1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2001
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------
Commission file number 1-9516
AMERICAN REAL ESTATE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 13-3398766
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 SOUTH BEDFORD ROAD, MT. KISCO, NY 10549
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number,
including area code) (914) 242-7700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE NO.
Consolidated Balance Sheets -
June 30, 2001 and December 31, 2000 .......................................... 1-2
Consolidated Statements of Earnings -
Three Months Ended June 30, 2001 and 2000..................................... 3-4
Consolidated Statements of Earnings -
Six Months Ended June 30, 2001 and 2000....................................... 5-6
Consolidated Statement of Changes In
Partners' Equity and Comprehensive Income
Six Months Ended June 30, 2001................................................ 7
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 ...................................... 8-9
Notes to Consolidated Financial Statements.................................... 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................. 26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISKS ............................................... 42
PART II. OTHER INFORMATION............................................................ 43
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information contained herein is unaudited; however, in the opinion
of management, all adjustments necessary for a fair presentation of such
financial information have been included. All such adjustments are of a normal
recurring nature.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN $000'S)
JUNE 30, DECEMBER 31,
2001 2000
---- ----
ASSETS
Real estate leased to others:
Accounted for under the financing
method $ 185,484 $ 193,428
Accounted for under the operating
method, net of accumulated
depreciation 188,872 185,968
Hotel, casino and resort operating properties,
net of accumulated depreciation:
Stratosphere Corporation hotel and casino 179,969 152,335
Hotel and resort 39,536 32,918
Land and construction-in-progress 78,971 75,952
Investment in U.S. Government and
Agency obligations 483,440 475,267
Cash and cash equivalents 127,263 147,705
Marketable equity and debt securities 45,061 54,736
Equity interest in GB Holdings, Inc. 40,284 38,359
Mortgages and notes receivable 36,034 19,946
Receivables and other assets 47,144 46,373
---------- ----------
Total $1,452,058 $1,422,987
========== ==========
Continued.....
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
CONSOLIDATED BALANCE SHEETS - CONTINUED
(UNAUDITED)
(IN $000'S)
JUNE 30, DECEMBER 31,
2001 2000
---- ----
LIABILITIES
Mortgages payable $ 175,995 $ 182,049
Due to affiliates 68,502 77,521
Accounts payable, accrued
expenses and other liabilities 61,858 55,785
----------- -----------
Total liabilities 306,355 315,355
----------- -----------
Minority interest in Stratosphere
Corporation hotel and casino 67,780 64,907
----------- -----------
Commitments and Contingencies
(Notes 2 and 3)
PARTNERS' EQUITY
Limited partners:
Preferred units, $10 liquidation
preference, 5% cumulative pay-
in-kind redeemable; 9,400,000
authorized; 8,886,631 and 8,463,459
issued and outstanding as of
June 30, 2001 and Dec. 31, 2000 89,977 87,808
Depositary units; 47,850,000
authorized; 47,235,484
outstanding 976,668 944,340
General partner 23,199 22,498
Treasury units at cost:
1,137,200 depositary units (11,921) (11,921)
----------- -----------
Total partners' equity 1,077,923 1,042,725
----------- -----------
Total $ 1,452,058 $ 1,422,987
=========== ===========
See notes to consolidated financial statements
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
THREE MONTHS ENDED JUNE 30,
---------------------------
2001 2000
---- ----
Revenues:
Hotel and casino operating income $ 33,508 $ 32,088
Land, house and condominium sales 10,163 22,227
Hotel and resort operating income 4,482 5,763
Interest income on financing leases 4,244 4,999
Interest income on treasury
bills and other investments 7,876 8,962
Rental income 6,913 6,224
Equity in earnings of GB Holdings, Inc. 1,621 --
Dividend and other income 375 2,052
-------- --------
69,182 82,315
-------- --------
Expenses:
Hotel and casino operating expenses 30,777 28,798
Cost of land, house and condominium sales 7,984 16,539
Hotel and resort operating expenses 3,835 4,801
Interest expense 4,816 4,524
Depreciation and amortization 3,826 3,961
General and administrative expenses 1,691 2,123
Rental property expenses 1,284 1,273
-------- --------
54,213 62,019
-------- --------
Earnings before property transactions
and minority interest 14,969 20,296
Provision for loss on real estate -- (232)
Gain on sales and disposition of real estate 1,362 1,109
Minority interest in net earnings of
Stratosphere Corporation hotel and casino (116) (566)
-------- --------
NET EARNINGS $ 16,215 $ 20,607
======== ========
Continued...........
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Continued........
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
THREE MONTHS ENDED JUNE 30,
--------------------------------
2001 2000
---- -----
Net earnings attributable to: (Note 9)
Limited partners $ 15,892 $ 20,197
General partner 323 410
----------- -----------
$ 16,215 $ 20,607
=========== ===========
Net earnings per limited partnership unit:
Basic earnings $ .32 $ .42
=========== ===========
Weighted average limited partnership
units outstanding 46,098,284 46,098,284
=========== ===========
Diluted earnings $ .29 $ .36
=========== ===========
Weighted average limited partnership units
and equivalent partnership units outstanding 55,369,785 56,055,005
=========== ===========
See notes to consolidated financial statements
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
---- ----
Revenues:
Hotel and casino operating income $ 66,765 $ 66,092
Land, house and condominium sales 20,927 41,036
Hotel and resort operating income 7,214 9,527
Interest income on financing leases 8,655 10,271
Interest income on treasury
bills and other investments 16,912 16,869
Rental income 13,053 11,481
Dividend and other income 1,888 2,406
Equity in earnings of GB Holdings, Inc. 675 --
--------- ---------
136,089 157,682
--------- ---------
Expenses:
Hotel and casino operating expenses 59,924 58,822
Cost of land, house and condominium sales 15,413 30,700
Hotel and resort operating expenses 6,671 9,261
Interest expense 10,123 8,457
Depreciation and amortization 7,902 7,598
General and administrative expenses 3,607 4,147
Rental property expenses 2,302 2,077
Bayswater acquisition costs -- 1,650
--------- ---------
105,942 122,712
--------- ---------
Earnings before property and securities
transactions and minority interest 30,147 34,970
Provision for loss on real estate -- (232)
Gain on sale of marketable equity
and debt securities 1,334 --
Gain on sales and disposition of real estate 1,362 2,106
Minority interest in net earnings of
Stratosphere Corporation hotel and casino (797) (1,539)
--------- ---------
NET EARNINGS $ 32,046 $ 35,305
========= =========
Continued...........
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Continued........
