<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): September 27, 1999
AMERICAN REAL ESTATE INVESTMENT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
- ------------------------------------------------------------------------------
Maryland 1-12514 84-1246585
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
- ------------------------------------------------------------------------------
620 W. Germantown Pike, Suite 200
Plymouth Meeting, Pennsylvania 19462
(Address of Principal Executive Offices) (Zip Code)
- ------------------------------------------------------------------------------
Registrant's telephone number, including area code:
(610) 834-7950
- ------------------------------------------------------------------------------
Page 1
<PAGE>
ITEM 2 . ACQUISITION OR DISPOSITION OF ASSETS.
On September 27, 1999, American Real Estate Investment
Corporation (the "Company") consummated its acquisition of
Reckson Morris Operating Partnership, L.P. ("RMOP") from
Reckson Morris Industrial Trust, Reckson Operating
Partnership, L.P., Robert Morris, Joseph D. Morris and
certain of their related entities (collectively, the "Morris
Contributors") pursuant to a Contribution and Exchange
Agreement (the "Contribution Agreement"), dated as of
August 6, 1999 which was filed as an exhibit to a Report on
Form 8-K dated August 6, 1999 filed by the Company on
August 20, 1999. Pursuant to the Contribution Agreement,
entities owning 28 "big box" industrial facilities will be
contributed in three stages to the Company in exchange for
approximately $300,000,000 in a combination of Preferred
Stock and Common Stock of the Company, Preferred Units of
the Company's Operating Partnership, American Real Estate
Investment, L.P. (the "Operating Partnership"), the assumption
of mortgage indebtedness and cash.
In the first stage, the Company acquired RMOP, which owns 22
warehouses comprising approximately 3.9 million square feet
and 105 acres of ground, which will accommodate an
additional 1.5 million square feet of development. The
total consideration for this stage was approximately $205
million, including closing costs, consisting of the
issuance to the Contributors of 103,878 shares of Common
Stock of the Company, 1.6 million shares of Series B
Convertible Preferred Stock of the Company, 1,434,136
Series C Convertible Preferred Units of limited partnership
interest in the Operating Partnership, the assumption of
approximately $16.4 million in assumed mortgage
indebtedness and approximately $105.5 million in cash. The
Company financed the cash portion of the consideration
through approximately $98 million of mortgage financing and
from part of the proceeds of a private placement of 800,000
shares of Series C Convertible Preferred Stock of the
Company to three institutional investors. None of the
securities issued to the Contributors were registered
under the Securities Act of 1933, as amended, and they may
not be sold in the United States absent registration or an
applicable exemption from registration. The Company has
agreed to grant the Contributors certain registration
rights with respect to Common Stock of the Company issued
in the transaction and Common Stock of the Company issued
upon conversion of the Series B Convertible Preferred Stock
of the Company and the Series C Convertible Preferred Units
of limited partnership interest in the Operating
Partnership.
In the second and third stages, we will acquire entities
each owning three buildings containing 1.1 million square
feet for a total of six buildings aggregating 2.2 million
square feet. The second and third stages are expected to
close early next year for a total consideration of
approximately $50 million and $48 million, respectively.
As part of this transaction, the Company entered into a
development agreement with Robert and Joseph Morris and
certain of their related entities pursuant to which the
Company and the Morrises will jointly develop all of the
Morris's New Jersey industrial investment opportunities for
three years and jointly develop the land to be acquired by the
Company in this transaction.
Page 2
<PAGE>
ITEM 5. OTHER EVENTS
As discussed in Item 2 above, the Company issued in a
private placement 800,000 shares of its Series C
Convertible Preferred Stock to AEW Targeted Securities
Fund, L.P., Allstate Insurance Company and Teachers
Insurance and Annuity Association of America (collectively,
the "Investors") for $20 million. AEW Targeted Securities
Fund, L.P. is currently a significant shareholder of the
Company. These shares were not registered under the
Securities Act of 1933, as amended, and may not be sold in
the United States absent registration or an applicable
exemption from registration. The Company has agreed to
grant the Investors certain registration rights set forth
in the registration rights agreements. The Series C
Convertible Preferred Shares have a conversion price of
$15.75, a distribution rate of 9.75% per annum and are
convertible at any time, at the Investors' option. The
liquidation preference of each share of Series C
Convertible Preferred Stock is $25.00. The Company may
redeem the Series C Convertible Preferred Stock at any time
on or after the fifth anniversary of the issuance of the
Series C Convertible Preferred Stock. The net proceeds of
approximately $19.0 million from the sale were used to
finance a portion of the first stage of the transaction
discussed in Item 2 above and for working capital.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
The audited statements of revenue and certain operating
expenses of the Reckson Morris Industrial Portfolio, BMG
Property, and the Polyfoam Properties for the year ended
December 31, 1998 and for the six month period ended
June 30, 1999 (unaudited) are included on pages F-24 to
F-34.
(b) PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma condensed consolidating financial
information which reflects the Company's acquisitions of the
Reckson Morris Industrial Portfolio, BMG Property, and the
Polyfoam Properties as of and for the six month period ended
June 30, 1999 and for the year ended December 31, 1998 are
included on pages F-1 to F-23.
Page 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN REAL ESTATE INVESTMENT
CORPORATION
Date: October 12, 1999 By /s/ Jeffrey E. Kelter
---------------------
Jeffrey E. Kelter
President and Chief Executive Officer
Date: October 12, 1999 By /s/ Timothy A. Peterson
-----------------------
Timothy A. Peterson
Executive Vice President, Chief Financial
Officer and Secretary
Date: October 12, 1999 By /s/ Timothy E. McKenna
----------------------
Timothy E. McKenna
Treasurer, Senior Vice President Finance
and Corporate Controller (Principal
Accounting Officer)
Page 4
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
INDEX
<TABLE>
<S> <C> <C>
I. UNAUDITED PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION
o Pro Forma Condensed Consolidating Balance Sheet as of June 30, 1999..........F-3
o Pro Forma Condensed Consolidating Statement of Operations for the
Six-month period ended June 30, 1999.........................................F-4
o Pro Forma Condensed Consolidating Statement of Operations for the
year ended December 31, 1998.................................................F-6
o Notes to Management's Assumptions to Unaudited Pro Forma Condensed
Consolidating Financial Information..........................................F-8
II. RECKSON MORRIS INDUSTRIAL PORTFOLIO
o Report of Independent Public Accountants.....................................F-24
o Combined Statement of Revenue and Certain Expenses for the six month period
ended June 30, 1999 (unaudited) and year ended December 31, 1998.............F-25
o Notes to Combined Statement of Revenue and Certain Expenses..................F-26
III. BMG Property
o Report of Independent Public Accountants.....................................F-29
o Combined Statement of Revenue and Certain Expenses for the six month period
ended June 30, 1999 (unaudited) and year ended December 31, 1998.............F-30
o Notes to Combined Statement of Revenue and Certain Expenses..................F-31
IV. Polyfoam Properties
o Report of Independent Public Accountants.....................................F-32
o Combined Statement of Revenue and Certain Expenses for the six month period
ended June 30, 1999 (unaudited) and year ended December 31, 1998.............F-33
o Notes to Combined Statement of Revenue and Certain Expenses..................F-34
</TABLE>
Page 5
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------
The following sets forth the unaudited pro forma condensed consolidating
balance sheet at June 30, 1999 and the unaudited pro forma condensed
consolidating statements of operations for American Real Estate Investment
Corporation (the "Company") for the six months ended June 30, 1999 and the
year ended December 31, 1998.
