Item 1. Business. --------
Introduction ------------
American Real Estate Partners, L.P. ("AREP") was formed in Delaware on February 17, 1987. Pursuant to an exchange offer (the "Exchange Offer") which was consummated on July 1, 1987, AREP acquired the real estate and other assets, subject to the liabilities, of thirteen limited partnerships (the "Predecessor Partnerships"). The Predecessor Partnerships acquired such assets between 1972 and 1985. A registration statement on Form S-4 relating to the Exchange Offer (Registration No. 33-13943) was filed with the Securities and Exchange Commission (the "SEC") and declared effective May 18, 1987.
AREP's general partner is American Property Investors, Inc. (the "General Partner"), a Delaware corporation which is wholly owned by Carl C. Icahn ("Icahn"). The General Partner's principal business address is 90 South Bedford Road, Mt. Kisco, New York 10549. AREP's business is conducted through a subsidiary limited partnership, American Real Estate Holdings Limited Partnership (the "Subsidiary"), in which AREP owns a 99% limited partnership interest. The General Partner also acts as the general partner for the Subsidiary. The General Partner has a 1% general partnership interest in each of AREP and the Subsidiary. References to AREP herein include the Subsidiary, unless the context otherwise requires.
During the end of March and early April 1995, AREP anticipates completing a rights offering (the "Rights Offering"), pursuant to which it will raise approximately $109,000,000, net of related expenses. High Coast Limited Partnership, a Delaware limited partnership which is controlled by Icahn, has acted as guarantor of the offering (the "Guarantor"). Through the Guarantor, Icahn will exercise certain subscription rights and an over-subscription privilege to acquire additional depositary units representing limited partner interests (the "Depositary Units") and 5% cumulative pay-in-kind redeemable preferred units representing limited partner interests (the "Preferred Units"). As of March 17, 1995, Icahn, through the Guarantor, beneficially owned 9.89% of the Depositary Units then outstanding prior to giving effect to the Rights Offering. In addition, as a result of the Guarantor's participation in the Rights Offering, AREP expects that Icahn will increase his percentage ownership in AREP and obtain a substantial portion of the Preferred Units being offered. A registration statement on Form S-3 relating to the Rights Offering (Registration No. 33-54767) was filed with the SEC and declared effective February 23, 1995. See "Business -- Rights Offering" and ITEM 12 -- "Security Ownership of Certain Beneficial Owners and Management."
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Description of Business -----------------------
AREP is in the business of acquiring and managing real estate and activities related thereto. Historically, the properties owned by AREP have been primarily office, retail, industrial, residential and hotel properties. Most of the real estate assets currently owned by AREP were acquired from the Predecessor Partnerships and such assets are generally net-leased to single, corporate tenants. As of March 17, 1995, AREP owned 249 separate real estate assets primarily consisting of fee and leasehold interests in 35 states and Canada (one property). As discussed below, AREP is seeking to acquire new investments to take advantage of investment opportunities it believes exist in the current real estate market to further diversify its portfolio and to mitigate against lease expirations.
For each of the years ended December 31, 1994, 1993 and 1992, no single real estate asset or series of assets leased to the same lessee accounted for more than 10% of the gross revenues of AREP. However, at December 31, 1994 and 1993, Portland General Electric Company ("PGEC") occupied a property (the "PGEC Property") which represented more than 10% of AREP's total assets. See ITEM 2

Item 2. Properties. ----------
As of March 17, 1995, AREP owned 249 separate real estate assets (primarily consisting of fee and leasehold interests and, to a limited extent, interests in real estate mortgages) in 35 states and Canada (one property). These properties are generally net-leased to single corporate tenants. Approximately 98% of AREP's properties are currently net-leased. See Note 8 to the Financial Statements contained herein for information on mortgages payable.
The following table summarizes the type, location and average net effective rent per square foot of AREP's properties:
Location Number of Property of Properties ----------- -------------
US: Southeast 109 Northeast 54 South Central 11 Southwest 20 North Central 46 Northwest 8
Canada: 1
From January 1, 1994 through March 17, 1995, AREP sold or otherwise disposed of 34 properties. In connection with such sales and dispositions, AREP received an aggregate of approximately $16,000,000 in cash, net of amounts utilized to
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satisfy mortgage indebtedness which encumbered such properties. As of December 31, 1994, AREP owned four properties that were being actively marketed for sale. The aggregate net realizable value of such properties is estimated to be approximately $413,000.
Furthermore, AREP has executed a contract for the sale of a property located in Taylor, Michigan which is tenanted by Pace Membership Warehouse, Inc. AREP expects to complete the sale by the end of March 1995. The sales price is $9,300,000 and AREP expects to record a gain of approximately $3,300,000 in the three months ended March 31, 1995. The property is encumbered by a nonrecourse mortgage payable of approximately $4,346,000, which the purchaser will assume. In addition, the purchaser is obligated to pay AREP $50,000 should it default on its obligations under the contract.
For each of the years ended December 31, 1994, 1993 and 1992, no single real estate asset or series of assets leased to the same lessee accounted for more than 10% of the gross revenues of AREP. However, at December 31, 1994 and 1993, PGEC occupied a property, which represented more than 10% of AREP's total assets. PGEC is an electric utility engaged in the generation, purchase, transmission, distribution and sale of electricity, whose shares are traded on the New York Stock Exchange, Inc. (the "NYSE").
The PGEC Property is an office complex consisting of three buildings containing an aggregate of approximately 803,000 square feet on an approximate 2.7 acre parcel of land located in Portland, Oregon. The Predecessor Partnership originally purchased the PGEC Property on September 11, 1978 for a price of approximately $57,143,000.
The PGEC Property is subject to two underlying mortgages, which in the aggregate as of December 31, 1994, had an outstanding principal balance of $36,190,135. The first mortgage bears interest at 8.5% per annum, provides for aggregate annual debt service of $2,856,960 and matures on October 1, 2002, at which time a balloon payment of $19,304,091 will be due and payable. By its terms, this mortgage is prepayable at any time subject to certain restrictions. The second mortgage bears interest at 10% per annum, provides for interest-only payments during its term (an aggregate of $1,000,000 per annum) and matures in October 1996, at which time a balloon payment of $10,000,000 will be due and payable. By its terms, this second mortgage was not prepayable until September 1989, and then only with a 6% penalty, which penalty decreases by .5% each year thereafter.
The PGEC Property is net-leased to a wholly owned subsidiary of PGEC for forty (40) years, with two ten-year and one five-year renewal options. The annual rental is $5,137,309 until 2003, $4,973,098 until 2018 and $2,486,549 during each renewal option. PGEC has guaranteed the performance of its subsidiary's obligations under the lease. The lessee has an option to purchase the PGEC
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Property in September of 2003, 2008, 2013 and 2018 at a price equal to the fair market value of the PGEC Property determined in accordance with the lease and is required to make a rejectable offer to purchase the PGEC Property in September 2018 for a price of $15,000,000. A rejection of such offer will have no effect on the lease obligations or the renewal and purchase options.
In June 1994, AREP entered into two joint ventures with unaffiliated co-venturers for the purpose of developing luxury garden apartment complexes. See ITEM 1 -- "Business -- Recent Acquisitions" above.
AREP's most significant acquisition in 1993 was the purchase of two non-performing mortgage loans for a combined price of $13,000,000. AREP foreclosed on these loans in 1993 and 1994, and now holds title to the underlying properties. On July 25, 1994, AREP obtained financing on these two properties. See ITEM 1 -- "Business -- Financing Activities."
AREP is continuing to seek opportunities to refinance upon favorable terms and sell certain of its properties to generate proceeds for future investments, in addition to the proceeds anticipated from the Rights Offering. In the current real estate environment, management continues to seek to improve the long- term value of AREP's portfolio by, among other means, using the proceeds of the Rights Offering and reinvesting capital transaction proceeds to maximize capital appreciation and diversification of the portfolio. AREP believes that the continuing weakness in the real estate market presents opportunities to acquire significantly undervalued properties, including commercial properties, residential development projects and non-performing loans, thereby enhancing AREP's portfolio and its return on investments. In selecting investments, AREP intends to focus on assets that it believes are undervalued in the current real estate market, such as development properties and non-performing loans, which the General Partner believes have the potential to diversify and enhance the long-term value of AREP's portfolio. Such investments may require active management which could result in higher operating expenses for AREP. The cash flow generated by an asset will be a consideration, but AREP may acquire assets that are not generating positive cash flow. While this may impact cash flow in the near term and there can be no assurance that any property acquired by AREP will increase in value or generate positive cash flow, management intends to focus on assets that it believes may provide opportunities for long- term growth and diversification of its portfolio.
Item 3.

Item 3. Legal Proceedings. -----------------
Unitholder Litigation ---------------------
On August 15 and 16, 1994, AREP was served with two class action complaints, both filed with the Delaware Court of Chancery,
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New Castle County, in connection with the Rights Offering, Steven Yavers v. American Real Estate Partners, L.P., American Property Investors, Inc., and Carl C. Icahn, C.A. No. 13682, and Allan Haymes, I.R.A. v. American Real Estate Partners, L.P., American Property Investors, Inc., and Carl C. Icahn, C.A. No. 13687. An additional complaint relating to the Rights Offering was filed with the Delaware Court of Chancery, New Castle County, and all three have been consolidated into one action (the "Consolidated Action").
Plaintiffs in the Consolidated Action claim that defendants have breached fiduciary and common law duties owed to plaintiffs and plaintiffs' putative class by engaging in self-dealing and by failing to disclose all relevant facts regarding the Rights Offering. Plaintiffs seek declaratory and injunctive relief declaring the action properly maintainable as a class action, declaring that defendants breached their fiduciary and other duties, enjoining the Rights Offering, ordering defendants to account for all damages suffered by the class as a result of the alleged acts and awarding further relief as the court deems appropriate.
By agreement among AREP and the above mentioned plaintiffs, AREP's time to respond to the consolidated complaint has been extended to April 7, 1995. AREP believes the allegations are without merit and intends to vigorously defend the Consolidated Action. The allegations in the consolidated complaint relate to previous superseded terms of the Rights Offering and, hence, AREP believes they are moot.
Defaulted Mortgages -------------------
As of December 31, 1994, AREP held a mortgage note receivable in the principal amount of approximately $463,000. The mortgage encumbers four properties together with a collateral assignment of ground leases and rents. The properties are tenanted by Gino's and Foodarama. The mortgage had been taken back by a Predecessor Partnership in connection with the sale of these properties. The tenants remained current in their lease obligations.
The terms of the mortgage called for a balloon payment of $1,100,000 on January 1, 1992, which was not received. On January 9, 1992, AREP gave written notice of default to Sheldon Lowe and Joseph T. Comras, the mortgagors and the current owners of the properties. As of December 31, 1994, AREP is in the process of foreclosing on the four properties. See Note 12(d) to the Financial Statements contained herein.
