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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________ to______________
Commission File Number 1-9516
AMERICAN REAL ESTATE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3398766
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 South Bedford Road, Mt. Kisco, New York 10549
(Address of principal executive offices) (Zip Code)
(914) 242-7700
(AREP's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Depositary Units Representing New York Stock Exchange
Limited Partner Interests
5% Cumulative Pay-in-Kind Redeemable Preferred New York Stock Exchange
Units Representing Limited Partner Interests
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether AREP (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based upon the closing price of Depositary Units on March 5, 1999, as reported
on the New York Stock Exchange Composite Tape (as reported by The Wall Street
Journal), the aggregate market value of AREP's Depositary Units held by
nonaffiliates of AREP as of such date was $69,130,022.
Based upon the closing price of Preferred Units on March 3, 1999, as reported on
the New York Stock Exchange Composite Tape (as reported by The Wall Street
Journal), the aggregate market value of AREP's Preferred Units held by
nonaffiliates of AREP as of such date was $7,888,368.
Number of Depositary Units outstanding as of March 5, 1999: 46,098,284.
Number of Preferred Units outstanding as of March 3, 1999: 7,676,607.
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PART I
Item 1. Business.
Introduction
American Real Estate Partners, L.P. ("AREP") was formed in Delaware on
February 17, 1987. Pursuant to an exchange offer (the "Exchange Offer") which
was consummated on July 1, 1987, AREP acquired the real estate and other assets,
subject to the liabilities, of thirteen limited partnerships (the "Predecessor
Partnerships"). The Predecessor Partnerships acquired such assets between 1972
and 1985. A registration statement on Form S-4 relating to the Exchange Offer
(Registration No. 33-13943) was filed with the Securities and Exchange
Commission (the "SEC") and declared effective May 18, 1987.
AREP's general partner is American Property Investors, Inc. (the
"General Partner"), a Delaware corporation which is wholly owned by Carl C.
Icahn ("Icahn"). The General Partner's principal business address is 100 South
Bedford Road, Mt. Kisco, New York 10549, and its telephone number is (914)
242-7700. AREP's business is conducted through a subsidiary limited partnership,
American Real Estate Holdings Limited Partnership (the "Subsidiary" or "AREH"),
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. References to
AREP herein include the Subsidiary, unless the context otherwise requires. As of
March 5, 1999, affiliates of Icahn owned 38,083,209 units representing limited
partner interests (the "Depositary Units"), representing approximately 82.6% of
the outstanding Depositary Units, and 6,642,067 5% cumulative pay in kind
redeemable preferred units representing limited partner interests (the
"Preferred Units"), representing approximately 86.5% of the outstanding
Preferred Units. See Item 12 - "Security Ownership of Certain Beneficial Owners
and Management."
As described below, AREP is primarily engaged in the business of
acquiring and managing real estate and activities related thereto. On August 16,
1996, an amendment (the "Amendment") to the Partnership's Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement") became effective
which permits AREP to make non-real estate related investments. As described
below, the Amendment permits AREP to invest in securities issued by companies
that are not necessarily engaged as one of their primary activities in the
ownership, development or management of real estate to further diversify its
investments while remaining in the real estate business and continuing to pursue
suitable investments in the real estate markets.
General Description of Business
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 March 5, 1999, AREP
owned 192 separate real estate assets primarily consisting of fee and leasehold
interests in 32 states.
For each of the years ended December 31, 1998, 1997 and 1996, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP. However, at December 31, 1998, 1997
and 1996, Portland General Electric Company ("PGEC") occupied a property (the
"PGEC Property") which represented more than 10% of AREP's total real estate
assets. See Item 2 -- "Properties."
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AREP's primary 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, debt or equity securities of
companies which may be undergoing restructuring and sub-performing properties
that may require active asset management and significant capital improvements.
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 a significant inventory of assets under
development, as well as experienced personnel. AREP may originate or purchase
mortgage loans including non-performing mortgage loans. AREP will often 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 Investment Company Act of
1940 (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. As of March 5, 1999, AREP had invested approximately
$175 million to purchase 6,448,200 common shares of RJR Nabisco Holdings Corp.
which represents over 10% of AREP's total assets.
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.
Investment Opportunities and Strategies
AREP believes that it will benefit from diversification of its
portfolio of assets. By the end of the year 2002, net leases representing
approximately 27% of AREP's net annual rentals from its real estate portfolio
will be due for renewal, and by the end of the year 2004, net leases
representing approximately 37% 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.
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Real Estate Investments
As mentioned above, 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 parcels for
future residential and commercial development, 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 REITS, and
debt or equity securities of companies which may be undergoing restructuring and
subperforming properties that may require active asset management and
significant capital improvements. 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 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"). In this regard, in 1997, an offer was made by AREP acting through
its Audit Committee to purchase Bayswater Realty and Capital Corp.
("Bayswater"), a land development company owned by Icahn, which offer was not
accepted. While the Audit Committee is considering whether AREP should make
another offer for Bayswater and may consider making such offer in Units of AREP
(the number of Units could be conditioned upon the Audit Committee's obtaining
a fairness opinion), there can be no assurances thereof or whether the
transaction will be pursued. AREP has engaged Bayswater to perform certain
development, construction management, marketing and sales services with respect
to the residential sites being developed by AREP as described below. See Item
13.--"Certain Relationships and Related Transactions--Property Management and
Other Related Transactions."
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 has invested and expects to invest in undeveloped land and
development properties. In particular, AREP expects to continue to pursue this
year the development of two residential sites it owns in Armonk, New York and
East Hampton, New York. The Armonk site is comprised of approximately 43
residential building lots, and the East Hampton site subdivision has been
approved for 16 residential building lots. Also, in 1998, AREP acquired
residential development land in connection with the acquisition of the New
Seabury Resort in Cape Cod, Massachusetts. 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 and projected
rental levels or sales prices may not be achieved and other unpredictable
contingencies beyond the control of AREP could occur. AREP 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
AREP without the
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benefit of income from these properties, which may adversely affect the ability
of AREP to successfully develop such properties. Furthermore, the ultimate
disposition price of these properties may be less than the costs incurred by
AREP with respect thereto.
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 these interests at what may be significant discounts to
the value of their underlying real estate in many instances. It should also be
noted, however, that such illiquidity may adversely affect AREP's ability to
profit from these investments in the near term, although AREP believes that such
investments provide opportunities for long term appreciation.
Further, as reported generally, recent global economic and monetary
conditions, especially in Asia, may create opportunities for value-added
investors in those markets. AREP has begun to consider additional opportunities
in foreign markets, but there can be no assurance that any such transactions
will be pursued or consummated. It should be noted that such investments may be
subject to additional considerations relating to foreign political and
regulatory risks, as well as currency and exchange risks, which may affect the
liquidity and value of any such investments in the near term, although AREP
believes that such investments provide opportunities for long term appreciation.
In addition, AREP has made investments in the gaming industry and will
consider additional investment opportunities in the gaming industry. See Item 1
- - Recent Acquisitions - Investment in Mortgages and Notes Receivable for a
further discussion on the Stratosphere Tower, Casino and Hotel transaction, as
well as a discussion on AREP's investments in the Sands Hotel and Casino and
the Claridge Hotel and Casino. As described herein, AREP, the General Partner,
and the directors and officrs of the General Partner are currently in the
process of pursuing gaming applications to obtain licenses from the Nevada
Gaming Authority. It should be noted that investments in the gaming industry
involve significant risks, including those relating to competitive pressures
and political and regulatory considerations. In recent years, there have been
several new gaming establishments opened as well as facility expansions,
providing increased supply of competitive products and properties in the
industry, which may adversely affect the operating margins and investment
returns. As new openings and expansion projects have been completed, supply has
grown more quickly than demand in some areas, and competition has increased.
Likewise, an increase in supply often leads to increases in complimentary and
promotional expenses in the industry. AREP believes that these market
conditions will lead some gaming properties to become available for
restructuring or purchase and will create potential investments for
opportunistic buyers such as AREP, and AREP intends to pursue such additional
investments in the gaming industry, including the possible acquisition of
additional interests in the Stratosphere Tower, Casino and Hotel from
affiliates of the General Partner. Any such aquisition by AREP of additional
interests in Stratosphere may be made in exchange for Units in AREP, provided
the terms thereof are fair and reasonable to AREP. While the increase in supply
and competition may provide additional investment opportunities for investors
such as AREP, such investments may require additional capital expenditures and
restructurings (such as in the case of Stratosphere) and there can be no
assurance that such investments will not be adversely affected by such
pressures or prove to be successful. Furthermore, federal, state and local
jurisdictions from time to time consider legislation regarding the gaming
industry which could adversely impact gaming operations. AREP believes,
however, that investments in the gaming industry provide AREP with
opportunities for long term appreciation.
While AREP believes opportunities in real estate related acquisitions
continue to remain available, such acquisition opportunities for value-added
investors are competitive to source and the increased competition may have some
impact on the spreads and the ability to find quality assets that provide
returns that are sought. These investments may not be readily financeable and
may not generate immediate positive cash flow for AREP. 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. While this may impact cash flow in the near term and
there can be no assurance that any asset acquired by AREP 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 further its objective to
diversify its portfolio.
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Non-Real Estate Related Investments
In selecting future investments, AREP may, while remaining in the real
estate business and continuing to pursue suitable investments for AREP in the
real estate markets, invest a portion of its funds available for investment 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 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. 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 regard 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.
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. In addition, AREP may engage in various investment
techniques, such as options and futures transactions, foreign currency
transactions and leveraging for either hedging or other purposes.
AREP will conduct its investment activities in such a manner so as not
to be deemed an investment company under the 1940 Act. Generally, this means
that AREP does not intend to enter the business of investing in securities and
that no more than 40% of AREP's total assets will be invested in securities. The
portion of AREP's assets invested in each type of security or any single issuer
or industry will not be limited. Investments may be made directly by AREP or
indirectly through entities in which it has an interest.
Partnership Distributions
On March 29, 1999, AREP announced that no distributions on its
Depositary Units are expected to be made in 1999. No distributions were made in
1998, 1997 or 1996. In making its announcement, AREP noted that it
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. By the end of
the year 2002, net leases representing approximately 27% of AREP's net annual
rentals from its portfolio will be due for renewal, and by the end of the year
2004, 37% of such rentals will be due for renewal. In making its decision, AREP
also considered the number of properties that are leased to retail tenants
(approximately 34% of AREP's net annual rentals from its portfolio) some of
which are experiencing cash flow difficulties and restructurings. Further, AREP
noted that the types of investments AREP is pursuing, including assets that may
not be readily financeable or generating positive cash flow, such as development
properties, non-performing mortgage loans or securities of companies which may
be undergoing restructuring or require significant capital investments, require
AREP to maintain a strong capital base in order to own, develop and reposition
those assets. AREP believes that it should continue to gold and invest, rather
than distribute, cash. See Item 5 -- "Market for AREP's Common Equity and
Related Security Holder Matters - Distributions" and Item 7 -- "Management's
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Discussion and Analysis of the Financial Condition and Results of Operations --
Capital Resources and Liquidity."
On March 31, 1998, AREP distributed to holders of record of its
Preferred Units as of March 13, 1998 approximately 365,553 additional Preferred
Units. Pursuant to the terms of the Preferred Units, on February 23, 1999, AREP
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10.00. The
distribution is payable March 31, 1999 to holders of record as of March 15,
1999.
Recent Acquisitions
Investment in Mortgages and Notes Receivable
In June, 1997 AREP invested approximately $42.8 million to purchase
approximately $55 million face value of 14 -1/4% First Mortgage Notes ("Notes"),
due May 15, 2002, issued by Stratosphere Corporation ("Stratosphere"), which had
approximately $203 million of such notes outstanding. In July and September
1998, AREP invested approximately $17.9 million to purchase approximately $43.5
million face value of additional Notes. An affiliate of Icahn owned
approximately $83.3 million face value of the 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 (the "Bankruptcy Code").
Stratosphere filed a Second Amended Plan of Reorganization which provided for
the holders of the First Mortgage Notes to receive 100% of the equity in the
reorganized entity and therefore provided the Company and the General Partner's
affiliate with a controlling interest. Such plan was approved by the Bankruptcy
Court on June 6, 1998 but was not effective until certain governmental approvals
were obtained including, among other things, certain licenses from the Nevada
Gaming Authority.
AREP, the General Partner, and the directors and officers of the
General Partner are currently in the process of pursuing gaming applications to
obtain licenses from the Nevada Gaming Authority. AREP understands that the
application process may take a number of months. AREP has no reason to believe
that it will not obtain its necessary license; however, the licensing
application of the affiliate of Icahn was reviewed and approved by the
authorities earlier than AREP's application. In an effort to facilitate the
consummation of the Stratosphere reorganization process, AREP entered into an
agreement (the "Transfer/Repurchase Agreement") to transfer its interests in
Stratosphere to an affiliate of Icahn at a price equal to AREP's cost for such
Notes. However, the affiliate of Icahn is obligated to sell back to AREP and
AREP is obligated to repurchase such interest in Stratosphere at the same price
(together with a commercially reasonable interest factor), when the appropriate
licenses are obtained by AREP.
In October 1998, the affiliate of the General Partner obtained its
license and in accordance with the Transfer/Repurchase Agreement AREP received
approximately $60.7 million for its Stratosphere interests. Stratosphere's
Second Amended Plan of Reorganization became effective on October 14, 1998. In
addition to Icahn becoming Chairman of the Board of Stratosphere, AREP
received the right to appoint two members to Stratosphere's board. As
mentioned above, AREP is continuing the process of obtaining licensing which
will permit it to repurchase its interest in Stratosphere along with its
proportionate share of all sale proceeds, stock rights, acquired shares and
other benefits, if any, that may have accreted to or been obtained in connection
with such Stratosphere equity interests while held by the affiliate of Icahn
under the Transfer/Repurchase Agreement.
As described above in "Real Estate Investments", AREP may consider
additional investments in the gaming industry, as it believes additional
opportunities may become available due to market conditions and other factors.
Upon approval of certain licenses by the Nevada Gaming Authority, AREP will
reacquire its interest in Stratosphere under the Transfer/Repurchase Agreement
and may consider the possibility of acquiring the interest in Stratosphere held
by the affiliate of the General Partner. Any such acquisition by AREP of the
General Partner's affiliate's interest in Stratosphere may be made in exchange
for Units in AREP and will be subject to review and approval by the Audit
Committee.
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At December 31, 1998 AREP continues to reflect in its financial
statements, its equity interest in Stratosphere and the liability to
repurchase its interest. See Note 7 to the Financial Statements contained
herein.
During 1998, AREP acquired an interest in the Sands Hotel and Casino
(the "Sands") located in Atlantic City, New Jersey by purchasing the principal
amount of $18.7 million of First Mortgage Notes issued by GB Property Funding
Corp. ("GB Property"). GB Property was organized as a special purpose entity for
the borrowing of funds by Greate Bay Hotel and Casino, Inc. ("Greate Bay"). The
purchase price for such notes was approximately $15.1 million. An affiliate of
the General Partner also has an investment in notes of GB Property. $185 million
of such notes were issued, which bear interest at 10.875% per annum and are due
on January 15, 2004.
Greate Bay owns and operates the Sands, a destination resort complex,
containing a 76,000 square foot casino and 532 hotel rooms and other amenities.
On January 5, 1998, GB Property and Greate Bay filed for bankruptcy protection
under Chapter 11 of the Bankruptcy Code to restructure its long term debt.
In January, 1998, AREP acquired an interest in the Claridge Hotel and
Casino (the "Claridge Hotel") located in Atlantic City, New Jersey by purchasing
the principal amount of $15 million of First Mortgage Notes of the Claridge
Hotel and Casino Corporation (the "Claridge Corporation"). The purchase price of
such notes was approximately $14.1 million. $85 million of such notes were
issued, which bear interest at 11.75% payable semi-annually and are due February
1, 2002. In August 1998 and March 1999, AREP received semi-annual interest
payments. An affiliate of the General Partner also has an investment in such
notes of the Claridge Corporation.
The Claridge Corporation through its wholly-owned subsidiary, the
Claridge at Park Place, Incorporated, operates the Claridge Hotel, a destination
resort complex, containing a 59,000 square foot casino on three levels and 502
hotel rooms and other attractions.
AREP has classified the Claridge Corporation and GB Property Notes as
available for sale for accounting purposes. These investments are carried at
fair market value on the Consolidated Balance Sheet. At December 31, 1998
unrealized holding losses of approximately $6.8 million are reflected in
Partners Equity.
See Item 1 - "Investment Opportunities and Strategies -- Real Estate
Investments," above, for a discussion of certain considerations relating to the
gaming industry.
In 1998, AREP purchased approximately $78.2 million of senior debt of
Philip Services Corp. and Philip Services (Delaware), Inc. ("Philips") for
approximately $35.2 million. In addition, an affiliate of Icahn purchased
approximately $80 million of senior debt of Philips and also owns common shares
of Philips. Philips is a Canadian-based company in the waste recovery business
and its common shares are listed on the New York Stock Exchange. In 1999, AREP
purchased an additional $10.2 million of Philips debt for approximately $4.4
million.
Investment in Real Estate Assets
AREP acquired mortgages for approximately $16 million secured by
certain real property in Cape Cod, Massachusetts. The properties are part of a
master planned community and golf resort known as New Seabury. The debtor had
filed a Chapter 11 petition in the United States Bankruptcy Court, District of
Massachusetts. In June 1998, a Chapter 11 plan of reorganization proposed by
AREP was approved by the Bankruptcy Court. Under the plan, in late July 1998,
AREP acquired substantially all of the debtor's assets including two golf
courses, other recreational facilities, a villa rental program, condominium and
time share units and land for future development. AREP assumed mortgage debt of
approximately $8.5 million (subsequently repaid) and made other payments to
creditors of approximately $3.5 million. Total
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costs of approximately $28 million are classified as approximately $8.9
million in "Development Properties", $17.4 million in"Hotel and resort
properties" and $1.7 million in "other assets" on the Consolidated Balance
Sheet.
On August 5, 1998, AREP purchased an industrial building located in
Hebron, Kentucky. The property is net leased to United Parcel Service ("UPS").
The purchase price was $21,080,000 which included the simultaneous funding of a
mortgage in the amount of $19,480,000. The lease term, which commenced on June
1, 1998, is for an initial term of ten years at $1,861,240 per year for the
first five years and $2,138,304 per year in years six to ten. There are three
five year renewal periods for increased rentals.
In August 1998, AREP purchased a manufacturing facility located in
Germantown, Wisconsin. The property is net leased to Stone Container
Corporation. The purchase price was $9,025,000 cash. The lease term, which
commenced May 1, 1998, is for eleven years at approximately $807,150 per year
increasing 2% annually. There is one five year renewal period at approximately
$1,013,429 per year increasing 3% annually.
Investment in Real Estate Limited Partnership Units
On July 17, 1996, AREP and Bayswater Realty and Capital Corp.
("Bayswater"), an affiliate of Icahn, became partners of Boreas Partners, L.P.
("Boreas"), a Delaware limited partnership. AREP's total partnership interests
in Boreas was 70%. Boreas together with unaffiliated third parties entered into
an agreement and became limited partners of Raleigh Capital Associates, L.P.
("Raleigh") for the purpose of making a tender offer for outstanding limited
partnership and assignee interests of Arvida/JMB Partners, L.P. ("Arvida") a
real estate partnership. Approximately 106,000 units in Arvida were acquired by
Raleigh. Boreas and an affiliated general partner acquired 100% of the interests
in Raleigh during 1998 Thereafter, on November 6, 1998, Raleigh entered into a
Buy/Sell Agreement (the "Buy/Sell Agreement") with St. Joe Company ("St. Joe")
and Arvida/JMB Managers, Inc. ("JMB Managers") regarding Arvida. In connection
with the Buy/Sell Agreement, St. Joe and JMB Managers acquired all the limited
partnership interests in Arvida owned by Raleigh and AREP received approximately
$33 million of proceeds before payment of related indebtedness. AREP recorded a
gain of approximately $4.4 million on the disposition of Arvida units.
In 1998, AREH formed Olympia Investors, L.P. ("Olympia"), a Delaware
limited partnership. In March 1998, Olympia initiated tender offers to purchase
units of limited partnership interest in Integrated Resources High Equity
Partners - Series 85 ("HEP 85"), in High Equity Partners L.P. - Series 86 ("HEP
86") and in High Equity Partners L.P. - Series 88 ("HEP 88"). In September 1998,
AREP paid approximately $7.5 million to the tender agent for 30,842 units of HEP
85; 32,104 units of HEP 86; and 14,687 units of HEP 88.
Concurrently with the tender offer AREP entered into an agreement with
an affiliate of the general partner of HEP 85, HEP 86 and HEP 88 which gave them
a purchase option for 50% of the tendered units at Olympia's tender price plus
expenses. AREP subsequently received approximately $4 million for half of the
tendered units.
Through December 31, 1998, AREP participated in five other tender
offers for limited partnership units.
Investment in RJR
In 1996, AREP purchased 3,121,700 shares of RJR Nabisco Holdings Corp.
("RJR"), representing approximately 1.1% of the total outstanding RJR common
shares, at a total cost of approximately $83 million and at an average cost per
share of $26.46 per share. Icahn owned (through affiliates) an additional
16,808,100 shares of RJR. In February 1997, AREP sold its entire interest in RJR
I-8
<PAGE> 10
for net proceeds of approximately $112 million realizing a gain of approximately
$29 million. During 1998 and the first quarter of 1999, AREP purchased 6,448,200
shares of RJR representing approximately 2% of the total outstanding RJR common
shares, for approximately $175 million. As of January 22, 1999, affiliates of
Icahn owned 18,551,800 shares of RJR representing approximately 5.7% of the
total outstanding RJR common shares. The investment in RJR is reflected on the
balance sheet as "Marketable Equity Securities," classified as available for
sale, which is carried at fair market value at December 31, 1998. Unrealized
holding gain of approximately $16 million is reflected in "Partners Equity."
Financing Activities
In May 1998, AREP made its final payment of approximately $11,308,000
under its unsecured note agreements with The Prudential Insurance Company of
America. During 1998, AREP also had approximately $3,500,000 in additional
maturing balloon mortgages due, all of which was repaid. Approximately
$8,700,000 of additional balloon payments are due during 1999 and 2000. AREP may
seek to refinance a portion of these maturing mortgages, although it does not
expect to refinance all of them and may repay them from cash flow and reserves
created from time to time, thereby reducing cash flow otherwise available for
other uses.
AREP is continuing to seek opportunities to refinance upon favorable
terms and sell certain of its properties to generate proceeds for future
investments. Management continues to seek to improve the long-term value of
AREP's portfolio by, among other means, using its available cash and reinvesting
capital transaction proceeds to maximize capital appreciation and
diversification of the portfolio.
Leasing Activities
In 1998, 25 leases covering 25 properties and representing
approximately $2,123,000 in annual rentals expired. Fifteen of these leases,
originally representing approximately $595,000 in annual rental income were
re-let or renewed for approximately $617,000 in annual rentals. Such renewals
are generally for a term of five years. Five properties with an approximate
annual rental income of $690,000 are currently being marketed for sale or lease.
Three properties with annual rental income of $138,000 were purchased by their
tenants pursuant to the exercise of purchase options. Two properties with
approximate annual rental income of $700,000 were sold.
In 1999, 23 leases covering 23 properties and representing
approximately $1,775,000 in annual rentals are scheduled to expire. Five of
these leases, originally representing approximately $735,000 in annual rental
income, have been or will be re-let or renewed for approximately $740,000 in
annual rentals. Such renewals are generally for a term of five years. Nine
properties, with an approximate annual rental income of $375,000 will be
marketed for sale or lease when the current lease term expires. Four properties
with approximate annual rentals of $251,000 will be purchased by tenants
pursuant to lease options. The status of five leases with approximate annual
rental income of $414,000 is uncertain at this time.
By the end of the year 2002, net leases representing approximately 27%
of AREP's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2004, net leases representing approximately 37% of AREP's
net annual rentals will be due for renewal. In many of these leases, the tenant
has an option to renew at the same rents they are currently paying and in many
of the leases the tenant also has an option to purchase the property. AREP
believes that tenants acting in their best interests will renew those leases
which are at below market rents, and permit leases for properties that are less
marketable (either as a result of the condition of the property or its location)
or are at above-market rents to expire. AREP expects that it may be difficult
and time consuming to re-lease or sell those properties that existing tenants
decline to re-let or purchase and that AREP may be required to incur
expenditures to renovate such properties for new tenants. AREP also may become
responsible for the
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<PAGE> 11
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. In addition, net leases
representing approximately 34% of AREP's net annual rentals from its portfolio
are with tenants in the retail sector, many of which are currently experiencing
cash flow difficulties and a number of which are in bankruptcy. As a result,
operating expenses may be incurred with respect to the properties underlying any
such leases rejected in bankruptcy and those expenses, coupled with the effects
of a downturn in the retail markets, could have an adverse impact on AREP's net
cash flow.
Bankruptcies and Defaults
AREP is aware that 14 of its present and former tenants have been or
are currently involved in some type of bankruptcy or reorganization. Under the
Bankruptcy Code, a tenant may assume or reject its unexpired lease. In the event
a tenant rejects its lease, the Bankruptcy Code limits the amount of damages a
landlord, such as AREP, is permitted to claim in the bankruptcy proceeding as a
result of the lease termination. Generally, a claim resulting from a rejection
of an unexpired lease is a general unsecured claim. When a tenant rejects a
lease, there can be no assurance that AREP will be able to re-let the property
at an equivalent rental. As a result of tenant bankruptcies, AREP has incurred
and expects, at least in the near term, to continue to incur certain property
expenses and other related costs. Thus far, these costs have consisted largely
of legal fees, real estate taxes and property operating expenses. Of AREP's 14
present and former tenants involved in bankruptcy proceedings or reorganization,
ten have rejected their leases, affecting 29 properties, all of which have been
vacated. These rejections have had an adverse impact on annual net cash flow
(including both the decrease in revenues from lost rents, as well as increased
operating expenses).
On June 24, 1998, the Grand Union Company ("Grand Union"), a tenant
leasing five properties owned by AREP filed a prepackaged voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the Federal
Bankruptcy Code. Grand Union emerged from Chapter 11 protection on or about
August 17, 1998 and affirmed all of the leases. These five properties' annual
rentals total approximately $1,294,000.
In June 1995, Bradlees, a tenant leasing four properties owned by AREP,
filed a voluntary petition for reorganization pursuant to the provisions of
Chapter 11 of the Bankruptcy Code. The annual rentals for these four properties
is approximately $1,320,000. The tenant is current in its obligations under the
leases. The tenant emerged from bankruptcy in February, 1999 and affirmed three
of the leases and assigned the fourth. At December 31, 1998, the carrying value
of these four properties was approximately $6,677,000. One of the properties is
encumbered by a nonrecourse mortgage payable of approximately $727,000.
