increase in value or generate positive cash
flow, management intends to focus on assets that it believes may provide
opportunities for long-term growth and diversification of its portfolio.
The determination of which assets are to be acquired will be within the
sole discretion of the General Partner. Other than a portion of the potential
additional investment in Stratosphere described herein, no assets have as yet
been identified for acquisition nor has the Partnership entered into
negotiations or agreements relating to the acquisition of any assets with the
proceeds of the Offering.
Icahn, in his capacity as majority Unitholder through the Guarantor, will
not receive any additional benefit with respect to distributions and
allocations of profits and losses not shared on a pro rata basis by all other
Unitholders. In addition, Icahn has confirmed to AREP neither he nor any of his
affiliates will receive any fees from AREP in consideration for services
rendered in connection with non-real estate related investments by AREP. The
General Partner and its affiliates may, however, realize substantial fees and
other income from transactions involving the Partnership's investments in real
estate as described herein. AREP may determine to make investments in certain
assets in which Icahn or his affiliates have independent investments; in
addition, AREP may enter into other transactions with the General Partner,
Icahn or their affiliates, including, without limitation, buying and selling
assets from or to the General Partner, Icahn or their affiliates, and
participating in joint venture investments in assets with the General Partner,
Icahn or their affiliates, whether real estate or non-real estate related,
provided the terms of all such transactions are fair and reasonable to AREP.
See "Use of Proceeds -- Fees to the General Partner and its Affiliates" and
"Risk Factors -- Substantial Fees to General Partner and its Affiliates."
Benefits to the Partnership and Unitholders. The Rights are exercisable
for both Depositary Units and Preferred Units. The two securities must be
purchased as a unit and may not be subscribed for separately. The General
Partner determined to offer the two securities as a unit, in part to give
Unitholders the right to purchase additional Depositary Units and Preferred
Units at a total price below market without incurring any commission charge
and, in part, to provide the Partnership through the issuance of the additional
Preferred Units with a rela-
32
<PAGE>
tively inexpensive source of financing for additional acquisitions. The
Preferred Units also have the further quality, at least initially, of not being
dilutive to those Unitholders who choose not to exercise their Rights (although
the Preferred Units could, if the Audit Committee determined it was in the best
interest of the Partnership at the time, be redeemed at a later time for
Depositary Units). In structuring the Offering, the General Partner considered
that the Preferred Units have been trading at a discount to their liquidation
preference, may not be as attractive to investors as the Depositary Units and
might reduce Unitholder participation in the Offering, but determined that the
benefit to the Partnership and ultimately Unitholders of raising approximately
an additional $51,500,000 for investment through the issuance of the additional
Preferred Units outweighed any potential negative impact that might arise as a
consequence of including the Preferred Units as part of the Offering. Moreover,
assuming the conditions of the Subscription Guaranty Agreement are met, the
Partnership is assured by virtue of the Subscription Guaranty of all Depositary
Units and Preferred Units offered being subscribed. See "The Offering -
Subscription Guaranty" for discussion of the Subscription Guaranty, including
the factors that were considered by the Board of Directors in approving the
Subscription Guaranty. In addition, the Board of Directors considered that the
Depositary Units recently have been trading at higher market prices than in
comparable periods over the most recent years.
In an attempt to at least partially compensate those Unitholders who
decline to participate in the Offering, the General Partner has structured the
Rights as transferrable. Accordingly, to the extent a market for the Rights
develop, non-participating Unitholders will be able to sell their Rights. See
"The Offering - Sale of Rights" for further discussion regarding the transfer
of Rights.
33
<PAGE>
USE OF PROCEEDS
General. The General Partner has determined that it is in the best
interests of the Partnership and its Unitholders to increase the Partnership's
available liquidity so that it will be in a better position to take advantage
of investment opportunities and to further diversify its portfolio.
Additionally, the General Partner may elect to reduce the debt of certain
properties where the interest rate is considered to be in excess of current
market rates. With the proceeds from the Offering (estimated to be
approximately $267,200,000 after payment of offering expenses which are
estimated to be approximately $600,000), AREP intends to pursue investments
involving raw-land development, debt or equity securities of companies that may
be undergoing restructuring and properties that may require active asset
management and significant capital improvements, along with other investments
described in this Prospectus. These investments may not be readily financeable
and may not generate immediate positive cash flow for the Partnership. As such,
they require AREP to maintain a strong capital base to react quickly to these
market opportunities as well as to allow AREP the financial strength to develop
or reposition these assets. See "Purpose of the Offering."
Fees to the General Partner and its Affiliates. The General Partner and
its affiliates may receive fees in connection with the acquisition, sale,
financing, development and management of new properties acquired by AREP. As
development and other new properties are acquired, developed, constructed,
operated, leased and financed, the General Partner or its affiliates may
perform acquisition functions, including the review, verification and analysis
of data and documentation with respect to potential acquisitions, and perform
development and construction oversight and other land development services,
property management and leasing services, either on a day-to-day basis or on an
asset management basis, and may perform other services and be entitled to fees
and reimbursement of expenses relating thereto, provided that, in accordance
with the Partnership Agreement, the terms of such transactions are fair and
reasonable to AREP and are customary to the industry. It is not possible to
state precisely what role, if any, the General Partner or any of its affiliates
may have in the acquisition, development or management of any new investments.
Consequently, it is not possible to state the amount of the income, fees or
commissions the General Partner or its affiliates might be paid in connection
with the investment of the Offering proceeds since the amount thereof is
dependent upon the specific circumstances of each investment, including the
nature of the services provided, the location of the investment and the amount
customarily paid in such locality for such services. However, Unitholders may
expect that, subject to the specific circumstances surrounding each transaction
and the overall fairness and reasonableness thereof to AREP, the fees charged
by the General Partner and its affiliates for the services described below
generally will be within the ranges set forth below:
o Property Management and Asset Management Services. To the extent that
AREP acquires any properties requiring active management (e.g., operating
properties that are not net-leased) or asset management services, including
on site services, it may enter into management or other arrangements with
the General Partner or its affiliates. Generally, it is contemplated that
under property management arrangements, the entity managing the property
would receive a property management fee (generally 3% to 6% of gross
rentals for direct management, depending upon the location) and under asset
management arrangements, the entity managing the asset would receive an
asset management fee (generally .5% to 1% of the appraised value of the
asset for asset management services, depending upon the location) in
payment for its services and reimbursement for costs incurred.
o Brokerage and Leasing Commissions. AREP also may pay affiliates of the
General Partner real estate brokerage and leasing commissions (which
generally may range from 2% to 6% of the purchase price or rentals
depending on location; this range may be somewhat higher for problem
properties or lesser-valued properties).
o Lending Arrangements. The General Partner or its affiliates may lend
money to, or arrange loans for, AREP. Fees payable to the General Partner
or its affiliates in connection with such activities include mortgage
brokerage fees (generally .5% to 3% of the loan amount), mortgage
origination fees (generally .5% to 1.5% of the loan amount) and loan
servicing fees (generally .10% to .12% of the loan amount), as well as
interest on any amounts loaned by the General Partner or its affiliates to
AREP.
34
<PAGE>
o Development and Construction Services. The General Partner or its
affiliates may also receive fees for development services, generally 1% to
4% of development costs, and general contracting services or construction
management services, generally 4% to 6% of construction costs.
AREP may also enter into other transactions with the General Partner and
its affiliates, including, without limitation, buying and selling properties
and borrowing and lending funds from or to the General Partner or its
affiliates, joint venture developments and issuing securities to the General
Partner or its affiliates in exchange for, among other things, assets that they
now own or may acquire in the future, provided the terms of such transactions
are fair and reasonable to AREP. The General Partner is also entitled to
reimbursement by AREP for all allocable direct and indirect overhead expenses
(including, but not limited to, salaries and rent) incurred in connection with
the conduct of AREP's business.
In addition, employees of AREP may, from time to time, provide services to
affiliates of the General Partner, with AREP being reimbursed therefor.
Reimbursement to AREP by such affiliates in respect of such services is subject
to review and approval by the Audit Committee of the Board of Directors of the
General Partner.
The Audit Committee of the Board of Directors of the General Partner meets
on an annual basis, or more often if necessary, to review and approve any
conflicts of interest which may arise, including the payment by AREP of any
fees to the General Partner or any of its affiliates. The General Partner and
its affiliates may not receive duplicative fees.
35
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED UNIT DISTRIBUTIONS
The following table sets forth the computation of the ratio of earnings to
fixed charges for the quarters ended March 31, 1997 and 1996 and each of the
years in the five-year period ended December 31, 1996. The financial
information for purposes of computing the ratio of earnings to fixed charges
has been derived from the unaudited and audited Consolidated Financial
Statements of American Real Estate Partners, L.P. and the Subsidiary (the
"Company") incorporated herein by reference.
The following table also sets forth the pro forma computation of the ratio
of earnings to fixed charges and Preferred Unit distributions for the quarters
ended March 31, 1997 and 1996 and the year ended December 31, 1996. The pro
forma ratio of earnings to fixed charges and Preferred Unit Distributions has
been prepared by adjusting the historical Consolidated Financial Statements of
the Company to give effect to the exercise of the Rights being offered hereby.
The pro forma ratio of earnings to fixed charges and Preferred Unit
Distributions for the quarters ended March 31, 1997 and 1996 and the year ended
December 31, 1996 has been prepared as if the exercise of the Rights occurred
on January 1, 1996. The pro forma ratio of earnings to fixed charges and
Preferred Unit Distributions does not purport to be indicative of the ratio of
earnings to fixed charges and Preferred Unit Distributions which might have
occurred had the Rights been exercised on January 1, 1996, or which may be
expected to occur in the future.
<TABLE>
<CAPTION>
Period Ended March 31,
-----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Earnings:
Net earnings ............... $ 40,789,128 $ 11,001,281
Add back fixed charges
charged to earnings ...... 3,451,522 4,580,495
------------- -------------
Earnings before fixed
charges .................. $ 44,240,650 $ 15,581,776
============= =============
Fixed Charges:
Interest expense as
reported .................. $ 3,317,478 $ 4,479,786
Amortization of debt
placement costs ......... 134,044 100,709
------------- -------------
3,451,522 4,580,495
Capitalized interest ...... 0 0
------------- -------------
Total Fixed charges . $ 3,451,522 . $ 4,580,495
============= =============
Ratio:
Earnings/Fixed
charges: ............... 12.82 3.40
------------- -------------
Pro forma Ratio of
Earnings to Fixed
Charges and Preferred
Unit Distributions
Fixed charges, per
above .................. $ 3,451,522 $ 4,580,495
Preferred Unit
distributions:
Current Preferred ......... 259,303 246,955
New Preferred(1) ......... 675,938 643,750
============= =============
Total fixed charges . $ 4,386,763 . $ 5,471,200
============= =============
Pro forma:
Earnings/Fixed
charges: ............... 10.09 2.85
============= =============
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings:
Net earnings ............... $ 57,822,052 $ 35,155,620 $ 23,168,564 $ 22,676,754 $ 11,291,877
Add back fixed charges
charged to earnings ...... 17,004,837 20,058,182 23,057,243 25,386,816 26,068,454
------------- ------------- ------------- ------------- -------------
Earnings before fixed
charges .................. $ 74,826,889 $ 55,213,802 $ 46,225,807 $ 48,063,570 $ 37,360,331
============= ============= ============= ============= =============
Fixed Charges:
Interest expense as
reported .................. $ 16,350,791 $ 19,613,860 $ 22,735,908 $ 25,127,931 $ 25,859,176
Amortization of debt
placement costs ......... 654,046 444,322 321,335 258,885 209,278
------------- ------------- ------------- ------------- -------------
17,004,837 20,058,182 23,057,243 25,386,816 26,068,454
Capitalized interest ...... 0 0 0 210,000 58,540
------------- ------------- ------------- ------------- -------------
Total Fixed charges . $ 17,004,837 $ 20,058,182 $ 23,057,243 $ 25,596,816 $ 26,126,994
============= ============= ============= ============= =============
Ratio:
Earnings/Fixed
charges: ............... 4.40 2.75 2.00 1.88 1.43
------------- ------------- ------------- ------------- -------------
Pro forma Ratio of
Earnings to Fixed
Charges and Preferred
Unit Distributions
Fixed charges, per
above .................. $ 17,004,837
Preferred Unit
distributions:
Current Preferred ......... 1,024,863
New Preferred(1) ......... 2,575,000
=============
Total fixed charges . $ 20,604,700
=============
Pro forma:
Earnings/Fixed
charges: ............... 3.63
=============
</TABLE>
- ------------
(1) Assumes $51,500,000 worth of Preferred Units are issued.
36
<PAGE>
DESCRIPTION OF SECURITIES
The following is a brief description of (i) the Depositary Units and
certain provisions of the Depositary Agreement (as amended, the "Depositary
Agreement") related thereto, entered into among the Partnership, Registrar and
Transfer Company, as depositary (the "Depositary"), and the Unitholders and
(ii) the Preferred Units.
The Depositary Units
General. The Depositary Units represent limited partner interests in AREP.
The percentage interest in AREP represented by a Depositary Unit is equal to
the ratio it bears at the time of such determination to the total number of
Depositary Units in AREP (including any undeposited Depositary Units)
outstanding, multiplied by 99%, which is the aggregate percentage interest in
AREP of all holders of Depositary Units. Subject to the rights and preferences
of the Preferred Units, each Depositary Unit evidences entitlement to a portion
of AREP's net cash flow and net proceeds from capital transactions when
distributed by the General Partner and an allocation of AREP's net income and
net loss, as determined in accordance with the Partnership Agreement.
The Depositary Units are registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the Partnership is subject to the
reporting requirements of the Exchange Act. The Partnership is required to file
periodic reports containing financial and other information with the
Commission.
The Depositary Units outstanding prior to this Offering are, and the
Depositary Units to be issued upon exercise of the Rights will be, listed on
the NYSE under the symbol "ACP." Depositary Units acquired pursuant to exercise
of the Rights will be freely transferable after consummation of this Offering.
Resale of Depositary Units held by the General Partner and its affiliates will
be restricted under federal securities laws. Depositary Units are evidenced by
depositary receipts issued by the Depositary.
The Partnership is authorized to issue additional Depositary Units or
other securities of the Partnership from time to time to Unitholders or
additional investors without the consent or approval of Unitholders. There is
no limit to the number of Depositary Units or additional classes thereof that
may be issued. The Board of Directors of the General Partner has the power,
without any further action by the Unitholders, to issue units with such
designations, preferences and relative, participating or other special rights,
powers and duties, including rights, powers and duties senior to existing
classes of Depositary Units or Preferred Units. The Depositary Units have no
preemptive rights.
Transfer of Depositary Units. Until a Depositary Unit has been transferred
on the books of the Depositary, the Depositary and the Partnership will treat
the record holder thereof as the absolute owner for all purposes. A transfer of
Depositary Units will not be recognized by the Depositary or the Partnership
unless and until the transferee of such Depositary Units (individually, a
"Subsequent Transferee," and collectively, the "Subsequent Transferees")
executes and delivers a Transfer Application to the Depositary. Transfer
Applications appear on the back of each Depositary Receipt and also will be
furnished at no charge by the Depositary upon receipt of a request therefor. By
executing and delivering a Transfer Application to the Depositary, a Subsequent
Transferee automatically requests admission as a substituted Unitholder in the
Partnership, agrees to be bound by the terms and conditions of the Partnership
Agreement and grants a power of attorney to the General Partner. On a monthly
basis, the Depositary will, on behalf of Subsequent Transferees who have
submitted Transfer Applications, request the General Partner to admit such
Subsequent Transferees as substituted limited partners in the Partnership. If
the General Partner consents to such substitution, a Subsequent Transferee will
be admitted to the Partnership as a substituted limited partner upon the
recordation of such Subsequent Transferee's name in the books and records of
the Partnership. Upon such admission, which is in the sole discretion of the
General Partner, he will be entitled to all of the rights of a limited partner
under the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act")
and pursuant to the Partnership Agreement. A Subsequent Transferee will, after
submitting a Transfer Application to the Depositary but before being admitted
to the Partnership as a substituted Unitholder of record, have the rights of an
assignee under the Delaware Act and the Partnership Agreement, including the
right to receive his pro rata share of distributions.
A Subsequent Transferee who does not execute and deliver a Transfer
Application to the Depositary will not be recognized as the record holder of
Depositary Units and will only have the right to transfer or assign his
37
<PAGE>
Depositary Units to a purchaser or other transferee. Therefore, such Subsequent
Transferee will neither receive distributions from the Partnership nor be
entitled to vote on Partnership matters or any other rights to which record
holders of Depositary Units are entitled under the Delaware Act or pursuant to
the Partnership Agreement. Distributions made in respect of the Depositary
Units held by such Subsequent Transferees will continue to be paid to the
transferor of such Depositary Units. A Subsequent Transferee will be deemed to
be a party to the Depositary Agreement and to be bound by its terms and
conditions whether or not such Subsequent Transferee executes and delivers a
Transfer Application to the Depositary. A transferor will have no duty to
ensure the execution of a Transfer Application by a Subsequent Transferee and
will have no liability or responsibility if such Subsequent Transferee neglects
or chooses not to execute and deliver the Transfer Application to the
Depositary.
Whenever Depositary Units are transferred, the Transfer Application
requires that a Subsequent Transferee answer a series of questions. The
required information is designed to provide the Partnership with the
information necessary to prepare its tax information return. If the Subsequent
Transferee does not furnish the required information, the Partnership will make
certain assumptions concerning this information, which may result in the
transferee receiving a lower dollar amount of depreciation.
Withdrawal of Depositary Units from Deposit. A Unitholder may withdraw
from the Depositary the Depositary Units represented by his Depositary Receipts
upon written request and surrender of the Depositary Receipts evidencing such
Depositary Units in exchange for a certificate issued by the Partnership
evidencing the same number of Depositary Units. A Subsequent Transferee is
required to become a Unitholder of record before being entitled to withdraw
Depositary Units from the Depositary. Depositary Units which have been
withdrawn from the Depositary, and are therefore not evidenced by Depositary
Receipts, are not transferable except upon death, by operation of law, by
transfer to the Partnership or redeposit with the Depositary. A holder of
Depositary Units withdrawn from deposit will continue to receive his respective
share of distributions and allocations of net income and losses pursuant to the
Partnership Agreement. In order to transfer Depositary Units withdrawn from the
Depositary (other than upon death, by operation of law or to the Partnership),
a Unitholder must redeposit the certificate evidencing such withdrawn
Depositary Units with the Depositary and request issuance of Depositary
Receipts representing such Depositary Units, which Depositary Receipts then may
be transferred. Any redeposit of such withdrawn Depositary Units with the
Depositary requires 60 days' advance written notice and payment to the
Depositary of a redeposit fee (initially $5.00 per 100 Depositary Units or
portion thereof), and will be subject to the satisfaction of certain other
procedural requirements under the Depositary Agreement.
Replacement of Lost Depositary Receipts and Certificates. A Unitholder or
Subsequent Transferee who loses or has his or her certificate for Depositary
Units or Depositary Receipts stolen or destroyed may obtain a replacement
certificate or Depositary Receipt by furnishing an indemnity bond and by
satisfying certain other procedural requirements under the Depositary
Agreement.
Amendment of Depositary Agreement. Subject to the restrictions described
below, any provision of the Depositary Agreement, including the form of
Depositary Receipt, may at any time and from time to time be amended by the
mutual agreement of the Partnership and the Depositary in any respect deemed
necessary or appropriate by them, without the approval of the holders of
Depositary Units. No amendment to the Depositary Agreement, however, may impair
the right of a holder of Depositary Units to surrender a Depositary Receipt and
to withdraw any or all of the deposited Depositary Units evidenced thereby or
to redeposit Depositary Units pursuant to the Depositary Agreement and receive
a Depositary Receipt evidencing such redeposited Depositary Units. The
Depositary will furnish notice to each record holder of a Depositary Unit, and
to each securities exchange on which Depositary Units are listed for trading,
of any material amendment made to the Depositary Agreement. Each record holder
of a Depositary Unit at the time any amendment of the Depositary Agreement
becomes effective will be deemed, by continuing to hold such Depositary Unit,
to consent and agree to the amendment and to be bound by the Depositary
Agreement as so amended.
The Depositary will give notice of the imposition of any fee or charge
(other than fees and charges provided for in the Depositary Agreement), or
change thereto, upon record holders of Depositary Units to any securities
exchange on which the Depositary Units are listed for trading and to all record
holders of Depositary Units. The imposition of any such fee or charge, or
change thereto, will not be effective until the expiration of 30 days after the
date of such notice, unless it becomes effective in the form of an amendment to
the Depositary Agreement effected by the Partnership and the Depositary.
38
<PAGE>
Termination of Depositary Agreement. The Partnership may not terminate the
Depositary Agreement unless such termination (i) is in connection with the
Partnership entering into a similar agreement with a new depositary selected by
the General Partner, (ii) is as a result of the Partnership's receipt of an
opinion of counsel to the effect that such termination is necessary for the
Partnership to avoid being treated as an "association" taxable as a corporation
for federal income tax purposes or to avoid being in violation of any
applicable federal or state securities laws or (iii) is in connection with the
dissolution of the Partnership. The Depositary will terminate the Depositary
Agreement, when directed to do so by the Partnership, by mailing notice of such
termination to the record holders of Depositary Units then outstanding at least
60 days before the date fixed for the termination in such notice. Termination
will be effective on the date fixed in such notice, which date must be at least
60 days after it is mailed. Upon termination of the Depositary Agreement, the
Depositary will discontinue the transfer of Depositary Units, suspend the
distribution of reports, notices and disbursements and cease to perform any
other acts under the Depositary Agreement, except in the event the Depositary
Agreement is not being terminated in connection with the Partnership entering
into a similar agreement with a new depositary, the Depositary will assist in
the facilitation of the withdrawal of Depositary Units by holders who desire to
surrender their Depositary Receipts.
Resignation or Removal of Depositary. The Depositary may resign as
Depositary and may be removed by the Partnership at any time upon 60 days'
written notice. The resignation or removal of the Depositary becomes effective
upon the appointment of a successor Depositary by the Partnership and written
acceptance by the successor Depositary of such appointment. In the event a
successor Depositary is not appointed within 75 days of notification of such
resignation or removal, the General Partner will act as Depositary until a
successor Depositary is appointed. Any corporation into or with which the
Depositary may be merged or consolidated will be the successor Depositary
without the execution or filing of any document or any further act.
The Preferred Units
General. The Preferred Units represent limited partner interests in AREP
and have such rights and designations as described below. The Preferred Units
are evidenced by certificates issued by the Partnership. The Preferred Units
are registered under the Exchange Act.
The Preferred Units outstanding prior to this Offering are, and the
Preferred Units to be issued upon exercise of the Rights will be, listed on the
NYSE under the symbol "ACP PR." Preferred Units acquired pursuant to exercise
of the Rights will be freely transferable after consummation of this Offering.
Resale of Preferred Units held by the General Partner and its affiliates,
including the Guarantor, will be restricted under federal securities laws. The
Preferred Units are not be evidenced by Depositary Receipts.
Each Rights Holder who subscribes for the purchase of Depositary Units and
Preferred Units pursuant to the Offering described in this Prospectus shall be
deemed to have applied for admission as a limited partner of the Partnership
with respect to the Units acquired and to have agreed to be bound by all of the
terms and conditions of the Partnership Agreement, as from time to time in
effect. See "Description of Partnership Agreement."
The Partnership is authorized to issue additional Preferred Units or other
securities of the Partnership from time to time to Unitholders or additional
investors without the consent or approval of Unitholders. There is no limit to
the number of Preferred Units or additional classes thereof that may be issued.
The Board of Directors of the General Partner has the power, without any
further action by the Unitholders to issue units with such designations,
preferences and relative, participating or other special rights, powers and
duties, including rights, powers and duties senior to existing classes of
Depositary Units or Preferred Units. The Preferred Units have no preemptive
rights.
Liquidation. Holders of the Preferred Units are entitled, subject to the
rights of creditors, in the event of any voluntary or involuntary liquidation
of the Partnership, to an amount in cash equal to $10.00 per Preferred Unit
plus any accrued and unpaid distributions. The rights of the holders of the
Preferred Units upon liquidation of the Company rank prior to those of holders
of Depositary Units issued by the Partnership.
Distributions. Each Preferred Unit has a liquidation preference of $10.00
and entitles the holder thereof to receive distributions thereon, payable
solely in additional Preferred Units, at the rate of 5% per annum of the
39
<PAGE>
liquidation preference (which is equal to $.50 per annum per Preferred Unit),
payable annually on March 31 of each year (each, a "Payment Date"). For
purposes of determining the number of new Preferred Units to be issued in
respect of distributions on existing Preferred Units, new Preferred Units will
be valued at the liquidation preference thereof.
The Preferred Units, including those issued as a result of distributions
by the Partnership, are represented by certificates issuable solely in whole
Preferred Units. No certificates representing fractional Preferred Units are
issued, but record of the ownership of such fractional Preferred Units is kept
on the books of the Partnership and allocations, distributions, voting rights,
rights with respect to redemption and the like are determined in accordance
with fractional Preferred Unit ownership.
Redemption. On any Payment Date commencing with the Payment Date on March
31, 2000, the Partnership, with the approval of the Audit Committee, 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. Upon any redemption of the Preferred Units, the
redemption price may be paid either all in cash or all in Depositary Units but
not in a combination thereof. For purposes of redemption, the Preferred Units
will be valued at the liquidation value thereof and the Depositary Units will
be valued at (i) if the Depositary Units are listed or admitted to trading on
one or more national securities exchanges, the average price at which the
Depositary Units had been trading over the 20-day period immediately preceding
such redemption on the principal national securities exchange on which the
Depositary Units are listed or admitted to trading; (ii) if the Depositary
Units are not listed or admitted to trading on a national securities exchange
but are quoted by NASDAQ, the average bid price per Depositary Unit at which
the Depositary Units had been trading over the 20-day period immediately
preceding such redemption, as furnished by the National Quotation Bureau
Incorporated or such other nationally recognized quotation service as may be
selected by the General Partner for such purpose, if such Bureau is not at the
time furnishing quotations; or (iii) if the Depositary Units are not listed or
admitted to trading on a national securities exchange or quoted by NASDAQ, an
amount equal to the book value as reflected in the most recent audited
financial statement of the partnership as of the date of redemption. On March
31, 2010, the Partnership must redeem the Preferred Units on the same terms as
any optional redemption.
Business Combinations. In the event that the Partnership shall effect any
capital reorganization or reclassification of its Units or shall consolidate or
merge with or into, or shall sell or transfer all or substantially all of its
assets to, any other entity, the holders of Preferred Units then outstanding
shall be entitled to receive the same kind and amount of securities, cash,
property, rights or interests as shall have been receivable for each Depositary
Unit by the holders thereof in such reorganization, reclassification,
consolidation, merger, sale or transfer had such Preferred Units been redeemed
for Depositary Units immediately prior to such reorganization,
reclassification, consolidation, merger, sale or transfer.
