Exhibit 99.2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a diversified holding company engaged in a variety of businesses.
Our primary business strategy is to seek to acquire undervalued assets and
companies that are distressed or out of favor. Our businesses currently include
rental real estate; real estate development; hotel and resort operations; hotel
and casino operations; investments in equity and debt securities; and oil and
gas exploration and production. We intend to continue to invest in our core
businesses, including real estate, gaming and entertainment, and oil and gas. We
may also seek opportunities in other sectors, including energy, industrial
manufacturing and insurance and asset management.
To capitalize on favorable real estate market conditions and the mature
nature of our commercial real estate portfolio, we are offering for sale our
rental real estate portfolio. No assurance can be given that either the attempt
to market our real estate portfolio will be successful or that, if successful,
the proceeds thereof can be used to acquire businesses and investments at prices
or at projected returns which are deemed favorable.
Historically, substantially all of our real estate assets leased to others
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 we are not typically responsible for payment
of expenses, such as maintenance, utilities, taxes and insurance associated with
such properties.
Expenses relating to environmental clean-up have not had a material effect
on our earnings, capital expenditures, or competitive position. We believe 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 we will not be deemed to be a responsible party or that the
tenant will bear the costs of remediation. Also, as we acquire more operating
properties, our exposure to environmental clean-up costs may increase. We have
completed Phase I environmental site assessments on most of our properties
through 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. We have 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, we could
potentially be liable for these costs. Based on the limited number of Phase II
environmental site assessments that 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, we have notified all tenants of
the Resource Conservation and Recovery Act's, or RCRA, December 22, 1998
requirements for regulated underground storage tanks. We may, at our own cost,
have to cause compliance with RCRA's requirements in connection with vacated
properties, bankrupt tenants and new acquisitions. Phase I environmental site
assessments will also be performed in connection with new acquisitions and with
such property refinancings as we may deem necessary and appropriate. We are in
the process of updating our Phase I site assessments for certain of our
environmentally sensitive properties including properties with open RCRA
requirements. Approximately 75 updates were completed in 2003. No additional
material environmental conditions were discovered.
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We have in recent years made investments in the gaming industry through
our ownership of Stratosphere Casino Hotel & Tower in Las Vegas, Nevada and
through our purchase of securities of the entity which owns the Sands Hotel in
Atlantic City, New Jersey. One of our subsidiaries, formed for this purpose,
entered into an agreement in January 2004 to acquire two Las Vegas
casino/hotels, Arizona Charlie's Decatur and Arizona Charlie's Boulder from Mr.
Icahn and an entity affiliated with Mr. Icahn, for an aggregate consideration of
$125.9 million. The closing of the acquisition was subject to certain
conditions, including among other things, obtaining all approvals necessary
under the Nevada gaming laws. Our subsidiary issued and sold debt securities
aggregating $215.0 million in principal amount to finance the acquisition and
the proceeds of this sale remained in escrow pending completion of the
acquisition. The amount raised in excess of the acquisition cost and expenses
was used to repay intercompany debt and make a distribution to us. We are
considering additional gaming industry investments. These investments may
include acquisitions from, or be made in conjunction with, our affiliates,
provided that the terms thereof are fair and reasonable to us.
We recently made an investment in the oil and gas industry. In October
2003, we acquired and presently hold 50.01% of the outstanding equity and all of
the outstanding debt securities of National Energy Group, Inc. which we acquired
from an affiliate of Mr. Icahn.