On September 18, 1995, Caldor Corp. ("Caldor"), a tenant leasing a
property owned by AREP, filed a voluntary petition for reorganization pursuant
to the provisions of Chapter 11 of the Bankruptcy Code. The annual rental for
this property is approximately $248,000. The tenant is current in its
obligations under the lease. In January, 1999, Caldor announced it would
liquidate its holdings and close its stores. The tenant has not yet determined
whether it will exercise its right to reject or affirm the lease which will
require an order of the Bankruptcy Court. At December 31, 1998, the property has
a carrying value of approximately $1,798,000 and is unencumbered by any
mortgage.
On September 24, 1996 Best Products, a tenant leasing a property owned
by AREP, filed a voluntary petition for reorganization pursuant to the
provisions of Chapter 11 of the Bankruptcy Code. The annual rental for this
property was approximately $508,000. The tenant has exercised its right to
reject the lease, effective April 30, 1997, which has been approved by the
Bankruptcy Court. At
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<PAGE> 12
December 31, 1998, the property was vacant and had a carrying value of
approximately $3,304,000 and is unencumbered by any mortgage.
For a description of certain other tenant and mortgagor bankruptcies
affecting AREP, please refer to Notes 10 and 19 to the Financial Statements
contained herein. The General Partner monitors all tenant bankruptcies and
defaults and may, when it deems it necessary or appropriate, establish
additional reserves for such contingencies.
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
site assessment, 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 evaluations 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.
Additionally, pursuant to the Resource Conservation and Recovery Act 42
U.S.C. Sections 9601, et seq. and the regulations promulgated thereunder
("RCRA") certain owners, operators and other parties in control of a property
that has a non-exempt underground storage tank ("UST") were required to remove,
replace, retrofit or take such tanks out of service by December 22, 1998. AREP
notified its tenants of the RCRA requirements. AREP believes that under the
terms of its net leases with its tenants, the cost of, and obligation to comply
with, this RCRA requirement generally would be the responsibility of its tenant.
Furthermore, with respect to vacated properties and prior lease terminations,
there cannot be any assurance that AREP would not be deemed responsible for this
RCRA requirement. However, there also can be no assurance that a tenant will
bear the costs of, or undertake compliance with, this RCRA requirement.
Most of AREP's properties continue to be net-leased to single corporate
tenants, and AREP believes these tenants would be responsible for any
environmental conditions existing on the properties they lease. Normally,
therefore, such conditions should not have a material adverse effect on the
financial statements or competitive position of AREP. Many of the properties
acquired by AREP in connection with the Exchange Offer were not subjected to any
type of environmental site assessment at the time of the acquisition.
Consequently, AREP undertook to have Phase I Environmental Site Assessments
completed on most of its properties. AREP believes that under the terms of its
net leases with its tenants, the costs of any environmental problems would be
the responsibility of such tenants. However, while most tenants have assumed
responsibility for the environmental conditions existing on their leased
property, there can be no assurance that AREP would not be deemed to be a
responsible party or that the tenant could bear the costs of remediation.
The Phase I Environmental Assessments received on these properties
inconclusively indicate that certain sites may have environmental conditions
that should be further reviewed. AREP has notified the responsible tenants to
attempt to ensure that they cause any required investigation and/or remediation
to be performed. It is possible that, in some instances, the tenant will either
refuse to take appropriate
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<PAGE> 13
action, or fail to respond at all, in which case AREP may be required to act.
Therefore, if the tenants fail to perform responsibilities under their leases in
respect of such sites, based solely upon the consultant's preliminary estimates
resulting from its Phase I Environmental Site Assessments referred to above, it
is presently estimated that AREP's exposure could amount to $2-3 million.
However, as no Phase II Environmental Site Investigations have been conducted by
the consultant, there can be no accurate estimation of the need for or extent of
any required remediation. AREP is in the process of updating its Phase I Site
Assessments for certain of its environmentally sensitive properties including
properties with open RCRA requirements. Approximately sixty-five updates are
expected to be completed in 1999 with another forty-five scheduled for the year
2000.
In addition to conducting such Phase I Environmental Site Assessments,
AREP has developed a site inspection program. This program is being conducted by
two in-house employees (both of which are experienced construction managers and
registered architects) who visit AREP's properties and visually inspect the
premises to assess the physical condition of the properties in an effort to
determine whether there are any obvious indications of environmental conditions
which would potentially expose AREP to liability and to ensure that the physical
condition of the property is being maintained properly. There is no assurance,
however, that this program will in fact minimize any potential environmental or
other cost exposure to AREP.
AREP could also become liable for environmental clean-up costs if a
bankrupt or insolvent tenant were unable to pay such costs. Environmental
problems may also delay or impair AREP's ability to sell, refinance or re-lease
particular properties, resulting in decreased income and increased cost to AREP.
Other Property Matters
Under Title III of the Americans with Disabilities Act of 1990 and the
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, owners and certain tenants of public
accommodations (such as hotels, restaurants, offices and shopping centers) must
remove architectural and communication barriers which are structural in nature
from existing places of public accommodation to the extent "readily achievable"
(as defined in the ADA). In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals.
Except for certain properties operated by AREP, the General Partner
believes that the existing net leases require the tenants of many of AREP's
properties to comply with the ADA. If a tenant does not comply with the ADA or
rejects its lease in bankruptcy without complying with the ADA, AREP may
ultimately have to bear the expense of complying with the ADA.
As AREP acquires more operating properties, it may be required to make
expenditures to bring such properties into compliance with the ADA and other
applicable laws.
Employees
Eighteen people, including three who are officers of the General
Partner, presently perform services for AREP on a full-time basis. These people
perform administrative services for AREP, including accounting, legal,
financial, investor services, secretarial, real estate management and other
services. Management believes it currently has sufficient staffing to operate
effectively the day-to-day business of AREP.
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<PAGE> 14
Competition
Competition in leasing and selling remains strong. As previously
discussed, 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 impact on the retail markets
and ongoing corporate consolidations have contributed to increasing vacancy
rates and oversupply for retail tenants. AREP believes it is one of the largest
real estate entities of its kind and that it will continue to compete
effectively with other similar real estate companies, although there are real
estate entities with greater financial resources than AREP.
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 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. While AREP believes its capital base may enable it to gain a competitive
advantage over certain other purchasers of real estate by allowing it to respond
quickly and make all cash transactions without financing contingencies where
appropriate, there can be no assurance that this will be the case.
Item 2. Properties.
As of March 5, 1999, AREP owned 192 separate real estate assets
(primarily consisting of fee and leasehold interests and, to a limited extent,
interests in real estate mortgages) in 32 states. These properties are generally
net-leased to single corporate tenants. Approximately 90% of AREP's properties
are currently net-leased, 4% are operating properties, 2% are in the process of
being developed and 4% are vacant and being marketed for sale or lease. See Note
11 to the Financial Statements contained herein for information on mortgages
payable.
The following table summarizes the type, number per type and average
net effective rent per square foot of AREP's properties:
<TABLE>
<CAPTION>
Number Average Net Effective
Type of Property of Properties Rent Per Square Foot
- ---------------- ------------- --------------------
<S> <C> <C>
Retail 87 $4.86(1)
Industrial 21 $2.33(1)
Office 29 $6.69(1)
Supermarkets 19 $3.36(1)
Banks 6 $4.10(1)
Other:
Properties That
Collateralize Purchase
Money Mortgages 9 N/A
Land 13 N/A
Truck Terminals 4 $3.63(1)
Hotels 3 N/A
Apartment Complexes 1 N/A
</TABLE>
(1) Based on net-lease rentals.
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<PAGE> 15
The following table summarizes the number of AREP's properties in each
region specified below:
<TABLE>
<CAPTION>
Location Number
of Property of Properties
----------- -------------
<S> <C>
United States:
Southeast 86
Northeast 42
South Central 9
Southwest 12
North Central 39
Northwest 4
</TABLE>
From January 1, 1998 through March 5, 1999, AREP sold or otherwise
disposed of 17 properties. In connection with such sales and dispositions, AREP
received an aggregate of approximately $25,300,000 in cash, net of closing costs
and amounts utilized to satisfy mortgage indebtedness which encumbered such
properties. As of December 31, 1998, AREP owned seven properties that were being
actively marketed for sale. The aggregate net realizable value of such
properties is estimated to be approximately $3,893,000.
On February 19, 1998, AREP sold a property located in Palo Alto,
California to its tenant, Lockheed Missile and Space Company, Inc. for a selling
price of approximately $9,400,000. As a result, AREP recognized a gain of
approximately $4,130,000 in the year ended December 31, 1998.
On May 21, 1998, AREP sold a property located in Atlanta, Georgia
tenanted by AT&T Corp. for a selling price of $8,600,000. As a result, AREP
recognized a gain of approximately $1,260,000 in the year ended December 31,
1998.
In accordance with a previously executed option agreement, AREP sold a
property located in Broomal, Pennsylvania to its tenant Federal Realty
Investment Trust. The consideration received by AREP was a satisfaction of
mortgage payable in the amount of approximately $8,500,000. A gain of
approximately $2.6 million was recorded in the year ended December 31, 1998.
For each of the years ended December 31, 1998, 1997 and 1996, no single
real estate asset or series of assets leased to the same lessee accounted for
more than 10% of the gross revenues of AREP. However, at December 31, 1998, 1997
and 1996, PGEC occupied a property, which represented more than 10% of AREP's
total real estate assets. PGEC is an electric utility engaged in the generation,
purchase, transmission, distribution and sale of electricity, whose shares are
traded on the NYSE.
The PGEC Property is an office complex consisting of three buildings
containing an aggregate of approximately 803,000 square feet on an approximate
2.7 acre parcel of land located in Portland, Oregon. A Predecessor Partnership
originally purchased the PGEC Property on September 11, 1978 for a price of
approximately $57,143,000.
The PGEC Property is net-leased to a wholly owned subsidiary of PGEC
for forty years, with two ten-year and one five-year renewal options. The annual
rental is $5,137,309 until 2003, $4,973,098 until 2018 and $2,486,549 during
each renewal option. PGEC has guaranteed the performance of its subsidiary's
obligations under the lease. The lessee has an option to purchase the PGEC
Property in September of 2003, 2008, 2013 and 2018 at a price equal to the fair
market value of the PGEC Property determined in accordance with the lease and is
required to make a rejectable offer to purchase the PGEC Property in September
2018 for a price of $15,000,000. A rejection of such offer will have no effect
on the lease obligations or the renewal and purchase options.
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<PAGE> 16
On December 5, 1997 AREP executed a mortgage loan with Principal Mutual
Life Insurance Company in the original principal amount of approximately $46.3
million, secured by, among other things, a first deed of trust, security
agreement and assignment of rents on the PGEC Property. The loan replaced the
existing mortgage loan on the complex with an outstanding principal balance of
approximately $24.2 million, bearing interest at 8.5% and maturing in 2002.
The interest rate is fixed at 7.51%. The entire net annual rent payable
by PGEC of approximately $5,137,000 is required to be applied toward the debt
service on the loan. The refinancing has a maturity date of September 10, 2008,
at which time a remaining principal payment of approximately $20 million will be
due from AREP.
Item 3. Legal Proceedings.
Unitholder Litigation
On November 18, 1998, Ruth Ellen Miller filed a Class Action Complaint
bearing the caption Ruth Ellen Miller, on behalf of herself and all others
similarly situated v. American Real Estate Partners, L.P., High Coast Limited
Partnership, American Property Investors, Inc., Carl C. Icahn, Alfred Kingsley,
Mark H. Rachesky, William A. Leidesdorf, Jack G. Wasserman and John P.
Saldarelli in the Delaware Chancery Court in New Castle County (Civil Action No.
16788NC) (the "Complaint"). The Complaint purports to state claims on behalf of
a putative class of all holders of Depositary Units sounding in breach of
fiduciary duty, aiding and abetting breaches of fiduciary duty, injunction and
breach of the Partnership Agreement. As of March 5, 1999, the complaint has not
yet been served on any of the defendants.
Plaintiff alleges that all defendants, in breach of their fiduciary
duties to AREP, have caused AREP to engage in self-dealing or self-interested
transactions which inure to the benefit of defendants. Plaintiff's claims are
alleged to arise out of two transactions: the February 1995 Rights Offering
effectuated pursuant to a purportedly false and misleading prospectus; and
Icahn's alleged use of his voting control to change the business purpose of AREP
by amending the Partnership Agreement to permit AREP to make "non-real estate
related investments," including investments in entities owned or controlled by
Icahn.
The Complaint seeks to have Ms. Miller appointed as class
representative and that the putative class be certified. The Complaint also
seeks an unspecified amount in damages and injunctive relief: (i) dissolving the
Partnership; (ii) enjoining API from continuing to act as general partner of the
Partnership; (iii) enjoining the Partnership from engaging in any transaction in
which Icahn has either a direct or indirect interest, absent an affirmative vote
of a majority of the outstanding Depositary Units held by the putative class;
and (iv) ordering API to exercise its fiduciary obligations. Further, the
plaintiff seeks to enjoin AREP from engaging in any transactions in which Icahn
has either a direct or indirect interest absent an affirmative vote by a
majority of the outstanding Depositary Units held by the class, as well as
damages resulting from the alleged breach of the partnership agreement for an
unquantified amount. The Complaint also seeks costs and attorneys' fees.
Management believes plaintiff's claims are without merit and intends to
vigorously defend against them.
On or about September 9, 1997, two limited partners in AREP brought a
derivative action against AREP, the General Partner, its directors and one of
its officers, alleging breach of fiduciary duties by the defendants in
connection with, inter alia, AREP's investments in Arvida and Stratosphere,
Amanda & Kimberly Kahn v. Carl C. Icahn, et al., C.A. No. 15916 (Del. Ch.).
Plaintiffs claimed that defendant Icahn improperly diverted opportunities to
participate in these investments from AREP to himself. Plaintiffs sought damages
arising from these alleged breaches of fiduciary duty, attorneys fees and other
relief. On November 12, 1998, the Court of Chancery of the State of Delaware
granted the defendants' motion to dismiss all of plaintiffs' claims against the
defendants. Plaintiffs served a notice of appeal upon
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<PAGE> 17
defendants on December 11, 1998. On March 11, 1999, AREP received a
copy of plaintiffs' opening brief and on March 24, 1999 all of the defendants
filed a Motion to Affirm in the Delaware Supreme Court. AREP believes that the
plaintiffs' appeal has no merit and it intends to vigorously oppose this
appeal.
Environmental Litigation
Lockheed, a tenant of a formerly-held 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 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 previously served a notice that it may exercise its statutory
right to have its liability reassessed in a binding arbitration proceeding. In
this notice of arbitration, Lockheed stated that it would attempt to have
allocated to AREP and to AREP's ground-lessor (which may have sought to claim a
right of indemnity against AREP) approximately 9% and 17%, respectively, of the
total remediation costs. In April 1995 Lockheed began ground water remediation
at the leasehold property.
On February 19, 1998, the property was conveyed by AREP to Lockheed for
a purchase price of $9,400,000. In connection with the sale, Lockheed executed a
release and indemnity in favor of AREP and a stipulation dismissing the
environmental arbitration, as against AREP. Leland Stanford Junior University
(the fee owner/ground lessor) also executed a release in favor of AREP.
On December 11, 1995, Panos Sklavenitis commenced an action against the
Subsidiary and others related to a shopping center that he purchased from a
successor-in-interest to AREP. The action was brought in the United States
District Court for the Central District of California, for reimbursement of the
cost of remediating certain environmental contamination that appears to have
been caused by a dry cleaner that was a tenant at the property; the amount of
damages sought have not yet been quantified. Mr. Sklavenitis is suing the
parties who are in the chain of ownership, as well as the dry cleaner and its
predecessor. AREP is presently engaged in discussions to settle this matter and
has made an offer of $10,000 toward an aggregate settlement, although there can
be no assurances that such offer will be accepted.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Unitholders during 1998.
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<PAGE> 18
PART II
Item 5. Market for AREP's Common Equity and Related Security Holder
Matters.
Market Information
AREP's Depositary Units are traded on the NYSE under the symbol "ACP."
Trading on the NYSE commenced July 23, 1987, and the range of high and low
market prices for the Depositary Units on the New York Stock Exchange Composite
Tape (as reported by The Wall Street Journal) from January 1, 1997 through
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Quarter Ended: High Low
- ------------- ---- ---
<S> <C> <C>
March 31, 1997 11.75 9.125
June 30, 1997 14.25 9.875
September 30, 1997 13.625 10.625
December 31, 1997 11.375 9.4375
March 31, 1998 $11.50 $9.8125
June 30, 1998 10.75 9.75
September 30, 1998 10.25 8.0625
December 31, 1998 10.50 7.125
</TABLE>
On March 5, 1999, 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 $8.625.
As of March 5, 1999, there were approximately 7,000 record holders of
the Depositary Units. As of March 2, 1998, there were approximately 9,000
record holders. See Item 12. "Security Ownership of Certain Beneficial Owners
and Management" for a discussion of the 1998 Tender Offer made by affiliates of
Icahn. Since a number of Unitholders participated in the 1998 Tender Offer and
affiliates of Icahn now hold approximately 82.6% of the Depositary Units
outstanding, there can be no assurance that there will not be a reduction in the
liquidity and volume of activity in the trading market for the Depositary Units.
Since January 1, 1994, AREP has made no cash distributions with respect
to the Depositary Units.
Distributions
On March 29, 1999, the Board of Directors of the General Partner
announced that no distributions are expected to be made in 1999. AREP believes
that it should continue to hold and invest, rather than distribute, cash. In
making its announcement, AREP noted it plans to continue to apply available
Partnership operating cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements and other capital expenditures and creation of
cash reserves for Partnership contingencies, including environmental matters and
scheduled lease expirations. By the end of the year 2002, net leases
representing approximately 27% of AREP's net annual rentals from its portfolio
will be due for renewal, and by the end of the year 2004, 37% of such rentals
will be due for renewal. Another factor that AREP took into consideration was
that net leases representing approximately 34% of AREP's net annual rentals from
its portfolio are with tenants in the retail sector, some of which are currently
experiencing cash flow difficulties and restructurings. AREP further stated that
it continues to believe that excess cash should be used to enhance long-term
Unitholder value through the improvement of its existing assets, the support of
AREP's debt and property obligations, and selected investment in assets
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<PAGE> 19
and companies with assets undervalued by the market as appropriate opportunities
arise. AREP believes that, in addition to acquiring development properties,
non-performing mortgage obligations and securities of companies which may be
undergoing restructuring or with real estate assets requiring significant
capital investments, it should diversify its portfolio and seek to make
acquisitions 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 these properties. These types of investments
may involve debt restructuring, capital improvements and active asset
management, and by their nature may not be readily financeable and may not
generate immediate positive cash flow. As such, they require AREP to maintain a
strong capital base both to react quickly to these market opportunities as well
as to allow AREP to rework the assets to enhance their turnaround performance.
See Item 7 -- "Management's Discussion and Analysis of the Financial Condition
and Results of Operations - Capital Resources and Liquidity."
As of March 1, 1999, there were 46,098,284 Depositary Units and
7,676,607 Preferred Units outstanding. Trading in the Preferred Units commenced
March 31, 1995 on the NYSE under the symbol "ACP PR." The Preferred Units
represent limited partner interests in AREP and have certain rights and
designations, generally as follows. 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 a rate of 5% of the
liquidation preference thereof, payable annually on March 31 of each year (each,
a "Payment Date"), commencing March 31, 1996. On any Payment Date commencing
with the Payment Date on March 31, 2000, AREP, 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. On March 31, 2010, AREP 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 have no voting rights
except as mentioned in Item 10 -- "Directors and Executive Officers of AREP,"
below.
On March 31, 1998, AREP distributed to holders of record of its
Preferred Units as of March 13, 1998, approximately 365,553 additional Preferred
Units. Pursuant to the terms of the Preferred Units, on February 23, 1999, AREP
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10.00. The
distribution is payable March 31, 1999 to holders of record as of March 15,
1999.
Each Depositary Unitholder will be taxed on the Unitholder's allocable
share of AREP's taxable income and gains and, with respect to Preferred
Unitholders, accrued guaranteed payments, whether or not any cash is distributed
to the Unitholder.
Repurchase of Depositary Units
AREP announced in 1987 its intention to purchase up to 1,000,000
Depositary Units. On June 16, 1993, AREP increased the amount of shares
authorized to be repurchased to 1,250,000 Depositary Units. In October 1998,
AREP repurchased 100,000 Depositary Units for $737,500. As of March 5, 1999,
AREP had purchased 1,137,200 Depositary Units at an aggregate cost of
approximately $11,921,000. Management recently has not been acquiring Depositary
Units for AREP, although AREP may from time to time acquire additional
Depositary Units.
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<PAGE> 20
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Unit Amounts)
Year Ended December 31,
1998 1997* 1996* 1995* 1994*
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 93,306 $ 70,918 $ 71,774 $ 69,920 $ 61,551
============ ============ ============ ============ ============
Earnings before property
and securities transactions $ 58,371 $ 41,020 $ 34,240 $ 30,833 $ 19,577
Gain on sales and
disposition of real estate 9,065 16,051 24,517 5,091 4,174
Gain on sale of limited
partnership interests 4,382
Gain on sales of marketable
equity securities -- 29,188 -- -- --
Provision for loss on mortgages
receivable -- (9,790) -- -- --
Provision for loss on real
estate (1,180) (1,085) (935) (768) (582)
------------ ------------ ------------ ------------ ------------
Net earnings $ 70,638 $ 75,384 $ 57,822 $ 35,156 $ 23,169
============ ============ ============ ============ ============
Net earnings per limited
partnership unit:
Basic:
Earnings before property and
securities transactions $ 1.16 $ 1.19 $ 1.27 $ 1.30 $ 1.39
Net gain from property and
securities transactions .26 1.08 .90 .19 .25
------------ ------------ ------------ ------------ ------------
Net earnings $ 1.42 $ 2.27 $ 2.17 $ 1.49 $ 1.64
============ ============ ============ ============ ============
Weighted average limited partnership
units outstanding 46,173,284 31,179,246 25,666,640 22,703,180 13,812,800
============ ============ ============ ============ ============
Diluted:
Earnings before property and
securities transactions $ 1.06 $ 1.16 $ 1.20 $ 1.17 $ 1.39
Net gain from property and
securities transactions .22 .97 .82 .16 .25
------------ ------------ ------------ ------------ ------------
Net earnings $ 1.28 $ 2.13 $ 2.02 $ 1.33 $ 1.64
============ ============ ============ ============ ============
Weighted average limited partnership
units and equivalent partnership
units outstanding 54,215,339 34,655,395 28,020,392 27,538,840 13,812,800
============ ============ ============ ============ ============
Distributions to partners $ -- $ -- $ -- $ -- $ --
At year end:
Real estate leased to others $ 381,554 $ 383,392 $ 357,184 $ 412,075 $ 437,699
Hotel and resort operating properties $ 22,037 $ 5,002 $ 12,955 $ 13,362 $ 13,654
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C>
Investment in treasury bills $ 363,884 $ 372,165 $ -- $ -- $ --
Marketable equity securities $ 190,775 $ -- $ 106,172 $ -- $ --
Mortgages and notes receivable $ 67,613 $ 59,970 $ 15,226 $ 15,056 $ 8,301
Development properties $ 12,830 $ 3,860 $ -- $ -- $ --
Total assets $ 1,135,915 $ 991,230 $ 641,310 $ 620,880 $ 492,868
Senior indebtedness $ -- $ 11,308 $ 22,616 $ 33,923 $ 45,231
Mortgages payable $ 173,559 $ 156,433 $ 115,911 $ 163,968 $ 174,096
Partners' equity $ 888,499 $ 809,325 $ 485,559 $ 404,189 $ 259,237
</TABLE>
* To the extent financial information
pertaining to AREP is reflected, such
information is consolidated for AREP
and its Subsidiary.
Item 7. Management's Discussion and Analysis of the
Financial Condition and Results of Operations.
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in
nature, are intended to be, and are hereby identified as, "forward looking
statements" for purposes of the safe harbor provided by Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended by Public Law 104-67.
Forward-looking statements regarding management's present plans or
expectations involve risks and uncertainties and changing economic or
competitive conditions, as well as the negotiation of agreements with third
parties, which could cause actual results to differ from present plans or
expectations, and such differences could be material. Readers should consider
that such statements speak only as to the date hereof.
General
AREP believes that it will benefit from diversification of its
portfolio of assets. To further its 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. From time to
time AREP has discussed and in the future may discuss and may make such
acquisitions from Icahn, the General Partner or their affiliates, provided the
terms thereof are fair and reasonable to AREP. Additionally, 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. These may
include commercial properties, residential and commercial development projects,
land, non-performing loans, 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 and the acquisition of debt
or equity securities of companies which may be undergoing restructuring and
sub-performing properties that may require active asset management and
significant capital improvements. AREP notes that while there are still
opportunities available to acquire investments that are undervalued, acquisition
opportunities in the real estate market for value-added investors have become
competitive to source and the increased competition
II-4
<PAGE> 22
may have some impact on the spreads and the ability to find quality assets that
provide returns that are sought. These investments may not be readily
financeable and may not generate immediate positive cash flow for AREP. 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. While this may impact cash flow in the near
term and there can be no assurance that any asset acquired by AREP 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 further its
objective to diversify its portfolio. Furthermore, it should be noted that
recent financial market conditions have resulted in reductions in available
credit on satisfactory terms to finance real estate related investments.
Historically, substantially all of AREP's real estate assets have been
net-leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore AREP is not typically responsible for payment of
expenses, such as maintenance, utilities, taxes and insurance associated with
such properties.
By the end of the year 2002, net leases representing approximately 27%
of AREP's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2004, net leases representing approximately 37% 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 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 in the future from such
properties.
The Amendment, which became effective in August, 1996, permits AREP to
invest in securities issued by companies that are not necessarily engaged as one
of their primary activities in the ownership, development or management of real
estate while remaining in the real estate business and continuing to pursue
suitable investments for AREP in the real estate market.
AREP raised funds through a rights offering in September 1997 (the
"1997 Offering") to increase its assets available for investment, take advantage
of investment opportunities, further diversify its portfolio of assets and
mitigate against the impact of potential lease expirations. The 1997 Offering
was successfully completed in September 1997 and net proceeds of approximately
$267 million were raised for investment purposes.
Expenses relating to environmental clean-up have not had a material
effect on the earnings, capital expenditures, or competitive position of AREP.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property, there can be no assurance that AREP will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. Also,
as AREP acquires more operating properties, its exposure to environmental
clean-up costs may increase. AREP completed Phase I Environmental Site
Assessments on most of its properties by third-party consultants. Based on the
results of these Phase I Environmental Site Assessments, the environmental
consultant has recommended that certain sites may have environmental conditions
that should be further reviewed.
AREP has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed.
