<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
----------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2000
------------------
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
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AMERICAN REAL ESTATE PARTNERS, L.P.
-----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3398766
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 SOUTH BEDFORD ROAD, MT. KISCO, NY 10549
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE NO.
--------------------
<S> <C>
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 ..............................................................1-2
Consolidated Statements of Earnings -
Three Months Ended September 30, 2000 and 1999.........................................................3-4
Consolidated Statements of Earnings
Nine Months Ended September 30, 2000 and 1999..........................................................5-6
Consolidated Statement of Changes In
Partners' Equity and Comprehensive Income
Nine Months Ended September 30,2000......................................................................7
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999..........................................................8-9
Notes to Consolidated Financial Statements..............................................................10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS............................................................................31
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
---------------------------------------------
MARKET RISKS..........................................................................47
------------
PART II. OTHER INFORMATION......................................................................................48
</TABLE>
<PAGE> 3
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information contained herein is unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. All such adjustments are of a normal
recurring nature.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN $000'S)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(RESTATED)
<S> <C> <C>
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 206,329 $ 223,391
Accounted for under the operating
method, net of accumulated
depreciation 179,822 152,086
Investment in treasury bills 467,692 468,529
Marketable equity and debt securities 56,969 67,397
Equity interest in GB Holdings, Inc. 40,463 -
Cash and cash equivalents 158,907 142,697
Land and construction-in-progress 77,934 99,043
Hotel, casino and resort operating properties,
net of accumulated depreciation:
Stratosphere Corporation hotel and casino 115,697 111,151
Hotel and resort 33,322 30,678
Mortgages and notes receivable 7,604 10,955
Receivables and other assets 53,157 58,934
--------- ---------
Total $ 1,397,896 $ 1,364,861
========= =========
</TABLE>
Continued.......
1
<PAGE> 4
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
(IN $000'S)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- -----------------
(RESTATED)
<S> <C> <C>
LIABILITIES
Mortgages payable $ 183,704 $ 179,387
Due to affiliates 76,547 32,876
Accounts payable, accrued
expenses and other liabilities 49,738 56,983
--------- ---------
Total liabilities 309,989 269,246
--------- ---------
Minority interest in Stratosphere
Corporation hotel and casino 64,347 66,307
--------- ---------
Commitments and Contingencies
(Notes 3 and 4)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 8,463,459 and 8,060,437
issued and outstanding as of
Sept. 30, 2000 and Dec. 31, 1999 86,750 83,627
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 926,613 876,760
General partner 22,118 80,842
Treasury units at cost:
1,137,200 depositary units (11,921) (11,921)
--------- ---------
Total partners' equity 1,023,560 1,029,308
--------- ---------
Total $ 1,397,896 $ 1,364,861
========= =========
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 5
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
(RESTATED)
<S> <C> <C>
Revenues:
Stratosphere Corporation hotel
and casino operating income $ 31,623 $ 30,712
Land, house and condominium sales 18,132 21,894
Hotel and resort operating income 7,984 8,922
Interest income on financing leases 4,871 5,491
Interest income on treasury
bills and other investments 9,069 7,834
Rental income 5,989 5,391
Dividend and other income 936 766
-------- --------
78,604 81,010
-------- --------
Expenses:
Stratosphere Corporation hotel
and casino operating expenses 28,897 28,610
Cost of land, house and condominium sales 14,387 16,153
Hotel and resort operating expenses 5,697 5,661
Interest expense 4,597 5,013
Depreciation and amortization 3,489 3,229
General and administrative expenses 1,582 1,855
Rental property expenses 1,020 650
-------- --------
59,669 61,171
-------- --------
Earnings before property
transactions and minority interest in subsidiary 18,935 19,839
Provision for loss on real estate (259) (1,137)
Gain on sales and disposition of real estate 357 4,902
Minority interest in net earnings of
Stratosphere Corporation hotel and casino (564) (51)
-------- --------
NET EARNINGS $ 18,469 $ 23,553
======== ========
</TABLE>
Continued........
3
<PAGE> 6
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Continued........
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- -----
(RESTATED)
<S> <C> <C>
Net earnings attributable to: (Note 11)
Limited partners $ 18,101 $ 18,558
General partner 368 4,995
----------- -----------
$ 18,469 $ 23,553
=========== ===========
Net earnings per limited partnership unit:
Basic earnings $ .37 $ .38
=========== ===========
Weighted average limited partnership
units outstanding 46,098,284 46,098,284
=========== ===========
Diluted earnings $ .33 $ .33
=========== ===========
Weighted average limited partnership units
and equivalent partnership units outstanding 55,624,078 56,359,662
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 7
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
(RESTATED)
<S> <C> <C>
Revenues:
Stratosphere Corporation hotel
and casino operating income $ 97,715 $ 94,398
Land, house and condominium sales 59,168 55,675
Hotel and resort operating income 17,511 17,033
Interest income on financing leases 15,142 16,997
Interest income on treasury
bills and other investments 25,938 17,732
Rental income 17,470 15,395
Dividend and other income 3,342 8,616
--------- ---------
236,286 225,846
--------- ---------
Expenses:
Stratosphere Corporation hotel
and casino operating expenses 87,719 85,773
Cost of land, house and condominium sales 45,087 42,514
Hotel and resort operating expenses 14,958 12,445
Interest expense 13,054 15,113
Depreciation and amortization 11,087 10,393
General and administrative expenses 5,729 5,697
Rental property expenses 3,097 2,172
Bayswater acquisition costs 1,650 -
--------- ---------
182,381 174,107
--------- ---------
Earnings before property and securities
transactions and minority interest in subsidiary 53,905 51,739
Provision for loss on real estate (491) (1,364)
Gain on sales and disposition of real estate 2,463 7,757
Gain on sale of marketable equity securities - 28,590
Minority interest in net earnings of
Stratosphere Corporation hotel and casino (2,103) (1,204)
--------- ---------
NET EARNINGS $ 53,774 $ 85,518
========= =========
</TABLE>
Continued...........
5
<PAGE> 8
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Continued........
