<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
[_] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------------
Commission file number 1-12514
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American Real Estate Investment Corporation
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 84-1246585
- -------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1670 Broadway, Suite 3350, Denver, Colorado 80202
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(Address of principal executive offices)
(303) 869-4700
------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes ______ No ______
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 1,131,010
-----------------
Transitional Small Business Disclosure Format (check one):
Yes No X
_____ -----
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Consolidated Condensed Balance Sheet (unaudited) as of
September 30, 1997 3
Consolidated Condensed Statements of Operations (unaudited)
for the nine months ended September 30, 1997 and
September 30, 1996 and the three months ended
September 30, 1997 and September 30, 1996 4
Consolidated Condensed Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1997 and
September 30, 1996 5
Notes to Consolidated Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 11
PART II. OTHER INFORMATION 19
SIGNATURES 20
</TABLE>
2
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1997
-------------
<S> <C>
ASSETS
- ------
Investment in real estate:
Land $ 6,517,428
Buildings and improvements 25,152,636
-----------
31,670,064
Less: Accumulated depreciation (2,827,747)
-----------
Total investment in real estate, net 28,842,317
Cash & cash equivalents 8,246,396
Restricted cash 544,821
Accounts receivable 41,759
Deferred transaction costs 1,829,256
Other assets, net 233,330
-----------
Total assets $39,737,879
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Mortgage notes payable $26,430,129
Accrued interest 157,820
Accrued property taxes 117,314
Accrued expenses and other liabilities 1,483,148
Security deposits 161,241
-----------
Total liabilities 28,349,652
-----------
Minority interest 4,573,283
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
no preferred shares issued and outstanding 0
Common stock, $.001 par value; 30,000,000 shares authorized;
1,131,010 common shares issued and outstanding 1,131
Additional paid-in capital 5,437,531
Cumulative net income 4,730,956
Cumulative dividends (3,354,674)
-----------
Total shareholders' equity 6,814,944
-----------
Total liabilities and shareholders' equity $39,737,879
===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this balance sheet.
3
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
------------------------------ --------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rents and fees $5,560,580 $7,404,880 $1,642,334 $2,487,705
Other income 270,302 215,723 95,184 71,909
---------- ---------- ---------- ----------
Total revenues 5,830,882 7,620,603 1,737,518 2,559,614
---------- ---------- ---------- ----------
Operating expenses:
Repairs and maintenance 363,744 539,744 123,344 236,366
Property taxes 259,277 323,910 81,084 112,120
Property management fees 198,102 262,720 59,665 87,267
Utilities 534,547 802,051 132,339 271,299
Payroll 455,009 653,883 142,469 222,511
Other property operations 538,218 730,154 173,243 253,679
General and administrative 510,229 329,945 99,204 45,577
Depreciation and amortization 768,814 981,183 233,440 328,923
---------- ---------- ---------- ----------
Total operating expenses 3,627,940 4,623,590 1,044,788 1,557,742
---------- ---------- ---------- ----------
Financing expenses:
Non-related party interest
expense 2,403,823 2,931,078 745,820 976,921
---------- ---------- ---------- ----------
Total financing expenses 2,403,823 2,931,078 745,820 976,921
---------- ---------- ---------- ----------
Minority interest 1,987,574 0 1,987,574 0
Equity in earnings from
investment in partnership 436,627 363,466 173,055 121,177
---------- ---------- ---------- ----------
Income (loss) before gain on
sale of properties (1,751,828) 429,401 (1,867,609) 146,128
Gain on sale of properties 4,608,233 0 4,205,307 0
---------- ---------- ---------- ----------
Net income $2,856,405 $ 429,401 $2,337,698 $ 146,128
========== ========== ========== ==========
Primary earnings per share $ 2.54 $ 0.39 $ 2.07 $ 0.13
========== ========== ========== ==========
Fully diluted earnings per
share $ 2.54 $ 0.25 $ 2.07 $ 0.08
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Page 1 of 2
Nine months Nine months
ended ended
September 30, September 30,
1997 1996
------------------ ------------------
<S> <C> <C>
Operating Activities:
Net income $ 2,856,405 $ 429,401
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 808,249 1,021,361
Minority interest allocation 1,987,574 0
Gain on sale of properties (4,608,233) 0
Common stock compensation 40,500 174,000
Cash provided by (used in) operating assets (1,509,279) 87,803
Cash provided by (used in) operating liabilities 689,181 (187,122)
------------------ ------------------
Net cash provided by operating activities 264,397 1,525,443
------------------ ------------------
Investing Activities:
Cash used in investment in real estate (1,139,860) (131,494)
Proceeds from sale of properties 13,476,658 0
------------------ ------------------
Net cash provided by (used in) investing activities 12,336,798 (131,494)
------------------ ------------------
Financing activities:
Dividends paid (734,339) (703,101)
Minority interest distributions (516,219) (504,905)
Proceeds from mortgage notes payable 5,700,000 0
Repayment of mortgage notes payable (269,244) (292,578)
Repayment of mortgage notes payable from sale (5,664,094) 0
Refinancing of other notes payable (4,212,493) 0
------------------ ------------------
Net cash used in financing activities (5,696,389) (1,500,584)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 6,904,806 (106,635)
Cash and cash equivalents, beginning of period 1,341,590 635,958
------------------ ------------------
Cash and cash equivalents, end of period $ 8,246,396 $ 529,323
================== ==================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Page 2 of 2
Nine months Nine months
ended ended
September 30, September 30,
1997 1996
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 1,558,692 $ 2,437,681
=========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
The Company issued 5,002 shares of common stock to a limited partner during
1997 in exchange for the conversion of a portion of his limited partnership
interest in American Real Estate Investment, L.P.