If such tenants do not arrange for further investigations, or remediations, if
required, AREP may determine to undertake the same at its own cost. If the
tenants fail to perform responsibilities under their leases referred to above,
based solely upon the consultant's estimates resulting from its Phase I
Environmental Site Assessments referred to above, it is
II-5
<PAGE> 23
presently estimated that AREP's exposure could amount to $2-3 million, however,
as no Phase II Environmental Site Assessments have been conducted by the
consultants, there can be no accurate estimation of the need for or extent of
any required remediation, or the costs thereof. In addition, AREP notified all
tenants of the Resource Conservation and Recovery Act's ("RCRA") December 22,
1998 requirements for regulated underground storage tanks. AREP may, at its own
cost, have to cause compliance with RCRA's requirements in connection with
vacated properties, bankrupt tenants and new acquisitions. Phase I Environmental
Site Assessments will also be performed in connection with new acquisitions and
with such property refinancings as AREP may deem necessary and appropriate. AREP
is in the process of updating its Phase I Site Assessments for certain of its
environmentally sensitive properties including properties with open RCRA
requirements. Approximately sixty-five updates are expected to be completed in
1999 with another forty-five scheduled for the year 2000.
AREP is investigating the potential impact of the year 2000 in the
processing of date-sensitive information by AREP's computerized information
systems. The year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of AREP's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
or system failures. AREP believes it has identified and is addressing the year
2000 operating issues under its control and based on current information,
costs of addressing and solving potential problems have not been and are not
expected to be or have a material adverse impact on AREP's financial
position, results of operations or cash flows in future periods. It should be
noted that substantially most of AREP's real estate assets have been net leased
to single corporate tenants who, with certain exceptions, are required to pay
all expenses and building maintenacne related to the leased property, including
any property related expenses from year 2000 problems. However, the likelihood
and effects of year 2000 failures on tenants, infrastructure systems and
suppliers and vendors of AREP cannot be estimated. Failures of third parties
such as banks and significant tenants to comply with year 2000 problems could
have an adverse impact on AREP's business including the inability to receive or
process payments from tenants for signifiacnt periods of time. If AREP, its
tenants or vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, AREP
will devote the necessary resources to resolve all significant year 2000 issues
in a timely manner, but believes that these issues will not be material to
AREP's business aside from a catostrophic third-party failure that would affect
most businesses.
Results of Operations
Calendar Year 1998 Compared to Calendar Year 1997
Gross revenues increased by $22,388,000, or 31.6%, during the calendar
year 1998 as compared to the same period in 1997. This increase reflects
increases of $11,487,000 in interest income on treasury bills and other
investments, $5,804,000 in dividend income, $2,660,000 in hotel and resort
operating income, $1,729,000 in rental income and $1,567,000 in other income
partially offset by a decrease of $859,000 in financing lease income. The
increase in interest income on treasury bills and other investments is primarily
due to an increase in short-term investments as a result of the 1997 Rights
Offering. The increase in dividend income is attributable to AREP's
investment in limited partnership units and RJR common stock. The increase in
hotel and resort operating income is primarily attributable to the acquisition
of New Seabury which began operations on August 1, 1998 partially offset by the
decrease in revenues due to the sale of the Phoenix Holiday Inn in April, 1997.
Expenses increased by $5,037,000, or 16.8%, during the calendar year
1998 compared to the same period in 1997. This increase reflects increases of
$2,721,000 in interest expense, $2,693,000 in hotel and resort operating
expenses, and $620,000 in general and administrative expenses partially offset
by decreases of $808,000 in property expenses and $189,000 in depreciation and
amortization. The increase in interest expense is primarily attributable to
financings related to recent property acquisitions. The increases in hotel and
resort operating expenses is primarily attributable to the acquisition of New
Seabury resport partially offset by a decrease in expenses due to the sale of
the Phoenix Holiday Inn in April 1997.
Earnings before property and securities transactions increased during
the calendar year 1998 by $17,351,000 as compared to the same period in 1997,
primarily due to increased interest income on treasury bills and other
investments and increased dividend income.
II-6
<PAGE> 24
Gain on property transactions decreased by $6,986,000 during the
calendar year 1998 as compared to the same period in 1997, due to differences in
the size and number of transactions.
In 1998, AREP recorded a gain sale of limited partnership
interests of $4,382,000. There was no such transaction in 1997.
During the calendar year 1998, AREP recorded a provision for
loss on real estate of $1,180,000 as compared to $1,085,000 during the same
period in 1997.
During the calendar year 1997, AREP recorded a gain on the sale
of marketable equity securities of $29,188,000 relating to its RJR stock. There
was no such transaction in 1998.
During the calendar year 1997, AREP recorded a provision for
loss on mortgages and note receivable of $9,790,000. No such provision was
recorded in 1997.
Net earnings for the calendar year 1998 decreased by $4,746,000 as
compared to the same period in 1997 primarily due to the non-recurring gain on
the sale of the RJR stock in 1997 partially offset by increased earnings before
property and securities transactions as mentioned above and the provision for
loss on mortgages and note receivable recorded in 1997.
Diluted earnings per weighted average limited partnership unit
outstanding before property and securities transactions were $1.06 in the
calendar year 1998 compared to $1.16 in the comparable period of 1997, and net
gain from property and securities transactions was $.22 in the calendar year
1998 compared to $.97 in the comparable period of 1997. Diluted net earnings per
weighted average limited partnership unit outstanding totaled $1.28 in the
calendar year 1998 compared to $2.13 in the comparable period of 1997.
Calendar Year 1997 Compared to Calendar Year 1996
Gross revenues decreased by approximately $856,000, or 1.2%, during the
calendar year 1997 as compared to the same period in 1996. This decrease
reflects approximate decreases of $3,945,000, or 39.3%, in hotel operating
income, $3,382,000, or 16.9%, in rental income, $2,698,000 in other income and
$927,000, or 3.6%, in interest income on financing leases partially offset by
approximate increases of $6,860,000, or 69.5%, in interest income on treasury
bills and other investments and $3,236,000 in dividend income. The decrease in
hotel operating income is primarily attributable to the sale of the Phoenix
Holiday Inn in April 1997. The decrease in rental income is primarily due to
property sales. The decrease in other income is primarily due to the Travelodge
lease termination in 1996. The decrease in interest income on financing leases
is primarily attributable to normal lease amortization and property sales. The
increase in interest income on treasury bills and other investments is primarily
due to an increase in short-term investments as a result of the 1997 Offering.
The increase in dividend income is due to AREP's investment in limited
partnership units.
Expenses decreased by approximately $7,636,000, or 20.3%, during the
calendar year 1997 compared to the same period in 1996. This decrease reflects
decreases of approximately $3,654,000, or 21.7%, in interest expense,
$2,709,000, or 35.4%, in hotel operating expenses, $954,000, or 21.6%, in
property expenses and $568,000, or 10.0%, in depreciation and amortization
partially offset by an increase of approximately $249,000, or 8.5%, in general
and administrative expenses. The decrease in interest expense is primarily
attributable to normal loan amortization and reductions due to repayments of
maturing balloon debt obligations, including the Senior Unsecured Debt, as well
as the sale of encumbered properties. The decrease in hotel operating expenses
is primarily attributable to the sale of the Phoenix Holiday Inn in April 1997.
Earnings before property and securities transactions increased during
the calendar year 1997 by approximately $6,780,000 compared to the same period
in 1996, primarily due to increased interest
II-7
<PAGE> 25
income on treasury bills and other investments and dividend income and decreased
property expenses and interest expense due to repayments of maturing debt
obligations partially offset by decreased rental income, other income, net hotel
operating income and interest income on financing leases.
Gain on property transactions decreased by approximately $8,466,000
during the calendar year 1997 as compared to the same period in 1996, due to
differences in the size and number of transactions.
During the calendar year 1997, AREP recorded a provision for loss on
real estate of approximately $1,085,000 as compared to $935,000 in the
comparable period of 1996.
During the calendar year 1997, AREP recorded a provision for loss on
mortgages receivable of $9,790,000 in connection with its investment in
Stratosphere. There was no such provision in 1996.
During the calendar year 1997, AREP recorded a non-recurring gain on
the sale of marketable equity securities of approximately $29,188,000 relating
to its RJR stock. There was no such transaction in 1996.
Net earnings for the calendar year 1997 increased by approximately
$17,562,000 as compared to net earnings for calendar year 1996 primarily due to
the non-recurring gain on the sale of the RJR stock and increased earnings
before property and securities transactions, partially offset by the provision
for loss on mortgages receivable and decreased gain on sales of real estate.
Diluted earnings before property and securities transactions per
weighted average limited partnership unit outstanding were $1.16 in 1997
compared to $1.20 in 1996, and diluted net gain from property and securities
transactions was $.97 in 1997 compared to $.82 in 1996. Diluted net earnings per
weighted average limited partnership unit outstanding totaled $2.13 in 1997
compared to $2.02 in 1996.
Capital Resources and Liquidity
Generally, the cash needs of AREP for day-to-day operations have been
satisfied from cash flow generated from current operations. In recent years,
AREP has applied a significant portion of its cash flow to the repayment of
maturing debt obligations. Cash flow from day-to-day operations represents net
cash provided by operating activities (excluding working capital changes and
non-recurring other income) plus principal payments received on financing leases
as well as principal receipts on certain mortgages receivable reduced by
periodic principal payments on mortgage debt.
In 1998, 25 leases covering 25 properties and representing
approximately $2,123,000 in annual rentals expired. Fifteen of these leases
originally representing approximately $595,000 in annual rental income were
re-let or renewed for approximately $617,000 in annual rentals. Such renewals
are generally for a term of five years. Five properties, with an approximate
annual rental income of $690,000, are currently being marketed for sale or
lease. Three properties with annual rental income of $138,000 were purchased by
their tenants pursuant to the exercise of purchase options. Two properties with
an annual rental income of $700,000 were sold.
In 1998 AREP sold 15 properties representing approximately $2,013,000
of net operating cash flow for net proceeds of approximately $23 million which
are being retained for reinvestment.
On March 29, 1999, the Board of Directors of the General Partner
announced that no distributions on its Depositary Units are expected to be made
in 1999. AREP believes that it should continue to hold and invest, rather than
distribute, cash. In making its announcement, AREP noted it plans to continue to
apply available operating cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements and other capital expenditures and creation of
cash reserves for contingencies including environmental matters and scheduled
lease expirations. By the end of the year 2002, net leases representing
approximately 27% of AREP's net annual rentals will be due for renewal, and by
the end of
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<PAGE> 26
the year 2004, 37% of such rentals will be due for renewal. Another factor that
AREP took into consideration was that net leases representing approximately 34%
of AREP's annual rentals from its portfolio are with tenants in the retail
sector, some of which are currently experiencing cash flow difficulties and
restructurings. Further, AREP noted that the types of investments AREP is
pursuing, including assets that may not be readily financeable or generating
positive cash flow, such as development properties, non-performing mortgage
loans or securities of companies which may be undergoing restructuring or
require significant capital investments, require AREP to maintain a strong
capital base in order to own, develop and reposition those assets.
During the year ended December 31, 1998, AREP generated approximately
$47 million in cash flow from day-to-day operations which excludes approximately
$10.9 million in interest earned on the 1997 Offering proceeds which will be
retained for future acquisitions. During 1997, AREP generated approximately
$38.7 million in such cash flow from day-to-day operations which excluded
approximately $3.9 million in interest earned on the proceeds from 1997 Rights
Offering.
Capital expenditures for real estate, excluding new acquisitions, were
approximately $505,000 during 1998. During 1997, such expenditures totaled
approximately $1,836,000.
During the year ended December 31, 1998, approximately $16.2 million of
maturing debt obligations, including the final $11.3 payment of the Senior
Unsecured Debt were repaid out of AREP's cash flow. During the year ended
December 31, 1997, approximately $18.2 million of maturing debt obligations,
including an $11.3 million payment on the Senior Unsecured Debt were repaid out
of AREP's cash flow.
During 1998, net cash flow after payment of maturing debt obligations
and capital expenditures was approximately $30 million which was added to AREP's
operating cash reserves. During 1997, net cash flow after payment of maturing
debt obligations and capital expenditures was approximately $18.7 million which
was added to AREP's operating cash reserves. AREP's operating cash reserves are
approximately $73.3 million at December 31, 1998 (which does not include the
cash from capital transactions which is being retained for investment), which
are being retained to meet maturing debt obligations, capitalized expenditures
for real estate and certain contingencies facing AREP. AREP from time to time
may increase its cash reserves to meet its maturing debt obligations, tenant
requirements and other capital expenditures and to guard against scheduled lease
expirations and other contingencies including environmental matters.
Sales proceeds from the sale or disposal of portfolio properties
totaled approximately $23 million in 1998. During 1997, such sales proceeds
totaled approximately $37.6 million. AREP received approximately $19.5 million
and $21 million of net proceeds from refinancings in 1998 and 1997 respectively.
AREP intends to use asset sales, financing and refinancing proceeds for new
investments.
As described herein, AREP's investment in Stratosphere was transferred
to an affiliate of Icahn in order to facilitate Stratosphere's reorganization.
Pursuant to the Transfer/Repurchase Agreement, AREP received $60.7 million for
its interest from an affiliate of Icahn. AREP expects that it will obtain the
appropriate licenses and repurchase such Stratosphere interest upon such
approval, together with its proportionate share of all sale proceeds, stock
rights, acquired shares and other benefits, if any, that may have accreted to or
been obtained in connection with such Stratosphere interests while held by the
affiliate of Icahn under the Transfer/Repurchase Agreement. Also, AREP
understands that Stratosphere may seek approximately $80 million for expansion
of its hotel and casino facility, a substantial portion of which may be provided
by AREP.
AREP also recently invested approximately $175 million in the common
stock of RJR, and $39.6 million in the debt of Philips and is investigating
possible tender offers for real estate operatingcompanies and real estate
limited partnership units. See Notes 6 and 9. Also, see Item 1 - "Investment
Opportunities and Strategies -- Real Estate Investments," for a discussion
of certain considerations relating to the gaming industry.
To further its investment objectives, AREP may consider the acquisition
or seek effective control of land development companies and other real estate
operating companies, including those from affiliates of the General Partner,
which may have a significant inventory of quality assets under development as
well as experienced personnel. This may enhance its ability to further
diversify its portfolio of properties and gain access to additional operating
and development capabilities.
II-9
<PAGE> 27
Pursuant to the 1997 Offering, which closed in September 1997, AREP
raised approximately $267 million (in addition to approximately $5.4 million
received from the General Partner) to increase its available liquidity so that
it will be in a better position to take advantage of investment opportunities
and to further diversity its portfolio. Additionally, AREP may determine to
reduce debt of certain properties where the interest rate is considered to be in
excess of current market rates. See Note 13.
AREP's cash and cash equivalents and investment in treasury bills
decreased by approximately $121 million during 1998, primarily due to the
purchase of RJR stock ($174.7 million), Sands and Claridge Notes ($29.2 million)
and Philips debt ($35.2 million) which was partially offset by the proceeds
from Icahn's purchase from AREP of its interest in Stratosphere ($60.7 million)
pursuant to the Transfer/Repurchase Agreement, net proceeds from property sales
($23 million) and approximately $30 million of net cash flow from operations
and other miscellaneous item ($4.4 million). AREP is obligated to repurchase
its interest in Stratosphere when the appropriate gaming licenses have been
obtained.
Quantitative and Qualitative Disclosure About Market Risks
The United States Securities and Exchange Commission requires that
registrants include information about primary market risk exposures relating to
financial instruments. Through its operating and investment activities, AREP is
exposed to market, credit and related risks, including those described
elsewhere herein. As AREP may invest in debt or equity securities of companies
undergoing restructuring or undervalued by the market, these securities are
subject to inherent risks due to price fluctuations, and risks relating to the
issuer and its industry, and the market for these securities may be less liquid
and more volatile than that of higher rated or more widely followed securities.
Other related risks include liquidity risks, which arise in the course
of AREP's general funding activities and the management of its balance sheet.
This includes both risks relating to the raising of funding with appropriate
maturity and interest rate characteristics and the risk of being unable to
liquidate an asset in a timely manner at an acceptable price. Real estate
investments by their nature are often difficult or time-consuming to liquidate.
Also, buyers of minority interests may be difficult to secure, while tranfers
of large block positions may be subject to legal, contractual or market
restrictions. Other operating risks for AREP include lease terminations,
whether scheduled terminations or due to tenant defaults or bankruptcies,
development risks, and environmental and capital expenditure matters, as
described elsewhere herein.
Whenever practical, AREP employs internal strategies to mitigate
exposure to these and other risks. AREP's management, on a case by case basis
with respect to new investments, performs internal analyses of risk
identification, assessment and control. AREP reviews credit exposures, and seeks
to mitigate counterparty credit exposure through various techniques, including
obtaining and maintaining collateral, and assessing the creditworthiness of
counterparties and issuers. Where appropriate, an analysis is made of
political, economic and financial conditions, including those of foreign
countries. Operating risk is managed through the use of experienced personnel.
AREP seeks to achieve adequate returns commensurate with the risk it assumes.
AREP utilizes qualitative and well as quantitative information in managing
risk.
AREP's market risk exposure with respect to its investments in
marketable securities such as the RJR stock may be material. The market risk
exposure in respect of the RJR stock at December 31, 1998 relates primarily to
price risk. For purposes of Securities and Exchange Commission risk disclosure
requirements, AREP considered the following sensitivity analysis which
expresses a potential loss in future fair value of these market risk sensitive
instruments resulting from the following hypothetical change in relevant market
price. As of December 31, 1998 a 10% reduction in price of the RJR stock would
have decreased any possible related net unrealized gain by approximately $19
million. It should be noted that while the above analysis may be a useful
benchmark, it should not be viewed as a forecast.
II-10
<PAGE> 28
AREP's investment in RJR stock accounted for approximately 17% of its
assets at December 31, 1998 and was acquired at an average purchase price per
share of $27.19. A material reduction in the price of the RJR stock could have
a material impact on AREP's capital position. As with other companies engaged
in the tobacco business, RJR is subject to risk and continuing litigation
relating to tobacco and related liabilities. While AREP has analyzed these
risks and considered market information regarding RJR, there can be no
assurance that there will not be a significant fluctuation in the market value
of its investment in RJR.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" above.
II-11
<PAGE> 29
Item 8. Financial Statements
INDEPENDENT AUDITORS' REPORT
The Partners
American Real Estate Partners, L.P.:
We have audited the accompanying consolidated balance sheets of American Real
Estate Partners, L.P. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, changes in partners' equity and
other comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1998. In connection with our audits of the
consolidated financial statements, we also have audited the 1998 financial
statement schedule as listed in the Index at Item 14 (a) 2. These consolidated
financial statements and the financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Real Estate
Partners, L.P. and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
March 23, 1999
New York, New York
II-12
<PAGE> 30
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997 (in $000's)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
REAL ESTATE LEASED TO OTHERS:
Accounted for under the financing method (Notes 2, 4 and 10) $ 245,920 $265,657
Accounted for under the operating method, net of accumulated
depreciation (Notes 2, 5 and 10) 135,634 117,735
INVESTMENT IN TREASURY BILLS 363,884 372,165
MARKETABLE EQUITY SECURITIES (Notes 2 and 6) 190,775 --
MORTGAGES AND NOTES RECEIVABLE (Notes 7, 9 and 21):
Held for investment 45,173 59,970
Available for sale 22,440 --
EQUITY INTEREST IN STRATOSPHERE CORPORATION (Notes 7 and 21) 48,969 --
HOTEL AND RESORT OPERATING PROPERTIES,
Net of accumulated depreciation (Notes 5, 9 and 10) 22,037 5,002
CASH AND CASH EQUIVALENTS (Note 2) 16,462 129,147
DEVELOPMENT PROPERTIES 12,830 3,860
INVESTMENT IN LIMITED PARTNERSHIPS (Notes 2 and 8) 5,569 22,970
RECEIVABLES AND OTHER ASSETS (Note 21) 18,994 7,838
PROPERTY HELD FOR SALE (Notes 2, 10 and 20) 3,893 4,164
DEBT PLACEMENT COSTS - Net of
accumulated amortization (Note 2) 1,544 1,473
CONSTRUCTION-IN-PROGRESS 1,791 1,249
---------- --------
TOTAL $1,135,915 $991,230
========== ========
</TABLE>
(Continued)
II-13
<PAGE> 31
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997(in $000's) (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
MORTGAGES PAYABLE (Notes 4, 5, 11 and 21) $ 173,559 $ 156,433
DUE TO AFFILIATE (Notes 7 and 21) 60,750 --
SENIOR INDEBTEDNESS (Notes 12 and 21) -- 11,308
ACCOUNTS PAYABLE, ACCRUED EXPENSES
AND OTHER LIABILITIES (Note 21) 10,004 10,929
DEFERRED INCOME (Note 9) 2,788 2,792
DISTRIBUTIONS PAYABLE (Note 22) 315 443
----------- ---------
247,416 181,905
----------- ---------
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 19)
LIMITED PARTNERS:
Preferred units, $10 liquidation preference,
5% cumulative pay-in-kind redeemable; 9,400,000
authorized; 7,676,607 and 7,311,054 issued and
outstanding as of December 31, 1998 and 1997 79,645 75,852
Depositary units; 47,850,000 authorized;
47,235,484 outstanding 802,856 728,329
GENERAL PARTNER 17,919 16,328
TREASURY UNITS AT COST:
1,137,200 and 1,037,200 depositary units
at December 31, 1998 and 1997 (11,921) (11,184)
----------- ---------
PARTNERS' EQUITY (Notes 2, 3, 13 and 23) 888,499 809,325
----------- ---------
TOTAL $ 1,135,915 $ 991,230
=========== =========
</TABLE>
See notes to consolidated financial statements.
II-14
<PAGE> 32
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in $000's, except per unit
amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Interest income on financing
leases $ 24,287 $ 25,146 $ 26,073
Interest income on treasury bills
and other investments 28,213 16,726 9,866
Rental income 18,346 16,617 19,999
Hotel and resort operating income (Notes 9 and 10) 8,758 6,098 10,043
Dividend income (Notes 6 and 8) 11,681 5,877 2,641
Other income (Notes 7, 9 and 10) 2,021 454 3,152
-------- -------- --------
93,306 70,918 71,774
-------- -------- --------
EXPENSES:
Interest expense (Notes 11 and 12) 15,910 13,189 16,843
Depreciation and amortization 4,923 5,112 5,680
General and administrative expenses (Note 3) 3,808 3,188 2,939
Property expenses 2,649 3,457 4,411
Hotel and resort operating expenses
(Notes 9 and 10) 7,645 4,952 7,661
-------- -------- --------
34,935 29,898 37,534
-------- -------- --------
EARNINGS BEFORE PROPERTY AND
SECURITIES TRANSACTIONS 58,371 41,020 34,240
PROVISION FOR LOSS ON MORTGAGES
RECEIVABLE (Note 7) -- (9,790) --
PROVISION FOR LOSS ON
REAL ESTATE (Notes 10 and 20) (1,180) (1,085) (935)
GAIN ON SALE OF MARKETABLE EQUITY
SECURITIES (Note 6) -- 29,188 --
GAIN ON SALES AND
DISPOSITION OF REAL ESTATE (Note 10) 9,065 16,051 24,517
GAIN ON SALE OF LIMITED
PARTNERSHIP INTERESTS (Note 8) 4,382 -- --
-------- -------- --------
NET EARNINGS $ 70,638 $ 75,384 $ 57,822
======== ======== ========
NET EARNINGS ATTRIBUTABLE TO
(Note 3):
Limited partners $ 69,232 $ 73,884 $ 56,671
General partner 1,406 1,500 1,151
-------- -------- --------
$ 70,638 $ 75,384 $ 57,822
======== ======== ========
</TABLE>
(Continued)
II-15
<PAGE> 33
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------------
<S> <C> <C> <C>
NET EARNINGS PER LIMITED
PARTNERSHIP UNIT (Note 2):
Basic earnings $ 1.42 $ 2.27 $ 2.17
========== ========== ==============
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS OUTSTANDING 46,173,284 31,179,246 25,666,640
========== ========== ==============
Diluted earnings $ 1.28 $ 2.13 $ 2.02
========== ========== ==============
WEIGHTED AVERAGE LIMITED
PARTNERSHIP UNITS AND EQUIVALENT
PARTNERSHIP UNITS OUTSTANDING 54,215,339 34,655,395 28,020,392
========== ========== ==============
</TABLE>
See notes to consolidated financial statements.
II-16
<PAGE> 34
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY AND OTHER COMPREHENSIVE
INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in $000's)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited Partners' Equity
General ------------------------ Held in Treasury Total
Partner's Depository Preferred ------------------- Partners'
Equity Units Units Amounts Units Equity
--------- ----------- --------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 8,266 $ 386,610 $20,497 $(11,184) 1,037 $ 404,189
Comprehensive income:
Net earnings 1,151 56,671 -- -- -- 57,822
Unrealized gains on securities
available for sale (Note 6) 468 23,080 -- -- -- 23,548
-------- --------- ------- -------- ------ ---------
Comprehensive income 1,619 79,751 -- -- -- 81,370
Pay-in-kind distribution (Note 13) -- (1,025) 1,025 -- -- --
-------- --------- ------- -------- ------ ---------
BALANCE, DECEMBER 31, 1996 9,885 465,336 21,522 (11,184) 1,037 485,559
Comprehensive income:
Net earnings 1,500 73,884 -- -- -- 75,384
Sale of marketable equity securities
available for sale (Note 6) (468) (23,080) -- -- -- (23,548)
-------- --------- ------- -------- ------ ---------
Comprehensive income 1,032 50,804 -- -- -- 51,836
Rights offering (Note 13) -- 215,582 51,329 -- -- 266,911
Expenses of Rights offering
(Note 13) (8) (392) -- -- -- (400)
Capital contribution (Note 13) 5,419 -- -- -- -- 5,419
Pay-in-kind distribution (Note 13) -- (3,001) 3,001 -- -- --
-------- --------- ------- -------- ------ ---------
BALANCE, DECEMBER 31, 1997 16,328 728,329 75,852 (11,184) 1,037 809,325
Comprehensive income:
Net earnings 1,406 69,232 -- -- -- 70,638
Net unrealized gains on
securities available for sale
(Notes 6 and 9) 185 9,088 -- -- -- 9,273
-------- --------- ------- -------- ------ ---------
Comprehensive income 1,591 78,320 -- -- -- 79,911
Repurchase of
Depositary units (Note 23) -- -- -- (737) 100 (737)
Pay-in-kind distribution (Note 13) -- (3,793) 3,793 -- -- --
-------- --------- ------- -------- ------ ---------
BALANCE, DECEMBER 31, 1998 $ 17,919 $ 802,856 $79,645 $(11,921) 1,137 $ 888,499
======== ========= ======= ======== ====== =========
</TABLE>
Accumulated other comprehensive income at December 31, 1998, 1997 and 1996 was
$9,273, $0 and $23,548, respectively.