Voting Rights. So long as any Preferred Units are outstanding, the
Partnership shall not amend, alter or repeal any provisions of the Partnership
Agreement, as amended so as to alter or change the express powers, preferences
or special rights of the Preferred Units so as to affect them adversely without
the consent of the holders of at least two-thirds of the total number of
outstanding Preferred Units (including those held by the General Partner and
its affiliates), given in person or by proxy, by vote at a meeting called for
that purpose or by written consent as permitted by the Partnership Agreement.
Except as described in "-- Nomination of Additional Independent Directors," the
holders of the Preferred Units have no other rights to vote or to participate
in the management of the Partnership.
Nomination of Additional Independent Directors. If distributions (which
are payable in kind) are not made to the holders of Preferred Units on any two
Payment Dates (which need not be consecutive), the holders of more than 50% of
all outstanding Preferred Units, including the General Partner and its
affiliates, voting as a class, shall be entitled to appoint two nominees for
the Board of Directors of the General Partner. Holders of Preferred Units
owning at least 10% of all outstanding Preferred Units, including the General
Partner and its affiliates to the extent that they are holders of Preferred
units, may call a meeting of the holders of Preferred Units to elect such
nominees. See "Description of Partnership Agreement -- Meetings; Voting Rights
of Unitholders." Once elected, the nominees will be appointed to the Board of
Directors of the General Partner by Icahn. As directors, the nominees will, in
addition to their other duties as directors, be specifically charged with
40
<PAGE>
reviewing all future distributions to the holders of the Preferred Units. Such
additional directors shall serve until the full distributions accumulated on
all outstanding Preferred Units have been declared and paid or set apart for
payment. If and when all accumulated distributions on the Preferred Units have
been declared and paid or set aside for payment in full, the holders of
Preferred Units shall be divested of the special voting rights provided by the
failure to pay such distributions, subject to revesting in the event of each
and every subsequent default. Upon termination of such special voting rights
attributable to all holders of Preferred Units with respect to payment of
distributions, the term of office of each director nominated by the holders of
Preferred Units (the "Preferred Unit Directors") pursuant to such special
voting rights shall terminate and the number of directors constituting the
entire Board of Directors shall be reduced by the number of Preferred Unit
Directors. The holders of the Preferred Units will have no other rights to
participate in the management of the Partnership and will not be entitled to
vote on any matters submitted to a vote of the holders of Depositary Units.
Transfer Agent, Registrar and Distribution Paying Agent. Registrar and
Transfer Company acts as the transfer agent, registrar and distribution-paying
agent (the "Transfer Agent") for the Preferred Units and the Depositary Units
and receives a fee from the Partnership for serving in such capacities. All
fees charged by the Transfer Agent for transfers and withdrawals of Preferred
Units are borne by the Partnership and not by the Unitholders, except that fees
similar to those customarily paid by stockholders for surety bond premiums to
replace lost or stolen certificates, taxes or other governmental charges,
special charges for services requested by a Unitholder and other similar fees
or charges are borne by the affected Unitholder. There is no charge to
Unitholders for disbursements of the Partnership's cash distributions. The
Partnership indemnifies the Transfer Agent and its agents from certain
liabilities.
The Transfer Agent may at any time resign, by notice to the Partnership,
or be removed by the Partnership, such resignation or removal to become
effective upon the appointment by the General Partner of a successor transfer
agent, registrar and distribution-paying agent and its acceptance of such
appointment. If no successor has been appointed and has accepted such
appointment within 30 days after notice of such resignation or removal, the
General Partner is authorized to act as transfer agent, registrar and
distribution-paying agent until a successor is appointed.
Transfer of Preferred Units. Until a Preferred Unit has been transferred
on the books of the Partnership, the Partnership and the Transfer Agent treat
the record holder thereof as the absolute owner for all purposes,
notwithstanding any notice to the contrary or any notation or other writing on
the certificate representing such Preferred Unit, except as otherwise required
by law. Any transfers of a Preferred Unit will not be recorded by the Transfer
Agent or recognized by the Partnership unless certificates representing the
Preferred Units are surrendered and the transferee executes and delivers a
Transfer Application to the Partnership. By executing and delivering a Transfer
Application, the transferee of Preferred Units is an assignee until admitted to
the Partnership as a substituted limited partner, automatically requests
admission to the Partnership as a substituted limited partner, agrees to be
bound by the terms and conditions of the Partnership Agreement, represents that
such transferee has the capacity and authority to enter into the Partnership
Agreement and grants powers of attorney to the General Partner. On a monthly
basis, the Transfer Agent will, on behalf of transferees who have submitted
Transfer Applications, request the General Partner to admit such transferees as
substituted limited partners in the Partnership. If the General Partner
consents to such substitution, a transferee will be admitted to the Partnership
as a substituted limited partner upon the recordation of such transferee's name
in the books and records of the Partnership. Upon such admission, which is in
the sole discretion of the General Partner, he will be entitled to all of the
rights of a limited partner under the Delaware Act and pursuant to the
Partnership Agreement. A transferee will, after submitting a Transfer
Application to the Partnership but before being admitted to the Partnership as
a substituted Unitholder of record, have the rights of an assignee under the
Delaware Act and the Partnership Agreement, including the right to receive his
distributions. Preferred Units are securities and are transferable according to
the laws governing transfers of securities.
A transferee who does not execute and deliver a Transfer Application to
the Partnership will not be recognized as the record holder of Preferred Units
and will only have the right to transfer or assign his Preferred Units to a
purchaser or other transferee. Therefore, such transferee will neither receive
distributions from the Partnership or any other rights to which record holders
of Preferred Units are entitled under the Delaware Act or
41
<PAGE>
pursuant to the Partnership Agreement. Distributions made in respect of the
Preferred Units held by such transferees will continue to be paid to the
transferor of such Preferred Units. A transferor will have no duty to ensure
the execution of a Transfer Application by a transferee and will have no
liability or responsibility if such transferee neglects or chooses not to
execute and deliver the Transfer Application to the Partnership.
Whenever Preferred Units are transferred, the Transfer Application
requires that a transferee answer a series of questions. The required
information is designed to provide the Partnership with the information
necessary to prepare its tax information return. If the transferee does not
furnish the required information, the Partnership will make certain assumptions
concerning this information, which may result in the transferee receiving a
lower dollar amount of depreciation.
Replacement of Lost Preferred Unit Certificates. A Unitholder or
transferee who loses or has his or her certificate for Preferred Units stolen
or destroyed may obtain a replacement certificate by furnishing an indemnity
bond and by satisfying certain other procedural requirements under the
Partnership Agreement.
DESCRIPTION OF PARTNERSHIP AGREEMENT
The rights of a limited partner of the Partnership are set forth in the
Partnership Agreement. The following is a summary of certain provisions of the
Partnership Agreement and the Agreement of Limited Partnership of the
Subsidiary (the "Subsidiary Partnership Agreement"), which is similar to the
Partnership Agreement in all material respects (except for the Preferred
Units). The following summary discusses certain provisions which relate to
both, and is qualified in its entirety by reference to both the Partnership
Agreement and the Subsidiary Partnership Agreement. A reference to the
"Partnership Agreement" in this Prospectus refers to each of the Partnership
Agreement and the Subsidiary Partnership Agreement, unless otherwise indicated.
Organization
The Partnership and the Subsidiary were organized as limited partnerships
under the Delaware Act. The General Partner is the general partner of both the
Partnership and the Subsidiary. The Partnership owns a 99% limited partnership
interest in the Subsidiary. The General Partner owns a 1% general partnership
interest in both the Partnership and the Subsidiary. Exercising Rights Holders,
who are not limited partners as of the date of exercise of their Rights, will,
following such exercise, be admitted as limited partners of the Partnership.
The limited partnership interests of Record Date Holders who exercise their
rights will be adjusted on the books and records of the Partnership
accordingly.
Purposes, Business and Management
The purposes and business of the Partnership are (a) to directly or
indirectly invest in, acquire, own, hold, manage, operate, sell, exchange and
otherwise dispose of interests in real estate (including, without limitation, a
limited partner interest in the Subsidiary) and securities of any type and
description now or hereafter in existence, whether or not related to interests
in real estate, and (b) to enter into any lawful transaction and engage in any
lawful activities related or incidental thereto or in furtherance of such
purposes.
The General Partner is authorized, in general, to perform all acts
necessary or appropriate to carry out the purposes and to conduct the business
of the Partnership, including the issuance of additional Depositary Units or
other securities of the Partnership (to which the Unitholders are not required
to consent). No Unitholder, in such capacity, may take part in the operation,
management or control of the business of the Partnership. The General Partner,
its affiliates and their employees may have other business interests and engage
in other activities and are not required to manage the Partnership as their
sole and exclusive function. The Partnership Agreement generally provides that,
subject to the satisfaction of certain conditions, the General Partner and its
affiliates will be exculpated from liability for losses sustained or
liabilities incurred by the Partnership and, to the maximum extent permitted by
law, will be indemnified for all liabilities and related expenses arising out
of proceedings or claims related to the business of the Partnership.
42
<PAGE>
The authority of the General Partner is limited in certain respects. The
General Partner is prohibited, without the written consent or affirmative vote
of Unitholders owning more than 50% of the total number of all outstanding
Depositary Units then held by Unitholders, including the General Partner and
its affiliates to the extent that they are Unitholders (a "Majority Interest"),
from, among other things, selling or otherwise disposing of all or
substantially all of the Partnership's assets in a single sale or in a related
series of multiple sales, dissolving the Partnership or electing to continue
the Partnership in certain instances, electing a successor general partner,
making certain amendments to the Partnership Agreement (see "-- Amendment of
the Partnership Agreement") or causing the Partnership, in its capacity as sole
limited partner of the Subsidiary, to consent to certain proposals submitted
for the approval of the limited partners of the Subsidiary. Since the Guarantor
currently holds more than 50% of the outstanding Depositary Units, Icahn,
through the Guarantor, has effective control over the taking of these actions
by the Partnership. See "-- Meetings; Voting Rights of Unitholders" below for a
discussion of certain limitations on the voting rights of Unitholders.
Removal of the General Partner
Subject to the limitation on the exercise by Unitholders of voting rights
as described under "-- Meetings; Voting Rights of Unitholders", the General
Partner may be removed by the written consent or affirmative vote of holders of
Depositary Units owning more than 75% of the total number of all outstanding
Depositary Units voting as a class then held by Unitholders, including the
General Partner and its affiliates to the extent that they are holders of
Depositary Units. Therefore, since the Guarantor currently holds 13,895,712
Depositary Units, representing approximately 54.1% of the outstanding
Depositary Units, the General Partner cannot be removed as provided above
without Icahn's consent.
Upon the removal of the General Partner as general partner of the
Partnership by holders of Depositary Units, the holders of Depositary Units
will be obligated to elect a successor general partner of the Partnership and
to continue the business of the Partnership. At the election of the General
Partner, a successor general partner will be required, at the effective date of
its admission to the Partnership as a general partner, to purchase the General
Partner's 1% general partner interest directly from the General Partner for a
price equal to its "fair market value" as described below. If the General
Partner does not elect to sell its interest, the successor general partner will
be required to contribute to the capital of the Partnership cash in an amount
equal to 1/99th of the product of the number of Depositary Units outstanding
immediately prior to the effective date of such successor general partner's
admission (but after giving effect to the conversion described below) and the
average price at which the Depositary Units had been trading over the 20-day
period immediately preceding such successor general partner's admission.
Thereafter, such successor general partner will be entitled to one percent (1%)
of all partnership allocations and distributions.
If the General Partner chooses not to sell its 1% General Partner interest
directly to a successor general partner, the General Partner's general partner
interest in the Partnership will be converted into Depositary Units, with the
number of Depositary Units to be received to be based upon the "fair market
value" of its General Partner interest at the time of such removal and the
average price at which the Depositary Units had been trading over the 20-day
period preceding the effective date of the General Partner's departure. In this
regard, the "fair market value" of the departing General Partner's general
partner interest is the amount that would be distributable to the General
Partner on account of such interest if the Partnership were to dispose of all
of its assets in an orderly liquidation commencing on the effective date of
such removal at a price equal to the fair market value of those assets
(discounted at the rate then payable on one-year U.S. Treasury obligations to
the effective date of such removal to reflect the time reasonably anticipated
to be necessary to consummate such sales), as agreed upon between the departing
General Partner and its successor, or in the absence of such of an agreement,
as determined by an independent appraiser.
Upon removal of the General Partner from the Partnership, the General
Partner will also be removed as general partner of the Subsidiary and its
general partner interest therein will either be purchased by the successor
general partner or converted into Depositary Units (in which case such
successor shall also contribute to the capital of the Subsidiary) in the same
manner as provided above with respect to the Partnership.
The Partnership Agreement provides that, upon the departure of the General
Partner and the conversion of its general partner interest in the Partnership
to Depositary Units, the Partnership will, at the request of the
43
<PAGE>
departing General Partner, file with the Commission up to three registration
statements under the Securities Act registering the offering and sale of all or
a portion of the Depositary Units owned by such departing General Partner,
including those Depositary Units received upon conversion of its general
partner interest in the Partnership and the Subsidiary. The cost of the first
of any such registrations will be borne by the Partnership and the cost of any
other such registration will be borne by the departing General Partner.
Withdrawal of the General Partner
The General Partner may withdraw from the Partnership, but only if: (i)
such withdrawal is with the consent of a Majority Interest; (ii) the General
Partner, with the consent of a Majority Interest, transfers all of its interest
as general partner in the Partnership; (iii) the transferee consents to be
bound by the Partnership Agreement and the transferee has the necessary legal
authority to act as successor general partner of the Partnership; and (iv) the
Partnership receives an opinion of counsel to the effect that such vote by the
Unitholders and the admission of a new general partner is in conformity with
local law, will not cause the loss of limited liability to the Unitholders and
will not cause the Partnership to be treated as an "association" taxable as a
corporation for federal income tax purposes. Since the Guarantor currently
holds 13,895,712 Depositary Units, representing approximately 54.1% of the
outstanding Depositary Units, Icahn, acting through the Guarantor, could
provide the consent of a Majority Interest.
Notwithstanding the foregoing, the General Partner may, without the
consent of the Unitholders (to the extent permitted by law), transfer its
interest as general partner in the Partnership to any person or entity that
has, by merger, consolidation or otherwise, acquired all or substantially all
of the assets or stock of the General Partner and continued its business,
provided that such person or entity has a net worth no less than that of the
General Partner and has accepted and agreed to be bound by the terms and
conditions of the Partnership Agreement. The General Partner also may mortgage,
pledge, hypothecate or grant a security interest in its interest as general
partner in the Partnership without the consent of Unitholders.
Distributions of Cash Flow to Depositary Unitholders
Distributions from Operations. The Partnership Agreement provides that,
subject to the rights of the holders of Preferred Units to receive their
in-kind distributions, net cash flow of the Partnership for each fiscal year or
portion thereof shall be distributed quarterly, or at any other time to the
extent deemed appropriate by the General Partner in its sole and absolute
discretion, to the holders of Depositary Units and the General Partner in
accordance with their respective ownership interests in the Partnership. The
holders of the Preferred Units are not entitled to distributions of net cash
flow of the Partnership. The General Partner has the power and authority to
retain or use Partnership assets or revenues as, in the sole and absolute
discretion of the General Partner, may be required to satisfy the anticipated
present and future cash needs of the Partnership, whether for operations,
expansion, improvements, acquisitions or otherwise.
The Partnership's ability to pay the distributions of net cash flow is
also based on the business plan of the Partnership, which includes retaining
capital transaction proceeds for reinvestment, and an assessment of the
Partnership's ability to distribute net cash flow in the future, its expenses,
obligations, investments and reserves. The availability of net cash flow in the
future depends as well upon events and circumstances outside the Partnership's
control and no assurance can be given that the Partnership will be able to make
distributions of net cash flow or as to the timing of the distribution.
Over the recent years, the General Partner has decreased and, finally,
suspended the Partnership's distributions to holders of Depositary Units. The
Partnership intends to continue to apply available cash flow toward its
operations, repayment of maturing indebtedness, tenant requirements and other
capital expenditures and creation of cash reserves for contingencies facing
AREP, including environmental matters and scheduled lease expirations. While
payment of maturing debt obligations requires the use of operating cash flow
and the establishment of reserves in the near-term, it should enhance AREP's
equity in its investments and its cash flow in later years. AREP does not
believe it would be prudent or in the long-term best interest of AREP to
encumber or sell assets for the purpose of paying distributions.
44
<PAGE>
Distributions from Sales and Refinancings. Capital transaction proceeds
may be distributed or retained by the Partnership for reinvestment or other
Partnership purposes in the discretion of the General Partner. Generally, the
Partnership intends that capital transaction proceeds will be reinvested,
subject to the establishment of any reserves. The amount and timing of
distributions of capital transaction proceeds, if any, will be in the sole
discretion of the General Partner.
If, in the opinion of the General Partner, a combination of capital
transactions during a tax year would result in a material tax liability to
holders of Depositary Units, the General Partner may distribute a portion of
capital transaction proceeds sufficient to pay all or a portion of such tax
liability, assuming the maximum federal capital gains tax rate for individuals.
However, there can be no assurance that holders of Depositary Units may not be
required to recognize taxable income in excess of cash distributions made in
respect of such period. See "Income Tax Considerations."
To the extent that capital transaction proceeds are distributed, such
capital transaction proceeds will be distributed by the Partnership to the
holders of Depositary Units and to the General Partner in accordance with their
respective ownership interests in the Partnership.
Generally, distributions resulting from a liquidation of the Partnership
will be made in the same manner as distributions of capital transaction
proceeds, subject to the overall requirement that distributions be made to
partners in accordance with their positive capital account balances and the
rights of the holders of Preferred Units to their liquidation preference.
Distribution Reinvestment Plan. A Distribution Reinvestment Plan (the
"Reinvestment Plan") is available to holders of Depositary Units and is
designed to enable such holders to have their distributions from the
Partnership invested in Depositary Units.
Pursuant to the Reinvestment Plan, the Registrar and Transfer Company (the
"Agent"), as agent for the Reinvestment Plan participants will use any
distributions paid on the Depositary Units of participants to purchase
additional Depositary Units in the open market. There is no assurance such
Depositary Units will be available from other investors. If a participant's
distribution is not large enough to purchase a full Depositary Unit, he or she
will be credited with fractional Depositary Units, computed to three decimal
places. To the extent Depositary Units are not available in the open market,
the Agent will distribute cash to the participants.
At the time of reinvestment, each participant will pay a service charge of
5% of the amount invested, but not less than $.75 or more than $2.50 for each
investment transaction, to the Agent, plus a proportionate share of the cost of
acquiring the Depositary Units purchased for all participants.
Holders of Depositary Units may become participants at any time by
completing and delivering to the Agent the appropriate authorization form which
will be available from the Agent and the Partnership. Participation in the
Reinvestment Plan will start the next distribution payable after receipt of a
participant's authorization form. A participant will be able to terminate his
or her participation in the Reinvestment Plan at any time without penalty by
delivering written notice to the Agent. A service charge of $2.50 will be
charged by the Agent for a termination.
Holders of Depositary Units that participate in the Reinvestment Plan will
be taxed on their share of Partnership income in the same manner as if they
received their Partnership distributions in cash; thus participants may incur a
tax liability even though they do not receive a distribution of cash.
Allocations of Income and Loss
The Partnership Agreement provides, in general, that all items of income,
gain, loss and deduction are allocated to the General Partner and to the
holders of Depositary Units in accordance with their respective percentage
ownership in the Partnership. Items allocated to the holders of Depositary
Units generally are further allocated among them pro rata in accordance with
the respective number of Depositary Units owned by each of them. However,
certain tax items reflecting differences between the fair market value and tax
basis of the Partnership's assets at the time additional Depositary Units are
or were issued will be allocated in accordance with the rules of Section 704(c)
of the Code. The Partnership's taxable income and losses will be computed on an
annual basis and apportioned monthly among record holders of Depositary Units
in proportion to the number of
45
<PAGE>
Depositary Units owned by them as of the close of business on the second to
last day of the month in which such taxable income or losses are apportioned,
notwithstanding that cash may be distributed quarterly to record holders of
Depositary Units 45 days after the end of each quarter. See "Certain Federal
Income Tax Considerations Relating to the Partnership and Unitholders." The
Partnership's gains and losses from capital transactions generally will be
allocated among record holders of Depositary Units in proportion to the number
of Depositary Units owned by them as of the close of business on the last day
of the month in which such gains and losses are realized.
Holders of Preferred Units will be treated as having received ordinary
income each year equal to the value of the liquidation preference paid or
accrued for the year. The amounts included in income by the Preferred Unit
holder will be deducted by the Partnership or capitalized, depending upon the
use of the contributed capital. See "Income Tax Considerations -- Certain
Federal Income Tax Considerations Relating to the Partnership and Unitholders
- -- Allocation of Income and Loss."
Amendment of the Partnership Agreement
Amendments to the Partnership Agreement may be proposed by the General
Partner or by holders of Depositary Units owning at least 10% of the total
number of Depositary Units outstanding then owned by all Unitholders. Any
proposed amendment (other than those described below) must be approved by the
General Partner in writing and, subject to the limitations on the exercise by
Unitholders of voting rights as described under "-- Meetings; Voting Rights of
Unitholders", by at least a Majority Interest in order to be adopted. Since the
Guarantor currently holds 13,895,712 Depositary Units, representing
approximately 54.1% of the outstanding Depositary Units, Icahn, acting through
the Guarantor, could provide the approval of a Majority Interest. Unless
approved by the General Partner in writing and, subject to the limitations on
the exercise by Unitholders of voting rights as described under "-- Meetings;
Voting Rights of Unitholders", by all of the holders of Depositary Units, no
amendment may be made to the Partnership Agreement if such amendment, in the
opinion of counsel would result in the loss of the limited liability of
Unitholders or the Partnership as the sole limited partner of the Subsidiary or
would cause the Partnership or the Subsidiary to be treated as an association
taxable as a corporation for federal income tax purposes. In addition, no
amendment to the Partnership Agreement may be made which would: (i) enlarge the
obligations of the General Partner or any Unitholder or convert the interest of
any Unitholder into the interest of a general partner; (ii) modify the expense
reimbursement payable to the General Partner and its affiliates pursuant to the
Partnership Agreement or the fees and compensation payable to the General
Partner and its affiliates pursuant to the Subsidiary Partnership Agreement;
(iii) modify the order and method for allocations of net income and net loss or
distributions of net cash flow from operations without the consent of the
General Partner or the Unitholders adversely affected; or (iv) amend Sections
14.01, 14.02 and 14.03 of the Partnership Agreement concerning amendments
thereof without the consent of Unitholders owning more than 95% of the total
number of Depositary Units outstanding then held by all Unitholders.
Notwithstanding the foregoing, the General Partner may make amendments to
the Partnership Agreement without the consent of the Unitholders, if such
amendments are necessary or appropriate: (i) to reflect a change in the name or
location of the principal office of the Partnership; (ii) to reflect the
admission, substitution, termination, or withdrawal of Unitholders in
accordance with the Partnership Agreement; (iii) to qualify the Partnership as
a limited partnership or to ensure that the Partnership will not be treated as
an association taxable as a corporation for federal income tax purposes; (iv)
in connection with or as a result of the General Partner's determination that
the Partnership does not or no longer will qualify as a partnership for federal
income tax purposes, including, without limitation, an amendment reflecting the
reorganization of the Partnership into a qualified "real estate investment
trust;" (v) to reflect a change that is of an inconsequential nature and does
not adversely affect the Unitholders in any material respect, or to cure any
ambiguity, correct or supplement any provision in the Partnership Agreement not
inconsistent with law or with other provisions, or make other changes with
respect to matters arising under the Partnership Agreement that will not be
inconsistent with law or with the provisions of the Partnership Agreement; (vi)
to satisfy any requirements, conditions, or guidelines contained in any order,
directive, opinion, ruling or regulation of a federal or state agency or
contained in federal or state law; (vii) to facilitate the trading of the
Depositary Units or comply with any requirement or guideline of any securities
exchange on which the Depositary Units are or will be listed for trading;
(viii) to make any change required or contemplated by the Partnership
Agreement; (ix) to amend any provisions requiring any action by
46
<PAGE>
the General Partner if applicable provisions of the Delaware Act related to the
Partnership are amended or changed so that such action is no longer necessary;
or (x) to authorize the Partnership to issue Units (or other securities) in one
or more additional classes, or one or more series of classes, with any
designations, preferences and relative, participating, optional or other
special rights as shall be fixed by the General Partner.
Issuance of Additional Securities
The Partnership is authorized to issue additional Depositary Units or
other securities of the Partnership from time to time to Unitholders or
additional investors without the consent or approval of Unitholders. There is
no limit to the number of Depositary Units or additional classes thereof that
may be issued. The Board of Directors of the General Partner has the power,
without any further action by the Unitholders to issue securities with such
designations, preferences and relative, participating or other special rights,
powers and duties, including rights, powers and duties senior to existing
classes of Depositary Units or Preferred Units.
Meetings; Voting Rights of Unitholders
Any action that is required or permitted to be taken by Unitholders may be
taken either at a meeting of the holders of Depositary Units or Preferred Units
or without a meeting if consents in writing setting forth the action so taken
are signed by holders of Depositary Units owning not less than the minimum
number of Depositary Units or Preferred Units that would be necessary to
authorize or take such action at a meeting. Meetings of the holders of
Depositary Units may be called by the General Partner or by Unitholders owning
at least 10% of the total Depositary Units outstanding then owned by all such
Unitholders. If a distribution is not made to holders of Preferred Units for a
period of two years, holders of Preferred Units owning at least 10% of the
total Preferred Units outstanding then owned by all such holders, including the
General Partner and its affiliates, may call a meeting of the holders of
Preferred Units to elect two nominees for the Board of Directors of the General
Partner. Each nominee must be approved by holders of Preferred Units owning
more than 50% of all Preferred Units outstanding then owned by all such
holders, including the Guarantor and its affiliates. Holders of Depositary
Units or Preferred Units may vote either in person or by proxy at meetings.
Unitholders of record who constitute a Majority Interest or more than 50% of
all outstanding Preferred Units, and who are represented in person or proxy
will constitute a quorum at a meeting of holders of Depositary Units or
Preferred Units. Since the Guarantor currently holds 13,895,712 Depositary
Units, representing approximately 54.1% of the outstanding Depositary Units,
Icahn, acting through the Guarantor, represents a Majority Interest. Except as
described above, the holders of Preferred Units have no rights to call meetings
and will not be entitled to vote on any of the matters submitted to a vote of
the holders of Depositary Units. See "Description of Securities -- The
Preferred Units -- Nomination of Additional Independent Directors."