RESULTS OF OPERATIONS
CALENDAR YEAR 2003 COMPARED TO CALENDAR YEAR 2002
Gross revenues decreased by $69.8 million, or 20.2%, during the year ended
December 31, 2003 as compared to the year ended December 31, 2002. This decrease
reflects decreases of (1) $62.8 million in land, house and condominium sales,
(2) $7.8 million in interest income on U.S. government and agency obligations
and other investments, (3) $3.8 million in equity in earnings of GB Holdings,
Inc., (4) $2.7 million in accretion of investment in NEG Holding LLC, (5) $1.6
million in financing lease income and (6) $0.3 million in hotel and resort
operating income, partially offset by increases of $7.4 million in hotel and
casino operating income, $1.1 million in rental income, $0.3 million in dividend
and other income and $0.3 million in NEG management fee. The decrease in land,
house and condominium sales is primarily due to a decrease in the number of
units sold, as the Grassy Hollow, Gracewood and Stone Ridge properties were
depleted by sales. During 2003, Hammond Ridge received necessary approvals and,
along with Penwood, have commenced lot sales. As a result, we expect land, house
and condominium sales to moderately increase in 2004 and additional increased
sales in 2005. The decrease in interest income on U.S. government and agency
obligations and other investments is primarily attributable to the prepayment of
the loan to Mr. Icahn in 2003 and a decline in interest rates on U.S. government
and agency obligations as higher rate bonds were called in 2002. The decrease in
equity in earnings of GB Holdings, Inc. is due to decreased casino revenue
primarily attributable to a reduction in the number of table games as new slot
machines
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were added in 2002. This business strategy had a negative effect on casino
operations and was changed in 2003 to focus on the mid to high-end slot customer
with a balanced table game business. The decrease in accretion of investment in
NEG Holding is primarily attributable to priority distributions received from
NEG Holding in 2003. The decrease in financing lease income is the result of
lease expirations, reclassifications of financing leases and normal financing
lease amortization. The increase in hotel and casino operating income is
primarily attributable to an increase in hotel, food and beverage revenues and a
decrease in promotional allowances. The average daily rate, or ADR, increased $3
to $51 and percentage occupancy increased approximately 0.2% to 89.8%. The
increase in rental income is primarily attributable to a property acquisition
and reclassifications of financing leases to operating leases.
Expenses decreased by $49.0 million or 18.7%, during the year ended
December 31, 2003 as compared to the year ended December 31, 2002. This decrease
reflects decreases of $45.5 million in the cost of land, house and condominium
sales, $6.7 million in interest expense, $1.4 million in hotel and resort
operating expenses and $0.1 million in general and administrative expenses
partially offset by increases of $3.8 million in hotel and casino operating
expenses, $0.8 million in rental property expenses and $0.1 million in
depreciation and amortization. The decrease in the cost of land, house and
condominium sales is due to decreased sales. Costs as a percentage of sales
decreased from 72% in 2002 to 69% in 2003. The decrease in interest expense is
primarily due to repayment of debt by NEG and our purchase of the NEG notes in
October 2003. The decrease in hotel and resort operating expenses is due to a
decrease in payroll and related expenses. The increase in hotel and casino
operating expenses is primarily attributable to increased costs associated with
increased revenues. Costs as a percentage of sales decreased from 84% in 2002 to
83% in 2003.
Operating income decreased during the year ended December 31, 2003 by
$20.8 million compared to the year ended December 31, 2002 as detailed above.
Earnings from land, house and condominium operations decreased
significantly in the year ended December 31, 2003 compared to the year ended
December 31, 2002 due to a decline in inventory of completed units available for
sale. Based on current information, sales will increase moderately during 2004.
However, municipal approval of land inventory or the purchase of approved land
is required to continue this upward trend into 2005 and beyond.
Earnings from hotel, casino and resort properties could be constrained by
recessionary pressures, international tensions and competition.
Gain on property transactions from continuing operations decreased by $1.9
million during the year ended December 31, 2003 as compared to the year ended
December 31, 2002 due to the size and number of transactions.
A provision for loss on real estate of $0.8 million was recorded in the
year ended December 31, 2003 as compared to $3.2 million in 2002. In 2002, there
were more properties vacated due to tenant bankruptcies than in 2003.
A write-down of marketable equity securities available for sale of $1.0
million was recorded in the year ended December 31, 2003 as compared to a
write-down of $8.5 million in 2002. These write-downs relate to our investment
in Philip Services Corp. which filed for bankruptcy protection in June 2003.