II-17
<PAGE> 35
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in $000's)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 70,638 $ 75,384 $ 57,822
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 4,923 5,112 5,680
Amortization of deferred income -- (26) (26)
Gain on sale of marketable equity securities -- (29,188) --
Gain on sales and disposition of real estate (9,065) (16,051) (24,517)
Gain on sale of limited partnership interests (4,382) -- --
Provision for loss on mortgages receivable -- 9,790 --
Provision for loss on real estate 1,180 1,085 935
Changes in:
(Decrease) increase in accounts payable,
accrued expenses and other liabilities (1,040) (1,277) 6,449
Decrease in deferred income (4) (4) (4)
(Increase) decrease in receivables and other assets (11,239) 1,188 (2,357)
--------- --------- ---------
Net cash provided by operating activities 51,011 46,013 43,982
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in mortgages and notes receivable (63,809) (56,345) (570)
Net proceeds from the sales and disposition of real estate 23,004 37,643 40,673
Principal payments received on leases
accounted for under the financing method 7,887 7,683 7,314
Construction in progress (542) (570) (5,264)
Principal receipts on mortgages receivable 478 332 330
Property acquisitions (41,451) (63,064) (103)
Capitalized expenditures for real estate (505) (1,836) (3,855)
Decrease (increase) in investment in treasury bills 8,281 (372,165) --
(Acquisition) disposition of marketable securities (174,717) 111,784 (82,596)
Equity interest in Stratosphere Corporation (17,939) -- --
Due to affiliate 60,750 -- --
Net disposition (acquisition) of limited partnership interests 21,784 6,977 (29,948)
--------- --------- ---------
Net cash used in investing activities (176,779) (329,561) (74,019)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Repurchase of Depositary Units (737) -- --
Proceeds from rights offering -- 272,331 --
Expenses of the rights offering -- (267) (21)
Distribution to partners (129) (1,071) (156)
Debt:
Increase (decrease) in mortgages payable 39,230 62,623 (593)
Periodic principal payments (8,710) (7,578) (8,091)
Balloon payments (4,892) (6,854) (14,598)
Senior debt principal payment (11,308) (11,308) (11,308)
Increase in construction loan payable -- -- 4,033
Debt placement costs (371) (724) 52
--------- --------- ---------
Net cash provided by (used in) financing activities 13,083 307,152 (30,682)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (112,685) 23,604 (60,719)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 129,147 105,543 166,262
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,462 $ 129,147 $ 105,543
========= ========= =========
</TABLE>
(Continued)
II-18
<PAGE> 36
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (in $000's)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash payments for interest $ 14,822 $ 12,377 $16,510
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property acquired in satisfaction of mortgages:
Additions to property accounted for under the
operating method $ -- $ -- $ 36
Decrease in mortgages receivable -- -- (97)
Increase to property held for sale -- -- --
Decrease in deferred income -- -- 61
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Reclassification of real estate to operating lease $ -- $ 4,001 $ 10,207
Reclassification of real estate from operating lease (5,140) (2,497) (2,437)
Reclassification to development properties 3,860 -- --
Reclassification of real estate from financing lease -- (4,001) (235)
Reclassification from mortgages and notes receivable (15,810) -- --
Reclassification to hotel and resort operating properties 15,810 -- --
Reclassification of real estate from construction in progress -- -- (10,207)
Reclassification of real estate to property held for sale 1,280 2,497 2,672
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
Net unrealized gains on securities available for sale $ 9,273 $ -- $ 23,548
========= ========= =========
Sale of marketable equity securities available for sale $ -- $ (23,548) $ --
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
II-19
<PAGE> 37
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
On July 1, 1987, American Real Estate Holdings Limited Partnership (the
"Subsidiary"), in connection with an exchange offer (the "Exchange"),
entered into merger agreements with American Real Estate Partners, L.P.
(the "Company") and each of American Property Investors, L.P., American
Property Investors II, L.P., American Property Investors III, L.P.,
American Property Investors IV, L.P., American Property Investors V,
L.P., American Property Investors VI, L.P., American Property Investors
VII, L.P., American Property Investors VIII, L.P., American Property
Investors IX, L.P., American Property Investors X, L.P., American
Property Investors XI, L.P., American Property Investors 82, L.P. and
American Property Investors 83, L.P. (collectively, the "Predecessor
Partnerships"), pursuant to which the Subsidiary acquired all the assets,
subject to the liabilities (known and unknown) of the Predecessor
Partnerships.
The limited partners of the Predecessor Partnerships received limited
partner interests in the Subsidiary. The number of such limited partner
interests received by a limited partner was determined based upon his
percentage ownership interest in the Predecessor Partnerships, the value
of the Predecessor Partnerships' net assets and the number of limited
partner interests allocable to the Predecessor Partnerships' general
partners and their affiliates. The limited partner interests in the
Subsidiary were contributed to the Company in exchange for limited
partner interests therein. Limited partnership interests were allocable
to the Predecessor Partnerships' general partners and their affiliates as
a result of their rights: (i) to receive a portion of the cash flow of
the Predecessor Partnerships by virtue of their ownership of interests in
such partnerships and their entitlement to receive management fees and
nonaccountable expense reimbursements and (ii) to share in the proceeds
from the sale or liquidation of the assets of the Predecessor
Partnerships and to receive real estate commissions with respect to the
sale of properties by the Predecessor Partnerships. These rights of the
Predecessor Partnerships' general partners and their affiliates were
valued in connection with the Exchange. As a result of such valuation,
and the assignment of the interests receivable by the corporate
affiliates to American Property Investors, Inc. (the "General Partner"),
an aggregate of 1,254,280 units and a 1% general partner interest in the
Company were issued to the General Partner and 5,679 units were issued to
noncorporate affiliates of the Predecessor Partnerships' general
partners. In addition, the General Partner also received a 1% general
partner interest in the Subsidiary.
II-20
<PAGE> 38
By virtue of the Exchange, the Subsidiary owns the assets, subject to the
liabilities, of the Predecessor Partnerships. The Company owns a 99%
limited partner interest in the Subsidiary. The General Partner owns a 1%
general partner interest in both the Subsidiary and the Company
representing an aggregate 1.99% general partner interest in the Company
and the Subsidiary.
The participation in the transaction by a Predecessor Partnership was
conditioned upon obtaining the approval of a majority-in-interest of the
limited partners in such Predecessor Partnership. Such approvals were
obtained with respect to each of the Predecessor Partnerships prior to
July 1, 1987.
During 1989, Integrated Resources, Inc. ("Integrated"), the former parent
of the General Partner, experienced serious financial difficulties and,
on February 13, 1990, it filed in the Bankruptcy Court for the Southern
District of New York a voluntary petition for reorganization pursuant to
the provisions of Chapter 11 of the Federal Bankruptcy Code (the
"Filing"). The General Partner was a separate entity and neither the
General Partner nor any other subsidiary of Integrated was included in
the Filing.
On September 13, 1990, in connection with its voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code, Integrated
entered into an agreement whereby it agreed to sell all of its stock in
the General Partner to Meadowstar Holding Company, Inc. ("Meadowstar").
Neither the Company nor the General Partner was a party to such
agreement. The sale of the stock of the General Partner to Meadowstar was
approved by the Bankruptcy Court on October 22, 1990. On November 15,
1990, pursuant to the terms of the Acquisition Agreement, Meadowstar
purchased all of the outstanding shares of Common Stock of the General
Partner. In May 1993, Carl C. Icahn acquired all of Meadowstar's interest
in the General Partner.
II-21
<PAGE> 39
An amendment (the "Amendment") to the Company's Partnership Agreement
became effective on August 16, 1996, which permits the Company to make
non-real estate investments. The Amendment permits the Company to invest
in securities issued by companies that are not necessarily engaged as one
of their primary activities in the ownership, development or management
of real estate to further diversify its investments while remaining in
the real estate business and continuing to pursue suitable investments in
the real estate markets. Under the Amendment, investments may include
equity and debt securities of domestic and foreign issuers. The
proportion of the Company's assets invested in any one type of security
or any single issuer will not be limited. The investment objective of the
Company with respect to such investments will be to purchase undervalued
securities so as to maximize total returns consisting of current income
and/or capital appreciation.
The Company will conduct its activities in such a manner so as not to be
deemed an investment company under the Investment Company Act of 1940.
Generally, this means that no more than 40% of the Company's total assets
will be invested in securities. In addition, the Company will structure
its investments 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.
II-22
<PAGE> 40
2. SIGNIFICANT ACCOUNTING POLICIES
Financial Statements and Principles of Consolidation - The consolidated
financial statements are prepared on the accrual basis of accounting and
include only those assets, liabilities and results of operations, which
relate to the Company and the Subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation.
Registration Costs, Expenses of the Exchange and Rights Offering Expenses
- Registration costs of the Predecessor Partnerships were charged against
partners' equity upon the closing of the public offerings in accordance
with prevalent industry practice. Expenses of the Exchange were charged
against partners' equity upon consummation of the Exchange. Rights
Offering Expenses were charged against partners' equity upon consummation
of the Right's Offerings.
Net Earnings Per Limited Partnership Unit - In February 1997 the
Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share ("SFAS
128")". SFAS 128 became effective for financial statements for both
interim and annual periods ending after December 15, 1997. It also
required prior period earnings per share data presented to be restated.
Under SFAS 128, basic earnings per share are based on earnings after the
preferred pay-in-kind distribution to Preferred Unitholders.
The resulting net earnings available for limited partners are divided by
the weighted average number of shares of limited partnership units
outstanding. Diluted earnings per share uses net earnings attributable to
limited partner interests as the numerator with the denominator based on
the weighted, average number of units and equivalent units outstanding.
The Preferred units are considered to be unit equivalents. The weighted
average number of depositary units outstanding for basic earnings per
share purposes for years ended December 31, 1998, 1997 and 1996 were
46,173,284, 31,179,246 and 25,666,640, respectively. The weighted average
number of depositary units and equivalent units assumed outstanding for
diluted earnings per share purposes for the years ended December 31,
1998, 1997 and 1996 were 54,215,339, 34,655,395 and 28,020,392,
respectively. The number of limited partner units used in the calculation
of diluted income per limited partner unit increased by 8,042,055,
3,476,149 and 2,353,752, limited partner units for the years ended
December 31, 1998, 1997 and 1996, respectively to reflect the effects of
the conversion of preferred units.
II-23
<PAGE> 41
For the years ended December 31, 1998, 1997 and 1996, basic and diluted
earnings per weighted average limited partnership unit are detailed as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Basic:
Earnings before property
and securities transactions $ 1.16 $ 1.19 $ 1.27
Net gain from property and
securities transactions .26 1.08 .90
-------- -------- --------
Net earnings $ 1.42 $ 2.27 $ 2.17
======== ======== ========
Diluted:
Earnings before property
and securities transactions $ 1.06 $ 1.16 $ 1.20
Net gain from property and
securities transactions .22 .97 .82
-------- -------- --------
Net earnings $ 1.28 $ 2.13 $ 2.02
======== ======== ========
</TABLE>
There were no distributions in 1998, 1997 or 1996.
Cash and Cash Equivalents - The Company considers short-term investments,
which are highly liquid with original maturities of three months or less
at date of purchase, to be cash equivalents. Included in cash and cash
equivalents at December 31, 1998, 1997 and 1996 are investments in
government backed securities of approximately $13,212,000, $127,805,000
and $102,270,000, respectively.
Marketable Equity Securities - Investments in equity securities
classified as available for sale, for accounting purposes, are required
to be carried at fair value on the Balance Sheet of the Company.
Unrealized holding gains and losses are excluded from earnings and
reported as a separate component of Partners' Equity.
Investment in Limited Partnership Units - Investment in Limited
Partnership Units are accounted for under the cost method with income
distributions reflected in earnings and return of capital distributions
as a reduction of investment.
Income Taxes - No provision has been made for Federal, state or local
income taxes since the Company is a partnership and, accordingly, such
taxes are the responsibility of the partners.
Leases - The Company leases to others substantially all its real property
under long-term net leases and accounts for these leases in accordance
with the provisions of Financial Accounting Standards Board Statement No.
13, "Accounting for Leases," as amended. This Statement sets forth
specific criteria for determining whether a lease is to be accounted for
as a financing lease or an operating lease.
II-24
<PAGE> 42
a. Financing Method - Under this method, minimum lease payments to be
received plus the estimated value of the property at the end of
the lease are considered the gross investment in the lease.
Unearned income, representing the difference between gross
investment and actual cost of the leased property, is amortized to
income over the lease term so as to produce a constant periodic
rate of return on the net investment in the lease.
b. Operating Method - Under this method, revenue is recognized as
rentals become due and expenses (including depreciation) are
charged to operations as incurred.
Properties - Properties, other than those accounted for under the
financing method, are carried at cost less accumulated depreciation
unless declines in the values of the properties are considered other than
temporary.
For each of the years ended December 31, 1998, 1997 and 1996 no
individual or series of real estate assets leased to the same lessee
accounted for more than 10% of the gross revenues of the Company. At
December 31, 1998, 1997 and 1996, Portland General Electric Company
occupied a property, consisting of corporate offices, which represented
more than 10% of the Company's total real estate assets.
Depreciation - Depreciation on properties accounted for under the
operating method is computed using the straight-line method over the
estimated useful life of the particular property or property components,
which range from 5 to 45 years. When properties are sold or otherwise
disposed of, the cost and accumulated depreciation are removed from the
property account and the accumulated depreciation account, and any gain
or loss on such sale or disposal is generally credited or charged to
income.
Debt Placement Costs - Debt placement costs are amortized over the term
of the respective indebtedness.
Use of Estimates - Management of the Partnership has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
Assets Held for Sale - Assets held for sale are carried at the lower of
cost or net realizable value.
Reclassifications - Certain amounts in prior year financial statements
have been reclassified to conform to the 1998 presentation.
Accounting by Creditors for Impairment of a Loan - The Company follows
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS 118, Accounting by Creditors for Impairment of a Loan -
Income Recognition Disclosures. In accordance with these standards, if it
is probable that based upon current information a creditor will be unable
to collect all amounts due according to the contractual terms of a loan
agreement, the asset is
II-25
<PAGE> 43
considered "impaired". Reserves are established against impaired loans in
amounts equal to the difference between the recorded investment in the
asset and either the present value of the cash flows expected to be
received, or the fair value of the underlying collateral if foreclosure
is deemed probable or if the loan is considered collateral dependent.
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of - The Company follows Statement of Financial
Accounting Standards 121, which requires that long-lived assets and
certain identifiable intangibles, and goodwill related to those assets to
be held and used by an entity and long-lived assets and certain
identifiable intangibles to be disposed of, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
In performing the review for recoverability, the Company estimates the
future cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying
amount of the asset an impairment loss is recognized. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that
the Company expects to hold and use is based on the fair value of the
asset. Long-lived assets and certain identifiable intangibles to be
disposed of are reported at the lower of carrying amount or fair value
less cost to sell.
II-26
<PAGE> 44
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
a. 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 the Company and the General Partner or its
affiliates must be fair and reasonable to the Company and
customary to the industry.
Reinvestment incentive fees as payment for services rendered in
connection with the acquisition of properties from July 1, 1987
through July 1, 1997 were 1% of the purchase price for the first
five years and are 1/2% for the second five years.
Reinvestment incentive fees were only payable on an annual basis
if the sum of (x), the sales price of all Predecessor
Partnerships' properties (net of associated debt which encumbered
such properties at the consummation of the Exchange) sold through
the end of such year, and (y), the appraised value of all
Predecessor Partnerships' properties which have been financed or
refinanced (and not subsequently sold), net of the amount of any
refinanced debt, through the end of such year determined at the
time of such financings or refinancings, exceeded the aggregate
values assigned to such Predecessor Partnerships' properties for
purposes of the Exchange. If the subordination provisions were not
satisfied in any year, payment of reinvestment incentive fees for
such year were deferred. At the end of each year, a new
determination was made with respect to subordination requirements
(reflecting all sales, financings and refinancings from the
consummation of the Exchange through the end of such year) in
order to ascertain whether reinvestment incentive fees for that
year and for any prior year, which had been deferred, may be paid.
From the commencement of the Exchange through June 30, 1997 the
Company (i) sold or disposed of an aggregate of 159 properties of
the Predecessor Partnerships for an aggregate of approximately
$99,268,000, net of associated indebtedness which encumbered such
properties at the consummation of the Exchange and (ii) refinanced
25 Predecessor Partnership properties with an aggregate appraised
value, net of the amount of the refinanced debt, of approximately
$37,672,000 for a sum total of approximately $136,940,000.
Aggregate appraised values attributable to such properties for
purposes of the Exchange were approximately $145,663,000. Eighteen
properties have been acquired
II-27
<PAGE> 45
since the commencement of the exchange, including two properties
acquired in June 1997 (see Note 10), for aggregate purchase prices
of approximately $61,000,000. Reinvestment incentive fees of
approximately $480,000 have previously been paid to the General
Partner. Since the subordination requirements were not met as of
June 30, 1997, the termination date of the right to receive such
fee, no reinvestment incentive fee was due or payable to the
General Partner for the two properties acquired in 1997.
b. The Company has a lease, expiring in 2001, for 7,920 square feet
of office space, at an annual rental of approximately $153,000.
The Company has sublet to certain affiliates 3,205 square feet at
an annual rental of approximately $62,000, resulting in a net
annual rental of approximately $91,000.
c. The Company was reimbursed by an affiliate of the General Partner
for payroll and certain overhead expenses related to certain
employees of the Company who provided services on a part-time
basis in the amounts of approximately $34,000 and $50,000 and for
the years ended December 31, 1997 and 1996, respectively. Such
reimbursements were approved by the Audit Committee of the Board
of Directors of the General Partner. There were no such
reimbursements in 1998.
d. In addition, in 1997 the Company entered a license agreement for a
portion of office space from an affiliate. The license agreement
dated as of February 1, 1997 expires May 22, 2004 unless sooner
terminated in accordance with the agreement. Pursuant to the
license agreement, the Company has the non-exclusive use of 3,547
square feet of office space and common areas (of an aggregate
21,123 rentable square feet sublet by such affiliate) for which it
pays $17,068 per month, together with 16.79% of certain
"additional rent". In 1998 and 1997, the Company paid such
affiliate approximately $216,000 and $69,000 of rent,
respectively, in connection with this licensing agreement. In
connection with the build-out of the space, the Company reimbursed
such affiliate $486,989 in 1997, representing the Company's
allocable share of such costs net of a pro rata share of the
sub-lessor's allowance for such build-out. The terms of such
sublease were reviewed and approved by the Audit Committee.
II-28
<PAGE> 46
4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE FINANCING METHOD
Real estate leased to others accounted for under the financing method is
summarized as follows (in $000's):
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Minimum lease payments receivable $301,988 $342,131
Unguaranteed residual value 142,919 150,912
-------- --------
444,907 493,043
Less unearned income 198,987 227,386
-------- --------
$245,920 $265,657
======== ========
</TABLE>
The following is a summary of the anticipated future receipts of the
minimum lease payments receivable at December 31, 1998 in ($000's):
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ------
<S> <C>
1999 $ 30,825
2000 29,463
2001 25,743
2002 23,831
2003 22,262
Thereafter 169,864
---------
$ 301,988
=========
</TABLE>
At December 31, 1998, approximately $172,281,000 of the net investment
in financing leases was pledged to collateralize the payment of
nonrecourse mortgages payable.
II-29
<PAGE> 47
5. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD
Real estate leased to others accounted for under the operating method is
summarized as follows (in $000's):
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Land $ 46,822 $ 44,433
Commercial buildings 127,262 113,471
-------- --------
174,084 157,904
Less accumulated depreciation 38,450 40,169
-------- --------
$135,634 $117,735
======== ========
</TABLE>
As of December 31, 1998, and 1997, accumulated depreciation on the hotel
and resort operating properties (not included above) amounted to
approximately $2,993,000 and $2,200,000, respectively (See Notes 9 and
10).
The following is a summary of the anticipated future receipts of minimum
lease payments under noncancelable leases at December 31, 1998 (in
$000's):
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ------
<S> <C>
1999 $ 11,949
2000 10,716
2001 9,443
2002 8,527
2003 7,341
Thereafter 27,340
--------
$ 75,316
========
</TABLE>
II-30
<PAGE> 48
At December 31, 1998, approximately $82,837,000 of real estate leased to
others was pledged to collateralize the payment of nonrecourse mortgages
payable.
6. MARKETABLE EQUITY SECURITIES
a. In 1996, the Company purchased 3,121,700 shares of RJR Nabisco
Holdings Corp. ("RJR") common stock at a cost of approximately
$82,596,000 at an average cost per share of $26.46.
The Company recorded "Dividend income" of $2,281,000 for the year
ended December 31, 1996 on the 3,121,700 shares of RJR purchased
in 1996.
Unrealized holding gains of approximately $23,548,000 were
recorded as a separate component of Partners' Equity at
December 31, 1996.
In February 1997, the Company sold its entire interest in RJR for
net proceeds of approximately $111,784,000 realizing a gain of
approximately $29,188,000. The Company's pro rata share of third
party expenses relating to such RJR investment was approximately
$2,154,000 which was paid in the year ended December 31, 1997 and
approved by the Audit Committee.
b. In 1998, the Company purchased 6,426,100 shares of RJR Nabisco
Holdings Corp. ("RJR") common stock at a cost of approximately
$174,717,000, at an average cost per share of $27.19. As of
December 31, 1998 the Company owns 6,426,100 shares of RJR,
representing approximately 2.0% of the total outstanding RJR
common shares. On December 31, 1998, the closing price of RJR
common shares on the New York Stock Exchange was $29.69
representing a market value of approximately $190,775,000 and
approximately 16.8% of the Company's total assets. Carl C. Icahn,
the Chairman of the Board of the General Partner, owned (through
affiliates) an additional 11,617,200 shares of RJR, as of December
31, 1998, representing approximately 3.6% of the total outstanding
RJR common shares.
The Company recorded "Dividend income" of approximately $2,219,000
for the year ended December 31, 1998 on the 6,426,100 shares of
RJR purchased in 1998.
Unrealized holding gains of approximately $16,058,000 were
recorded as a separate component of Partners' Equity at
December 31, 1998.
Subsequent to December 31, 1998, the Company purchased 22,100
additional shares for approximately $611,000. As of March 18,
1999, Carl C. Icahn has purchased additional shares representing
approximately 2.3% of the total outstanding RJR common shares.
II-31
<PAGE> 49
7. EQUITY INTEREST IN STRATOSPHERE CORPORATION
In June, 1997 the Company 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 had approximately $203 million of such notes
outstanding. In July and September 1998, the Company invested
approximately $17.9 million to purchase approximately $43.5 million face
value of additional notes. An affiliate of the General Partner owned
approximately $83.3 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 filed a Second Amended Plan of Reorganization which provided
for the holders of the First mortgage Notes to receive 100% of the equity
in the reorganized entity and therefore provided the Company and its
affiliate with a controlling interest. Such plan was approved by the
Bankruptcy Court on June 6, 1998 but was not effective until certain
governmental approvals were obtained including, among other things,
gaming licenses from the Nevada Gaming Authority.
The Company, the General Partner, and the directors and officers of the
General Partner are currently in the process of pursuing gaming
applications to obtain licenses from the Nevada Gaming Authority. The
Company understands that the application process may take a number of
months. The Company has no reason to believe it will not obtain its
necessary license; however, the licensing application of the affiliate of
the General Partner was reviewed by the authorities earlier than the
Company's application. In an effort to facilitate the consummation of the
Stratosphere reorganization process, the Company entered into an
agreement to transfer its interest (the "Transfer Agreement") in
Stratosphere to an affiliate of the General Partner at a price equal to
the Company's cost for such Stratosphere First Mortgage Notes. However,
the affiliate of the General Partner would be obligated to sell back to
the Company and the Company would be obligated to repurchase such
interest in Stratosphere at the same price (together with a commercially
reasonable interest factor), when the appropriate licenses are obtained
by the Company. The Company believes there should be no problem for the
Company to obtain its license, and thereupon such Stratosphere interests
would be transferred back to the Company; however, in order to secure the
Company, if such Stratosphere interests are not transferred back to the
Company then any net gains (less such interest) from the subsequent sale
by the affiliate of the General Partner of such Stratosphere interests
previously held by the Company will be paid to the Company.
In October 1998, the affiliate of the General Partner obtained its
licenses and in accordance with the Transfer Agreement the Company
received approximately $60.7 million for its Stratosphere interests.
Stratosphere's Second Amended Plan of Reorganization became effective on
October 14, 1998.
II-32
<PAGE> 50
Based on current hotel and casino operations' management believed the
fair value of this investment to be $33,021,000 at December 31, 1997. As
a result, the Company recorded a provision for loss on mortgages
receivable of $9,790,000 in the year ended December 31, 1997.
At December 31, 1998 the Company has an equity interest of approximately
$48,969,000 and a corresponding liability of approximately $60,750,000 to
reflect the Company's obligation to repurchase the Stratosphere First
Mortgage Notes it previously held. A loss of approximately $89,000 offset
by approximately $79,000 of accretion is included in "other income" in
the year ended December 31, 1998.
Condensed financial information for this investment at December 31, 1998
is shown below (in $000's).
<TABLE>
<CAPTION>
AREP's
Total Share
--------- --------
<S> <C> <C>
Current assets $ 26,179 $ 12,706
Noncurrent assets 129,367 62,790
Current liabilities 28,557 13,860
Noncurrent liabilities 95 46
Net equity 126,894 61,590
Revenues $ 30,586 $ 14,845
Costs and other deductions 30,770 14,934
Net loss (184) (89)
</TABLE>
The difference between the Company's carrying value and its share of
Stratosphere's net equity at date of reorganization is being accreted
over a 40 year period.
II-33
<PAGE> 51
8. INVESTMENT IN LIMITED PARTNERSHIP UNITS
a. In June 1996, the Company entered into an agreement with
non-affiliated third parties and became a member of a limited
liability company, Beattie Place LLC ("Beattie"). The purpose of
Beattie is to acquire, hold, and ultimately dispose of limited
partnership units in ten Balcor Limited Partnerships (the "Balcor
Units") in connection with previously commenced tender offers.