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN $000'S EXCEPT PER UNIT DATA)
SIX MONTHS ENDED JUNE 30,
--------------------------------
2001 2000
---- -----
Net earnings attributable to: (Note 9)
Limited partners $ 31,408 $ 33,173
General partner 638 2,132
----------- -----------
$ 32,046 $ 35,305
=========== ===========
Net earnings per limited partnership unit:
Basic earnings $ .63 $ .67
=========== ===========
Weighted average limited partnership
units outstanding 46,098,284 46,098,284
=========== ===========
Diluted earnings $ .57 $ .59
=========== ===========
Weighted average limited partnership units
and equivalent partnership units outstanding 55,341,276 56,559,509
=========== ===========
See notes to consolidated financial statements
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY
AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
(IN $000'S )
Limited Partners' Equity
General -------------------------- Total
Partner's Depositary Preferred Held in Partners'
Equity Units Units Treasury Equity
------ ----- ----- -------- ------
Balance Dec. 31, 2000 $ 22,498 $ 944,340 $87,808 $(11,921) $ 1,042,725
Comprehensive income:
Net earnings 638 31,408 -- -- 32,046
Sale of debt securities
available for sale 78 3,818 -- -- 3,896
Unrealized losses on
securities available
for sale (15) (729) -- -- (744)
-------- --------- ------- -------- -----------
Comprehensive income 701 34,497 -- -- 35,198
Pay-in-kind
distribution -- (2,169) 2,169 -- --
-------- --------- ------- -------- -----------
Balance
June 30, 2001 $ 23,199 $ 976,668 $89,977 $(11,921) $ 1,077,923
======== ========= ======= ======== ===========
Accumulated other comprehensive loss at June 30, 2001 was $4,396.
See notes to consolidated financial statements
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN $000'S)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32,046 $ 35,305
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 7,902 7,598
Gain on sale of marketable equity and debt securities (1,334) --
Gain on sales and disposition of real estate (1,362) (2,106)
Minority interest in net earnings of Stratosphere
Corporation hotel and casino 797 1,539
Provision for loss on real estate -- 232
Equity in earnings of GB Holdings Inc. (675) --
Changes in:
(Increase) decrease in land and
construction-in-progress (1,852) 9,816
Increase in receivables and other assets (2,613) (179)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 8,641 (1,967)
-------- --------
Net cash provided by operating activities 41,550 50,238
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in mortgages and notes receivable (16,088) 5,974
Net proceeds from the sale and disposition of real estate 2,061 10,337
Principal payments received on leases
accounted for under the financing method 3,463 3,848
Acquisition of Bayswater's net assets -- (84,350)
Acquisition of rental real estate -- (27,308)
Additions to rental real estate (424) (2,028)
Additions to hotel casino and resort operating properties (41,630) (5,325)
Increase (decrease) in investment in U.S. Government and
Agency obligations (8,173) 18,655
Decrease in minority interest in Stratosphere Corp.
hotel and casino -- (1,970)
Proceeds from the deposition of marketable equity and
debt securities 13,891 --
(Decrease) increase in due to affiliate (9,038) 41,266
Other -- 455
-------- --------
Net cash used in investing activities (55,938) (40,446)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' equity:
Distributions to General Partner -- (4,100)
Debt:
Decrease in mortgages payable (182) (632)
Periodic principal payments (3,409) (4,715)
Balloon payments (2,463) (3,221)
-------- --------
Net cash used in financing activities (6,054) (12,668)
-------- --------
Continued..............
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED))
(IN $000'S)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2001 2000
---- ----
NET DECREASE IN CASH
AND CASH EQUIVALENTS (20,442) (2,876)
CASH AND CASH EQUIVALENTS,
beginning of period 147,705 142,697
--------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 127,263 $ 139,821
========= =========
SUPPLEMENTAL INFORMATION:
Cash payments for interest-net of amount
capitalized $ 7,188 $ 7,023
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Reclassifications:
From financing lease $ (4,481) $ (6,730)
To operating lease 4,481 6,730
From hotel and resort operating properties (1,167) --
To land and construction-in-progress 1,167 --
From mortgages and notes receivable -- (62,338)
To marketable equity and debt securities -- 62,338
--------- ---------
$ -- $ --
========= =========
Net unrealized losses on securities
available for sale $ (744) $ (556)
========= =========
Increase in equity and debt securities $ 2,500 $ --
========= =========
See notes to consolidated financial statements
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying consolidated financial statements and related footnotes should
be read in conjunction with the consolidated financial statements and related
footnotes contained in the Company's annual report on Form 10-K for the year
ended December 31, 2000.
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
The results of operations for the three and six months ended June 30, 2001 are
not necessarily indicative of the results to be expected for the full year.
The Company has adopted Statement of Financial Accounting Standards No.
133-Accounting for Derivative Instruments and Hedging Activities ("Statement
133") as of January 1, 2001. The adoption of Statement 133 has not had any
impact in the Company's financial statements.
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements Nos. 141 and 142 (FAS 141 and FAS 142): "Business Combinations" and
"Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates
pooling-of-interests accounting prospectively. It also provides guidance on
purchase accounting related to the recognition of intangible assets and
accounting for negative goodwill. FAS 142 changes the accounting for goodwill
from an amortization method to an impairment-only approach. Under FAS 142,
goodwill will be tested annually and whenever events or circumstances occur
indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective
for all business combinations completed after June 30, 2001. Upon adoption of
FAS 142, amortization of goodwill recorded for business combinations consummated
prior to July 1, 2001 will cease, and intangible assets acquired prior to July
1, 2001 that do not meet the criteria for recognition under FAS 141 will be
reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal
years beginning after December 15, 2001, but early adoption is permitted. The
Company is evaluating the impact of the adoption of these standards but does not
expect them to have any material effect on the Company's financial statements.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
2. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
a. The Company entered into a license agreement with an affiliate of the General
Partner for a portion of office space at an annual rental of approximately
$135,000, plus its share of certain additional rent. Such agreement was approved
by the Audit Committee of the Board of Directors of the General Partner (the
"Audit Committee"). For the three and six months ended June 30, 2001 the Company
paid rent of approximately $35,000 and $70,000 respectively, in accordance with
the agreement.
b. Stratosphere Corp. ("Stratosphere") billed affiliates of the General Partner
approximately $344,000 and $449,000 for administrative services performed by
Stratosphere personnel during the three and six months ended June 30, 2001,
respectively.