The pro forma condensed consolidating financial information should be read
in conjunction with the historical financial statements of the Company and
those acquisitions deemed significant pursuant to the rules and regulations
of the Securities and Exchange Commission.
The unaudited pro forma consolidating financial information is presented as
if the following events occurred on June 30, 1999 for balance sheet purposes
and on January 1, 1998 for purposes of the statements of operations:
- - The Company acquired the properties described in Note 1 to these
pro forma financial statements.
- - The Quadrangles Village Apartments and Americana Lakewood
Apartments dispositions. On June 24, 1998, the Company sold
Quadrangles Village Apartments, a 510-unit apartment building
located in Tempe, Arizona for approximately $26,500,000. On January
9, 1998, the Company consummated the sale of a 300-unit
multi-family residential property known as Americana Lakewood
Apartments located in the metropolitan Denver area for a gross
sales price of $15,066,000.
- - The Company's private placement on July 9, 1998 of 1,092,051 shares
of Common Stock with certain institutional investors for
approximately $18,000,000 and the use of net proceeds of
$17,440,000 to repay indebtedness under the Company's credit
facility.
- - The Company's private placement on August 19, 1998 of 720,743
shares of its Common Stock for an aggregate purchase price of
$11,400,000 were issued to the New York State Common Retirement
Fund as partial repayment of certain indebtedness encumbering
certain properties in the Pioneer Portfolio.
- - The Company's private placement on December 24, 1998 of 800,000
shares of its Series A Convertible Preferred Stock to AEW Targeted
Securities Fund, L.P. ("AEW") for net proceeds of approximately
$19,500,000 was used to repay outstanding indebtedness. The
Convertible Preferred Shares have a conversion price of $16.50, a
distribution rate of 9% per annum and are convertible at any time,
at AEW's option. The liquidation preference of each Convertible
Preferred Share is $25.00. The Company may redeem the Convertible
Preferred Shares at any time on or after December 15, 2003.
- - The Company acquired 22 industrial properties included in Stage I
of the Reckson Morris Industrial Portfolio which contain an
approximately 3.9 million square feet pursuant to the Contribution
Agreement, dated as of August 6, 1999. In addition, as part of
Stage I of the transaction, the Company will also acquire 105 acres
of land located in Mercer County, New Jersey. The purchase price
associated with Stage I of the transaction is approximately $205
million including estimated closing costs. In accordance with the
terms of the Contribution Agreement, these properties and land were
contributed to the Company in exchange for the following:
o The issuance of approximately $35.9 million in stated value of
the Company's 9.75% Series C Convertible Preferred Units (the
"Series C Preferred Units") to the Morris Contributors.
F-1
<PAGE>
Each of the 1,434,136 Series C Preferred Units has a stated
value of $25 and is convertible into shares of the Company's
Common Stock at the option of the holder at a conversion price
of $16.
o The issuance of $40.0 million in stated value of the Company's
9.75% Series B Convertible Preferred Stock (the "Series B
Preferred Stock") will be issued to RMIT. Each of the 1,600,000
shares of Series B Preferred Stock has a stated value of $25 and
is convertible into shares of the Company's Common Stock at the
option of the holder at a conversion price of $16.
o The issuance of 103,878 in shares of Common Stock to RMIT for an
aggregate price of $1.5 million.
o The assumption of $16.4 million of existing mortgage notes with
interest rates ranging from 7.00% to 7.50% and maturities
ranging from 2002 to 2007, respectively, related to the 309 and
409 Kennedy Drive properties and certain parcels contained in
the 105 acres of land included in Stage I.
o Approximately $105.5 million in cash, which will be funded from
proceeds of the following:
- a $98 million mortgage note from an institutional lender with
a six year term and a fixed rate of 7.45%
- the issuance of $20 million of the Company's 9.75% Series C
Convertible Preferred Stock (the "Series C Preferred Stock") to
the Investors. Each of the 800,000 shares of Series "C"
Preferred Stock has a stated value of $25 and is convertible
into shares of the Company's Common Stock at the option of the
holder at a conversion price of $15.75.
The acquisition transactions described in Note 1 to these pro forma financial
statements were accounted for in the pro forma financial statements using the
purchase method of accounting.
F-2
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET--AS OF JUNE 30, 1999
--------------------------------------------------------------------
(Unaudited--in thousands, except share and per share data)
<TABLE>
<CAPTION>
The
Company Property Pro Forma The Company
Historical Acquisitions (A) Adjustments Pro Forma
---------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in real estate, net $ 550,140 $ 236,260 $ $ 786,400
Investment in direct financing lease 1,584 1,584
Investment in management company 4,329 4,329
Cash and cash equivalents 1,791 (968) 823
Restricted cash 3,628 3,628
Accounts and other receivables 3,747 3,747
Other assets, net 10,982 10,982
----------- ----------- --------- ---------
Total assets $ 576,201 $ 235,292 $ --- $ 811,493
=========== =========== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable and other debt $ 361,297 $ 125,621 $ $ 486,918
Accrued expenses and other liabilities 12,386 2,000 14,386
Minority interest 88,185 191 (B) 88,376
Convertible Preferred Units 7,500 47,121 54,621
Shareholders' equity:
Preferred Stock 1 2 3
Common stock 8 8
Warrants 685 685
Additional paid-in capital 104,272 60,548 (191)(B) 164,629
Cumulative net income 17,912 17,912
Cumulative dividends (16,045) (16,045)
----------- ----------- --------- ----------
Total shareholders' equity 106,833 60,550 (191) 167,192
---------- ----------- --------- ----------
Total liabilities and shareholders' equity $ 576,201 $ 235,292 $ --- $ 811,493
========== =========== ========= ==========
</TABLE>
F-3
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
---------------------------------------------------------
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
---------------------------------------------
(Unaudited--in thousands, except Share and Per Share Data)
<TABLE>
<CAPTION>
1999 Property Acquisitions
The ----------------------------
Company 1999 The Company, Historical Pro Forma The Company
Historical Dispositions (a) As Adjusted Operations (b) Adjustments Pro Forma
---------- ---------------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Minimum rent $ 32,976 $ (276) $ 32,700 $ 11,643 $ --- $ 44,343
Tenant reimbursements and other
income 3,506 (51) 3,455 1,779 --- 5,234
--------- --------- ---------- ----------- -------- -----------
Total revenue 36,482 (327) 36,155 13,422 49,577
OPERATING EXPENSES:
Property operating expenses 7,581 (152) 7,429 2,788 (110)(c) 10,107
General and administrative 1,611 --- 1,611 --- 41(d) 1,652
Interest 13,148 --- 13,148 --- 4,660(c) 17,808
Depreciation 6,879 --- 6,879 --- 2,862(c) 9,741
--------- ---------- ------------ ----------- -------- -----------
Total operating expenses 29,219 (152) 29,067 2,788 7,453 39,308
INCOME (LOSS) BEFORE EQUITY IN
LOSSES FROM INVESTMENT IN
MANAGEMENT COMPANY, GAINS
ON SALES OF ASSETS, DISTRIBUTIONS
TO PREFERRED UNITHOLDERS,
MINORITY INTEREST, AND INCOME