The Company recorded a decrease in mortgage notes payable in the amount of
$6,363,077 during 1997 due to the assumption of the first mortgage loan
collateralized by Timberleaf apartments in conjunction with the sale of
Timberleaf apartments on February 28, 1997.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
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AMERICAN REAL ESTATE INVESTMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements include the account balances as
of September 30, 1997 and the activity for the nine months ended September 30,
1997 and September 30, 1996 and for the three months ended September 30, 1997
and September 30, 1996 for American Real Estate Investment Corporation (the
"Company") on a consolidated basis. Certain prior year balances may have been
reclassified to conform with the current year presentation.
The unaudited interim financial statements prepared by management
include all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation.
Nonrecurring Transaction Costs
Nonrecurring transaction costs relating to the transactions
contemplated by the agreements entered into by the Company on August 20, 1997
have been capitalized (see Note 2). A portion of the transaction costs will be
allocated to the assets to be acquired and the remainder of the transaction
costs will be recorded as an equity reduction against the cash received from the
issuance of common stock of the Company upon consummation of the transactions in
Note 2. In the event that the transactions described in such agreements are not
consummated, the capitalized nonrecurring transaction costs would be expensed by
the Company.
Allocations of Income and Distributions of Cash
In accordance with the terms of the partnership agreement, income of
American Real Estate Investment, L.P. (the "Operating Partnership") for the nine
months ended September 30, 1997 was allocated $2,856,405 to the Company and
$1,987,574 to the minority interest and for the three months ended September 30,
1997 was allocated $2,337,698 to the Company and $1,987,574 to the minority
interest. All income of the Operating Partnership for the nine months ended
September 30, 1996 and for the three months ended September 30, 1996 was
allocated to the Company, therefore there were no allocations to the minority
interest for the 1996 periods. All such allocations of net income and net loss
will be made subject to compliance with the provisions of Section 704(b) and
704(c) of the Internal Revenue Code and the Treasury Regulations promulgated
thereunder.
7
<PAGE>
The Company has the right to cause the Operating Partnership to
distribute all or any portion of its "net operating cash flow" (as defined) to
the partners as determined from time to time. The Company, in its capacity as
general partner, will make this determination. The Company is required to use
its best efforts to cause the Operating Partnership to distribute sufficient
amounts to enable the Company to pay shareholders dividends that will satisfy
the REIT requirements and avoid any Federal income tax or excise tax liabilities
for the Company.
Revenue Recognition
Revenues, consisting primarily of rentals for apartments, are
recognized on the accrual basis of accounting .
Earnings per Share
Primary earnings per share were calculated based on weighted average
shares outstanding of 1,125,828 and 1,102,758 for the nine months ended
September 30, 1997 and September 30, 1996, respectively, and 1,129,145 and
1,111,232 for the three months ended September 30, 1997 and September 30, 1996,
respectively. Fully diluted earnings per share were calculated based on
weighted average shares outstanding upon conversion of the limited partner
interests, or a total of 1,814,982 and 1,738,943 for the nine months ended
September 30, 1997 and September 30, 1996, respectively, and a total of
1,818,299 and 1,747,417 for the three months ended September 30, 1997 and
September 30, 1996, respectively.