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
(RESTATED)
<S> <C> <C>
Net earnings attributable to: (Note 11)
Limited partners $ 51,273 $ 74,642
General partner 2,501 10,876
----------- -----------
$ 53,774 $ 85,518
=========== ===========
Net earnings per limited partnership unit:
Basic earnings $ 1.04 $ 1.55
=========== ===========
Weighted average limited partnership
units outstanding 46,098,284 46,098,284
=========== ===========
Diluted earnings $ .91 $ 1.34
=========== ===========
Weighted average limited partnership units
and equivalent partnership units outstanding 56,247,699 55,831,750
=========== ===========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 9
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
(IN $000'S )
<TABLE>
<CAPTION> Limited Partners' Equity
General ------------------------ Total
Partner's Depositary Preferred Held in Partners'
Equity Units Units Treasury Equity
------ ----- ----- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance Dec. 31, 1999
as previously reported $ 19,500 $ 876,760 $ 83,627 $ (11,921) $ 967,966
Bayswater acquisition
(Note 8) 61,342 - - - 61,342
----------- ----------- ----------- ----------- -----------
Balance Dec. 31, 1999
as restated 80,842 876,760 83,627 (11,921) 1,029,308
Comprehensive income:
Net earnings 2,501 51,273 - - 53,774
Unrealized gains on
securities available
for sale 35 1,703 - - 1,738
----------- ----------- ----------- ----------- -----------
Comprehensive income 2,536 52,976 - - 55,512
Net adjustment for
Bayswater acquisition
(Note 8) (62,801) - - - (62,801)
Capital contribution
(Note 8) 1,541 - - - 1,541
Pay-in-kind
distribution - (3,123) 3,123 - -
----------- ----------- ----------- ----------- -----------
Balance
Sept.30, 2000 $ 22,118 $ 926,613 $ 86,750 $ (11,921) $ 1,023,560
=========== =========== =========== =========== ===========
</TABLE>
Accumulated other comprehensive loss at September 30, 2000 was $5,337.
See notes to consolidated financial statements
7
<PAGE> 10
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN $000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 53,774 $ 85,518
Adjustments to reconcile earnings to net
cash provided by operating activities:
Depreciation and amortization 11,087 10,393
Gain on sales and disposition of real estate (2,463) (7,686)
Gain on sale of marketable equity securities - (28,590)
Minority interest in net earnings of Stratosphere
Corporation hotel and casino 2,103 1,204
Provision for loss on real estate 491 1,364
Changes in:
Decrease (increase) in land and
construction-in-progress 4,554 (6,236)
(Increase) decrease in receivables and other assets (2,021) 958
(Decrease) increase in accounts payable,
accrued expenses and other liabilities (3,946) 8,475
--------- ---------
Net cash provided by operating activities 63,579 65,400
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in mortgages and notes receivable 2,845 (7,457)
Net proceeds from the sale and disposition of real estate 14,036 18,534
Principal payments received on leases
accounted for under the financing method 5,699 5,958
Acquisition of Bayswater's net assets (84,350) -
Acquisition of rental real estate (27,308) (23,923)
Additions to rental real estate (2,032) (2,227)
Additions to hotel casino and resort operating properties (4,441) (7,257)
Decrease (increase) in investment in treasury bills 837 (88,311)
Investment in Stratosphere Corp. hotel and casino (1,970) -
Increase in equity interest in GB Holdings, Inc. (32,500) -
Decrease in marketable equity and debt securities 4,165 202,446
Investment in Northstar Capital Investment Corp. - (6,888)
Increase in due to affiliate 76,341 15,674
Net disposition of limited partnership interests 455 1,270
--------- ---------
Net cash (used in) provided by investing activities (48,223) 107,819
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to partners (10) -
Distributions to General Partner (Note 7) (4,100) (4,050)
Debt:
Increase in mortgages payable 19,600 22,400
Periodic principal payments (7,278) (7,048)
Balloon payments (7,358) -
--------- ---------
Net cash provided by financing activities 854 11,302
--------- ---------
</TABLE>
Continued..............
8
<PAGE> 11
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED))
(IN $000'S
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
(RESTATED)
<S> <C> <C>
NET INCREASE
IN CASH AND CASH EQUIVALENTS 16,210 184,521
CASH AND CASH EQUIVALENTS,
beginning of period 142,697 34,014
--------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 158,907 $ 218,535
========= =========
SUPPLEMENTAL INFORMATION:
Cash payments for interest-net of amount
capitalized $ 10,332 $ 16,027
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassifications:
From mortgages and notes receivable $ (62,338) $ -
To marketable equity and debt securities 56,107 -
To equity interest in GB Holdings, Inc. 6,231 -
To property held for sale 2,916 1,333
From financing lease (8,016) (384)
To operating lease 6,730 -
From operating lease (1,630) (949)
From receivables and other assets - (2,169)
To hotel and resort operating properties - 180
To due to affiliate - 3,221
From accounts payable, accrued expenses
and other liabilities - (1,232)
From hotel and resort operating property - (763)
To development property - 763
--------- ---------
$ - $ -
========= =========
</TABLE>
See notes to consolidated financial statements
9
<PAGE> 12
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying consolidated financial statements and related footnotes should
be read in conjunction with the consolidated financial statements and related
footnotes contained in the Company's annual report on Form 10-K for the year
ended December 31, 1999. The Company's prior period consolidated financial
statements have been restated as described in Notes 2 b. and 2 c. below.
The results of operations for the three and nine months ended September 30, 2000
are not necessarily indicative of the results to be expected for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
b. In March 2000, the Company acquired from affiliates of the General
Partner the assets of Bayswater Realty & Capital Corp. and the ownership
interests of its affiliated entities ("Bayswater"). In accordance with generally
accepted accounting principles, assets and liabilities transferred between
entities under common control are
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
accounted for at historical costs similar to a pooling of interests, and the
financial statements of previously separate companies for periods prior to the
acquisition are restated on a combined basis. Therefore, the accounts of
Bayswater are included in these consolidated financial statements for the three
and nine months ended September 30, 2000 and prior period financial statements
have been restated to include Bayswater.
c. Also in March 2000, the Company purchased an additional 50,000 shares of
the Stratosphere Corporation ("Stratosphere") from an affiliate of the General
Partner. The Company now owns approximately 51% of Stratosphere and has included
its accounts on a consolidated basis for the three and nine months ended
September 30, 2000. Prior period financial statements have been restated to
include Stratosphere on a consolidated basis.
d. Revenue recognition - Revenue from real estate sales and related costs
are recognized at the time of closing, when title passes to the buyer. The
Company follows the guidelines for profit recognition set forth by Financial
Accounting Standards Board (FASB) Statement No. 66, "Accounting for Sales of
Real Estate."
e. Land and construction-in-progress - These costs are stated at the lower
of cost or net realizable value. Interest is capitalized on expenditures for
long-term projects until a salable condition is reached. The capitalization rate
is based on the interest rate on specific borrowings to fund the projects.
f. Stratosphere Hotel and Casino:
11
<PAGE> 14
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
1. The third quarter ended on September 24, 2000. There were no
intercompany transactions during the period September 24 to
September 30, 2000.