ALLOCATED PREFERRED SHARES 7,263 (175) 7,088 10,634 (7,453) 10,269
EQUITY IN LOSSES FROM INVESTMENT IN
MANAGEMENT COMPANY (490) -- (490) --- --- (490)
GAINS ON SALE OF ASSETS 1,284 (1,284) --- --- --- ---
--------- --------- ---------- ----------- -------- -----------
</TABLE>
(Continued)
F-4
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
---------------------------------------------------------
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
---------------------------------------------
(CONTINUED)
-----------
(Unaudited--in thousands, except Share and Per Share Data)
<TABLE>
<CAPTION>
1999 Property Acquisitions
The ----------------------------
Company 1999 The Company, Historical Pro Forma The Company
Historical Dispositions (a) As Adjusted Operations (b) Adjustments Pro Forma
---------- ---------------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCOME (LOSS) BEFORE DISTRIBUTIONS
TO PREFERRED UNITHOLDERS,
MINORITY INTEREST AND INCOME
ALLOCATED TO PREFERRED SHARES 8,057 (1,459) 6,598 10,634 (7,453) 9,779
DISTRIBUTIONS TO PREFERRED
UNITHOLDERS (337) --- (337) --- (2,242)(e) (2,579)
---------- --------- ----------- ------- --------- ------------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND INCOME ALLOCATED TO
PREFERRED SHARES 7,720 (1,459) 6,261 10,634 (9,695) 7,200
MINORITY INTEREST (3,200) --- (3,200) --- 1,644 (f) (1,556)
---------- --------- ----------- ------- -------- ------------
NET INCOME (LOSS) 4,520 (1,459) 3,061 10,634 (8,051) 5,644
INCOME ALLOCATED TO PREFERRED SHARES (900) --- (900) --- (2,925)(g) (3,825)
---------- --------- ----------- ------- --------- ------------
INCOME ALLOCATED TO COMMON SHARES $ 3,620 $ (1,459) $ 2,161 $10,634 $(10,976) $ 1,819
========= ========= ========== ======= ========= ===========
BASIC EARNINGS PER COMMON SHARE $ .49 $ .24
========= ===========
DILUTED EARNINGS PER COMMON SHARES $ .47 $ .23
========= ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING-BASIC 7,432,909 7,536,787
========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 14,588,622 14,722,244
========== ==========
</TABLE>
F-5
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
---------------------------------------------------------
FOR YEAR ENDED DECEMBER 31, 1998
--------------------------------
(Unaudited -in thousands, except Share and Per Share Data)
<TABLE>
<CAPTION>
1998 Events
------------------------------
The Company Historical Pro Forma
Historical Operations(a) Adjustments Subtotal
----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
REVENUE:
Minimum rent $ 36,332 $ 26,477 $ 1,688(b) $ 64,497
Tenant reimbursements and other
income 4,696 2,441 --- 7,137
--------- --------- -------- --------
Total revenue 41,028 28,918 1,688 71,634
OPERATING EXPENSES:
Property operating expenses 8,814 6,112 22(b) 14,948
General and administrative 869 --- 869
Interest 14,539 --- 11,549(b) 26,088
Depreciation and amortization 6,911 --- 5,654(b) 12,565
--------- --------- -------- --------
Total operating expenses 31,133 6,112 17,225 54,470
INCOME (LOSS) BEFORE EQUITY IN
LOSSES FROM INVESTMENT IN MANAGEMENT
COMPANY, GAINS ON SALES OF ASSETS,
DISTRIBUTIONS TO PREFERRED UNITHOLDERS,
MINORITY INTEREST, AND INCOME ALLOCATED
PREFERRED SHARES 9,895 22,806 (15,537) 17,164
EQUITY IN INCOME LOSSES FROM
INVESTMENT IN MANAGEMENT
COMPANY (1,167) --- --- (1,167)
GAINS ON SALES OF ASSETS 11,952 (11,952) ---
--------- --------- -------- --------
INCOME (LOSS) BEFORE
DISTRIBUTIONS TO PREFERRED
UNITHOLDERS AND MINORITY
INTEREST 20,680 10,854 (15,537) 15,997
DISTRIBUTIONS TO PREFERRED
UNITHOLDERS (15) --- (660)(c) (675)
</TABLE>
<TABLE>
<CAPTION>
1999 Events
--------------------------
Historical Pro Forma The Company
Operations(e) Adjustments Pro Forma
------------- ----------- ------------
<S> <C> <C> <C>
REVENUE:
Minimum rent $ 18,562 479(f) $ 83,538
Tenant reimbursements and other
income 3,068 632(f) 10,837
--------- -------- ---------
Total revenue 21,630 1,111 94,375
OPERATING EXPENSES:
Property operating expenses 4,749 (208)(f) 19,489
General and administrative --- 165 (g) 1,034
Interest --- 5,588 (f) 31,676
Depreciation and amortization (194) 5,949 (f) 18,320
--------- -------- -----------
Total operating expenses 4,555 11,494 70,519
INCOME (LOSS) BEFORE EQUITY IN
LOSSES FROM INVESTMENT IN MANAGEMENT
COMPANY, GAINS ON SALES OF ASSETS,
DISTRIBUTIONS TO PREFERRED UNITHOLDERS,
MINORITY INTEREST, AND INCOME ALLOCATED
PREFERRED SHARES 17,075 (10,383) 23,856
EQUITY IN INCOME LOSSES FROM
INVESTMENT IN MANAGEMENT
COMPANY --- (1,842) (3,009)
GAINS ON SALES OF ASSETS --- --- ---
----------- -------- -----------
INCOME (LOSS) BEFORE
DISTRIBUTIONS TO PREFERRED
UNITHOLDERS AND MINORITY
INTEREST 17,075 (12,225) 20,847
DISTRIBUTIONS TO PREFERRED
UNITHOLDERS --- (4,483)(h) (5,158)
</TABLE>
F-6
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
--------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
---------------------------------------------------------
FOR YEAR ENDED DECEMBER 31, 1998
--------------------------------
(Continued)
(Unaudited -in thousands, except Share and Per Share Data)
<TABLE>
<CAPTION>
1998 Events
-----------------------------
The Company Historical Pro Forma
Historical Operations (a) Adjustments Subtotal
----------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME ALLOCATED TO PREFERRED
SHARES $ 20,665 $ 10,854 $ (16,197) $ 15,322
MINORITY INTEREST (9,452) --- --- (9,452)
----------- ------------ ---------- ----------
NET INCOME (LOSS) 11,213 10,854 (16,197) 5,870
INCOME LOSS ALLOCATED TO
PREFERRED SHARES (40) --- (1,760)(d) (1,800)
----------- ------------ ---------- ----------
INCOME ALLOCATED TO
COMMON SHARES $ 11,173 $ 10,854 $ (17,957) $ 4,070
=========== ============ ========== ==========
BASIC EARNINGS PER COMMON
SHARE $ 1.51
===========
DILUTED EARNINGS PER COMMON
SHARE $ 1.41
===========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 7,391,765
===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 14,667,523
===========
</TABLE>
<TABLE>
<CAPTION>
1999 Events
-----------------------------
Historical Pro Forma The Company
Operations (e) Adjustments Pro Forma
------------- ----------- -------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME ALLOCATED TO PREFERRED
SHARES $ 17,075 $(16,708) $ 15,689
MINORITY INTEREST --- 5,746 (i) (3,706)
----------- -------- -----------
NET INCOME (LOSS) 17,075 (10,962) 11,983
INCOME LOSS ALLOCATED TO
PREFERRED SHARES --- (5,850)(j) (7,650)
----------- --------- -----------
INCOME ALLOCATED TO
COMMON SHARES $ 17,075 $(16,812) $ 4,333
=========== ========= ===========
BASIC EARNINGS PER COMMON
SHARE $ .58
===========
DILUTED EARNINGS PER COMMON
SHARE $ .54
===========
WEIGHTED AVERAGE SHARES
OUTSTANDING - BASIC 7,495,643
===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 14,761,339
===========
</TABLE>
F-7
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
---------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
---------------------------------------------
1. BASIS OF PRESENTATION
American Real Estate Investment Corporation (the "Company") is a
self-administered and self-managed equity real estate investment trust
which was organized in the state of Maryland. As of October 4, 1999,
the Company owned 95 industrial and 34 office properties aggregating
14.8 million and 2.4 million square feet, respectively and an
investment in a direct financing lease. The Company is the sole general
partner of the American Real Estate Investment, L.P. (the "Operating
Partnership") and as of June 30, 1999 owned approximately 53% of the
Operating Partnership.