These Balcor limited partnerships own and operate commercial and
multi-family real estate properties nationwide. The Company agreed
to purchase a non-voting membership interest in Beattie of
approximately 71.5%. Beattie purchased approximately 119,000
Balcor Units of which approximately 85,000 Balcor Units represent
the Company's pro rata share. As of December 31, 1998, the Company
has received distributions of approximately $2,906,000 in excess
of its original investment of $9,834,000. Such distributions of
approximately $430,000 and $2,476,000 have been recognized in
"Dividend income" in the years ended December 31, 1998 and 1997,
respectively. In addition, approximately $622,000 and $360,000 of
income distributions were received and recorded in "Dividend
income" for the years ended December 31, 1997 and 1996,
respectively.
b. In July 1996, the Company's subsidiary, American Real Estate
Holdings Limited Partnership ("AREH") and an affiliate of the
General Partner, Bayswater Realty and Capital Corp. ("Bayswater")
became partners of Boreas Partners, L.P., ("Boreas"), a Delaware
limited partnership. AREH and Bayswater have a 69.999% and 30%
limited and general partner interest, respectively, and a wholly
owned subsidiary of AREH has a .001% interest as a general partner
of Boreas. AREH's total interests are 70%. Boreas together with
unaffiliated third parties entered into an agreement and became
limited partners of Raleigh Capital Associates, L.P. ("Raleigh")
for the purpose of making a tender offer for up to 46% of the
outstanding limited partnership and assignee interests ("Units")
of Arvida/JMB Partners, L.P. ("Arvida") a real estate partnership.
Boreas and an affiliated general partner had a total interest in
Raleigh of 33 1/3%. In 1996, Boreas made capital contributions of
approximately $17,650,000 to Raleigh representing, as of December
31, 1996, approximately 27,000 of the outstanding Units. In
February 1997, Raleigh returned approximately $3,625,000, together
with interest earned thereon of approximately $29,000, of excess
capital contribution. In April 1997, an additional contribution of
approximately $4,333,000 was made representing 8,000 additional
units.
Boreas received approximately $5,550,000 and $1,333,000 of income
distributions, representing Arvida's cash flow distributions,
which were recorded as "Dividend income" in the years ended
December 31, 1998 and 1997, respectively.
On May 15, 1998 Raleigh redeemed the 66 2/3% partnership interests
of the unaffiliated third parties for approximately $27,703,000.
The redemption was funded by Raleigh utilizing approximately
$253,000 of its cash on hand and incurring the following debt
obligations: (i) $10,000,000 loan from Ing (U.S.) Capital Corp.
("Ing"), bearing interest at prime plus 1 -1/2% ("Base Rate"),
with a maturity date of May 14, 1999, and collateralized by the
assets of Raleigh; (ii) $5,235,263 subordinated loan from Vegas
Financial Corp., an affiliate of Carl C. Icahn, bearing interest
at the Base Rate plus 1%
II-34
<PAGE> 52
and payable semi-annually, with a maturity date of November 15,
2000 and (iii) $12,215,614 subordinated loan from the Company
under the same terms and conditions as (ii) above.
On December 23, 1998, Raleigh sold all of its limited partnership
interest in Arvida for approximately $47,697,000. All of the above
outstanding loans were paid off along with accrued interest to the
date of sale. The Company received approximately $14,004,000 of
net sale proceeds. A gain of approximately $4,382,000 was recorded
by the Company on the disposition of the units including
distributions received in excess of the Company's investment.
As of December 31, 1998, Boreas and Raleigh have been consolidated
in the Company's financial statements. Included in the
Consolidated Statements of Earnings for the year ended December
31, 1998 is approximately $416,000 of "Interest expense".
c. On March 12, 1998 the Company, through its affiliate Olympia
Investors, L.P. ("Olympia"), initiated tender offers to purchase
up to 160,000 units of limited partnership interest in Integrated
Resources High Equity Partners Series 85 ("HEP 85") at a purchase
price of $95 per unit, up to 235,000 units of High Equity Partners
L.P. - Series 86 ("HEP 86") at a purchase price of $85 per unit
and up to 148,000 units of High Equity Partners L.P. - Series 88
("HEP 88") at a purchase price of $117 per unit (subsequently
increased to $125.50 per unit). The offers expired on July 24,
1998.
On September 17, 1998, the Company paid approximately $7.5 million
to the tender agent for 30,842 units of HEP 85; 32,104 units of
HEP 86; and 14,687 units of HEP 88. In January 1999, the Company
paid an additional $108,240 for 290 units of HEP 85; 646 units of
HEP 86; and 268 units of HEP 88.
Concurrently with the tender offer the Company entered into an
agreement with an affiliate of the general partner of HEP 85, HEP
86 and HEP 88 which gave them a purchase option for 50% of the
tendered units at Olympia's tender price plus expenses. On October
20, 1998, the Company received notice from the affiliate of the
general partner of HEP 85, HEP 86, and HEP 88 that it would
exercise their 50% purchase option pertaining to all of the
tendered units.
In December 1998 and January 1999, the Company received
approximately $4,018,000 and $58,000, respectively, in payment of
a total of 15,566 units of HEP 85; 16,375 units of HEP 86; and
7,478 units of HEP 88.
As of December 31, 1998, the Company's investment in HEP 85, 86
and 88 limited partnership units totalled approximately
$4,079,000.
d. As of December 31, 1998, the Company has participated in four
other tender offers for limited partnership units. The Company has
invested approximately $1,490,000 in these partnerships as of
December 31, 1998.
II-35
<PAGE> 53
9. MORTGAGES AND NOTES RECEIVABLE
(in $000's)
<TABLE>
<CAPTION>
Balance Monthly Balance at
Collateralized by Property Interest Maturity at Payment December 31,
Tenanted by or Debtor Rate Date Maturity Amount 1998 1997
- --------------------- ---- ---- -------- ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Held for investment:
Hardee's Food Systems, Inc. (l) 9.00% (a) 11/05 $ -- 1 (a) $ 117 $ 117
Bank of Virginia (l) 9.00 (b) 1/06 848 1 (b) 365 359
Best Products Co., Inc. (l) 9.00 (c) 9/01 -- -- (c) -- 173
Data 100 Corp. (l) 9.00 12/10 -- (d) 10 -- --
11.6087 12/19 -- (d) -- -- --
Easco Corp. (l) 8.875 2/98 (e) 3,587 27 (e) 3,468 3,481
Winchester Partnership (l) 9.00 11/01 -- 34 1,039 1,336
Queens Moat Houses,
P.L. C. (Note receivable) (f) Variable 12/00 9,839 (f) -- (f) 4,944 5,600
Stratosphere Corp. (g) 14.25 5/02 -- (g) -- (g) -- 33,021
New Seabury Company, LP (h) -- -- -- (h) -- (h) -- 15,883
Philip Services Corp. (k) Variable 8/02 -- 35,240 --
------- --------
45,173 59,970
------- --------
Available for sale:
Sands Hotel and Casino (i) 10.875 1/04 -- (i) -- (i) 11,190 --
Claridge Hotel and Casino
Corp. (j) 11.75 2/02 -- (j) -- (j) 11,250 --
------- --------
22,440 --
------- --------
$67,613 $ 59,970
======= ========
</TABLE>
II-36
<PAGE> 54
(a) 5.75% is paid currently and 3.25% is deferred. The principal and
deferred interest is payable in monthly installments from March 1999
until November 2005.
(b) 4.5% is paid currently and 4.5% is deferred until maturity.
(c) Payments are $54,276 through September 1, 2001.
(d) In August 1997, the outstanding principal balance of the notes was paid
off and a gain of approximately $950,000 was realized in the year ended
December 31, 1997.
(e) As of January 31, 1999, the purchase money mortgage was amended. The
maturity date was extended to February 2000 under similar terms.
(f) On August 15, 1995, the Company invested approximately $7.1 million in
a note receivable by purchasing a portion (approximately 1.85%) of an
unsecured Senior Term Facility Agreement ("Facility Agreement"). The
borrower is Queens Moat Houses P.L.C. ("Queens Moat") and certain
subsidiaries. Queens Moat is a United Kingdom based hotel operator with
properties in the U.K., Germany, Netherlands, France and Belgium. The
Company purchased its participation portion from Lazard Freres & Co.
LLC at 71.75% of the face amount of the Company's pro rata portion of
the Facility Agreement's outstanding senior advances on the acquisition
date. The Facility Agreement's advances are denominated in Pounds
Sterling, Deutsche Marks, Dutch Guilders, Belgian Francs and French
Francs. The discount at acquisition date, based on the then existing
spot rate, was approximately $2.8 million. The Facility Agreement
matures December 31, 2000 and bears interest at LIBOR (London Interbank
Offered Rate) plus 1.75% per annum for the relevant currencies.
Interest accrued from July 1, 1995 to June 30, 1996, in the approximate
amount of $622,000, has been capitalized into the note receivable in
accordance with the terms of the Facility Agreement. Subsequent to June
30, 1996 interest periods and payments can vary from one month to two,
three or six months at the discretion of the borrower. There are
scheduled payments of the advances over the term of the loan. In
addition, repayments are required when certain underlying assets are
sold. During the years ended December 31, 1998, 1997 and 1996, these
repayments totalled approximately $1,443,000, $2,165,000 and $419,000,
respectively.
The discount at acquisition date is being amortized over the term of
the Facility Agreement. For the years ended December 31, 1998, 1997 and
1996, approximately $691,000, $1,015,000 and $619,000 of discount was
amortized including $371,000, $626,000 and $122,000 as a result of
repayments, respectively. In accordance with accounting policy, foreign
exchange gains and losses will be recorded each quarter based on the
prevailing exchange rates at each balance sheet date. A foreign
exchange gain of approximately $50,000 was recognized and included in
"Other income" in the year ended December 31, 1998 and foreign exchange
losses of approximately $979,000 and $253,000 have been recognized and
are included in "Other income" for the years ended December 31, 1997
and 1996, respectively.
II-37
<PAGE> 55
(g) See Note 7
(h) On August 18, 1997, a wholly-owned subsidiary of the Company acquired
five notes and mortgages for approximately $10,745,000 with an
aggregate face amount of approximately $14,340,000, excluding accrued
and unpaid interest and penalties owed by the borrower and estimated to
total approximately an additional $8,200,000. The notes were secured by
certain real property belonging to the borrower, New Seabury Company
Limited Partnership ("New Seabury"). The loans were non-performing and
the debtor had filed a Chapter 11 petition for relief in the United
States Bankruptcy Court, District of Massachusetts. The properties are
part of a master planned community situated in the town of Mashpee
located on Cape Cod in Massachusetts. Subsequent to the closing, the
Company received approximately $115,000 in cash flow from property
operations from a portion of the underlying collateral which was
applied to the Company's investment.
On September 26, 1997, a wholly-owned subsidiary of the Company
acquired four additional notes and mortgages for a purchase price of
approximately $5,000,000 with an outstanding principal balance of
approximately $8,320,000, excluding accrued and unpaid interest and
penalties owed by the borrower and estimated to total approximately an
additional $3,000,000 to $4,000,000. The notes were secured by certain
real property belonging to the borrower, New Seabury. The loans also
were non-performing and subject to the debtor's Chapter 11 proceeding.
The properties are part of a master planned community situated in the
Town of Mashpee located in Cape Cod in Massachusetts.
In June 1998, a Chapter 11 plan of reorganization proposed by the
Company was approved by the Bankruptcy Court. In late July 1998, the
Company acquired substantially all of the debtor's assets including two
golf courses, other recreational facilities, a villa rental program,
condominium and time share units and land for future development. The
Company assumed mortgage debt of approximately $8.5 million
(subsequently repaid) and made other payments to creditors of
approximately $3.5 million.
Total costs of approximately $28 million have been classified as
follows: approximately $17.4 million as "Hotel and resort properties",
$8.9 million as "Development property" and $1.7 million as "Other
assets" on the Consolidated Balance Sheet. Resort operations for the
period August 1 to December 31, 1998 have been included in the "Hotel
and resort operating income and expenses" in the Consolidated
Statements of Earnings. Net hotel and resort operations ("hotel and
resort operating income" less "hotel and resort operating expenses")
totalled approximately $841,000 for the year ended December 31, 1998.
Hotel and resort operating expenses include all expenses except for
approximately $216,000 of depreciation and amortization and $273,000 of
interest expense for the year ended December 31, 1998. These amounts
are included in their respective captions in the Consolidated
Statements of Earnings. In addition, approximately $35,000 of interest
income was recorded in the year ended December 31, 1998.
II-38
<PAGE> 56
Resort operations are highly seasonal in nature with peak activity
occurring from June to September.
(i) In 1998, the Company acquired an interest in the Sands Hotel and Casino
(the "Sands) located in Atlantic City, New Jersey by purchasing the
principal amount of approximately $18.7 million of First Mortgage Notes
("Notes") issued by GB Property Funding Corp. ("GB Property"). GB
Property was organized as a special purpose entity for the borrowing of
funds by Greate Bay Hotel and Casino, Inc. ("Greate Bay"). The purchase
price for such notes was approximately $15.1 million. An affiliate of
the General Partner also has an investment in Notes of GB Property.
$185 million of such Notes were issued, which bear interest at 10.875%
per annum and are due on January 15, 2004.
Greate Bay owns and operates the Sands, a destination resort complex,
containing a 76,000 square foot casino and 532 hotel rooms and other
amenities. On January 5, 1998, GB Property and Greate Bay filed for
bankruptcy protection under Chapter 11 of the Bankruptcy Code to
restructure its long term debt.
The Company has classified the GB Property Notes as available for sale
for accounting purposes. This investment is carried at fair market
value on the Balance Sheet. At December 31, 1998 unrealized holding
losses of $3,935,000 are reflected in Partners' Equity.
(j) In January 1998, the Company acquired an interest in the Claridge Hotel
and Casino (the "Claridge Hotel") located in Atlantic City, New Jersey
by purchasing the principal amount of $15 million of First Mortgage
Notes of the Claridge Hotel and Casino Corporation (the "Claridge
Corporation"). The purchase price of such notes was approximately $14.1
million. $85 million of such notes were issued, which bear interest at
11.75% payable semi-annually and are due February 1, 2002. In August
1998, the Company received the semi-annual interest payment. The
February 1, 1999 payment was postponed until March 2, 1999 when it was
paid.
The Claridge Corporation through its wholly-owned subsidiary, the
Claridge at Park Place, Incorporated, operates the Claridge Hotel, a
destination resort complex, containing a 59,000 square foot casino on
three levels and 502 hotel rooms and other attractions.
The Company has classified the Claridge Corporation Note as available
for sale for accounting purposes. This investment is carried at fair
market value on the Balance Sheet. At December 31, 1998 unrealized
holding losses of $2,850,000 are reflected in Partners' Equity.
(k) In 1998, the Company purchased approximately $78.2 million of senior
debt of Philip Services Corp. and Philip Services (Delaware), Inc.
("Philips") for approximately $35.2 million. In addition, an affiliate
of Icahn purchased $35.7 million of senior debt of Philips and also
owns common shares of Philips. Philips is a Canadian-based company in
the waste recovery business and its shares are listed on the New York
Stock Exchange.
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<PAGE> 57
In 1999, the Company purchased an additional $10.2 million of
Philips debt for approximately $4.4 million.
(l) The Company has generally not recognized any profit in
connection with the property sales in which the above purchase
money mortgages receivable were taken back. Such profits are
being deferred and will be recognized when the principal
balances on the purchase money mortgages are received since
profit recognition was not allowed under generally accepted
accounting principles at the time of sale.
10. SIGNIFICANT PROPERTY TRANSACTIONS
Information on significant property transactions during the three-year
period ended December 31, 1998 is as follows:
a. On July 14, 1992, Integra, a Hotel and Restaurant Company,
which leased two hotel properties located in Miami, Florida
and Phoenix, Arizona filed a voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the
Bankruptcy Code. The tenant's petition, previously filed with
the Bankruptcy Court, to reject the aforementioned leases, was
approved on August 7, 1992, and the Company assumed operation
of the properties on that date.
At December 31, 1998, the property located in Miami Florida
has a carrying value of approximately $4,842,000 and is
unencumbered by any mortgages. This property is subject to a
ground lease.
In April 1997, the Company sold the hotel property located in
Phoenix, Arizona. The selling price was $15,750,000 and a gain
of approximately $7,863,000 was recognized in the year ended
December 31, 1997. This property was encumbered by a
nonrecourse mortgage with a principal balance outstanding of
approximately $3,211,000 which was repaid at closing. A
prepayment penalty of approximately $250,000 was also
incurred.
The Company entered into a management agreement for the
operation of the hotels with a national management
organization. Since August 7, 1992, the hotels have been
included in Hotel and Resort Operating Properties and their
revenues and expenses separately disclosed in the Consolidated
Statements of Earnings. Net hotel and resort operations
("hotel and resort operating revenues" less "hotel and resort
operating expenses") totalled approximately $271,000,
$1,110,000 and $2,382,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Hotel and resort operating
expenses include all expenses except for approximately
$577,000, $527,000 and $933,000 of depreciation for the years
ended December 31, 1998, 1997 and 1996, respectively, and $0,
$83,000 and $335,000 of interest expense for the years ended
December 31, 1998, 1997, and 1996, respectively. These amounts
are included in their respective captions in the Consolidated
Statements of Earnings.
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<PAGE> 58
b. On June 17, 1993, the Company purchased two non-performing
mortgage loans for a combined price of $13,000,000. Each loan
was collateralized by a residential apartment complex located
in Lexington, Kentucky. The face value of the non-performing
loans was approximately $21,188,000. The Company foreclosed on
the above loans in October, 1993 and February 1994.
On September 17, 1996, the Company sold the two apartment
complexes for $20,325,000. First mortgages with principal
balances outstanding of approximately $9,800,000 were repaid
at closing. As a result, the Company recognized a gain on the
sale of these properties of approximately $6,723,000 in the
year ended December 31, 1996.
c. The Company entered into two joint ventures in June 1994 with
unaffiliated co-venturers for the purpose of developing luxury
garden apartment complexes. The Alabama joint venture has been
consolidated in the accompanying financial statements. The
North Carolina joint venture sold its property in December
1996 at a gain of approximately $4.9 million.
d. On May 18, 1995, the Company purchased approximately 248 acres
of partially improved land located in Armonk, New York. The
purchase price was approximately $3,044,000. The Company
intends to construct approximately 45 to 50 single-family
detached luxury homes subject to subdivision and other
required approvals. No material development costs have yet
been incurred.
A reinvestment incentive fee of approximately $15,000 was paid
to the Company's general partner in 1996 (See Note 3).
e. On January 11, 1996, Forte Hotels, Inc. ("Forte") a/k/a
Travelodge, a tenant in a property owned by the Company
entered into a Lease Termination and Mutual Release Agreement
("Agreement") which required Forte to pay the Company
$2,800,000.
As a result of the above settlement the Company recognized
"Other income" of approximately $2,700,000, net of related
costs, in the year ended December 31, 1996. In January 1997,
the Company sold this property for approximately $2,165,000,
net of closing costs. A gain of approximately $1,403,000 was
recorded in the year ended December 31, 1997.
f. On May 10, 1996, the Company sold a property in Miami, Florida
that was tenanted by the Cordis Corporation. The Company
permitted an early exercise by the tenant of its purchase
option as the Company believed the option price to be above
the market price. The selling price for the property was
$24,310,000. First and second mortgages with principal
balances outstanding of approximately $14,416,000 were repaid
at closing. In addition, closing costs of approximately
$228,000 were incurred. As a result, the Company recognized a
gain on the sale of this property of approximately $4,659,000.
II-41
<PAGE> 59
In connection with the early extinguishment of the outstanding
mortgage balances, the Company paid approximately $522,000 in
prepayment penalties which were included in interest expense
in the 1996 consolidated statement of operations.
g. On July 24, 1996, the Company entered into a gross lease with
AT&T Corp. for its Atlanta office building formerly leased to
Days Inn of America, Inc. The initial term of the lease was
for five years at $1,478,923 per annum plus operating expense
escalations with two five-year renewal periods. The renewal
rent was the initial term rent plus 50% of the increase in the
Consumer Price Index. Tenant improvements, allowances and
commissions incurred in connection with this lease were
approximately $2,500,000. The lease commenced on November 25,
1996.
On May 21, 1998, the Company sold this property for a selling
price of $8,600,000. As a result, the Company recognized a
gain of approximately $1,260,000 in the year ended December
31, 1998.
h. On July 29, 1996, the Company sold a property in Woodbury, NY
that was tenanted by Pioneer Standard Electronics, Inc. The
selling price was $2,000,000 and the Company recognized a gain
of approximately $1,040,000 in the year ended December 31,
1996.
i. On August 15, 1996, the Company sold a property in
Philadelphia, Pennsylvania that was tenanted by A&P and Ginos.
The selling price for the property was $3,500,000. A first
mortgage with a principal balance outstanding of approximately
$301,000 was repaid at closing. In addition, closing costs of
approximately $194,000 were incurred. As a result, the Company
recognized a gain on the sale of this property of
approximately $2,198,000.
j. On September 30, 1996, the Company sold a property in
Southfield, Michigan that was tenanted by the Penske
Corporation. The selling price for the property was $4,700,000
and the Company recognized a gain on the sale of this property
of approximately $3,253,000.
k. On January 7, 1997, the Company sold three properties tenanted
by Federal Realty Investment Trust ("FRIT") for a total
selling price of approximately $9,363,000. Two first mortgages
with principal balances outstanding of approximately $878,000
were repaid at closing. In addition, closing costs of
approximately $40,000 were incurred. As a result, the Company
recognized a gain of approximately $1,778,000.
In addition, on January 7, 1997, FRIT made a loan to the
Company in the approximate amount of $8,759,000 secured by a
fourth property tenanted by FRIT located in Broomal, PA.
Concurrently with this loan, the Company granted and FRIT
exercised an option to purchase the Broomal property with a
closing to occur on or about June 30, 1998. The purchase price
was the unpaid balance of the mortgage loan of approximately
$8,500,000 at the closing date. The nonrecourse mortgage loan
had an interest rate of 8% per annum and required monthly debt
service payments of approximately $72,000. This property was
sold in July 1998 and a gain of approximately $2.7 million was
recorded in the year ended December 31, 1998.
II-42
<PAGE> 60
l. On June 30, 1997, the Company acquired two adjacent medical
office buildings located in Nashville, Tennessee, both of
which are net leased to Baptist Hospitals, Inc. ("Baptist").
The total purchase price was approximately $34,616,000, which
included the assumption of existing mortgages on each building
totaling approximately $31,666,000.
The lease term, which commenced June 28, 1996, is for 22.5
years with seven 10-year renewal periods at approximately
$3,032,000 per annum paid semi-annually. The mortgages bear
interest at the rate of 7.84% per annum, self liquidate
December 31, 2018, and have total debt service of
approximately $3,070,000 payable semi-annually. Cash flow from
these properties is approximately break-even.
m. On September 26, 1997 the Company purchased a retail property
located in Schaumburg, Illinois for approximately $9,138,000
cash. The completed building, which is approximately 100,000
square feet, is tenanted by Bed Bath & Beyond, Inc., and
Golfsmith International, Inc.
Bed Bath & Beyond's lease is for an initial term of fifteen
years starting at $565,896 per year for their approximately
71,000 square foot store with four five year renewal options
at increased rentals. Golfsmith International's lease is for
an initial term of fifteen years starting at $375,450 per year
with three five year renewal options at increased rentals. The
rent commencement date for both tenants occurred in November
1997.
In April 1998, the Company executed a new mortgage loan and
obtained funding in the principal amount of $7,150,000. The
loan bears interest of 7.25% per annum and matures May 10,
2008, at which time the remaining principal balance of
approximately $6,183,000 will be due. Annual debt service is
approximately $585,000.
n. On December 12, 1997, the Company sold the property tenanted
by Hancock Bank located in Baton Rouge, Louisiana. The selling
price was $5,075,000. As a result, the Company recognized a
gain of approximately $1,345,000.
o. In December 1997, the Company purchased for approximately $19
million, two multi-tenant industrial buildings, located in
Hebron, Kentucky. Net rental income is approximately $1.75
million per annum. The Company obtained a mortgage of
approximately $12.4 million in 1998. See Note 11b.
p. On February 19, 1998, the Company sold a property located in
Palo Alto, California to its tenant, Lockheed Missile and
Space Company, Inc. for a selling price of approximately
$9,400,000. As a result, the Company recognized a gain of
approximately $4,130,000 in the year ended December 31, 1998.
q. On August 5, 1998, the Company purchased an industrial
building located in Hebron, Kentucky. The property is net
leased to United Parcel Service ("UPS"). The purchase price
was $21,080,000 which included the simultaneous funding of a
mortgage for $19,480,000. See Note 11c for details on the
mortgage.
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<PAGE> 61
The lease term, which commenced on June 1, 1998, is for an
initial term of ten years at $1,861,240 per year for the first
five years and $2,138,304 per year in years six to ten. There
are three five year renewal periods at increased rentals.
r. In August 1998, the Company purchased a manufacturing facility
located in Germantown, Wisconsin. The property is net leased
to Stone Container Corporation. The purchase price was
$9,025,000 cash. The lease term, which commenced May 1, 1998,
is for eleven years at approximately $807,150 per year
increasing 2% annually. There is one five year renewal period
at approximately $1,013,429 per year increasing 3% annually.
11. MORTGAGES PAYABLE
At December 31, 1998, mortgages payable, all of which are nonrecourse
to the Company, are summarized as follows (in $000's):
<TABLE>
<CAPTION>
Annual Balance at
Principal December 31
Range of Range of and ---------------------
Interest Rates Maturities Interest Payment 1998 1997
---------------- ------------------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
7.080% - 8.790% 06/30/99 - 04/30/28 $ 15,839 $ 135,131 $ 104,737
9.000 - 10.750 11/01/99 12/13/13 6,704 38,428 51,132
11.500 - 12.000 -- -- -- -- 564
-------- --------- ---------
$ 22,543 $ 173,559 $ 156,433
======== ========= =========
</TABLE>
The following is a summary of the anticipated future principal payments
of the mortgages:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ---------
<S> <C>
1999 $ 14,413
2000 20,234
2001 8,670
2002 7,057
2003 7,344
2004 - 2008 71,757
2009 - 2013 16,172
2014 - 2018 17,051
2019 - 2023 6,172
2024 - 2028 4,689
---------
$ 173,559
=========
</TABLE>
II-44
<PAGE> 62
a. In December 1997, the Company executed a new mortgage loan and
obtained funding in the principal amount of $46.3 million,
which is secured by a mortgage on a three building
office/retail/conference center complex net leased by the
Company to a subsidiary of Portland General Electric
Corporation ("PGE") in Portland, Oregon, the complex contains
approximately 800,000 square feet on approximately 2.7 acres.
The loan replaces an existing mortgage loan on the complex
with an outstanding principal balance of approximately $24.2
million, bearing interest at 8.5% and maturing in 2002.
The interest rate on the new mortgage loan is 7.51%. The
entire net annual rent payable by PGE of approximately
$5,137,000 will be applied by the Company towards the debt
service on the loan. The new loan has a maturity date of
September 2008, at which time the remaining principal payment
of approximately $20 million will be due from the Company.