Stratosphere also received hotel revenue of approximately $200,000 and $300,000
during the three and six months ended June 30, 2001, respectively, in connection
with a tour and travel agreement entered into with an affiliate of the General
Partner.
c. As of August 10, 2001 affiliates of Carl C. Icahn ("Icahn"), the Chairman of
the Board of the General Partner, own 7,689,016 Preferred Units and 39,409,836
Depositary Units.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
3. COMMITMENTS AND CONTINGENCIES
a. On November 18, 1998, Ruth Ellen Miller filed a class Action Complaint
bearing the caption Ruth Ellen Miller, on behalf of herself and all others
similarly situated v. American Real Estate Partners, L.P., High Coast Limited
Partnership, American Property Investors, Inc., Carl C. Icahn, Alfred Kingsley,
Mark H. Rachesky, William A. Leidesdorf, Jack G. Wasserman and John P.
Saldarelli in the Delaware Chancery Court in New Castle County (Civil Action
No. 16788NC). On September 21, 2000, Ruth Ellen Miller, Charles and Lydia
Hoffman, and Joy Lazarus, claiming as plaintiffs on behalf of themselves and
all others similarly situated, filed an amended complaint (the "Complaint") and
a motion for class certification.
Plaintiffs allege that all defendants, in breach of their fiduciary duties to
the Company, have caused the Company to engage in self-dealing or
self-interested transactions which inure to the benefit of defendants.
Plaintiff's claims are alleged to arise out of two transactions: the February
1995 Rights Offering effectuated pursuant to a purportedly false and misleading
prospectus; and Icahn's alleged use of his voting control to change the
business purpose of the Company by amending the Partnership Agreement to permit
the Company to make "non-real estate related investments," including
investments in entities owned or controlled by Icahn.
The Complaint seeks to have plaintiffs appointed as class representative and
that the putative class be certified. The Complaint also seeks an unspecified
amount in damages and injunctive relief: (i) dissolving the Partnership; (ii)
enjoining API from continuing to act as general partner of the Partnership;
(iii) enjoining the Partnership from engaging in any transaction in which Icahn
has either a direct or indirect interest; (iv) ordering API to exercise its
fiduciary obligations; and (v) compelling the Partnership to make periodic
distributions on the Depositary Units. Further, plaintiffs seek damages
resulting from the alleged breach of the Partnership Agreement for an
unquantified amount. The Complaint also seeks costs and attorneys' fees.
Defendants moved to dismiss the amended complaint. The Company joined in the
motions to the extent that the allegations are deemed applicable to it.
Management believes plaintiffs' claims are without merit and intends to
vigorously defend against them.
b. In January 2001, Stratosphere Gaming Corp. ("Stratosphere Gaming"), a
wholly-owned subsidiary of Stratosphere, was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No. A430070, in the
Eighth Judicial District Court of the State of Nevada. The complaint alleges a
number of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new tower until the property fully
complies with the ADA. Stratosphere Gaming removed the action to the United
States District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RSH (PAL).
Stratosphere Gaming has moved to dismiss one of the counts of plaintiffs'
complaint. Stratosphere Gaming also opposed plaintiffs' Motion for Preliminary
Injunction.In March, 2001, the Court held a hearing on the plaintiffs' Motion
for Preliminary Injunction and denied the motion, focusing upon what the Court
believed to be the plaintiffs' lack of irreparable injury. At present, discovery
has commenced and the parties are awaiting the Court's ruling on the Motion to
Dismiss.
In May, 2001, Stratosphere was named in an action brought by Harrah's
Entertainment, Inc. alleging infringement of a purported patent covering a
business method allegedly developed by Harrah's. The use of an allegedly similar
business method by Stratosphere in its advertising and promotions is said by
plaintiff to infringe upon its patent rights.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Stratosphere's management intends to vigorously defend itself against the above
actions which are in the early stages of the litigation process. However, the
Company does not believe that they will have a material effect on the results of
operations or financial position of the Company.
c. In addition, in the ordinary course of business, the Company, its
subsidiaries and other companies in which the Company has invested are parties
to various legal actions. In management's opinion, the ultimate outcome of such
legal actions will not have a material effect on the results of operations or
the financial position of the Company.
d. In October, 2000, Grand Union Company, a tenant leasing four properties owned
by the Company filed for Chapter 11 Bankruptcy protection. The annual rental for
these four properties is approximately $395,000. In 2001, the tenant exercised
its right to affirm the leases which were simultaneously assigned to
unaffiliated third parties. At June 30, 2001, the carrying value of these four
properties was approximately $2,739,000.
e. In December 2000, Bradlees, a tenant leasing two properties owned by the
Company, filed a voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code. The annual rentals for these two properties is approximately
$550,000. In 2001, the tenant exercised its right to affirm the leases which
were simultaneously assigned to unaffiliated third parties. At June 30, 2001,
the carrying value of these two properties was approximately $2,381,000.
f. In April 2001, WR Grace, a tenant in a property owned by the Company, filed a
voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.
The annual rental for the property is approximately $988,000. The tenant has not
yet exercised its right to affirm or reject the lease. At June 30, 2001, the
carrying value of the property was approximately $5,279,000.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
4. HOTEL, CASINO AND RESORT OPERATING PROPERTIES
a. Stratosphere Hotel and Casino
The Company owns approximately 51% of Stratosphere and consolidates Stratosphere
in its financial statements. In September 2000, Stratosphere's Board of
Directors approved a going private transaction proposed by the Company and an
affiliate of Icahn. The Company, subject to certain conditions, will pay
approximately $44.3 million for the outstanding shares of Stratosphere not
currently owned. This transaction is expected to be completed in the fourth
quarter of 2001. Stratosphere owns and operates the Stratosphere Tower Casino &
Hotel, a resort complex located in Las Vegas, Nevada.
Stratosphere will invest up to $100 million for construction of an additional
1,000 rooms to the hotel, related amenities and purchase of the leasehold
interest to the shopping center located on its premises. The improvements were
substantially completed in July 2001. As of June 30, 2001, Stratosphere has
expended approximately $78.2 million for additions to hotel and casino operating
property.
Stratosphere's operations for the three and six months ended June 30, 2001 and
2000 have been included in "Hotel and casino operating income and expenses" in
the Consolidated Statements of Earnings. Hotel and casino
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
operating expenses include all expenses except for approximately $2,229,000 and
$4,652,000 of depreciation and amortization for the three and six months ended
June 30, 2001, respectively, and $2,124,000 and $4,214,000 of depreciation and
amortization for the three and six months ended June 30, 2000, respectively.
Such amounts have been included in "Depreciation and amortization expense" in
the Consolidated Statements of Earnings.
b. Hotel and Resort Operating Properties
Hotel and resort operations for the three and six months ended June 30, 2001 and
2000 have been included in "Hotel and resort operating income and expenses" in
the Consolidated Statements of Earnings. Hotel and resort operating expenses
include all expenses except for approximately $325,000 and $648,000 of
depreciation and amortization for the three and six months ended June 30, 2001
respectively, and $369,000 and $673,000 of depreciation and amortization for the
three and six months ended June 30, 2000, respectively. Such amounts have been
included in "Depreciation and amortization expense" in the Consolidated
Statements of Earnings.