2. COMPANY STRATEGY AND OPERATIONS
On August 20, 1997, the Company and the Operating Partnership entered
into agreements with a group of investors regarding certain transactions (the
"Transactions") which, if approved by the Company's stockholders and consummated
as contemplated by such agreements, will involve a change in control of the
Company and a complete change in the Company's business strategy. The
significant aspects of the Transactions include the following. The Company will
acquire from McBride Hudson Bay, L.P. and various entities affiliated with it
(collectively, "McBride") and Fair Lawn Industrial Park, Inc. ("FLIP") fifteen
properties owned by McBride or FLIP and $6.4 million in cash or, in lieu of such
cash, any properties acquired upon consummation of certain agreements (the
"Acquisition Agreements") to acquire real property (described below) by McBride
or FLIP prior to closing of the Transactions. McBride and its predecessors and
affiliates have been engaged in real estate development activity in Northern New
Jersey for over 40 years. The Company will issue to FLIP stockholders and
McBride an aggregate of 2,001,132 shares of common stock, par value $.001 per
share, of the Company ("Common Stock") and an aggregate of 2,998,867 units of
limited partnership interests of the Operating Partnership ("LP Units"),
representing an aggregate consideration of approximately $55.0 million, based on
the $11 per share or LP Unit price, and will assume approximately $56.8 million
in debt. No third party appraisal was obtained with respect to the valuation of
the fifteen properties owned by McBride or FLIP. As a result, the consideration
paid for such
8
<PAGE>
properties may exceed its fair market value. The Company will acquire the
Acquisition Agreements and a 95% non-voting equity interest in Penn Square
Properties, Inc. ("Penn Square"). Penn Square is a full service real estate
management, construction and brokerage company located in Philadelphia,
Pennsylvania. The Acquisition Agreements relate to seven commercial and
industrial properties located in Eastern Pennsylvania. In consideration for the
acquisition of Penn Square, the Company will issue to Mr. Jeffrey Kelter,
President and one of the principal shareholders of Penn Square, 363,636 LP
Units. No third party appraisal was obtained with respect to the valuation of
Penn Square. As a result, the consideration paid for Penn Square may exceed its
fair market value. The Company, in exchange for an aggregate investment of
approximately $21.6 million by Hudson Bay Partners, L.P. ("Hudson Bay") and
other investors, will issue an aggregate of 1,963,635 shares of Common Stock.
In addition, Hudson Bay will invest $2.0 million in McBride which will be
contributed to the Company. Hudson Bay is a discretionary investment fund
formed to make strategic investments in real estate and real estate related
securities. Upon the consummation of the Transactions, David F. McBride will
become Chairman of the Board and a director of the Company. In addition,
Timothy McBride, David Lesser and Robert Branson will be elected directors
joining James Mulvihill and Evan Zucker who will remain directors of the
Company.
Upon consummation of the Transactions, it is anticipated that the
Company's existing stockholders will hold approximately 21.4% of the shares of
Common Stock outstanding, assuming no LP Units are converted. Assuming all the
LP Units outstanding prior to consummation of the Transactions as well as those
issued concurrently with consummation of the Transactions are converted into
shares of Common Stock, the shares of Common Stock currently held by the
Company's stockholders would represent approximately 12.0% of the shares of
Common Stock then outstanding. Following the consummation of the Transactions,
there will be a change in the Company's operations from the ownership of multi-
family residential properties in the Southwestern states to the ownership of
office and industrial properties located in Northern New Jersey and Eastern
Pennsylvania. The Company intends to sell its remaining asset base of
multifamily properties and may reinvest all or part of the cash proceeds from
such sales in any future acquisitions or other corporate opportunities.
On August 29, 1997, pursuant to an agreement dated March 20, 1997
which was subsequently amended on July 1, 1997, the Company, through a limited
partnership of which a wholly owned subsidiary is the general partner and the
Operating Partnership is the sole limited partner, sold the 276 unit apartment
complex known as the Sedona Apartments, which was constructed in 1971 and is
located at 1039 South Parker Road in Denver, Colorado. The gross selling price
for the property was $9,150,000. The property was sold to an unaffiliated
entity.
On September 26, 1997, pursuant to the Mutual Release and Settlement
Agreement (the "Settlement Agreement") dated April 30, 1997, the Company,
through a limited partnership of which a wholly owned subsidiary is the general
partner and the Operating Partnership is the sole limited partner, sold to
Emerald Vista Associates, L.P. and certain affiliated entities, on exercise of
an option granted in the Settlement Agreement, the Company's 50% general partner
interest in Emerald Vista Associates, L.P., the owner of a 456 unit apartment
complex known as the Emerald Pointe apartments, which is located at 333 North
Emerald Drive, Vista, California in north San Diego county. The gross selling
price for the general partner interest was $2,000,000.