2. Casino revenues and promotional allowances - The Company
recognizes revenues in accordance with industry practice. Casino
revenue is the net win from gaming activities (the difference
between gaming wins and losses). Casino revenues are net of
accruals for anticipated payouts of progressive and certain other
slot machine jackpots. Revenues include the retail value of rooms,
food and beverage and other items that are provided to customers
on a complimentary basis. A corresponding amount is deducted as
promotional allowances.
3. Sales, advertising and promotion - These costs are expensed as
incurred.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
a. The Company entered into a license agreement with an affiliate of the
General Partner for a portion of office space at an annual rental of
approximately $205,000, plus its share of certain additional rent. Such
agreement was approved by the Audit Committee of the Board of Directors of the
General Partner (the "Audit Committee"). For the three and nine months ended
September 30, 2000, the Company paid rent of approximately $52,000 and $156,000,
respectively, in accordance with the agreement.
12
<PAGE> 15
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
b. Stratosphere billed affiliates of the General Partner approximately
$60,000 and $180,000 for administrative services performed by Stratosphere
personnel during the three and nine months ended September 30, 2000,
respectively.
Stratosphere also received hotel revenue of approximately $100,000 and $500,000
during the three and nine months ended September 30, 2000, respectively, in
connection with a tour and travel agreement entered into with an affiliate of
the General Partner.
c. As of November 11, 2000, affiliates of Carl C. Icahn ("Icahn"), the
Chairman of the Board of the General Partner, own 7,322,873 Preferred Units and
39,359,836 Depositary Units.
4. COMMITMENTS AND CONTINGENCIES
a. On April 7, 2000, Skyway Freight Systems ("Skyway"), a tenant in a
multi-tenanted industrial complex located in Hebron, Kentucky owned by the
Company, filed a voluntary petition for reorganization under Chapter 11 of the
Federal Bankruptcy Code. Skyways annual rental is approximately $774,000. On
August 12, 2000, the tenant rejected the lease pursuant to an order of the
Bankruptcy Court. The Company has re-let the space, effective December 15, 2000,
for approximately $650,000 per annum.
13
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
b. In October, 2000 Stratosphere Corp. settled the litigation regarding
rental of its retail space and acquired the leasehold interest to the shopping
center located on its premises for approximately $12.5 million.
c. As previously reported by the Company in its annual report on Form 10-K
for the year ended December 31, 1999, on November 18, 1998, Ruth Ellen Miller
filed a Class Action Complaint. On September 21, 2000, Ruth Ellen Miller,
Charles and Lydia Hoffman, and Joy Lazarus, claiming as plaintiffs on behalf of
themselves and all others similarly situated, filed an amended complaint (the
"Complaint") and a motion for class certification and have sought to make
service of the Complaint on the defendants. Management believes that the
plaintiffs' claims are without merit and intends to vigorously defend against
them.
5. HOTEL, CASINO AND RESORT OPERATING PROPERTIES
.
a. Stratosphere Hotel and Casino
Stratosphere Corp. ("Stratosphere") owns and operates the Stratosphere Tower
Casino & Hotel, a resort complex located in Las Vegas, Nevada.
On March 24, 2000, the Company purchased from an affiliate of the General
Partner an additional 50,000 shares of the common stock of Stratosphere for
approximately $2 million. The Company now owns approximately 51% of the issued
and outstanding shares of the common stock of Stratosphere. In September 2000,
Stratosphere's Board of Directors approved a going private transaction proposed
by the Company. The Company, subject to certain conditions, will pay
approximately $44.3 million for the outstanding shares of Stratosphere not
currently owned. Stratosphere stockholders not affiliated with Icahn will
receive a cash price of $45.32 per share and Icahn related stockholders will
receive a cash price of $44.33 per share. Stratosphere will invest up to $100
million for construction of an additional 1,000 rooms to the hotel, related
amenities and purchase of the leasehold interest to the shopping center located
on its premises. The Company advanced
14
<PAGE> 17
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
approximately $7 million to Stratosphere in September 2000. The advances and
related interest expense have been eliminated in consolidation. In October 2000,
the Company advanced an additional $ 17.3 million to Stratosphere.
For accounting purposes, the Company has consolidated Stratosphere in the
accompanying financial statements and prior period financial statements have
been restated to include Stratosphere on a consolidated basis.
Stratosphere's operations for the three and nine months ended September 30, 2000
and 1999 have been included in "Stratosphere Hotel and Casino operating income
and expenses" in the Consolidated Statements of Earnings. Stratosphere Hotel and
Casino operating expenses include all expenses except for approximately
$2,048,000 and $6,262,000 of depreciation and amortization for the three and
nine months ended September 30, 2000, respectively and $2,001,000 and $6,283,000
for the three and nine months ended September 30, 1999, respectively. Such
amounts have been included in "Depreciation and amortization expense" in the
Consolidated Statements of Earnings.
b. Hotel and Resort Operating Properties
On August 1, 1998, the Company acquired the New Seabury resort located in Cape
Cod, Massachusetts.
Since August 1992, the Company has operated a Holiday Inn located in Miami,
Florida, subject to a ground lease. In April 1999, the Company acquired the
underlying land for approximately $1.9 million.
15
<PAGE> 18
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Hotel and resort operations for the three and nine months ended September 30,
2000 have been included in "Hotel and resort operating income and expenses" in
the Consolidated Statements of Earnings. Hotel and resort operating expenses
include all expenses except for approximately $180,000 and $1,154,000 of
depreciation and amortization for the three and nine months ended September 30,
2000, respectively, and $176,000 and $528,000 for the three and nine months
ended September 30, 1999, respectively. Such amounts have been included in
"Depreciation and amortization expense" in the Consolidated Statements of
Earnings.