Property Litigation -------------------
Simultaneously with the acquisition of property in East Syracuse, New York, AREP entered into a general construction
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contract (the "GC Agreement") pursuant to which the seller was required to construct the property for a guaranteed maximum amount of $2,327,802. However, the construction of the BJ's Warehouse Store was subject to delays and the seller did not meet all of its construction obligations under the GC Agreement and failed to cure such defaults. AREP sent a notice, dated February 19, 1993, terminating the GC Agreement. AREP contacted the surety of the GC Agreement to make a claim pursuant to the terms of the surety bond and was unsuccessful. AREP has determined at this point that it will not pursue any potential claims that it may have against the surety, because after due inquiry, it believes that such claims will not be able to be satisfied. Additionally, in connection with certain alleged agreements between related entities and principals of the seller, and a brokerage company, the broker filed an action in the amount of $250,000. AREP did not agree to assume the obligation to pay such commission and is defending such action. Furthermore, another broker has instituted an action against AREP and certain other co-defendants regarding a $224,500 brokerage claim with respect to such property, as well as punitive damages of $1,000,000; this action was settled in January 1995 with dismissal of the action with prejudice and with a reservation of AREP's rights against its co- defendants.
Environmental Litigation ------------------------
On September 16, 1991, AREP brought suit against Alco Standard Corporation and its affiliates, a former tenant of an industrial facility located in Rome, Georgia whose lease expired in October 1990. The action was brought against the defendants in the United States District Court for the Northern District of Georgia, Rome Division, for reimbursement of costs that could be incurred for clean-up of hazardous materials on the site and certain deferred maintenance. In July 1994, this litigation was settled and the property was sold for $525,000. A gain of approximately $100,000 was recognized in the third quarter of 1994. In addition, Alco reimbursed AREP for $150,000 of expenses incurred and indemnified AREP against any future liability in connection with any site contamination.
Lockheed, a tenant of AREP's leasehold property in Palo Alto, California, has entered into a consent decree with the California Department of Toxic Substances ("CDTS") to undertake certain environmental remediation at this property. Lockheed has estimated that the environmental remediation costs may be up to approximately $14,000,000. In a non-binding determination by CDTS, Lockheed was found responsible for approximately 75% of such costs and the balance was allocated to other parties. AREP was allocated no responsibility for any such costs.
Lockheed has served a notice that it may exercise its statutory right to have its liability reassessed in a binding arbitration proceeding. In this notice of arbitration, Lockheed stated that it will attempt to have allocated to AREP and to AREP's ground-lessor (which may claim a right of indemnity against AREP)
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approximately 9% and 17%, respectively, of the total remediation costs. AREP believes that it has no liability for any of such costs and, in any proceeding in which such liability is asserted against AREP, AREP intends to contest such liability vigorously. In the event any of such liability is allocated to AREP, AREP intends to seek indemnification for any such liability from Lockheed in accordance with its lease.
Bankruptcies ------------
AREP is aware that eleven of its present and former tenants have been or are currently involved in some type of bankruptcy or reorganization during the three-year period ended December 31, 1994, affecting a total of forty-one of AREP's properties. See also Notes 7(c), (d), (e), (g) and 12(a), (c), (d), (e) and 16(a) to the Financial Statements contained herein describing various tenant and mortgagor bankruptcies for which AREP has filed claims.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------
None.
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PART II
Item 5.

Item 5. Market for AREP's Common Equity and Related Security Holder Matters. -----------------------------------
Market Information ------------------
AREP's Depositary Units are traded on the NYSE under the symbol "ACP." Trading on the NYSE commenced July 23, 1987, and the range of high and low market prices for the Depositary Units on the New York Stock Exchange Composite Tape (as reported by The Wall Street Journal) from January 1, 1993 through December 31, 1994 is as follows:
High Low ---- ---
Quarter ended: March 31, 1993 $ 9.38 $6.63 June 30, 1993 8.25 7.50 September 30, 1993 9.00 8.00 December 31, 1993 9.50 7.00
March 31, 1994 $ 8.375 $7.375 June 30, 1994 8.50 7.375 September 30, 1994 8.625 7.375 December 31, 1994 8.00 7.25
On March 17, 1995, the last sales price of the Depositary Units, as reported by the New York Stock Exchange Composite Tape (as reported by The Wall Street Journal) was $7.375.
As of March 17, 1995, there were approximately 23,400 record holders of the Depositary Units.
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Trading in the Preferred Units on the NYSE under the symbol "ACP PR" is expected to commence on March 31, 1995 on a when issued basis.
Distributions -------------
After evaluating the contingencies facing AREP, its anticipated cash flows, liquidity needs, maturing debt obligations and capital expenditure requirements, the Board of Directors of the General Partner reduced the quarterly distributions in 1993 from $.25 to $.125 per quarter. This reduction permitted management to continue to establish reserves for AREP's maturing debt obligations and other contingencies. In 1994, the General Partner determined that it was necessary for AREP to conserve cash and increase reserves from time to time in order to meet capital expenditures and maturing debt obligations. As a result, distributions to Unitholders were suspended. On March 16, 1995, the Board of Directors of the General Partner announced that a distribution for the fiscal quarter ended March 31, 1995 would not be made. In making its announcement, AREP noted that, consistent with previously announced estimates, net operating cash flow in 1994 was only break-even, after payment of periodic principal payments and maturing debt obligations, capital expenditures and the creation of additional cash reserves. AREP also noted that cash reserves had been set aside for its scheduled approximately $11.3 million principal payment due in May 1995 on its Senior Unsecured Debt and for the repayment of approximately $3.6 million of balloon mortgages coming due by May 1995. See ITEM 7 -- "Management's Discussion and Analysis of the Financial Condition and Results of Operations -- Capital Resources and Liquidity." Following the Rights Offering, a substantial portion of the proceeds from the Rights Offering will be used to fund the acquisition of additional properties by AREP, which the General Partner believes have the potential to diversify and enhance the long-term value of AREP's investment portfolio. Each Unitholder will be taxed on the Unitholder's allocable share of AREP's taxable income and gains and accrued guaranteed payments, whether or not any cash is distributed to the Unitholder.
Repurchase of Depositary Units ------------------------------
AREP announced in 1987 its intention to purchase up to one million Depositary Units. On June 16, 1993, AREP increased the amount of shares authorized to be repurchased to 1,250,000 Depositary Units. As of March 17, 1995, AREP had purchased 1,037,200 Depositary Units at an aggregate cost of approximately $11,184,000. In light of the existing cash needs of the Partnership, management recently has not been acquiring Depositary Units for AREP, although AREP may from time to time acquire additional Depositary Units. Under the terms of the Note Agreements for the Senior Unsecured Debt, distributions and the amounts used to repurchase Depositary Units cannot exceed net cash flow, as defined therein, plus $15,000,000. See ITEM 7 -- "Management's Discussion and Analysis of the Financial Condition and Results of Operations -- Capital Resources and Liquidity." To
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date this restriction has not impaired the ability of AREP to make distributions.
Item 6.

Item 6. Selected Financial Data. -----------------------
* To the extent financial information pertaining to AREP is reflected, such information is consolidated for AREP and its Subsidiary.
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Item 7.

Item 7. Management's Discussion and Analysis of the Financial Condition and Results of Operations. ---------------------------------------------
General -------
Historically, substantially all of AREP'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 AREP is not typically responsible for payment of expenses, such as maintenance, utilities, taxes and insurance associated with such properties. AREP has experienced an increase in its property expenses in recent years, due principally to tenant bankruptcies and defaults as well as the acquisition of operating properties. Management expects that AREP's property ownership and management expenses will continue to be higher for the next several years as properties vacated by tenants are re-leased or held for sale and development and operating properties are acquired. Moreover, as AREP's various debt obligations come due, including the Senior Unsecured Debt, there will be increasing demands on cash flow.
By the end of the year 2000, net leases representing approximately 26% of AREP's net annual rentals from its portfolio will be due for renewal, and by the end of the year 2002, net leases representing approximately 40% of AREP's net annual rentals will be due for renewal. In many of these leases, the tenant has an option to renew at the same rents they are currently paying and in many of these leases the tenant also has an option to purchase. AREP believes that tenants acting in their best interest may be expected to renew those leases which will be at below market rents and to permit leases for properties that are less marketable (either as a result of the condition of such property or its location) or provide for renewal at above-market rents to expire. Since most of AREP's properties are net- leased to single, corporate tenants, it is expected that it may be difficult and time-consuming to re-lease or sell those properties that existing tenants decline to re-let or purchase and AREP may be required to incur expenditures to renovate such properties for new tenants. In addition, AREP 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, AREP could experience an adverse impact on net cash flow from such properties in the next decade.
In the past AREP has generated cash flow from operations, primarily through net-lease transactions, for the purpose of making distributions to Unitholders; however, the recession and real estate downturn that occurred in the early 1990's led the General Partner to re-examine AREP's cash needs and investment opportunities. As a result of tenant defaults, including the bankruptcy of a number of tenants, and lease expirations, AREP's property management and operating expenses increased, as well as
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its expenditures relating to the re-leasing of properties (such expenditures including capital expenditures necessary to refurbish vacated properties and to build out properties to meet the specifications of new tenants) and rental revenues decreased. In addition, the availability of acceptable financing to re-finance maturing mortgage debt and AREP's Senior Unsecured Debt became increasingly scarce. Consequently, the General Partner determined that it was necessary to conserve cash and establish reserves from time to time in order to meet capital expenditures and maturing debt obligations. As a result, there was insufficient cash flow from operations to pay distributions to Unitholders and such distributions were reduced and finally suspended. As of December 31, 1994, AREP had approximately $13,000,000 in cash reserves.
At the same time that the recession was imposing cash flow constraints on AREP, it was also creating what the General Partner perceived as significant investment opportunities to acquire undervalued properties. As discussed under ITEM 1 -- "Business -- Rights Offering," during the next decade AREP expects net leases representing approximately 40% of its net annual rentals to expire and it is possible that AREP's investment portfolio will become stagnant. In order to enhance AREP's investment portfolio (and ultimately its asset values and cash flow prospects), AREP is seeking to acquire investments in undervalued properties. The General Partner believes that because of overdevelopment in certain real estate markets and the desire of certain real estate holders, including financial institutions, to dispose of real estate assets, there are assets available which are performing at a level, or may be available at a price, which may be substantially below their potential value (due to management weaknesses or temporary market conditions such as oversupply of comparable space or stagnant or recessionary local regional economies). Such properties may not be generating a positive cash flow in the near term; however, the General Partner believes that the acquisition of properties requiring some degree of management or development activity have the greatest potential for growth, both in terms of capital appreciation and the generation of cash flow. With the implementation of improved asset management, debt restructuring and capital improvements, for example, AREP would seek to maximize the performance and value of any such undervalued properties. Where opportunities exist, AREP may acquire such properties with proceeds of the Rights Offering or, as has been the case with acquisitions made by AREP over the last several years, sale or refinancing proceeds which AREP retains for reinvestment (rather than for distribution to Unitholders). The General Partner believes the acquisition of such investments is consistent with AREP's historical objectives of reinvesting proceeds of sales and refinancings in properties that offer greater growth potential and diversification. In addition, to the extent such investments enhance AREP's portfolio, AREP may be able to reinstate distributions to holders of Depositary Units, although there can be no assurances thereof.