Matters submitted to the Unitholders for their consent will be determined
by the affirmative vote, in person or by proxy, of a Majority Interest, except
that a higher vote will be required for certain amendments referred to above
under "-- Amendment of the Partnership Agreement," the removal of the General
Partner, as described above under "-- Removal of the General Partner," and the
continuation of the Partnership after certain events that would otherwise cause
dissolution, as described below under "-- Termination, Dissolution and
Liquidation," and as otherwise required by law. Since the Guarantor currently
holds 13,895,712 Depositary Units, representing approximately 54.1% of the
outstanding Depositary Units, Icahn, acting through the Guarantor, controls the
vote of a Majority Interest. Each Unitholder will have one vote for each
Depositary Unit as to which such Unitholder has been admitted as a Unitholder.
A Subsequent Transferee of Depositary Units who has not been admitted as a
Unitholder of record with respect to such Depositary Units will have no voting
rights with respect to such Depositary Units, even if such Subsequent
Transferee holds other Depositary Units as to which it has been admitted as a
Unitholder. The voting rights of a Unitholder who transfers a Depositary Unit
will terminate with respect to such Depositary Unit upon such transfer, whether
or not the Subsequent Transferee thereof is admitted as a Unitholder of record
with respect thereto.
The Partnership Agreement does not provide for annual meetings of the
Unitholders, and the General Partner does not anticipate calling such meetings.
Liability of General Partner and Unitholders
The General Partner will be liable for all general obligations of the
Partnership to the extent not paid by the Partnership. The General Partner will
not, however, be liable for the nonrecourse obligations of the Partnership.
47
<PAGE>
Assuming that a Unitholder does not take part in the control of the
business of the Partnership and otherwise acts in conformity with the
provisions of the Partnership Agreement, the liability of the Unitholder will,
under the Delaware Act, be limited, subject to certain possible exceptions,
generally to the amount contributed by the Unitholder or the Unitholder's
predecessor in interest to the capital of the Partnership, plus such
Unitholder's share of any undistributed Partnership income, profits or
property. However, under the Delaware Act, a Unitholder who receives a
distribution from the Partnership that is made in violation of the Delaware Act
and who knew at the time of the distribution that the distribution was
improper, is liable to the Partnership for the amount of the distribution. Such
liability or liability under other applicable Delaware law (such as the law of
fraudulent conveyances) ceases after expiration of three years from the date of
the applicable distribution. Under the Delaware Act, a partnership is
prohibited from making a distribution to a partner to the extent that at the
time of the distribution, after giving effect to the distribution, all
liabilities of the partnership, other than liabilities to partners on account
of their partnership interests and liabilities for which the recourse of
creditors is limited to specified property of the partnership, exceed the fair
value of the assets of the partnership (except that fair value of property that
is subject to a liability for which the recourse of creditors is limited is
included in the assets of the partnership only to the extent that the fair
value of the property exceeds that liability). An assignee of a limited partner
who becomes a substituted limited partner does not, under the Delaware Act,
become liable for any obligation of the assignor to restore prior
distributions.
The Partnership conducts business through the Subsidiary in several
states. Maintenance of limited liability will require compliance with legal
requirements of those states. The Partnership is the sole limited partner of
the Subsidiary. Limitations on the liability of a limited partner for the
obligations of a limited partnership have not clearly been established in many
states; accordingly, if it were determined that the possession or exercise of
the right by the Partnership, as limited partner of the Subsidiary, to remove
the General Partner as general partner thereof, to approve certain amendments
to the Subsidiary Partnership Agreement or to take other action pursuant to the
Subsidiary Partnership Agreement constituted "control" of the Subsidiary's
business for the purposes of the statutes of any relevant state, the
Partnership and/or Unitholders might be held personally liable for the
Subsidiary's obligations. Further, under the laws of certain states, the
Partnership might be liable for other amounts, such as the amount of any
undistributed profits to which it is entitled, with interest, or for the amount
of distributions made to the Partnership by the Subsidiary. The Partnership and
the Subsidiary will operate in a manner the General Partner deems reasonable,
necessary and appropriate to preserve the limited liability of the Unitholders
and the Partnership.
Upon dissolution of the Partnership for any reason (including the
withdrawal or removal of the General Partner if no successor general partner is
selected), the assets of the Partnership may, in certain instances, be
distributed in kind to the Unitholders of record. If a distribution in kind is
made, the Unitholder receiving the distribution in kind will no longer have
limited liability with respect to, and will be required to make arrangements
for further operation of the assets distributed to him and will receive the
assets subject to certain operating agreements and liabilities of the
Partnership. Disposing of distributed assets or arranging for the operation
thereof could be difficult, particularly in view of the large number of persons
who could receive undivided interests in certain events. See "-- Termination,
Dissolution and Liquidation."
Exculpation and Indemnification of the General Partner
The Partnership Agreement provides that the General Partner and its
affiliates and all of their officers, directors, employees and agents will not
be liable to the Partnership or to any Unitholder for any error of judgment or
breach of fiduciary duty that does not constitute (i) a breach of that person's
duty of loyalty to the Partnership as described in the Partnership Agreement,
(ii) an act or omission in bad faith which involves intentional misconduct or a
knowing violation of law or (iii) a transaction from which an improper personal
benefit is derived. The Partnership Agreement also provides that the
Partnership will indemnify the General Partner and its affiliates, officers,
directors, employees and agents to the fullest extent permitted by law against
any liability and related expenses (including attorneys' fees) incurred in
conjunction with any proceeding in which any of them may be involved, or
threatened to be involved, as a party or otherwise, arising out of or
incidental to the business of the Partnership, if (i) such party seeking
indemnification acted in good faith and in a manner it believed to be in, or
not opposed to, the best interests of the Partnership, and, with respect to any
criminal proceeding, had no reasonable cause to believe its conduct was
unlawful and (ii) such party's conduct did not constitute willful misconduct.
Unitholders may have more limited recourse against the General Partner than
would
48
<PAGE>
apply absent these provisions. The Partnership may purchase and maintain
liability insurance covering the General Partner, or any other persons as the
General Partner shall determine, against any liability that may be asserted
against the General Partner or any such person in connection with the
activities of the Partnership, regardless of whether indemnification against
such liability would be permitted under the provisions of the Partnership. TO
THE EXTENT THAT SUCH INDEMNIFICATION PROVISIONS PURPORT TO INCLUDE
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION
IS CONTRARY TO PUBLIC POLICY AND THEREFORE UNENFORCEABLE.
No Withdrawal of Capital
A Unitholder will not have the right to request withdrawal of his capital
from the Partnership nor will a Unitholder be entitled to demand or receive any
return of his capital.
Books and Reports
The General Partner is required to keep complete and accurate books with
respect to the Partnership's business at the principal office of the
Partnership. The books are maintained for financial accounting purposes on the
accrual basis, in accordance with generally accepted accounting principles. The
fiscal year of the Partnership is the calendar year. Record holders will be
entitled to have access to the Partnership books and certain other records at
reasonable times upon reasonable notice to the General Partner, subject to
certain limitations including those intended to protect confidential business
information.
The General Partner will furnish to each record holder, within 120 days
after the close of each fiscal year, reports containing certain financial
statements of the Partnership for such fiscal year, including a balance sheet
and statements of income, Unitholders' equity and changes in financial
position, which will be audited by a nationally recognized firm of independent
certified public accountants. In addition, after the close of each fiscal
quarter (except the fourth quarter), the General Partner will furnish to each
record holder a quarterly report for the fiscal quarter containing certain
financial and other information relating to the Partnership, subject to the
Partnership's timely receipt of information from third parties.
Within 90 days after the close of each taxable year, the Partnership will
use its best efforts to furnish to each Unitholder as of the last day of any
month during such taxable year such information as may be required by the
Unitholders for the preparation of their individual federal, state and local
tax returns. Such information will be furnished in summary form so that certain
complex calculations normally required can be avoided. The Partnership's
ability to furnish such summary information may depend on the cooperation of
Unitholders in supplying certain information to the Partnership.
Power of Attorney
Pursuant to the terms of the Partnership Agreement, each investor who
receives Units pursuant to the exercise of Rights and each Subsequent
Transferee who is admitted as a Unitholder of record in the Partnership
following the consummation of the Rights Offering appoints the General Partner
and each of the General Partner's authorized officers as such Unitholder's or
substituted Unitholder's attorney-in-fact (i) to enter into the Depositary
Agreement and deposit the Depositary Units of such Unitholder or substituted
Unitholder in the deposit account established by the Depositary, and admit the
holders of Depositary Units and Preferred Units acquired upon exercise of the
Rights (to the extent such holders are not already admitted) as limited
partners in the Partnership and (ii) to make, execute, file and/or record (a)
instruments with respect to any amendment of the Partnership Agreement; (b)
conveyances and other instruments and documents with respect to the
dissolution, termination and liquidation of the Partnership pursuant to the
terms of the Partnership Agreement; (c) financing statements or other documents
necessary to grant or perfect a security interest, mortgage, pledge or lien on
all or any of the assets of the Partnership; (d) instruments or papers required
to continue the business of the Partnership pursuant to the Partnership
Agreement; (e) instruments relating to the admission of substituted limited
partners in the Partnership; and (f) all other instruments deemed necessary or
appropriate to carry out the provisions of the Partnership Agreement. Such
power of attorney is irrevocable, will survive the subsequent death,
incompetency, dissolution, disability, incapacity, bankruptcy or termination of
the granting Unitholder, and will extend to such Unitholder's heirs, successors
and assigns.
49
<PAGE>
Death, Bankruptcy or Incompetency of a Unitholder
The death, bankruptcy or adjudication of incompetency of a Unitholder will
not dissolve the Partnership. In such event, the legal representatives of such
Unitholders will have all the rights of a Unitholder for the purpose of
settling or managing the estate and such power as the deceased, bankruptcy or
incompetent Unitholder possessed to assess, sell or transfer any part of his
interest. The transfer of Depositary Units and Preferred Units by such legal
representative to any person or entity is subject to all of the restrictions to
which such transfer would have been subject if it had been made by the
deceased, bankrupt or incompetent Unitholder.
Termination, Dissolution and Liquidation
The Partnership will continue until December 31, 2085, unless sooner
dissolved or terminated and its assets liquidated upon the occurrence of the
earliest of: (i) the withdrawal, removal or bankruptcy of the General Partner
(subject to the right of the Unitholders to reconstitute and continue the
business of the Partnership by written agreement of a Majority Interest and
designation by them of a successor general partner within 90 days); (ii) the
written consent or affirmative vote of a Majority Interest, with the approval
of the General Partner, to dissolve and terminate the Partnership; (iii) the
sale or other disposition of all or substantially all of the assets of the
Partnership; (iv) the Partnership's insolvency or bankruptcy; or (v) any other
event causing or requiring a dissolution under the Delaware Act. Since the
Guarantor currently holds 13,895,712 Depositary Units, representing
approximately 54.1% of the outstanding Depositary Units, Icahn, acting through
the Guarantor, controls the vote of a Majority Interest. The Unitholder's right
to continue the Partnership described in (i) above is subject to the receipt by
the Partnership of an opinion of counsel to the effect that such continuation
and the selection of a successor general partner will not result in the loss of
limited liability of the Unitholders and will not cause the Partnership to be
treated as an association taxable as a corporation for federal income tax
purposes.
Upon dissolution, the General Partner or other entity or person authorized
to wind up the affairs of the Partnership will proceed to liquidate the assets
of the Partnership and apply the proceeds of liquidation in the order of
priority set forth in the Partnership Agreement.
50
<PAGE>
INCOME TAX CONSIDERATIONS
The following is a summary of the federal income tax aspects which are
material to a typical Unitholder who is a U.S. citizen or resident regarding
the ownership, exercise or sale of Rights and the ownership and sale of
Depositary Units and Preferred Units and is based upon the Code, judicial
decisions, final, temporary and proposed Treasury regulations ("Regulations")
and administrative rulings and pronouncements of the Internal Revenue Service
("IRS"). No attempt has been made to comment on all federal income tax matters
affecting the Partnership, the Subsidiary or the Unitholders. The tax aspects
of an investment to certain categories of Unitholders (such as C corporations,
tax-exempt organizations, dealers in securities, banks, insurance companies,
real estate investment trusts or foreign persons) may differ significantly from
those described below. Prospective investors should consult their own tax
advisors about the federal, state, local and foreign income tax consequences to
them prior to exercising Rights.
This summary is based on current legal authority and there is no assurance
that legislative or administrative changes or court decisions may not occur
which would significantly modify the statements and opinions expressed herein.
The General Partner must make certain federal income tax determinations that
will impact Unitholders which may be based on factual determinations or upon
which no legal precedent or authority is available (e.g., the allocation of the
exercise price of Rights between Depositary Units and Preferred Units, the
determination of the valuation of the Partnerships' assets for purposes of
making tax allocations and the proper allocations of income and loss as between
the holders of Depositary Units and Preferred Units). There is no assurance
that the IRS will agree with the General Partner's determinations and it is
possible that the allocation or treatment of tax items by the General Partner
may be modified upon audit.
Legal Opinion
Rogers & Wells, counsel to the Partnership ("Counsel"), has expressed its
opinion as to the following matters: (i) the Partnership and the Subsidiary
each will continue to be classified as a partnership for federal income tax
purposes following the issuance and exercise of the Rights and not as an
association taxable as a corporation; and (ii) it is more likely than not that
the Preferred Units will be classified as partnership interests for federal
income tax purposes rather than as debt obligations of the Partnership and, if
so, an assignee of record of a Depositary Unit or a Preferred Unit generally
will be treated as a partner of the Partnership for federal income tax purposes
from the date such person becomes the record owner of such Unit. Counsel has
based its opinion on applicable legal authority, the facts set forth in this
Prospectus and certain factual representations made by the General Partner and
its opinion is conditioned on the accuracy of such facts. Counsel's opinion
represents only its best legal judgment, and does not bind the IRS or the
courts. Thus, no assurance can be provided that the opinions and statements set
forth herein will not be challenged by the IRS or would be sustained by a court
if litigated. Due to the factual nature of the issue, or uncertainty of the
law, Counsel is not able to opine with respect to certain issues that involve:
(i) the allocation of the Subscription Price between the Preferred Units and
Depositary Units upon exercise of Rights due to the factual nature of the
issue; (ii) whether certain expenses of the Partnership deducted as business
expenses may have to be capitalized for tax purposes due to the factual nature
of the issue; (iii) whether the allocations of income and loss of the
Partnership, including amounts reported as income to holders of Preferred
Units, will be respected for federal income tax purposes due to the absence of
authority regarding the methods used by the Partnership as described below in
"-- Certain Federal Income Tax Considerations Relating to the Partnership and
Unitholders -- Allocation of Income and Loss"; and (iv) whether any interest
expense on debt incurred to purchase Preferred Units will be treated as
investment interest or interest subject to the passive activity loss
limitations due to the absence of authority on this issue.
Certain Federal Income Tax Considerations Relating to the Rights
Effect of Rights Distribution. The distribution by a partnership to its
partners of rights to purchase partnership interests does not generally give
rise to taxable income to the partnership or the partners. Accordingly, neither
the Partnership nor the holders of Depositary Units will recognize gain or loss
upon the distribution of Rights.
Unitholder's Basis in Rights. Although not completely certain, the tax
basis of Rights received by a Unitholder from the Partnership likely will be
zero and the distribution of Rights will not change the tax basis
51
<PAGE>
of the existing Depositary Units or Preferred Units. If Rights received by a
Unitholder are not exercised but are allowed to expire, no loss will be allowed
to the Unitholder, unless the Right had been acquired by purchase, in which
case there will be a capital loss equal to the cost basis of the Right.
Effect of Exercise of Rights. No gain or loss will be recognized by a
Unitholder or the Partnership on the purchase of Depositary Units and Preferred
Units through the exercise of Rights. The tax basis of the Depositary Units and
Preferred Units purchased thereby will be equal to the sum of the price paid
for the Depositary Units and Preferred Units plus the share of the
Partnership's nonrecourse liabilities allocated to the Depositary Units and
Preferred Units, and the amount, if any, paid for the Rights. See "Certain
Federal Income Tax Considerations Relating to the Partnership and Unitholders
- -- Unitholders' Basis in his Units."
Sale of the Rights. Any gain or loss on the sale of a Right will be
treated as a short-term capital gain or loss if the Right is a capital asset in
the hands of the seller.
Sale of the Depositary Units or the Preferred Units. Gain or loss will be
recognized by a Unitholder upon the sale of the Depositary Units or the
Preferred Units acquired upon exercise of the Rights in an amount equal to the
difference between the amount realized on the sale and the tax basis of the
Unitholder allocable to the Depositary Units or the Preferred Units, as the
case may be. Except to the extent attributable to unrealized receivables or
certain inventory items (as determined under Section 751 of the Code), which
are not expected to be material, such gain or loss will be a capital gain or
loss if the Depositary Units or the Preferred Units are capital assets in the
hands of the holder thereof and will be a long-term capital gain or loss if the
holder's holding period in the Depositary Units or the Preferred Units is more
than one year. The holding period of the Depositary Units and the Preferred
Units purchased through exercise of Rights likely will begin on the date of
exercise.
It is the position of the IRS that a partner has a single aggregate basis
in all of the partner's partnership interests and that, to determine gain or
loss upon a sale of a part of such partnership interests, the portion of the
partner's basis allocated to the interests being sold equals the partner's
share of partnership liabilities transferred in the sale plus the partner's
aggregate tax basis (excluding basis attributable to partnership liabilities)
multiplied by the ratio of the fair market value of the interests sold to the
fair market value of all of the partner's partnership interests. This portion
may produce unexpected results if applied to a Unitholder who owns both
Depositary Units and Preferred Units and who sells some Units while retaining
other Units because the sale may result in significantly different gains or
losses than in the case of a partner who held only the Units being sold. It is
not clear whether the IRS's ruling position applies to interests in publicly
traded partnerships represented by separate certificates.
A Unitholder who is a natural person, trust, estate, a personal service
company or a closely held "C" corporation, generally is subject to limitations
on deducting passive activity losses. Most or all of any loss realized upon a
sale or retirement of Depositary Units or Preferred Units will be subject to
these limitations. See "Certain Federal Income Tax Considerations Relating to
the Partnership and Unitholders -- Limitations on Deductibility of Losses."
In the case of a corporate Unitholder, under Section 291(a)(1) of the
Code, a sale or other disposition of its Units might result in recapture (to
the extent of gain) as ordinary income of a portion of its allocable share of
the depreciation claimed with respect to the Partnership's properties.
The amount realized on the sale or disposition of a Depositary Unit
includes, among other things, an allocable share of the outstanding amount of
the Partnership's nonrecourse indebtedness (including unpaid interest accrued
thereon) to the extent such amount was includable in the basis of such Unit.
Therefore, it is possible that the gain realized on the sale or disposition of
a Depositary Unit may exceed the cash proceeds of such sale or disposition and,
in some cases, the income taxes payable with respect to such disposition may
exceed such cash proceeds.
Retirement of Preferred Units. A holder of Preferred Units who does not
own any other Units may recognize a taxable gain or loss upon the retirement of
the Preferred Units in exchange for cash. Such gain or loss would equal the
difference, if any, between the amount of cash paid to the holder and his tax
basis in the Preferred Units. Such gain or loss generally will be treated as a
long-term capital gain or loss provided the holder has held the Preferred Units
for a period of one year or more.
52
<PAGE>
If the holder also owns Depositary Units or Preferred Units which are not
retired, the holder generally will not recognize gain or loss upon receipt of a
redemption distribution except that gain would be recognized to the extent the
amount of cash paid exceeds the holder's basis in all of his or her Units.
However, the holder may recognize ordinary income or loss to the extent
redemption proceeds are treated as an exchange for all or part of the holder's
share of the Partnership's unrealized receivables or certain inventory items
under Section 751 of the Code.
In general, no gain or loss will be recognized by a holder of Preferred
Units if the Preferred Units are redeemed by the Partnership for Depositary
Units. The holder would take a tax basis in the Depositary Units equal to his
prior basis in the Preferred Units, adjusted for any increase or decrease in
the holder's share of the Partnership's nonrecourse liabilities. In order to
cause the Depositary Units received upon redemption to have the same book
capital accounts as other Depositary Units, the General Partner is authorized
to allocate gross income or loss to the holder to adjust his capital account in
his or her Depositary Units to equal that of the other Depositary Units of the
Partnership. Such an allocation may increase or decrease the amount of taxable
income otherwise allocable to the holder in the year of the exchange of the
Preferred Units for Depositary Units.
Certain Federal Income Tax Considerations Relating to the Partnership and
Unitholders
Taxation of the Partnership and the Unitholders. A partnership itself is
not subject to any federal income tax. The Partnership, as a partner in the
Subsidiary, is required to report on its information tax return its
distributive share of income, gain, loss, deduction and items of tax
preference, if any, of the Subsidiary. Similarly, each Unitholder is required
to report on his personal income tax return his distributive share of
Partnership income, gain, loss, deduction and items of tax preference
(substantially all of which will be derived from the Subsidiary) and will be
subject to tax on his distributive share of the Partnership's taxable income,
regardless of whether any portion of that income is, in fact, distributed to
such Unitholder. Thus, holders of Depositary Units may be required to accrue
income, without the current receipt of cash if the Partnership continues not to
make cash distributions while generating taxable income from operations or from
the sale or foreclosure of properties. Holders of Preferred Units will accrue
income, without the current receipt of cash, as discussed in "-- Allocation of
Income and Loss," below. Consequently, a Unitholder's tax liability with
respect to his share of Partnership taxable income may exceed the cash actually
distributed to him in a given taxable year.
The Partnership must file a federal information tax return on Form 1065.
The Partnership will provide information as to each Unitholder's distributive
share of the Partnership's income, gain, loss, deduction and items of tax
preference on a Schedule K-1 supplied to such Unitholder after the close of the
Partnership's fiscal year. In preparing such information, the General Partner
will utilize various accounting and reporting conventions, some of which are
discussed herein, to determine each Unitholder's allocable share of income,
gain, loss and deduction. There is no assurance that the use of such
conventions will produce a result that conforms to the requirements of the
Code, Regulations or IRS administrative pronouncements and there is no
assurance that the IRS will not successfully contend that such conventions are
impermissible. Any such contentions could result in substantial expenses to the
Partnership and the Unitholders as a result of contesting such contentions, as
well as an increase in tax liability to Unitholders as a result of adjustments
to their allocable share of the Partnership's income, gain, loss and deduction.
See "-- Tax Returns, Audits, Interest and Penalties."
Partnership Classification. Most of the tax benefits of the Partnership
are due to the classification of the Partnership and the Subsidiary as
partnerships for tax purposes. The General Partner and the Partnership believe
that the Partnership and the Subsidiary have been properly classified as
partnerships for federal income tax purposes since the initial issuance of
Depositary Units. Counsel has advised the Partnership of its opinion that the
Partnership and the Subsidiary will continue to be treated as partnerships for
federal income tax purposes following the issuance and exercise of the Rights
and the holders of Depositary Units will be treated as partners of the
Partnership for federal income tax purposes. Counsel also has expressed its
opinion that holders of Preferred Units likely will be treated as partners for
federal income tax purposes provided Preferred Units are classified as equity.
See "-- Tax Treatment of Preferred Units."
In 1987, Congress added Section 7704 to the Code to tax most publicly
traded partnerships as corporations. The Partnership is a publicly traded
partnership. Section 7704 of the Code provides two relevant exceptions to
53
<PAGE>
the corporate taxation of publicly traded partnerships. Section 7704(c)(2)
provides that a publicly traded partnership which is not an investment company
will not be taxed as a corporation for a taxable year if at least 90% of its
gross income for the year consists of "qualifying income". Qualifying income
includes interest, dividends, real property rents, gain from the sale or other
disposition of real property, gain from the sale or disposition of assets held
for the production of qualifying income and certain income from currency,
forwards and commodity options. Dividend and interest income from non-real
estate corporations would constitute "qualifying income"; however, interest
received from a non-real estate corporation the stock of which is controlled by
Icahn and/or the Partnership may not be treated as qualifying income. If
instead of securities the Partnership were to invest in the assets of a
business, directly or through a partnership or limited liability company, its
share of gross income of the business will be taken into account in testing for
qualifying income. Although under the Amendment, the Partnership may make
non-real estate related investments, the General Partner expects that
substantially all of the income of the Partnership and the Subsidiary will
consist of qualifying income. In addition, a transition rule provided in the
Revenue Act of 1987, which added Section 7704 to the Code, provides that a
partnership which was publicly traded on December 17, 1987 will continue to be
classified as a partnership through December 31, 1997, provided that it does
not acquire or commence a substantial new line of business. It cannot be
determined at this time whether the expanded investment activities of the
Partnership may cause it to enter into a substantial new line of business.
Counsel's opinion as to partnership classification relies on representations of
the General Partner that the Partnership and the Subsidiary will satisfy the
gross income requirement of Section 7704(c)(2) of the Code.
Failure of the Partnership or the Subsidiary to satisfy the transition
rule and the 90% gross income test would result in a deemed incorporation of
the Partnership or Subsidiary, respectively. If either the Partnership or the
Subsidiary were treated as an association taxable as a corporation in any
taxable year, its taxable income, gains, losses, deductions and credits would
be subject to corporate income tax and would not be passed through to its
partners. In addition, distributions made to Unitholders would be treated as
either taxable dividend income (to the extent of the Partnership's or
Subsidiary's current and accumulated earnings and profits) and the balance a
non-taxable return of capital to the extent of the partner's basis in his or
her Units. Also, the reclassification of the Partnership or the Subsidiary as
an association taxable as a corporation would be treated as a deemed
incorporation of such entity upon which gain could be recognized, and which
could result in additional corporate tax. Treatment of either the Partnership
or the Subsidiary as an association taxable as a corporation would
substantially reduce the Partnership's economic income and cash resources and
would result in reduction of the after-tax return to Unitholders.
Tax Treatment of Preferred Units. The Partnership intends to treat
Preferred Units as equity of the Partnership for federal income tax purposes.
The Preferred Units have some characteristics in common with debt, such as a
fixed redemption date, a fixed rate of return and a right to payment senior to
distributions to holders of Depositary Units. The IRS therefore may seek to
recharacterize Preferred Units as debt of the Partnership, rather than equity.
Such a recharacterization could affect the amount of gain or loss recognized by
a Unitholder upon the sale of his Depositary Units or Preferred Units, the
deductibility of interest paid by the Unitholder on debt incurred to acquire
Preferred Units and could, under some circumstances, affect the tax treatment
of income attributable to, or payments by the Partnership to, a holder of
Preferred Units. Treatment of Preferred Units as debt also may result in some
recognition of gain or loss upon the payment of Preferred Units with Depositary
Units. However, the Preferred Units have many of the significant
characteristics of equity and are intended by the Partnership to be equity of
the Partnership. These equity characteristics include: (i) the status of the
Preferred Units as limited partnership interests under Delaware law; (ii) the
fact that payment upon maturity is subject to the requirements of Delaware
partnership law, including limitation of payment in the event such payment
would cause the Partnership to become insolvent; (iii) the ability of the
Partnership, at its option, to redeem Preferred Units for Depositary Units
rather than make payments of cash; (iv) the subordination of the holders of
Preferred Units to other creditors of the Partnership, including unsecured
creditors; (v) the fact that holders of Preferred Units will have more limited
and different rights against the Partnership than those available to creditors;
(vi) the fact that holders of Preferred Units will have certain rights of
limited partners, including limited voting rights; (vii) the fact that the
right to payments on Preferred Units are unsecured and will be limited to the
net assets of the Partnership; and (viii) the fact that the Partnership intends
to treat Preferred Units as equity for both financial accounting and tax
reporting purposes.