These pro forma financial statements should be read in conjunction
with the historical financial statements and notes thereto of the
Company, 101 Commerce Drive, the GATX Properties, the Double M
Development Properties, the Galesi Properties, the Fed One
Industrial Portfolio, the ASW Property, the Szeles Portfolio, the
Pioneer Portfolio, the Chambersburg Properties, the Browning
Investments Portfolio, the Brashier Portfolio, the Reckson Morris
Industrial Portfolio, BMG Property, and the Polyfoam Properties. In
management's opinion, all adjustments necessary to reflect the
acquisitions of the 101 Commerce Drive, the GATX Properties, the
Double M Development Properties, the Galesi Properties, the Fed One
Industrial Portfolio, the ASW Property, the Szeles Portfolio, the
Pioneer Portfolio, the Chambersburg Properties, the Browning
Investments Portfolio, the Brashier Portfolio, the Reckson Morris
Industrial Portfolio, BMG Property, the Polyfoam Properties, the
October 1998 debt refinancing, and the private placements
consummated in 1998 by the Company have been made. The operating
results reflected herein include the historical results and related
pro forma adjustments to reflect the period January 1, 1998, through
the earlier of the respective acquisition date or June 30, 1999 or
December 31, 1998. Operating results from those dates forward are
included in the historical results of the Company.
2. ADJUSTMENTS TO PRO FORMA CONSOLIDATING BALANCE SHEET AT JUNE 30, 1999
(A) Reflects the Company's recent property acquisitions as follows (in 000's):
<TABLE>
<CAPTION>
Cost Consideration
---------- ---------------------------------------------------------------------------------------
Total Accrued Convertible Additional
Purchase Mortgage And other Preferred Preferred Common Paid in
Acquisition Price Debt Liabilities Units Stock Stock Capital Cash
- ----------- ----- ---- ----------- ----- ----- ----- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One Park Place $ 22,661 $ 11,193 $ --- $ 11,268 $ --- $ --- $ --- $ (200)
Polyfoam Properties
Stage II 8,500 --- --- --- --- --- --- (8,500)
Reckson Morris
Industrial Portfolio
Stage I 205,099 114,428 2,000(ii) 35,853 2 --- 60,548(i) 7,732
--------- --------- --------- --------- ---------- ------- --------- ---------
$ 236,260 $ 125,621 $ 2,000 $ 47,121 $ 2 $ --- $ 60,548 $ (968)
========= ========= ========= ========= ========== ======= ========== =========
</TABLE>
(i) Net of costs of equity issuance of $950,000.
(ii) Consists of the Company's estimate of required capital improvements to
these buildings as of acquisition date and other costs associated with
the transaction.
F-8
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
---------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
---------------------------------------------
(B) Adjustment to reflect the Company's 53.9% ownership of the Operating
Partnership after the consummation of the 1999 acquisitions and various
private placements.
3. ADJUSTMENTS TO PROFORMA CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
(a) 1999 DISPOSITIONS
On March 26, 1999, the Company sold the Urban Farms Shopping Center
in Franklin Lakes, New Jersey. This 90,000 square foot retail
facility was sold for approximately $10,000,000, and generated a
gain of $1,284,000. Proforma adjustments reflect the disposition of
this asset and the related gain on sale.
F-9
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
-------------------------------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
---------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
---------------------------------------------
(b) 1999 EVENTS - HISTORICAL OPERATIONS:
Reflects the historical operations of the BMG Property, Polyfoam
Properties-Stages I and II, 10th Street-Office Works Building, One
Park Place, and the Reckson Morris Industrial Portfolio through the
earlier of the respective acquisition dates, or June 30, 1999.
Operating results from those dates forward are included in the
historical results of the Company.
<TABLE>
<CAPTION>
(In 000's)
-------------------------------------------------------------------------
REVENUE OPERATING EXPENSES
------------------------------------------- --------------------------
Tenant
Reimbursements Property
Minimum and Operating And
ACQUISITION Rent Other Income Total Other Expenses Subtotal
----------- ----------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
BMG Property $ 103 $ 3 $ 106 $ 4 $ 102
Polyfoam Properties-Stage I 500 2 502 160 342
and II
10th Street-Office Works 104 -- 104 4 100
Building
One Park Place 2,076 372 2,448 894 1,554
Reckson Morris Industrial 8,860 1,402 10,262 1,726 8,536
----------- ----------- ----------- ---------- ----------
Portfolio
TOTAL $ 11,643 $ 1,779 $ 13,422 $ 2,788 $ 10,634
=========== =========== =========== ========== ==========
</TABLE>
F-10
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
(c) 1999 PROFORMA ADJUSTMENTS:
Reflects the Company's pro forma adjustments relative to the acquisitions of
the BMG Property, Polyfoam Properties-Stage I and II, 10th Street-Office
Works Building, One Park Place, and the Reckson Morris Industrial Portfolio
for the six months ended June 30, 1999.
<TABLE>
<CAPTION>
(In 000's)
--------------------------------------------------------------------------------------------
REVENUE OPERATING EXPENSES
-------------------------------------------- --------------------------------------------
Tenant Depreciation
Reimbursements Property and
and Operating And Interest Amortization
ACQUISITION Minimum Rent Other Income Total Other Expenses Expense (i) (ii) Total
------------ ------------ ----- -------------- ----------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BMG Property $ $ $ $ $ 90 $ 56 $ 146
Polyfoam Properties-
Stage I and II 217 176 393
10th Street- Office
Works Building 77 37 114
One Park Place 453 249 702
Reckson Morris
Industrial
Portfolio (110)(iii) 3,907 2,344 6,141
Urban Farms (iv) (84) --- (84)
---------- ----------- ---------- --------- -------- ---------- -----------
$ $ $ $ (110) $ 4,660 $ 2,862 $ 7,412
========== =========== ========== ========== ======= ========== ==========
</TABLE>
Footnote explanations appear on the following page.
F-11
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
Footnotes to 1999 Pro Forma Adjustments:
(i) Proforma interest expense is presented assuming an effective
rate of 6.56% on borrowings under the Company's $150 million
revolving credit facility (the "Credit Facility"), and
interest rates on assumed mortgage debt from the BMG Property,
Polyfoam Properties-Stage I and II, 10th Street-Office Works
Building, One Park Place and Reckson Morris Industrial
Portfolio acquisitions ranging from 6.88% to 8.75%
(ii) Proforma depreciation expense is presented assuming a
useful life of 35 years.