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As a consequence of the foregoing, AREP decided to raise funds through the Rights Offering to increase its assets available for investment so that it will be in a better position to take further advantage of the investment opportunities in the real estate market and to further diversify its portfolio and mitigate against the impact of potential lease expirations. See ITEM 1 -- "Business -- Rights Offering" for a further discussion of the Rights Offering.
During 1994 AREP had approximately $10,000,000 in maturing balloon mortgages due, approximately $6,700,000 of which have been repaid and approximately $3,300,000 of which have been refinanced. Approximately $5,700,000 and $16,000,000 of balloon mortgages are due in 1995 and 1996, respectively. During the period 1997 through 1998, approximately $9,100,000 in maturing balloon mortgages come due. AREP will seek to refinance a portion of these maturing mortgages, although it does not expect to be able to refinance all of them and may be required to repay them from cash flow and reserves created from time to time, thereby reducing cash flow otherwise available for other uses. AREP also has significant maturing debt requirements under the note agreements. In particular, AREP is required to make semi-annual interest payments and annual principal payments. In May 1994, AREP repaid $10,000,000 of the outstanding principal balance under the Note Agreements. Prior to 1994, AREP was only required to make payments of interest on such debt. Principal payments of approximately $11,308,000 are due under such agreements annually from 1995 through 1998. See ITEM 1 -- "Business -- Financing Activities" and ITEM 2 -- "Properties."
Expenses relating to environmental clean-up have not had a material effect on the earnings, capital expenditures, or competitive position of AREP. 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 AREP will not be deemed to be a responsible party or that the tenant will bear the costs of remediation. In addition, environmental clean-up costs could become the responsibility of AREP to the extent that tenants file for bankruptcy or otherwise fail to fulfill their lease obligations. See ITEM 1 -- "Business -- Environmental Matters." Environmental problems may also delay or impair AREP's ability to sell, refinance or re-lease particular properties, resulting in decreased income and increased costs to AREP. In addition, as AREP acquires more operating properties, its exposure to environmental clean-up costs may increase. In light of the potential impact of environmental clean-up costs, AREP recently has undertaken to have certain properties (approximately 81) in its portfolio which were not inspected at the time of acquisition to be subjected to Phase I Environmental Site Assessment by a third-party consultant. Based on the results of these Phase I Environmental Site Assessments, the environmental consultant has recommended that limited Phase II Environmental Site Investigations be conducted for approximately 29 of the
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sites in order to ascertain whether there are any environmental conditions and the anticipated cost of any remediation. At the conclusion of AREP's environmental site investigations, AREP will seek to coordinate with the tenants to attempt to ensure that they undertake any required remediation. As no Phase II Environmental Site Investigations have been conducted by the consultant, there can be no accurate estimation of the need for or extent of any required remediation, or the cost thereof. See also the discussion of the Lockheed property in ITEM 3 -- "Legal Proceedings."
Results of Operations ---------------------
CALENDAR YEAR 1994 COMPARED TO CALENDAR YEAR 1993. Gross revenues increased by approximately $1,394,000, or 2.3%, during calendar year 1994 as compared to calendar year 1993. This increase reflects approximate increases of $3,393,000, or 21.6%, in rental income and $405,000, or 4.8%, in hotel operating income, partially offset by decreases of approximately $861,000, or 2.6%, in financing lease income, $571,000, or 28.4%, in other interest income, and $972,000, or 84.1%, in other income. The increase in rental income is primarily attributable to the two apartment complexes in Lexington, Kentucky acquired in 1993, increases in rents from a property formerly occupied by Amdura and rents received from BJ's Warehouse Store. The hotel operating revenues were generated by two hotels formerly leased to Integra. AREP has been operating these hotel properties through a third- party management company since August 7, 1992. The decrease in financing lease income is primarily attributable to normal amortization of financing leases partially offset by increased income from the Toy's "R" Us properties reacquired as a result of foreclosure on defaulted purchase money mortgages. The decrease in other interest income is primarily attributable to less interest received on defaulted purchase money mortgages and payments of balloon balances due. The decrease in other income related primarily to the settlement of the Days Inn bankruptcy claim, most of which was recognized in 1993.
Expenses increased by approximately $196,000, or .5%, during calendar year 1994 compared to calendar year 1993. This increase reflects increases of approximately $1,833,000, or 71.1%, in property expenses, $600,000, or 13.8%, in depreciation and amortization and $336,000, or 13.7%, in general and administrative expenses, offset by decreases of approximately $2,392,000, or 9.5%, in interest expense and $181,000, or 2.5%, in hotel operating expenses. The increase in property expenses is primarily attributable to costs associated with the newly acquired operating properties mentioned previously, as well as the former Days Inn and Amdura properties now operated by the Company. The decrease in interest expense is primarily attributable to normal loan amortization and reductions due to certain loan refinancings and the repayments of maturing balloon debt obligations, including the Senior Unsecured Debt.
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Earnings before property transactions increased during the calendar year 1994 by approximately $1,198,000, or 6.5%, from calendar year 1993.
Gain on property transactions decreased by approximately $586,000 during the calendar year 1994 as compared to calendar year 1993, due to differences in the size and number of transactions.
During calendar year 1994, AREP recorded a provision for loss on real estate of $582,000 as compared to $462,000 in 1993.
Net earnings for the calendar year 1994 increased by approximately $492,000, or 2.2%, as compared to net earnings for the calendar year 1993. This increase is attributable to the approximate $1,198,000 increase in earnings before property transactions, offset by the decrease in gain on sales of real estate and the increase in provision for loss on real estate.
CALENDAR YEAR 1993 COMPARED TO CALENDAR YEAR 1992. Gross revenues, including revenues from hotel operating properties, increased by approximately $2,375,000, or 4.1%, during calendar year 1993 as compared to calendar year 1992. This increase reflects approximate increases of $4,745,000, or 128.1%, in hotel operating revenues and $498,000, or 75.8%, in other income, partially offset by decreases of approximately $1,270,000, or 3.7%, in financing lease income, $1,373,000, or 8.0%, in rental income, and $224,000, or 10.0%, in other interest income. The hotel operating revenues were generated by two hotels formerly leased to Integra and accounted for as financing leases. AREP has been operating these hotel properties through a third-party management company since August 7, 1992. The other income reflects partial settlements of bankruptcy claims against Days Inn and National Convenience Stores. See Note 7 to the Financial Statements contained herein. The decrease in financing lease income was primarily attributable to normal amortization of financing leases and the reclassification of rent from Integra and certain National Convenience Stores due to the filings by such tenants of voluntary petitions for reorganization pursuant to the provisions of Chapter 11 of the Bankruptcy Code, which leases were subsequently rejected in 1992. As a result of lease rejections, financing lease income decreased by approximately $740,000. The decrease in other interest income was primarily attributable to less interest received on two purchase money mortgages due to defaults and payments of balloon balances due. The decrease in rental income was primarily attributable to the loss of income resulting from property sales (approximately $1,200,000), the rejection of its lease by Days Inn, the Occidental lease expiration and decreases caused by re-letting properties at lower rentals, partially offset by increases primarily attributable to rents received from BJ's Warehouse Store and the Stoney Falls apartment complex in Lexington, Kentucky, both newly acquired operating properties in 1993. As a result of lease rejections, AREP's rental income decreased by approximately $480,000.
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Expenses increased by approximately $4,578,000, or 12.3%, during calendar year 1993 compared to calendar year 1992. This increase reflects an increase of approximately $4,344,000, or 149.3%, in hotel operating expenses, $802,000, or 45.1%, in property expenses and $136,000, or 5.9%, in general and administrative expenses, partially offset by a decrease of approximately $731,000, or 2.8%, in interest expense. The hotel operating expenses were generated by the two hotels mentioned previously. The increase in property expenses is primarily attributable to expenses from several properties, including the former Days Inn and Amdura properties, AREP is now operating through third-party management companies, as well as off-lease properties and the newly acquired apartment complex in Lexington, Kentucky. The decrease in interest expense is primarily attributable to normal loan amortization, reductions due to certain loan refinancings and repayments, and the capitalization of interest in connection with the construction of the BJ's Warehouse Store, partially offset by increases in mortgage interest due to the foreclosure of properties tenanted by Toys R Us.
Earnings before property transactions decreased during the calendar year 1993 by approximately $2,202,000, or 10.7%, from calendar year 1992.
Gain on property transactions increased by approximately $4,418,000 during the calendar year 1993 as compared to calendar year 1992, due to differences in the size and number of transactions.
During calendar year 1993, AREP recorded a provision for loss on real estate of $462,000 as compared to approximately $8,847,000 in 1992.
During calendar year 1992, a loss from early extinguishment of debt was incurred of approximately $785,000. No such loss was incurred during calendar year 1993.
Net earnings for the calendar year 1993 increased by approximately $11,385,000, or 100.8%, as compared to net earnings for the calendar year 1992. This increase is attributable to the approximately $4,418,000 increase in gain on property transactions and the decreases of approximately $8,385,000 and $785,000 in provision for loss on real estate and loss from early extinguishment of debt, respectively, partially offset by the decrease in earnings before property transactions of approximately $2,202,000.
Capital Resources and Liquidity -------------------------------
Generally, the cash needs of AREP for day-to-day operations have been satisfied from cash flow generated from current operations. The cash flow generated from day-to-day operations (before payment of maturing debt
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obligations) has decreased in recent years, although it improved in 1994 due to the acquisition and foreclosure of certain operating properties and the repayment of debt. Cash flow has been negatively impacted by a reduction in operating cash flow caused by, among other things, tenant defaults and the termination of existing leases (due to expiration, rejection in bankruptcy or otherwise). Furthermore, AREP has experienced an increase in operating expenses with respect to vacated properties and has been required to perform maintenance and repair work in order to re-let such properties. AREP also has had to apply a larger portion of its cash flow to the repayment of maturing debt obligations. Cash flow from day-to-day operations represents net cash provided by operating activities (excluding working capital changes and non-recurring other income) plus principal payments received on financing leases, as well as principal receipts on mortgages receivable reduced by periodic principal payments on mortgage debt.