Hotel, casino and resort operations are highly seasonal in nature and are not
necessarily indicative of results expected for the full year.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
5. MARKETABLE EQUITY AND DEBT SECURITIES
a. In March 2000, in accordance with a prior agreement, the Company transferred
its First Mortgage Notes ("Notes") in the Sands Hotel and Casino ("Sands") and
the Claridge Hotel and Casino ("Claridge") to an affiliate of the General
Partner in order to facilitate the bankruptcy reorganizations of the two
Atlantic City casinos. The Company was paid its cost for such notes. However,
the affiliate of the General Partner is obligated to sell back to the Company
and the Company is obligated to repurchase its interest in the Sands and/or
Claridge, as the case may be, at the same price increased by Icahn advances,
decreased by distributions and/or interest payments received (together with a
commercially reasonable interest factor) when the appropriate licenses are
obtained by the Company. The Company's liability to repurchase its interests is
reflected as "Due to affiliates" in the Consolidated Balance Sheets.
In February 2001, the Icahn affiliates sold their entire Claridge portfolio
($37.1 million face amount of Claridge Notes) for the following additional
interests in the Sands: (i) 779,861 common shares of GB Holdings Inc. ("GB
Holdings"), (ii) $15.96 million face amount of GB Property First Mortgage Notes
("GB Notes") and (iii) $21.56 million in cash. The Company recognized a gain of
approximately $1.3 million as a result of this sale in the six months ended June
30, 2001. As a result, affiliates of the General Partner are, in effect, holding
on behalf of the Company approximately (i) 3.6 million common shares of GB
Holdings and (ii) $26.9 million face amount of GB Notes, to which the Company
will become entitled and obligated to purchase when it is fully licensed. The
Company no longer has any interest in the Claridge.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
For accounting purposes, the Company reflects its interest in the new Sands
notes as held to maturity and has recorded its corresponding liability to
repurchase such interests from the affiliate of the General Partner. At June 30,
2001 this investment is carried at cost of $21.3 million in the Consolidated
Balance Sheets.
The Company reflects its pro rata equity interest in the Sands as "Equity
interest in GB Holdings, Inc." in the Consolidated Balance Sheets (see note 6).
6. EQUITY INTEREST IN GB HOLDINGS, INC.
The Company reflects its pro rata equity interest (approximately 36%) in the
Sands under this caption in the Consolidated Balance Sheets. The Company's
corresponding obligation to repurchase its interest is included in "Due to
affiliates" in the Consolidated Balance Sheets. The Company accounts for its
investment under the equity method.
7. BAYSWATER
In March 2000, the Company acquired from affiliates of the General Partner the
assets of Bayswater Realty & Capital Corp. and the ownership interests of its
affiliated entities ("Bayswater") for approximately $84.35 million.
17
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
In accordance with generally accepted accounting principles, assets and
liabilities transferred between entities under common control are accounted for
at historical costs similar to a pooling of interests, and the financial
statements of the previously separate companies for periods prior to the
acquisition are restated on a combined basis.
8. PREFERRED UNITS
Pursuant to the terms of the Preferred Units, on February 23, 2001, the Company
declared its scheduled annual preferred unit distribution payable in additional
Preferred Units at the rate of 5% of the liquidation preference of $10. The
distribution was payable March 31, 2001 to holders of record as of March 15,
2001. A total of 423,172 additional Preferred Units were issued. As of June 30,
2001, 8,886,631 Preferred Units are issued and outstanding.
9. EARNINGS PER SHARE
Basic earnings per share are based on earnings after the preferred pay-in-kind
distribution to Preferred Unitholders.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Diluted earnings per share uses net earnings attributable to limited partner
interests as the numerator with the denominator based on the weighted average
number of units and equivalent units outstanding. The Preferred Units are
considered to be unit equivalents.
For the three and six months ended June 30, 2001 and 2000, basic and diluted
earnings per weighted average limited partnership unit are detailed as follows:
Three Months Ended Six Months Ended
------------------ ----------------
6/30/01 6/30/00 6/30/01 6/30/00
------- ------- ------- -------
Basic:
Earnings before property
and securities transactions $ .29 $ .41 $ .57 $ .63
Net gain from property
and securities transactions .03 .01 .06 .04
----- ----- ----- -----
Net earnings $ .32 $ .42 $ .63 $ .67
===== ===== ===== =====
Diluted:
Earnings before property
and securities transactions $ .27 $ .35 $ .52 $ .55
Net gain from property
and securities transactions .02 .01 .05 .04
----- ----- ----- -----
Net earnings $ .29 $ .36 $ .57 $ .59
===== ===== ===== =====
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
For accounting purposes Bayswater's earnings prior to the date of acquisition
(March 23, 2000) were allocated to the General Partner and therefore excluded
from the computation of basic and diluted earnings per limited partnership unit.
10. COMPREHENSIVE INCOME
The Company follows SFAS No. 130 "Reporting Comprehensive Income" which
establishes standards for the reporting and display of comprehensive income and
its components. The components of comprehensive income include net income and
certain amounts previously reported directly in equity.
Comprehensive income for the three and six months ended June 30, 2001 and 2000
is as follows (in $000's):
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Three Months Ended Six Months Ended
------------------ ----------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income $ 16,215 $ 20,607 $ 32,046 $ 35,305
Sale of debt securities
available for sale -- -- 3,896 --
Unrealized losses on securities
available for sale (1,459) (743) (744) (1,299)
-------- -------- -------- --------
Comprehensive income $ 14,756 $ 19,864 $ 35,198 $ 34,006
======== ======== ======== ========
11. SEGMENT REPORTING
The Company is engaged in five operating segments consisting of: (i) rental real
estate, (ii) hotel and resort operating properties, (iii) hotel and casino
operating properties, (iv) land sales, house and condominium development, and
(v) investment in securities including investment in other limited partnerships
and marketable equity securities. The Company's reportable segments offer
different services and require different operating strategies and management
expertise. There have been no material changes in segment assets since December
31, 2000.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
The Company assesses and measures segment operating results based on segment
earnings from operations as disclosed below. Segment earnings from operations
are not necessarily indicative of cash available to fund cash requirements nor
synonymous with cash flow from operations.
The revenues and net earnings for each of the reportable segments are summarized
as follows for the three and six months ended June 30, 2001 and 2000 (in
$000's).