(iii) Adjustment to property operating expenses are recorded to
reflect a reduction in management fees to the actual
management fee levels to be changed as a result of the
Company's acquisition. Interest expense is shown net of
interest of $360,000 capitalized on land under development.
(iv) Proforma interest savings from the sale of Urban Farm Shopping
Center on March 26, 1999. Approximately $5.5 million of
proceeds were utilized to repay Credit Facility borrowings
which this property had secured.
F-12
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
(d) To reflect additional general and administrative expense
associated with the Company's on-going management of the
acquired properties.
(e) To reflect the preferred distributions on 1,434,136 Series
C Preferred Units issued as partial consideration in the
acquisition of the Reckson Morris Industrial Portfolio.
These preferred units have an aggregate liquidation value
of approximately $35.9 million and are entitled to a 9.75%
preferred return. Also reflected is the preferred
distribution for 450,700 Series D Convertible Preferred
Units issued as partial consideration in the acquisition of
One Park Place. These preferred units have an aggregate
liquidation value of approximately $11.3 million and are
entitled to a 9.0% preferred return.
(f) To adjust the minority interest's share of income in the
Operating Partnership. The Company owns approximately 53.9%
of the Operating Partnership after the consummation of
Stage I of the Reckson Morris Industrial Portfolio
transaction. The adjustment to record the income effect of
the minority interest share for the six months ended June
30, 1999 in the pro forma statement of operations was
computed as follows:
<TABLE>
<S> <C>
Proforma Revenue $ 49,577
Proforma Operating Expenses (39,308)
Proforma Preferred Dividends and Distributions (6,404)
Proforma Equity in Loss from Equity Investment (490)
-----------------
Proforma Income before Minority Interest $ 3,375
=================
Minority Interest (46.1%) $ 1,556
Minority Interest at June 30, 1999 3,200
-----------------
Adjustment Required $ 1,644
=================
</TABLE>
F-13
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
(g) To reflect the income allocated to:
- the 1,600,000 shares of Series B Preferred Stock
issued as partial consideration in the acquisition of
the Reckson Morris Industrial Portfolio. These
Convertible Preferred shares have a liquidation value
of $40,000,000, and are entitled to a preferred
dividend at a rate equal to 9.75%.
- the 800,000 shares of Series C Preferred Stock issued
to the Investors. These Convertible Preferred shares
have a liquidation value of $20,000,000 and entitled
to a preferred dividend equal to 9.75%.
F-14
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
4. ADJUSTMENTS TO PROFORMA CONDENSED CONSOLIDATING STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
(a) 1998 EVENTS - HISTORICAL OPERATIONS;
Reflects historical statements of operations of 101
Commerce Drive, One Phillips Drive, Americana Lakewood
Apartments, GATX Properties, Double M Development
Properties, The Galesi Properties, Fed One Properties, 6
British American Boulevard, Marway Circle, Szeles
Portfolio, Pioneer Portfolio, Chambersburg Properties,
Browning Investments Portfolio, and the Brashier Portfolio.
The historical statements reflected below include the
operating results for the period January 1, 1998 through
the earlier of the respective acquisition dates or December
31, 1998. Operating results from those dates forward are
included in the historical results of the Company.
<TABLE>
<CAPTION>
(In 000's)
---------------------------------------------------------------------------------------
OPERATING
REVENUE EXPENSES
----------------------------------------------- ------------------
Tenant
Reimbursements Property
and Operating And Gains on Sales
ACQUISITION/DISPOSITION Minimum Rent Other Income Total Other Expenses of Properties
------------- ------------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
101 Commerce Drive $ 61 $ -- $ 61 $ $
One Phillips Drive 26 3 29 3
Americana Lakewood Apartments - Sale (44) (45) (89) (53) 6,852
GATX Properties 423 423
Double M Development Properties 350 78 428 109
The Galesi Properties 1,880 565 2,445 651
Quadrangles Village Apartments - Sale (1,636) (107) (1,743) (636) 5,100
Fed One Properties 852 8 860 42
6 British American Boulevard 209 91 300 90
Marway Circle 268 268 20
Szeles Portfolio 3,674 44 3,718 1,157
ASW Facility 477 5 482 43
Pioneer Portfolio 7,630 932 8,562 2,647
Chambersburg Properties 3,438 151 3,589 880
Browning Portfolio 3,161 545 3,706 532
Brashier Portfolio 5,708 171 5,879 627
---------- ----------- ---------- ----------- ------------
$ 26,477 $ 2,441 $ 28,918 $ 6,112 $ 11,952
========== =========== ========== =========== ============
</TABLE>
F-15
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
(b) PRO FORMA ADJUSTMENTS FOR 1998 EVENTS
Reflect the Company's pro forma adjustments relative to the acquisitions of
101 Commerce Drive, One Phillips Drive,GATX Properties, Double M Development
Properties, The Galesi Properties, , Fed One Properties, 6 British American
Boulevard, Marway Circle, the ASW Facility, Szeles Portfolio, Pioneer
Properties, Chambersburg Properties, Browning Investments Portfolio and the
Brashier Portfolio and the disposition of Americana Lakewood Apartments and
Quadrangles Village Apartments during the year ended December 31, 1998 and
including pro forma adjustments to reflect the July 9, 1998 Private
Placement, the August 19, 1998 Private Placement, the October 1998 debt
re-financing of a portion of the Credit Facility with term debt provided by
Column Financial, Inc. ,the AEW Preferred Stock Private Placement, and the
Brashier Preferred Unit transaction for the year ended December 31, 1998. The
pro forma adjustments below reflect the period January 1, 1998 through the
earlier of the respective acquisition dates or December 31, 1998. Operating
results from those dates forward are included in the historical results of
the Company.
<TABLE>
<CAPTION>
(In 000's)
-------------------------------------------------------------------
REVENUE OPERATING EXPENSES
--------------- ------------------------------------------------
Depreciation
Property and
ACQUISITION/DISPOSITION/ Operating And Interest Amortization
OFFERING Minimum Rent Other Expenses Expense (i) (ii)
--------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
101 Commerce Drive $ $ $ 26 $ 13
One Phillips Drive 12 6
Americana Lakewood Apartments - Sale (23)
GATX Properties 155 71
Double M Development Properties 159 79
The Galesi Properties 1,018 450
Quadrangles Village Apartments - Sale (531)
Fed One Properties 435 134
6 British American Boulevard 137 42
Marway Circle 140 45
Szeles Portfolio 1,311 559
ASW Facility 327 105
Pioneer Portfolio 3,333 1,346
Chambersburg Properties (iii) 1,688 22 3,002 932
Browning Portfolio 1,461 735
July 9, 1999 Private Placement (iv) (663)
August 19, 1998 - Private Placement (iv) (630)
Brashier Portfolio 1,846 1,137
Column Financial, Inc. Term Debt Financing (v) 498
Amortization of Debt Premiums (v) (464)
---------- ----------- ----------- -----------
$ 1,688 $ 22 $ 11,549 $ 5,654
========== =========== =========== ===========
</TABLE>
(Footnote explanations appear on next page.)
F-16
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
Footnotes:
(i) Pro forma interest expense is presented assuming an effective rate
of 7.39% on borrowings under the Company's Credit Facility. The
adjustment also includes interest expense associated with assumed
indebtedness which ranged from 7.03% to 9.75%.