As a result of tenant bankruptcies, AREP has incurred and expects -- at least in the near term -- to continue to incur certain property expenses and other related costs. Thus far, these costs have consisted largely of legal fees, real estate taxes and property operating expenses. As of December 31, 1994, the total of such expenses relating to tenants who rejected their leases during the three-year period then ended was approximately $1,400,000 net of rent received from re-let properties. Of AREP's eleven present and former tenants involved in bankruptcy proceedings or reorganization, eight have rejected their leases, affecting 27 properties, all of which have been vacated. During 1992, AREP began operating some of these properties through third-party management companies. The rejections have had an adverse impact on annual cash flow (including both the decrease in revenues from lost rents, as well as increased operating expenses). The aggregate annual rent lost from tenants who rejected their leases during the three-year period ended December 31, 1994 was approximately $4,000,000. See Notes 7(c), (d), (e), (g) and 12(a), (c), (d), (e) and 16(a) to the Financial Statements contained herein. Currently AREP has one tenant in bankruptcy which occupies eight of AREP's properties.
In 1994, fourteen leases covering fourteen properties and representing approximately $810,000 in annual rental income expired. Seven of these fourteen leases originally representing approximately $513,000 in annual rental income were renewed or re-let for approximately $593,000 in annual rental income. One property, which had an approximate annual rental income of $112,000, has been renewed at $175,000, which amount has been determined by a market value appraisal. Three properties, with an approximate annual rental income of $69,000, are currently being marketed for sale or lease. Three properties, with an approximate annual rental of $116,000, were sold in 1994.
In 1995, 24 leases covering 24 properties and representing approximately $832,000 in annual rentals are scheduled to expire. AREP anticipates that eleven of these 24 leases originally representing
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approximately $492,000 in annual rental income have been or will be re-let or renewed for approximately $507,000 in annual rentals. Thirteen leases, with an approximate annual rental income of $340,000, will be marketed for sale or lease when the current lease terms expire.
AREP may not be able to re-let certain of its properties at current rentals. As discussed above, net leases representing approximately 40% of AREP's net annual rentals will be due for renewal by the end of the year 2002. Moreover, it is expected that it may be difficult and time consuming to re-lease or sell those properties that existing tenants decline to re-let or purchase and AREP may be required to incur expenditures to renovate such properties for new tenants. In addition, AREP will 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, AREP could experience an adverse impact on net cash flow from such properties in the next decade. There are also certain below-market leases with renewal options which are likely to be exercised.
During 1994, AREP generated approximately $22 million in cash flow from day-to-day operations and approximately $200,000 from the Days Inn bankruptcy claim settlement. During the comparable period in 1993, AREP generated approximately $19 million in cash flow from day-to-day operations and approximately $1,200,000 from the Days Inn and SNG bankruptcy claims' settlements. During the comparable period of 1992, AREP generated approximately $23.5 million in cash flow from day-to-day operations and approximately $700,000 from the settlement of the Amdura Corp. bankruptcy claim. See Note 7(d) to the Financial Statements contained herein.
Capital expenditures for real estate, excluding new acquisitions, were approximately $2,300,000 during 1994. During 1993, such expenditures, excluding new acquisitions, totalled approximately $2,500,000. During 1992, such expenditures totalled approximately $200,000.
During 1994, AREP had approximately $10,000,000 in maturing balloon mortgages due, approximately $6,700,000 of which have been repaid and approximately $3,300,000 of which have been refinanced. Repayment of balloon mortgages out of AREP's cash flow totalled approximately $3,800,000 in 1993 and $1,100,000 in 1992, net of refinancings and exclusive of debt placement costs. Approximately $5,700,000 and $16,000,000 of maturing balloon mortgages are due in 1995 and 1996, respectively, and during the period 1997 through 1998 approximately $9,100,000 in maturing balloon mortgages come due. AREP will seek to refinance a portion of these maturing mortgages, although it does not expect to be able to refinance all of them and may be required to repay them from cash flow and increase reserves from time to time, thereby reducing cash flow otherwise available for other uses.
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AREP also has significant maturing debt requirements under the Note Agreements. As of December 31, 1994, AREP had $45,231,106 of Senior Unsecured Debt outstanding. Pursuant to the Note Agreements, AREP is required to make semi-annual interest payments and annual principal payments. The interest rate charged on the Senior Unsecured Debt is 9.6% per annum. Under the terms of the Note Agreements, AREP deferred and capitalized 2% annually of its interest payment through May 1993. In May 1994, AREP repaid $10 million of its outstanding Senior Unsecured Debt under the Note Agreements and principal payments of approximately $11,308,000 are due annually from 1995 through the final payment date of May 27, 1998. As of December 31, 1994, AREP was in compliance with the terms of the Note Agreements.
The Note Agreements contain certain covenants restricting the activities of AREP. Under the Note Agreements, AREP must maintain a specified level of net annual rentals from unencumbered properties (as defined in the Note Agreements) and is restricted, in certain respects, in its ability to create liens and incur debts. Investment by AREP in certain types of assets that may be regarded as non-income producing, such as land or non-performing loans, is restricted under the Note Agreements. The holders of the Senior Unsecured Debt have agreed, however, to waive this restriction with respect to any additional capital raised by AREP in the Rights Offering. While the restrictions in the Note Agreements generally have not adversely affected AREP's operations in any material manner, if AREP encountered severe operating difficulties, certain options that management might otherwise elect, such as seeking additional secured financing, might be limited or prohibited.
The Note Agreements contain certain prepayment penalties which AREP would be required to pay if it extinguishes any portion of the outstanding principal prior to its annual due date. The Note Agreements require that such prepayment consist of 100% of the principal amount to be prepaid plus a premium based on a formula described therein. As of March 17, 1995 the premium required in order to prepay the Note Agreement in full would have been approximately $2,600,000. Subject to negotiating terms favorable to AREP, the Senior Unsecured Debt may be prepaid in full with a portion from the proceeds of the Rights Offering. Prepayment would release AREP from certain covenants which restrict its operating and investment activities, including, among others, covenants relating to the level of net annual rentals from unencumbered properties and the ability to create liens and incur additional debt. AREP believes that this prepayment and the resulting release from the covenants in the Note Agreements could further permit it to take advantage of the investment opportunities that exist in the real estate market.
After evaluating the contingencies facing AREP, its anticipated cash flows, liquidity needs, maturing debt obligations and capital expenditure requirements, the Board of Directors of the General Partner reduced the quarterly distributions in 1993 from $.25 to $.125 per quarter. This reduction permitted management to continue to establish reserves for AREP's
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maturing debt obligations and other contingencies. In 1994, the General Partner determined that it was necessary for AREP to conserve cash and increase reserves from time to time in order to meet capital expenditures and maturing debt obligations. As a result, distributions to Unitholders were reduced and finally suspended. On March 16, 1995, the Board of Directors of the General Partner announced that a distribution for the fiscal quarter ended March 31, 1995 would not be made. In making its announcement, AREP noted that, consistent with previously announced estimates, net operating cash flow in 1994 was only breakeven, after payment of periodic principal payments and maturing debt obligations, capital expenditures and the creation of additional cash reserves. AREP also noted that cash reserves had been set aside for its scheduled approximately $11.3 million principal payment due in May 1995 on its Senior Unsecured Debt and for the repayment of approximately $3.6 million of balloon mortgages coming due by May 1995.
There were no distributions due to Unitholders for the year ended December 31, 1994. Distributions paid during 1994 totalled approximately $1,869,000, representing distributions due to Unitholders for the fourth quarter of 1993 and to Unitholders who exchanged their limited partner interests during 1994. Distributions due to Unitholders for the year ended December 31, 1993 were approximately $7.1 million. Distributions paid during the year ended December 31, 1993 totalled approximately $9.3 million, representing distributions due to Unitholders for the fourth quarter of 1992 and the first three quarters of 1993 and to Unitholders who exchanged their limited partner interests during 1993. Distributions due to Unitholders for the year ended December 31, 1992 were approximately $14.3 million. Distributions paid during 1992 totalled approximately $18.8 million, representing distributions due to Unitholders for the fourth quarter of 1991 and the first three quarters of 1992 and to Unitholders who exchanged their limited partner interests during 1992.
The proceeds from the Rights Offering are anticipated to be approximately $109,000,000 after the payment of offering expenses of approximately $1,000,000. The net proceeds of the Rights Offering will be used to further diversify and expand AREP's investment portfolio and, subject to negotiating terms favorable to AREP, the balance may be used to prepay its Senior Unsecured Debt. If the Senior Unsecured Debt is not prepaid, such funds will be used for additional portfolio investments. See ITEM 1 -- "Investment Opportunities and Strategies."
Sales proceeds from the sale or disposal of portfolio properties totalled approximately $12.6 million, including $1.4 million of net proceeds from balloon payments of mortgages receivable in 1994. During the comparable period of 1993, sales proceeds totalled approximately $14 million, including $2.4 million of net proceeds from balloon payments of mortgages receivable. AREP entered into two joint ventures with unaffiliated co-venturers in June 1994 for the purpose of developing luxury garden apartment complexes in Hoover, Alabama, and Cary, North Carolina. In
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the year ended December 31, 1994, AREP invested approximately $5,500,000 in these joint ventures. In May 1993, AREP completed the construction of the BJ's Warehouse in Syracuse, New York for an aggregate cost of approximately $7,900,000, and an approximate $1.2 million cost for the adjacent parcel. In June 1993 AREP also acquired two non-performing mortgage loans on two residential apartment complexes located in Lexington, Kentucky for approximately $13 million. AREP foreclosed on each of these loans (one in 1993 and one in 1994) and now holds title to the underlying properties. See Notes 7(h) and (l) of the Financial Statements contained herein.
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ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Partners American Real Estate Partners, L.P.:
We have audited the accompanying consolidated balance sheets of American Real Estate Partners, L.P. and subsidiary as of December 31, 1994 and 1993, and the related consolidated statements of earnings, partners' equity and cash flows for each of the years in the three year period ended December 31, 1994. In connection with our audits of the consolidated financial statements, we also have audited the 1994 financial statement schedule as listed in the Index at Item 14 (a) 2. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Real Estate Partners, L.P. and subsidiary as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP New York, New York March 16, 1995
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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY ________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 _____________________________________________
1. ORGANIZATION AND BASIS OF PRESENTATION
On July 1, 1987, American Real Estate Holdings Limited Partnership (the "Subsidiary"), in connection with an exchange offer (the "Exchange"), entered into merger agreements with American Real Estate Partners, L.P. (the "Company") and each of American Property Investors, L.P., American Property Investors II, L.P., American Property Investors III, L.P., American Property Investors IV, L.P., American Property Investors V, L.P., American Property Investors VI, L.P., American Property Investors VII, L.P., American Property Investors VIII, L.P., American Property Investors IX, L.P., American Property Investors X, L.P., American Property Investors XI, L.P., American Property Investors 82, L.P. and American Property Investors 83, L.P. (collectively, the"Predecessor Partnerships"), pursuant to which the Subsidiary acquired all the assets, subject to the liabilities (known and unknown) of the Predecessor Partnerships.