Three Months Ended
------------------
6/30/01 6/30/00
------- -------
Revenues:
Rental real estate $11,157 $11,223
Land, house and condominium sales 10,163 22,227
Hotel & resort operating properties 4,482 5,763
Hotel & casino operating properties 33,508 32,088
Other investments 2,830 2,915
------- -------
Sub-total 62,140 74,216
Reconciling items - primarily interest income on
short-term investments and other income 7,042 8,099
------- -------
Total revenues $69,182 $82,315
======= =======
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Three Months Ended
------------------
6/30/01 6/30/00
------- -------
Net earnings:
Segment earnings (losses):
Rental real estate $ 9,873 $ 9,950
Land, house and condominium development 2,179 5,688
Hotel and resort operating properties 647 962
Hotel and casino operating properties 2,731 3,290
Other investments 2,830 2,915
------- -------
Total segment earnings 18,260 22,805
Other expenses net (2,045) (2,198)
General partner's share (323) (410)
------- -------
Net earnings-limited partner unitholders $15,892 $20,197
======= =======
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Six Months Ended
----------------
6/30/01 6/30/00
--------- ---------
Revenues:
Rental real estate $ 21,708 $ 21,752
Land, house and condominium sales 20,927 41,036
Hotel & resort operating properties 7,214 9,527
Hotel & casino operating properties 66,765 66,092
Other investments 3,941 3,978
--------- ---------
Sub-total 120,555 142,385
Reconciling items - primarily interest income on
short-term investments and other income 15,534 15,297
--------- ---------
Total revenues $ 136,089 $ 157,682
========= =========
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Six Months Ended
----------------
6/30/01 6/30/00
--------- ---------
Net earnings:
Segment earnings (losses):
Rental real estate $ 19,406 $ 19,675
Land, house and condominium development 5,514 10,336
Hotel and resort operating properties 543 266
Hotel and casino operating properties 6,841 7,270
Other investments 3,941 3,978
--------- ---------
Total segment earnings 36,245 41,525
Other expenses net (4,199) (6,220)
General partner's share (638) (2,132)
--------- ---------
Net earnings-limited partner unitholders $ 31,408 $ 33,173
========= =========
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, as amended by
Public Law 104-67.
Forward-looking statements regarding management's present plans or expectations
involve risks and uncertainties and changing economic or competitive conditions,
as well as the negotiation of agreements with third parties, which could cause
actual results to differ from present plans or expectations, and such
differences could be material. Readers should consider that such statements
speak only as to the date hereof.
GENERAL
The Company believes that it will benefit from the diversification of its
portfolio of assets. To further its investment objectives, the Company may
consider the acquisition or seek effective control of land development companies
and other real estate operating companies which may have a significant inventory
of quality assets under development. In selecting future real estate
investments, the Company intends to focus on assets that it
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
believes are undervalued in the real estate market, which investments may
require substantial liquidity to maintain a competitive advantage. The Company
believes that there are still opportunities available to acquire investments
that are undervalued. These may include commercial properties, residential and
commercial development projects, land, assets in the gaming industry,
non-performing loans, the securities of entities which own, manage or develop
significant real estate assets, including limited partnership units and
securities issued by real estate investment trusts and the acquisition of debt
or equity securities of companies which may be undergoing restructuring and
under-performing properties that may require active asset management and
significant capital improvements. The Company has made investments in the gaming
industry, and may consider additional gaming industry investments and
investments related to the entertainment industry. Such investments may include
additional casino properties and those in the entertainment field, such as movie
theater interests and the financing and investment in the movie production and
distribution industry. Such investments may include acquisitions from, or in
joint venture or co-management with, Icahn, the General Partner or their
affiliates, provided that the terms thereof are fair and reasonable to the
Company. The Company notes that while there are still opportunities available to
acquire investments that are undervalued, acquisition opportunities in the real
estate market for value-added investors have become more competitive to source
and the increased competition may have some impact on the spreads and the
ability to find quality assets that provide returns that are sought. These
investments may not be readily financeable and may not generate immediate
positive cash flow for the Company. As such, they require the Company to
maintain a strong capital base in order to react quickly to these market
opportunities as well as to allow the Company the financial strength to develop
or reposition these assets. While
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
this may impact cash flow in the near term and there can be no assurance that
any asset acquired by the Company will increase in value or generate positive
cash flow, the Company intends to focus on assets that it believes may provide
opportunities for long-term growth and further its objective to diversify its
portfolio.
Historically, substantially all of the Company's real estate assets have been
net leased to single corporate tenants under long-term leases. With certain
exceptions, these tenants are required to pay all expenses relating to the
leased property and therefore the Company is not typically responsible for
payment of expenses, such as maintenance, utilities, taxes and insurance
associated with such properties.
By the end of the year 2003, net leases representing approximately 11% of the
Company's net annual rentals from its portfolio will be due for renewal, and by
the end of the year 2005, net leases representing approximately 31% of the
Company's net annual rentals will be due for renewal. Since most of the
Company's properties are net-leased to single, corporate tenants, it may be
difficult and time-consuming to re-lease or sell those properties that existing
tenants decline to re-let or purchase and the Company may be required to incur
expenditures to renovate such properties for new tenants. In addition, the
Company may become responsible for the payment of certain operating expenses,
including maintenance, utilities, taxes, insurance and environmental compliance
costs associated with such properties, which are presently the responsibility of
the tenant. As a result, the Company could experience an adverse impact on net
cash flow in the future from such properties.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
An amendment to the Partnership Agreement (the "Amendment" ) became effective in
August, 1996 which permits the Company to invest in securities issued by
companies that are not necessarily engaged as one of their primary activities in
the ownership, development or management of real estate while remaining in the
real estate business and continuing to pursue suitable investments for the
Company in the real estate market.
In September 1997, the Company completed its Rights Offering (the "1997
Offering") to holders of its Depositary Units to increase its assets available
for investment, take advantage of investment opportunities and further diversify
its portfolio of assets. Net proceeds of approximately $267 million were raised
for investment purposes.
Expenses relating to environmental clean-up have not had a material effect on
the earnings, capital expenditures, or competitive position of the Company.
Management believes that substantially all such costs would be the
responsibility of the tenants pursuant to lease terms. While most tenants have
assumed responsibility for the environmental conditions existing on their leased
property, there can be no assurance that the Company will not be deemed to be a
responsible party or that the tenant will bear the costs of remediation. Also,
as the Company acquires more operating properties, its exposure to environmental
clean-up costs may increase. The Company completed Phase I Environmental Site
Assessments on most of its properties by third-party consultants. Based on the
results of these Phase I Environmental Site Assessments, the environmental
consultant has recommended that certain sites may have environmental conditions
that should be further reviewed.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
The Company has notified each of the responsible tenants to attempt to ensure
that they cause any required investigation and/or remediation to be performed
and most tenants continue to take appropriate action. However, if the tenants
fail to perform responsibilities under their leases referred to above, based
solely upon the consultant's estimates resulting from its Phase I Environmental
Site Assessments referred to above, it is presently estimated that the Company's
exposure could amount to $2-3 million. However, as no Phase II Environmental
Site Assessments have been conducted by the consultants, there can be no
accurate estimation of the need for or extent of any required remediation, or
the costs thereof. In addition, the Company has notified all tenants of the
Resource Conservation and Recovery Act's ("RCRA") December 22, 1998 requirements
for regulated underground storage tanks. The Company may, at its own cost, have
to cause compliance with RCRA's requirements in connection with vacated
properties, bankrupt tenants and new acquisitions. Phase I Environmental Site
Assessments will also be performed in connection with new acquisitions and
property refinancings.