Hotel, casino and resort operations are highly seasonal in nature and are not
necessarily indicative of results expected for the full year.
6. MARKETABLE EQUITY AND DEBT SECURITIES
a. In March 2000, in accordance with a prior agreement, the Company
transferred its First Mortgage Notes ("Notes") in the Sands Hotel and Casino
("Sands") and the Claridge Hotel and Casino ("Claridge")to an affiliate of the
General Partner in order to facilitate the bankruptcy reorganizations of the two
Atlantic City casinos. The Company was paid approximately $40.5 million, its
cost for such notes. However, the affiliate of the General Partner is obligated
to sell back to the Company and the Company is obligated to repurchase its
interest in the Sands and/or Claridge, as the case may be, at the same price
increased by Icahn advances, decreased by distributions and/or interest payments
received (together with a commercially reasonable interest factor) when the
appropriate licenses are obtained by the Company.
16
<PAGE> 19
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Regarding the Sands, in July 2000, the U.S. Bankruptcy Court ruled in favor of
the reorganization plan proposed by affiliates of Icahn which provides for an
additional investment of $65 million by the Icahn affiliates in exchange for a
46% equity interest, with bondholders (which also includes Icahn affiliates) to
receive $110 million in new notes and a 54% ownership position. The plan, which
became effective September 29, 2000, provides the Icahn affiliates with a
controlling interest. For accounting purposes, the Company reflects its interest
in the new Sands notes as held to maturity and has recorded its corresponding
liability to repurchase such interests from the affiliate of the General
Partner. At September 30, 2000 this investment is carried at cost of $17.3
million in the Consolidated Balance Sheets.
The Company reflects its pro rata equity interest in the Sands as "Equity
interest in GB Holdings, Inc." in the Consolidated Balance Sheets (see note 7).
In July 2000, the Claridge's proposed reorganization plan was not accepted by
the required number of bondholders. The plan would have provided for the holders
of $85 million of First Mortgage Notes to receive 100% of the equity in the
reorganized entity. In August 2000, the U.S. Bankruptcy Court approved a
proposal by the bondholders to market for sale the hotel-casino. It is possible
that the Sand's may participate in the auction process.
Subsequent to the transfer of interests, pursuant to the prior agreement, the
affiliate of the General Partner has purchased approximately $1,709,000 face
value of additional Claridge Notes for approximately $942,000 on the
17
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Company's behalf. The cost of these notes has been added to the Company's
investment and "Due to affiliate" in the Consolidated Balance Sheets.
For accounting purposes, the Company continues to reflect its interest in the
Claridge notes as available for sale and has recorded its corresponding
liability to repurchase such interest from the affiliate of the General Partner.
This investment is carried at fair market value on the Balance Sheet. At
September 30, 2000, unrealized holding losses of $3,525,000 have been recorded
in Partners' Equity and the carrying value of the investment was approximately
$12,616,000.
Interest expense due to the affiliate for the three and nine months ended
September 30, 2000 of $1,147,000 and $2,446,000, respectively, has been included
in "Interest expense" in the Consolidated Statements of Earnings.
b. In 1998 and 1999, the Company purchased approximately $88 million of
senior debt of Philips Services Corp. and Philip Services (Delaware), Inc.
(collectively "Philips") for approximately $39.6 million and received
approximately $5.6 million as a return of capital.
18
<PAGE> 21
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
In June 1999, Philips filed a voluntary application to reorganize under the
Companies Creditors Arrangement Act with the Ontario Superior Court of Justice
in Toronto, Canada and voluntary petitions under Chapter 11 of the U.S.
Bankruptcy Code in the District of Delaware.
On April 7, 2000, Philip Services Corporation ("New Philips"), the newly
restructured company incorporated in Delaware, emerged from Chapter 11 of the
U.S. Bankruptcy Code and the Companies Creditors' Arrangement Act in Canada.
As a result of the reorganization, the Company received approximately 1.8
million common shares of New Philips, approximately $15.9 million in secured
term debt, $8.3 million in secured convertible payment-in-kind debt and
approximately $5.1 million in cash. The Company presently has an approximate 8%
interest in New Philips and an Icahn affiliate has an approximate interest of
26%.
The secured term debt matures March 31, 2005 and bears interest at 9% per annum.
Interest is payable quarterly, in arrears, beginning July 1, 2000. Interest due
the Company for the three and nine months ended September 30, 2000 in the
amounts of approximately $364,000 and $757,000, respectively has been received
and is included in "Interest income" in the Consolidated Statements of Earnings
in the three and nine months ended September 30, 2000.
19
<PAGE> 22
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
The secured convertible payment-in-kind debt matures March 31, 2005 and bears
interest at 10% per annum. Interest is accreted quarterly with interest on the
accreted interest also calculated at the rate of 10% per annum. Interest accrued
and accreted for the three and nine months ended September 30, 2000 in the
amounts of approximately $163,000 and $311,000, respectively, is included in
"Interest income" in the Consolidated Statements of Earnings in the three and
nine months ended September 30, 2000.
For accounting purposes, the Company reflects its interest in New Philips stock
and debt securities as available for sale. These investments are carried at fair
market value on the Balance Sheet. At September 30, 2000, unrealized holding
losses of $1,812,000 have been recorded in Partners' Equity and the carrying
value of the investments was approximately $27,021,000.
7. EQUITY INTEREST IN GB HOLDINGS, INC.
The Company reflects it pro rata equity interest in the Sands under this caption
in the Consolidated Balance Sheets. The Company's corresponding obligation to
repurchase its interest of approximately $40.4 million is included in "Due to
affiliates" in the Consolidated Balance Sheets. The Company accounts for its
investment under the equity method of accounting.
8. BAYSWATER ACQUISITION
20
<PAGE> 23
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
On March 23, 2000, the Company purchased from affiliates of the General Partner,
the net assets of Bayswater Realty & Capital Corp. and the ownership interests
of its affiliated entities ("Bayswater") for approximately $84.35 million.
Bayswater, a real estate investment, management and development company has
focused primarily on the construction and sale of single family homes. The
assets acquired included interests in ten residential subdivisions in New York
and Florida.
The accounts of Bayswater are included in these Consolidated Financial
Statements for the three and nine months ended September 30, 2000 and prior
period financial statements have been restated to include Bayswater. For
accounting purposes, earnings and distributions/dividends prior to the
acquisition have been allocated to the General Partner and therefore excluded
from the computation of basic and diluted earnings per limited partnership unit.