54
<PAGE>
Although there is limited authority which deals directly with the issue of
when a formal partnership interest will be characterized as debt for federal
income tax purposes, Counsel has advised the Partnership that in its opinion
the proposed tax treatment of Preferred Units as equity for tax purposes more
likely than not is correct and would be sustained if the issue were fully
litigated in court. The following discussion assumes that the Preferred Units
will be treated as partnership interests for federal income tax purposes.
Allocation of Income and Loss. Holders of Preferred Units will accrue
income in an amount equal to the accrued liquidation preference amounts plus
the difference, if any, between the portion of the Subscription Price allocated
to the Preferred Units and their par value. Such amounts will be treated by the
Partnership as "guaranteed payments" under Section 707(c) of the Code. Holders
of Preferred Units will be required to include these amounts in ordinary income
for their taxable year within or with which the Partnership's taxable year
ends, regardless of whether they receive any distributions during such year.
The Partnership intends to deduct these amounts to the extent not required to
be capitalized. Although the Partnership intends to allocate $10 of the
Subscription Price to the Preferred Units, there is no assurance the IRS will
agree that such allocation is proper. Recent trading prices of the
Partnership's outstanding Preferred Units have reflected a lower price. If the
IRS were to allocate a lesser portion of the Subscription Price to the
Preferred Units, it may require an increased allocation of income to the
holders of the Preferred Units in a corresponding amount for the period from
issuance through redemption.
In general, the balance of the Partnership's income, gain, loss and
deduction will be allocated 1% to the General Partner and 99% to the holders of
Depositary Units. Items allocated to the holders of Depositary Units will be
shared among them according to the respective number of Depositary Units owned
by each holder.
The Partnership Agreement's allocation provisions will be recognized for
federal income tax purposes only if they are considered to have "substantial
economic effect" and are not retroactive allocations. If any allocation of an
item fails to satisfy the "substantial economic effect" requirement, the item
will be allocated among the Unitholders based on their respective "interests in
the Partnership," determined on the basis of all of the relevant facts and
circumstances. Such a determination could result in the income, gains, losses,
deductions, or credits allocated under the Partnership Agreement being
reallocated among the Unitholders or the General Partner. Such a reallocation,
however, would not alter the distribution of cash flow under the Partnership
Agreement.
Regulations provide detailed rules for the maintenance of capital
accounts. The Regulations permit partners' capital accounts to be increased or
decreased to reflect the revaluations of partnership property (at fair market
value) on a partnership's books in connection with a contribution or
distribution of money or other property. Capital accounts will be restated to
reflect the issuance of additional Depositary Units and Preferred Units upon
the exercise of Rights.
Adjusting a partner's book capital account to reflect a property's fair
market value will create a disparity between the partner's "book" capital
account and his "tax" capital account (a "Book-Tax Disparity"), because the tax
capital account reflects only recognized tax consequences (i.e., it reflects
only the basis rather than the value of contributed property). A Book-Tax
Disparity exists because the partner has been given credit for specific
economic consequences, through the amount recorded in his book capital account,
but has not recognized the corresponding tax consequences. Section 704(c) of
the Code provides rules for the allocation of gain, loss and certain deductions
to eliminate Book-Tax Disparities by requiring allocations that cause the
partner whose book capital account reflects built-in gain or loss to bear the
tax burden or receive the tax benefit corresponding thereto.
Allocations under Section 704(c) of the Code may require the allocation of
depreciation deductions from property contributed to a partnership, or property
whose book value is adjusted by a partnership upon issuing additional
partnership interests, away from the contributing or previously admitted
partners where there is unrealized gain inherent in such property. If the
actual depreciation deductions available with respect to the property are
insufficient to fully eliminate the Book-Tax Disparity, the so-called "ceiling
rule" limits the depreciation to that actually realized by the partnership.
This rule can prevent the full elimination of Book-Tax Disparities and could
result in less depreciation being allocated to a person who exercises Rights
than his share of book depreciation. The result would be that holders of
Depositary Units received upon exercise of Rights may be allocated somewhat
greater taxable income than their share of the Partnership's book income.
55
<PAGE>
The Partnership will attempt to correct ceiling rule problems by making
allocations of gross income to the contributing partner or the previously
admitted partner pursuant to Section 704(c) of the Code, which should
completely eliminate Book-Tax Disparities and will give the non-contributing or
newly admitted partners the equivalent of depreciation deductions equal to book
depreciation. Regulations under Section 704(c) of the Code were recently
issued. The allocations of gross income by the Partnership may not technically
comply with Section 704(c) and the Regulations thereunder and might be
challenged by the IRS. In that event, the allocations of income (including any
allocations of gross income described above to correct a ceiling rule problem)
or loss to the Depositary Unitholders may be affected.
Specific regulations have been promulgated relating to partnership
allocations of losses and deductions attributable to nonrecourse indebtedness
(the "Nonrecourse Regulations"). In general, the Nonrecourse Regulations
require that deductions and credits associated with nonrecourse debt must be
allocated in accordance with the partners' interests in the partnership. The
amount of nonrecourse deductions for a partnership's taxable year equals the
net increase, if any, in the amount of that partnership's "minimum gain" during
that taxable year ("Nonrecourse Deductions"). Partnership minimum gain is
determined by computing, with respect to each nonrecourse liability of the
Partnership or the Subsidiary (other than a nonrecourse liability payable to or
guaranteed by a partner), the amount of book gain, if any, that would be
realized for tax purposes by disposing of the property (subject to such
liability) in a taxable transaction in full satisfaction of such liability. The
Partnership Agreement will allocate Nonrecourse Deductions between the General
Partner and holder of Depositary Units in proportion to their shares of other
income and loss.
As noted above, in general, the Partnership's income, gains, losses and
deductions are allocated 99% to the Unitholders and 1% to the General Partner.
The Partnership Agreement provides, for both book and federal income tax
purposes, certain special allocations of income and gain if a Unitholder has a
negative book capital account in excess of certain cumulative allocations of
Nonrecourse Deductions or upon a sale of a property which had minimum gain.
These allocations are required by the Regulations.
The Partnership Agreement also requires that gain from the sale of
Partnership properties, characterized as ordinary income attributable to prior
depreciation deductions ("Recapture Income"), will be allocated (to the extent
such allocation does not alter the allocation of gain otherwise provided for in
the Partnership Agreement) among the partners (or their successors) in the same
manner in which such partners were allocated the deductions giving rise to such
Recapture Income. The Nonrecourse Regulations and Sections 1.1245-1(e) and
1.1250(f) of the Regulations tend to support a special allocation of Recapture
Income. However, such Regulations do not specifically address a special
allocation based on the allocation of the deductions giving rise to such
Recapture Income as stated in the Partnership Agreement. Therefore, it is not
clear that the allocation of Recapture Income will be given effect for federal
income tax purposes. If it is not, such Recapture Income will be allocated
among Depositary Unitholders and the General Partner.
Based on the analysis set forth above, the Partnership has followed the
allocations under the Partnership Agreement on the belief that they generally
should be respected under the standards of Section 704(b) of the Code. Counsel
is unable to opine to that effect, however, because the Partnership Agreement
has not been amended to reflect certain technical changes to the Regulations
adopted since formation of the Partnership, certain methods used by the
Partnership to account for Book-Tax Disparities do not follow all technical
requirements of the Regulations and because certain allocations to preserve
uniformity as among Depositary Units and eliminate Book-Tax Disparities are not
in technical compliance with the Regulations, although such allocations are
consistent with the underlying purpose of Section 704(c) in fully eliminating
Book-Tax Disparities.
Unitholder's Basis in his Units. A Unitholder's adjusted basis in his
Units is relevant in determining the gain or loss on the sale or other
disposition of his Units and the tax consequences of a distribution from the
Partnership. See "-- Treatment of Cash Distributions to Depositary Unitholders
from the Partnership." In addition, a limited partner is entitled to deduct on
his personal income tax return, subject to the limitations discussed below, his
distributive share of a partnership's net loss, if any, to the extent of such
partner's adjusted basis in his partnership interest.
A Unitholder's initial basis in newly issued Units will be the portion of
the Subscription Price allocated to the Units, increased by (i) his share of
nonrecourse indebtedness of the Partnership and (ii) his share of items
56
<PAGE>
of Partnership income and gain, and reduced, but not below zero, by (a) his
share of items of Partnership loss and deduction, and (b) any cash
distributions received by such Unitholder from the Partnership. Cash
distributions are considered to include, for this purpose, any reductions in
the amount of the Partnership's nonrecourse indebtedness (including a reduction
due to amortization thereof). Regulations under Section 752 of the Code employ
an economic risk of loss analysis to determine (i) whether a partnership
liability is recourse or nonrecourse, and (ii) the partners' shares of any
recourse liability of the partnership. Under the regulations, a partnership
liability is a recourse liability to the extent that any partner bears the
economic risk of loss for the liability. If no partner bears the economic risk
of loss for a partnership liability, the liability is a nonrecourse liability
of the partnership. A partnership's nonrecourse liabilities are allocated among
the partners first to reflect the partners' shares of (i) any partnership
minimum gain and (ii) any tax gain that would be allocated to the partners
under Section 704(c) of the Code if the partnership disposed of all partnership
property subject to one or more nonrecourse liabilities of the partnership in
full satisfaction of the liabilities and for no other consideration. The
balance of the nonrecourse liabilities are shared by the partners according to
their interests in the partnership profits. Because Preferred Units do not
share in profits of the Partnership, other than through their cumulative
liquidation preference, the Partnership Agreement has been amended to allocate
nonrecourse liabilities solely to the General Partner and holders of Depositary
Units.
Treatment of Cash Distributions to Depositary Unitholders from the
Partnership. Cash distributions made to holders of Depositary Units will
generally be treated as a non-taxable return of capital and will not generally
increase or decrease such holders' share of taxable income or loss from the
Partnership. A return of capital generally does not result in any recognition
of gain or loss for federal income tax purposes but reduces a Unitholder's
adjusted basis in his Depositary Units. Distributions of cash (including
reductions in nonrecourse liabilities) in excess of a Unitholder's adjusted
basis in his Depositary Units immediately prior thereto will result in the
recognition of gain to the extent of such excess. See "-- Unitholder's Basis in
his Units."
Limitations on Deductibility of Losses. It is not anticipated that the
Partnership will generate any tax losses. A corporate Unitholder generally will
be entitled to deduct its distributive share of any losses of the Partnership
to the extent of the tax basis of its Units at the end of the year in which
such losses occur. However, Unitholders who are individuals, trusts, estates,
personal service companies and certain closely held C corporations are subject
to limitations on deducting losses of the Partnership. In general, losses from
the Partnership's "passive activities," such as ownership of rental real estate
or operating real estate such as hotels, may offset only subsequent Partnership
income of the Unitholder from the Partnership, but not including income accrued
in respect of Preferred Units, or gain upon the sale of Units. Disallowed
losses from passive activities may be carried forward and treated as a
deduction in the next taxable year, subject to these limitations. Closely held
corporations (a corporation more than 50% of the stock of which is owned
directly or indirectly by not more than five individuals) may not offset
portfolio income (such as interest and dividends) with passive losses but may
use passive losses to offset active business income. Any disallowed losses from
a passive activity are allowed in full when the taxpayer disposes of his entire
interest in the Partnership in a taxable transaction. Interest incurred in
passive activities and interest incurred to purchase an interest in a passive
activity (such as Depositary Units and, possibly, Preferred Units) are not
generally subject to these limitations (and not the previously applicable
investment interest limitations). See "-- Limitation on Interest Deductions."
At Risk Limitations. A Unitholder subject to the "at risk" rules under
Section 465 of the Code may not deduct from taxable income his share of the
Partnership's losses to the extent that such losses exceed the lesser of (i)
the adjusted tax basis of his Units at the end of the Partnership's taxable
year in which the loss occurs or (ii) the amount the Unitholder is considered
"at risk" under Section 465 of the Code at the end of that year. It is not
contemplated that the Partnership's operations will result in deductions or
losses that would cause the application of the "at risk" limitation.
Limitation on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest" expense is generally limited to the amount of
such taxpayer's "net investment income." Investment interest expense includes
(i) interest on indebtedness incurred or continued to purchase or carry
property held for investment and that is not part of a passive activity (such
as rental real estate), (ii) a partnership's interest expense attributed to
portfolio income under the passive loss rules and (iii) the portion of interest
expense incurred or continued to purchase or carry an interest in a passive
activity (such as a Depositary Unitholder's interest in the
57
<PAGE>
Partnership) to the extent attributed to portfolio income under the passive
loss rules. Net investment income includes gross income from property held for
investment, gain attributable to the disposition of property held for
investment, and amounts treated as gross portfolio income pursuant to the
passive loss rules less deductible expenses (other than interest) directly
connected with the production of investment income.
Specifically, a Depositary Unitholder would treat as investment interest
his allocable portion of the Partnership's total interest expense, or of any
margin account or other interest expense incurred to purchase or carry a Unit,
that is attributable to the Partnership's gross portfolio income less
deductible expenses directly connected with such portfolio income. The portion
of a Depositary Unitholder's allocable share of interest expense of the
Partnership, or of any margin account or other interest expense incurred to
purchase or carry a Unit, that is attributable to the Partnership's passive
income is subject to the passive loss limitations described above.
The income of holders of Preferred Units from the Partnership likely will
be treated as investment income. The law is not clear as to whether margin and
other interest expense of a holder of Preferred Units incurred to acquire or
hold Preferred Units will be treated as investment interest or as interest
attributable to a passive activity. If interest is treated as passive activity
interest, the interest would be subject to the passive loss limitation
discussed in "-- Limitations on Deductibility of Losses" above. However, a
literal interpretation of existing Regulations and IRS rulings is that such
interest is subject to the passive loss limitations and is not investment
interest. Investment interest deductions which are disallowed may be carried
forward and deducted in subsequent years to the extent of net investment income
in such years. Rights Holders who intend to borrow funds to exercise their
Rights should consult their tax advisors.
Deductibility of Interest Connected with Tax-Exempt Income. Section
265(a)(2) of the Code disallows any deduction for interest paid by a taxpayer
on indebtedness incurred or continued for the purpose of purchasing or carrying
a tax-exempt obligation. The IRS announced in Revenue Procedure 72-18, 1972-1
C.B. 940, that a purpose to carry tax-exempt obligations will be inferred
whenever a taxpayer owns tax-exempt obligations and has outstanding
indebtedness which is neither directly connected with personal expenditures nor
incurred in connection with the active conduct of a trade or business.
Therefore, in the case of a Unitholder (or a related person) owning tax-exempt
obligations (or stock in a regulated investment company which distributes
exempt interest as "dividends") the IRS might take the position that his
allocable portion of any interest paid by the Partnerships on their borrowings
and any interest paid by the Unitholder on indebtedness incurred to purchase an
interest in the Partnership should be viewed in whole or in part as incurred to
enable such Unitholder to continue carrying such tax-exempt obligations and,
therefore, that the deduction of any such interest by such Unitholder should be
disallowed in whole or in part.
Partnership Expenses. The Partnership has incurred or will incur various
expenses in connection with its ongoing administration and with the operation
of its properties. Payments for services generally are deductible if the
payments are ordinary and necessary expenses, are reasonable in amount and are
for services performed during the taxable year in which paid or accrued.
Payments for services related to the acquisition of an asset having a useful
life in excess of one year, such as brokerage fees, generally must be
capitalized into the cost basis of the acquired property. The IRS may not agree
with the Partnership's determinations as to the deductibility of fees and
expenses and might require that certain expenses be capitalized and amortized
or depreciated over a period of years. These issues are essentially questions
of fact with respect to which Counsel cannot opine. If all or a portion of such
deductions were to be disallowed, on the basis that some of the foregoing
expenses are non-deductible syndication fees or otherwise, the Partnership's
taxable income would be increased or its losses would be reduced.
An individual's miscellaneous itemized deductions, including his
investment expenses, are deductible only to the extent they exceed 2% of his
adjusted gross income. The Tax Reform Act of 1988 also authorized the Treasury
Department to issue Regulations prohibiting an individual's indirect deduction,
through the use of pass-through entities, such as partnerships, of expenses
that could not be deducted by such individual directly.
Offering Expenses. Expenses of issuing and marketing Units in the
Partnership ("syndication expenses") are not allowable deductions to the
Partnership or any Unitholder. Syndication expenses are defined as expenditures
connected with the issuing and marketing of interests in partnerships. Fees
payable to dealer managers and soliciting dealers, registration fees, printing
costs, selling and promotional material costs and legal fees for securities and
tax advice pertaining to registration of the Units with the Commission are
syndication expenses and, therefore, do not qualify for amortization.
58
<PAGE>
Depreciation and Cost Recovery Deductions. Real property purchased or
developed by the Subsidiary generally is subject to a 31 1/2-year or 39-year
recovery period (27 1/2-years in the case of residential rental property), and
is recovered using the straight-line method. Any personal property acquired by
the Subsidiary generally will be depreciated over a seven-year recovery period
using the double declining balance method (switching to straight-line at a time
to maximize the depreciation deductions). In addition, if any tax-exempt
entities hold Units and the Partnership's allocations are not considered to be
"qualified allocations," then a portion of the Partnership's depreciation
deductions, corresponding to the tax-exempt entities' percentage interest in
the Partnership, may be required to be depreciated over somewhat longer
recovery periods than those otherwise applicable.
The Partnerships have made elections under Section 754 of the Code and are
required to adjust the basis of partnership property on the transfer of
partnership interests by the difference between the transferee's basis for his
partnership interest and the transferee's allocable share of the basis of all
partnership property. The increase or decrease affects the basis of partnership
property only with respect to the transferee partner. The procedure for
allocating the basis adjustment is complex and there is no assurance that the
IRS would not challenge the allocations of the step-up among the Subsidiary's
assets.
Pursuant to Proposed Regulation Section 1.168-2(n)(1), the Section 743(b)
"step-up" allocable to depreciable, tangible assets must be recovered over a
new recovery period (7-years or 39-years, as the case may be) and will be
recovered as discussed above. Thus, under the Proposed Regulations, the
recovery period associated with the Section 743(b) adjustment will differ from
the remaining recovery period used by the Partnership to compute its
depreciation deductions in such assets. The differing useful lives will likely
result in different tax consequences for Units acquired upon exercise of the
Rights and Units already outstanding. Based on the advice of its accountants,
the General Partner has determined that there is a reasonable and meritorious
reporting position to depreciate a Section 743(b) adjustment (or a portion
thereof) using the remaining recovery period attributable to a depreciable
asset. The General Partner adopted such depreciation method, despite its
inconsistency with Proposed Regulation Section 1.168-2(n)(1). In addition, the
IRS may seek to challenge the allocation of the step-up to depreciable assets.
If the IRS were successful, the effect would be to reduce the Partnership's
cost recovery deductions.
Depreciation Recapture. There is generally no depreciation recapture for
real property that is depreciated pursuant to the straight-line method.
However, legislation pending in Congress would tax the recapture of real estate
depreciation at a somewhat higher maximum rate to individual Unitholders than
the proposed 20% maximum rate on long-term capital gain. If real property is
sold or otherwise disposed of within 12 months after it was acquired, all
depreciation claimed will be recaptured as ordinary income on such disposition.
All depreciation deductions attributable to personal property are subject, to
the extent of any gain recognized, to being fully recaptured as ordinary income
on a sale or other disposition of the personal property.
Under Section 291(a)(1) of the Code, which applies only to corporate
Unitholders, 20% of a corporate Unitholder's share of the depreciation
deductions claimed by the Partnership will be subject to recapture as ordinary
income on such disposition to the extent of the Unitholder's share of any gain
recognized, even though the Partnership and the Unitholder might not otherwise
be subject to general depreciation recapture on such depreciation.
Tax Considerations for Tax-Exempt Entities. Unitholders who are exempt
from federal income tax (including IRAs and tax-exempt organizations such as
trusts that hold assets of employee benefit retirement plans) may be subject to
federal income tax on their allocable share of Partnership income to the extent
that such income is "unrelated business taxable income." Tax-exempt entities
(including IRAs and trusts that hold assets of employee benefit or retirement
plans) are subject to tax on certain income derived from a trade or business
regularly carried on by the organization that is unrelated to its exempt
activities (i.e., unrelated business taxable income). Unrelated business
taxable income generally does not include rental income from real property,
gain from the sale of property other than inventory, interest, dividends, and
certain other types of passive investment income, unless such income is derived
from "debt-financed property" (as defined in Section 514 of the Code). A
Unitholder that is otherwise exempt from tax may have unrelated business
taxable income with respect to such
59
<PAGE>
Unitholder's distributive share of Partnership taxable income in the proportion
that the Partnership's acquisition indebtedness bears to the Partnership's
total adjusted bases for its properties. Acquisition indebtedness could arise
from indebtedness incurred directly by a Unitholder in connection with its
Units or from indebtedness incurred by the Partnership.
Section 514(c)(9)(A) of the Code provides, as a general rule, that a
"qualified organization" (i.e., qualified corporate or government pension plans
and certain educational organizations) will not be treated as having incurred
"acquisition indebtedness" with respect to real property owned by a
partnership. Section 514(c)(9)(A) is not applicable, however, if the
Partnership's tax allocations are not "qualified allocations." Because
allocations to the Preferred Units may prevent the Partnership from having
"qualified allocations" and the Partnership may not otherwise satisfy all
requirements for qualified allocations, the General Partner does not anticipate
that the exemption of Section 514(c)(9) will be available.
Any borrowing incurred by a qualified plan to acquire a Unit will
constitute acquisition indebtedness resulting in the qualified plan realizing
unrelated business taxable income on its income from the Partnership in
accordance with the ratio of the indebtedness to the purchase price of his
Unit.
For social clubs, voluntary employee beneficiary associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans exempt from federal income taxation under Section 501(c)(7), (c)(9),
(c)(17) and (c)(20) of the Code, respectively, income from an investment in the
Partnership will constitute unrelated business taxable income unless the
organization is able to properly deduct amounts set aside or placed in reserve
for certain purposes so as to offset the unrelated business taxable income
generated by its investment in the Partnership. Such prospective Unitholders
should consult their professional tax advisors concerning these "set aside" and
reserve requirements.
The receipt of unrelated business taxable income by a tax-exempt entity
generally has no effect on its status or on the exemption from tax of its other
income. However, for certain types of tax-exempt entities, the receipt of any
unrelated business taxable income may have extremely adverse consequences. For
example, the receipt of any taxable income from an unrelated business by a
charitable remainder trust (defined under Section 664 of the Code) during a
taxable year will result in the taxation of all of the trust's income from all
sources during such year.
An entity that is subject to tax on unrelated business taxable income
would be subject to tax only to the extent that the sum of its unrelated
business taxable income, if any, from Units and from other sources exceeds
$1,000 in any particular year and would be required to file federal income tax
returns for any taxable year in which it has gross income, included in
computing unrelated business taxable income, in excess of $1,000 (whether or
not any tax was due).
Backup Withholding. Distributions to Unitholders whose Units are held on
their behalf by a "broker" may constitute "reportable payments" under the
federal income tax rules regarding "backup withholding." Backup withholding,
however, would apply only if the Unitholder (i) failed to furnish his Social
Security number or other taxpayer identification number of the person subject
to the backup withholding requirement (e.g., the "broker") or (ii) furnished an
incorrect Social Security number or taxpayer identification number. If "backup
withholding" were applicable to a Unitholder, the Partnership would be required
to withhold 31% of each distribution to such Unitholder and to pay such amount
to the IRS on behalf of such Unitholder.
Tax Considerations for Foreign Investors. A resident alien generally is
taxed in the United States as if he were a United States citizen (with the
result that this entire discussion of federal income tax considerations
generally will apply to him). In contrast, a non-resident alien is taxed by the
United States only on income arising out of (i.e., "effectively connected
with") a United States trade or business (and, under some income tax treaties
to which the United States is a party, only if such income is effectively
connected with a permanent establishment in the United States) and on certain
other types of income.
A non-resident alien, as well as a foreign corporation, trust or estate (a
"foreign person") who is a partner in a partnership engaged in a trade or
business in the United States, such as the Partnership, will be considered to
be engaged in such trade or business, even though the foreign person is only a
limited partner. The activities of the Partnership constitute a United States
trade or business for this purpose, and such activities will be deemed
60
<PAGE>
to be conducted through a permanent establishment within the meaning of the
Code and applicable tax treaties. Therefore, a foreign person who becomes a
Unitholder in the Partnership will be required to file a United States tax
return on which he must report his distributive share of the Partnership's
items of income, gain, loss, deduction, and credit, and to pay United States
taxes at regular United States rates on his share of any Partnership net
income, whether ordinary income or capital gains. Thus, the entire discussion
of federal income tax considerations also is generally applicable to foreign
persons who are Unitholders.
The Partnership may have interest income or certain other investment-type
income from United States sources that is not effectively connected with the
Partnership's business. Such income, if any, would be subject to U.S.
withholding tax at a 30% rate except to the extent that an applicable tax
treaty provides for a reduced rate or an exemption for portfolio debt applies.
Such income would be excluded in determining such Unitholder's distributive
share of the Partnership's taxable income subject to regular tax.
The Partnership generally is required to withhold, at the highest
applicable tax rates, all amounts attributable to effectively connected income
that are distributed to foreign Unitholders. Amounts withheld in excess of a
Unitholder's actual tax liability will be eligible for refund. This withholding
requirement does not apply to distributions from United States source income
that are investment income subject to the 30% withholding or that would be
subject to withholding but for an income tax treaty as described above. The
withholding requirements will be coordinated with the withholding requirements
on the disposition of United States real property interests in order to avoid
duplication.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), as
amended, generally subjects foreign persons to United States taxation at
regular United States rates, and imposes withholding requirements, on the sales
by foreign persons of United States real property interests ("USRPIs"), which
include (i) interests in United States real estate and (ii) interests in
certain entities (including publicly traded partnerships) holding United States
real estate. FIRPTA generally requires foreign persons to pay tax on the net
gain from dispositions of USRPIs during the taxable year at rates generally
identical to rates imposed on U.S. persons (but, with respect to non-resident
aliens, at a minimum rate of 26%). Further, FIRPTA provides that, unless an
exception applies or under Regulations to be promulgated, the proceeds of a
sale of a partnership interest by a foreign person are treated as received from
the sale of USRPIs to the extent of the seller's interest in the partnership's
USRPIs. It is anticipated that substantially all of the proceeds of a sale of a
Unit will be attributable to USRPIs. There is, however, an exception to these
provisions which applies to investors in publicly traded partnerships, such as
the Partnership. In general, any foreign person owning publicly traded
Depositary Units comprising not more than a 5% interest in the Partnership will
not be subject to U.S. taxation on the disposition of such Depositary Units,
and any foreign persons owning publicly traded Depositary Units (regardless of
the percentage interest owned) will not be subject to the withholding
provisions of a disposition of such Depositary Units. This exception may not
apply upon the sale of Preferred Units or the exchange of Preferred Units for
Depositary Units. FIRPTA also subjects foreign persons to U.S. taxation at
regular U.S. rates on, and imposes certain withholding obligations with respect
to, dispositions of USRPIs by a partnership if the Partnership does not satisfy
the withholding requirement for effectively connected income, discussed above.