9
<PAGE>
3. SUBSEQUENT EVENTS
The Company filed a definitive Proxy Statement with the Securities and
Exchange Commission on November 12, 1997 pursuant to which a special meeting of
shareholders of record as of October 8, 1997 will be held on December 11, 1997
for purposes of voting on the Transactions and related actions.
The Company announced on November 14, 1997 that it had declared a cash
dividend of $.22 per share for the quarter ended September 30, 1997 payable on
December 9, 1997 to shareholders of record on November 25, 1997.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The following discussion should be read in conjunction with the
consolidated condensed financial statements of American Real Estate Investment
Corporation (the "Company"), including Notes to Consolidated Condensed Financial
Statements. The Company presently owns multifamily residential properties which
comprise an aggregate of 810 units.
RESULTS OF OPERATIONS
The following discussion of results of operations relates to the
consolidated operations of the Company for the nine months ended September 30,
1997 and September 30, 1996 and the three months ended September 30, 1997 and
September 30, 1996. Certain balances for the periods ended September 30, 1996
were reclassified for comparability to the current reporting classifications for
the same periods in 1997.
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
AND THREE MONTHS ENDED SEPTEMBER 30, 1996
Rents and fees revenues decreased from $7,404,880 for the nine months ended
September 30, 1996 to $5,560,580 for the same period in 1997 and from $2,487,705
for the three months ended September 30, 1996 to $1,642,334 for the same period
in 1997, primarily as a result of the sale of International apartments
("International") on December 20, 1996, the sale of Timberleaf apartments
("Timberleaf") on February 28, 1997 and the sale of Sedona apartments ("Sedona")
on August 29, 1997. Americana Lakewood apartments ("Americana") and Quadrangles
Village apartments "(Quadrangles"), the Company's two remaining properties as of
September 30, 1997, both experienced higher rents and fees revenues for the 1997
periods as a result of higher rental rates. In addition, lower vacancies
occurred at Americana for both 1997 periods, contributing to higher rents and
fees revenues in 1997.
Other income increased from $215,723 to $270,302 for the nine months ended
September 30, 1996 and September 30, 1997, respectively and from $71,909 to
$95,184 for the three months ended September 30, 1996 and September 30, 1997,
respectively, primarily as a result of interest earned on the net cash proceeds
from the sale of International, Timberleaf and Sedona. This increase was
partially offset by the sale of International, Timberleaf and Sedona.
Repairs and maintenance decreased from $539,744 to $363,744 for the nine
months ended September 30, 1996 and September 30, 1997, respectively, and from
$236,366 to $123,344 for the three months ended September 30, 1996 and September
30, 1997, respectively. Repairs and maintenance decreased in both periods
primarily as a result of the sale of International and Timberleaf. In addition,
lower repairs and maintenance expenses were incurred by Quadrangles for both
1997 periods as a result of certain capital improvements completed in 1996.
11
<PAGE>
Property taxes decreased to $259,277 and $81,084, respectively, for the
nine months ended September 30, 1997 and the three months ended September 30,
1997 from $323,910 and $112,120, respectively, for these same two periods in
1996. This decrease in property taxes from 1996 to 1997 was primarily due to
the sale of International, Timberleaf and Sedona. In addition, 1997 property
taxes decreased slightly for Quadrangles.
Property management fees decreased from $262,720 to $198,102 for the nine
months ended September 30, 1996 and September 30, 1997, respectively, and from
$87,267 for the three months ended September 30, 1996 to $59,665 for the three
months ended September 30, 1997 primarily due to the sale of International,
Timberleaf and Sedona.
Utilities decreased from $802,051 to $534,547, respectively, for the nine
months ended September 30, 1996 and September 30, 1997 and from $271,299 to
$132,339, respectively, for the three months ended September 30, 1996 and
September 30, 1997 primarily as a result of the sale of International,
Timberleaf and Sedona. The decreases were partially offset by higher utility
expenses for Quadrangles for both 1997 periods.
Payroll decreased to $455,009 for the nine months ended September 30, 1997
from $653,883 for the nine months ended September 30, 1996 and from $222,511 to
$142,469, respectively, for the three months ended September 30, 1996 and
September 30, 1997 as a result of the sale of International, Timberleaf and
Sedona. In addition payroll costs for Quadrangles were higher for the nine
months ended September 30, 1997, partially offsetting the decrease for this
period resulting from the sale of the Company's three properties.