The limited partners of the Predecessor Partnerships received limited partner interests in the Subsidiary. The number of such limited partner interests received by a limited partner was determined based upon his percentage ownership interest in the Predecessor Partnerships, the value of the Predecessor Partnerships' net assets and the number of limited partner interests allocable to the Predecessor Partnerships' general partners and their affiliates. The limited partner interests in the Subsidiary were contributed to the Company in exchange for limited partner interests therein. Limited partnership interests were allocable to the Predecessor Partnerships' general partners and their affiliates as a result of their rights: (i) to receive a portion of the cash flow of the Predecessor Partnerships by virtue of their ownership of interests in such partnerships and their entitlement to receive management fees and nonaccountable expense reimbursements and (ii) to share in the proceeds from the sale or liquidation of the assets of the Predecessor Partnerships and to receive real estate commissions with respect to the sale of properties by the Predecessor Partnerships. These rights of the Predecessor Partnerships' general partners and their affiliates were valued in connection with the Exchange. As a result of such valuation, and the assignment of the interests receivable by the corporate affiliates to American Property Investors, Inc. (the "General Partner"), an aggregate of 1,254,280 units and a 1% general partner interest in the Company were issued to the General Partner and 5,679 units were issued to noncorporate affiliates of the Predecessor Partnerships' general partners. In addition, the General Partner also received a 1% general partner interest in the Subsidiary.
By virtue of the Exchange, the Subsidiary owns the assets, subject to the liabilities, of the Predecessor Partnerships. The Company owns a 99% limited partner interest in the Subsidiary. The General Partner owns a 1% general partner interest in both the Subsidiary and the Company representing an aggregate 1.99% general partner interest in the Company and the Subsidiary.
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The participation in the transaction by a Predecessor Partnership was conditioned upon obtaining the approval of a majority-in-interest of the limited partners in such Predecessor Partnership. Such approvals were obtained with respect to each of the Predecessor Partnerships prior to July 1, 1987.
During 1989, Integrated Resources, Inc. ("Integrated"), the former parent of the General Partner, experienced serious financial difficulties and, on February 13, 1990, it filed in the Bankruptcy Court for the Southern District of New York a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code (the "Filing"). The General Partner was a separate entity and neither the General Partner nor any other subsidiary of Integrated was included in the Filing.
On September 13, 1990, in connection with its voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code, Integrated entered into an agreement whereby it agreed to sell all of its stock in the General Partner to Meadowstar Holding Company, Inc. ("Meadowstar"). Neither the Company nor the General Partner was a party to such agreement. The sale of the stock of the General Partner to Meadowstar was approved by the Bankruptcy Court on October 22, 1990. On November 15, 1990, pursuant to the terms of the Acquisition Agreement, Meadowstar purchased all of the outstanding shares of Common Stock of the General Partner. In May 1993, Carl C. Icahn acquired all of Meadowstar's interest in the General Partner.
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2. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENTS AND PRINCIPLES OF CONSOLIDATION - The consolidated financial statements are prepared on the accrual basis of accounting and include only those assets, liabilities and results of operations which relate to the Company and the Subsidiary. All material intercompany accounts and transactions have been eliminated in consolidation.
REGISTRATION COSTS AND EXPENSES OF THE EXCHANGE - Registration costs of the Predecessor Partnerships were charged against partners' equity upon the closing of the public offerings in accordance with prevalent industry practice. Expenses of the Exchange were charged against partners' equity upon consummation of the Exchange.
NET EARNINGS AND DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT - For financial reporting purposes, the weighted average number of units assumed outstanding for the years ended December 31, 1994, 1993 and 1992 was 13,812,800, 13,889,667 and 14,058,153, respectively. There were no distributions in 1994. Distributions were $.50 per unit in 1993 and $1.00 per unit in 1992.
UNIT OPTION PLAN - The Company adopted a Nonqualified Unit Option Plan (the "Plan") in 1987, which was further amended in 1989, under which options to purchase an aggregate of 1,416,910 Units may be granted to officers and key employees of the General Partner and the Company who provide services to the Company. To date, no options have been granted under the Plan.
CASH AND CASH EQUIVALENTS - The Company considers short-term investments, which are highly liquid with original maturities of three months or less from date of issuance, to be cash equivalents.
Included in cash and cash equivalents at December 31, 1994 and 1993 are investments in government backed securities of approximately $17,155,000 and $13,772,000, respectively.
INCOME TAXES - No provision has been made for Federal, state or local income taxes since the Company is a partnership and, accordingly, such taxes are the responsibility of the partners.
LEASES - The Company leases to others substantially all its real property under long-term net leases and accounts for these leases in accordance with the provisions of Financial Accounting Standards Board Statement No. 13, "Accounting for Leases," as amended. This Statement sets forth specific criteria for determining whether a lease is to be accounted for as a financing lease or operating lease.
a. FINANCING METHOD - Under this method, minimum lease payments to be received plus the estimated value of the property at the end of the lease are considered the gross investment in the lease. Unearned income, representing the difference between gross investment and actual cost of the leased property, is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease.
b. OPERATING METHOD - Under this method, revenue is recognized as rentals become due and expenses (including depreciation) are charged to operations as incurred.
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PROPERTIES - Properties, other than those accounted for under the financing method, are carried at cost less accumulated depreciation unless declines in the values of the properties are considered other than temporary.
For each of the years ended December 31, 1994, 1993 and 1992 no individual real estate or series of assets leased to the same lessee accounted for more than 10% of the gross revenues of the Company. At December 31, 1994 and 1993, Portland General Electric Company occupied a property, consisting of corporate offices, which represented more than 10% of the Company's total assets.
DEPRECIATION - Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years. When properties are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the property account and the accumulated depreciation account, and any gain or loss on such sale or disposal is generally credited or charged to income (see Note 7).
DEBT PLACEMENT COSTS - Debt placement costs are amortized on a straight-line basis over the term of the respective indebtedness.
Assets Held for Sale - Assets held for sale are carried at the lower of cost or net realizable value.
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3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
a. The General Partner and its affiliates may realize substantial fees, commissions and other income from transactions involving the purchase, operation, management, financing and sale of the Partnership's properties, subject to certain limitations relating to properties acquired from the Predecessor Partnerships in the Exchange. Some of such amounts may be paid regardless of the overall profitability of the Partnership and whether any distributions have been made to Unitholders. As new properties are acquired, developed, constructed, operated, leased, financed and sold, the General Partner or its affiliates may perform acquisition functions, development and construction oversight and other land development services, property management and leasing services, either on a day-to-day basis or on an asset management basis, and other services and be entitled to fees and reimbursement of expenses relating thereto, including the Reinvestment Incentive Fee, property management fees, real estate brokerage and leasing commissions, fees for financing either provided or arranged by the General Partner and its affiliates, development fees, general contracting fees and construction management fees. The terms of any transactions between the Company and the General Partner or its affiliates must be fair and reasonable to the Company and customary to the industry.
Reinvestment incentive fees as payment for services rendered in connection with the acquisition of properties from July 1, 1987 through July 1, 1997 were 1% of the purchase price for the first five years and are 1/2% for the second five years.
Reinvestment incentive fees are only payable on an annual basis if the sum of (x), the sales price of all Predecessor Partnerships' properties (net of associated debt which encumbered such properties at the consummation of the Exchange) sold through the end of such year, and (y), the appraised value of all Predecessor Partnerships' properties which have been financed or refinanced (and not subsequently sold), net of the amount of any refinanced debt, through the end of such year determined at the time of such financings or refinancings, exceeds the aggregate values assigned to such Predecessor Partnerships' properties for purposes of the Exchange. If the subordination provisions are not satisfied in any year, payment of reinvestment incentive fees for such year will be deferred. At the end of each year, a new determination will be made with respect to subordination requirements (reflecting all sales, financings and refinancings from the consummation of the Exchange through the end of such year) in order to ascertain whether reinvestment incentive fees for that year and for any prior year, which have been deferred, may be paid.
From the commencement of the Exchange through December 31, 1994, the Company (i) sold or disposed of an aggregate of 126 properties of the Predecessor Partnerships for an aggregate of approximately $56,879,000, net of associated indebtedness which encumbered such properties at the consummation of the Exchange and (ii) refinanced 25 Predecessor Partnership properties with an aggregate appraised value, net of the amount of the refinanced debt, of approximately $44,431,000 for a sum total of approximately $101,310,000. Aggregate appraised values attributable to such properties for purposes of the Exchange were approximately $88,322,000. Fifteen properties have been acquired since the commencement of the Exchange, including two joint ventures entered into in 1994, for aggregate purchase prices of approximately $52,000,000. Reinvestment incentive fees of approximately $354,000 have previously been paid to the General Partner, and approximately $113,000 are payable to the General Partner for the 1994 acquisitions. The property acquired in 1992 was subject to a
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conditional sale agreement (see Note 7); therefore, no reinvestment incentive fee was due at December 31, 1992.
b. The Company entered into a lease, effective June 1, 1991, for approximately 6,900 square feet of office space with an affiliate of the General Partner. The lease is for a ten year term and provides for initial monthly rent (inclusive of charges for utilities) of $11,642, which amount increased to $12,936 on June 1, 1994 and increases to $14,804 on June 1, 1997. The terms of the lease agreement were reviewed for fairness by the Audit Committee of the Board of Directors of the General Partner which determined that the terms of such transaction were fair and reasonable to the Company. In evaluating the transaction, the Audit Committee consulted with an independent appraiser regarding the terms of the lease. For the year ended December 31, 1992, the Company paid $139,704 in rent.
On December 29, 1992, the affiliate of the General Partner assigned its interest in the lease to an unaffiliated third party.
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4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE FINANCING METHOD
Real estate leased to others accounted for under the financing method is summarized as follows:
December 31, -------------------------------- 1994 1993 --------------- --------------- Minimum lease payments receivable $446,943,110 $497,100,936 Unguaranteed residual value 171,636,874 175,214,737 ------------ ------------- 618,579,984 672,315,673 Less unearned income 304,319,198 344,845,351 ------------ ------------- $314,260,786 $327,470,322 ============ =============
The following is a summary of the anticipated future receipts of the minimum lease payments receivable at December 31, 1994:
Year ending December 31, Amount -------------------- --------------- 1995 $ 38,439,834 1996 38,397,613 1997 38,366,876 1998 38,293,967 1999 37,214,924 Thereafter 256,229,896 -------------- $ 446,943,110 ==============
At December 31, 1994, approximately $244,463,000 of the net investment in financing leases was pledged to collateralize the payment of nonrecourse mortgages payable.