In addition, the Code imposes a branch-level tax on profits of foreign
corporations engaged in a trade or business in the United States. The amount of
the tax is 30% (or lower treaty rate for branch profits or dividends) of the
earnings and profits of a U.S. branch of a foreign corporation for the taxable
year which are attributable to its income that is effectively connected with a
U.S. trade or business. Since foreign corporate Unitholders will be considered
to be engaged in a trade or business in the United States, such Unitholders
will be subject to the branch profits tax.
A foreign person may be subject to tax on his distributive share of the
Partnership's income and gain in his country of nationality, residence or
elsewhere. The methods of taxation, if any, in such jurisdictions may differ
considerably from the United States tax system described previously, and may be
affected by the United States characterization of the Partnership and its
income. Prospective Unitholders who are foreign persons should consult with
their professional tax advisors with respect to the potential tax effects of
these and other items relating to an investment in the Partnership.
Issuance of Additional Units. The Partnership has adopted a Nonqualified
Unit Option Plan under which options to purchase an aggregate of 1,416,910
Units may be granted to officers and key employees of the General Partner and
the Partnership who provide services to the Partnership. On any issuance of
additional Units,
61
<PAGE>
the capital accounts of the existing partners will be adjusted to reflect a
revaluation of the Partnership's properties (based on their then fair market
value, net of liabilities, to which they are then subject). Any resulting
unrealized gain or loss will be allocated among the existing partners and
subsequent allocations of taxable income, gain, loss and deduction will be
allocated in such a manner as to eliminate any Book-Tax Disparities with
respect to the revalued assets. See "-- Allocation of Income and Loss."
The issuance of additional Units could also result in a decrease in a
Unitholder's percentage interest in the Partnership and thereby decrease the
Unitholder's share of nonrecourse debt. Any such reduction would be treated as
a distribution of cash. See "-- Treatment of Cash Distributions to Depositary
Unitholders from the Partnership." In addition, a Unitholder may recognize
ordinary income to the extent that the cash distribution is treated as an
exchange of "substantially appreciated inventory" and "unrealized receivables."
In part, to avoid any constructive exchange occurring upon the Partnership's
issuance of additional Units, the Partnership Agreement provides for special
allocations of certain items of income, gain, loss or deduction. Thus, for
example, certain items of recapture income will be allocated, to the extent
possible, to the partner allocated the related depreciation deduction.
Tax Returns, Audits, Interest and Penalties. The Partnership will supply
Schedules K-1 to Form 1065 to each Unitholder of record as of the last day of
each month after the end of each calendar year. See "Description of Partnership
Agreement -- Books and Reports." The Partnership is not obligated to provide
tax information to persons who are not such Unitholders of record.
Any Unitholder who sells or exchanges a Unit will be required to notify
the Partnership of such transaction in writing within 30 days of the
transaction (or, if earlier, by January 25 of the calendar year after the year
in which the transaction occurs). The notification is required to include (i)
the names and addresses of the transferor and the transferee; (ii) the taxpayer
identification number of the transferor and, if known, of the transferee; and
(iii) the date of the sale or exchange. A Unitholder will not be required to
notify the Partnership of a sale or exchange of a Unit if an information return
is required to be filed by a broker with respect to such sale or exchange. Any
transferor who fails to notify the Partnership of a sale or exchange may be
subject to a $50 penalty for each such failure. The Partnership will treat any
transferor Unitholder who provides all of the information requested of the
transferor on the depositary receipt as having satisfied this notification
requirement.
In addition, the Partnership must file a return notifying the IRS of any
sale or exchange of a Unit of which the Partnership has notice and report the
name and address of the transferee and the transferor who were parties to such
transaction, along with all other information required by applicable
Regulations, including the fair market value of the selling Unitholder's
allocable share of unrealized receivables (including depreciation recapture, if
any). If the Partnership does not know the identity of the beneficial owner of
the Unit, the record holder of such Unit may be treated as the transferor or
transferee, as the case may be. If the Partnership fails to file such a return,
it may be subject to a penalty of $50 for each such failure up to an annual
maximum of $250,000 (with no limit in the case of intentional disregard of the
filing requirement). The Partnership is also required to provide this
information to the transferor and the transferee. If the Partnership fails to
furnish any such information, it may be subject to a penalty of $50 per failure
up to an annual maximum of $250,000. However, the Partnership would not be
required to file a return upon the sale or exchange of a Unit with respect to
which an information return is required to be filed by a broker.
The tax treatment of items of the Partnership's income, gain, loss or
deductions or credit will be determined at the partnership level in a unified
partnership proceeding, rather than in separate proceedings with Unitholders.
With respect to proposed tax deficiency adjustments at the administrative
level, in general each partner (other than a partner owning less than a 1%
profits interest in a partnership having more than 100 partners) whose name and
address is furnished to the IRS (a "notice partner") will receive notice of the
commencement of a partnership level audit as well as notice of the final
partnership administrative adjustment. All partners have the right to
participate in the partnership audit proceeding. In general, each partner is
free to negotiate his own settlement of partnership items with the IRS. If the
IRS enters into a settlement agreement with any partner, it must offer the same
settlement terms to the other parties who request settlement. A "tax matters
partner" must be designated by the partnership who may enter into a settlement
on behalf of, and binding on, partners owning less than a 1% profits interest
in partnerships having more than 100 partners. The Partnership Agreement
designates the General Partner as the tax matters partner. Under the Code, the
tax matters partner may not settle on behalf of
62
<PAGE>
partners with less than a 1% profits interest if (i) an aggregate of 5% or more
of such partners designate with the IRS a notice-partner to receive notice from
the IRS on behalf of the group or (ii) such partners notify the IRS that the
tax matters partner may not settle on their behalf. Except for the
above-described settlement power granted the tax matters partner, any
settlement entered into by any partner (including the tax matters partner) is
not binding on any partner who does not wish to be bound thereby. However, the
tax matters partner may extend the statute of limitations for assessment of a
deficiency with respect to all partners.
Tax legislation is pending in the Congress which would simplify audit
procedures for large partnerships and permit a partnership election to simplify
to some degree the tax reporting to partners. The General Partner has not yet
determined whether such an election would be beneficial to the Partners if the
pending tax legislation is enacted. The proposed audit rules would require all
Partners to report tax items as they are reported to the Partners by the
Partnership, would provide that all audit adjustments are done at the
Partnership level and without the participation of Partners other than the
General Partner, and would generally require the Partnership to take an audit
adjustment into account in the taxable year in which the adjustment takes
effect. Enactment of this legislation may increase the risk that the
Partnership will be audited in the future.
State, Local and Foreign Income Taxes
In addition to the federal income tax consequences described above, Rights
Holders should consider potential state, local and foreign tax consequences of
an investment in the Partnership and are urged to consult their individual tax
advisors in this regard. The rules of some states and localities for computing
and/or reporting taxable income may differ from the federal rules. The
Partnership owns property in thirty-five states and Canada. Certain of these
states will impose an income tax on that portion of an individual Unitholder's
distributive share of Partnership net income, as adjusted, attributable to that
state in excess of certain allowable prorated deductions and/or personal
exemptions (or credits). A number of states and Canada also impose withholding
requirements on either income or distributions to holders who are nonresidents
of such state or Canada.
Both the substantive features and the filing requirements of state income
taxation of Unitholders will vary according to several factors which include
the following: (i) the status of the Unitholder as an individual (and, if so,
his state or other jurisdiction of residence), taxable "C" corporation, taxable
"S" corporation, taxable trust, tax-exempt trust (including IRAs and other
employee benefit plans) or tax-exempt corporation; (ii) whether the state
imposes personal or corporate income taxation or instead imposes a form of
franchise, unincorporated business or occupational taxation; (iii) whether the
state will allow credits or exemptions for income taxes to which a Unitholder
is subject in his state or other jurisdiction of residence; (iv) the level of
personal exemptions or credits allowed by the state and whether those
exemptions or credits are required to be prorated in the ratio of income
sourced in the taxing state to total income; and (v) whether the applicable tax
rate structure is applied on the basis of income sourced in the taxing
jurisdiction or on the basis of total income of a nonresident taxpayer. The
Partnership may be required and, although there is no present intention to do
so, the General Partner is allowed where not so required in its sole and
absolute discretion, to withhold state taxes from distributions to Unitholders
in some instances.
Unitholders of record on December 31 of each year will be required to file
a Canadian tax return for such year and will be subject to Canadian taxes on
their share of the Partnership's Canadian income from Partnership operations
for the entire year. Unitholders who dispose of their Units during the year
will not be subject to Canadian taxes and will not be required to file a
Canadian tax return. The amount of any Canadian tax paid by a Unitholder will,
in general, be deductible for U.S. income tax purposes. Alternatively, at the
election of the Unitholder, subject to various conditions and limitations, the
amount paid in Canada may be credited against the Unitholder's U.S. income tax.
The state of residence of a Unitholder may also impose state, local and
foreign taxes for which such Unitholder may be liable as a result of his
investment in the Partnership. Unitholders should consult with their individual
tax advisors concerning the applicability of state, local and foreign taxes to
an investment in the Partnership.
The summary tax consequences set forth above is for general information
only and does not address the circumstance of any particular Unitholder.
Unitholders should consult their own tax advisors as to the specific tax
consequences of the receipt, exercise or lapse of Rights and the ownership of
Units including the application of state, local and foreign tax laws.
63
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Depositary Units and the Preferred
Units offered hereby has been passed upon for the Partnership by Rogers & Wells
and by its special Delaware counsel, Morris, Nichols, Arsht & Tunnell.
EXPERTS
The financial statements and schedule of American Real Estate Partners,
L.P. and Subsidiary as of December 31, 1996 and 1995, and for each of the years
in the three-year period ended December 31, 1996, have been incorporated by
reference herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing.
64
<PAGE>
Appendix A
[Form of Subscription Certificate]
SUBSCRIPTION CERTIFICATE NUMBER: ---------------------------
NUMBER OF RIGHTS: ---------------------------
CUSIP NO: 029169117
AMERICAN REAL ESTATE PARTNERS, L.P.
SUBSCRIPTION RIGHT FOR DEPOSITARY UNITS AND PREFERRED UNITS
This Subscription Certificate represents the number of Rights set forth in
the upper right hand corner of this Form. The registered holder hereof is
entitled to acquire the following securities: (i) four depositary units
representing limited partner interests (the "Depositary Units") in American
Real Estate Partners, L.P. (the "Partnership") and (ii) one 5% cumulative
pay-in-kind redeemable preferred unit representing a limited partner interest
in the Partnership (the "Preferred Units") for each Right held. Depositary
Units and Preferred Units purchased through the exercise of Basic Subscription
Rights and the Over-Subscription Privilege must be purchased as a unit
consisting of four Depositary Units and one Preferred Unit and may not be
subscribed for separately.
To subscribe for Depositary Units and Preferred Units, the Holder must
present to Registrar and Transfer Company (the "Subscription Agent"), prior to
5:00 p.m., New York City time, on September 11, 1997 unless extended by the
Partnership (the "Expiration Date"), either:
(1) a properly completed and executed Subscription Certificate and a
money order or check drawn on a bank located in the United States and
payable to Registrar and Transfer Company, as Subscription Agent for
American Real Estate Partners, L.P. for the Subscription Price of the
number of Depositary Units and Preferred Units subscribed for under its
Basic Subscription Rights and, if applicable, payment of the Subscription
Price for the number of Depositary Units and Preferred Units for which the
Over-Subscription Privilege is to be exercised; or
(2) a Notice of Guaranteed Delivery from a bank, a trust company or a
NYSE member guaranteeing delivery of (i) a properly completed and executed
Subscription Certificate and (ii) a money order or check drawn on a bank
located in the United States and payable to Registrar and Transfer Company,
as Subscription Agent for American Real Estate Partners, L.P. for the
Subscription Price of the number of Depositary Units and Preferred Units
subscribed for under its Basic Subscription Rights and, payment of the
Subscription Price for the number of Depositary Units and Preferred Units
for which the Over-Subscription Privilege is to be exercised (which
certificate and full payment must then be delivered by the close of
business on the fifth Business Day after the Expiration Date).
If the Holder of this certificate subscribes for additional Depositary
Units and Preferred Units pursuant to the Over-Subscription Privilege, Part B
of Section I of the Subscription Certificate must be completed to indicate the
maximum number of Depositary Units and Preferred Units for which the
Over-Subscription Privilege is being exercised.
No later than 12 Business Days following the Expiration Date, the
Subscription Agent will send to each Exercising Rights Holder (or, if the
Partnership's Depositary Units are held by Cede & Co. or any other depositary
or nominee, to Cede & Co. or such other depositary or nominee), the
certificates representing the Depositary Units and Preferred Units purchased
pursuant to its Basic Subscription Rights and, if applicable, in the
Over-Subscription Privilege, along with a letter explaining the allocation of
Depositary Units and Preferred Units pursuant to the Over-Subscription
Privilege. Any excess payment to be refunded by the Partnership to a Rights
Holder who is not allocated the full amount of Depositary Units and Preferred
Units subscribed for pursuant to the Over-Subscription Privilege will be mailed
by the Subscription Agent. An Exercising Rights Holder will have no right to
modify or rescind a subscription after the Subscription Agent has received
payment, either by means of a notice of guaranteed delivery or a check. Any
excess payment to be refunded by the Partnership to a Rights Holder will be
mailed by the Subscription Agent to him as promptly as practicable.
If the Holder does not make payment of any amounts due in respect of
Depositary Units and Preferred Units subscribed for, the Partnership and the
Subscription Agent reserve the right to (i) find other Holders or Rights
Holders for the subscribed and unpaid for Depositary Units and Preferred Units;
(ii) apply any payment actually received by it toward the purchase of the
greatest whole number of Depositary Units and Preferred Units which could be
acquired by such Holder upon exercise of his Basic Subscription Rights and/or
pursuant to the Over- Subscription Privilege, and/or (iii) exercise any and all
other rights and/or remedies to which it may be entitled, including, without
limitation, the right to set-off against payments actually received by it with
respect to such subscribed Depositary Units and Preferred Units.
<PAGE>
The Subscription Certificate may be transferred, in the same manner and
with the same effect as in the case of a negotiable instrument payable to
specific persons, by duly completing and signing the assignment on the reverse
side hereof. Capitalized terms used but not defined in this Subscription
Certificate shall have the meanings assigned to them in the Prospectus, dated
August 7, 1997 relating to the Rights.
AMERICAN REAL ESTATE PARTNERS, L.P.
By:----------------------------------
THIS SUBSCRIPTION RIGHT IS TRANSFERABLE AND MAY BE COMBINED OR DIVIDED (BUT
ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER OF RIGHTS) AT THE
OFFICE OF THE SUBSCRIPTION AGENT.
Any questions regarding this Subscription Certificate and the Offer may be
directed to the Subscription Agent toll-free at (800) 368-5948 or to the
Partnership toll-free at (800) 255-2737 or collect at (914) 242-7700.
A-1
<PAGE>
Expiration Date: September 11, 1997
PLEASE COMPLETE ALL APPLICABLE INFORMATION
BY MAIL OR OVERNIGHT COURIER: BY HAND ONLY:
Registrar and Transfer Company c/o The Depository Trust Company
10 Commerce Drive Transfer Agent Drop Window
Cranford, New Jersey 07016 55 Water Street, 1st Floor
New York City
SECTION I: TO SUBSCRIBE: I hereby irrevocably subscribe for the dollar amount
of Depositary Units and Preferred Units indicated in A and B below upon the
terms and conditions specified in the Prospectus related hereto, receipt of
which is acknowledged. I will send the Partnership a check or money order for
the Subscription Price for the number of Depositary Units and Preferred Units
indicated in A together with the Subscription Price for the number of
Depositary Units and Preferred Units indicated in B. I hereby apply for
admission as a limited partner of the Partnership with respect to all
Depositary Units and Preferred Units acquired by me and agree to be bound by
all of the terms of the Partnership Agreement, as from time to time in effect.
Please check (-) below:
<TABLE>
<S> <C> <C> <C> <C>
.00 $52 = $
/ / A. Basic =
Subscription ----------- ---------- (Subscription Price) -----------
Rights (Rights Exercised) (Units Requested)* (Amount Required)
/ / B. Over-Subscription Privilege .000 X $52
----------- (Subscription Price) = $
(Additional Units -----------
Requested)* (Amount Required)
*For purposes of this Certificate, a Unit equals
four Depositary Units and one Preferred Unit.
/ / C. Amount of Check or Money Order Enclosed (Total of A and B). Make check payable to
"Registrar and Transfer Company, as Subscription Agent for American Real Estate Partners,= $
L.P." -----------
----------------------- Please provide your Day ( ) --------------
Signature of Subscriber(s)/Sellers(s) telephone number Evening ( ) --------------
</TABLE>
SECTION II: TO TRANSFER RIGHTS:
For value received in the amount of $----- , ----- of the Rights
represented by this Subscription Certificate are assigned to
- -
------------------------------------ ------------------------------------
Social Security Number or Tax ID of Assignee (Print Full Name of Assignee)
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
Signature(s) of Assignee(s) (Print Full Address including
postal Zip Code)
<PAGE>
The signature(s) must correspond with the name(s) as written upon the face of
this Subscription Certificate, in every particular, without alteation.
IMPORTANT: For transfer, a Signature Guarantee must be provided by an eligible
financial institution as defined in Rule 17Ad-15 of the Securities Exchange Act
of 1934, as amended, subject to the standards and procedures adopted by the
issuer, and by a participant in a medallion guarantee program acceptable to the
Subscription Agent.
SIGNATURE GUARANTEED BY:
- ------------------
PROCEEDS FROM THE SALE OF RIGHTS MAY BE SUBJECT TO WITHHOLDING OF U.S. TAXES
UNLESS THE SELLER'S CERTIFIED U.S. TAXPAYER IDENTIFICATION NUMBER (OR
CERTIFICATION REGARDING FOREIGN STATUS) IS ON FILE WITH THE SUBSCRIPTION AGENT
AND THE SELLER IS NOT OTHERWISE SUBJECT TO U.S. BACKUP WITHHOLDING.
/ / CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF GUARANTEED
DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE HEREOF AND
COMPLETE THE FOLLOWING:
NAME(S) OF REGISTERED OWNER(S):
WINDOW TICKET NUMBER (IF ANY):
DATE OF EXECUTION OF NOTICE OF GUARANTEED DELIVERY:
NAME OF INSTITUTION WHICH GUARANTEED DELIVERY:
A-2
<PAGE>
Appendix B
[Form of Notice of Guaranteed Delivery]
NOTICE OF GUARANTEED DELIVERY FOR DEPOSITARY UNITS AND PREFERRED UNITS OF
AMERICAN REAL ESTATE PARTNERS, L.P.
SUBSCRIBED FOR PURSUANT TO BASIC SUBSCRIPTION RIGHTS AND
THE OVER-SUBSCRIPTION PRIVILEGE
As set forth in the Prospectus under "The Offering -- Payment for
Securities," this form or one substantially equivalent hereto may be used as a
means of effecting subscription and payment for all Depositary Units and
Preferred Units of American Real Estate Partners, L.P. subscribed for pursuant
to Basic Subscription Rights and the Over-Subscription Privilege. Such form may
be delivered by hand or sent by facsimile transmission, overnight courier or
mail to the Subscription Agent.
The Subscription Agent is:
Registrar and Transfer Company
By Mail or Overnight Courier: By Hand Only: By Facsimile:
Registrar and Transfer Company c/o The Depository Trust Company (908) 497-2312
10 Commerce Drive Transfer Agent Drop Window
Cranford, New Jersey 07016 55 Water Street, 1st Floor
Attention: Reorg. Department New York City
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION
OF INSTRUCTIONS VIA A TELECOPY OR FACSIMILE NUMBER, OTHER THAN
AS SET FORTH ABOVE, DOES NOT CONSTITUTE A VALID DELIVERY
The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Depositary
Units and Preferred Units subscribed for (under Basic Subscription Rights and
the Over-Subscription Privilege) to the Subscription Agent and must deliver
this Notice of Guaranteed Delivery of Payment guaranteeing delivery of (i)
payment in full for all subscribed Depositary Units and Preferred Units and
(ii) a properly completed and executed Subscription Certificate (which
certificate and full payment must then be delivered by the close of business on
the fifth business day after the Expiration Date, as defined in the Prospectus)
to the Subscription Agent prior to 5:00 p.m., New York City time, on the
Expiration Date (September 11, 1997 unless extended). Failure to do so will
result in a forfeiture of the Rights.
B-1
<PAGE>
GUARANTEE
The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company guarantees delivery to the Subscription Agent by the close of
business (5:00 p.m., New York City time) on the fifth Business Day after the
Expiration Date (September 11, 1997 unless extended) of (A) a properly
completed and executed Subscription Certificate and (B) payment of the full
Subscription Price for Depositary Units and Preferred Units subscribed for
pursuant to Basic Subscription Rights together with payment of the Subscription
Price for the number of Depositary Units and Preferred Units for which the
Over-Subscription Privilege is to be exercised, as subscription for such
Depositary Units and Preferred Units is indicated herein or in the Subscription
Certificate.
- ------------------------------------- --------------------------------------
Number of Depositary Units and Number of Depositary Units and
Preferred Units Pursuant to Basic Preferred Units on Over-Subscription
Subscription Rights for which you are Privilege for which you are guaran-
guaranteeing delivery of Rights and teeing delivery of Rights and payment
payment
Number of Rights to be delivered: --------------------------------------
Method of Delivery [circle one] A. Through DTC
B. Direct to Company
Please note that if you are guaranteeing for Depositary Units and Preferred
Units subscribed for pursuant to the Over-Subscription Privilege and are a DTC
participant, you must also execute and forward to Registrar and Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016, a Nominee Holder
Over-Subscription Exercise Form.
- ------------------------------------- --------------------------------------
Name of Firm Authorized Signature
- ------------------------------------- --------------------------------------
Address Title
- ------------------------------------- --------------------------------------
Zip Code Name (Please Type of Print)
- ------------------------------------- --------------------------------------
Name of Registered Holder (If Applicable) Date
- -------------------------------------
Telephone Number
* Signature must be guaranteed by a participant in a medallion guarantee
program acceptable to the Subscription Agent.
** IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, A REPRESENTATIVE OF THE
COMPANY WILL PHONE YOU WITH A PROTECT IDENTIFICATION NUMBER, WHICH NEEDS TO
BE COMMUNICATED BY YOU TO DTC.
B-2
<PAGE>
Appendix C
[Form of Nominee Holder Over-Subscription Exercise Form]
AMERICAN REAL ESTATE PARTNERS, L.P.
RIGHTS OFFERING
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM
PLEASE COMPLETE ALL APPLICABLE INFORMATION*
BY MAIL OR OVERNIGHT COURIER: BY HAND:
To: Registrar and Transfer Company c/o Midwest Clearing Corp.
10 Commerce Drive 40 Broad Street
Cranford, New Jersey 07016 New York, New York 10004
THIS FORM IS TO BE USED ONLY BY NOMINEE HOLDERS TO EXERCISE THE
OVER-SUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH ITS
BASIC SUBSCRIPTION RIGHTS WERE EXERCISED AND DELIVERED THROUGH THE FACILITIES
OF A COMMON DEPOSITARY. ALL OTHER EXERCISES OF OVER-SUBSCRIPTION PRIVILEGES BY
RIGHTS HOLDERS MUST BE EFFECTED BY THE DELIVERY OF SUBSCRIPTION CERTIFICATES.
DEPOSITARY UNITS AND PREFERRED UNITS SUBSCRIBED FOR THROUGH THE EXERCISE OF THE
OVER-SUBSCRIPTION PRIVILEGE MUST BE PURCHASED AS A UNIT CONSISTING OF FOUR
DEPOSITARY UNITS AND ONE PREFERRED UNIT AND MAY NOT BE SUBSCRIBED FOR
SEPARATELY.
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE
PARTNERSHIP'S PROSPECTUS DATED AUGUST 7, 1997 (THE "PROSPECTUS") AND ARE
INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE UPON
REQUEST FROM THE PARTNERSHIP.
VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 PM,
NEW YORK CITY TIME, ON SEPTEMBER 11, 1997, UNLESS EXTENDED BY THE PARTNERSHIP
(THE "EXPIRATION DATE").
1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in ---------------- [Name of Depositary] (the "Depositary") and
that it has either (i) exercised Basic Subscription Rights in respect of Rights
and delivered such exercised Rights to the Subscription Agent by means of
transfer to the Depositary Account of the Partnership or (ii) delivered to the
Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise
of Basic Subscription Rights and will deliver the Rights called in for by such
Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to
such Depositary Account of the Partnership.
2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, ______ Depositary Units and ______ Preferred
Units and certifies to the Subscription Agent that such Over-Subscription
Privilege is being exercised for the account or accounts of persons (which may
include the undersigned) who are Rights Holders and on whose behalf Basic
Subscription Rights have been exercised. The undersigned hereby applies for
admission as a limited partner of the Partnership with respect to all
Depositary Units and Preferred Units subscribed for pursuant to this
Over-Subscription Privilege and agrees to be bound by all of the terms and
conditions of the Partnership Agreement, as from time to time in effect.
3. The undersigned understands that payment of the Subscription Price of $52
per each four Depositary Units and one Preferred Unit subscribed for pursuant
to the Over-Subscription Privilege must be received by the Subscription Agent
at or before 5:00 p.m. New York City time on the Expiration Date and represents
that such payment, in the aggregate amount of $ either (check appropriate
box):
/ / has been or is being delivered to the Subscription Agent pursuant to the
Notice of Guaranteed Delivery referred to above
or
/ / is being delivered to the Subscription Agent herewith
or
/ / has been delivered separately to the Subscription Agent;
and, in the case of funds not delivered pursuant to a Notice of Guaranteed
Delivery, is or was delivered in the manner set forth below (check
appropriate box and complete information relating thereto):
/ / uncertified check
/ / certified check
/ / bank draft
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------- -------------------------------------
Basic Subscription Right Confirmation Number Name of Nominee Holder
- ------------------------------------- -------------------------------------
Depositary Participant Number Address
Contact Name:----------------------------- -------------------------------------
State Zip Code
Phone Number:---------------------------- By:----------------------------------
Dated: -------- , 1997 Name:--------------------------------
Title:-------------------------------
</TABLE>
* PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION
OF BASIC SUBSCRIPTION RIGHTS OWNED, THE NUMBER OF BASIC SUBSCRIPTION RIGHTS
SUBSCRIBED AND THE NUMBER OF DEPOSITARY UNITS AND PREFERRED UNITS SUBSCRIBED
FOR PURSUANT TO THE OVER-SUBSCRIPTION PRIVILEGE REQUESTED BY EACH OWNER.