Other property operations decreased for the nine months ended September 30,
from $730,154 in 1996 to $538,218 in 1997, while decreasing from $253,679 in
1996 to $173,243 in 1997 for the three months ended September 30, primarily due
to the sale of International, Timberleaf and Sedona. In addition, higher
advertising expenses were incurred by Americana for both 1997 periods to improve
and subsequently maintain occupancy levels and higher insurance expense was
incurred by Americana and Quadrangles for the three months ended September 30,
1997 as a result of the renewal of the Company's annual insurance policy in July
at higher premiums, both of which partially offset the decrease in other
property operations.
General and administrative expenses increased from $329,945 to $510,229 for
the nine months ended September 30, 1996 and September 30, 1997, respectively,
and from $45,577 to $99,204 for the three months ended September 30, 1996 and
September 30, 1997, respectively. The primary factors for the increases in 1997
expenses were the following: a bonus was earned by the Chairman of the Board
and accrued for the President and Treasurer in 1997; additional legal fees were
incurred by the Company in conjunction with the settlement of the lawsuit
relating to the Company's 50% general partner interest in Emerald Vista
Associates, L.P. ("Emerald Vista") in April 1997; and the Company paid its self
insurance retention for various
12
<PAGE>
incidents at Americana and Sedona, along with employee health insurance
expenses, in the 1997 periods.
Depreciation and amortization expense decreased from $981,183 for the nine
months ended September 30, 1996 to $768,814 for the nine months ended September
30, 1997 and for the three months ended September 30 from $328,923 in 1996 to
$233,440 in 1997. The decrease, which was primarily due to the sale of
International, Timberleaf and Sedona, was partially offset by the slightly
higher depreciation for Americana and Quadrangles associated with property
improvements.
Total financing expenses decreased from $2,931,078 to $2,403,823 for the
nine month periods ended September 30, 1996 and 1997, respectively, and from
$976,921 to $745,820 for the three months ended September 30, 1996 and September
30, 1997, respectively. The decrease in financing expenses resulted primarily
from the assumption by the buyer of the mortgage loan collateralized by
Timberleaf and the payoff of the mortgage loan collateralized by Sedona in
conjunction with the sale of these properties in February 1997 and August 1997,
respectively. The Company also restructured the mortgage note payable
collateralized by Americana originally funded on April 27, 1995 by General
Electric Capital Corporation ("GECC") whereby the interest rate was reduced by
130 basis points effective March 1, 1997.
Allocations of $1,987,574 to minority interest resulted from operations for
the nine months ended September 30, 1997 and for the three months ended
September 30, 1997. In accordance with the terms of the partnership agreement
of the Operating Partnership there were no allocations to minority interest
based on results of operations for the nine months ended September 30, 1996 and
the three months ended September 30, 1996.
Equity in earnings from investment in partnership was $436,627 and
$173,055, respectively, for the nine months ended September 30, 1997 and the
three months ended September 30, 1997 as compared to $363,466 and $121,177 for
the same two respective periods ended September 30, 1996. These amounts, which
increased in 1997 primarily due to improved operating results of Emerald Pointe
apartments during the third quarter of 1997, represent the Company's 50% general
partnership interest in the earnings of Emerald Vista.
Loss before gain on sale of properties was $(1,751,828) and $(1,867,609),
respectively, for the nine months ended September 30, 1997 and the three months
ended September 30, 1997 as compared to income before gain on sale of property
of $429,401 for the nine months ended September 30, 1996 and $146,128 for the
three months ended September 30, 1996. The loss for both periods in 1997 was due
primarily to the allocations to minority interest, in addition to the sale of
International, Timberleaf and Sedona.
Gain on sale of properties of $4,608,233 for the nine months ended
September 30, 1997
13
<PAGE>
related to the sale of Timberleaf for a gross sales price of $9,115,000 on
February 28, 1997, the sale of Sedona for a gross sales price of $9,150,000 on
August 29, 1997 and the sale of the Company's 50% general partner interest in
Emerald Vista for a price of $2,000,000 on September 26, 1997. Gain on sale of
properties of $4,205,307 for the three months ended September 30, 1997 related
to the sale of Sedona and the Company's interest in Emerald Vista. No property
sales occurred in either of the 1996 periods.