(ii) Pro forma depreciation expense is presented assuming an approximate
useful life of 35 years.
(iii) To reflect rental income and other expenses associated with a lease
executed by the seller with the Company in conjunction with the
Company's acquisition of this property.
(iv) Assumes the proceeds from these offerings were utilized to repay the
Company's Credit Facility.
(v) To reflect additional interest expense related to the October 1998
term debt refinancing, amortization of deferred finance costs
related to the refinancing over a 10 year term and amortization of
debt premiums an assumed indebtedness over the respective debt term.
F-17
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
---------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
---------------------------------------------
(c) Reflects preferred distributions related to the 454,545 Series B
Convertible Preferred Units issued as partial consideration in the
acquisition of the Brashier Portfolio. The Series A Convertible
Units have an aggregate stated value of $7,500,000, and are entitled
to a 9% preferred return.
(d) Reflects income allocated to the 800,000 Series A Convertible
Preferred Shares issued to AEW in December 1998. The Series A
Preferred Shares have an aggregate liquidation value of $20,000,000
and are entitled to preferred dividends at a rate equal to 9%.
F-18
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
---------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
---------------------------------------------
(e) 1999 EVENTS HISTORICAL OPERATIONS:
Reflects the historical operations of the BMG Property, Polyfoam Properties,
10th Street-Office Works Building, One Park Place, and the Reckson Morris
Industrial Portfolio for the year ended December 31, 1998. Also reflected is the
elimination of the historical operations of the Urban Farms Shopping Center
which was sold by the Company in March 1999.
<TABLE>
<CAPTION>
(In 000's)
-----------------------------------------------------------------------------------
REVENUE OPERATING EXPENSES
------------------------------------ --------------------------------------------
Tenant
Reimbursements Property Depreciation Total
and Operating And and Operating
ACQUISITION/DISPOSITION Minimum Rent Other Income Sub-total Other Expenses Amortization Expenses Total
------------ ------------ --------- -------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BMG Property $ 411 $ 10 $ 421 $ 15 $ $ 15 $ 406
Polyfoam Properties-Stage I and II 1,929 8 1,937 641 641 1,296
10th Street-Office Works Building 119 --- 119 --- --- 119
One Park Place 4,562 816 5,378 1,505 1,505 3,873
Reckson Industrial Portfolio 12,715 2,510 15,225 3,040 3,040 12,185
Urban Farms Shopping Center (1,174) (276) (1,450) (452) (194) (646) (804)
------------ -------- -------- -------- --------- -------- --------
Total $ 18,562 $ 3,068 $ 21,630 $ 4,749 $ (194) $ 4,555 $ 17,075
=========== ======== ======== ======== ========== ======== ========
</TABLE>
F-19
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
---------------------------------------------------------
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
---------------------------------------------
(f) 1999 PRO FORMA ADJUSTMENTS:
Reflects the Company's pro forma adjustments relative to the acquisitions of the
BMG Property, Polyfoam Properties, 10th Street-Office Works Building, One Park
Place, and the Reckson Morris Industrial Portfolio for the year ended December
31, 1998. Also reflected is a pro forma adjustment to eliminate the interest
expense associated with the Urban Farms Shopping Center which was sold by the
Company in March 1999.
<TABLE>
<CAPTION>
(In 000's)
-----------------------------------------------------------------------------------
REVENUE OPERATING EXPENSES
----------------------------------- --------------------------------------------
Tenant Depreciation
Reimbursements Property and
Minimum and Operating And Interest Amortization
ACQUISITION/DISPOSITION Rent Other Income Sub-total Other Expenses Expense (i) (ii) Total
-------- -------------- --------- -------------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BMG Property $ --- $ --- $ --- $ --- $ 120 $ 237 $ 357
Polyfoam Properties-Stage I and II 479 632(v) 1,111 866 510 1,376
10th Street-Office Works Building 31 15 46
One Park Place 905 499 1,404
Reckson Morris Industrial
Portfolio (208)(iii) 4,024 4,688 8,504
Urban Farms (iv) (358) --- (358)
--------- ---------- -------- ----------- ---------- ---------- -------
$ 479 $ 632 $ 1,111 $ (208) $ 5,588 $ 5,949 $11,329
========= ========== ======== =========== ========== ========== =======
</TABLE>
F-20
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
Footnotes:
(i) Proforma interest expense is presented assuming an effective rate of
6.56% on borrowings under the Company's $150 million revolving
credit facility (the "Credit Facility"), and interest rates on
assumed mortgage debt from the 10th Street-Office Works Building,
One Park Place and Reckson Morris Industrial Portfolio acquisitions
ranging from 6.88% to 8.75%
(ii) Proforma depreciation expense is presented assuming a useful life of
35 years.
(iii) Adjustment to property operating expenses are recorded to reflect a
reduction in management fees to the actual management fee levels to
be charged as a result of the Company's acquisition. Interest
expense is shown net of approximately $4,509,000 in interest
capitalized on land under development.
(iv) Proforma interest savings from the sale of Urban Farm Shopping
Center on March 26, 1999. Approximately $5.5 million of proceeds
were utilized to repay Credit Facility borrowings which this
property had secured.
(v) Adjustment to reflect additional reimbursement of property
operating expenses associated with a lease executed by the seller
with the Company in conjunction with the Company's acquisition of
this property.
- -----------------------------------------------------------------------------
F-21
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
(g) To reflect additional general and administrative expense associated
with the Company's management of the acquired properties.
(h) To reflect the preferred distributions on 1,434,136 Series C
Preferred Units issued as partial consideration in the acquisition
of the Reckson Morris Industrial Portfolio. These Preferred Units
have an aggregate liquidation value of approximately $35.9 million
and are entitled to a 9.75% preferred return. Also reflected is the
preferred distribution of 450,700 Series D Convertible Preferred
Units issued as partial consideration in the acquisition of One Park
Place. These preferred units have an aggregate liquidation value of
approximately $11.3 million and are entitled to a 9% preferred
return.
(i) To adjust the minority interest's share of income in the Operating
Partnership. The Company owns approximately 53.9% of the Operating
Partnership after the consummation of Stage I of the Reckson Morris
Industrial Portfolio transaction. The adjustment to record the
income effect of the minority interest share for the year ended
December 31, 1998 in the pro forma statement of operations was
computed as follows:
<TABLE>
<S> <C>
Pro forma Revenue $ 94,375
Pro forma Operating Expenses (70,519)
Pro forma Preferred Dividends and Distributions (12,808)
Pro forma Equity in Loss from Equity Investments (3,009)
---------------
Pro forma Income before Minority Interest $ 8,039
===============
Minority Interest (46.1%) 3,706
Minority Interest at December 31, 1998 9,452
---------------
Adjustment Required $ 5,746
===============
</TABLE>
F-22
<PAGE>
AMERICAN REAL ESTATE INVESTMENT CORPORATION
----------------------------------------------
NOTES TO MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
----------------------------------------------
PRO FORMA CONDENSED CONSOLIDATING INCOME STATEMENT
--------------------------------------------------
(j) To reflect the income allocated to:
- the 1,600,000 shares of Series B Preferred Stock issued as
partial consideration in the acquisition of the Reckson Morris
Industrial Portfolio. These Convertible Preferred shares have a
liquidation value of $40,000,000, and are entitled to a
preferred dividend at a rate equal to 9.75%.