The Company is in the process of updating its Phase I Site Assessments for
certain of its environmentally sensitive properties including properties with
open RCRA requirements. Approximately forty-one updates are expected to be
completed in 2001 with another thirty-seven scheduled for the year 2002.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Gross revenues decreased by $13,133,000, or 16%, during the three months ended
June 30, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $12,064,000 in land, house and condominium sales, $1,677,000 in
dividend and other income, $1,281,000 in hotel and resort operating income,
$1,086,000 in interest income on treasury bills and other investments and
$755,000 in financing lease income partially offset by increases of $1,621,000
in equity in earnings of GB Holdings, Inc., $1,420,000 in hotel and casino
operating income and $689,000 in rental income. The decrease in land, house and
condominium sales is primarily due to a decline in inventory of completed units
available for sale. The decrease in dividend and other income is primarily due
to a decrease in distributions from limited partnership investments. The
decrease in hotel and resort operating income is primarily attributable to New
Seabury resort operations which were negatively impacted by the construction of
a new club house and golf course improvements. The decrease in interest income
on treasury bills and other investments is primarily attributable to a decrease
in interest rates on short-term investments. The decrease in financing lease
income is the result of lease expirations and normal financing lease
amortization. The increase in hotel and casino operating income is primarily
attributable to an increase in gaming revenues. The equity in earnings of GB
Holdings, Inc. is the result of accounting for the Company's
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
interest under the equity method effective October 1, 2000. The increase in
rental income is primarily attributable to operating lease rentals.
Expenses decreased by $7,806,000, or 12.6%, during the three months ended June
30, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $8,555,000 in the cost of land, house and condominium sales,
$966,000 in hotel and resort operating expenses, $432,000 in general and
administrative expenses and $135,000 in depreciation and amortization partially
offset by increases of $1,979,000 in hotel and casino operating expenses,
$292,000 in interest expense and $11,000 in rental property expenses. The
decrease in cost of land, house and condominium sales is due to decreased sales
as explained above. The decrease in hotel and resort operating expenses is
primarily attributable to the New Seabury resort operations as explained above.
The increase in hotel and casino operating expenses is primarily attributable to
increased costs associated with increased revenues.
As a result of the completion of Stratosphere's additional 1,000 rooms and
related amenities, management anticipates increased hotel and casino operating
revenues and expenses in the second half of 2001. Due to this expansion,
management also expects the occupancy percentage and average daily rate ("ADR")
to decline during this period while marketing and advertising expenses are
expected to increase.
Earnings before property and securities transactions and minority interest
decreased during the three months ended June 30, 2001 by $5,327,000 as compared
to the same period in 2000.
Gain on property transactions increased by $253,000 during the three months
ended June 30, 2001 as compared to the same period in 2000 due to the size and
number of transactions.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
During the three months ended June 30, 2000, the Company recorded a provision
for loss on real estate of $232,000. No such provision was required in 2001.
Minority interest in the net earnings of Stratosphere Corporation decreased by
$450,000 during the three months ended June 30, 2001 as compared to the same
period in 2000 due to a decrease in Stratosphere's net hotel and casino
operating income.
Net earnings for the three months ended June 30, 2001 decreased by $4,392,000 as
compared to the three months ended June 30, 2000 primarily due to decreased
interest income ($1.1 million) and decreased earnings from land, house and
condominium operations ($3.5 million). Interest income declined due to lower
short-term rates which trend is expected to continue. Earnings from land, house
and condominium operations decreased due to a decline in inventory of completed
units available for sale. Based on existing contracts, sales are expected to
increase in the second half of 2001. However, the decrease in land inventory in
approved sub-divisions is expected to negatively impact 2002 earnings from this
business segment unless mitigated by the purchase of land, development and sale
of units in approved sub-divisions.
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.27 in the three months ended
June 30, 2001 compared to $.35 in the comparable period of 2000, and net gain
from property transactions was $.02 in the three months ended June 30, 2001
compared to $.01 in the comparable period of 2000. Diluted net earnings per
weighted average limited partnership unit
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
outstanding totalled $.29 in the three months ended June 30, 2001 compared to
$.36 in the comparable period of 2000.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Gross
revenues decreased by $21,593,000, or 13.7%, during the six months ended June
30, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $20,109,000 in land, house and condominium sales, $2,313,000 in
hotel and resort operating income, $1,616,000 in financing lease income and
$518,000 in dividend and other income partially offset by increases of
$1,572,000 in rental income, $675,000 in equity in earnings of GB Holdings,
Inc., $673,000 in hotel and casino operating income and $43,000 in interest
income on treasury bills and other investments. The decrease in land, house and
condominium sales is primarily due to a decline in inventory of completed units
available for sale. The decrease in hotel and resort operating income is
primarily attributable to a decline in New Seabury resort operations, including
membership initiation fees, which were negatively impacted by the construction
of a new clubhouse and golf course improvements. The decrease in financing lease
income is the result of lease expirations and normal financing lease
amortization. The decrease in dividend and other income is primarily due to
decreased distributions from limited partnership investments partially offset by
a lease termination fee received in the six months ended June 30, 2001. The
increase in rental income is primarily attributable to newly acquired
properties. The equity in earnings of GB Holdings, Inc. is the
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
result of accounting for the Company's interest under the equity method
effective October 1, 2000. The increase in hotel and casino operating income is
primarily attributable to increased gaming revenues.
Expenses decreased by $16,770,000, or 13.7%, during the six months ended June
30, 2001 as compared to the same period in 2000. This decrease reflects
decreases of $15,287,000 in the cost of land, house and condominium sales,
$2,590,000 in hotel and resort operating expenses, $1,650,000 in Bayswater
acquisition costs and $540,000 in general and administrative expenses partially
offset by increases of $1,666,000 in interest expense, $1,102,000 in hotel and
casino operating expenses, $304,000 in depreciation and amortization and
$225,000 in rental property expenses. The decrease in cost of land, house and
condominium sales is due to decreased sales as explained above. The decrease in
hotel and resort operating expenses is primarily attributable to New Seabury
resort operations as explained above. The increase in interest expense is
primarily attributable to increased interest due affiliates in connection with
repurchase obligations. The increase in hotel and casino operating expenses is
primarily attributable to increased costs associated with increased revenues.