Net income of the Company was $2,856,405 and $2,337,698, respectively, for
the nine months ended September 30, 1997 and the three months ended September
30, 1997 compared to net income of $429,401 for the nine months ended September
30, 1996 and $146,128 for the three months ended September 30, 1996. The
increase in net income for the periods ended September 30, 1997 related
primarily to the gain on the sale of Timberleaf, Sedona and the Company's
interest in Emerald Vista. The net income increase was partially offset by the
allocation to minority interest and the reduction in net income resulting from
the sale of the Company's properties and partnership interest. The increase in
net income for the periods from 1996 to 1997 was also attributable to the
increased rents and fees revenues for Americana and Quadrangles and the reduced
interest expense relating to the mortgage loan collateralized by Americana.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the nine months ended September 30, 1997
were the sale of Timberleaf, Sedona and the Company's interest in Emerald Vista,
the new mortgage loan with GMAC collateralized by Sedona and the Company's cash
from operations. Principal cash outflows for the same nine month period were
repayment of the mortgage loan collateralized by Sedona, repayment (through
assumption by the buyer) of the mortgage loan collateralized by Timberleaf,
refinancing of the bank installment loan collateralized by Sedona, nonrecurring
transaction costs, dividends paid to holders of Common Stock (as defined below),
distributions to limited partners (i.e. minority interest distributions) and
interest payments.
On August 20, 1997, the Company and American Real Estate Investment, L.P.
(the "Operating Partnership"), of which the Company is the sole general partner,
entered into agreements with a group of investors (the "Investors") whereby, if
approved by the Company's stockholders, the Investors will contribute cash, real
estate properties and other assets to the Company and the Operating Partnership
and in exchange the Investors will receive shares of common stock, par value
$0.001 per share, of the Company ("Common Stock") and units of limited
partnership interest (the "LP Units") in the Operating Partnership, each valued
at $11.00 per share of Common Stock or LP Unit. See Note 2 in Notes to
Consolidated Condensed Financial Statements for further details of the
agreements. In the event stockholder approval is received and the transactions
contemplated by the agreements referred to above are
14
<PAGE>
consummated, the Company will receive cash in the gross amount of approximately
$30 million, before deductions for transaction related expenses incurred by the
Company and the Investors in conjunction with the agreements. The capitalized
nonrecurring transaction costs reflected in the Company's consolidated condensed
balance sheet as of September 30, 1997 relate to such agreements with the
Investors and are comprised primarily of legal fees, investment advisory and
consulting fees, fairness opinion fees and tax research and accounting fees
incurred by the Company in relation to the negotiation of the agreements, the
completion of due diligence procedures and the preparation and filing of
appropriate documents with the Securities and Exchange Commission. Additional
costs will be incurred to finalize the documents filed with the Securities and
Exchange Commission, obtain the requisite stockholder approval of the agreements
and close the various transactions contained in such agreements. Subject to the
completion of the Transactions, the Company intends to sell its remaining asset
base of multifamily properties and may reinvest all or part of the cash proceeds
from such sales in any future acquisitions or other corporate opportunities.
The proposed transactions described in the agreements are subject to the
approval of the Company's stockholders, among other closing conditions.
Management has no present plans for the Company to be operated other than as a
REIT.
In conjunction with the agreements executed with the Investors, the Company
recently entered into a listing agreement with a national brokerage firm
specializing in multifamily residential properties to market Americana and
Quadrangles for the potential sale of both properties. The marketing procedures
for Americana and Quadrangles are expected to be completed during the fourth
calendar quarter of 1997. The eventual sale of both properties is subject to
the receipt of an acceptable offer by the Company from an acceptable buyer and
the negotiation of an acceptable sales contract, the completion of due diligence
procedures and the fulfillment of stipulated closing conditions which will be
included in the formal sales contract. The sales price of Americana is expected
to be in excess of its net book value, which was approximately $7.7 million as
of September 30, 1997. Revenues for Americana were $1,634,135 and $554,443 for
the nine months ended September 30, 1997 and the three months ended September
30, 1997, respectively. Net income for Americana for the nine months ended
September 30, 1997 was $258,056 and net income for the three months ended
September 30, 1997 for Americana was $90,827. The sales price of Quadrangles is
expected to be in excess of its net book value, which was approximately $21.1
million as of September 30, 1997. Revenues for Quadrangles were $2,669,985 and
$873,003 for the nine months ended September 30, 1997 and the three months ended
September 30, 1997, respectively. Net income for Quadrangles was $474,373 and
$142,557, respectively, for the nine months ended September 30, 1997 and the
three months ended September 30, 1997.
The Company expects to meet its short term liquidity requirements generally
through its cash flow provided by operations supplemented by cash generated from
the sale of properties and, if the transactions contemplated by the agreements
referred to above are consummated, cash
15
<PAGE>
provided by such transactions. The Company believes that such cash will be
sufficient to meet operating requirements and to make dividend payments to
stockholders in accordance with REIT qualification requirements.
The Company had outstanding indebtedness of approximately $26,430,000 as of
September 30, 1997, representing two non-recourse mortgage notes payable.