A write-down of mortgages and notes receivable of $18.8 million,
pertaining to our investment in the Philip notes, was recorded in the year ended
December 31, 2003. There was no such write-down in the year ended
December 31, 2002. In 2003, we reviewed Philip's financial statements and other
data and determined this investment to be impaired.
A write-down of a limited partnership investment of $3.8 million was
recorded in the year ended December 31, 2002. There was no such write-down in
2003.
A gain on sale of marketable equity securities of $2.6 million was
recorded in the year ended December 31, 2003. There was no such gain in 2002.
Minority interest in the net earnings of Stratosphere Corporation was $1.9
million during the year ended
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December 31, 2002. As a result of the acquisition of the minority interest in
December 2002, there was no minority interest in Stratosphere in 2003 and none
thereafter.
Income from continuing operations before income taxes decreased by $23.2
million in the year ended December 31, 2003 as compared to the year ended
December 31, 2002 as detailed above.
An income tax benefit of $6.5 million was recorded in the year ended
December 31, 2003 as compared to an expense of $7.5 million in 2002. The
effective tax rate on earnings of taxable subsidiaries was positively affected
in 2003 by a reduction in the valuation allowance in deferred tax assets. We
expect our effective tax rate on earnings of taxable subsidiaries to increase
significantly in 2004.
Income from continuing operations decreased by $9.3 million in the year
ended December 31, 2003 as compared to 2002 primarily as detailed above.
Income from discontinued operations increased by $3.5 million in the year
ended December 31, 2003 as compared to 2002 primarily due to gains on property
dispositions.
Net earnings for the year ended December 31, 2003 decreased by $5.8
million as compared to the year ended December 31, 2002 primarily due to a
write-down of mortgages and notes receivable of $18.8 million, decreased
earnings from land, house and condominium operations of $17.2 million, decreased
interest income of $7.8 million and decreased equity in earnings of GB Holdings
of $3.8 million, partially offset by decreased income tax expense of $14.0
million, a decrease in write-down of equity securities available for sale of
$7.5 million, decreased interest expense of $6.7 million, decreased write-down
of limited partnership interests of $3.8 million, increased earnings from hotel
and casino operations of $3.6 million, increased gain on the sale of marketable
equity securities of $2.6 million and an increase in income from discontinued
operations of $3.5 million.
CALENDAR YEAR 2002 COMPARED TO CALENDAR YEAR 2001
Gross revenues increased by $24.1 million, or 7.5%, during the year ended
December 31, 2002 as compared to the year ended December 31, 2001. This increase
reflects increases of $23.0 million in accretion of investment in NEG Holding,
$20.5 million in land, house and condominium sales, $12.0 million in hotel and
casino operating income, $4.9 million in NEG management fee, $2.6 million in
hotel and resort operating income and $0.1 million in rental income partially
offset by decreases of $33.2 million in oil and gas operating income, $2.2
million in financing lease income, $2.2 million in dividend and other income,
$1.5 million in equity in earnings of GB Holdings and $23,000 in interest income
on U.S. government and agency obligations and other investments. The increase in
accretion of investment in NEG Holding and the management fee are due to the
partial year of 2001 which began May 1 as a result of the bankruptcy
reorganization. Prior to that time, NEG directly owned and operated oil and
natural gas properties. The increase in land, house and condominium sales is
primarily attributable to higher selling prices and an increase in the number of
units sold, due to a strong residential housing market and low mortgage rates.
The increase in hotel and casino operating income is primarily attributable to
an increase in gaming and hotel revenues as a result of increased capacity
brought about by the hotel expansion. ADR remained at $48 during the years ended
December 31, 2002 and 2001; however, percentage occupancy decreased 4% to 89.6%.