- the 800,000 shares of Series C Preferred Stock issued to
the Investors. These Convertible Preferred shares have a
liquidation value of $20,000,000 and entitled to a preferred
dividend equal to 9.75%.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Real Estate Investment Corporation:
We have audited the accompanying combined statement of revenue and certain
expenses of Reckson Morris Industrial Portfolio for the year ended December
31, 1998. This financial statement is the responsibility of the Portfolio's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The statement of revenue and certain expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a current report on Form 8-K of American Real
Estate Investment Corporation as described in Note 1 and is not intended to
be a complete presentation of the Portfolio's revenue and expenses.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenue and certain expenses of Reckson
Morris Industrial Portfolio for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
Philadelphia, Pa.
August 13, 1999
F-24
<PAGE>
RECKSON MORRIS INDUSTRIAL PORTFOLIO
-----------------------------------
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES (NOTE 1)
-----------------------------------------------------------
<TABLE>
<CAPTION>
For the Six
Months Ended For the Year
June 30, 1999 Ended
(Unaudited) December 31, 1998
--------------- -------------------
<S> <C> <C>
REVENUE:
Minimum rent (Note 2) $ 8,860,443 $ 12,715,243
Tenant reimbursements 1,401,951 2,509,841
-------------- ---------------
Total revenue 10,262,394 15,225,084
-------------- ---------------
CERTAIN EXPENSES:
Maintenance and other operating expenses 222,409 304,750
Management fees 256,819 436,685
Real estate taxes 1,187,756 2,194,570
Insurance 59,666 104,351
-------------- ---------------
Total certain expenses 1,726,650 3,040,356
-------------- ---------------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 8,535,744 $ 12,184,728
============== ===============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-25
<PAGE>
RECKSON MORRIS INDUSTRIAL PORTFOLIO
-----------------------------------
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
-----------------------------------------------------------
DECEMBER 31, 1998
-----------------
1. BASIS OF PRESENTATION:
The statement of revenue and certain expenses reflects the operations of
Reckson Morris Industrial Portfolio. On August 6, 1999, American Real Estate
Investment Corporation (the "Company") entered into a Contribution and
Exchange Agreement to acquire certain entities owning real property from
Reckson Morris Industrial Trust, Reckson Operating Partnership, L.P., Robert
Morris, Joseph D. Morris and certain related entities. Pursuant to the
Contribution Agreement, entities owning 28 "big box" industrial facilities
aggregating 6.1 million square feet will be contributed to the Company in
exchange for approximately $300 million of preferred stock and common stock
of the Company, preferred units of the Company's operating partnership,
(American Real Estate Investment, L.P.), cash, and assumed indebtedness. The
Company expects to finance the cash portion of the consideration through
mortgage financing and other capital transactions. The mortgage financing
will be funded from proceeds of a $98 million loan from an institutional
lender with a six-year term and a fixed rate of 7.45%. In acquiring these
industrial facilities, the Company will acquire approximately 111 acres of
land, supporting approximately 1.6 million square feet of development and
definitive options for approximately 259 additional acres of land, supporting
approximately 2.9 million square feet of development. The acquisition is
expected to close in three stages, subject to the satisfaction of certain
customary closing conditions. Stage I, which includes 22 buildings (the
"Stage I Properties") representing approximately 3.9 million square feet is
expected to close in September 1999. Stages II and III, each comprised of
three buildings containing 1.1 million square feet for a total of six
buildings aggregating 2.2 million square feet, are expected to close by April
30, 2000. All of the Stage I properties are currently owned by Reckson Morris
Operating Partnership, L.P. The Stage I Properties are identified in the
following table:
<TABLE>
<CAPTION>
Aggregate
Net
Rentable
Property Address Type Sq. Ft.
- -------- ------- ---- -----------
<S> <C> <C> <C>
One Nixon Lane Edison, NJ Operating 192,829
200-250 Kennedy Drive Sayreville, NJ Operating 164,267
300-350 Kennedy Drive Sayreville, NJ Operating 161,705
309 Kennedy Drive Sayreville, NJ Operating 202,000
409 Kennedy Drive Sayreville, NJ Operating 225,831
55 Carter Drive Edison, NJ Operating 108,548
200 Carter Drive Edison, NJ Operating 105,910
243 St. Nicholas Avenue South Plainfield, NJ Operating 15,000
275-285 Pierce Street Franklin Township, NJ Operating 102,735
301-321 Herrod Blvd. South Brunswick, NJ Operating 610,949
24 Abeel Road Cranbury, NJ Operating 40,022
21 Cranbury Cranbury, NJ Development 845,835
34 Englehard Cranbury, NJ Operating 203,404
200 Industrial Teterboro, NJ Operating 332,352
118 Moonachie Avenue Carlstadt, NJ Operating 243,751
135 Fieldcrest Avenue Edison, NJ Operating 77,975
24 Madison Road Fairfield, NJ Operating 35,494
22 Madison Road Fairfield, NJ Operating 39,875
18 Madison Road Fairfield, NJ Operating 14,000
26 Madison Road Fairfield, NJ Operating 30,306
535 Secaucus Road Secaucus, NJ Operating 68,439
Mount Ebo Mount Ebo, NY Operating 93,948
------
3,915,175
==========
</TABLE>
F-26
<PAGE>
The 21 Cranbury property was under development at December 31, 1998 and had
not generated revenue or incurred operating expenses during the year ended
December 31, 1998. This property was placed in operation subsequent to
December 1998 and the revenue and certain expenses are included in the period
ended June 30, 1999.
The average occupancy for the six months ended June 30, 1999 and year ended
December 31, 1998 for the Stage I Properties is approximately 98.5% and
92.6%, respectively.
This combined statement of revenue and certain expenses is to be included in
the Company's current report on Form 8-K, as the above-described transaction
has been deemed significant pursuant to the rules and regulations of the
Securities and Exchange Commission.
The accounting records of the Stage I Properties are maintained on an accrual
basis. The accompanying financial statement excludes certain expenses such as
interest, depreciation and amortization, professional fees, and other costs
not directly related to the future operations of the Stage I Properties.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of revenue and expenses during the reporting
period. The ultimate results could differ from those estimates.
The combined statement of revenue and certain expenses for the six months
ended June 30, 1999 is unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for
the fair presentation of the combined statement of revenue and certain
expenses for the interim period have been included. The results of the
interim periods are not necessarily indicative of the results for the full
year.
2. OPERATING LEASES:
Minimum rent presented includes straight-line adjustments for rental revenue
increases in accordance with generally accepted accounting principles. The
aggregate rental revenue increase resulting from the straight-line adjustment
for the year ended December 31, 1998 was $410,394 and for the six months
ended June 30, 1999 was $263,429 (unaudited).
The following tenants account for greater than 10% of annual minimum rent for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
Property Tenant Minimum Rent
- -------- ------ ------------
<S> <C> <C>
301/321 Herrod Blvd. Herrod Distribution Center, Inc. $2,291,059
118 Moonachie Avenue The Coca-Cola Bottling Company of New $1,828,133
York, Inc.