C-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized in connection with the Offering made
hereby to give any information or to make any representation not contained in
this Prospectus and, if given or made, such information or representation may
not be relied upon as having been authorized by American Real Estate Partners,
L.P. This Prospectus does not constitute an offer or solicitation of an offer
to buy any of the securities offered hereby by any person in any jurisdiction
in which it is unlawful for such person to make such an offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances imply that the information contained herein is correct as of
any time subsequent to the date of this Prospectus.
--------------------------------------------
TABLE OF CONTENTS
Page
-----
Available Information ........................ 2
Information Incorporated By Reference. ...... 2
Prospectus Summary ........................... 3
Risk Factors ................................. 13
The Partnership .............................. 21
The Offering ................................. 23
Purpose of the Offering ..................... 30
Use of Proceeds .............................. 34
Ratio of Earnings to Fixed Charges and
Preferred Unit Distributions ............ 36
Description of Securities .................. 37
Description of Partnership Agreement ......... 42
Income Tax Considerations .................. 51
Legal Matters .............................. 64
Experts .................................... 64
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Subscription Rights
Expiring September 11, 1997
to Purchase Depositary Units
Representing Limited Partner Interests
and 5% Cumulative Pay-in-Kind
Redeemable Preferred Units
Representing Limited Partner Interests
American Real Estate
Partners, L.P.
-----------------------------------
Prospectus
-----------------------------------
August 7, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Set forth below is an estimate (except for the registration fee) of the
fees and expenses payable by the registrant in connection with the issuance and
distribution of the Depositary Units and Preferred Units:
SEC Registration Fee ....................................... $ 90,910
Printing and engraving expenses ........................... 75,000
Accountant's fees and expenses .............................. 25,000
Legal fees and expenses .................................... 300,000
NYSE Listing Fee .......................................... 0
Blue Sky fees and expenses (including counsel's fees) ...... 5,000
Subscription Agent Fees .................................... 30,000
Miscellaneous ............................................. 74,090
---------
Total ...................................................... $600,000
=========
Item 15. Indemnification of Directors and Officers.
Indemnification of American Property Investors, Inc., in its capacity as
the general partner of American Real Estate Partners, L.P. (the "Registrant"),
and its affiliates is provided for in Section 6.15 of the Agreement of Limited
Partnership of the Registrant. Section 6.15 of the Agreement of Limited
Partnership of the Registrant provides as follows:
"6.15 (a) The Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the General Partner, its Affiliates, and all
officers, directors, employees and agents of the General Partner and its
Affiliates (individually, an "Indemnitee") from and against any and all losses,
claims, demands, costs, damages, liabilities, joint and several, expenses of
any nature (including attorneys' fees and disbursements), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which the Indemnitee may be involved, or threatened to be
involved, as a party or otherwise by reason of its status as (x) the General
Partner or an Affiliate thereof or (y) a partner, shareholder, director,
officer, employee or agent of the General Partner or an Affiliate thereof or
(z) a person serving at the request of the Partnership in another entity in a
similar capacity, which relate to, arise out of or are incidental to the
Partnership, its property, business, affairs or the Exchange, including,
without limitation, liabilities under the federal and state securities laws,
regardless of whether the Indemnitee continues to be a General Partner, an
Affiliate, or an officer, director, employee or agent of the General Partner or
of an Affiliate thereof at the time any such liability or expense is paid or
incurred, if (i) the Indemnitee acted in good faith and in a manner it believed
to be in, or not opposed to, the best interests of the Partnership, and, with
respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful and (ii) the Indemnitee's conduct did not constitute
willful misconduct. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, in and of itself, create a presumption or otherwise
constitute evidence that the Indemnitee acted in a manner contrary to that
specified in (i) or (ii) above.
(b) Expenses incurred by an Indemnitee in defending any claim, demand,
action, suit or proceeding subject to this Section 6.15 shall, from time to
time, be advanced by the Partnership prior to the final disposition of such
claim, demand, action, suit or proceeding upon receipt by the Partnership of an
undertaking by or on behalf of the Indemnitee to repay such amount unless it
shall be determined that such Person is entitled to be indemnified as
authorized in this Section 6.15.
(c) The indemnification provided by this Section 6.15 shall be in addition
to any other rights to which those indemnified may be entitled under any
agreement, vote of Record Holders, as a matter of law or equity, or otherwise,
both as to an action in the Indemnitee's capacity as a General Partner, an
Affiliate or as an officer, director, employee or agent of a General Partner or
an Affiliate, and as to an action in another capacity, and shall continue as to
an Indemnitee who has ceased to serve in such capacity and shall inure to the
benefit of the heirs, successors, assigns and administrators of the Indemnitee.
II-1
<PAGE>
(d) The Partnership may purchase and maintain insurance on behalf of the
General Partner and such other Persons as the General Partner shall determine
against any liability that may be asserted against or expense that may be
incurred by such Person in connection with the Exchange and the activities of
the Partnership, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
(e) Except as set forth in the next sentence below, any indemnification
hereunder shall be satisfied solely out of the assets of the Partnership. The
Record Holders shall not be subject to a personal liability by reason of these
indemnification provisions.
(f) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.15 by reason of the fact that the Indemnitee had an
interest in the transaction with respect to which the indemnification applies
if the transaction was otherwise permitted by the terms of this Agreement.
(g) The provisions of this Section 6.15 are for the benefit of the
Indemnitees and shall not be deemed to create any rights for the benefit of any
other persons."
Indemnification of American Property Investors, Inc., in its capacity as
the general partner of American Real Estate Holdings Limited Partnership, in
which the Registrant owns a 99% limited partner interest, and its affiliates
are provided for in Section 6.13 of the Agreement of Limited Partnership of
American Real Estate Holdings Limited Partnership. Section 6.13 of the
Agreement of Limited Partnership of American Real Estate Holdings Limited
Partnership provides as follows:
"6.13 (a) The Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the General Partner, its Affiliates, and all
officers, directors, employees and agents of the General Partner and its
Affiliates (individually, an "Indemnitee") from and against any and all losses,
claims, demands, costs, damages, liabilities, joint and several, expenses of
any nature (including attorneys' fees and disbursements), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, whether civil, criminal, administrative or
investigative, in which the Indemnitee may be involved, or threatened to be
involved, as a party or otherwise by reason of its status as (x) the General
Partner or an Affiliate thereof or (y) a partner, shareholder, director,
officer, employee or agent of the General Partner or an Affiliate thereof or
(z) a Person serving at the request of the Partnership in another entity in a
similar capacity, which relate to, arise out of or are incidental to the
Partnership, its property, business, affairs of the Exchange, including,
without limitation, liabilities under the federal or state securities laws,
regardless of whether the Indemnitee continues to be a General Partner, an
Affiliate, or an officer, director, employee or agent of the General Partner or
of an Affiliate thereof at the time any such liability or expense is paid or
incurred, if (i) the Indemnitee acted in good faith and in a manner it believed
to be in, or not opposed to, the best interests of the Partnership, and, with
respect to any criminal proceeding, had no reasonable cause to believe its
conduct was unlawful and (ii) the Indemnitee's conduct did not constitute
willful misconduct. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, in and of itself, create a presumption or otherwise
constitute evidence that the Indemnitee acted in a manner contrary to that
specified in (i) or (ii) above.
(b) Expenses incurred by an Indemnitee in defending any claim, demand,
action, suit or proceeding subject to this Section 6.13 shall, from time to
time, be advanced by the Partnership prior to the final disposition of such
claim, demand, action, suit or proceeding upon receipt by the Partnership of an
undertaking by or on behalf of the Indemnitee to repay such amount unless it
shall be determined that such Person is entitled to be indemnified as
authorized in this Section 6.13.
(c) The indemnification provided by this Section 6.13 shall be in addition
to any other rights to which those indemnified may be entitled under any
agreement, vote of Limited Partners, as a matter of law or equity, or
otherwise, both as to an action in the Indemnitee's capacity as a General
Partner, an Affiliate or as an officer, director, employee or agent in another
capacity, and shall continue as to an Indemnitee who has ceased to serve in
such capacity and shall inure to the benefit of the heirs, successors, assigns
and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain insurance on behalf of the
General Partner and such other Persons as the General Partner shall determine
against any liability that may be asserted against or expense that
II-2
<PAGE>
may be incurred by such Person in connection with the Exchange and the
activities of the Partnership, regardless of whether the Partnership would have
the power to indemnify such Person against such liability under the provisions
of this Agreement.
(e) Except as set forth in the next sentence below, any indemnification
hereunder shall be satisfied solely out of the assets of the Partnership. The
Limited Partners shall not be subject to a personal liability by reason of
these indemnification provisions.
(f) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 6.13 by reason of the fact that the Indemnitee had an
interest in the transaction with respect to which the indemnification applies
if the transaction was otherwise permitted by the terms of this Agreement.
(g) The provisions of this Section 6.13 are for the benefit of the
Indemnitees and shall not be deemed to create any rights for the benefit of any
other persons."
Indemnification of the officers and directors of American Property
Investors, Inc. is provided for in Section 10 of its Certificate of
Incorporation and ARTICLE X of its By-Laws. Section 10 of the Certificate of
Incorporation of American Property Investors, Inc., as amended, provides as
follows:
No director will have any personal liability to the corporation or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
of which involve intentional misconduct or a knowing violation of law, (iii)
under section 174 of the Delaware General Corporation Law, as amended, or (iv)
for any transaction from which the director obtained an improper personal
benefit.
ARTICLE X of the By-Laws of American Property Investors, Inc., provides as
follows:
(a) any person made a party to any action, suit or proceeding, by reason
of the fact that he, his testator or intestate representative is or was a
director, officer or employee of the Corporation, or of any Corporation in
which he served as such at the request of the Corporation, shall be indemnified
by the Corporation against the reasonable expenses, including attorney's fees,
actually and necessarily incurred by him in connection with the defense of such
action, suit or proceeding, or in connection with any appeal therein, except in
relation to matters as to which it shall be adjusted in such action, suit or
proceeding, or in connection with any appeal therein that such officer,
director or employee is liable for negligence or misconduct in the performance
of his duties.
(b) The foregoing right of indemnification shall not be deemed exclusive
of any other rights to which any officer or director or employee may be
entitled apart from the provisions of this section.
(c) The amount of indemnity to which any officer or any director may be
entitled shall be fixed by the Board of Directors, except that in any case
where there is no disinterested majority of the Board available, the amount
shall be fixed by arbitration pursuant to the then existing rules of the
American Arbitration Association."
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Documents
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
4.1 -- Amended and Restated Agreement of Limited Partnership of Registrant, dated as of May 12,
1987 (the "Partnership Agreement") (filed as Exhibit No. 3.2 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.2 -- Amendment No. 1 to the Partnership Agreement, dated as of February 22, 1995 (filed as
Exhibit No. 4.2 to Registrant's Registration Statement on Form S-3 (Registration No.
33-54767) and incorporated herein by reference).
4.3 -- Amendment No. 2 to the Partnership Agreement, dated as of August 16, 1996 (filed as
Exhibit No. 10.1 to Registrant's Current Report on Form 8-K, dated August 16, 1996 and
incorporated herein by reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Documents
- --------- ------------------------
<S> <C>
4.4 -- Amended and Restated Agreement of Limited Partnership of American Real Estate Holdings,
Limited Partnership ("AREH"), dated as of July 1, 1987 (filed as Exhibit No. 3.4 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 and
incorporated herein by reference).
4.5 -- Depositary Agreement dated as of May 21, 1987 among Registrant, the General Partner and
the Subscription Agent (the "Depositary Agreement") (filed as Exhibit No. 4.1 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 and
incorporated herein by reference).
4.6 -- Amendment No. 1 to the Depositary Agreement (filed as Exhibit No. 4.5 to Registrant's
Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by
reference).
4.7 -- Form of Subscription Certificate (included on pages A-1 and A-2 of the Prospectus forming
part of this Registration Statement).
4.8 -- Form of Notice of Guaranteed Delivery (included on pages B-1 and B-2 of the Prospectus
forming part of this Registration Statement).
4.9 -- Form of Nominee Holder Over-Subscription Exercise Form (included on page C-1 of the
Prospectus forming a part of this Registration Statement).
4.10 -- Form of Subscription Guaranty Agreement between Registrant and High Coast Limited
Partnership (the "Guarantor").**
4.11 -- Form of Registration Rights Agreement between Registrant and the Guarantor.**
5 -- Opinion of Rogers & Wells.**
8 -- Opinion of Rogers & Wells as to certain federal income tax matters.**
10.1 -- Note Purchase Agreements, dated as of May 27, 1988, among Registrant, AREH and The
Prudential Insurance Company of America (the "Note Agreements") (filed as Exhibit Nos. 2a
and 2b to Registrant's Current Report on Form 8-K dated May 27, 1988 and incorporated
herein by reference).
10.2 -- Amendment No. 1 to the Note Agreements dated November 17, 1988 (filed as Exhibit No.
10.2 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.3 -- Amendment No. 2 to the Note Agreements dated November 17, 1988 (filed as Exhibit No.
10.3 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.4 -- Amendment No. 3 to the Note Agreements dated as of June 21, 1994 (filed as Exhibit No.
10.4 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.5 -- Amendment No. 4 to the Note Agreements dated as of August 12, 1994 (filed as Exhibit No.
10.5 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
12 -- Computation of Ratio of Earnings to Fixed Charges (included on page 36 of the Prospectus
forming a part of this Registration Statement).
23.1 -- Consent of KPMG Peat Marwick LLP.**
23.2 -- Consents of Rogers & Wells (included in Exhibits 5 and 8).**
99.1 -- Form of Subscription Agent Agreement between Registrant and the Subscription Agent.*
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
II-4
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth
the results of the subscription Offer. If any public offering is to be
made on terms differing from those set forth on the cover page of the
prospectus, a post-effective amendment will be filed to set forth the
terms of such offering.
(6) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933,
shall be deemed to be part of this registration statement as of the
time it was declared effective.
(ii) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such controlling person in
II-5
<PAGE>
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Mount Kisco, State of New York, on
August 6, 1997.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: AMERICAN PROPERTY INVESTORS, INC.
General Partner
By: *
----------------------------------
Carl C. Icahn
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ------
<S> <C> <C>
* Chairman of the Board
- ----------------------------- (Principal Executive Officer) August 6, 1997
Carl C. Icahn
* Director August 6, 1997
- -----------------------------
Alfred D. Kingsley
* Director August 6, 1997
- -----------------------------
William A. Leidesdorf
* Director August 6, 1997
- -----------------------------
Jack G. Wasserman
/s/ John P. Saldarelli Treasurer
- ----------------------------- (Principal Financial Officer and August 6, 1997
John P. Saldarelli Principal Accounting Officer)
*By: /s/ John P. Saldarelli
-------------------------
John P. Saldarelli
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Documents
- --------- ---------------------------------------------------------------------------------------------
<S> <C>
4.1 -- Amended and Restated Agreement of Limited Partnership of Registrant, dated as of May 12,
1987 (the "Partnership Agreement") (filed as Exhibit No. 3.2 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.2 -- Amendment No. 1 to the Partnership Agreement, dated as of February 22, 1995 (filed as
Exhibit No. 4.2 to Registrant's Registration Statement on Form S-3 (Registration No.
33-54767) and incorporated herein by reference).
4.3 -- Amendment No. 2 to the Partnership Agreement, dated as of August 16, 1996 (filed as
Exhibit No. 10.1 to Registrant's Current Report on Form 8-K, dated August 16, 1996 and
incorporated herein by reference).
4.4 -- Amended and Restated Agreement of Limited Partnership of American Real Estate Holdings,
Limited Partnership ("AREH"), dated as of July 1, 1987 (filed as Exhibit No. 3.4 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 and
incorporated herein by reference).
4.5 -- Depositary Agreement dated as of May 21, 1987 among Registrant, the General Partner and
the Subscription Agent (the "Depositary Agreement") (filed as Exhibit No. 4.1 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 and
incorporated herein by reference).
4.6 -- Amendment No. 1 to the Depositary Agreement (filed as Exhibit No. 4.5 to Registrant's
Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by
reference).
4.7 -- Form of Subscription Certificate (included on pages A-1 and A-2 of the Prospectus forming
part of this Registration Statement).
4.8 -- Form of Notice of Guaranteed Delivery (included on pages B-1 and B-2 of the Prospectus
forming part of this Registration Statement).
4.9 -- Form of Nominee Holder Over-Subscription Exercise Form (included on page C-1 of the
Prospectus forming a part of this Registration Statement).
4.10 -- Form of Subscription Guaranty Agreement between Registrant and High Coast Limited
Partnership (the "Guarantor").**
4.11 -- Form of Registration Rights Agreement between Registrant and the Guarantor.**
5 -- Opinion of Rogers & Wells.**
8 -- Opinion of Rogers & Wells as to certain federal income tax matters.**
10.1 -- Note Purchase Agreements, dated as of May 27, 1988, among Registrant, AREH and The
Prudential Insurance Company of America (the "Note Agreements") (filed as Exhibit Nos. 2a
and 2b to Registrant's Current Report on Form 8-K dated May 27, 1988 and incorporated
herein by reference).
10.2 -- Amendment No. 1 to the Note Agreements dated November 17, 1988 (filed as Exhibit No.
10.2 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.3 -- Amendment No. 2 to the Note Agreements dated November 17, 1988 (filed as Exhibit No.
10.3 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.4 -- Amendment No. 3 to the Note Agreements dated as of June 21, 1994 (filed as Exhibit No.
10.4 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
10.5 -- Amendment No. 4 to the Note Agreements dated as of August 12, 1994 (filed as Exhibit No.
10.5 to Registrant's Registration Statement on Form S-3 (Registration No. 33-54767) and
incorporated herein by reference).
12 -- Computation of Ratio of Earnings to Fixed Charges (included on page 36 of the Prospectus
forming a part of this Registration Statement).
23.1 -- Consent of KPMG Peat Marwick LLP.**
23.2 -- Consents of Rogers & Wells (included in Exhibits 5 and 8).**
99.1 -- Form of Subscription Agent Agreement between Registrant and the Subscription Agent.*
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
<PAGE>
SUBSCRIPTION GUARANTY
THIS SUBSCRIPTION GUARANTY AGREEMENT (the "Agreement"), is
made and entered into as of this ______ day of August, 1997, by and between
American Real Estate Partners, L.P., a Delaware limited partnership ("AREP"),
and High Coast Limited Partnership, a Delaware limited partnership ("High
Coast").
RECITALS:
WHEREAS, AREP is distributing at no cost to holders of record
as of the close of business on August 8, 1997 (the "Record Date"), one
transferable subscription right (each a "Right") for each five depositary units
representing limited partner interests in AREP (the "Depositary Units") held by
such holder. Each Right entitles the holder thereof (each a "Rights Holder") to
purchase (the "Basic Subscription Right") four Depositary Units and one 5%
cumulative pay-in-kind redeemable preferred unit representing a limited partner
interest in AREP (each a "Preferred Unit"); and
WHEREAS, the Rights also entitle each holder thereof who has
exercised any portion of his Basic Subscription Rights to purchase additional
Depositary Units and Preferred Units (the "Over-Subscription Privilege") that
are not purchased through the exercise of all Basic Subscription Rights (the
Depositary Units and the Preferred Units issued upon exercise of the Basic
Subscription Rights and/or the Over-Subscription Privilege, if any, are referred
to herein as the "Securities"). The Securities available pursuant to the
Over-Subscription Privilege will be allocated pro rata (according to the
aggregate number of Basic Subscription Rights exercised so that the aggregate
amount of Depositary Units and Preferred Units issued to exercising Rights
Holders who subscribe pursuant to the Over-Subscription Privilege will generally
be in proportion to the aggregate amount of Depositary Units and Preferred Units
purchased through the exercise of Basic Subscription Rights) among those Rights
Holders who exercise the Over-Subscription Privilege. Other terms and conditions
of the issuance of Rights and the subscription for Securities (the "Offering")
are more particularly set forth in the definitive prospectus dated as of August
__, 1997 (the "Prospectus"), delivered to the holders of Depositary Units
simultaneously with the distribution of the Rights; and
WHEREAS, the Rights, once issued, will be freely transferable
until the close of business on the last business day prior to the expiration
date of the Rights (the "Expiration Date"); and
WHEREAS, the Rights will be listed on the New York Stock
Exchange, Inc. (the "Exchange") under the symbol "ACP.RT;" and
<PAGE>
WHEREAS, High Coast, the general partner of which is American
Property Investors, Inc. ("API"), a Delaware corporation wholly owned by Carl C.
Icahn ("Icahn") and which is the general partner of AREP (in such capacity, the
"General Partner") together with its affiliates, owns 13,895,712 Depositary
Units (54.1%) and 1,920,945 Preferred Units (88.2%) as of the Record Date; and
WHEREAS, High Coast agrees herein to serve as a stand by
purchaser, guaranteeing to purchase all Depositary Units and Preferred Units
available through the Offering but which have not been subscribed for and
purchased by other Rights Holders either through the exercise of their Basic
Subscription Rights or the Over-Subscription Privilege (the "Unsubscribed
Units"), thereby assuring AREP of receiving gross proceeds from the Offering of
an amount equal to approximately $300 million.
NOW THEREFORE, for and in consideration of the premises, and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Representations and Warranties. (a) AREP represents and
warrants to High Coast as follows: (The definitions of certain terms, used in
this Section 1 are defined in paragraphs (i) and (xix) of this Section 1(a)).
(i) AREP meets the requirements for use of Form S-3
under the Securities Act of 1933 (the "1933 Act") and has filed with the
Securities and Exchange Commission (the "Commission"), a registration statement
(File number 333-31561) on such Form S-3, (together with any pre-effective or
post-effective amendments thereto, including post-effective amendments filed
pursuant to Rule 462, the "Registration Statement"). As filed, the Registration
Statement and amendments thereto and the prospectus included therein (together
with any amendments and supplements thereto, the "Prospectus"), shall contain
all information required by, and comply in all material respects with the
requirements of, the 1933 Act with respect to the Rights, the Securities, the
Offering thereof and the purchase of the Unsubscribed Units. The Prospectus and
any related letters from AREP to record or beneficial owners of Depositary Units
or Rights, related letters from AREP to securities dealers, commercial banks,
trust companies and other nominees and other offering materials, in each case
disseminated by AREP or by any of its agents with AREP's prior consent,
including, without limitation, the Form of Subscription Certificates, the Form
of Notice of Guaranteed Delivery, Guarantee, and any other information in
writing that AREP may approve or authorize for use in connection with the
Offering, are collectively referred to hereinafter as the "Offering Materials."
(ii) On the Effective Date (as hereinafter defined),
the Registration Statement did or will, and when the Prospectus is first filed
(if required) in accordance with Rule 424(b) and on the Closing Date (as
hereinafter defined), the Prospectus will, comply
2
<PAGE>
in all material respects with the applicable requirements of the 1933 Act and
the respective rules thereunder; on the Effective Date, the Registration
Statement did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and on the Effective Date,
the Prospectus, if not required to be filed pursuant to Rule 424(b), and the
Offering Materials did not or will not, and on the date of any filing pursuant
to Rule 424(b) and on the Closing Date, the Prospectus and the Offering
Materials will not, include any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; provided,
however, that AREP makes no representations or warranties as to the information
contained in or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with information furnished in writing to AREP by
or on behalf of High Coast specifically for inclusion in the Registration
Statement or the Prospectus.
(iii) AREP and its subsidiary, American Real Estate
Holding Limited Partnership (the "Subsidiary"), are limited partnerships duly
formed, validly existing and in good standing under the laws of the State of
Delaware with full power, authority and legal right to own, lease and operate
their respective properties and conduct their respective businesses as now
conducted and currently proposed to be conducted by each of them in the
Registration Statement and the Prospectus; and AREP and its Subsidiary are each
duly qualified to transact business as a foreign limited partnership and are in
good standing in each other jurisdiction in which they own or lease property of
a nature, or transact business of a type, that would make such qualification
necessary, except to the extent that the failure to so qualify or be in good
standing would not have a material adverse effect on AREP and its Subsidiary,
considered as one enterprise.
(iv) AREP and its Subsidiary have all requisite power and
authority to execute, deliver and perform their obligations under this
Agreement; and this Agreement has been duly authorized, executed and delivered
by AREP and, assuming due execution and delivery of this Agreement by High
Coast, constitutes a legal, valid and binding obligation of AREP, enforceable
against AREP in accordance with its terms except (A) as enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law), and (B) as rights to indemnity
and contribution hereunder may be limited by Federal or state securities laws
and/or public policy.
(v) The consolidated financial statements and the related
notes of AREP incorporated by reference in the Registration Statement and the
Prospectus present fairly in accordance with
3
<PAGE>
generally accepted accounting principles ("GAAP") the consolidated financial
position of AREP as of the dates indicated therein and the consolidated results
of operations and cash flows of AREP for the periods specified therein. Such
financial statements have been prepared in conformity with GAAP applied on a
consistent basis throughout the periods involved, except as otherwise noted
therein and subject, in the case of interim financial statements, to normal
year-end audit adjustments. The financial statement schedules incorporated by
reference in the Registration Statement and the Prospectus present fairly in
accordance with GAAP the information required to be stated therein.
(vi) All of the Unsubscribed Units will have been duly
authorized, validly issued and duly recorded in the books and on the records of
AREP at the time of issuance; no holder of the Unsubscribed Units will be
subject to personal liability by reason of being such a holder; and none of the
Unsubscribed Units will be issued in violation of the preemptive rights of any
Depositary Unit or Preferred Unit holder.
(vii) The Preferred Units, issued and delivered upon a
distribution, if any, equal to 5% of the liquidation preference on any of the
Unsubscribed Units, will be duly authorized and validly issued and duly recorded
in the books and records of AREP; no holder of any of the Unsubscribed Units as
of the date of issuance will be subject to personal liability by reason of being
such a holder; and none of such Unsubscribed Units outstanding as of the date
thereof, will be issued in violation of the preemptive rights of any holder of
Preferred Units.
(viii) The Depositary Units, when issued and delivered
upon conversion, if any, of any of the Unsubscribed Units, will be duly
authorized and validly issued and duly recorded in the books and records of
AREP; no holder of any of the Depositary Units resulting from the conversion of
any of the Unsubscribed Units as of the date of issuance will be subject to
personal liability by reason of being such a holder; and none of such Depositary
Units outstanding as of the date thereof, will be issued in violation of the
preemptive rights of any holder of Depositary Units.
(ix) AREP has taken or will take all valid and necessary
actions to register and insure the qualification of the Unsubscribed Units under
state securities laws.
(x) AREP has taken all valid action to duly reserve for
listing on the Exchange such number of its authorized and unissued Unsubscribed
Units, if accepted for listing, as are deliverable by AREP pursuant to this
Agreement, against receipt of and payment therefor in accordance with the
provisions set forth herein.