One mortgage note payable, collateralized by Americana, which was
restructured effective March 1, 1997, bears interest at GECC's composite
commercial paper rate plus 2.45%, adjusted on a monthly basis, and matures on
April 30, 2000. The mortgage note payable requires monthly interest payments,
in addition to quarterly principal payments based on a stipulated percentage of
the excess cash flow, as defined, from Americana. The note cannot be prepaid
prior to March 1, 1998 unless such prepayment results from a sale of Americana
and after March 1, 1998 the note may be prepaid in full without penalty. The
note requires a balloon payment in the amount of the outstanding principal
balance on April 30, 2000, the maturity date. Proceeds from the GECC loan were
used to repay the previously existing first mortgage loan collateralized by
Americana and the bridge loan which was originally obtained from a related party
to provide a portion of the financing to acquire Quadrangles.
A non-recourse mortgage note payable, collateralized by Quadrangles, which
is a financing by the Department of Housing and Urban Development, bears
interest at 6.35% per annum payable monthly and matures in 2026. The note
cannot be prepaid prior to June, 2003 and thereafter contains a prepayment
penalty as follows: 2% from June, 2003 to May, 2004; 1% from June, 2004 to May,
2005; 0% thereafter. At maturity on May 1, 2026, the note will be fully
amortized.
On December 20, 1996, the Company sold its 150-unit International
apartments located in Aurora, Colorado for a purchase price of $3,050,000. On
February 28, 1997, the Company sold its 450-unit Timberleaf apartments located
in Aurora, Colorado for a purchase price of $9,115,000. As part of the
transaction, the buyer assumed the outstanding balance of the first mortgage
loan of approximately $6,363,000 collateralized by Timberleaf apartments. On
August 29, 1997 the Company sold its 276-unit Sedona apartments located in
Denver, Colorado for a gross purchase price of $9,150,000 and used a portion of
the sales proceeds to pay off the mortgage loan collateralized by Sedona. The
Company may apply all or part of the cash proceeds from the sale of
International, Timberleaf or Sedona or from any future property sales toward any
future acquisitions or other corporate opportunities.
On September 26, 1997, pursuant to the Mutual Release and Settlement
Agreement (the "Settlement Agreement") dated April 30, 1997, the Company,
through a limited partnership of which a wholly owned subsidiary is the general
partner and the Operating Partnership is the sole limited partner, sold to
Emerald Vista Associates, L.P. and certain affiliated entities, on exercise
16
<PAGE>
of an option granted in the Settlement Agreement, the Company's 50% general
partner interest in Emerald Vista Associates, L.P., the owner of a 456 unit
apartment complex known as the Emerald Pointe apartments, which is located at
333 North Emerald Drive, Vista, California in north San Diego county. The gross
selling price for the general partner interest was $2,000,000.
The Company has no material commitments for additional capital improvements
to its properties.
See the accompanying Consolidated Condensed Statements of Cash Flows
included in the financial statements for a reconciliation of cash for the
periods described therein.
THE YEAR 2000 ISSUE
Management does not anticipate that the Company will incur significant
operating expenses or be required to invest heavily in computer system
improvements to be year 2000 compliant.
FUNDS FROM OPERATIONS
Funds From Operations ("FFO"), which is a commonly used measurement of the
performance of an equity real estate investment trust ("REIT"), as defined by
the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), is
net income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect funds from
operations on the same basis. Management believes the presentation of FFO is a
useful disclosure as a general measurement of its performance in the real estate
industry, although the Company's FFO may not necessarily be comparable to
similarly titled measures of other REITs. NAREIT recently clarified the
application of its FFO definition and recommended the implementation of the new
application of its FFO definition no later than for fiscal periods beginning in
1996. The Company implemented the new application of the NAREIT FFO definition
in the first quarter of 1996 and all amounts shown conform to the new NAREIT
definition wherein amortization of loan costs aggregating $21,320 and $18,048,
respectively, have not been included in FFO for the three months ended September
30, 1997 and 1996. FFO does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs and should not
be considered as an alternative to net income as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity.
17
<PAGE>
The Company's FFO was $399,859 for the three months ended September 30,
1997 as compared to $544,349 for the three months ended September 30, 1996. The
decline in FFO in 1997 was primarily attributable to the sale of International,
Timberleaf and Sedona. FFO for the three months ended September 30, 1997 was
calculated by deducting the gain on sale of property of $4,205,307 and deducting
the Company's equity in earnings from investment in partnership (i.e. the
Company's unconsolidated investment in Emerald Vista) of $173,055 from net
income before minority interest of $4,325,272, and then adding depreciation and
amortization of $233,440 and adding the Company's FFO allocation from Emerald
Vista of $219,509. FFO for the three months ended September 30, 1996 was
calculated by deducting the Company's equity in earnings from investment in
partnership (i.e. the Company's unconsolidated investment in Emerald Vista) of
$121,177 from net income before minority interest of $146,128, adding
depreciation and amortization of $328,923, and then adding the Company's FFO
allocation from Emerald Vista of $190,475.