The Bayswater assets acquired and the liabilities assumed have been accounted
for at historical cost. The excess of the historical cost of the net assets over
the amount of cash disbursed, which amounted to $1,541,000, has been accounted
for as a capital contribution by the General Partner. The Company's costs of
$1.65 million related to the Bayswater transaction have been included as
"Bayswater acquisition costs" in the Consolidated Statements of Earnings in the
nine months ended September 30, 2000. A reduction of $62,801,000 has been made
to the General Partner's equity as an adjustment for the restatement at December
31, 1999. See Consolidated Statement of Changes in Partners' Equity and
Comprehensive Income.
21
<PAGE> 24
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
9. SIGNIFICANT PROPERTY TRANSACTIONS
a. On March 30, 2000, the Company acquired a five story multi-tenant office
building located in Alexandria, VA for approximately $27.5 million cash. The
building, which was recently renovated, has approximately 140,000 square feet of
rentable space and is 96% occupied. Lease terms range from 5-12 years with lease
expirations ranging from December 2004 to March 2011. Annual net operating
income is anticipated to be approximately $2.7 million.
b. On March 31, 2000, the Company entered into a lease cancellation and
termination agreement with the Grand Union Company, a tenant in a Mt. Kisco,
N.Y. distribution center owned by the Company. In accordance with the agreement,
the Company paid $1.15 million to the tenant to cancel the lease (which had an
annual rental of approximately $900,000) to obtain control of the property. The
lease cancellation payment has been capitalized in "Real estate leases accounted
for under the operating method" in the Consolidated Balance Sheet.
At September 30, 2000, the property had a carrying value of approximately
$7,880,000. The mortgage balance of approximately $4,137,000 was repaid in
August 2000.
10. PREFERRED UNITS
22
<PAGE> 25
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Pursuant to the terms of the Preferred Units, on February 23, 2000, 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 was payable March 31, 2000 to holders of record as of March 15,
2000. A total of 403,022 additional Preferred Units were issued. As of September
30, 2000, 8,463,459 Preferred Units are issued and outstanding.
11. EARNINGS PER SHARE
Basic earnings per share are based on earnings after the preferred pay-in-kind
distribution to Preferred Unitholders. 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 the three and nine months ended September 30, 2000 and 1999
were 46,098,284. The weighted average number of depositary units and equivalent
units assumed outstanding for diluted earnings per share purposes were (i) for
the three months ended September 30, 2000 and 1999 55,624,078 and 56,359,662,
respectively, and (ii) for the nine months ended September 30, 2000 and 1999
56,247,699 and 55,831,750, respectively. The number of limited partnership units
used in the calculation of diluted income per limited partnership unit increased
by (i) 9,525,794 and 10,261,378 limited partnership units for the three months
ended
23
<PAGE> 26
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
September 30, 2000 and 1999, respectively, and (ii) 10,149,415 and 9,733,466
limited partnership units for the nine months ended September 30, 2000 and 1999,
respectively, to reflect the effects of the conversion of Preferred Units.
For the three and nine months ended September 30, 2000 and 1999, basic and
diluted earnings per weighted average limited partnership unit are detailed as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic:
Earnings before property
and securities transactions $ .37 $ .30 $ 1.00 $ .81
Net gain from property
and securities transactions - .08 .04 .74
------- ------- ------- -------
Net earnings $ .37 $ .38 $ 1.04 $ 1.55
======= ======= ======= =======
Diluted:
Earnings before property
and securities transactions $ .32 $ .26 $ .88 $ .72
Net gain from property
</TABLE>
24
<PAGE> 27
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
<TABLE>
<S> <C> <C> <C> <C>
and securities transactions .01 .07 .03 .62
------- ------- ------- -------
Net earnings $ .33 $ .33 $ .91 $ 1.34
======= ======= ======= =======
</TABLE>
12. COMPREHENSIVE INCOME
The Company follows SFAS No. 130 "Reporting Comprehensive Income" which
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 three months ended September 30, 2000 and 1999 is
as follows (in $000's):
<TABLE>
<CAPTION>
2000 1999
---- ----
(Restated)
<S> <C> <C>
Net income $ 18,469 $ 23,553
Unrealized gains on securities
available for sale 3,037 1,558
--------- ----------
Comprehensive income $ 21,506 $ 25,111
========= ==========
</TABLE>
25
<PAGE> 28
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Comprehensive income for the nine months ended September 30, 2000 and 1999 is as
follows (in $000's):
<TABLE>
<CAPTION>
2000 1999
---- ----
(Restated)
<S> <C> <C>
Net income $ 53,774 $ 85,518
Realized gains previously reported
in partner's equity - (16,058)
Unrealized gains (losses) on securities
available for sale 1,738 (475)
--------- ----------
Comprehensive income $ 55,512 $ 68,985
========= ==========
</TABLE>
13. SEGMENT REPORTING
The Company is engaged in five operating segments consisting of the ownership
and operation of (i) rental real estate, (ii) hotel and resort operating
properties, (iii) hotel and casino operating properties, (iv) land sales, house
and condominium development, and (v) 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.
26
<PAGE> 29
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Non-segment revenue to reconcile to total revenue consists primarily of interest
income on treasury bills and other investments. There have been no material
changes in segment assets since December 31, 1999, after giving effect to the
restatement as described in notes 2b. and c.
The Company assesses and measures segment operating results based on segment
earnings from operations as disclosed below. Segment earnings from operations
are not necessarily indicative of cash available to fund cash requirements nor
synonymous with cash flow from operations.
The revenues and net earnings for each of the reportable segments are summarized
as follows for the three and nine months ended September 30, 2000 and 1999 (in
$000's).
<TABLE>
<CAPTION>
Three Months Ended
------------------
9/30/00 9/30/99
------- -------
(Restated)
<S> <C> <C>
Revenues:
Rental real estate $ 10,860 $ 10,882
Hotel & resort operating properties 7,984 8,922
Hotel & casino operating properties 31,623 30,712
</TABLE>
27
<PAGE> 30
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
<TABLE>
<S> <C> <C>
Land, house and condominium sales 18,132 21,894
Other investments 979 789
---------- ----------
Sub-total 69,578 73,199
Reconciling items 9,026 (1) 7,811 (1)
-------- ---------
Total revenues $ 78,604 $ 81,010
======= =======
</TABLE>
(1) Primarily interest income on T-bills and other short-term investments and
other income.