The increase in hotel and resort operating income is primarily attributable to
increased revenues at New Seabury as prior year's revenues were negatively
impacted by construction activities. The decrease in financing lease income is
the result of lease expirations, reclassification of financing leases and normal
financing lease amortization. The decrease in dividend and other income is
primarily due to lease termination and deferred maintenance payments received
from tenants in 2001. The decrease in equity earnings of GB Holdings is due to
decreased casino revenue, primarily attributable to a reduction in the number of
table games as new slot machines were added in 2002, which was partially offset
by decreased promotional allowances and decreased casino expenses. In addition,
GB Holdings recorded an impairment loss on certain property expansion costs
determined to be unusable.
Expenses increased by $4.1 million, or 1.6%, during the year ended
December 31, 2002 as compared to 2001. This increase reflects increases of $12.0
million in the cost of land, house and condominium sales, $3.7 million in hotel
and casino operating expenses, $1.7 million in rental property expenses, $1.8
million in hotel and resort operating expenses and $1.1 million in general and
administrative expenses partially offset by decreases of $7.4 million in
interest expense, $5.6 million in oil and gas operating expenses and $3.2
million in depreciation
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and amortization. The increase in the cost of land, house and condominium sales
is due to increased sales as explained above. Costs as a percentage of sales
declined from 77% in 2001 to 72% in 2002 primarily due to higher margin sales in
2002. The increase in hotel and casino operating expenses is primarily
attributable to increased costs associated with increased revenues. Costs as a
percentage of sales declined from 89% in 2001 to 84% in 2002 as hotel and casino
revenues increased at a greater rate than hotel and casino expenses due to the
hotel expansion. The increase in property expenses is primarily due to an
increase in expenses related to off-lease properties and expenses of the New
Seabury development litigation of approximately $1 million. The increase in
hotel and resort operating expenses is primarily attributable to increased costs
associated with increased revenues at New Seabury. Costs as a percentage of
sales decreased from 88% in 2001 to 84% in 2002. The decrease in interest
expense is primarily due to the repayment of debt to affiliates in May 2002 in
connection with the Sands repurchase obligation, as well as decreased interest
rates prior to repayment of this debt. The decrease in oil and gas operating
expenses is due to the partial year of 2001. The decrease in depreciation and
amortization expense is primarily attributable to NEG contributing its operating
properties to NEG Holding in May 2001.
Earnings from land, house and condominium operations increased in the year
ended December 31, 2002 as compared to the same period in 2001. However, the
decrease in land inventory in approved sub-divisions is expected to negatively
impact earnings from this business segment.
As a result of the completion of Stratosphere's additional 1,000 rooms and
related amenities in June 2001, hotel and casino operating revenues and expenses
have increased. Increased room capacity provided more hotel guests thereby
increasing revenues. Earnings from hotel, casino and resort properties are
expected to be constrained by recessionary pressures, international tensions and
competition.
Operating income increased during the year ended December 31, 2002 by
$20.0 million as compared to 2001.
Gain on sale of real estate increased by $7.3 million, during the year
ended December 31, 2002 as compared to 2001 due to the size and number of
transactions.
During the years ended December 31, 2002 and 2001, we recorded a provision
for loss on real estate of $3.2 million. A substantial portion of the 2002
provision resulted from vacated properties where leases were not renewed or were
rejected by tenants in bankruptcy.
A write-down of equity securities available for sale of $8.5 million was
recorded in the year ended December 31, 2002. The market value of Philip's
common stock has declined steadily since it was acquired by us. In 2002, based
on a review of Philip's financial statements, we deemed the decrease in value to
be other than temporary. As a result, we wrote down our investment in Philips'
common stock by a charge to earnings. There was no such write-down in 2001.
Gain on sale of marketable equity and debt securities was $6.8 million, in
the year ended December 31, 2001. There was no such income in 2002.
A write-down of a limited partnership investment of $3.8 million was
recorded in the year ended December 31, 2002. We invested $6.0 million in an
unaffiliated limited partnership. Upon review of this investment in 2002, we
determined that the investment was impaired and wrote down its value by a charge
to earnings. There was no such write-down in 2001.