(xi) All securities registered by the Registration
Statement conform in all material respects to the descriptions
4
<PAGE>
thereof contained or incorporated by reference in the Registration
Statement and the Prospectus.
(xii) Prior to or at the Effective Date, AREP and the
Registrar and Transfer Company, the subscription agent ("Subscription Agent")
will have entered into a subscription agent agreement (the "Subscription Agent
Agreement"). When executed by AREP, the Subscription Agent Agreement will have
been duly authorized, executed and delivered by AREP and, assuming due
authorization, execution and delivery by the Subscription Agent, will constitute
a valid and binding obligation of AREP enforceable against AREP in accordance
with its terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally and except as enforcement thereof is subject to general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law).
(xiii) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as otherwise
stated or described therein, there has not been (a) any material adverse change
in the condition (financial or otherwise), results of operations, earnings or
business affairs of AREP, whether or not arising in the ordinary course of
business, or (b) any distribution of any kind declared, paid or made by AREP on
its Depositary Units or Preferred Units, other than regular periodic
distributions, if any, and other than the Rights.
(xiv) Neither AREP nor its Subsidiary is in violation of
its certificate of limited partnership or in default under any contract,
indenture, mortgage, loan agreement or other agreement or instrument to which it
is a party or by which any of their respective properties may be subject or by
which it may be bound, except for such defaults that in the aggregate would not
have a material adverse effect on the condition (financial or otherwise) of AREP
or its Subsidiary considered as one enterprise. The execution and delivery of,
and performance under, this Agreement, the exercise of and payment of the
subscription price in connection with such exercise of, the Rights and the
participation in the Offering do not and will not result in any violation of the
certificate of limited partnership of AREP or its Subsidiary or the agreement of
limited partnership of AREP and its Subsidiary, and do not and will not conflict
with, or result in a breach of any of the terms or provisions of, or constitute
a default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of AREP or its Subsidiary under (a) any
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument to which AREP or its Subsidiary is a party or by which any of their
respective properties may be subject or by which it is or may be bound, or (b)
any existing applicable law, rule, regulation, judgment, order or decree of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over AREP or its Subsidiary or any of their respective properties
5
<PAGE>
(except, in the case of (a) and (b) above, where such conflicts, breaches or
defaults or liens, charges or encumbrances in the aggregate would not have a
material adverse effect on the condition (financial or otherwise) of AREP or its
Subsidiary considered as one enterprise).
(xv) No authorization, approval, consent or license of
any government, governmental instrumentality or court, domestic or foreign
(other than under the 1933 Act, the Securities Exchange Act of 1934, as amended
(the "1934 Act") and the securities or blue sky laws of the various states), is
required for the offer and sale by AREP of the Securities or the consummation of
the Offering as set forth in the Registration Statement and the Prospectus or
the consummation by AREP of the transactions contemplated by this Agreement.
(xvi) Except as disclosed in the Prospectus, there is no
action, suit or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending against or affecting
AREP or its Subsidiary that is required to be disclosed in the Registration
Statement and the Prospectus.
(xvii) AREP has not taken and will not take, directly or
indirectly, any action designed to, or that might be reasonably expected to,
cause or result in stabilization or manipulation of the price of the Rights, the
Depositary Units or the Preferred Units; provided, however, that AREP makes no
representation as to any action taken by High Coast or its affiliates (other
than AREP), except in such affiliates' capacities as officers or agents of AREP,
acting in those capacities.
(xviii) The proceeds of the Offering will be applied as
set forth in the Prospectus.
(xix) The terms which follow, when used in this
Agreement, shall have the meanings indicated. The term "the Effective Date"
shall mean each date that the Registration Statement and any post-effective
amendment or amendments thereto are declared effective by the Securities and
Exchange Commission. "Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto. "Registration
Statement" shall mean the registration statement referred to in paragraph (i)
above, including exhibits and financial statements, as amended at the Execution
Time (or, if not declared effective at the Execution Time, in the form in which
it shall be declared effective) and, in the event any post-effective amendment
thereto is declared effective prior to the Closing Date, shall also mean such
registration statement as so amended. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as provided by
Rule 430A and any post-effective amendment filed pursuant to Rule 462. "Rule
424," "Rule 430A" and "Rule 462" refer to such rules under the 1933 Act. "Rule
430A Information" means information with respect to the Securities, the
6
<PAGE>
Unsubscribed Units and the Offering permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A. Any
reference herein to the Registration Statement or the Prospectus shall be deemed
to refer to and include the documents incorporated by reference therein pursuant
to Item 12 of Form S-3 which were filed under the 1934 Act on or before the
Effective Date of the Registration Statement or the issue date of any such
Prospectus, as the case may be; and any reference herein to the terms "amend",
"amendment" or "supplement" with respect to the Registration Statement, any such
Prospectus shall be deemed to refer to and include the filing of any document
under the 1934 Act after the issue date of any such Prospectus, as the case may
be, deemed to be incorporated therein by reference.
(b) High Coast represents and warrants to AREP as follows:
(i) High Coast is a limited partnership duly formed,
validly existing and in good standing under the laws of the State of Delaware
with full power, authority and legal right to own, lease and operate its
properties and conduct its business as now conducted; High Coast is duly
qualified to transact business as a foreign limited partnership and is in good
standing in each other jurisdiction in which it owns or leases property of a
nature, or transact business of a type, that would make such qualification
necessary, except to the extent that the failure to so qualify or be in good
standing would not have a material adverse effect on High Coast.
(ii) High Coast has all requisite power and authority
to execute, deliver and perform its obligations under this Agreement; and this
Agreement has been duly authorized, executed and delivered by High Coast, and,
assuming due execution and delivery of this Agreement by AREP, constitutes a
legal, valid and binding obligation of High Coast, enforceable against High
Coast in accordance with its terms except (A) as enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law), and (B) as rights to indemnity
and contribution hereunder may be limited by Federal or state securities laws
and/or public policy.
(iii) High Coast is not in violation of its certificate
of limited partnership or in default under any contract, indenture, mortgage,
loan agreement or other agreement or instrument to which it is a party or any of
its properties may be subject or by which it may be bound, except for such
defaults that in the aggregate would not have a material adverse effect on the
condition (financial or otherwise) of High Coast. The execution and delivery of,
and performance under, this Agreement, the exercise of and payment of the
subscription price in connection with such exercise of, the Rights and the
participation in the
7
<PAGE>
Offering do not and will not result in any violation of the certificate of
limited partnership of High Coast or the agreement of limited partnership of
High Coast, and do not and will not conflict with, or result in a breach of any
of the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of High Coast under (a) any indenture, mortgage, loan agreement, note,
lease or other agreement or instrument to which High Coast is a party or any of
its respective properties may be subject or by which it is or may be bound, or
(b) any existing applicable law, rule, regulation, judgment, order or decree of
any government, government instrumentality or court, domestic or foreign, having
jurisdiction over High Coast or any of its respective properties (except, in the
case of (a) and (b) above, where such conflicts, breaches or defaults or liens,
charges or encumbrances in the aggregate would not have a material adverse
effect on the condition (financial or otherwise) of High Coast).
(iv) The partnership interests of High Coast are owned
beneficially by the General Partner, ACF Industries, Incorporated, a New Jersey
corporation ("ACF"), and Tortoise Corp., a New York corporation, each of which
is controlled by Icahn; and
(v) High Coast owns beneficially 13,895,712 Depositary
Units and 1,920,945 Preferred Units.
(vi) Immediately prior to the Expiration Date, High
Coast will receive a cash contribution from ACF or an affiliate thereof of such
dollar amount, if any, as is necessary for High Coast to comply with its
obligations to AREP pursuant this Agreement.
(vii) To the extent that the Registration Statement or
Prospectus contains any information regarding High Coast, on the Effective Date,
those portions of the Registration Statement or the Prospectus, furnished in
writing to AREP by or on behalf of High Coast specifically for inclusion
therein, did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading.
(viii) The execution, delivery and consummation of this
Agreement, and the participation by High Coast in the Offering as described in
the Registration Statement and the Prospectus do not and will not result in any
violation of High Coast's agreement of limited partnership and do not and will
not conflict with, or result in a breach of any of the terms or provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of High Coast or its
affiliates under (A) any indenture, mortgage, lien agreement, or other agreement
or instrument to which High Coast or its affiliates is a party or any of their
respective properties may be subject, or by which each of them or any of them
may be bound or (B) any existing applicable law, rule, regulation,
8
<PAGE>
judgment, order or decree of any government, governmental instrumentality or
court, domestic or foreign, having jurisdiction over High Coast or its
affiliates or any of its respective properties (except, in the case of (A) and
(B) above, where such conflicts, breaches or defaults or liens, charges or
encumbrances in the aggregate would not have a material adverse effect on the
condition (financial or otherwise) of High Coast).
(ix) No authorization, approval, consent or license of
any government, governmental instrumentality or court, domestic or foreign
(other than under the 1933 Act and the securities or blue sky laws of the
various states), is required for the receipt or sale of Unsubscribed Units by
High Coast or its affiliates, in connection with the execution, delivery and
consummation of this Agreement, and the participation by High Coast in the
Offering as described in the Registration Statement and the Prospectus.
(x) Except as disclosed in the Prospectus, there is no
action, suit or proceeding before or by any government, governmental
instrumentality or court, domestic or foreign, now pending against or affecting
High Coast.
(xi) High Coast has not taken and will not take,
directly or indirectly, any action designed to, or that might be reasonably
expected to, cause or result in stabilization or manipulation of the price of
the Rights, the Depositary Units or the Preferred Units; provided, however, that
High Coast makes no representation as to any action taken by AREP or its
Subsidiary.
2. Agreement of Parties Concerning Purchase, Sale, Delivery
--------------------------------------------------------
and Compensation.
-----------------
On the basis of, and in reliance upon, the representations and
warranties contained herein and subject to the terms and conditions set forth
herein, the parties agree as follows:
(a) AREP agrees to issue and sell to High Coast and High Coast
agrees to (i) subscribe for and purchase 11,116,568 Depositary Units and
2,779,142 Preferred Units through the exercise of its Basic Subscription Rights
and (ii) to purchase Depositary Units and Preferred Units which are not
otherwise acquired by Rights Holders pursuant hereto, thereby assuring AREP will
receive gross proceeds from the Offering of an amount equal to approximately
$300 million.
(b) Delivery of and payment for the Securities purchased by
High Coast mentioned in Section 2(a)(i) above shall be made in accordance with
the terms set forth in the Registration Statement. Delivery of and payment for
the Unsubscribed Units purchased by High Coast mentioned in Section 2(a)(ii)
above shall be on the third (3rd) business day after written notice is given by
AREP or the Subscription Agent to High Coast of the number and
9
<PAGE>
aggregate purchase price of the Unsubscribed Units High Coast is obligated
hereunder to purchase (the "Closing Date"). Payment shall be made to AREP by
certified or official bank check or similar next day funds payable to the order
of AREP, against delivery to High Coast of those certificates for those
Unsubscribed Units High Coast is obligated hereunder to purchase. The
certificates for such Unsubscribed Units shall be in such denominations as may
be requested by High Coast and registered in the name of High Coast, unless
otherwise designated by High Coast in writing two days before the date of the
Closing Date.
(c) AREP will enter into and perform under an agreement
between High Coast and AREP whereby High Coast is granted registration rights
with respect to all Depositary Units and Preferred Units owned by High Coast
(the "Registration Rights Agreement"), a copy of which is attached hereto as
Exhibit A.
(d) AREP will pay all expenses incident to the performance of
its obligations under this Agreement, including (i) the printing and filing, and
delivery to High Coast of copies, of the Registration Statement as originally
filed and of each amendment thereto, and of the Prospectus; (ii) the printing
(or otherwise reproducing) of this Agreement; (iii) the preparation, issuance
and delivery of the Subscription Certificates to the unit holders of AREP; (iv)
the preparation, issuance and delivery of the certificates for the Securities
and Unsubscribed Units to High Coast; (v) the reasonable fees and disbursements
of AREP's counsel and accountants; (vi) the qualification of the Rights and the
Securities under state securities laws in accordance with the provisions of
Section 1(a)(ix) hereof, including filing fees and the fees and disbursements of
counsel in connection therewith and in connection with the preparation of a
survey of the state securities laws (the "Blue Sky Survey"); (vii) the printing
(or otherwise reproducing) and delivery to High Coast of copies of the Blue Sky
Survey; and (viii) the fees and expenses incurred in connection with the listing
of the Rights and the Securities issued in connection with the Offering, on the
Exchange.
(e) If this Agreement is terminated by High Coast in
accordance with the provisions of Section 4 or Section 6 hereof, AREP shall
reimburse High Coast for all of its reasonable out-of-pocket expenses, including
the reasonable fees and disbursements of High Coast's counsel up to a maximum of
$25,000.
3. Covenants.
---------
(a) AREP covenants to and agrees with High Coast that:
(i) AREP will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, including any post-effective amendment, to become effective
as soon as practicable. Prior to the termination of the Offering, AREP will not
file any amendment of the
10
<PAGE>
Registration Statement or supplement to the Prospectus without High Coast's
prior consent, which consent shall not be unreasonably withheld or delayed.
Subject to the foregoing sentence, if the Registration Statement has become or
becomes effective pursuant to Rule 430A, or filing of the Prospectus is
otherwise required under Rule 424(b), AREP will cause the Prospectus, properly
completed, to be filed with the Commission pursuant to the applicable paragraph
of Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to High Coast of such timely filing. AREP will promptly advise High
Coast (A) when the Registration Statement, if not effective at the Execution
Time, and any amendment thereto, shall have become effective, (B) when the
Prospectus, shall have been filed (if required) with the Commission pursuant to
Rule 424(b), (C) when, prior to termination of the Offering, any amendment to
the Registration Statement shall have been filed or become effective, (D) of any
request by the Commission for any amendment of the Registration Statement or
supplement to the Prospectus or for any additional information, (E) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding for
that purpose and (F) of the receipt by AREP of any notification with respect to
the suspension of the qualification of the Securities or the Unsubscribed Units
for sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose. AREP will use its best efforts to prevent the issuance of any
such stop order or suspension and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) If, at any time when the Prospectus relating to the
Securities is required to be delivered under the 1933 Act, any event occurs as a
result of which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein in the light of the circumstances under which they
were made not misleading, or if it shall be necessary to amend the Registration
Statement or supplement the Prospectus to comply with the 1933 Act or the rules
thereunder (including to comply with Item 512(c) of the Regulation S-K under the
1933 Act), AREP promptly will prepare and file with the Commission, subject to
the second sentence of paragraph (a)(i) of this Section 3, an amendment or
supplement which will correct such statement or omission or effect such
compliance.
(iii) As soon as practicable, AREP will make generally
available to its unit holders, including High Coast, an earning statement or
statements of AREP which will satisfy the provisions of Section 11(a) of the
1933 Act and Rule 158 promulgated thereunder.
(iv) AREP will furnish to High Coast and its counsel,
without charge, a signed copy of the Registration Statement (including all
amendments and exhibits thereto).
11
<PAGE>
(v) AREP will promptly advise High Coast if any of the
representations and warranties contained in Section 1(a) hereof becomes
inaccurate in any material respect subsequent to the date hereof.
(vi) AREP will commence mailing, or cause the
Subscription Agent to mail, the Subscription Certificates to holders of the
Depositary Units as of the Record Date not later than seven business days
following the Record Date and shall complete such mailing expeditiously, and
will offer the Securities for subscription in accordance with the terms and
under the conditions set forth in the Prospectus. The Expiration Date shall be
not later than 5:00 PM, New York City time, on September 11, 1997. AREP will
advise High Coast daily, during the period when the Rights are exercisable, of
the number and class of Securities subscribed for, and prior to 12:00 Noon, New
York City time, on the business day following the Expiration Date, will advise
High Coast of the number of Securities for which Rights Holders subscribed.
(b) High Coast covenants to and agrees with AREP that:
(i) High Coast will promptly advise AREP if any of the
representations and warranties contained in Section 1(b) hereof becomes
inaccurate in any material respect subsequent to the date hereof.
(ii) High Coast will deliver to AREP consolidated
financial statements and the related notes of ACF, which present fairly in
accordance with generally accepted accounting principles ("GAAP") the
consolidated financial position of ACF for the last two years.
4. Conditions to Obligations of High Coast.
---------------------------------------
The obligation of High Coast to comply with the provisions of
this Agreement shall be subject to the accuracy of the representations and
warranties on the part of AREP contained herein as of the Execution Time and the
Closing Date, to the accuracy of the statements made by AREP in any certificates
pursuant to the provisions hereof, to the performance by AREP of its obligations
hereunder and the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution time, unless High Coast agrees in writing to a later
time, the Registration Statement will become effective not later than 12:00
Noon, New York City time on the day on which trading in the Rights begins on the
Exchange; if filing of the Prospectus is required pursuant to Rule 424(b), the
Prospectus, will be filed in the manner and within the time period required by
Rule 424(b); and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
12
<PAGE>
(b) AREP shall furnish Gordon Altman Butowsky Weitzen Shalov &
Wein, counsel to High Coast, such documents as are required to enable Gordon
Altman Butowsky Weitzen Shalov & Wein to render a legal opinion on matters
including, without limitation, the issuance and sale of the Rights and the
Securities, the Unsubscribed Units, the Registration Statement, Prospectus and
other related matters as High Coast may reasonably request.
(c) AREP shall have furnished to High Coast certificates of
AREP dated as of the Execution Time and the Closing Date and signed by any two
officers of the General Partner to the effect that:
(i) the representations and warranties of AREP
in this Agreement are true and correct in all material respects at and
as of the Execution Time or on and as of the Closing Date, as the case
may be, with the same effect as if made at the Execution Time or on the
Closing Date, as the case may be, and AREP shall have complied with all
the covenants and agreements and satisfied all conditions, as
applicable;
(ii) there has been no issuance of a stop
order suspending the effectiveness of the Registration Statement and no
proceedings for that purpose have been instituted or, to the best of
AREP's knowledge, no such order is threatened;
(iii) since the date of the most recent
financial statements included in the Prospectus, there has been no
material adverse change in the condition (financial or otherwise), of
AREP or its Subsidiary, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated by
AREP in the Prospectus.
5. Indemnification and Contribution.
(a) AREP agrees to indemnify and hold harmless the general
partner, officers, other limited partners, employees and agents of High Coast
and each person who controls High Coast within the meaning of either the 1933
Act or the 1934 Act against any and all losses, claims, damages or liabilities,
joint or several, to which they or any of them may become subject under the 1933
Act, the 1934 Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement as originally filed or in any amendment thereof, or in
any of the Offering Materials, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that AREP will not be
liable in any such case to the extent that any such loss, claim, damage or
liability (A) arises
13
<PAGE>
out of or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to AREP by or on behalf of High Coast
specifically for inclusion therein or (B) is found in a final judgment by a
court of competent jurisdiction to have resulted from the bad faith or
negligence of such indemnified party or any party related to an indemnified
party. This indemnity agreement will be in addition to any liability which AREP
may otherwise have.
(b) High Coast agrees to indemnify and hold harmless AREP,
each of its directors, each of its officers who signs the Registration
Statement, and each person who controls AREP within the meaning of the 1933 Act
or the 1934 Act, to the same extent as the foregoing indemnity from AREP to High
Coast, but only with reference to (i) written information relating to High Coast
furnished to AREP by or on behalf of High Coast specifically for inclusion in
the documents referred to in the foregoing indemnity, or (ii) securities law
violations. This indemnity agreement will be in addition to any liability which
High Coast may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 5 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 5, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above, unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory to the
indemnified party. Notwithstanding the indemnifying party's election to appoint
counsel to represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or
14
<PAGE>
additional to those available to the indemnifying party (it being understood,
however, that in connection with such action the indemnifying party shall not be
liable for the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in the
same jurisdiction arising out of the same general allegations or circumstances,
representing the indemnified parties who are parties to such action), (iii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of the institution of such action or (iv) the indemnifying
party shall authorize the indemnified party to employ separate counsel at the
expense of the indemnifying party. An indemnifying party will not, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or action), unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 5 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, AREP and High Coast agree to contribute to the
aggregate losses, claims, damages and liabilities, including legal or other
expenses reasonably incurred in connection with investigating or defending same
(collectively "Losses") to which AREP, on the one hand, and High Coast, on the
other hand, may be subject in such proportion as is appropriate to reflect the
relative benefits received by AREP, on the one hand, and High Coast, on the
other hand, from the Offering. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, AREP, on the one hand, and
High Coast, on the other hand, shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of AREP, on the one hand, and of High Coast, on the other hand, in
connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by AREP
shall be deemed to be equal to the total net proceeds from the Offering (before
deducting expenses), as set forth on the cover page of the Prospectus (assuming
that all such Rights are exercised), and benefits received by High Coast shall
be deemed to be equal to the total compensation paid to High Coast hereunder.
Relative fault shall be determined by reference to whether any alleged untrue
statement or omission relates to information provided by AREP or High Coast.
AREP and High Coast agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of
15
<PAGE>
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 5, each person who controls High Coast within the meaning of either the
1933 Act or the 1934 Act and each director, officer, partner, employee and agent
of High Coast shall have the same rights to contribution as High Coast, and each
person who controls AREP within the meaning of either the 1933 Act or the 1934
Act, each officer of AREP who shall have signed the Registration Statement and
each officer of AREP shall have the same rights to contribution as AREP, subject
in each case to the applicable terms and conditions of this paragraph (d).
6. Termination. This Agreement shall be subject to termination
in the absolute discretion of High Coast, by notice given to AREP prior to
delivery of and payment for the Securities and Unsubscribed Units, if prior to
such time (i) trading in AREP's Depositary Units or Preferred Units shall have
been suspended by the Commission or the Exchange or trading in securities
generally on the Exchange shall have been suspended or limited or minimum prices
shall have been established on the Exchange, (ii) AREP shall terminate the
Offering or the Offering shall not take place, (iii) a banking moratorium shall
have been declared either by Federal or New York State authorities, (iv) there
shall have occurred a decline in either the Dow Jones Industrial Average or the
Standard & Poor's Index of 400 Industrial Companies by an amount in excess of
20% measured from the close of business on the last trading day preceding the
date hereof to the close of business on the Expiration Date, or (v) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency, or war or other calamity or crisis the
effect of which on the financial markets is such as to make it, in the sole
judgment of High Coast, impracticable or inadvisable to proceed with the
Offering or delivery of the Securities and/or the Unsubscribed Units or the
fulfillment of High Coast's obligations, as contemplated by this Agreement.
7. Representations and Indemnities to Survive. The
respective representations, warranties, agreements, covenants, indemnities and
other statements of AREP or its officers, and of High Coast or its affiliates as
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any of the
officers, directors or controlling persons of High Coast or AREP. The
representations, warranties, agreements, covenants, indemnities and other
statements will survive delivery of and payment for the Securities. The
provisions of the subsection (e) of Section 2 and Section 5 hereof shall survive
the termination or cancellation of this Agreement.
8. Notices. All communications hereunder will be in
writing and effective only on receipt, and, if sent to High Coast
16
<PAGE>
will be mailed, delivered or telegraphed and confirmed to it at 767 Fifth
Avenue, 47th Floor, New York, New York 10153, Attn: Carl C. Icahn; or, if sent
to AREP, will be mailed, delivered or telegraphed and confirmed to it at 100
South Bedford, Mount Kisco, NY 10549, attn. John P. Saldarelli.
9. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons of AREP and High Coast, and no
other person will have any right or obligation hereunder.
10. Applicable Law. This Agreement will be governed by and
construed in accordance with the substantive laws of the State of New York.
11. Business Day. For purposes of this Agreement, "business
day" means any day on which the Exchange is open for trading.
12. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
13. Agreement Supersedes. This Agreement shall supersede all
provisions of any prior agreements, whether written or oral, of the parties to
this Agreement that relate to the transactions contemplated by this Agreement.
17
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound thereby,
each of AREP and High Coast has signed or caused to be signed its name by its
proper officers thereunto duly authorized, all as of the day and year first
above written.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc.
By:
-----------------------------
Name:
Title:
HIGH COAST LIMITED PARTNERSHIP
By: American Property Investors, Inc.
By:
-----------------------------
Name:
Title:
18
<PAGE>
AMERICAN REAL ESTATE PARTNERS, L.P.
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT is made as of the __ day of August,
1997 by and between AMERICAN REAL ESTATE PARTNERS, L.P., a Delaware limited
partnership (the "Partnership"), and HIGH COAST LIMITED PARTNERSHIP, a Delaware
limited partnership ("High Coast").
In consideration of the mutual promises contained herein, the parties
hereto, intending to be legally bound, do hereby agree as follows:
1. Registration Rights.
-------------------
The Partnership covenants and agrees as follows:
1.1. Definitions.
-----------
(a) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of 1933, as
amended (the "1933 Act"), and the declaration or ordering of effectiveness of
such registration statement or document.
(b) The term "Registration Rights" means rights to cause the
registration of Registrable Securities.
(c) The term "Registrable Securities" means all of those
depositary units representing limited partnership interests in the Partnership
(the "Depositary Units") and 5% cumulative pay-in-kind redeemable preferred
units representing limited partner interests in the Partnership (the "Preferred
Units"), which Holder now owns or hereinafter acquires. Registrable Securities
will cease to be such when (x) a registration statement covering such
Registrable Securities has been declared effective and they have been disposed
of pursuant to such effective registration statement; (y) they are sold,
transferred or distributed to the public pursuant to Rule 144 (or any similar
provision then in force under the 1933 Act); or (z) they are not required to be
sold pursuant a registration statement.
(d) The term "Holder" means High Coast and its Affiliates.
(e) The terms "Form S-3", "Form S-4" and "Form S-8" mean such
respective forms under the 1933 Act as in effect on the date hereof or any
successor registration forms to Form S-3, Form S-4
<PAGE>
and Form S-8, respectively, under the 1933 Act subsequently adopted by the
Securities and Exchange Commission (the "Commission").
(f) "Affiliate" shall mean, with respect to any Person, any
other Person which directly or indirectly controls, or is controlled by, or is
under common control with, such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise, and the term "controlled" shall have a
meaning correlative to the foregoing.
1.2. Request for Registration.
------------------------
(a) If the Partnership shall receive at any time a written
request from Holder that the Partnership effect the registration under the 1933
Act, then the Partnership agrees to, within five days of the receipt thereof,
subject to the limitations of this Section 1.2, use its best efforts to effect
such a registration as soon as practicable and in any event to file within 90
days of the receipt of such request a registration statement under the 1933 Act
covering all the Registrable Securities which Holder shall request in such
written request and to use its best efforts to have such registration statement
promptly become effective.
(b) If Holder submits a registration request hereunder and
intends to distribute the Registrable Securities covered by a registration
statement filed pursuant to that request by means of an underwriting, it shall
so advise the Partnership as a part of its request made pursuant to this Section
1.2. In such event, the right of Holder to include its Registrable Securities in
such registration shall be conditioned upon its participation in such
underwriting and the inclusion of its Registrable Securities in the underwriting
to the extent provided herein. Holder shall (together with the Partnership as
provided in subsection 1.4(e)) enter into an underwriting agreement with the
underwriter or underwriters selected for such underwriting by Holder and
reasonably satisfactory to the Partnership.