<TABLE>
<CAPTION>
Three Months Ended
------------------
9/30/00 9/30/99
------- -------
(Restated)
<S> <C> <C>
Net earnings:
Segment earnings:
Rental real estate $ 9,840 $ 10,232
Land, house and condominium development 3,745 5,741
</TABLE>
28
<PAGE> 31
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
<TABLE>
<S> <C> <C>
Hotel and resort operating properties 2,287 3,261
Hotel and casino operating properties 2,726 2,102
Other investments 979 789
-------- --------
Total segment earnings 19,577 22,125
Other (expenses)/income net (1,108) 1,428
General partner's share (368) (4,995)
-------- --------
Net earnings-limited partner unitholders $ 18,101 $ 18,558
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
9/30/00 9/30/99
------- -------
(Restated)
<S> <C> <C>
Revenues:
Rental real estate $ 32,612 $ 32,392
Hotel & resort operating properties 17,511 17,033
Hotel & casino operating properties 97,715 94,398
Land, house and condominium sales 59,168 55,675
Other investments 4,957 9,531
---------- ----------
</TABLE>
29
<PAGE> 32
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
<TABLE>
<S> <C> <C>
Sub-total 211,963 209,029
Reconciling items 24,323 (1) 16,817 (1)
---------- ----------
Total revenues $ 236,286 $ 225,846
========== ==========
</TABLE>
(1) Primarily interest income on T-bills and other short-term investments and
other income.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
9/30/00 9/30/99
------- -------
(Restated)
<S> <C> <C>
Net earnings:
Segment earnings:
Rental real estate $ 29,515 $ 30,220
Land, house and condominium development 14,081 13,161
Hotel and resort operating properties 2,553 4,588
Hotel and casino operating properties 9,996 8,625
Other investments 4,957 9,531
----------- ---------
Total segment earnings 61,102 66,125
</TABLE>
30
<PAGE> 33
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
<TABLE>
<S> <C> <C>
Other expenses, net (7,328) (9,197)
Gain on sale of marketable equity securities - 28,590
General partner's share (2,501) (10,876)
----------- ---------
Net earnings-limited partner unitholders $ 51,273 $ 74,642
=========== =========
</TABLE>
14. SUBSEQUENT EVENTS
On October 12, 2000 the Company sold its limited partnership interests in the
High Equity Partners Series 85, 86 and 88 limited partnerships to an
unaffiliated third party. The selling price was $7,500,000. A gain of
approximately $3,380,000 will be recognized in the fourth quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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.
31
<PAGE> 34
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
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
The Company believes that it will benefit from the diversification of its
portfolio of assets. In selecting future real estate investments, the Company
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. To further its investment objectives, the Company 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. The Company believes that there are still
opportunities available to acquire investments that are undervalued. These may
include commercial properties, residential and commercial development projects,
land, assets in the gaming industry, 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. As discussed elsewhere
herein, the Company has made investments in the gaming industry, and may
consider
32
<PAGE> 35
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
additional gaming industry investments and investments related to the
entertainment industry including interests in additional casino properties and
those in the entertainment field such as movie theater interests and the
financing and investment in the movie production and distribution industry. Such
investments may include acquisitions from, or in joint venture or co-management
with, Icahn, the General Partner or their affiliates, provided that the terms
thereof are fair and reasonable to the Company. The Company 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 more 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 the Company.
As such, they require the Company to maintain a strong capital base in order to
react quickly to these market opportunities as well as to allow the Company 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 the Company will increase in value or generate positive cash flow, the
Company intends to focus on assets that it believes may provide opportunities
for long-term growth and further its objective to diversify its portfolio.
Historically, substantially all of the Company's real estate assets have been
net leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore the Company is not typically responsible for
payment of expenses, such as maintenance, utilities, taxes and insurance
associated with such properties.
33
<PAGE> 36
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
By the end of the year 2003, net leases representing approximately 14.0% of the
Company's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2005, net leases representing approximately 32% of the
Company's net annual rentals will be due for renewal. Since most of the
Company's properties are net-leased to single, corporate tenants, it may be
difficult and time-consuming to re-lease or sell those properties that existing
tenants decline to re-let or purchase and the Company may be required to incur
expenditures to renovate such properties for new tenants. In addition, the
Company may become responsible for the payment of certain operating expenses,
including maintenance, utilities, taxes, insurance and environmental compliance
costs associated with such properties, which are presently the responsibility of
the tenant. As a result, the Company could experience an adverse impact on net
cash flow in the future from such properties.
An amendment to the Partnership Agreement (the "Amendment" ) became effective in
August, 1996 which 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 while remaining in the
real estate business and continuing to pursue suitable investments for the
Company in the real estate market.
In September 1997, the Company completed its Rights Offering (the "1997
Offering") to holders of its Depositary Units 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. Net proceeds of approximately $267 million were raised for
investment purposes.
34
<PAGE> 37
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Expenses relating to environmental clean-up have not had a material effect on
the earnings, capital expenditures, or competitive position of the Company.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property, there can be no assurance that the Company will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. Also,
as the Company acquires more operating properties, its exposure to environmental
clean-up costs may increase. The Company 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.
The Company has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed
and most tenants continue to take appropriate action. However, 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 presently estimated that the Company'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, the Company has notified all tenants of the
Resource Conservation and Recovery Act's ("RCRA") December 22, 1998 requirements
for regulated
35
<PAGE> 38
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
underground storage tanks. The Company 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 the Company may deem necessary and appropriate.
The Company 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 forty updates are expected to be completed
in 2000 with another forty scheduled for the year 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Gross revenues decreased by $2,406,000, or 3.0%, during the three months ended
September 30, 2000 as compared to the same period in 1999. This decrease
reflects decreases of $3,762,000 in land, house and condominium sales, $938,000
in hotel and resort operating income and $620,000 in financing lease income
partially offset by increases of $1,235,000 in interest income on treasury bills
and other investments, $911,000 in Stratosphere Corporation hotel and casino
operating income, $598,000 in rental income and $170,000 in dividend and other
income. The decrease in land, house and condominium sales is primarily due to
differences in the size and number of transactions. The decrease in hotel and
resort operating income is primarily attributable
36
<PAGE> 39
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
to the New Seabury resort. The increase in interest income on treasury bills and
other investments is primarily attributable to an increase in short-term
investments and an increase in interest rates. The increase in Stratosphere
Corporation hotel and casino operating income is primarily attributable to
gaming operations.