INFLATION
Substantially all of the leases at the Company's properties are for a term
of one year or less which may enable the Company to seek increased rents upon
renewal or reletting of apartment units. Such short-term leases generally
minimize the risk to the Company of the adverse effects of inflation.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included herein is
forward-looking, such as information set forth above in Management's Discussion
and Analysis or Plan of Operation. Such forward-looking information involves
important risks and uncertainties that could cause actual future results to
differ significantly form those expressed in any forward-looking statements made
by, or on behalf of, the Company or to render the Company unable to accomplish
its business objectives. These risks and uncertainties include, but are not
limited to, uncertainties relating to economic conditions, acquisitions,
development and divestitures of properties, operational and management changes,
possible rapid growth of the Company, geographic concentrations of real estate,
possible future tenant breaches of leases, and changes in the competitive
environment in which the Company and the Investors operate.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-QSB
10.1 Master Investment Agreement (the "Master Agreement") dated
August 20, 1997 by and among the Registrant, American Real Estate
Investment, L.P. (the "Operating Partnership"), and the McBride
Entities (as further identified in the Master Agreement), the
FLIP Shareholders (as further identified in the Master
Agreement), Jeffrey Kelter, Penn Square Properties, Inc. and
Hudson Bay Partners, L.P. (incorporated by reference to Exhibit
10.1 to the Company's Form 8-K/A dated August 20, 1997);
10.2 Stock Purchase Agreement dated August 20, 1997 between the
Registrant and Hudson Bay Partners, L.P. (incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K/A dated
August 20, 1997);
10.3 Management Contribution Agreement dated August 20, 1997
among the Registrant, the Operating Partnership, Jeffrey Kelter
and Penn Square Properties, Inc. (incorporated by reference to
Exhibit 10.3 to the Company's Form 8-K/A dated August 20, 1997);
10.4 McBride Contribution Agreement dated August 20, 1997 among
the Registrant, the Operating Partnership and the parties
identified on the signature page of the agreement (incorporated
by reference to Exhibit 10.4 to the Company's Form 8-K/A dated
August 20, 1997); and
10.5 Agreement and Plan of Merger dated August 20, 1997 among the
Registrant, Fair Lawn Industrial Park, Inc. and the parties
identified on the signature page of the agreement (incorporated
by reference to Exhibit 10.5 to the Company's Form 8-K/A dated
August 20, 1997).
(b) A Current Report on Form 8-K dated August 20, 1997 was filed in
response to Items 5 and 7 during the fiscal quarter ended
September 30, 1997
A Current Report on Form 8-K/A dated August 20, 1997 relating to
Form
19
<PAGE>
8-K dated August 20, 1997 was filed in response to Items 5 and 7
during the fiscal quarter ended September 30, 1997
A Current Report on Form 8-K/A dated August 25, 1997 relating to
Form 8-K dated February 28, 1997 was filed in response to Items 2
and 7 during the fiscal quarter ended September 30, 1997
A Current Report on Form 8-K dated August 29, 1997 was filed in
response to Items 2 and 7 during the fiscal quarter ended
September 30, 1997
A Current Report on Form 8-K dated September 26, 1997 was filed
in response to Items 2 and 7 on October 3, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN REAL ESTATE INVESTMENT CORPORATION
By: /s/ EVAN ZUCKER
____________________________________
Evan Zucker
President
By: /s/ RICK A. BURGER
____________________________________
Rick A. Burger
Treasurer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,246
<SECURITIES> 0
<RECEIVABLES> 42
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,895
<PP&E> 31,670
<DEPRECIATION> 2,828
<TOTAL-ASSETS> 39,738
<CURRENT-LIABILITIES> 1,919
<BONDS> 26,430
0
0
<COMMON> 1
<OTHER-SE> 6,814
<TOTAL-LIABILITY-AND-EQUITY> 39,738
<SALES> 0<F1>
<TOTAL-REVENUES> 5,831
<CGS> 0
<TOTAL-COSTS> 3,118
<OTHER-EXPENSES> 510<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,404
<INCOME-PRETAX> 2,856
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,856
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,856
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.54
<FN>
<F1>The Company's revenues relate primarily to income from rental property.
<F2>Other expenses reflects the Company's general and administrative expenses.
</FN>
</TABLE>