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5. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD
Real estate leased to others accounted for under the operating method is summarized as follows:
December 31, ---------------------------- 1994 1993 ------------- -------------
Land $ 57,411,117 $ 53,446,863 Commercial building 112,762,861 107,809,870 ------------- -------------- $170,173,978 $ 161,256,733 Less accumulated depreciation 46,735,534 44,317,402 ------------- -------------- $123,438,444 $ 116,939,331 ============= ==============
As of December 31, 1994 and 1993, accumulated depreciation on the hotel operating properties (not included above) amounted to approximately $1,499,000 and $723,000, respectively (see Note 7).
The following is a summary of the anticipated future receipts of minimum lease payments under noncancelable leases at December 31, 1994:
Year ending December 31, Amount ------------ ----------- 1995 $14,413,774 1996 13,554,598 1997 11,872,170 1998 10,650,677 1999 9,174,571 Thereafter 36,548,268 ------------ $96,214,058 ============
At December 31, 1994, approximately $91,029,000 of real estate leased to others was pledged to collateralize the payment of nonrecourse mortgages payable.
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6. MORTGAGES RECEIVABLE
(a) See Note 7.
(b) 5.75% is paid currently and 3.25% is deferred. The principal and deferred interest is payable in monthly installments from March 1999 until November 2005.
(c) 4.5% is paid currently and 4.5% is deferred until maturity.
(d) Payments (with interest only at 9%) are $46,931 through November 1, 1996 and $54,276 through September 1, 2001 (See Note 12a).
(e) Interest only will accrue until December 1, 2010; commencing January 1, 2011, monthly payments of $39,035 will be due, which will self-amortize the outstanding principal and current and deferred interest, with the final payment due December 1, 2019. Increased rentals on the property, if any, during the renewal term of the underlying lease will be applied against accrued interest and then the outstanding principal.
(f) On January 16, 1992, the purchase money mortgage was amended. The maturity date was extended to November 1994 and the monthly payments decreased to $27,800 commencing February 1, 1992. Under the terms of the amendment, the maturity date has been further extended to February 1997 to coincide with Easco's renewal of its lease for an additional ten years.
The Company has generally not recognized any profit in connection with the property sales in which the above 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.
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7. SIGNIFICANT PROPERTY TRANSACTIONS
Information on significant property transactions during the three-year period ended December 31, 1994 is as follows:
a. On March 27, 1991, The Public Building Commission of Chicago ("Public Building Commission") commenced a condemnation proceeding against a property leased by The TJX Companies, Inc. The condemnation proceeding was settled on March 12, 1993 when the Company received approximately $4,305,000 from the tenant who purchased the property in accordance with their lease obligations. A net gain of approximately $1,575,000 was recognized on this transaction in the year ended December 31, 1993.
b. The lease on a property formerly tenanted by Occidental Petroleum Corp. initially expired June 30, 1992 and was extended to March 1993 on a month-to-month basis. Based on existing conditions, the Company believed the carrying value at December 31, 1992 to be substantially in excess of the property's value, and as a result, wrote the asset down to its recoverable value by incurring a provision for loss on real estate in the amount of $1,400,000 for the year then ended. This asset has a carrying value of approximately $2,242,000 and is encumbered by a nonrecourse mortgage payable of approximately $2,182,000 as of December 31, 1994.
The Company has obtained zoning approval which will enable the re-development of the site into a 67,000 square foot retail center with two out parcels totaling 11,000 square feet of rentable area.
c. On April 2, 1990, Amdura Corp., formerly American Hoist and Derrick Co., and certain of its subsidiaries, including Amdura National Distribution Company, a tenant of a property owned by the Company, filed voluntary petitions for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The Company and the tenant previously executed an agreement which permitted the tenant to assume the lease and pursue assignment of said lease, subject to the Company's approval, during a specified time period. The tenant was unsuccessful in assigning the lease and, as a result, the lease was terminated and the Company took possession of the premises effective August 1, 1992. In accordance with this agreement, the Company was entitled to and recognized approximately $657,000 of income in full settlement of all claims against the tenant. This was included in "Other income" for the year ended December 31, 1992. The lease termination initially adversely impacted day-to-day operating cash flow by approximately $35,000 per month. During the year ended December 31, 1994, operating rental income exceeded expenses by approximately $575,000. During the year ended December 31, 1993, operating expenses exceeded rental income by approximately $280,000. As of December 31, 1994, the property is 100% leased. The property has a carrying value of approximately $3,699,000 and is encumbered by a nonrecourse mortgage payable of approximately $1,554,000 as of December 31, 1994. Based on current circumstances, the Company believes that the carrying value of the asset
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is fairly stated. The Company engaged and continues to use a management company to perform supervisory management and leasing services, including the leasing of any vacant portions of the premises.
d. On September 27, 1991, Days Inn of America, Inc. ("Days Inn"), a tenant of a property owned by the Company, located in Atlanta, Georgia, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The tenant, by order of the Bankruptcy Court, rejected the lease effective July 31, 1992. As of December 31, 1992, the tenant was in arrears by approximately $250,000 in rent and real estate taxes, both of which were pre-petition obligations. Subsequent to the filing, the tenant was current in its lease obligations. The Company previously wrote the asset down to what it believed was the recoverable value by incurring a provision for loss on real estate in the amount of approximately $4,252,000 for the year ended December 31, 1991. The asset whose carrying value at December 31, 1994 is approximately $4,537,000 is unencumbered by any mortgage.
The Company submitted a claim to the Bankruptcy Court and in August 1993, it reached a settlement of this claim against Days Inn, now known as Buckhead America Corporation ("Buckhead"). As a result, the Company has received cash in the amounts of approximately $184,000 and $730,000 in the years ended December 31, 1994 and 1993, respectively. In addition, stock in Buckhead valued at approximately $305,000 was received in the year ended December 31, 1993. These amounts of approximately $184,000 and $1,035,000 have been included in "Other income" for the years ended December 31, 1994 and 1993, respectively. The Buckhead stock was disposed of in 1994 with a nominal gain.
Effective August 1, 1992 the Company engaged a management company to perform on-site and supervisory management services. The lease rejection has adversely impacted operating cash flow by approximately $110,000 per month. In addition, the Company expects to incur costs of approximately $3,200,000, as leases are executed, to renovate, build-out and re-lease the property.
e. On July 14, 1992, Integra, A Hotel and Restaurant Company ("Integra"), which leased two hotel properties located in Miami, Florida and Phoenix, Arizona filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Bankruptcy Code. The tenant's petition, previously filed with the Bankruptcy Court, to reject the aforementioned leases, was approved on August 7, 1992 and the Company assumed operation of the properties on that date. As of December 31, 1992, the tenant was in arrears by approximately $720,000 for which an allowance of approximately $543,000 was provided in the year then ended. In addition, real estate taxes representing a pre-petition obligation were paid or accrued in the amount of approximately $425,000. These taxes were included in "Property expenses" for the year ended December 31, 1992. The Company has submitted a claim to the Bankruptcy Court.
At December 31, 1994, the property located in Miami, Florida has a carrying value of approximately $5,774,000 and is encumbered by nonrecourse mortgages payable of approximately $46,000. This property is subject to a ground lease. Based on current conditions, management
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believes the carrying value of the Miami property is reasonably stated.
Based on existing conditions and discussions with certain operators and managers of hotels, management believed the recoverable value of the Phoenix property to be substantially less than its carrying value. As a result, the Company wrote the property down by incurring a provision for loss on real estate in the amount of $4,538,000 in the year ended December 31, 1992. At December 31, 1994, this property has a carrying value of approximately $7,880,000 and is encumbered by a nonrecourse mortgage payable of approximately $3,286,000.
This mortgage was refinanced during the year ended December 31, 1994 (see Note 8).
During the year ended December 31, 1993, the Company completed major renovations at the Miami and Phoenix Holiday Inns with capital expenditures totalling approximately $1,700,000 and $400,000, respectively. In connection with these renovations, approximately $250,000 of nonrecurring maintenance expenses were incurred at the Miami location. These expenses were included in hotel operating expenses for the year ended December 31, 1993. During the year ended December 31, 1994, additional capital expenditures of approximately $190,000 and $240,000 were incurred at the Miami and Phoenix Holiday Inns, respectively.
The Company has entered into a management agreement for the operation of the hotels with a national management organization. Since August 7, 1992, the hotels have been classified as Hotel Operating Properties and their revenues and expenses separately disclosed in the Consolidated Statements of Earnings. From August 7 through December 31, 1992, net hotel operations (hotel operating revenues less hotel operating expenses) totalled approximately $795,000. This was $100,000 less than the rent would have been from the rejected leases for the same period. Net hotel operations totalled approximately $1,781,000 and $1,195,000 for the years ended December 31, 1994 and 1993, respectively. This was approximately $379,000 and $965,000 less than the rent would have been from the rejected leases for the years then ended, respectively. Hotel operating expenses include all expenses except for approximately $215,000 of depreciation and $322,000 of interest expense for the period commencing August 7, 1992 through year end and approximately $776,000 and $509,000 of depreciation and $456,000 and $742,000 of interest expense for the years ended December 31, 1994 and 1993, respectively. These amounts are included in their respective captions in the Consolidated Statements of Earnings. The results for the year ended December 31, 1994 are not necessarily indicative of future operating results.
f. During 1992, leases on two properties formerly tenanted by Petrolane, Inc. located in Belle Chasse, LA and Nisku, Alberta, Canada, expired and were re-let at rents substantially less than the previous leases. The new lease on the former location expires April 1996 and includes a purchase option for $575,000. The latter location's new lease expires March 1995. After evaluating the existing market conditions and the
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potential use of the facilities, the Company believed the Belle Chasse property's carrying value at September 30, 1992 of approximately $1,267,000 to exceed the recoverable value in the amount of $517,000 and the Nisku property's carrying value at September 30, 1992 of approximately $1,020,000 to exceed the recoverable value in the amount of $270,000. As a result, the Company recorded a provision for loss on real estate in the amount of $787,000 for the year ended December 31, 1992. In addition, after further evaluation and review, the Company believed the Belle Chasse property's carrying value at June 30, 1994 to exceed the recoverable value in the amount of $237,000. As a result, the Company recorded a provision for loss on real estate in the amount of $237,000 for the year ended December 31, 1994.
g. On December 9, 1991, Stop N Go Markets of Texas, Inc. (National Convenience Stores, Inc.) filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Bankruptcy Code. The tenant, who previously leased twenty-three locations, filed a motion with the Bankruptcy Court to assume four leases and reject the remaining leases. Pursuant to a stipulation by the Bankruptcy Court on February 4, 1993, the tenant's motion was approved effective as of August 31, 1992. The tenant was in arrears in the approximate amount of $6,000 rent and $34,000 of real estate taxes as of December 31, 1992. On March 19, 1993, the Company filed a proof of claim with the Bankruptcy Court. In November 1993, the Company received stock of the debtor valued at approximately $123,000 in partial settlement of its claim. This total has been included in "Other income" for the year ended December 31, 1993. In May of 1994 additional stock of the debtor was received. The total value of the stock at December 31, 1994 of $102,000 is based on the lower of cost or market.