As a result of the completion of Stratosphere's additional 1,000 rooms and
related amenities, management anticipates increased hotel and casino operating
revenues and expenses in the second half of 2001. Due to this expansion,
management also expects the occupancy percentage and ADR to decline during this
period while marketing and advertising expenses are expected to increase.
Earnings before property and securities transactions and minority interest
decreased during the six months ended June 30, 2001 by $4,823,000 as compared to
the same period in 2000.
Gain on property transactions decreased by $744,000 during the six months ended
June 30, 2001 as compared to the same period in 2000 due to the number and size
of transactions.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
During the six months ended June 30, 2000, the Company recorded a provision for
loss on real estate of $232,000. No such provision was required in 2001.
Gain on sale of marketable equity and debt securities was $1,334,000 in the six
months ended June 30, 2001. There was no such transaction in 2000.
Minority interest in the net earnings of Stratosphere Corporation decreased by
$742,000 during the six months ended June 30, 2001 as compared to the same
period in 2000 due to a decrease in Stratosphere's net hotel and casino
operating income.
Net earnings for the six months ended June 30, 2001 decreased by $3,259,000 as
compared to the six months ended June 30, 2000 primarily due to decreased
earnings from land, house and condominium operations ($4.8 million) and
increased interest expense ($1.7 million) partially offset by decreased
Bayswater acquisition costs ($1.7 million) and increased gain on sale of
marketable equity and debt securities ($1.3 million). Earnings from land, house
and condominium operations decreased due to a decline in inventory of completed
units available for sale. Based on existing contracts, sales are expected to
increase in the second half of 2001. However, the decrease in land inventory in
approved sub-divisions is expected to negatively impact 2002 earnings from this
business segment unless mitigated by the purchase of land, development and sale
of units in approved sub-divisions.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Diluted earnings per weighted average limited partnership unit outstanding
before property and securities transactions were $.52 in the six months ended
June 30, 2001 compared to $.55 in the comparable period of 2000, and net gain
from property and securities transactions was $.05 in the six months ended June
30, 2001 compared to $.04 in the comparable period of 2000. Diluted net earnings
per weighted average limited partnership unit outstanding totalled $.57 in the
six months ended June 30, 2001 compared to $.59 in the comparable period of
2000.
For accounting purposes Bayswater's earnings prior to the date of acquisition
(March 23, 2000) were allocated to the General Partner and therefore excluded
from the computation of basic and diluted earnings per limited partnership unit.
CAPITAL RESOURCES AND LIQUIDITY
Generally, the cash needs of the Company for day-to-day operations have been
satisfied from cash flow generated from current operations. Cash flow from
day-to-day operations represents net cash provided by operating activities
(excluding working capital changes, non-recurring other income and the cash flow
from the operations of Bayswater and Stratosphere retained for their operations)
plus principal payments received on financing leases as well as principal
receipts on certain mortgages receivable reduced by periodic principal payments
on mortgage debt.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
In 2001, ten leases covering ten properties and representing approximately $1.0
million in annual rentals are schedule to expire. Seven leases, originally
representing approximately $667,000 in annual rental income, have been renewed
at tenants' option for approximately $434,000 annual rentals. Such renewals are
generally for a term of five years. The renewal status of two properties, with
an approximate annual rental income of $300,000, is currently pending. One
property representing approximately $33,000 in annual rentals was sold.
The Board of Directors of the General Partner announced that no distributions on
its Depositary Units are expected to be made in 2001. The Company believes that
it should continue to hold and invest rather than distribute cash. In making its
announcement, the Company noted it plans to continue to apply available
operating cash flow toward its operations, repayment of maturing indebtedness,
tenant requirements and other capital expenditures and creation of cash reserves
for contingencies including environmental matters and scheduled lease
expirations.
During the six months ended June 30, 2001, the Company generated approximately
$26.1 million in cash flow from day-to-day operations which excludes
approximately $7.2 million in cash flow from the operations of Bayswater and
Stratosphere which are being retained for their operations and excludes
approximately $3.2 million in interest earned on the 1997 Offering proceeds
which is being retained for future acquisitions.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
In 2001, the Company had approximately $1.77 million of maturing debt
obligations which was repaid in the first quarter of 2001. In addition, the
Company repaid a mortgage of approximately $706,000 in connection with a lease
termination in the six months ended June 30, 2001.
Capital expenditures for real estate, excluding hotel and casino operating
property, were approximately $8.8 million during the six months ended June 30,
2001.
During the six months ended June 30, 2001, net cash flow after payment of
maturing debt obligations and capital expenditures was approximately $14.8
million which was added to the Company's operating cash reserves. This excludes
cash flow from Bayswater and Stratosphere which is being retained for their
operations. The Company's operating cash reserves are approximately $156.3
million at June 30, 2001 (not including the cash from capital transactions or
from the 1997 Offering which is being retained for investment), which are being
retained to meet maturing debt obligations, capital expenditures and certain
contingencies.
The Company has the right and obligation to repurchase its interest in the Sands
when licensed by the N.J. Casino Control Commission. At June 30, 2001, the
Company's obligation to affiliates of the General Partner for interests held in
the Sands on its behalf was approximately $68.5 million.
In September 2000, Stratosphere's Board of Directors approved a going private
transaction proposed by the
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Company and an affiliate of Icahn. The Company, subject to certain conditions,
will pay approximately $44.3 million for the outstanding shares of Stratosphere
not currently owned. This transaction is expected to be completed in the fourth
quarter of 2001. In addition, Stratosphere will invest up to $100 million for
expansion of its hotel and casino facility, related amenities and the purchase
of the leasehold interest in the shopping center located on the premises. This
expansion was substantially completed in July 2001. As of June 30, 2001,
Stratosphere has expended approximately $78.2 million for additions to hotel and
casino operating property. The parent company has funded $68.5 million of this
expansion and the balance has been funded from Stratosphere's working capital.
The Company anticipates that golf course and clubhouse improvements in New
Seabury, Massachusetts will require the expenditure by the Company of an
aggregate of approximately $10 million in the year 2001, of which $8.0 million
was expended in the six months ended June 30, 2001. These improvements are
expected to be completed in the third quarter of 2001.
Pursuant to the 1997 Offering, which closed in September 1997, the Company
raised approximately $267 million to increase its available liquidity so that it
will be in a better position to take advantage of investment opportunities and
to further diversity its portfolio.