Debt placement costs of approximately $808,000 were incurred.
b. On March 31, 1998, the Company executed a mortgage loan and
obtained funding in the principal amount of approximately
$12.4 million, which is secured by a mortgage on two
multi-tenant industrial buildings located in Hebron, Kentucky
acquired in December of 1997. The loan bears interest at 7.21%
per annum and matures July 15, 2008, at which time the
remaining principal balance of approximately $10.8 million
will be due. Annual debt service is approximately $1,027,000.
c. On August 5, 1998, the Company executed a mortgage loan and
obtained funding in the principal amount of approximately
$19.5 million, which is secured by a mortgage on one
industrial building tenanted by United Parcel Service, located
in Hebron, Kentucky. The loan bears interest at 7.08% per
annum and matures July 15, 2008, at which time the remaining
principal balance of approximately $15.4 million will be due.
Annual debt service is approximately $1,664,000.
12. SENIOR INDEBTEDNESS
On May 27, 1988, the Company closed a $50,000,000, 10-year senior
unsecured debt financing. The notes had an interest rate of 9.6%,
payable semiannually, 2% of which was deferred and added to the
principal at the Company's option during the first five years. In May
1996 and 1997, the Company repaid approximately $11,308,000 each year
of the outstanding principal balance of the notes. The Company made its
final principal repayment of approximately $11,308,000 on the final
payment date of May 27, 1998.
13. RIGHTS OFFERINGS
a. A registration statement relating to the 1995 Rights Offering
(the "1995 Offering") was filed with the Securities and
Exchange Commission and declared effective February 23, 1995.
II-45
<PAGE> 63
On March 1, 1995, the Company issued to record holders of its
Depositary Units one transferable subscription right (a "Right"), for
each seven Depositary Units of the Company held on February 24, 1995,
the record date. The Rights entitled the holders thereof (the "Rights
Holders") to acquire during the subscription period at a subscription
price of $55, six Depositary Units and one 5% cumulative pay-in-kind
redeemable preferred unit representing a limited partner interest
("Preferred Units"). The subscription period commenced on March 1, 1995
and expired at the close of business on March 30, 1995.
The Preferred Units have certain rights and designations, generally as
follows. Each Preferred Unit 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 $.50 per Preferred
Unit per annum (which is equal to a rate of 5% of the liquidation
preference thereof), payable annually on March 31 of each year (each, a
"Payment Date"). On any Payment Date commencing with the Payment Date
on March 31, 2000, the Company with the approval of the Audit Committee
of the Board of Directors of the General Partner may opt to redeem all,
but not less than all, of the Preferred Units for a price, payable
either in all cash or by issuance of additional Depositary Units, equal
to the liquidation preference of the Preferred Units, plus any accrued
but unpaid distributions thereon. On March 31, 2010, the Company must
redeem all, but not less than all, of the Preferred Units on the same
terms as any optional redemption. The first Payment Date was April 1,
1996 on which 98,782 additional Preferred Units were issued. On March
31, 1997, the distribution of 103,721 additional Preferred Units were
issued to holders of record as of March 14, 1997.
1,975,640 Rights were issued in the 1995 Offering of which 418,307 were
exercised. 190,554 Depositary Units and 31,759 Preferred Units were
subscribed for through the exercise of the Over-Subscription Privilege
by Rights Holders other than High Coast Limited Partnership ("High
Coast"), a Delaware limited partnership.
High Coast acted as guarantor for the 1995 Offering and is an affiliate
of Carl C. Icahn, ("Icahn"), the Chairman of American Property
Investors, Inc., ("API"), the general partner of the Company. API is
also the general partner of the guarantor and the two limited partners
are affiliates of and are controlled by Icahn. Pursuant to its
subscription guaranty, High Coast oversubscribed for a total of
9,343,998 Depositary Units and 1,557,333 Preferred Units. As a result,
the 1995 Offering was fully subscribed. The proceeds received by the
Company, after deduction of expenses of approximately $1.1 million
incurred by the Company in connection with the 1995 Offering, were
approximately $107.6 million.
In addition, in accordance with the terms of the Company's and its
subsidiary's partnership agreements, API was required to contribute
approximately $2.2 million in order to maintain its aggregate 1.99%
general partnership interest.
On April 12, 1995, the Company received approximately $108.7 million,
the gross proceeds of the 1995 Offering, from its subscription agent
and approximately
II-46
<PAGE> 64
$2.2 million from API. The Company issued 1,975,640 Preferred Units and
an additional 11,853,840 Depositary Units. Trading in the Preferred
Units commenced March 31, 1995 on the New York Stock Exchange ("NYSE")
under the symbol "ACP PR". The Depositary Units trade on the NYSE under
the symbol "ACP".
b. In September 1997, the Company completed its 1997 Rights Offering (the
"1997 Offering") to holders of its Depositary Units. The aggregate
amount raised in the 1997 Offering was approximately $267 million,
which is expected to be used primarily for additional investment
opportunities.
Record date holders were issued one transferable right for each five
Depositary Units held. Each right (the "Primary Subscription Right")
entitled the holder thereof to acquire during the subscription period,
at a subscription price of $52, four Depositary Units and one 5%
cumulative pay-in-kind redeemable Preferred Unit representing a limited
partner interest. The subscription period commenced August 13, 1997 and
expired at the close of business on September 11, 1997.
5,132,911 Rights were issued in the 1997 Offering of which 3,307,512
were exercised. 798,832 Depositary Units and 199,708 Preferred Units
were subscribed for through the exercise of the Over-Subscription
Privilege by Rights Holders other than High Coast.
High Coast acted as the guarantor for the offering. Pursuant to its
subscription guaranty, High Coast agreed to subscribe for and purchase
all of the Depositary Units and Preferred Units not otherwise purchased
by Rights Holders. As a result, the offering was fully subscribed.
Pursuant to its subscription guaranty, High Coast over-subscribed for a
total of 6,502,764 Depositary Units and 1,625,691 Preferred Units.
In addition, in accordance with the terms of the Company's and its
subsidiary's partnership agreements, API was required to contribute
approximately $5.4 million in order to maintain its aggregate 1.99%
general partnership interest.
On September 25, 1997 the Company received approximately $267 million,
the gross proceeds of the 1997 Offering, from its subscription agent
and approximately $5.4 million from API. Expenses incurred in
connection with the 1997 Offering were approximately $400,000. The
Company issued an additional 5,132,911 Preferred Units and 20,531,644
Depositary Units. The Preferred and Depositary Units trade on the New
York Stock Exchange under the symbols "ACP PR" and "ACP", respectively.
On March 31, 1998, the Company distributed 365,553 units to holders of
record as of March 13, 1998. As of December 31, 1998, 7,676,607
Preferred Units are issued and outstanding.
As of December 31, 1998, High Coast owns 6,642,065 Preferred Units and
31,515,044 Depositary Units.
II-47
<PAGE> 65
14. TENDER OFFER
On November 20, 1998, affiliates of Icahn made an offer to purchase up
to 10,000,000 of the outstanding Depository Units at a purchase price
of $10.50 per Depositary Unit, net to the seller in cash, without
interest (the "1998 Tender Offer"). As a result, Leyton LLC, an
affiliate of Icahn, purchased 6,568,165 Depository Units.
As of December 31, 1998, Icahn affiliates own 38,083,209 Depository
Units.
15. RECONCILIATION OF NET EARNINGS PER FINANCIAL STATEMENTS TO TAX
REPORTING (in $000's)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net earnings per financial statements $ 70,638 $ 75,384 $ 57,822
Minimum lease payments received,
net of income earned on leases
accounted for under the financing
method 7,887 7,683 7,314
Gain on real estate transactions and sale
of limited partnership interests for
tax purposes (lesser than)/greater than
that for financial statement purposes (3,527) (5,594) 8,867
Provision for loss for financial
statement purposes 1,180 10,875 935
Difference attributed to joint
ventures and minority interest (209) (46) (143)
Difference between expense accruals,
net of income accruals, at
beginning of year and end of year (4,872) (2,094) 807
Depreciation and amortization for
tax purposes in excess of that for
financial statement purposes due
to leases accounted for under the
financing method (4,852) (4,464) (5,215)
Other (26) (26) (26)
-------- -------- --------
Taxable income $ 66,219 $ 81,718 $ 70,361
======== ======== ========
</TABLE>
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<PAGE> 66
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN $ THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 21,356 $ 17,299 $ 21,319 $ 15,523
======== ======== ======== ========
Earnings before property and securities
transactions $ 13,902 $ 8,605 $ 14,100 $ 8,369
Gains on property transactions 4,550 2,957 2,527 7,967
Gain (loss) on sale of marketable
equity securities -- 29,227 -- (39)
Provision for loss on real estate (452) -- (150) (362)
-------- -------- -------- --------
Net earnings $ 18,000 $ 40,789 $ 16,477 $ 15,935
======== ======== ======== ========
Net earnings per limited partnership unit:
Basic earnings $ .36 $ 1.55 $ .33 $ .61
======== ======== ======== ========
Diluted earnings $ .33 $ 1.43 $ .30 $ .57
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
September 30, December 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 27,044 $ 16,054 $ 23,587 $ 22,042
======== ======== ======== ========
Earnings before property and securities
transactions $ 18,251 $ 8,894 $ 12,118 $ 15,152
Gain (loss) on property transactions 2,683 2,364 (695) 2,764
Gain on sale of limited partnership interests -- -- 4,382 --
Provision for loss on mortgages receivable -- -- -- (9,790)
Provision for loss on real estate -- (343) (578) (380)
-------- -------- -------- --------
Net earnings $ 20,934 $ 10,915 $ 15,227 $ 7,746
======== ======== ======== ========
Net earnings per limited partnership unit:
Basic earnings $ .42 $ .36 $ .30 $ .14
======== ======== ======== ========
Diluted earnings $ .38 $ .36 $ .27 $ .14
======== ======== ======== ========
</TABLE>
II-49
<PAGE> 67
Net earnings per unit is computed separately for each period and,
therefore, the sum of such quarterly per unit amounts may differ from
the total for the year.
17. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 "Reporting Comprehensive Income"
effective January 1, 1998. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components. The
components of comprehensive income include net income and certain
amounts previously reported directly in equity.
Comprehensive income for the years ended December 31, 1998 and 1997 is
as follows (in $ thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Income $70,638 $ 75,384 $57,822
Net unrealized gains on securities available for sale 9,273 -- 23,548
Realized gains previously reported in partner's equity -- (23,548) --
-------- -------- --------
$79,911 $ 51,836 $81,370
======== ======== ========
</TABLE>
18. SEGMENTED REPORTING
The Company is engaged in four operating segments consisting of the
ownership and operation of (i) rental real estate (ii) hotel and resort
operating properties (iii) property development, and (iv) investment in
securities including investment in other limited partnerships and
marketable equity securities. The Company's reportable segments offer
different services and require different operating strategies and
management expertise.
Non-segment revenue to reconcile to total revenue consists primarily of
interest income on treasury bills and other investments. Non-segment
assets to reconcile to total assets includes investment in treasury
bills, cash and cash equivalents, investment in Stratosphere
Corporation for 1998, receivables and other assets, and debt placement
costs.
The accounting policies of the segments are the same as those described
in Note 2.
The Company assesses and measures segment operating results based on
segment earnings from operations as disclosed below. Segment earnings
from operations is not necessarily indicative of cash available to fund
cash requirements nor synonymous with cash flow from operations.
II-50
<PAGE> 68
The revenues, net earnings, and assets and real estate investment
capital expenditures for each of the reportable segments are summarized
as follows for the year ended and as of December 31, 1998, 1997 and
1996 (in $000's).
<TABLE>
<CAPTION>
Revenues: 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Rental real estate $42,633 $41,763 $46,072
Hotel & resort operating properties 8,758 6,098 10,043
Other investments 14,714 7,405 4,462
------- ------- -------
Sub-total 66,105 55,266 60,577
Reconciling items 27,201(1) 15,652(1) 11,197
------- ------- -------
Total revenues $93,306 $70,918 $71,774
======= ======= =======
</TABLE>
(1) Primarily interest income on T-bills and other short-term investments
and other income.
<TABLE>
<CAPTION>
Net earnings: 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Segment earnings:
Rental real estate $ 39,984 $ 38,306 $ 41,661
Hotel and resort operating properties 1,113 1,146 2,382
Other investments 14,714 7,405 4,462
-------- -------- --------
Total segment earnings 55,811 46,857 48,505
Interest income 25,180 15,198 8,045
Interest expense (15,910) (13,189) (16,843)
Other income 2,021 454 3,152
General and administrative expenses (3,808) (3,188) (2,939)
Depreciation and amortization (4,923) (5,112) (5,680)
-------- -------- --------
Earnings before property
and securities transactions 58,371 41,020 34,240
Gain on sales and disposition of
real estate 9,065 16,051 24,517
Gain on sale of limited partnership interests 4,382 -- --
Provision for loss on real estate (1,180) (1,085) (935)
Provision for loss on mortgages receivable -- (9,790) --
Gain on sale of marketable equity securities -- 29,188 --
General partner's share (1,406) (1,500) (1,151)
-------- -------- --------
Net earnings-limited partner unitholders $ 69,232 $ 73,884 $ 56,671
======== ======== ========
</TABLE>
II-51
<PAGE> 69
<TABLE>
<CAPTION>
Assets: 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Rental real estate $ 381,554 $ 383,392 $ 353,324
Development properties 12,830 3,860 3,860
Hotel and resort operating properties 22,037 5,002 12,955
Other investments 263,957 82,940 151,346
---------- ---------- ----------
680,378 475,194 521,485
Reconciling items 455,537 516,036 119,825
---------- ---------- ----------
Total $1,135,915 $ 991,230 $ 641,310
========== ========== ==========
Real estate investment capital expenditures:
Acquisitions:
Rental real estate $ 30,218 $ 63,064 $ 103
Development properties 8,970 -- --
Hotel and resort operating properties 17,444 -- --
---------- ---------- ----------
$ 56,632 $ 63,064 $ 103
========== ========== ==========
Developments:
Rental real estate $ 112 $ 1,480 $ 6,996
Development properties 542 568 1,597
Hotel and resort operating properties 384 357 526
---------- ---------- ----------
$ 1,038 $ 2,405 $ 9,119
========== ========== ==========
</TABLE>
19. COMMITMENTS AND CONTINGENCIES
a. On September 18, 1995, Caldor Corp., a tenant in a property
owned by the Company, filed a voluntary petition for
reorganization pursuant to the provisions of Chapter 11 of the
Federal Bankruptcy Code. The annual rental for this property
is approximately $248,000. The tenant is current in its
obligations under the lease with the exception of
approximately $12,000 of prepetition rent. In January 1999,
Caldor announced it would liquidate its holding and close its
stores. The tenant has not yet determined whether it will
exercise its right to reject or affirm the leases, which will
require an order of the Bankruptcy Court. At December 31,
1998, the property has a carrying value of approximately
$1,798,000 and is unencumbered by any mortgage.
b. On November 18, 1998, Ruth Ellen Miller filed a Class Action
Complaint bearing the caption Ruth Ellen, on behalf of herself
and all others similarly situated v. American Real Estate
Partners, L.P., High Coast Limited Partnership, American
Property Investors, Inc., Carl C. Icahn, Alfred Kinglsey, Mark
H. Rachesky, William A. Leidesdorf, Jack G.
II-52
<PAGE> 70
Wasserman and John P. Saldarelli in the Delaware Chancery
Court in New Castle County (Civil Action No. 16788NC) (the
"Complaint"). The Complaint purports to state claims on behalf
of a putative class of all holders of Depositary Units
sounding in breach of fiduciary duty, aiding and abetting
breaches of fiduciary duty, injunction and breach of the
Partnership Agreement. As of March 23, 1999, the complaint has
not yet been served on any of the defendants.
Plaintiff alleges that all defendants, in breach of their
fiduciary duties to the Company, have caused the Company to
engage in self-dealing or self-interested transactions which
inure to the benefit of defendants. Plaintiff's claims are
alleged to arise out of two transactions: the February 1995
Rights Offering effectuated pursuant to a purportedly false
and misleading prospectus; and Icahn's alleged use of his
voting control to change the business purpose of the Company
by amending the Partnership Agreement to permit the Company to
make "non-real estate related investment," including
investments in entities owned or controlled by Icahn.
The Complaint seeks to have Ms. Miller appointed as class
representative and that the putative class be certified. The
Complaint also seeks an unspecified amount in damages and
injunctive relief: (i) dissolving the Partnership; (ii)
enjoining API from continuing to act as general partner of the
Partnership; (iii) enjoining the Partnership from engaging in
any transaction in which Icahn has either a direct or indirect
interest, absent an affirmative vote of a majority of the
outstanding Depositary Units held by the putative class; and
(iv) ordering API to exercise its fiduciary obligations.
Further, the plaintiff seeks to enjoin the Company from
engaging in any transactions in which Icahn has either a
direct or indirect interest absent an affirmative vote by a
majority of the outstanding Depositary Units held by the
class, as well as damages resulting from the alleged breach of
the partnership agreement for an unquantified amount. The
Complaint also seeks costs and attorneys' fees. Management
believes plaintiff's claims are without merit and intends to
vigorously defend against them.
On or about September 9, 1997, two limited partners in the
Company brought a derivative action against the Company, the
General Partner, its directors and one of its officers,
alleging breach of fiduciary duties by the defendants in
connection with, inter alia, the Company's investments in
Arvida and Stratosphere, Amanda & Kimberly Kahn v. Carl C.
Icahn, et al., C.A. No. 15916 (Del. Ch.). Plaintiff's claimed
that defendant Icahn improperly diverted opportunities to
participate in these investments from the Company to himself.
Plaintiffs sought damages arising from these alleged breaches
of fiduciary duty, attorney's fees and other relief. On
November 12, 1998, the Court of Chancery of the State of
Delaware granted the defendants' motion to dismiss all of
plaintiffs' claims against the defendants. Plaintiffs served a
notice of appeal upon defendants on December 11, 1998. On
March 11, 1999, the Company received a copy of plaintiffs'
opening brief. The Company believes that the plaintiffs'
appeal has no merit and it intends to vigorously oppose this
appeal.
II-53
<PAGE> 71
20. PROPERTY HELD FOR SALE
At December 31, 1998, the Company owned seven properties that were
being actively marketed for sale. The aggregate value of the properties
is estimated to be approximately $3,893,000 after incurring a provision
for loss on real estate in the amount of $657,000 in the year ended
December 31, 1998.
At December 31, 1997, the Company owned seven properties that were
being actively marketed for sale. The aggregate value of the properties
was estimated to be approximately $4,164, 000 after incurring a
provision for loss on real estate in the amount of $240,000 in the year
ended December 31, 1997. At December 31, 1996, the aggregate value of
twelve properties was estimated to be approximately $3,698,000 after
incurring a provision for loss on real estate in the amount of $275,000
in 1996.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Investment in Treasury Bills, Receivables,
Mortgages Payable and Accounts Payable, Accrued Expenses and Other
Liabilities
The carrying amount of cash and cash equivalents, investment in
treasury bills, receivables, mortgages payable and accounts payable,
accrued expenses and other liabilities are carried at cost, which
approximates their fair value.
Mortgages and Notes Receivable
The fair values of the mortgages and notes receivable past due, in
process of foreclosure, or for which foreclosure proceedings are
pending, are based on the discounted cash flows of the underlying lease
except for the Sands Hotel and Casino notes which are valued at quoted
market prices. The fair values of the mortgages and notes receivable
satisfied after year end are based on the amount of the net proceeds
received.
The fair values of the mortgages and notes receivable which are current
are based on the discounted cash flows of their respective payment
streams except for the Claridge Corporation notes which are valued at
quoted market prices.
II-54
<PAGE> 72
The approximate estimated fair values of the mortgages receivable held as
of December 31, 1998 are summarized as follows (in 000's):
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------
Collateralized by Net Estimated
Property Tenanted by or debtor Investment Fair Value
- ------------------------------ ---------- ----------
<S> <C> <C>
Hardee's Food Systems, Inc. $ 15 $ 197
Bank of Virginia 366 505
Easco Corp. 903 3,450
Winchester Partnership 1,039 1,049
Philip Services Corp. 35,240 35,240
Sands Hotel and Casino 11,190 11,190
Claridge Hotel and Casino Corp. 11,250 11,250
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------
Collateralized by Net Estimated
Property Tenanted by or debtor Investment Fair Value
- ------------------------------ ---------- ----------
<S> <C> <C>
Hardee's Food Systems, Inc. $ 15 $ 187
Bank of Virginia 359 474
Best Products Co., Inc. 173 169
Easco Corp. 916 3,450
Winchester Partnership 1,336 1,336
Stratosphere Corporation 33,021 33,021
New Seabury Company, L.P. 15,883 17,240
</TABLE>
The net investment at December 31, 1998 and 1997 is equal to the carrying
amount of the mortgage receivable less any deferred income recorded.
Marketable Equity Securities
- ----------------------------
Marketable equity securities available for sale are carried at fair market
value.
Equity Interest in Stratosphere Corporation
- -------------------------------------------
The equity interest in Stratosphere Corporation whose fair value and carrying
value at December 31, 1998 is $48,969,000 is valued using the equity method.
II-55
<PAGE> 73
Senior Indebtedness
The approximate fair value and carrying value of the Company's senior
indebtedness at December 31, 1997 was $11,756,000 and $11,308,000,
respectively. The estimated fair value was based on the amount of
future cash flows associated with the instrument discounted using the
rate at which the Company believed it could replace the senior
indebtedness.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could
significantly affect the estimates.
22. DISTRIBUTIONS PAYABLE
Distributions payable represent amounts accrued and unpaid due to
non-consenting investors ("Non-consents"). Non-consents are those
investors who have not yet exchanged their limited partnership interest
in the various Predecessor Partnerships for limited partnership units
of American Real Estate Partners, L.P. In the year ended December 31,
1997, approximately $1,020,000 of distributions due to non-consents was
paid to certain states pursuant to local escheatment laws.
23. REPURCHASE OF DEPOSITARY UNITS
In October 1998, the Company repurchased 100,000 Depositary Units at a
cost of $737,500. The Company had previously been authorized to
repurchase up to 1,250,000 Depositary Units. As of December 31, 1998,
the Company had purchased 1,137,200 Depositary Units at an aggregate
cost of approximately $11,921,000.
24. SUBSEQUENT EVENTS
Pursuant to the terms of the Preferred Units, on February 23, 1999, the
Company declared its scheduled annual preferred unit distribution
payable in additional Preferred Units at the rate of 5% of the
liquidation preference of $10. The distribution is payable March 31,
1999 to holders of record as of March 15, 1999.
Item 9. Changes in Disagreements with Accountants on Accounting and
Financial Disclosure
None
II-56
<PAGE> 74
PART III
Item 10. Directors and Executive Officers of AREP.
The names, offices held and the ages of the directors and executive
officers of the General Partner are as follows:
<TABLE>
<CAPTION>
Name Age Office
- ---- --- ------
<S> <C> <C>
Carl C. Icahn 63 Chairman of the Board
William A. Leidesdorf 53 Director
Jack G. Wasserman 62 Director
John P. Saldarelli 57 Vice President, Secretary and
Treasurer
</TABLE>
Carl C. Icahn has been Chairman of the Board of the General Partner
since November 15, 1990. He is also President and a Director of Starfire Holding
Corporation (formerly Icahn Holding Corporation), a Delaware corporation ("SHC")
and Chairman of the Board and a Director of various of SHC's subsidiaries,
including ACF Industries, Inc., a New Jersey corporation ("ACF"). SHC is
primarily engaged in the business of holding, either directly or through
subsidiaries, a majority of the common stock of ACF and its address is 100 South
Bedford Road, Mount Kisco, New York 10549. Mr. Icahn has also been Chairman of
the Board of Directors of ACF since October 29, 1984 and a Director of ACF since
June 29, 1984. ACF is a railroad freight and tank car leasing, sales and
manufacturing company. He has also been Chairman of the Board of Directors and
President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered
broker-dealer and a member of the National Association of Securities Dealers. In
1979, Mr. Icahn acquired control and presently serves as Chairman of the Board
of Directors of Bayswater Realty & Capital Corp., which is a real estate
investment and development company. ACF, Icahn & Co., Inc. and Bayswater Realty
& Capital Corp. are deemed to be directly or indirectly owned and controlled by
Carl C. Icahn. Mr. Icahn was Chief Executive Officer and Member of the Office of
the Chairman of Trans World Airlines, Inc. ("TWA") from November 8, 1988 to
January 8, 1993; Chairman of the Board of Directors of TWA from January 3, 1986
to January 8, 1993 and Director of TWA from September 27, 1985 to January 8,
1993. Mr. Icahn also serves as a director of Cadus Pharmaceutical Corporation, a
public biotechnology company. Mr. Icahn also has substantial equity interests in
and controls various partnerships and corporations which invest in publicly
traded securities. In October 1998, Mr. Icahn was appointed Chairman of the
Board of Stratosphere.
William A. Leidesdorf has served as Director of the General Partner
since March 26, 1991. Since June 1997, Mr. Leidesdorf has been an owner and a
managing director of Renaissance National Housing, LLC, a company primarily
engaged in acquiring multifamily residential properties. From April 1995
through December 1997, Mr. Leidesdorf acted as an independent real estate
investment banker. From January 1, 1994 through April 1995, Mr. Leidesdorf was
Managing Director of RFG Financial, Inc., a commercial mortgage company. From
September 30, 1991 to December 31, 1993, Mr. Leidesdorf was Senior Vice
President of Palmieri Asset Management Group. From May 1, 1990 to September 30,
1991, Mr. Leidesdorf was Senior Vice President of Lowe Associates, Inc., a real
estate development company, where he was involved in the acquisition of real
estate and the asset management workout and disposition of business areas. He
also acted as the Northeast Regional Director for Lowe Associates, Inc. From
June 1985 to January 30, 1990, Mr. Leidesdorf was Senior Vice President and
stockholder of Eastdil Realty, Inc., a real estate company, where he was
involved in the asset management workout, disposition of business and financing
areas. During the interim period from January 30, 1990 through May 1, 1990, Mr.
Leidesdorf was an independent contractor for Eastdil Realty, Inc. on real
estate matters.
III-1
<PAGE> 75
Jack G. Wasserman has served as a Director of the General Partner since
December 3, 1993. Mr. Wasserman is an attorney and a member of the New York
State Bar and has been with the New York based law firm of Wasserman, Schneider
& Babb since 1966, where he is currently a senior partner. Mr. Wasserman also
serves as a director of Cadus Pharmaceutical Corporation, a public biotechnology
company. In addition, in 1998 Mr. Wasserman was appointed to the Board of
Directors of National Energy Group, Inc., an independent energy company
primarily engaged in the acquisition, exploitation, development, exploration
and production of oil and natural gas.
John P. Saldarelli has served as Vice President, Secretary and
Treasurer of the General Partner since March 18, 1991. Mr. Saldarelli was also
President of Bayswater Realty Brokerage Corp. from June 1987 until November 19,
1993 and Vice President of Bayswater Realty & Capital Corp. from September 1979
until April 15, 1993, both of which are deemed to be directly or indirectly
owned and, controlled by Carl C. Icahn. In Octobr 1998, Mr. Saldarelli was
appointed to the Board of Directors of Stratosphere.