In 1994, all four of the leased locations were sold. The remaining nineteen properties, whose rents totaled approximately $217,000 per year, were actively marketed for sale by the Company. Based on existing market conditions, the Company believed the carrying value of approximately $1,781,000 at December 31, 1992 to exceed the estimated net realizable value by $780,000, for which a provision for loss on real estate was recorded during the year then ended. During the years ended December 31, 1994 and 1993, the Company sold ten and nine of these locations, respectively. A nominal gain was recognized on the disposal of all twenty-three properties.
h. On November 2, 1992, the Company purchased approximately fifteen acres of land in East Syracuse, New York for approximately $3,500,000 and contracted to build a 116,000 square foot BJ's Warehouse Store ("BJ's") upon the site. The Company has entered into a twenty year lease with Waban, Inc. ("Waban"), the parent company of BJ's Warehouse Club. Construction was substantially completed on May 22, 1993 and Waban took possession of the premises, which is situated on approximately ten acres of land, and commenced rental payments on that date. The lease provides for an initial annual net rental of $659,262 with CPI increases every five years, not to exceed 8.77%. Under the lease, Waban is responsible for any required structural repairs. Of the remaining five acres of adjacent land approximately 3.6 acres is available for future development by the Company.
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Simultaneously with the acquisition of the property, the Company entered into a general construction contract with the seller (the "GC Agreement") pursuant to which the seller (the "Seller") was required to construct BJ's in accordance with the terms and conditions of the lease for a guaranteed maximum amount of $2,327,802. However, the construction of BJ's was subject to delays and the Seller did not meet all of its construction obligations under the GC Agreement and failed to cure such defaults. The Company sent a notice, dated February 19, 1993, terminating the GC Agreement and assumed the construction obligations. The Company contacted the surety of the GC Agreement pertaining to the site work. The surety was not responsive to the Company. The Company has determined at this point to not pursue any potential claims it may have because after further investigation, it believes such claims will not be able to be satisfied.
At December 31, 1994, the BJ's land, including related improvements, cost a total of approximately $4,996,000 and the building cost a total of approximately $3,105,000. The adjacent land available for future development, including related improvements, cost a total of approximately $1,256,000. Approximately $268,000 of interest was capitalized which included $210,000 and $58,000 during the years ended December 31, 1993 and 1992, respectively.
A reinvestment incentive fee was paid to the General Partner of approximately $45,000 pertaining to this acquisition and development.
The Company received permanent financing of $4,000,000 on the BJ's parcel and improvements. (see Note 8).
i. At December 31, 1992, the Company owned fifteen properties tenanted by Nationsbank, formerly NCNB National Bank of South Carolina. The leases on fourteen of these properties expired in December 1992 and one expired in March 1993; however, nine leases were extended to March 1993 in connection with an executed agreement (the "Agreement") entered into between the Company and the tenant to purchase and/or lease any one or more of ten locations, including the property whose lease expired in March 1993. The tenant elected to purchase four and lease six properties in accordance with the Agreement. The four properties which were sold on March 26, 1993 had a carrying value of approximately $4,357,000 and were unencumbered by any mortgage at December 31, 1992. Since the contracted selling price of approximately $5,300,000 exceeded the carrying value, the Company believed the assets were fairly stated. The six leased locations were re-let at an annual rental of approximately $214,000, a reduction of approximately $196,000 from the previous rent. As a result, the Company believed the carrying value at December 31, 1992 exceeded the recoverable value and wrote the properties down by incurring a provision for loss on real estate in the amount of $1,000,000 for the year then ended. At December 31, 1994, these properties have a carrying value of approximately $2,081,000 and are unencumbered by any mortgage.
Of the remaining five properties whose leases were not extended, one was sold on January 20, 1993. The property had a carrying value at December 31, 1992 of
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approximately $261,000 that exceeded the net realizable value and therefore the Company wrote the property down by incurring a provision for loss on real estate in the amount of $192,165 for the year then ended. This asset was unencumbered by any mortgage at December 31, 1992.
Another property, whose carrying value at December 31, 1992 was $357,000 was written down by incurring a provision for loss on real estate in the amount of $182,000 in the three months ended March 31, 1993 and subsequently sold on April 15, 1993. The other three properties were sold during the year ended December 31, 1994.
j. On July 31, 1993, the Company held a nonrecourse mortgage in the amount of approximately $3,456,000 secured by four properties tenanted by Toys "R" Us, Inc. The mortgage had been taken back by a Predecessor Partnership in connection with the sale of such properties. The tenant remained current in its obligations under the lease. The terms of the mortgage called for a balloon payment of approximately $3,456,000 on January 1, 1993 which was not received. The Company reacquired these properties in satisfaction of such mortgage and as of August 1, 1993 real estate with a carrying value of approximately $5,883,000 and a nonrecourse mortgage payable with a balance of approximately $2,904,000 were recorded. No gain or loss resulted upon foreclosure because the estimated fair value of the properties exceeds their carrying value. These properties have a carrying value of approximately $5,799,000 and are encumbered by a nonrecourse mortgage payable of approximately $3,354,000 at December 31, 1994. See Note 8 concerning the mortgage refinancing in 1994.
k. On December 31, 1992, the Company held four nonrecourse wrap-around mortgages in the amount of approximately $7,689,000 secured by four properties tenanted by The Wickes Corp. The mortgages had been taken back by a Predecessor Partnership in connection with the sale of such properties. The tenant remained current in its obligations under the lease. However, the Company did not receive monthly debt service payments on these mortgages from the purchaser. Additionally, the terms of mortgages called for balloon payments of approximately $7,689,000 on January 1, 1993 which were not received. However, the tenant had previously purchased one property from the debtor and in January 1993, the tenant paid the balloon mortgage due on the property net of the underlying first mortgage, which it assumed. A gain of approximately $1,371,000 was recognized on this transaction in the year ended December 31, 1993.
In addition, the debtor paid the balloon mortgage due on one property, net of the underlying first mortgage in August of 1993. A gain of approximately $784,000 was recognized in the year ended December 31, 1993.
In January 1994, the debtor paid the balloon mortgage due, net of the underlying first mortgage, on one Wickes property and a gain of approximately $1,238,000 was recognized in the year ended December 31, 1994. In addition, the Company foreclosed on the remaining Wickes
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property in January 1994 and real estate with a carrying value of approximately $643,000 was recorded in the year ended December 31, 1994. No gain or loss was incurred upon foreclosure because the estimated fair value of the property is equal to its carrying value. The mortgage balance on this remaining property is approximately $544,000 at December 31, 1994.
l. On June 17, 1993, the Company purchased two non- performing mortgage loans for a combined price of $13,000,000. Each loan was collateralized by a residential apartment complex located in Lexington, Kentucky. The face value of the non-performing loans was approximately $21,188,000.
The first non-performing loan, purchased for $6,990,000, was collateralized by a 396 unit multi-family complex. The Company foreclosed on this property ("Stoney Falls"), and received the deed on October 11, 1993. The Company has entered into a management agreement for the operation of this property with a national management organization which began operating the property effective September 1, 1993. Subsequent to the acquisition, the Company received distributions from the receiver and cash flow from the property pertaining to the period prior to formal foreclosure, net of expenditures incurred by the Company, which have been applied as a reduction to the initial cost of the loan. This net cash flow, subsequent to the acquisition, totalled approximately $94,000. During the year ended December 31, 1994, the Company completed major renovations which totalled approximately $1,360,000. In connection with these renovations, approximately $350,000 of non recurring maintenance expenses were incurred. These expenses are included in "property expenses" for the year ended December 31, 1994. This asset has a carrying value of approximately $8,078,000 at December 31, 1994.
The second non-performing loan, purchased for $6,010,000, is collateralized by a 232-unit apartment complex. Foreclosure proceedings were initiated in April 1993 resulting in the debtor filing for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The Company executed an agreement with the borrower, which was approved by the Bankruptcy Court, and foreclosed on this property ("Stoney Brooke") and received the deed on February 11, 1994. Subsequent to the acquisition, the Company received distributions from the seller of the note and began to receive cash flow from the property pertaining to the period prior to formal foreclosure, net of expenditures incurred by the Company, which have been applied as a reduction to the initial cost of the loan. This cash flow, net of expenditures incurred by the Company, totalled approximately $735,000. This property at December 31, 1994 has a carrying value of approximately $5,144,000.
A reinvestment incentive fee of approximately $65,000 was paid the General Partner (See Note 3).
See Note 8 in connection with the mortgage financing of these two properties in 1994.
m. In March 1994, the Company foreclosed on the property tenanted by Webcraft Technologies and KSS Transportation.
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As a result, real estate with a carrying value of approximately $626,000 was recorded in the year ended December 31, 1994. No gain or loss was incurred upon foreclosure because the estimated fair value of the property is believed to exceed its carrying value.
n. In June 1994, the Company sold a property to the tenant, Lockheed Sanders, Inc. The property, which was located in Plainfield, N.J., was subject to a purchase option which was exercised. The selling price was $5,625,000 and a gain of approximately $1,961,000 was recognized in the year ended December 31, 1994. The property was unencumbered by any mortgage.
o. The Company entered into two joint ventures in June 1994 with unaffiliated co-venturers for the purpose of developing luxury garden apartment complexes. Both of these joint ventures have been consolidated in the accompanying financial statements.
1. The first joint venture, formed as an Alabama Limited Liability Company, will develop a 240 unit multi-family project situated on approximately twenty acres, currently owned by the joint venture, located in Hoover, Alabama, a suburb of Birmingham. The Company, which owns a seventy percent (70%) majority interest in the joint venture, contributed $1,750,000 in June 1994 and the co-venturer contributed $250,000. As of December 31, 1994 $250,000 representing the minority interest of the co-venturer has been included in "Accounts payable, accrued expenses, and other liabilities" in the accompanying financial statements. The Company has no further funding commitment. Distributions will be made in proportion to ownership interests. Construction financing has been obtained by the joint venture in the amount of $8,760,000 and is guaranteed by the co-venturer and personally by its principals. The development costs are expected to total approximately $11,350,000. As of December 31, 1994, approximately $5,529,000 of development costs have been incurred, including the acquisition of land valued at approximately $1,138,000. Construction loan funding at December 31, 1994 was approximately $2,400,000. The first units were completed and available for occupancy in February 1995 and project completion is scheduled for August 1995. An affiliate of the Company's co-venturer will manage the property.