Minority interest in the net earnings of Stratosphere increased by $1.5
million during the year ended December 31, 2002 as compared to the same period
in 2001, due to an increase in Stratosphere's net hotel and casino operating
income. As a result of the acquisition of the minority interest in December
2002, there will be no minority interest in net earnings of Stratosphere in 2003
and thereafter.
Income from operations before income taxes increased by $6.7 million in
the year ended December 31, 2002 as compared to the same period in 2001 as
detailed above.
The income tax expense was $7.5 million for the year ended December 31,
2002 as compared to an income tax
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benefit of $30.1 million for 2001.
Income from continuing operations decreased by $30.9 million in the year
ended December 31, 2002 as compared to 2001.
Income from discontinued operations decreased by $0.1 million for the year
ended December 31, 2002 as compared to 2001.
Net earnings for the year ended December 31, 2002 decreased by $31.0
million as compared to the year ended December 31, 2001 primarily due to
increased income tax expense of $37.6 million, a write-down of equity securities
available for sale of $8.5 million, decreased gain on sale of marketable equity
securities of $6.7 million and the write-down of a limited partnership
investment of $3.8 million partially offset by increased earnings from land
house and condominium operations of $8.4 million, increased earnings from hotel
and casino operations of $8.3 million and increased gain on sale of real estate
of $7.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $18.5 million for the year
ended December 31, 2003 as compared to $100.1 million in 2002. This decrease
resulted primarily from a decrease in the land, house and condominium operations
of $45.6 million and the payment of accrued interest on senior notes of $41.7
million partially offset by an increase in cash flow from other operations of
$5.7 million.
The following table reflects our contractual cash obligations, as of
December 31, 2003, due during the indicated periods (dollars in millions):
LESS THAN 1 AFTER 5
YEAR 1-3 YEARS 4-5 YEARS YEARS TOTAL(1)
---- --------- --------- ----- --------
Mortgages payable ...................... $ 6.5 $ 28.2 $ 68.0 $ 78.3 $ 181.0
Mezzanine loan commitments ............. 20.0 -- -- -- 20.0
Construction and development obligations 23.0 -- -- -- 23.0
-------- ------- ------- -------- ----------
Total .................................. $ 49.5 $ 28.2 $ 68.0 $ 78.3 $ 224.0
======== ======= ======= ======== ==========
(1) In addition, see note 25 to consolidated financial statements for
preferred limited partnership redemption.
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On March 15, 2004, we announced that no distributions on our depositary
units are expected to be made in 2004. We continue to believe that we should
continue to hold and invest, rather than distribute, cash. We intend to continue
to apply available cash flow toward its operations, repayment of maturing
indebtedness, tenant requirements, investments, acquisitions and other capital
expenditures.
In January 2004, American Casino closed on its offering of senior secured
notes due 2012. The notes, in the aggregate principal amount of $215 million,
bear interest at the rate of 7.85% per annum. American Casino used the proceeds
of the offering for the Arizona Charlie's acquisitions to repay intercompany
indebtedness and for distributions to AREH.
In 2003, 17 leases covering 17 properties and representing approximately
$2.2 million in annual rentals expired. Twelve leases originally representing
$1.6 million in annual rental income were renewed for $1.4 million in annual
rentals. Such renewals are generally for a term of five years. Five properties
with annual rental income of $0.6 million were not renewed.
In 2004, 11 leases covering 11 properties and representing approximately
$1.8 million in annual rentals are scheduled to expire. Eight leases
representing $1.5 million in annual rental income were renewed for $1.5 million
in annual rentals. Such renewals are generally for a term of five years. Three
properties with annual rentals of $0.3 million were not renewed.
On March 31, 2003, we distributed to holders of record of our preferred
units as of March 14, 2003, 466,548 additional preferred units. Pursuant to the
terms of the preferred units, on February 23, 2004, we declared our scheduled
annual preferred unit distribution payable in additional preferred units at the
rate of 5% of the liquidation preference of $10.00. The distribution of 489,657
preferred units was paid on March 31, 2004 to holders of record as of March 12,
2004. In February 2004, the number of authorized preferred units was increased
to 10,400,000.