</TABLE>
F-27
<PAGE>
Stage I Properties are leased to tenants under operating leases with
expiration dates extending to 2013. Future minimum rentals under
non-cancelable operating leases, excluding tenant reimbursements of operating
expenses, as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 16,499,038
2000 14,630,424
2001 12,754,730
2002 10,397,235
2003 9,996,529
Thereafter $ 49,634,951
</TABLE>
3. RELATED PARTY TRANSACTIONS:
Stage I Properties paid management fees of $436,685 to Reckson Morris
Management Inc., a related party, representing 3.5% of base rental revenue.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Real Estate Investment Corporation:
We have audited the accompanying statement of revenue and certain expenses of
BMG Property for the period from August 3, 1998 to December 31, 1998. This
financial statement is the responsibility of the Property's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The statement of revenue and certain expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a current report on Form 8-K of American Real Estate
Investment Corporation as described in Note 1 and is not intended to be a
complete presentation of the Property's revenue and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenue and certain expenses of the BMG Property for
the period from August 3, 1998 to December 31, 1998, in conformity with
generally accepted accounting principles.
Philadelphia, Pa.,
October 11, 1999
F-29
<PAGE>
BMG PROPERTY
STATEMENT OF REVENUE AND CERTAIN EXPENSES (NOTE 1)
<TABLE>
<CAPTION>
For the six months For the period from
ended June 30, 1999 August 3, 1998 to
(unaudited) December 31, 1998
------------------- -------------------
<S> <C> <C>
REVENUE:
Minimum rent (Note 2) $ 499,000 $ 411,364
Tenant reimbursements 5,700 9,919
---------- ----------
Total revenues 504,700 421,283
---------- ----------
CERTAIN EXPENSES:
Maintenance and other operating expenses -- 1,576
Insurance 500 5,277
Real estate taxes 5,200 8,094
---------- ----------
Total certain expenses 5,700 14,947
---------- ----------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 499,000 $ 406,336
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-30
<PAGE>
BMG PROPERTY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1998
1. BASIS OF PRESENTATION:
The statement of revenue and certain expenses reflects the operations of the
BMG Property (the "Property"), located in Duncan, South Carolina. The
Property was acquired by American Real Estate Investment Corporation ("the
Company") from W/H No. 35, LLC. ("the Seller") in March, 1999 for
approximately $9,700,000, including closing costs. The Property has an
aggregate net rentable area of approximately 303,091 square feet (100% leased
as of December 31, 1998). This statement of revenue and certain expenses is
to be included in the Company's current report on Form 8-K.
The accounting records of the Property are maintained on an accrual basis.
Adjusting entries have been made to present the accompanying financial statement
in accordance with generally accepted accounting principles. The accompanying
financial statement excludes certain expenses such as interest, depreciation and
amortization, professional fees, and other costs not directly related to the
future operations of the Property in conformity with Rule 3-14 of the Securities
and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the reporting period.
The actual results could differ from those estimates.
The combined statement of revenue and certain expenses for the six months
ended June 30, 1999 is unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for
the fair presentation of the combined statement of revenue and certain
expenses for the interim period have been included. The results of the
interim periods are not necessarily indicative of the results for the full
year.
2. OPERATING LEASE:
The Property is leased to BMG under an operating lease with an expiration
date extending to the year 2003. The lease commenced on August 3, 1998 upon
completion of the Property. Future minimum rentals under the noncancellable
operating lease, excluding tenant reimbursements of operating expenses as of
December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 1,000,178
2000 1,000,178
2001 1,000,178
2002 1,000,178
Thereafter 588,814
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Real Estate Investment Corporation:
We have audited the accompanying combined statement of revenue and certain
expenses of Poly-Foam Properties for the year ended December 31, 1998. This
financial statement is the responsibility of the Properties' management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The statement of revenue and certain expenses was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a current report on Form 8-K of American Real Estate
Investment Corporation as described in Note 1 and is not intended to be a
complete presentation of the Properties' revenue and expenses.
In our opinion, the combined financial statement referred to above presents
fairly, in all material respects, the revenue and certain expenses of Poly-Foam
Properties for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
Philadelphia, Pa.,
October 11, 1999
F-32
<PAGE>
POLY-FOAM PROPERTIES
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES (NOTE 1)
<TABLE>
<CAPTION>
For the six months
ended June 30, 1999 For the year ended
(unaudited) December 31, 1998
------------------- ------------------
<S> <C> <C>
REVENUE:
Minimum rent (Note 2) $1,181,306 $1,928,587
Other income 7,521 7,888
---------- ----------
Total revenue 1,188,827 1,936,475
---------- ----------
CERTAIN EXPENSES:
Maintenance and other operating expenses (Note 2) -- 482,368
Real estate taxes 6,521 146,642
Insurance 1,000 11,691
---------- ----------
Total certain expenses 7,521 640,701
---------- ----------
REVENUE IN EXCESS OF CERTAIN EXPENSES $1,181,306 $1,295,774
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE>
POLY-FOAM PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1998
1. BASIS OF PRESENTATION:
The statement of revenue and certain expenses reflects the operations of the
Poly-Foam Properties ("the Properties"), which include the following seven
buildings, all located in Fremont, Ohio.
<TABLE>
<CAPTION>
PROPERTY SQUARE FEET PHASE
-------- ----------- -----
<S> <C> <C>
1311 Majestic Drive 143,400 II
800 Hagerty Drive 30,150 I
600 Hagerty Drive 126,250 I
1411 Majestic Drive 181,350 I
605 Hagerty Drive 76,464 I
670 Hagerty Drive 100,272 I
300 Enterprise Drive 181,838 II
</TABLE>
The Phase I Properties were acquired by American Real Estate
Investment Corporation (the "Company") from Poly-Foam International, Inc.
("the Seller") in April, 1999 for a purchase price of approximately
$13,200,000. The Phase II Properties were acquired in September, 1999 for a
purchase price of approximately $8,500,000. These properties have an
aggregate net rentable area of approximately 839,724 square feet (95.3%
leased as of December 31, 1998). This combined statement of revenue and
certain expenses is to be included in the Company's current report on Form
8-K.
The accompanying financial statement excludes certain expenses such as interest,
depreciation and amortization, professional fees, and other costs not directly
related to the future operations of the Properties in conformity with Rule 3-14
of the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the reporting period.
The actual results could differ from those estimates.
The combined statement of revenue and certain expenses for the six months
ended June 30, 1999 is unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for
the fair presentation of the combined statement of revenue and certain
expenses for the interim period have been included. The results of the interim
periods are not necessarily indicative of the results for the full year.
2. RELATED PARTY TRANSACTIONS:
The Seller, leases space in each of the seven properties and paid to the
Properties $1,571,015 of minimum rent for the year ended December 31, 1998.
The expenses related to the Seller's occupancy of the Properties were paid by
the Properties, and were not reimbursed by the Seller because of the related
party relationship. Under the terms of the lease signed by the Company with
Polyfoam in connection with the sale transaction, the Seller will reimburse
the Company for its share of future operating expenses applicable to its
leased space.
3. OPERATING LEASES:
Poly-Foam paid $1,571,015 of minimum rent that accounts for greater than 10% of
annual minimum rent for the year ended December 31, 1998.
The Properties are leased to tenants under operating leases with expiration
dates extending to the year 2008. Future minimum rentals under noncancellable
operating leases, which exclude future related party rental revenue for which
there are no rental agreements, as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 543,458
2000 $ 441,456
2001 $ 441,456
2002 $ 441,446
2003 $ 441,446
Thereafter $ 2,207,280
</TABLE>
Certain leases also include provisions requiring tenants to reimburse the
Properties for management costs and other operating expenses up to stipulated
amounts.
F-34