William Leidesdorf and Jack G. Wasserman are on the Audit Committee of
the Board of Directors of the General Partner.
Alfred D. Kingsley resigned from the Board of Directors on February 18,
1999 effective immediately.
Mr. Icahn served on the Board of Directors of TWA. On January 31, 1992,
TWA filed a petition for bankruptcy in the U.S. Bankruptcy Court in Delaware,
seeking reorganization under Chapter 11 of the Bankruptcy Code. In connection
therewith, the Pension Benefit Guaranty Corporation asserted that there existed
in the TWA defined benefit plans an underfunding deficiency, and that if the
Plans were terminated, TWA and all members of the controlled group of which TWA
was a member, including the General Partner, would be liable, jointly and
severally, for approximately $1.2 billion. On January 8, 1993, TWA, the Pension
Benefit Guaranty Corporation, Mr. Icahn and the members of the controlled group,
among others, settled all claims and potential claims which they had against
each other. See Item 12. "Security Ownership of Certain Beneficial Owners and
Management."
Each executive officer and director will hold office until the next
annual meeting of the General Partner and until his or her successor is elected
and qualified. Directors who are not employed by AREP or certain affiliates,
receive fees of $3,000 for attendance at each meeting of the Board of Directors.
Mr. Kingsley, Mr. Leidesdorf and Mr. Wasserman each received $15,000 for
attendance at such meetings in 1998. In addition, directors who are not employed
by AREP or certain affiliates may receive additional fees for special meetings
of or services rendered on behalf of the Audit Committee.
Each of the executive officers of the General Partner performs services
for other affiliates of the General Partner.
There are no family relationships between or among any of the directors
and/or executive officers of the General Partner.
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, will 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. 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 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,
III-2
<PAGE> 76
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
have no other rights to participate in the management of AREP and are not
entitled to vote on any matters submitted to a vote of the holders of Depositary
Units.
Filing of Reports
To the best of AREP's knowledge, no director, executive officer or
beneficial owner of more than 10% of AREP's Depositary Units failed to file on a
timely basis reports required by Section 16(a) of the Securities Exchange Act of
1934, as amended, during the year ended December 31, 1998.
Item 11. Executive Compensation.(1)
The following table sets forth information in respect of the
compensation of the Chief Executive Officer and each of the other four most
highly compensated executive officers of AREP for services in all capacities to
AREP for the fiscal years ended December 31, 1998, 1997 and 1996.(2)
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
(a) (b) (c)
Name and Principal Position Year Salary ($)
- --------------------------- ---- ----------
<S> <C> <C>
John P. Saldarelli(3) 1998 148,000
Vice President, Secretary and Treasurer 1997 136,000
1996 132,300
</TABLE>
In February 1993, AREP adopted a 401K plan pursuant to which AREP will
make a matching contribution to an employee's individual plan account in the
amount of one-third (1/3) of the first six (6%) percent of gross salary
contributed by the employee.
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
On November 20, 1998, affiliates of Icahn (the "Purchaser") made an
offer to purchase up to 10,000,000 of the outstanding Depositary Units at a
purchase price of $10.50 per Depositary Unit, net to
- --------------------
(1) Pursuant to applicable regulations, certain columns of the Summary
Compensation Table and each of the remaining tables have been omitted, as there
has been no compensation awarded to, earned by or paid to any of the named
executive officers by AREP or by the General Partner, which was subsequently
reimbursed by AREP, required to be reported in those columns or tables.
(2) Carl C. Icahn, the Chief Executive Officer, received no compensation as such
for the periods indicated. In addition, other than John P. Saldarelli, no other
executive officer received compensation in excess of $100,000 from AREP for the
applicable period.
(3) On March 18, 1991, Mr. Saldarelli was elected Vice President, Secretary and
Treasurer of the General Partner. Mr. Saldarelli devotes substantially all of
his time to the performance of services for AREP and the General Partner. The
other executive officer and directors of the General Partner devote only a
portion of their time to performance of services for AREP.
III-3
<PAGE> 77
the seller in cash, without interest (the "1998 Tender Offer"). As of March 1,
1999, affiliates of Icahn, including High Coast Limited Partnership, a Delaware
limited partnership, owned 38,083,209 Depositary Units, or approximately 82.6%
of the outstanding Depositary Units, and 6,642,067 Preferred Units, or
approximately 86.5% of the outstanding Preferred Units.
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 affiliates, holds approximately 82.6% of the
Depositary Units outstanding, the General Partner will not be able to be removed
pursuant to 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 affiliates of
Icahn, is required to approve, among other things, selling or otherwise
disposing of all or substantially all of AREP's assets in a single sale or in a
related series of multiple sales, dissolving AREP or electing to continue AREP
in certain instances, electing a successor general partner, making certain
amendments to the Partnership Agreement or causing AREP, 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
affiliates of Icahn hold in excess of 50% of the Depositary Units outstanding,
Icahn, through affiliates, will have effective control over such approval
rights.
The following table provides information, as of March 5, 1999, as to
the beneficial ownership of the Depositary Units and Preferred Units of AREP for
each director of the General Partner, and all directors and executive officers
of the General Partner as a group.
<TABLE>
<CAPTION>
Beneficial Beneficial
Name of Ownership of Percent Ownership of Percent
Beneficial Owner Depositary Units of Class Preferred Units of Class
- ---------------- ---------------- -------- --------------- --------
<S> <C> <C> <C> <C>
Carl C. Icahn(1) 38,083,209 82.6% 6,642,067 86.5%
All directors and
executive officers
as a group (4 persons) 38,083,209 82.6% 6,642,067 86.5%
</TABLE>
As described above, affiliates of Icahn hold 82.6% of the Depositary
Units and 86.5% of the outstanding Preferred Units. Entities directly or
indirectly owned by Icahn that are members of a controlled group for purposes of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and
Section 414 of the Internal Revenue Code of 1986, as amended (the "Code"), which
in general terms includes entities in which there is at least 80% common
ownership, may have joint and several responsibility for various
benefits-related liabilities arising under ERISA and the Code. As a
- --------------------
(1) Carl C. Icahn, through affiliates, is the beneficial owner of the 38,083,209
Depositary Units set forth above and may also be deemed to be the beneficial
owner of the 28,642 Depositary Units owned of record by API Nominee Corp., which
in accordance with state law are in the process of being turned over to the
relevant state authorities as unclaimed property; however, Mr. Icahn disclaims
such beneficial ownership. The foregoing is exclusive of a 1.99% ownership
interest in AREP which the General Partner holds by virtue of its 1% General
Partner interest in each of AREP and the Subsidiary, but inclusive of the
Depositary Units affiliates of Icahn acquired through the 1997 Offering and the
1998 Tender Offer. Furthermore, pursuant to a registration rights agreement
entered into by affiliates of Icahn in connection with the 1997 Offering, AREP
has agreed to pay any expenses incurred in connection with two demand and
unlimited piggy-back registrations requested by affiliates of Icahn.
III-4
<PAGE> 78
result of the more than 80% ownership interest in AREP of Icahn and his
affiliates, AREP will be deemed to be included in the same controlled group that
includes ACF and Pichin Corp. ("Pichin"), an affiliate of ACF (the "Controlled
Group").
ERISA and the Code require, among other things, that a contributing
sponsor of a defined benefit pension plan make certain minimum funding
contributions to fund the benefits that participants accrue under the pension
plan and make the sponsor liable for any unfunded benefit liabilities that may
exist at termination. As a member of the Controlled Group, AREP would be jointly
and severally liable with the other members of the Controlled Group for such
potential pension plan minimum funding and termination liabilities. In addition,
upon the failure to make minimum funding contributions in excess of $1 million
when due or pay termination liabilities after demand by the Pension Benefit
Guaranty Corporation (the "PBGC"), liens in favor of the relevant pension plans
or the PBGC, respectively, would attach to the assets of all members of the
sponsor's controlled group.
ACF and other members of the Controlled Group sponsor several pension
plans (the "ACF Pension Plans") which (not including the "TWA Plans," as defined
below) are underfunded in the aggregate by approximately $26 million on an
ongoing actuarial basis and by approximately $91 million on a termination basis,
in each case as most recently determined by the plans' actuaries. The liability
upon plan termination could be more or less than this amount depending on future
changes in promised benefits, investment returns, the assumptions used to
calculate the liability and the outcome of any litigation relating to the amount
of liability. As a member of the Controlled Group, AREP is jointly and severally
liable for any failure of ACF or any other member of the Controlled Group to
make minimum funding contributions or pay termination liabilities with respect
to the ACF Pension Plans.
Pursuant to a settlement entered into in 1993 by the PBGC and TWA (the
"Settlement"), among others, in connection with the Chapter 11 bankruptcy case
of TWA, as amended and revised to date, Pichin became the sponsor directly
liable for minimum funding obligations of the pension plans for TWA employees
(the "TWA Plans"), which TWA Plans had theretofore been frozen. As a member of
the Controlled Group (which includes Pichin), AREP would be jointly and
severally liable, together with all the other entities in the Controlled Group,
for minimum funding obligations applicable with respect to the TWA Plans.
However, under the Settlement, Pichin has the right to terminate the minimum
funding obligations with respect to the TWA Plans by causing a termination of
those plans. In the event of a termination of the TWA Plans, termination
payments are limited under the Settlement to $30 million per year for eight
years and the PBGC's recourse for those termination payments is limited to
collateral pledged to secure those payments. Control over making minimum funding
payments and the decision whether to seek termination of the TWA Plans is
ultimately in the control of Icahn.
The current underfunded status of the ACF Pension Plans and the TWA
Plans requires ACF and Pichin to notify the PBGC of certain corporate
transactions that are deemed to be "reportable events" under ERISA. Such
reportable events include, among other things, any transaction which would
result in a Controlled Group member's leaving the Controlled Group, and certain
extraordinary dividends and stock redemptions. Thus, any transaction in which
AREP would cease to be a member of the Controlled Group and certain
extraordinary distributions and redemptions with respect to the Units would be
among those that would have to be reported to the PBGC.
Starfire Holding Corporation, a Delaware corporation ("Starfire"),
which is directly 100% owned by Icahn, has undertaken to indemnify AREP from
losses resulting from any imposition of termination or minimum funding
liabilities on AREP or its assets. The Starfire indemnity provides, among other
things, that so long as such contingent liabilities exist and could be imposed
on AREP, Starfire will not make any distributions to its stockholders that would
reduce its net worth to below $250 million.
III-5
<PAGE> 79
Item 13. Certain Relationships and Related Transactions.
Related Transactions with the General Partner and its Affiliates
Icahn, in his capacity as majority Unitholder, 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 such as advice to purchase RJR
shares which generated $29 million of profits for AREP in 1997. AREP may
determine to make investments in which Icahn or his affiliates have independent
investments in such assets; in addition, AREP may enter into other transactions
with the General Partner and its affiliates, including, without limitation,
buying and selling assets from or to the General Partner or its affiliates and
participating in joint venture investments in assets with the General Partner or
its affiliates, whether real estate or non-real estate related, provided the
terms of all such transactions are fair and reasonable to AREP. Furthermore, it
should be noted that the Partnership Agreement provides that the General Partner
and its affiliates are permitted to have other business interests and may engage
in other business ventures of any nature whatsoever, and may compete directly or
indirectly with the business of AREP. Icahn and his affiliates currently invest
in and perform investment management services with respect to assets that may be
similar to those AREP may invest in and intend to continue to do so; pursuant to
the Partnership Agreement, however, AREP shall not have any right to participate
therein or receive or share in any income or profits derived therefrom. See Item
1. "Business - Investment in RJR" and "Investment in Limited Partnership Units."
For the years ended December 31, 1998 and 1997, AREP made no payments
with respect to the Depositary Units owned by the General Partner. However, in
1997 and 1998 the General Partner was allocated approximately $1,500,000 and
approximately $1,406,000, respectively, of the income of AREP as a result of its
1.99% general partner interest in AREP.
On March 31, 1998, Icahn received 316,289 Preferred Units as part of
AREP's scheduled annual preferred unit distribution and is expected to receive
an additional 332,000 Preferred Units in March 1999 as part of such scheduled
annual preferred unit distribution.
In May 1995, AREP and an affiliate of the General Partner ("Affiliate")
entered into an agreement with the third-party landlord of its leased executive
office space. The agreement provided for AREP and the Affiliate to relocate
their offices to an adjacent building also owned by the landlord which
relocation occurred in September 1995. In accordance with the agreement, AREP
entered into a lease, expiring in 2001, for 7,920 square feet of office space,
at an annual rental of approximately $153,000. AREP has sublet to certain
affiliates of the General Partner 3,205 square feet at an annual rental of
approximately $62,000, resulting in a net annual rental of approximately
$91,000. Affiliates of the General Partner reimbursed AREP for approximately
$62,000 in rent paid by AREP on its behalf during 1998 in connection with the
new lease. The prior lease, which was terminated, provided for approximately
6,900 square feet at an annual rental of $155,000 to AREP. In addition, AREP and
the Affiliate received a lease termination fee of $350,000 allocated $175,000 to
AREP and $175,000 to the Affiliate. Such allocations and the terms of the
sublease were reviewed and approved by the Audit Committee. In addition, in 1997
AREP entered into a license agreement for a portion of office space from an
affiliate of the General Partner. The license agreement dated as of February 1,
1997 expires May 22, 2004 unless sooner terminated in accordance with the
agreement. Pursuant to the license agreement, AREP has the non-exclusive use of
approximately 3,547 square feet of office space and common areas (of an
aggregate 21,123 rentable square feet sublet by such affiliate) for which it
pays $17,067.78 per month, together with 16.79% of certain "additional rent". In
1998, AREP paid an affiliate of the General Partner $216,000 of rent in
connection with this licensing agreement. In connection with the build-out of
the space, AREP reimbursed such affiliate $486,989, representing AREP's
allocable share of such costs
III-6
<PAGE> 80
net of a pro rata share of the sub-lessor's allowance for such build-out. The
terms of such sublease were reviewed and approved by the Audit Committee.
See Item 12. "Security Ownership of Certain Beneficial Owners and
Management" for a discussion of the 1998 Tender Offer made by affiliates of
Icahn and the Icahn Controlled Group pension liability considerations.
Property Management and Other Related Transactions
The General Partner and its affiliates may receive fees in connection
with the acquisition, sale, financing, development, construction, marketing 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 the terms of such transactions are fair and
reasonable to AREP in accordance with the Partnership Agreement and 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 therewith 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:
- 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.
- 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).
- 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.
- 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.
III-7
<PAGE> 81
AREP has engaged Bayswater Realty & Capital Corp., an affiliate of the
General Partner, to perform development, construction management, marketing and
sales services with respect to three residential development sites located in
New Seabury, Massachusetts, Armonk, New York and East Hampton, New York
respectively. It is presently anticipated that Bayswater would be reimbursed a
pro rata portion of the salaries, benefits and related expenses for the
personnel performing such services, plus all reasonable and customary out of
pocket expenses incurred in connection with performing such services. Such
reimbursements will be subject to review and approval by the Audit Committee.
As Bayswater's services continue or expand, AREP may enter into additional
agreements with and pay fees to Bayswater upon the terms generally described
above, provided such agreements and fees are fair and reasonable to AREP and
approved by the Audit Committee. In the first quarter of 1999, AREP reimbursed
Bayswater approximately $98,500 for such services rendered and expenses in
connection therewith.
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. In 1998 there were no such
amounts. In addition, an affiliate of the General Partner provided certain
administrative services to AREP in the amount of approximately $3,500 in 1998.
The Audit Committee meets on an annual basis, or more often if
necessary, to review 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.
III-8
<PAGE> 82
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
(a)(1) Financial Statements:
The following financial statements of American Real Estate Partners,
L.P. are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report II-12
Consolidated Balance Sheets - II-13-14
December 31, 1998 and 1997
Consolidated Statements of Earnings - II-15-16
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Partners' Equity - II-17
and Other Comprehensive Income Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - II-18-19
Years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements II-20-56
(a)(2) Financial Statement Schedules:
Schedule III - Real Estate Owned and Revenues IV-5-17
Earned (by tenant or guarantor,
as applicable)
</TABLE>
All other Financial Statement schedules have been omitted because the required
financial information is not applicable or the information is shown in the
Financial Statements or Notes thereto.
(a)(3) Exhibits:
3.1 Certificate of Limited Partnership of AREP, dated February 17,
1987 (filed as Exhibit No. 3.1 to AREP's Annual Report on Form
10-K for the year ended December 31, 1987 and incorporated
herein by reference).
3.2 Amended and Restated Agreement of Limited Partnership of AREP,
dated as of May 12, 1987 (filed as Exhibit No. 3.2 to AREP's
Annual Report on Form 10-K for the year ended December 31,
1987 and incorporated herein by reference).
3.3 Amendment No. 1 to the Amended and Restated Agreement of
Limited Partnership of AREP (filed as Exhibit 3.3 to AREP's
Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
3.4 Certificate of Limited Partnership of American Real Estate
Holdings Limited Partnership (the "Subsidiary"), dated
February 17, 1987, and amendment thereto, dated March 12, 1987
(filed as Exhibit No. 3.3 to AREP's Annual Report on Form 10-K
for the year ended December 31, 1987 and incorporated herein
by reference).
IV-1
<PAGE> 83
3.5 Amended and Restated Agreement of Limited Partnership of the
Subsidiary, dated as of July 1, 1987 (filed as Exhibit No. 3.4
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
4.1 Depositary Agreement among AREP, the General Partner and
Registrar and Transfer Company, dated as of July 1, 1987
(filed as Exhibit No. 4.1 to AREP'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 Depositary Agreement (filed as Exhibit
4.2 to AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
4.3 Specimen Depositary Receipt (filed as Exhibit No. 4.2 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
4.4 Form of Transfer Application (filed as Exhibit No. 4.3 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
4.5 Specimen Certificate representing Preferred Units (filed as
Exhibit No. 4.9 to AREP's Registration Statement on Form S-3
(Registration No. 33-54767) and incorporated herein by
reference).
10.1 Nonqualified Unit Option Plan (filed as Exhibit No. 10.1 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
10.2 Distribution Reinvestment Plan (filed as Exhibit No. 10.3 to
AREP's Annual Report on Form 10-K for the year ended December
31, 1987 and incorporated herein by reference).
10.10 Subscription Guaranty Agreement between AREP and High Coast
Limited Partnership (the "Guarantor") (filed as Exhibit 4.10
to AREP's Registration Statement on Form S-3 (Registration No.
33-54767) and incorporated herein by reference).
10.11 Registration Rights Agreement between AREP and the Guarantor
(filed as Exhibit 4.11 to AREP's Registration Statement on
Form S-3 (Registration No. 33-54767) and incorporated herein
by reference).
10.12 Amended and Restated Agency Agreement (filed as Exhibit 10.12
to AREP's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
10.13 Subscription Agent Agreement (filed as Exhibit 10.13 to AREP's
Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
10.14 Subscription Guaranty Agreement between AREP and the Guarantor
(filed as Exhibit 4.10 to Amendment No. 1 to AREP's
Registration Statement on Form S-3 (Registration No.
333-31561) and incorporated herein by reference).
IV-2
<PAGE> 84
10.15 Registration Rights Agreement between AREP and the Guarantor
(filed as Exhibit 4.11 to Amendment No. 1 to AREP's
Registration Statement on Form S-3 (Registration No.
333-31561) and incorporated herein by reference).
10.16 Subscription Agent Agreement filed as Exhibit 99.1 to AREP's
Registration Statement on Form S-3 (Registration No.
333-31561) and incorporated herein by reference).
16 Letter dated September 27, 1991 of Deloitte & Touche regarding
change in accountants (filed as Exhibit No. A to AREP's
Current Report on Form 8-K dated October 3, 1991 and
incorporated herein by reference).
22 List of Subsidiaries (filed as Exhibit No. 22 to AREP's Annual
Report on Form 10-K for the year ended December 31, 1987 and
incorporated herein by reference).
(b) Reports on Form 8-K:
(1) A Form 8-K was filed on March 31, 1998 regarding a March 26, 1998
announcement of 1997 fourth quarter and full year financial results and
that no distributions were expected during 1998.
(2) A Form 8-K was filed on November 23, 1998 regarding the
announcement of a tender offer for its Depositary Units made by
affiliates of Icahn.
IV-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) of the Securities
Exchange Act of 1934, AREP has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 31st day of March,
1999.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: AMERICAN PROPERTY INVESTORS, INC.