(c) Notwithstanding the foregoing, (i) the Partnership shall
not be obligated to effect the filing of a registration statement pursuant to
this Section 1.2 during the shorter of (x) 120 days following the filing of and
(y) 90 days following the effective date of a registration statement pertaining
to an underwritten public offering of securities for the account of the
Partnership, provided the Partnership is at all times during such period
diligently pursuing an offering pursuant to such registration, and (ii) if the
Partnership shall furnish to Holder requesting a registration statement pursuant
to Section 1.2(a) a certificate signed by American Property Investors, Inc., a
Delaware corporation and the general partner of the Partnership (the "General
Partner") stating that in the judgment of the General Partner on behalf of the
Partnership, it would not be in the best
2
<PAGE>
interests of the Partnership and its limited partners generally for such
registration statement to be filed, the Partnership shall have the right to
defer such filing for a period of not more than 210 days after receipt of the
request of Holder; provided, however, that the Partnership may not utilize the
right set forth in this subsection (d)(ii) more than once in any twelve-month
period.
1.3. Partnership Registration. If (but without any obligation to do so)
the Partnership proposes to register any of its Depositary Units or other
securities, including those held by other persons, under the 1933 Act in
connection with the public offering of such securities solely for cash (other
than a registration on Form S-8 relating solely to the sale of securities to
participants in the Partnership Nonqualified Unit Plan, or a registration on
Form S-4), the Partnership shall, at such time, promptly give Holder written
notice of such registration. Upon the written request of Holder given within 20
days after mailing of such notice by the Partnership, the Partnership shall,
subject to the provisions of Section 1.8, use its best efforts to cause such
registration statement being filed by the Partnership to cover all of the
Registrable Securities that Holder has requested to be registered.
Notwithstanding the foregoing, the Partnership shall be under no obligation to
complete any offering of its securities it proposes to make and shall incur no
liability to Holder for its failure to do so. In addition, the failure of Holder
to respond to the notice delivered by the Partnership pursuant to this Section
1.3 within 20 days after its mailing by the Partnership shall be deemed to
indicate that Holder does not desire to include any Registrable Securities in
such registration statement.
1.4. Obligations of the Partnership. Whenever required under this
Section 1 to use its best efforts to effect the registration of any Registrable
Securities, the Partnership shall, as expeditiously as possible:
(a) Prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective, and,
upon the request of Holder, keep such registration statement effective
for up to 180 days.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement, and use its best efforts
to cause each such amendment to become effective, as may be necessary
to comply with the provisions of the 1933 Act with respect to the
disposition of all Registrable Securities covered by such registration
statement.
(c) Furnish to Holder such reasonable number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as Holder may
reasonably request in writing in
3
<PAGE>
order to facilitate the disposition of Registrable Securities
owned by it.
(d) Use its best efforts to register or qualify the securities
covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by
Holder in writing, provided that the Partnership shall not be required
in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such
states or jurisdiction.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter of such
offering. If Holder participates in such underwriting, it shall also
enter into and perform its obligations under such an agreement,
including furnishing any opinion of counsel or entering into a lock-up
agreement reasonably requested by the managing underwriter.
(f) Notify Holder, whose Registrable Securities are covered by
such registration statement, at any time when a prospectus relating
thereto covered by such registration statement is required to be
delivered under the 1933 Act, of the happening of any event as a result
of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances then existing and promptly file such amendments and
supplements which may be required pursuant to subparagraph (b) of this
Section 1.4 on account of such event and use its best efforts to cause
each such amendment and supplement to become effective; provided,
however, once Holder is notified by the Partnership that there is an
inaccuracy in the Partnership's registration statement or prospectus,
Holder will thereafter immediately discontinue the distribution of such
registration statement or prospectus and the disposition of Registrable
Securities pursuant to such registration statement or prospectus until
such time as Holder has received a copy or copies of an amended or
supplemental registration statement or prospectus, and is so directed
by the Partnership in its notice to Holder. Holder shall deliver to the
Partnership (at the Partnership's expense) all inaccurate copies, other
than permanent file copies, then in its possession of the registration
statement or prospectus covering such Registrable Securities.
(g) Use its best efforts to furnish, at the request of Holder
requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered
to the underwriters for sale in connection with a registration pursuant
to this Section 1, if
4
<PAGE>
such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters on the date that the
registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of the counsel representing
the Partnership for the purposes of such registration, in form and
substance as is customarily given by Partnership counsel to the
underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to Holder if Holder requested registration of
Registrable Securities and (ii) a letter dated such date, from the
independent certified public accountant of the Partnership, in form and
substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to Holder if Holder
requested registration of Registrable Securities.
1.5. Furnish Information. It shall be a condition precedent to the
obligations of the Partnership to take any action pursuant to this Section 1
that Holder shall furnish to the Partnership such information regarding itself,
the Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of its
Registrable Securities. Holder hereby agrees to notify the Partnership as
promptly as practicable of any inaccuracy or change in or addition to the
information previously furnished by Holder to the Partnership, which results in
any registration statement or prospectus containing an untrue statement of a
material fact regarding Holder or the distribution of such Registrable
Securities or omitting to state any material fact regarding Holder or the
distribution of such Registrable Securities required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing.
1.6. Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions relating to Registrable Securities
incurred in connection with three (3) requests for registration, filings or
qualifications pursuant to Section 1.2, including, without limitation, all
registration, filing and qualification fees, printing and accounting fees, fees
and disbursements of counsel for the Partnership, and the reasonable fees and
disbursements of counsel selected by Holder shall be borne by the Partnership.
1.7. Expenses of Partnership Registration. The Partnership shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for Holder, including, without limitation, all
registration, filing and qualification fees, printing and accounting fees,
underwriting discounts and commissions relating to Registrable Securities fees
and disbursements of counsel for the Partnership and the reasonable fees and
disbursements of counsel selected by Holder.
5
<PAGE>
1.8. Underwriting Requirements. In connection with any offering
involving an underwriting of securities being issued by the Partnership or in
connection with any demand registration made by Holder, the Partnership shall
not be required under Section 1.3 to include any of Holder's securities in such
underwriting unless it accepts the terms of the underwriting as agreed upon
between the Partnership and the underwriters selected by it, and then only in
such quantity, if any, as will not, in the opinion of the underwriters, have a
material adverse effect on the price of the securities being offered by the
Partnership. If the managing underwriter for the offering shall advise the
Partnership or Holder in writing that the total amount of securities, including
Registra-ble Securities, to be included in such offering exceeds the amount of
securities that can be successfully offered, then the Partnership shall be
required to include in the offering only that number of such securities,
including Registrable Securities, which the managing underwriter believes will
not have a material adverse effect on the price of the securities being offered
by the Partnership. If the foregoing provision requires the exclusion of
securities from any offering described in this Section, then such exclusion of
all securities which unitholders other than Holder seek to include in the
offering shall be effected prior to the exclusion of securities which Holder
seeks to register.
1.9. Indemnification. In the event any Registrable Securities
are included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Partnership will
indemnify and hold harmless Holder, the officers, directors, partners,
agents and employees thereof, any underwriter (as defined in the 1933
Act) therefor and each person, if any, who controls Holder or the
underwriter within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), against any losses,
claims, damages, or liabilities (joint or several) to which they may
become subject under the 1933 Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (iii) any violation or
alleged violation by the Partnership of the 1933 Act, the 1934 Act, any
state securities law or any rule or regulation promulgated under the
1933 Act, the 1934 Act or any state securities law. The Partnership
will reimburse Holder, officer, director, partner, agent, employee,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage,
6
<PAGE>
liability, or action. The indemnity agreement contained in this
subsection 1.9(a) shall not apply to amounts paid in settlement of any
loss, claim, damage, liability, or action if such settlement is
effected without the consent of the Partnership (which consent shall
not be unreasonably withheld), nor shall the Partnership be liable to
Holder in any such case for any such loss, claim, damage, liability, or
action (i) to the extent that it arises out of or is based upon a
Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such
registration by or on behalf of Holder, underwriter or controlling
person or (ii) in the case of a sale directly by Holder, including a
sale of such Registrable Securities through any underwriter retained by
Holder to engage in a distribution solely on behalf of Holder, such
untrue statement or alleged untrue statement or omission or alleged
omission was contained in a preliminary prospectus and corrected in a
final or amended prospectus, and Holder failed to deliver a copy of the
final or amended prospectus at or prior to the confirmation of the sale
of the Registrable Securities to the person asserting any such loss,
claim, damage or liability in any case where such delivery is required
by the 1933 Act.
(b) To the extent permitted by law, Holder will indemnify and
hold harmless the Partnership, each of its partners and officers who
have signed the registration statement, each person, if any, who
controls the Partnership within the meaning of the 1933 Act, each agent
and any underwriter for the Partnership, and any other person selling
securities in such registration statement or any of its directors,
officers, partners, agents or employees or any person who controls such
person or underwriter, against any losses, claims, damages, or
liabilities (joint or several) to which the Partnership or any such
director, officer, controlling person, agent, or underwriter or
controlling person, or other person or director, officer or controlling
person may become subject, under the 1933 Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with
written information furnished by or on behalf of Holder expressly for
use in connection with such registration; and Holder will reimburse any
legal or other expenses reasonably incurred by the Partnership or any
such director, officer, controlling person, agent or underwriter or
controlling person, or other person selling securities in such
registration or any of its officers, directors, partners, agents,
employees, or controlling persons in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided,
however, that the liability of Holder hereunder shall be limited to the
amount of proceeds received by Holder
7
<PAGE>
in the offering giving rise to the Violation; and provided further that
the indemnity agreement contained in this subsection 1.9(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent
of Holder, which consent shall not be unreasonably withheld nor, in the
case of a sale directly by the Partnership of its securities (including
a sale of such securities through any underwriter retained by the
Partnership to engage in a distribution solely on behalf of the
Partnership), shall Holder be liable to the Partnership in any case in
which such untrue statement or alleged untrue statement or omission or
alleged omission was contained in a preliminary prospectus and
corrected in a final or amended prospectus, and the Partnership failed
to deliver a copy of the final or amended prospectus at or prior to the
confirmation of the sale of the securities to the person asserting any
such loss, claim, damage or liability in any case where such delivery
is required by the 1933 Act.
(c) Promptly after receipt by an indemnified party under this
Section 1.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this
Section 1.9, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume
and control the defense thereof with counsel mutually satisfactory to
the parties; provided, however, that, if representation of such
indemnified party by counsel retained by the indemnifying party would
be inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented in such
proceeding, then (i) if such indemnified party is Holder or any
Affiliate of Holder, Holder and any Affiliate of Holder shall have the
right to retain one counsel to represent Holder and any Affiliates of
Holder, with fees and expenses to be paid by the indemnifying party and
(ii) all other indemnified parties shall have the right to select one
counsel to represent such indemnified parties, with fees and expenses
to be paid by the indemnifying party. The failure to deliver written
notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 1.9 to the extent
of such prejudice, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 1.9.
(d) The obligations of the Partnership and Holder under this
Section 1.9 shall survive the completion of any offering
8
<PAGE>
of Registrable Securities in a registration statement whether under
this Section 1 or otherwise.
1.10. Reports Under Securities Exchange Act of 1934. With a view to
making available to Holder the benefits of Rule 144 promulgated under the 1933
Act and any other rule or regulation of the Commission that may at any time
permit Holder to sell securities of the Partnership to the public without
registration, and with a view to making it possible for Holder to register the
Registrable Securities pursuant to a registration on Form S-3, the Partnership
agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times;
(b) take such action, including the voluntary registration of
its securities under Section 12 of the 1934 Act, as is necessary to
enable Holder to utilize Form S-3 for the sale of its Registrable
Securities, such action to be taken as soon as practicable (but not
later than 90 days) after the end of the fiscal year in which the first
registration statement filed by the Partnership for the offering of its
securities to the general public is declared effective;
(c) file with the Commission in a timely manner all reports
and other documents required of the Partnership under the 1933 Act and
the 1934 Act; and
(d) furnish to Holder so long as it owns any Registrable
Securities, forthwith upon request (i) a written statement by the
Partnership that it has complied with the reporting requirements of
Rule 144, the 1933 Act and the 1934 Act, or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any
time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Partnership and such other reports and
documents so filed by the Partnership, and (iii) such other information
as may be reasonably requested in availing Holder of any rule or
regulation of the Commission which permits the selling of any such
securities without registration or pursuant to such form.
2. Miscellaneous.
-------------
2.1. Parties in Interest. All covenants, agreements, representations,
warranties and undertakings in this Agreement made by and on behalf of any of
the parties hereto shall bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
2.2. Amendments and Waivers. Except as set forth in this Agreement,
changes in or additions to this Agreement may be made or compliance with any
term, covenant, agreement, condition or
9
<PAGE>
provision set forth herein may be omitted or waived (either generally or in a
particular instance and either retroactively or prospectively), upon the written
consent of the Partnership and Holder.
2.3. Governing Law. This Agreement shall be deemed a contract made
under the laws of the State of New York and, together with the rights of
obligations of the parties hereunder, shall be construed under and governed by
the laws of the State of New York.
2.4. Notices. All notices, requests, demands and other communications
provided for hereunder shall be made in writing (including telegraphic
communication) and mailed, telecopied, telegraphed or delivered:
If to Holder:
High Coast Limited Partnership
767 Fifth Avenue
Mt. Kisco, New York 10153
with a copy to:
Marc Weitzen, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 W. 47th Street
New York, New York 10036
If to the Partnership to:
American Real Estate Partners, L.P.
100 South Bedford Road
Mt. Kisco, New York 10549
with a copy to:
Craig S. Medwick, Esq.
Rogers & Wells
200 Park Avenue
New York, New York 10166
or at such other address as shall be designated by any party in a written notice
to the other parties complying as to delivery with the terms of this Section
2.4.
All such notices, requests, demands and other communications shall,
when mailed (registered mail, return receipt requested, postage prepaid),
personally delivered, or telegraphed, be effective four days after deposit in
the mails, when personally delivered, or when delivered to the telegraph
Partnership, respectively, addressed as aforesaid, unless otherwise provided
herein and, when telecopied, shall be effective upon actual receipt.
10
<PAGE>
2.5. Counterparts. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one and the same
instrument.
2.6. Effect of Headings. The section and paragraph headings herein are
for convenience only and shall not affect the construction hereof.
2.7. Entire Agreement. This Agreement constitutes the entire agreement
between the Partnership and Holder with respect to the subject matter hereof.
There are no representations, warranties, covenants or undertakings with respect
to the subject matter hereof other than those expressly set forth herein. This
Agreement supersedes all prior agreements between the parties with respect to
the Registrable Securities described herein and the subject matter hereof.
2.8. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written, by the parties hereto.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc.,
General Partner
------------------------------
Name:
Title:
HIGH COAST LIMITED PARTNERSHIP
By: American Property Investors, Inc.,
General Partner
------------------------------
Name:
Title:
11
<PAGE>
[LETTERHEAD OF ROGERS & WELLS]
August 6, 1997
American Real Estate Partners, L.P.
100 South Bedford Road
Mt. Kisco, New York 10549
Ladies and Gentlemen:
We have acted as counsel for American Real Estate Partners,
L.P., a Delaware limited partnership (the "Partnership"), in connection with the
preparation and filing with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, of a Registration Statement on Form S-3
(Registration No. 333-31561), as amended (the "Registration Statement"),
relating to the issuance by the Partnership of transferable subscription rights
(the "Rights") for up to 20,600,000 depositary units representing limited
partner interests in the Partnership (the "Depositary Units") and up to
5,150,000 5% cumulative pay-in-kind redeemable preferred units representing
limited partner interests in the Partnership (the "Preferred Units").
In so acting, we have examined and relied upon originals or
copies, certified or otherwise identified to our satisfaction, of such
partnership records, documents, certificates and other instruments as in our
judgment are necessary or appropriate to enable us to render the opinions
expressed below. As to certain matters governed by the laws of the State of
Delaware, we have relied on the opinion of Morris, Nichols, Arsht & Tunnell, a
copy of which is attached hereto.
Based upon the foregoing, and such examination of law as we
have deemed necessary, we are of the opinion that the issuance of the Rights and
the sale of the Depositary Units and the Preferred Units have been duly
authorized and, when issued as contemplated in the Registration Statement and in
accordance with the agreements and documents referred to therein, the Rights
will be legally issued and, when issued and paid for as contemplated in the
Registration Statement and in accordance with the agreements and documents
referred to therein, the Depositary Units and the Preferred Units will be
legally issued, fully paid and non-assessable (except as such assessability may
be affected by the matters referenced in the prospectus forming a part of the
Registration Statement (the "Prospectus") under the heading "Description of
Partnership Agreement - Liability of General Partner and Unitholders").
<PAGE>
Rogers & Wells
American Real Estate Partners, L.P. 2 August 6, 1997
We consent to the filing of this opinion with the Securities
and Exchange Commission as an Exhibit to the Registration Statement and to the
reference to this firm under the heading "Legal Matters" in the Prospectus. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the Rules and Regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
ROGERS & WELLS
<PAGE>
[LETTERHEAD OF MORRIS, NICHOLS, ARSHT & TUNNELL]
August 6, 1997
American Real Estate Partners, L.P.
100 South Bedford Road
Mt. Kisco, New York, l0549
RE: American Real Estate Partners, L.P.
Ladies and Gentlemen:
We have acted as special Delaware counsel to American Real Estate
Partners, L.P., a Delaware limited partnership (the "Partnership"), in
connection with the proposed issuance by the Partnership of transferrable rights
("Rights") to subscribe for up to approximately 20.6 million depositary units
("Depositary Units") and up to approximately 5.15 million 5% cumulative
pay-in-kind redeemable preferred units ("Preferred Units"), such units
representing limited partner interests in the Partnership, as described in
Registration Statement No. 333-31561 on Form S-3 filed with the Securities and
Exchange Commission, as amended by Amendment No. 1 thereto (as amended, the
"Registration Statement").
In rendering this opinion, we have examined and relied upon copies of
the following documents in the forms provided to us: the Registration Statement
and the Prospectus forming a part thereof (the "Prospectus"); the Amended and
Restated Agreement of Limited Partnership of the Partnership dated as of May 12,
1987, as amended by Amendment Nos. 1 and 2 thereto dated as of February 22, 1995
and August 16, 1996, respectively (as from time to time in effect, the
"Partnership Agreement"); the subscription documentation attached as Appendices
A through C to the Prospectus (the "Subscription Documentation"); the
Certificate of Limited Partnership of the Partnership as filed in the Office of
the Secretary of State of the State of Delaware (the "State Office") on February
17, 1987; a Certificate of Amendment to the Certificate of Limited Partnership
of the Partnership as filed in the State Office on October 12, 1993; and such
other instruments, certificates and documents as we have deemed necessary or
appropriate for the purposes of rendering this opinion. In such examinations, we
have assumed the genuineness of all signatures, the authenticity of all
<PAGE>
American Real Estate Partners, L.P.
August 6, 1997
Page 2
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as copies or drafts of documents to be executed
and the legal competence or capacity of natural persons or entities (who are or
will become signatories thereto) to complete the execution of documents. We have
further assumed for purposes of this opinion: (i) the due organization or
formation, valid existence and good standing of the Partnership and each entity
that is a party to any of the documents reviewed by us under the laws of the
jurisdiction of their respective organization or formation; (ii) the due
authorization, execution and delivery by, or on behalf of, each of the parties
thereto of the above-referenced documents and of all documents contemplated by
the Partnership Agreement or the Registration Statement (collectively, the
"Operative Documents") to be executed by persons or entities exercising Rights
to acquire Depositary Units and Preferred Units (including, without limitation,
due execution and delivery of applicable Subscription Documentation); (iii) the
payment of consideration in connection with the exercise of Rights in accordance
with the term of the Operative Documents and compliance with the other terms,
procedures and requirements of the Operative Documents in connection with the
issuance and exercise of Rights and the issuance of associated Depositary Units
and Preferred Units; (iv) the deposit with the Depositary of one or more
Certificates evidencing Units relating to Depositary Units to be issued upon the
exercise of Rights, and the proper issuance of Depositary Receipts and
Certificates evidencing Depositary Units and Preferred Units, respectively,
acquired pursuant to the exercise of Rights; (v) that appropriate notation of
the names, addresses and capital contributions of the persons or entities
exercising Rights and acquiring Depositary Units and Preferred Units will be
made in the books and records of the Partnership; and (vi) that the documents
reviewed by us are in full force and effect, set forth the entire understanding
of the parties with respect to the subject matter thereof and have not been
amended, supplemented or otherwise modified, except as herein referenced. No
opinion is expressed herein with respect to the requirements of, or compliance
with, federal or state securities or blue sky laws. As to any facts material to
our opinion, other than those assumed, we have relied upon the referenced
instruments, certificates and other documents and on the accuracy as of the date
hereof of the matters therein set forth. Capitalized terms used herein and not
otherwise herein defined are used as defined in the Partnership Agreement.
Based on and subject to the foregoing, and limited in all respects
to matters of Delaware law, it is our opinion that (i) Rights, when issued to
Limited Partners in accordance with the terms, procedures and requirements set
forth in the Operative Documents, will be validly issued and (ii) Depositary
Units and Preferred Units, when issued in accordance with the terms,
<PAGE>
American Real Estate Partners, L.P.
August 6, 1997
Page 3
procedures and requirements set forth in the Operative Documents upon the
exercise of Rights, will be validly issued and fully paid and will not be
subject to assessment by the Partnership for additional capital contributions
(except an such assessability may be affected by the matters referenced in the
Prospectus under the heading "DESCRIPTION OF PARTNERSHIP AGREEMENT - Liability
of General Partner and Unitholders").
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"LEGAL MATTERS" in the Prospectus. In giving this consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
We understand that the firm of Rogers & Wells wishes to rely as to
matters of Delaware law on the foregoing opinions in connection with the
rendering of its opinion to you on or about the date hereof concerning the
transactions contemplated thereby and we hereby consent to such reliance.
Except as referenced in the foregoing sentence, this opinion is intended solely
for the benefit of the addressee hereof in connection with the
transactions contemplated hereby and may not be relied upon by any other person
or entity, or for any other purpose, without our prior written consent.
Very truly yours,
MORRIS, NICHOLS, ARSHT & TUNNELL
/s/ Walter C. Tuthill
---------------------------------
Walter C. Tuthill
<PAGE>
[LETTERHEAD OF ROGERS & WELLS]
August 6, 1997
American Real Estate
Partners, L.P.
100 South Bedford Road
Mt. Kisco, New York 10549
Re: American Real Estate Partners, L.P. --
Prospectus for the Rights Offering
----------------------------------
Gentlemen:
You have requested our opinion with respect to certain federal income
tax matters in connection with the transactions contemplated by the prospectus
(the "Prospectus") included in the Registration Statement on Form S-3, filed
with the Securities and Exchange Commission on July 18, 1997, as amended to date
hereof, relating to American Real Estate Partners, L.P. ("AREP"). All
capitalized terms used herein have their respective meanings set forth in the
Prospectus unless otherwise stated.
We have acted as counsel to AREP with respect to the Offering pursuant
to the terms of the Prospectus. This letter is for delivery in connection with
the Offering to be made by the Prospectus and is intended to confirm as of the
date hereof the opinion described in the section of the Prospectus captioned
"Income Tax Considerations." We hereby consent to the use of this opinion letter
as an exhibit to the Registration Statement of AREP and to the reference to this
firm in the Registration Statement under the captions "Investment Considerations
- -- Certain Tax Considerations," "Income Tax Considerations" and "Legal Matters."
<PAGE>
Rogers & Wells
American Real Estate
Partners, L.P. 2 August 6, 1997
In rendering the opinion stated below, we have examined and relied,
with your consent, upon the following:
(i) The Prospectus, Registration Statement and all amendments thereof
to date;
(ii) The Agreement of Limited Partnership of AREP;
(iii) The Agreement of Limited Partnership of American Real Estate
Holdings, L.P. ("Holdings"); and
(iv) Such other documents, records and instruments as we have deemed
necessary in order to enable us to render the opinion referred to in this
letter.
In our examination of the foregoing documents, we have assumed, with
your consent, that (i) all documents reviewed by us are original documents, or
true and accurate copies of original documents, and have not been subsequently
amended, (ii) the signatures on each original document are genuine, (iii) each
party who executed the document had proper authority and capacity, (iv) all
representations and statements set forth in such documents are true and correct,
(v) all obligations imposed by any such documents on the parties thereto have
been or will be performed or satisfied in accordance with their terms and (vi)
AREP and Holdings at all times will be organized and operated in accordance with
the terms of such documents. We have further assumed the accuracy of the
statements and descriptions of AREP's and Holdings' intended activities as
described in the Prospectus.
For purposes of rendering the opinion stated below, we have also
assumed, with your consent, the accuracy of the representations contained in the
Certificate of Representations dated August 6, 1997 provided to us by AREP.
These representations generally relate to the classification, organization and
operation of AREP and Holdings.
Based upon and subject to the foregoing and the qualifications
hereinafter set forth, we are of the opinion that:
(1) AREP will continue to be classified as a partnership and not as an
association for federal income tax purposes.
<PAGE>
Rogers & Wells
American Real Estate
Partners, L.P. 3 August 6, 1997
(2) Holdings will continue to be classified as a partnership and not as
an association for federal income tax purposes.
(3) It is more likely than not that the Preferred Units will be
classified as partnership interests for federal income tax purposes rather than
debt of AREP.
(4) The summary of federal income tax considerations set forth in the
Prospectus under the heading "Income Tax Considerations" fairly summarizes the
federal income tax considerations that are likely to be material to a Unitholder
who is a United States citizen or resident.
The opinion stated above represents our conclusions as to the
application of federal income tax laws existing as of the date of this letter to
the transactions contemplated in the Prospectus and we can give no assurance
that legislative enactments, administrative changes or court decisions may not
be forthcoming that would modify or supersede our opinion. Moreover, there can
be no assurance that positions contrary to our opinion will not be taken by the
IRS, or that a court considering the issues would not hold contrary to such
opinion. Further, the opinion set forth above represents our conclusions based
upon the documents, facts and representations referred to above. Any material
amendments to such documents, changes in any significant facts or inaccuracy of
such representations could affect the opinion referred to herein. Although we
have made such inquiries and performed such investigations as we have deemed
necessary to fulfill our professional responsibilities as counsel, we have not
undertaken an independent investigation of all of the facts referred to in this
letter.
We express no opinion as to any federal income tax issue or other
matter except those set forth above. We assume no obligation to update our
opinion or to advise any person of any subsequent changes in facts or law which
may affect the validity of the conclusions expressed herein.
Very truly yours,
ROGERS & WELLS
<PAGE>
The Board of Directors
American Real Estate Partners, L.P.:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
-----------------------------
KPMG Peat Marwick LLP
New York, New York
August 5, 1997