Expenses decreased by $1,502,000, or 2.5%, during the three months ended
September 30, 2000 as compared to the same period in 1999. This decrease
reflects decreases of $1,766,000 in the cost of land, house and condominium
sales, $416,000 in interest expense and $273,000 in general and administrative
expenses partially offset by increases of $370,000 in rental property expenses
$287,000 in Stratosphere Corporation hotel and casino operating expenses,
$260,000 in depreciation and amortization and $36,000 in hotel and resort
operating expenses. The decrease in cost of land, house and condominium sales
is due to differences in the size and number of transactions. The decrease in
interest expense is primarily attributable to decreased interest due affiliates
in connection with repurchase obligations. The increase in rental property
expenses is primarily attributable to newly acquired and off-lease properties.
The increase in Stratosphere Corporation hotel and casino operating expenses is
primarily attributable to gaming operations.
Earnings before property transactions and minority interest in subsidiary
decreased during the three months ended September 30, 2000 by $904,000 as
compared to the same period in 1999.
37
<PAGE> 40
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Gain on property transactions decreased by $4,545,000 during the three months
ended September 30, 2000 as compared to the same period in 1999 due to
differences in the size and number of transactions.
During the three months ended September 30, 2000, the Company recorded a
provision for loss on real estate of $259,000 as compared to $1,137,000 in the
same period in 1999.
Minority interest in the net earnings of Stratosphere Corporation increased by
$513,000 during the three months ended September 30, 2000 as compared to the
same period in 1999.
Net earnings for the three months ended September 30, 2000 decreased by
$5,084,000 as compared to the three months ended September 30, 1999 primarily
due to the decrease in gain on property transactions and decrease in earnings
before property transactions and minority interest in subsidiary.
Diluted earnings per weighted average limited partnership unit outstanding
before property transactions were $.32 in the three months ended September 30,
2000 compared to $.26 in the comparable period of 1999, and net gain from
property and securities transactions was $.01 in the three months ended
September 30, 2000 compared to $.07 in the comparable period of 1999. Diluted
net earnings per weighted average limited partnership unit outstanding totalled
$.33 in the three months ended September 30, 2000 compared to $.33 in the
comparable period of 1999.
38
<PAGE> 41
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Gross revenues increased by $10,440,000, or 4.6%, during the nine months ended
September 30, 2000 as compared to the same period in 1999. This increase
reflects increases of $8,206,000 in interest income on treasury bills and other
investments, $3,493,000 in land, house and condominium sales, $3,317,000 in
Stratosphere Corporation hotel and casino operating income, $2,075,000 in rental
income, and $478,000 in hotel and resort operating income, partially offset by
decreases of $5,274,000 in dividend and other income and $1,855,000 in financing
lease income. The increase in interest income on treasury bills and other
investments is primarily attributable to an increase in short-term investments
as well as an increase in interest rates. The increase in land, house and
condominium sales is primarily due to differences in the size and number of
transactions. The increase in Stratosphere Corporation hotel and casino
operating income is primarily attributable to gaming operations. The increase in
rental income is primarily attributable to newly acquired properties. The
decrease in dividend and other income is primarily due to the disposition of
the RJR common stock in June of 1999.
Expenses increased by $8,274,000, or 4.8%, during the nine months ended
September 30, 2000 as compared to the same period in 1999. This increase
reflects increases of $2,573,000 in the cost of land, house and condominium
sales, $2,513,000 in hotel and resort operating expenses, $1,946,000 in
Stratosphere Corporation
39
<PAGE> 42
AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
hotel and casino operating expenses, $1,650,000 in Bayswater acquisition costs,
$925,000 in rental property expenses, $694,000 in depreciation and amortization
and $32,000 in general and administrative expenses partially offset by a
decrease of $2,059,000 in interest expense. The increase in the cost of land,
house and condominium sales is due to the differences in size and number of
transactions. The increase in hotel and resort operating expenses is primarily
attributable to the Bayswater and New Seabury resort operations. The increase in
Stratosphere Corporation hotel and casino operating expenses is primarily due to
gaming operations. The increase in rental property expenses is primarily
attributable to newly acquired and off-lease properties. The decrease in
interest expense is primarily due to decreased interest due affiliates in
connection with repurchase obligations.
Earnings before property and securities transactions and minority interest in
subsidiary increased during the nine months ended September 30, 2000 by
$2,166,000 as compared to the same period in 1999.
Gain on property transactions decreased by $5,294,000 during the nine months
ended September 30, 2000 as compared to the same period in 1999 due to
differences in the size and number of transactions.
During the nine months ended September 30, 2000, the Company recorded a
provision for loss on real estate of $491,000 as compared to $1,364,000 in the
same period in 1999.
40
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
In the nine months ended September 30, 1999, the Company recorded a
non-recurring gain on sale of marketable equity securities of $28,590,000
related to the sale of its RJR common stock. There was no such income in 2000.
Minority interest in the net earnings of Stratosphere Corporation increased by
$899,000 during the nine months ended September 30, 2000 as compared to the same
period in 1999.
Net earnings for the nine months ended September 30, 2000 decreased by
$31,744,000 as compared to the nine months ended September 30, 1999 primarily
due to the non-recurring gain on the sale of the Company's RJR common stock in
1999 and the decrease in gain on property transactions partially offset by
increased earnings before property and securities transactions and minority
interest in subsidiary.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.88 in the nine months ended
September 30, 2000 compared to $.72 in the comparable period of 1999, and net
gain from property and securities transactions was $.03 in the nine months ended
September 30, 2000 compared to $.62 in the comparable period of 1999. Diluted
net earnings per weighted average limited partnership unit outstanding totalled
$.91 in the nine months ended September 30, 2000 compared to $1.34 in the
comparable period of 1999.