The Company's cash and cash equivalents and investment in U.S. Government and
Agency obligations decreased by $12.3 million during the six months ended June
30, 2001, primarily due to additions to hotel and casino property ($33.8
million), mezzanine loan advances ($9.3 million) and participation loan ($6.8
million) partially
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
offset by net cash flow from operations ($14.8 million), net cash flow from
Bayswater and Stratosphere operations ($7.2 million), working capital changes
($4.2 million), interest earned on the 1997 Rights Offering ($3.2 million),
equity and debt securities ($3.1 million) and miscellaneous other items ($5.1
million).
The United States Securities and Exchange Commission requires that registrants
include information about primary market risk exposures relating to financial
instruments. Through its operating and investment activities, the Company is
exposed to market, credit and related risks, including those described elsewhere
herein. As the Company may invest in debt or equity securities of companies
undergoing restructuring or undervalued by the market, these securities are
subject to inherent risks due to price fluctuations, and risks relating to the
issuer and its industry, and the market for these securities may be less liquid
and more volatile than that of higher rated or more widely followed securities.
Other related risks include liquidity risks, which arise in the course of the
Company's general funding activities and the management of its balance sheet.
This includes both risks relating to the raising of funding with appropriate
maturity and interest rate characteristics and the risk of being unable to
liquidate an asset in a timely manner at an acceptable price. Real estate
investments by their nature are often difficult or time-consuming to liquidate.
Also, buyers of minority interests may be difficult to secure, while transfers
of large block positions may be subject to legal, contractual or market
restrictions. Other operating risks for the Company include lease terminations,
whether scheduled terminations or due to tenant defaults or bankruptcies,
development risks, and
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
environmental and capital expenditure matters, as described elsewhere herein.
Whenever practical, the Company employs internal strategies to mitigate exposure
to these and other risks. The Company, on a case by case basis with respect to
new investments, performs internal analyses of risk identification, assessment
and control. The Company reviews credit exposures, and seeks to mitigate counter
party credit exposure through various techniques, including obtaining and
maintaining collateral, and assessing the creditworthiness of counterparties and
issuers. Where appropriate, an analysis is made of political, economic and
financial conditions, including those of foreign countries. Operating risk is
managed through the use of experienced personnel. The Company seeks to achieve
adequate returns commensurate with the risk it assumes. The Company utilizes
qualitative as well as quantitative information in managing risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Response to this item is included in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" above.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
PART II. Other information
ITEM 1. LEGAL PROCEEDINGS
Unitholder Litigation
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a. On November 18, 1998, Ruth Ellen Miller filed a class Action Complaint
bearing the caption Ruth Ellen Miller, on behalf of herself and all others
similarly situated v. American Real Estate Partners, L.P., High Coast Limited
Partnership, American Property Investors, Inc., Carl C. Icahn, Alfred Kingsley,
Mark H. Rachesky, William A. Leidesdorf, Jack G. Wasserman and John P.
Saldarelli in the Delaware Chancery Court in New Castle County (Civil Action
No. 16788NC). On September 21, 2000, Ruth Ellen Miller, Charles and Lydia
Hoffman, and Joy Lazarus, claiming as plaintiffs on behalf of themselves and
all others similarly situated, filed an amended complaint (the "Complaint") and
a motion for class certification.
Plaintiffs allege that all defendants, in breach of their fiduciary duties to
the Company, have caused the Company to engage in self-dealing or
self-interested transactions which inure to the benefit of defendants.
Plaintiff's claims are alleged to arise out of two transactions: the February
1995 Rights Offering effectuated pursuant to a purportedly false and misleading
prospectus; and Icahn's alleged use of his voting control to change the
business purpose of the Company by amending the Partnership Agreement to permit
the Company to make "non-real estate related investments," including
investments in entities owned or controlled by Icahn.
The Complaint seeks to have plaintiffs appointed as class representative and
that the putative class be certified. The Complaint also seeks an unspecified
amount in damages and injunctive relief: (i) dissolving the Partnership; (ii)
enjoining API from continuing to act as general partner of the Partnership;
(iii) enjoining the Partnership from engaging in any transaction in which Icahn
has either a direct or indirect interest; (iv) ordering API to exercise its
fiduciary obligations; and (v) compelling the Partnership to make periodic
distributions on the Depositary Units. Further, plaintiffs seek damages
resulting from the alleged breach of the Partnership Agreement for an
unquantified amount. The Complaint also seeks costs and attorneys' fees.
Management believes plaintiffs' claims are without merit and intends to
vigorously defend against them. Defendants moved to dismiss the amended
complaint. The Company joined in the motions to the extent that the allegations
are deemed applicable to it.
Stratosphere Litigation
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In January 2001, Stratosphere Gaming Corp. ("Stratosphere Gaming"), a
wholly-owned subsidiary of Stratosphere, was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No. A430070, in the
Eighth Judicial District Court of the State of Nevada. The complaint alleges a
number of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new tower until the property fully
complies with the ADA. Stratosphere Gaming removed the action to the United
States District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RSH (PAL).
Stratosphere Gaming has moved to dismiss one of the counts of plaintiffs'
complaint. Stratosphere Gaming also opposed plaintiffs' Motion for Preliminary
Injunction. In March, 2001, the Court held a hearing on the plaintiffs' Motion
for Preliminary Injunction and denied the motion, focusing upon what the Court
believed to be the plaintiffs' lack of irreparable injury. At present, discovery
has commenced and the parties are awaiting the Court's ruling on the Motion to
Dismiss.
In May, 2001, Stratosphere was named in an action brought by Harrah's
Entertainment, Inc. alleging infringement of a purported patent covering a
business method allegedly developed by Harrah's. The use of an allegedly similar
business method by Stratosphere in its advertising and promotions is said by
plaintiff to infringe upon its patent rights.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
Stratosphere's management intends to vigorously defend itself against the above
actions which are in the early stages of the litigation process. However, the
Company does not believe that they will have a material effect on the results of
operations or financial position of the Company.
In addition, in the ordinary course of business, the Company, its subsidiaries
and other companies in which the Company has invested are parties to various
legal actions. In management's opinion, the ultimate outcome of such legal
actions will not have a material effect on the results of operations or the
financial position of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - none
(b) (1) Form 8-K was filed on April 2, 2001 announcing 2000 fourth
quarter and full year financial results and that no distributions
are expected to be made during 2001.
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AMERICAN REAL ESTATE PARTNERS, L.P.-FORM 10-Q-JUNE 30, 2001
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 PARTNERS, L.P.
By: American Property Investors, Inc.
General Partner
/s/ John P. Saldarelli
----------------------
John P. Saldarelli
Treasurer
Chief Financial Officer
and Principal Accounting Officer
Date: August 14, 2001
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