Our preferred units are subject to redemption at our option on any payment
date, and the preferred units must be redeemed by us on or before March 31,
2010. The redemption price is payable, at our option, subject to the indenture,
either all in cash or by the issuance of depositary units, in either case, in an
amount equal to the liquidation preference of the preferred units plus any
accrued but unpaid distributions thereon.
The types of investments we are pursuing, including assets that may not be
readily financeable or generating positive cash flow, such as development
properties, non-performing mortgage loans or securities of companies which may
be undergoing restructuring or require significant capital investments, require
us to maintain a strong capital base in order to own, develop and reposition
these assets.
Sales proceeds from the sale or disposal of portfolio properties totaled
approximately $20.6 million in 2003. During 2002, such sales proceeds totaled
approximately $20.5 million. In May 2003, we obtained mortgage
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financing in the principal amount of $20 million on a distribution facility
located in Windsor Locks, Connecticut. In 2002, mortgage financing proceeds were
$12.7 million.
In October 2003, pursuant to a purchase agreement dated as of May 16,
2003, we acquired all of the debt and 50% of the equity securities of NEG from
entities affiliated with Mr. Icahn for an aggregate consideration of
approximately $148.1 million plus approximately $6.7 million of accrued interest
on the debt securities.
Capital expenditures for real estate and hotel, casino and resort
operations were approximately $20.1 million during 2003. During 2002, such
expenditures totaled approximately $4.8 million. In 2004, capital expenditures
are estimated to be approximately $13 million.
During the year ended December 31, 2003, approximately $10.3 million of
principal payments were repaid. During the year ended December 31, 2002,
approximately $7.6 million of principal payments were repaid.
Our cash and cash equivalents and investment in U.S. government and agency
obligations increased by $138.3 million during the year ended December 31, 2003,
primarily due to affiliate loan repayment of $250 million, property sales and
refinancing proceeds of $40.6 million, priority distribution from NEG Holding of
$40.5 million, net cash flow from operations of $18.5 million, guaranteed
payment from NEG Holding of $18.2 million and other items of $14.9 million
partially offset by the purchase of NEG interests of $148.1 million, purchase of
debt securities of $45.1 million, increase in mezzanine loans of $31.1 million
and capital expenditures for real estate and hotel, casino and resort operating
properties of $20.1 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principals in the United States of America,
or GAAP. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Among others, estimates are used when
accounting for valuation of investments, recognition of casino revenues and
promotional allowances and estimated costs to complete our land, house and
condominium developments. Estimates and assumptions are evaluated on an ongoing
basis and are based on historical and other factors believed to be reasonable
under the circumstances. The results of these estimates may form the basis of
the carrying value of certain assets and liabilities and may not be readily
apparent from other sources. Actual results, under conditions and circumstances
different from those assumed, may differ from estimates.
We accounted for our acquisition of NEG as assets transferred between
entities under common control which requires that they be accounted for at
historical costs similar to a pooling of interests. NEG's investment in NEG
Holding constitutes a variable interest entity. In accordance with generally
accepted accounting principles, we have determined that NEG is not the primary
beneficiary of NEG Holding and therefore we do not consolidate NEG Holding in
our consolidated financial statements.
We believe the following accounting policies are critical to our business
operations and the understanding of results of operations and affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF
Long-lived assets held and used by us and long-lived assets to be disposed
of, are reviewed for impairment whenever events or changes in circumstances,
such as vacancies and rejected leases, indicate that the carrying amount of an
asset may not be recoverable.
In performing the review for recoverability, we estimate the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows, undiscounted and without interest
charges, is less than the carrying amount of the asset an impairment loss is
recognized. Measurement of an impairment loss for long-lived assets that we
expect to hold and use is based on the fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less cost to sell.