General Partner
By: /s/ Carl C. Icahn
---------------------
Carl C. Icahn
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of AREP and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Carl C. Icahn Chairman of the Board March 31, 1999
- -------------------------- (Principal Executive
Carl C. Icahn Officer)
/s/William A. Leidesdorf Director March 31, 1999
- --------------------------
William A. Leidesdorf
/s/Jack G. Wasserman Director March 31, 1999
- --------------------------
Jack G. Wasserman
/s/John P. Saldarelli Treasurer March 31, 1999
- ------------------------ (Principal Financial
John P. Saldarelli Officer and Principal
Accounting Officer
</TABLE>
IV-4
<PAGE> 86
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership Schedule III
Page 1
<TABLE>
<CAPTION>
REAL ESTATE OWNED AND REVENUES EARNED
Part 1 - Real estate owned at December 31, 1998 - Accounted for under the:
Operating Method
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
--------------- ------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PROPERTY LAND AND BUILDING
Acme Markets, Inc. and FPBT of Penn. PA 1 $2,004,393 $2,004,393 $1,427,071
Alabama Power Company AL 5 $3,867,849
Amer Stores and The Fidelity Bank PA 1
Amer Stores, Grace, & Shottenstein
Stores NJ 1 2,043,567 2,043,567 1,543,113
American Recreation Group, Inc. NC 1
Amterre Ltd. Partnership PA 1
Best Products Co., Inc. VA 1 3,303,553 3,303,553
Caldor, Inc. MA 1
Chesebrough-Pond's Inc. CN 1 1,549,805 1,549,805 1,129,605
Chomerics, Inc. MA 1
Collins Foods International, Inc. OR 3 169,048 169,048
Collins Foods International, Inc. CA 1 87,810 87,810
David Miller of California CA 1
Dillon Companies, Inc. MO 1 546,681 546,681 322,954
Dillon Companies, Inc. LA 6 1,555,112 1,555,112 866,200
Druid Point Bldg. GA 1
Duke Power Co. NC 1 2,578,397
European American Bank and Trust Co. NY 1 1,355,210 1,355,210 1,284,888
Farwell Bldg. MN 1 697,341 5,073,279 5,073,279 1,339,032
Federated Department Stores, Inc. CA 1
First National Supermarkets, Inc. CT 1 13,271,593
First Union National Bank NC 1
Fisher Scientific Company IL 1 597,806 597,806 165,290
Forte Hotels International, Inc. NJ 1
Forte Hotels International, Inc. TX 1
Fox Grocery Company WV 1 1,031,000
Gino's, Inc. MO 1 209,213 209,213
Gino's, Inc. CA 1 225,100 225,100
Gino's, Inc. OH 1 201,938 201,938
Gino's, Inc. IL 1 235,972 235,972
Gino's, Inc. NJ 1
Golf Road IL 1 7,104,423 9,292,656 (14,492) 9,278,164 278,780
Grand Union Co. NJ 1 430,664 430,664
Grand Union Co. MD 1 372,383 372,383 254,735
Grand Union Co. NY 3 1,091,020 (7,000) 1,084,020
Grand Union Co. NY 1
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE OWNED AND REVENUES EARNED
Part 1 - Real estate owned at Part 2 - Revenues earned for the
December 31, 1998 - Accounted Year ended December 31, 1998
for under the:
Operating Method Financing Method
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
and of period Investment of period to period expenses to period
------------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PROPERTY LAND AND BUILDING
Acme Markets, Inc. and FPBT of Penn. ($20,491) $245,888 $39,333 $206,555
Alabama Power Company $7,170,726 766,425 390,867 375,558
Amer Stores and The Fidelity Bank 565,753 ($6,208) 74,711 0 74,711
Amer Stores, Grace, & Shottenstein
Stores (10,228) 142,735 92,063 50,672
American Recreation Group, Inc. 350,700 (3) 45,304 305,396
Amterre Ltd. Partnership 288,480 284,990 3,490
Best Products Co., Inc. 1,358,287 (3) 477,265 881,022
Caldor, Inc. 1,797,980 172,506 (674) 173,180
Chesebrough-Pond's Inc. (11,770) 141,236 19,580 121,656
Chomerics, Inc. 5,980,904 (1,843) 766,423 0 766,423
Collins Foods International, Inc. (2,707) 81,764 32,489 7,057 25,432
Collins Foods International, Inc. 46,444 17,646 (3,502) 21,148
David Miller of California 63,482 58,250 5,232
Dillon Companies, Inc. (2,804) 53,966 15,034 38,932
Dillon Companies, Inc. (19,668) 186,542 10,902 175,640
Druid Point Bldg. 515,700 490,278 25,422
Duke Power Co. 4,370,712 451,619 266,166 185,453
European American Bank and Trust Co 175,000 0 175,000
Farwell Bldg. 985,249 452,821 532,428
Federated Department Stores, Inc. 18,689 2,312 16,377
First National Supermarkets, Inc. 23,178,919 (221,459) 2,150,454 1,295,366 855,088
First Union National Bank 536,071 50,291 0 50,291
Fisher Scientific Company 163,000 25,264 137,736
Forte Hotels International, Inc. 6,273,466 (59,447) 573,855 10,737 563,118
Forte Hotels International, Inc. 0 6,000 (6,000)
Fox Grocery Company 3,108,735 281,568 100,845 180,723
Gino's, Inc. 143,567 31,885 279 31,606
Gino's, Inc. 136,700 41,186 10,424 30,762
Gino's, Inc. 122,260 37,739 298 37,441
Gino's, Inc. 127,073 44,246 672 43,574
Gino's, Inc. 0 98 (98)
Golf Road 800,220 570,894 229,326
Grand Union Co. 400,088 83,078 0 83,078
Grand Union Co. 33,750 55,229 (21,479)
Grand Union Co. 1,031,255 214,140 76 214,064
Grand Union Co. 85,142 21,785 63,357
</TABLE>
IV-5
<PAGE> 87
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership Schedule III
Page 2
<TABLE>
<CAPTION>
REAL ESTATE OWNED AND REVENUES EARNED
Part 1 - Real estate owned at December 31, 1998 - Accounted for under the:
Operating Method
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
----- --------- ------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Grand Union Co. VA 1 266,468 266,468 182,578
Grand Union Co. NY 1 4,357,591
Gunite IN 1 98,618 1,134,565 1,134,565 1,065,034
G.D. Searle & Co. MD 1 299,229 299,229 151,206
G.D. Searle & Co. MN 1
G.D. Searle & Co. AL 1 0 0 0
G.D. Searle & Co. IL 1 256,295 256,295 167,219
G.D. Searle & Co. MN 1 339,358 339,358 152,816
G.D. Searle & Co. IL 1 323,559 323,559 227,999
G.D. Searle & Co. TN 1 214,421 214,421 150,365
G.D. Searle & Co. TN 1 0 0 0
G.D. Searle & Co. MD 1 325,891 325,891 152,165
Haverty Furniture Companies, Inc. GA 1
Haverty Furniture Companies, Inc. FL 1
Haverty Furniture Companies, Inc. VA 1
Holiday Inn AZ 1
Integra A Hotel and Restaurant Co. AL 2 245,625 245,625
Integra A Hotel and Restaurant Co. IL 1 198,392 198,392
Integra A Hotel and Restaurant Co. IN 1 231,513 231,513
Integra A Hotel and Restaurant Co. OH 1
Integra A Hotel and Restaurant Co. MO 1 224,837 224,837
Integra A Hotel and Restaurant Co. TX 1 228,793 228,793
Integra A Hotel and Restaurant Co. MI 1 234,464 234,464
Intermountain Color KY 1 559,644 559,644 455,593
J.C. Penney Company, Inc. MA 1 2,484,262 2,484,262 1,667,822
Kelley Springfield Tire Company TN 1 120,946 120,946 75,200
K-Mart Corporation LA 1
K-Mart Corporation WI 1
K-Mart Corporation FL 1
K-Mart Corporation MN 1 480,000
K-Mart Corporation FL 1 2,760,118 2,760,118 1,721,199
K-Mart Corporation IA 1
K-Mart Corporation FL 1 2,636,000 2,636,000 1,802,441
K-Mart Corporation IL 1 221,616
Kobacker Stores, Inc. MI 3 163,687 163,687
Kobacker Stores, Inc. KY 1 88,364 88,364
Kobacker Stores, Inc. OH 5 354,030 354,030
Kraft, Inc. NC 1
</TABLE>
<TABLE>
<CAPTION>
Part 1 - Real estate owned at Part 2 - Revenues earned for the
December 31, 1998 - Accounted Year ended December 31, 1998
for under the:
Operating Method Financing Method
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
and of period Investment of period to period expenses to period
------------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Grand Union Co. 24,150 3,579 20,571
Grand Union Co. 7,066,958 655,951 458,981 196,970
Gunite (19,422) 228,500 12,373 216,127
G.D. Searle & Co. 27,000 5,372 21,628
G.D. Searle & Co. 9,235 3,638 5,597
G.D. Searle & Co. 0 5,047 (5,047)
G.D. Searle & Co. (1,918) 23,013 13,190 9,823
G.D. Searle & Co. 30,614 5,551 25,063
G.D. Searle & Co. 35,397 6,795 28,602
G.D. Searle & Co. 18,740 0 18,740
G.D. Searle & Co. 0 7,472 (7,472)
G.D. Searle & Co. 28,598 5,365 23,233
Haverty Furniture Companies, Inc. 569,072 51,975 6,494 45,481
Haverty Furniture Companies, Inc. 431,114 (983) 39,375 11,800 27,575
Haverty Furniture Companies, Inc. 548,863 50,390 11,256 39,134
Holiday Inn 0 (1,949) 1,949
Integra A Hotel and Restaurant Co. 1,294,285 229,320 1,850 227,470
Integra A Hotel and Restaurant Co. 407,298 98,632 925 97,707
Integra A Hotel and Restaurant Co. 558,438 117,946 925 117,021
Integra A Hotel and Restaurant Co. 553,590 81,721 925 80,796
Integra A Hotel and Restaurant Co. 415,355 103,448 925 102,523
Integra A Hotel and Restaurant Co. 519,979 133,483 925 132,558
Integra A Hotel and Restaurant Co. 530,837 134,073 925 133,148
Intermountain Color 83,971 32,295 51,676
J.C. Penney Company, Inc. (41,707) 250,244 80,071 170,173
Kelley Springfield Tire Company 11,449 0 11,449
K-Mart Corporation 1,639,289 138,196 2,300 135,896
K-Mart Corporation 1,865,041 168,524 2,300 166,224
K-Mart Corporation 2,117,236 204,209 2,300 201,909
K-Mart Corporation 1,730,587 (16,000) 142,142 25,194 116,948
K-Mart Corporation 135,000 140,414 186,730 (46,316)
K-Mart Corporation 1,325,808 125,099 2,300 122,799
K-Mart Corporation 1,743,794 406,510 41,162 365,348
K-Mart Corporation 937,314 75,184 23,659 51,525
Kobacker Stores, Inc. 309,215 60,430 3,700 56,730
Kobacker Stores, Inc. 96,326 18,843 4,192 14,651
Kobacker Stores, Inc. 589,121 90,401 7,305 83,096
Kraft, Inc. 0 46,728 (46,728)
</TABLE>
IV-6
<PAGE> 88
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership Schedule III
Page 3
REAL ESTATE OWNED AND REVENUES EARNED
<TABLE>
<CAPTION>
Part 1 - Real estate owned at December 31, 1998 - Accounted for under the:
Operating Method
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
--------------- ------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Landmark Bancshares Corporation MO 1
Levitz Furniture Corporation NY 1 988,463 988,463
Lockheed Corporation CA 1 2,449,469 2,449,469
Louisiana Power and Light Company LA 8 2,378,572
Louisiana Power and Light Company LA 7 1,422,886 3,491,431 3,491,431
Marsh Supermarkets, Inc. IN 1 5,001,933 5,001,933 2,365,163
Montgomery Ward, Inc. PA 1 3,289,166 3,289,166 2,170,123
Montgomery Ward, Inc. NJ 1
Morrison, Inc. AL 1 324,288 324,288
Morrison, Inc. GA 1 347,404 347,404
Morrison, Inc. FL 1 375,392 375,392
Morrison, Inc. VA 2 363,059 363,059
North Carolina National Bank SC 2 1,450,047 1,450,047 522,346
Occidental Petroleum Corp. CA 1 1,727,522
Ohio Power Co. Inc. OH 1
Old National Bank of Washington WA 1
Park West KY 1 12,498,202 19,020,000 79,418 19,099,418 464,583
Park West UPS KY 1 19359869 21,106,313 21,106,313 185,675
Penske Corp. OH 1 7,195
Pneumo Corp. OH 1 708,484
Portland General Electric Company OR 1 44,484,262
Rouse Company MD 1 2,919,305
Safeway Stores, Inc. LA 1 1,782,885 1,782,885 1,074,469
Sams MI 1 5,464,813 8,844,225 8,844,225 1,533,157
Smith's Management Corp. NV 1 338,472
Southland Corporation FL 5 1,162,971 1,162,971 672,935
Staples NY 1 2,457,582 26,570 2,484,152 75,368
Stone Container WI 1 9,028,034 9,028,034 88,649
Stop 'N Shop Co., Inc. NY 1 5,013,507 5,013,507 3,657,364
Stop 'N Shop Co., Inc. VA 1 713,202
Super Foods Services, Inc. MI 1 6,325,398
SuperValu Stores, Inc. MN 1 1,370,965 1,370,965 238,627
SuperValu Stores, Inc. OH 1 3,000,671 3,000,671 532,883
SuperValu Stores, Inc. GA 1 2,344,836 2,344,836 413,084
SuperValu Stores, Inc. IN 1 2,267,573 2,267,573 399,093
Telecom Properties, Inc. OK 1
Telecom Properties, Inc. KY 1 281,253 281,253
The A&P Company MI 1
</TABLE>
<TABLE>
<CAPTION>
Part 1 - Real estate owned at Part 2 - Revenues earned for the
December 31, 1998 - Accounted Year ended December 31, 1998
for under the:
Operating Method Financing Method
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
and of period Investment of period to period expenses to period
------------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Landmark Bancshares Corporation 4,481,277 631,058 2,300 628,758
Levitz Furniture Corporation (13,017) 2,003,204 (27,661) 341,983 34 341,949
Lockheed Corporation (52,793) 4,012,497 (107,624) 831,834 2,552 829,282
Louisiana Power and Light Company 11,505,823 1,501,578 280,557 1,221,021
Louisiana Power and Light Company 4,060,947 977,761 170,560 807,201
Marsh Supermarkets, Inc. 563,504 231,479 332,025
Montgomery Ward, Inc. 314,280 49,750 264,530
Montgomery Ward, Inc. 1,513,413 (4,105) 182,711 2,300 180,411
Morrison, Inc. 684,449 130,267 925 129,342
Morrison, Inc. 654,004 130,484 925 129,559
Morrison, Inc. 692,411 137,883 925 136,958
Morrison, Inc. 1,712,949 267,701 925 266,776
North Carolina National Bank 148,249 (3) 59,140 89,109
Occidental Petroleum Corp. 0 242,459 (242,459)
Ohio Power Co. Inc. 3,865,306 361,580 0 361,580
Old National Bank of Washington 225,741 177,005 48,736
Park West 1,801,210 1,190,865 610,345
Park West UPS 755,506 806,308 (50,802)
Penske Corp. 543,865 74,924 5,491 69,433
Pneumo Corp. 2,149,779 212,259 75,306 136,953
Portland General Electric Company 51,384,934 4,440,732 3,303,302 1,137,430
Rouse Company 6,162,704 547,302 311,162 236,140
Safeway Stores, Inc. 85,150 15,514 69,636
Sams (90,412) 1,086,487 177,483 909,004
Smith's Management Corp. 812,265 73,337 35,897 37,440
Southland Corporation 127,573 15,457 112,116
Staples 280,245 346,344 (66,099)
Stone Container (67,263) 299,427 97,103 202,324
Stop 'N Shop Co., Inc. 454,145 82,474 371,671
Stop 'N Shop Co., Inc. 2,688,102 243,897 71,918 171,979
Super Foods Services, Inc. 10,019,445 1,067,870 554,407 513,463
SuperValu Stores, Inc. 114,885 26,679 88,206
SuperValu Stores, Inc. 319,834 58,394 261,440
SuperValu Stores, Inc. 224,215 45,631 178,584
SuperValu Stores, Inc. 194,954 44,128 150,826
Telecom Properties, Inc. 110,415 10,475 363 10,112
Telecom Properties, Inc. 94,908 36,496 940 35,556
The A&P Company 1,619,959 170,983 2,300 168,683
</TABLE>
IV-7
<PAGE> 89
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership Schedule III
Page 4
<TABLE>
<CAPTION>
REAL ESTATE OWNED AND REVENUES EARNED
Part 1 - Real estate owned at December 31, 1998 - Accounted for under the:
Operating Method
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumberances to Company Improvements of period Depreciation
----- --------- ------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
The TJX Companies, Inc. IL 1
Toys "R" Us, Inc. TX 1 814,219 501,836 501,836
USA Petroleum Corporation SC 2 163,161 163,161
USA Petroleum Corporation OH 1 78,443 78,443
USA Petroleum Corporation GA 2 138,062 138,062
Waban NY 1 8,378,095 8,378,095 610,224
Watkins MO 1 965,741 965,741 102,190
Webcraft Technologies MD 1 426,766 780,774 780,774 148,670
Wetterau, Inc. PA 1
Wetterau, Inc. NJ 2
Wickes Companies, Inc. CA 2 923,463 2,447,297 2,447,297 1,293,630
RESIDENTIAL PROPERTY LAND AND BUILDING
Crown Cliffs AL 1 8,277,128 11,065,875 13,884 11,079,759 (2) 1,590,656
COMMERCIAL PROPERTY - LAND
Easco Corp. NC 1 157,560 157,560
Foodarama supermarkets, Inc. NY 1 140,619 140,619
Foodarama supermarkets, Inc. PA 1 112,554 112,554
Gino's, Inc. MD 1
Gino's, Inc. PA 1 36,271 36,271
Gino's, Inc. MI 1
Gino's, Inc. MA 2 102,048 102,048
Gino's, Inc. NJ 1 61,050 61,050
J.C. Penney Company, Inc. NY 1 51,009 51,009
Levitz Furniture Corporation CA 2 1,134,836 1,134,836
Levitz Furniture Corporation KS 1 460,490 460,490
COMMERCIAL PROPERTY - BUILDING
Bank South GA 1
Harwood Square IL 1 6,803,769 50,883 6,854,652 3,193,782
Lockheed Corporation CA 1
</TABLE>
<TABLE>
<CAPTION>
Part 1 - Real estate owned at Part 2 - Revenues earned for the
December 31, 1998 - Accounted Year ended December 31, 1998
for under the:
Operating Method Financing Method
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
and of period Investment of period to period expenses to period
------------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
The TJX Companies, Inc. 2,561,944 (50,276) 235,248 2,300 232,948
Toys "R" Us, Inc. 1,083,015 140,905 61,487 79,418
USA Petroleum Corporation 54,090 37,441 0 37,441
USA Petroleum Corporation 77,831 18,900 0 18,900
USA Petroleum Corporation 65,387 31,676 0 31,676
Waban 694,388 650,031 44,357
Watkins (9,650) 115,800 28,516 87,284
Webcraft Technologies 171,353 75,032 96,321
Wetterau, Inc. 763,833 (910) 82,828 0 82,828
Wetterau, Inc. 1,656,414 175,352 3,831 171,521
Wickes Companies, Inc. 3,676 588,030 277,156 310,874
RESIDENTIAL PROPERTY LAND AND BUILDING
Crown Cliffs 1,733,748 1,768,225 (34,477)
COMMERCIAL PROPERTY - LAND
Easco Corp. 20,833 12,400 358 12,042
Foodarama supermarkets, Inc. 14,000 0 14,000
Foodarama supermarkets, Inc. 12,000 0 12,000
Gino's, Inc. 3,571 0 3,571
Gino's, Inc. 7,138 0 7,138
Gino's, Inc. 6,398 4,271 2,127
Gino's, Inc. 14,286 0 14,286
Gino's, Inc. 7,143 0 7,143
J.C. Penney Company, Inc. 5,500 2,300 3,200
Levitz Furniture Corporation (332) 132,861 (2,475) 135,336
Levitz Furniture Corporation 47,009 9,743 37,266
COMMERCIAL PROPERTY - BUILDING
Bank South 3,635,209 371,201 44,595 326,606
Harwood Square 805,599 228,766 576,833
Lockheed Corporation 112,918 0 112,918
</TABLE>
IV-8
<PAGE> 90
AMERICAN REAL ESTATE PARTNERS, LP
a limited partnership Schedule III
Page 5
<TABLE>
<CAPTION>
REAL ESTATE OWNED AND REVENUES EARNED
Part 1 - Real estate owned at December 31, 1998 - Accounted for under the:
Operating Method
Amount
Carried
No. of Amount of Initial Cost Cost of at close Reserve for
State Locations Encumbrances to Company Improvements of period Depreciation
----- --------- ------------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Safeway Stores, Inc. CA 1 558,652 558,652 534,615
Toys "R" Us, Inc. RI 1
United Life & Accident Ins. Co. NH 1
Wickes Companies, Inc. PA 1
Weigh-Tronix, Inc. CA 1
Baptist Hospital 1 TN 1 22,653,010
Baptist Hospital 2 TN 1 8,407,763
HOTEL AND RESORT OPERATING PROPERTIES
Holiday Inn FL 1 7,203,982 383,627 7,587,609 2,777,420
New Seabury MA 1 17,443,596 17,443,596 215,898
DEVELOPMENT PROPERTIES
Dellwood NY 1 3,120,317 3,120,317
Grassy Hollow NY 1 601,135 601,135
East Syracuse NY 1 138,108 138,108
New Seabury MA 1 8,970,039 8,970,039
-------------------------------------------------------------------------
$173,558,959 $211,412,457 $532,890 $211,945,347(1) $41,443,909(1)
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Part 1 - Real estate owned at Part 2 - Revenues earned for the
December 31, 1998 - Accounted Year ended December 31, 1998
for under the:
Operating Method Financing Method
Rent due Minimum lease Expended
and accrued payments due Total for interest,
or received and accrued revenue taxes, Net income
in advance at Net at end applicable repairs and applicable
and of period Investment of period to period expenses to period
------------- ---------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Safeway Stores, Inc. 26,900 22,969 3,931
Toys "R" Us, Inc. 998,046 95,310 2,300 93,010
United Life & Accident Ins. Co. 4,231,871 (43,667) 358,963 2,300 356,663
Wickes Companies, Inc. 3,129,711 (46,366) 445,945 459 445,486
Weigh-Tronix, Inc. 2,261,569 297,265 (3) 11,121 286,144
Baptist Hospital 1 25,027,701 921,265 1,976,181 1,788,771 187,410
Baptist Hospital 2 9,278,541 341,931 733,468 663,910 69,558
HOTEL AND RESORT OPERATING PROPERTIES
Holiday Inn 4,222,839 (4) 4,454,239 (231,400)
New Seabury 4,631,633 4,279,323 352,310
DEVELOPMENT PROPERTIES
Dellwood 0 0 0
Grassy Hollow 0 0 0
East Syracuse 0 0 0
New Seabury 0 0 0
--------------------------------------------------------------------------------------
($204,673) $245,919,755 $676,647 $53,170,221 $28,637,443 $24,532,778
======================================================================================
</TABLE>
(1) Amount shown includes hotel operating properties.
(2) The Company owns a 70% interest in the joint venture which owns this
property.
(3) Amount shown includes other income which totaled $1,682,787.
(4) Amount shown includes other income which totaled $96,532.
IV-9
<PAGE> 91
Schedule III
Page 6
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1998
1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel and resort operating
properties and development properties, was carried at the beginning of
the period, with the total at the close of the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1998 $ 168,968,239
Additions during period 57,080,872
Write downs (271,000)
Reclassifications during period to assets held for sale (1,280,333)
Disposals during period (12,552,431)
-------------
Balance - December 31, 1998 $ 211,945,347
=============
</TABLE>
b. A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:
<TABLE>
<S> <C>
Balance - January 1, 1998 $ 42,369,888
Depreciation during period 4,246,969
Disposals during period (4,807,794)
Reclassifications during period to property held for sale (365,154)
-------------
Balance - December 31, 1998 $ 41,443,909
=============
</TABLE>
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life
of the particular property or property components, which range from 5
to 45 years.
2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning
of the period, with the total at the close of the period, is shown
below:
<TABLE>
<S> <C>
Balance - January 1, 1998 $ 265,656,836
Additions during period 28,455
Disposals during period (11,355,448)
Amortization of unearned income 24,287,140
Minimum lease rentals received (32,174,228)
Write downs (523,000)
-------------
Balance - December 31, 1998 $ 245,919,755
=============
</TABLE>
3. The aggregate cost of real estate owned for Federal income tax purposes
is $362,116,104.
(Continued)
IV - 10
<PAGE> 92
Schedule III
Page 7
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1998
4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
<TABLE>
<S> <C>
Net income applicable to financing and operating leases $ 24,532,778
Add: Interest income on treasury bills and other investments 28,213,058
Dividend and unallocated other income 11,922,713
------------
64,668,549
------------
Deduct expenses not allocated:
General and administrative expenses 3,808,227
Nonmortgage interest expense 2,105,671
Other 383,901
------------
6,297,799
------------
Earnings before gain on property and securities transactions 58,370,750
Provision for loss on real estate (1,180,000)
Gain on sale of limited partnership interests 4,382,048
Gain on sale of real estate 9,065,423
------------
Net earnings $ 70,638,221
============
</TABLE>
(Continued)
IV - 11
<PAGE> 93
Schedule III
Page 8
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1997
1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel and resort operating
properties and development properties, was carried at the beginning of
the period, with the total at the close of the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1997 $ 160,112,640
Additions during period 28,946,473
Write downs (704,782)
Reclassifications during period from financing leases 4,000,824
Reclassifications during period to assets held for sale (3,763,071)
Disposals during period (19,623,845)
-------------
Balance - December 31, 1997 $ 168,968,239
=============
</TABLE>
b. A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:
<TABLE>
<S> <C>
Balance - January 1, 1997 $ 43,754,936
Depreciation during period 3,849,795
Disposals during period (3,752,894)
Reclassifications during period to assets held for sale (1,481,949)
------------
Balance - December 31, 1997 $ 42,369,888
============
</TABLE>
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated life of the
particular property or property components, which range from 5 to 45
years.
2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning
of the period, with the total at the close of the period, is shown
below:
<TABLE>
<S> <C>
Balance - January 1, 1997 $ 253,781,903
Additions during period 34,750,966
Write downs (380,000
Reclassifications during period (4,000,824)
Disposals during period (10,812,126)
Amortization of unearned income 25,146,392
Minimum lease rentals received (32,829,475)
-------------
Balance - December 31, 1997 $ 265,656,836
=============
3. The aggregate cost of real estate owned for Federal income tax poses
is $361,474,634.
</TABLE>
(Continued)
IV - 12
<PAGE> 94
Schedule III
Page 9
<TABLE>
<S> <C>
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1997
4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
Net income applicable to financing and operating leases $ 23,815,644
Add: Interest income on Treasury bills and other investments 16,726,520
Dividend and unallocated other income 6,334,348
------------
46,876,512
------------
Deduct expenses not allocated:
General and administrative expenses 3,187,794
Nonmortgage interest expense 1,525,796
Other 1,143,306
------------
5,856,896
------------
Earnings before gain on property and securities transactions 41,019,616
Provision for loss on mortgages receivable (9,790,000)
Provision for loss on real estate (1,084,782)
Gain on sales of real estate 16,051,491
Gain on sale of marketable equity securities 29,188,087
------------
Net earnings $ 75,384,412
============
</TABLE>
(Continued)
IV - 13
<PAGE> 95
Schedule III
Page 10
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1996
1a. A reconciliation of the total amount at which real estate owned,
accounted for under the operating method and hotel and resort operating
properties and development properties, was carried at the beginning of
the period, with the total at the close of the period, is shown below:
<TABLE>
<S> <C>
Balance - January 1, 1996 $ 193,311,259
Additions during period 11,991,211
Write downs (660,000)
Reclassifications during period from financing leases 233,879
Reclassifications during period to assets held for sale (6,110,905)
Disposals during period (38,652,804)
-------------
Balance - December 31, 1996 $ 160,112,640
=============
</TABLE>
b. A reconciliation of the total amount of accumulated depreciation at the
beginning of the period, with the total at the close of the period, is
shown below:
<TABLE>
<S> <C>
Balance - January 1, 1996 $ 49,406,334
Depreciation during period 4,895,252
Disposals during period (6,530,965)
Reclassifications during period to assets held for sale (4,015,685)
------------
Balance - December 31, 1996 $ 43,754,936
============
</TABLE>
Depreciation on properties accounted for under the operating method is
computed using the straight-line method over the estimated useful life
of the particular property or property components, which range from 5
to 45 years.
2. A reconciliation of the total amount at which real estate owned,
accounted for under the financing method, was carried at the beginning
of the period, with the total at the close of the period, is shown
below:
<TABLE>
<S> <C>
Balance - January 1, 1996 $ 281,532,529
Other (988)
Reclassifications during period (233,879)
Disposals during period (20,201,810)
Amortization of unearned income 26,073,205
Minimum lease rentals received (33,387,154)
-------------
Balance - December 31, 1996 $ 253,781,903
=============
</TABLE>
3. The aggregate cost of real estate owned for Federal income tax purposes
is $340,405,247.
(Continued)
IV - 14
<PAGE> 96
Schedule III
Page 11
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED
YEAR ENDED DECEMBER 31, 1996
4. Net income applicable to the period in Schedule III is reconciled with
net earnings as follows:
<TABLE>
<S> <C>
Net income applicable to financing and operating leases $ 27,911,271
Add: Interest income on treasury bills and other investments 9,866,131
Dividend and unallocated other income 3,083,548
------------
40,860,950
------------
Deduct expenses not allocated:
General and administrative expenses 2,938,684
Nonmortgage interest expense 2,604,345
Other 1,077,736
------------
6,620,765
------------
Earnings before gain on property and securities transactions 34,240,185
Provision for loss on real estate (935,000)
Gain on sales of real estate 24,516,867
------------
Net earnings $ 57,822,052
============
</TABLE>
(Continued)
IV - 15
<PAGE> 97
Schedule III
Page 12
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Net
State Investment
- -------------- ------------
<S> <C>
Alabama $ 9,149,460
California 6,457,209
Connecticut 23,178,919
Florida 4,984,556
Georgia 4,985,671
Illinois 4,033,629
Indiana 558,438
Iowa 1,325,808
Kentucky 191,235
Louisiana 17,206,059
Maryland 6,162,704
Massachusetts 7,778,884
Michigan 12,479,456
Minnesota 1,730,587
Missouri 5,040,199
Nevada 812,264
New Hampshire 4,231,871
New Jersey 9,843,381
New York 10,101,418
North Carolina 4,906,783
Ohio 7,839,752
Oklahoma 110,415
Oregon 51,466,698
Pennsylvania 4,459,297
Rhode Island 998,046
South Carolina 54,090
Tennessee 34,306,242
Texas 1,602,994
Virginia 4,949,914
West Virginia 3,108,735
Wisconsin 1,865,041
------------
$245,919,755
============
</TABLE>
IV-16
<PAGE> 98
Schedule III
Page 13
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE
(ACCOUNTED FOR UNDER THE OPERATING METHOD)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Amount at which
Carried at Reserve for
Close of Year Depreciation
--------------- ------------
<S> <C> <C>
Alabama $ 11,649,673 $ 1,590,656
California 6,903,164 1,828,245
Connecticut 1,549,805 1,129,605
Florida 14,522,091 6,973,995
Georgia 2,830,301 413,084
Illinois 17,744,837 4,033,068
Indiana 8,635,584 3,829,290
Kansas 460,490 --
Kentucky 41,134,991 1,105,851
Louisiana 6,829,427 1,940,670
Maryland 1,778,277 706,775
Massachusetts 28,999,945 1,883,720
Michigan 9,242,377 1,533,157
Minnesota 6,783,602 1,730,476
Missouri 1,946,471 425,144
New Jersey 2,535,281 1,543,113
New York 23,354,636 5,627,845
North Carolina 157,560 --
Ohio 3,635,082 532,883
Oregon 169,048 --
Pennsylvania 5,442,384 3,597,195
South Carolina 1,613,209 522,346
Tennessee 335,367 225,564
Texas 730,630 --
Virginia 3,933,081 182,578
Wisconsin 9,028,034 88,649
------------ ------------
$211,945,347 $41,443,909
============ ============
</TABLE>
IV-17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,462
<SECURITIES> 554,659
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 457,865
<DEPRECIATION> 41,444
<TOTAL-ASSETS> 1,135,915
<CURRENT-LIABILITIES> 0
<BONDS> 173,559
0
0
<COMMON> 0
<OTHER-SE> 888,499
<TOTAL-LIABILITY-AND-EQUITY> 1,135,915
<SALES> 0
<TOTAL-REVENUES> 93,306
<CGS> 0
<TOTAL-COSTS> 15,217
<OTHER-EXPENSES> 3,808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,910
<INCOME-PRETAX> 70,638
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,638
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.28
</TABLE>