CAPITAL RESOURCES AND LIQUIDITY
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Generally, the cash needs of the Company for day-to-day operations have been
satisfied from cash flow generated from current operations. Cash flow from
day-to-day operations represents net cash provided by operating activities
(excluding working capital changes, non-recurring other income and the cash flow
from the operations of Bayswater and Stratosphere retained for their operations)
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 2000, thirty-nine leases covering thirty nine properties and representing
approximately $5.7 million in annual rentals are scheduled to expire.
Twenty-nine of these leases originally representing approximately $3.7 million
in annual rental income have been or will be re-let or renewed for approximately
$3.7 million in annual rentals. Such renewals are generally for a term of five
years. Seven properties, with an approximate annual rental income of $.6
million have not been renewed and will be marketed for sale or lease when the
current lease terms expire. Three properties whose annual rentals were $1.4
million have been sold.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 2000. The Company believes that
it should continue to hold and invest rather than distribute cash. In making its
announcement, the Company 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.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
During the nine months ended September 30, 2000, the Company generated
approximately $36.7 million in cash flow from day-to-day operations which
excludes approximately $29 million in cash flow from the operations of Bayswater
and Stratosphere which are being retained for their operations and excludes
approximately $6.1 million in interest earned on the 1997 Offering proceeds
which is being retained for future acquisitions.
Capital expenditures for real estate were approximately $3.9 million during the
nine months ended September 30, 2000.
In 2000, the Company had approximately $3.2 million of maturing debt
obligations, which it repaid in the second quarter 2000, and repaid a higher
interest rate mortgage in the third quarter of approximately $4.1 million
secured by a property formerly tenanted by Grand Union Company. The Company 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 increase
reserves from time to time, thereby reducing cash flow otherwise available for
other uses.
During the nine months ended September 30, 2000, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $25.5
million which was added to the Company's operating cash reserves. This excludes
cash flow from Bayswater and Stratosphere which is being retained for their
operations. The Company's operating cash reserves are approximately $134 million
at September 30, 2000 (not including the cash
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
from capital transactions or from the 1997 Offering which is being retained for
investment), which are being retained to meet maturing debt obligations, capital
expenditures and certain contingencies.
Sales proceeds from the sale or disposal of portfolio properties totalled
approximately $11.8 million in the nine months ended September 30, 2000. The
Company intends to use asset sales, financing and refinancing proceeds for new
investments.
In March, 2000 the Company transferred its interests in the Sands and Claridge
to an affiliate of the General Partner and received approximately $40.5 million
therefor, however, as noted above, the transfer is subject to the Company's
right and obligation to repurchase such interests (at the same price, increased
by advances, decreased by distributions or interest payments received), upon
obtaining the proper gaming license in New Jersey. At September 2000, affiliates
of the General Partner paid $65 million for a 46% equity interest in the Sands.
The Company's pro rata share of this advance is $32.5 million, representing an
equity interest of approximately 23% in the Sands, which the Company will be
required to pay when it receives its gaming license and reacquires its interest
in the Sands.
In March, 2000, the Company acquired the assets of Bayswater and all of the
ownership interests of its affiliated entities for approximately $84.35 million.
In addition the Company purchased a multi-tenant office building for
approximately $27.5 million.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Also in March, 2000, the Company acquired approximately an additional 2%
interest in Stratosphere from affiliates of the General Partner for
approximately $2 million, thereby providing the Company with an aggregate
interest in Stratosphere of approximately 51%. In September 2000, Stratosphere's
Board of Directors approved a going private transaction proposed by the Company.
The Company, subject to certain conditions, will pay approximately $44.3 million
for the outstanding shares of Stratosphere not currently owned. Stratosphere
will invest up to $100 million for expansion of its hotel and casino facility,
related amenities and the purchase of the leasehold interest in the shopping
center located on the premises. Stratosphere estimates that this expansion is
expected to be completed by the latter part of 2001. As of September 30, 2000,
the Company has advanced Stratosphere $7 million and subsequently advanced an
additional $17.3 million.
The Company anticipates that golf course and clubhouse improvements in New
Seabury, Massachusetts will require the expenditure by the Company of an
aggregate of approximately $12 million in years 2000 and 2001.
To further its investment objectives, the Company 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. This may enhance its ability to further diversify its
portfolio of properties and gain access to additional operating and development
capabilities.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Pursuant to the 1997 Offering, which closed in September 1997, the Company
raised approximately $267 million 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.
The Company's cash and cash equivalents and investment in treasury bills
increased by $15.3 million during the nine months ended September 30, 2000,
primarily due to the transfer of the Claridge and Sands interests ($40.5
million), net cash flow from operations ($25.5), net cash flow from Bayswater
and Stratosphere operations ($29 million), mortgage proceeds ($19.6 million),
sales proceeds from the disposition of real estate ($11.8 million), and
miscellaneous other items ($.6 million) partially offset by the acquisition of
Bayswater's net assets ($84.4 million), and one property acquisition ($27.3
million).
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, the Company is
exposed to market, credit and related risks, including those described elsewhere
herein. As the Company 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.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Other related risks include liquidity risks, which arise in the course of the
Company'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 transfers
of large block positions may be subject to legal, contractual or market
restrictions. Other operating risks for the Company 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, the Company employs internal strategies to mitigate exposure
to these and other risks. The Company, on a case by case basis with respect to
new investments, performs internal analyses of risk identification, assessment
and control. The Company reviews credit exposures, and seeks to mitigate counter
party 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. The Company seeks to achieve
adequate returns commensurate with the risk it assumes. The Company utilizes
qualitative as well as quantitative information in managing risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
Response to this item is included in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above.
PART II. Other information
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company in its annual report on Form 10-K for the
year ended December 31, 1999, 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). On September 21, 2000, Ruth Ellen Miller,
Charles and Lydia Hoffman, and Joy Lazarus, claiming as plaintiffs on behalf of
themselves and all others similarly situated, filed an amended complaint (the
"Complaint") and a motion for class certification and have sought to make
service of the Complaint on the defendants. Management believes that the
plaintiffs' claims are without merit and intends to vigorously defend against
them.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q - SEPT. 30, 2000
(a) Financial Data Schedule is attached hereto as Exhibit EX-27
EXHIBIT INDEX
Exhibit Description
EX-27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: American Property Investors, Inc.
General Partner
/s/ John P. Saldarell
--------------------------------
John P. Saldarelli
Treasurer
Chief Financial Officer
and Principal Accounting Officer
Date: November 14, 2000