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COMMITMENTS AND CONTINGENCIES-LITIGATION
On an ongoing basis, we assess the potential liabilities related to any
lawsuits or claims brought against us. While it is typically very difficult to
determine the timing and ultimate outcome of such actions, we use our best
judgment to determine if it is probable that we will incur an expense related to
the settlement or final adjudication of such matters and whether a reasonable
estimation of such probable loss, if any, can be made. In assessing probable
losses, we make estimates of the amount of insurance recoveries, if any. We
accrue a liability when we believe a loss is probable and the amount of loss can
be reasonably estimated. Due to the inherent uncertainties related to the
eventual outcome of litigation and potential insurance recovery, it is possible
that certain matters may be resolved for amounts materially different from any
provisions or disclosures that we have previously made.
MARKETABLE EQUITY AND DEBT SECURITIES AND INVESTMENT IN U.S. GOVERNMENT AND
AGENCY OBLIGATIONS
Investments in equity and debt securities are classified as either
held-to-maturity or available for sale for accounting purposes. Investment in
U.S. government and agency obligations are classified as available for sale.
Available for sale securities are carried at fair value on our balance sheet.
Unrealized holding gains and losses are excluded from earnings and reported as a
separate component of partners' equity. Held-to-maturity securities are recorded
at amortized cost.
A decline in the market value of any held-to-maturity security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Dividend income is recorded when declared and
interest income is recognized when earned.
MORTGAGES AND NOTES RECEIVABLE
We have generally not recognized any profit in connection with the
property sales in which certain purchase money mortgages receivable were taken
back. Such profits are being deferred and will be recognized when the principal
balances on the purchase money mortgages are received.
We engage in real estate lending, including making second mortgage or
secured mezzanine loans to developers for the purpose of developing
single-family homes, luxury garden apartments or commercial properties. These
loans are subordinate to construction financing and we target an interest rate
in excess of 20% per annum. However interest is not paid periodically and is due
at maturity or earlier from unit sales or refinancing proceeds. We defer
recognition of interest income on mezzanine loans pending receipt of principal
and interest payments.
REVENUE RECOGNITION
Revenue from real estate sales and related costs are recognized at the
time of closing primarily by specific identification. We follow the guidelines
for profit recognition set forth by Financial Accounting Standards Board (FASB)
Statement No. 66, Accounting for Sales of Real Estate.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
We recognize revenues in accordance with industry practice. Casino revenue
is the net win from gaming activities, the difference between gaming wins and
losses. Casino revenues are net of accruals for anticipated payouts of
progressive and certain other slot machine jackpots. Revenues include the retail
value of rooms, food and beverage and other items that are provided to customers
on a complimentary basis. A corresponding amount is deducted as promotional
allowances. The cost of such complimentaries is included in "Hotel and casino
operating expenses."
INCOME TAXES
No provision has been made for Federal, state or local income taxes on the
results of operations generated by partnership activities as such taxes are the
responsibility of the partners. Stratosphere and NEG, our corporate
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subsidiaries, account for their income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Management periodically evaluates all evidence, both positive and
negative, in determining whether a valuation allowance to reduce the carrying
value of deferred tax assets is still needed. In 2003, it concluded, based on
the projected allocations of taxable income, our corporate subsidiaries, NEG and
Stratosphere, more likely than not will realize a partial benefit from its
deferred tax assets and loss carryforwards. Ultimate realization of the deferred
tax asset is dependent upon, among other factors, their ability to generate
sufficient taxable income within the carryforward periods and is subject to
change depending on the tax laws in effect in the years in which the
carryforwards are used.
PROPERTIES
Properties held for investment, other than those accounted for under the
financing method, are carried at cost less accumulated depreciation unless
declines in the value of the properties are considered other than temporary at
which time the property is written down to net realizable value. A property is
classified as held for sale at the time we determine that the criteria in SFAS
144 have been met. Properties held for sale are carried at the lower of cost or
net realizable value. Such properties are no longer depreciated and their
operations are included in discontinued operations.
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