A reinvestment incentive fee of approximately $40,000 will be due the General Partner upon completion of the project (see Note 3).
2. The second joint venture, a Delaware limited partnership, will develop a 288-unit multi-family project situated on approximately thirty-three acres in Cary, North Carolina (Raleigh-Durham area). The Company, which owns a ninety percent (90%) majority interest in the partnership, has contributed approximately $3,744,000 as of December 31, 1994 and is a limited partner. The co-venturer
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is the general partner and has a limited partner interest. The Company is entitled to a cumulative annual preferred return of 12% on its investment before cash distributions are made in proportion to ownership interests. The Company has made its final contribution which totalled approximately $278,000 in January 1995. Construction financing has been obtained by the joint venture in the amount of $12,205,000 and is guaranteed by the joint venture general partner and personally by its principals. The development costs are expected to total approximately $16,100,000. As of December 31, 1994, approximately $3,891,000 of development costs have been incurred, including the acquisition of land valued at $1,600,000. The first units are expected to be available for occupancy on or about July 1995 and project completion is scheduled for February 1996. An affiliate of the Company's co- venturer will manage the property.
A reinvestment incentive fee of approximately $70,000 will be due the Company's General Partner upon completion of the project (see Note 3).
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8. MORTGAGES PAYABLE
At December 31, 1994, mortgages payable, all of which are nonrecourse to the Company, are summarized as follows:
The following is a summary of the anticipated future principal payments of the mortgages:
Year ending December 31, Amount -------------- -------------- 1995 $ 13,556,295 1996 25,230,486 1997 14,461,679 1998 8,917,349 1999 21,818,304 2000-2004 61,154,049 2005-2009 24,523,090 2010-2014 4,377,923 2015-2017 56,522 -------------- $ 174,095,697 ==============
a. On November 5, 1992, the Company closed a nonrecourse mortgage on the property located in Broomal, PA. The mortgage is in the amount of $3,000,000, bears interest at 9.125%, and matures October 15, 1997. Monthly debt service is approximately $38,000. Debt placement costs totaled approximately $145,000. The new mortgage replaces a previous wrap-around mortgage, which bore interest at 9 1/2%, that was prepaid at a discount in December 1991.
b. On April 15, 1992, the Company refinanced a nonrecourse mortgage loan which had an outstanding principal balance of approximately $4,677,000. The mortgage encumbered a property tenanted by The Rouse Company and bore interest at 8.625%. The original maturity date was April 1, 1999; however, in 1991 the lender called the mortgage as provided for under the terms of the loan. The new nonrecourse mortgage loan, which is in the principal amount of $5,000,000, bears interest at 9.5%, matures May 1, 2004 and is self-liquidating. Debt placement costs of approximately $153,000 were incurred. No gain or loss was incurred as a result of this transaction.
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c. On May 1, 1992, the Company refinanced a nonrecourse mortgage loan which had an outstanding principal balance of approximately $11,803,000. This mortgage encumbered fifteen properties tenanted by the Louisiana Power and Light Company. It was scheduled to mature on November 1, 2000 and bore interest at 13.5%. The new mortgage loan was obtained at an interest rate of 8.79%, in the principal amount of $13,000,000, matures November 15, 2000 and is self-liquidating. Debt placement costs of approximately $390,000 were incurred. Prepayment penalties in connection with the extinguishment of the former debt totaled approximately $785,000. As a result, an extraordinary loss of the same amount was recorded during the year ended December 31, 1992. The monthly debt service of approximately $180,000 reflects a decrease of $14,000.
d. As of June 1, 1992, the Company consummated a modification and extension of a nonrecourse mortgage loan which had an outstanding principal balance of approximately $4,713,000. This mortgage encumbers a property tenanted by Forte Hotels, Inc. It matured June 1, 1992 and bore interest at 9% per annum. In accordance with the modified terms, approximately $2,357,000 of the outstanding principal balance was repaid on June 1, 1992. The remaining principal balance matures June 1, 1998, bears interest at 10.75%, and is self-liquidating with monthly payments of approximately $45,000. An extension fee of approximately $24,000 was incurred in connection with this transaction.
e. On October 18, 1993, the Company obtained permanent financing on the BJ's property in East Syracuse, New York. The nonrecourse loan is in the principal amount of $4,000,000, bears interest at 8.25% per annum, and matures October 31, 1998 at which time the Company has the option to extend the loan for one to five years, providing certain conditions are met. The monthly debt service is approximately $34,000. Debt placement costs of approximately $156,000 have been incurred.
f. On December 13, 1993, the Company prepaid a mortgage with an outstanding balance of $3,038,346 that encumbered a property tenanted by the Lockheed Corporation, located in Burbank, CA. This mortgage was scheduled to mature on February 1, 1996 and bore interest at 16%. Prepayment penalties of approximately $91,000 were incurred.
g. On December 22, 1993, the Company refinanced a nonrecourse mortgage loan which had an outstanding principal balance of approximately $7,613,000. This mortgage encumbered a property tenanted by Super Foods Services, Inc. It was scheduled to mature on October 1, 2010 and bore interest at 11.076%. The new mortgage loan which is self-liquidating is in the principal amount of $7,650,000, bears interest at 8.25% per annum, and matures August 1, 2010. Debt placement costs of approximately $333,000 and prepayment penalties of approximately $76,000 were incurred. The new annual debt service of approximately $846,000 reflects a decrease of $156,000 and initial interest savings of approximately $215,000 in 1994.
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h. On March 4, 1994, the Company paid off one nonrecourse mortgage loan and refinanced two nonrecourse mortgage loans that encumbered a total of seven properties tenanted by Toys "R" Us. The loan paid off, which encumbered one property, had an outstanding principal balance of approximately $616,000, bore interest at 10.375%, and was callable at the lender's option in 1994. The two loans refinanced had outstanding principal balances of approximately $1,550,000 and $2,863,000, bore interest at 9.25% and 9.55%, were self-liquidating, and were callable at the lender's option in 1995 and 1996, respectively. The two new mortgage loans, in the principal amounts of approximately $1,464,000 and $3,636,000, bear interest at 7.08%, are self-liquidating and mature January 15, 2012. Debt placement costs of approximately $226,000 have been incurred. The new annual debt service of approximately $532,000 reflects a decrease of approximately $89,000.
i. A balloon payment of approximately $6,266,000 was originally due June 1, 1994 on a nonrecourse mortgage which encumbered the Holiday Inn in Phoenix, Arizona; however, the Company paid off approximately $2,966,000 on that date and was granted an extension on the remaining balance. The interest rate was 10.75%. On June 27, 1994 the Company refinanced the remaining balance with a nonrecourse mortgage loan in the amount of $3,300,000. The new mortgage loan matures July 27, 1999, bears interest at 10.35% and has a balloon payment due at maturity of approximately $3,120,000. Debt placement costs of approximately $143,000 were incurred. The new annual debt service is approximately $370,000.
j. On July 25, 1994 the Company obtained financing on the two apartment complexes located in Lexington, Kentucky. The two nonrecourse mortgage loans in the amount of $5,500,000 and $4,500,000 for Stoney Falls and Stoney Brooke Apartments, respectively, bear interest at 8.375% and mature in ten years when balloon payments totaling approximately $8,150,000 will be due. Under the terms of the loans, $100,000 was initially funded on each loan with the balance funded in January 1995. Debt placement costs of approximately $250,000 have been incurred. Annual debt service on the two loans is approximately $956,000.
k. On December 9 and 23, 1994, the Company prepaid the first and second mortgages, respectively, with aggregrate outstanding balances of approximately $3,364,000 which encumbered a property tenanted by Chomerics, Inc. located in Woburn, Massachusetts. The first and second mortgages were scheduled to mature August 1, 2011 and February 1, 2005, respectively, and both bore interest at 13.875%. The first mortgage was callable August 1, 1996.
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9. SENIOR INDEBTEDNESS
On May 27, 1988, the Company closed a $50,000,000, 10-year senior unsecured debt financing. The notes bear interest at 9.6%, payable semiannually, 2% of which may be deferred and added to the principal at the Company's option during the first five years. During 1993 and 1992, $546,842 and $1,077,496, respectively, were added to the principal of the note. In May 1994, the Company repaid $10,000,000 of the outstanding principal balance of the notes. The Company is required to make principal repayments of approximately $11,308,000 in each of the years 1995 through 1998.
The note agreements also place limitations on the Company with respect to, among other things, additional debt and the use of proceeds from property sales. In addition, distributions and the amounts used to purchase partnership interests cannot exceed cash flow, as defined in the agreements, plus $15,000,000. The Company is also required to maintain, among other things, specified levels of (i) net annual rentals, as defined in the agreements, on properties unencumbered by mortgage financing and (ii) net cash flow.
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10. RECONCILIATION OF NET EARNINGS PER FINANCIAL STATEMENTS TO TAX REPORTING
1994 1993 1992 ------------ ------------ ------------ Net earnings per financial statements $ 23,168,564 $ 22,676,754 $ 11,291,877 Minimum lease payments 6,708,644 6,066,011 5,592,462 received, net of income earned on leases accounted for under the financing method Gain on real estate 1,325,735 228,436 119,712 transactions for tax purposes in excess of that for financial statement purposes Provision for loss for 582,000 462,000 8,847,165 financial statement purposes Difference attributed to (29,367) (25,094) (4,243) joint ventures and minority interest Difference between expense (256,431) 584,286 1,768,031 accruals, net of income accruals, at beginning of year and end of year Depreciation and (9,532,694) (9,818,998) (10,124,573) amortization for tax purposes in excess of that for financial statement purposes due to leases accounted for under the financing method Other (26,218) (26,218) (26,218) ------------ ------------ ----------- Taxable income $ 21,940,233 $ 20,147,177 $17,464,213 ============ ============ ===========
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11. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT DATA)
Three Months Ended --------------------------------------------- March 31, June 30, ---------------------- ---------------------- 1994 1993 1994 1993 -------- --------- --------- --------
Revenues $15,943 $15,787 $15,156 $14,342 ======== ========= ========= ======== Earnings before property transactions $ 5,231 $ 5,375 $ 5,030 $ 4,093 Provision for loss on real estate (75) (182) (237) (196) Gains on property transactions 1,364 3,806 2,236 34 -------- -------- --------- -------- Net earnings $ 6,520 $ 8,999 $ 7,029 $ 3,931 ======== ======== ========= ======== Net earnings per limited partnership unit $.46 $.63 $.50 $.28 ======== ======== ========= ========
Three Months Ended --------------------------------------------- September 30, December 31, --------------------- --------------------- 1994 1993 1994 1993 --------- --------- --------- ---------- Revenues $14,750 $14,952 $15,702 $15,076 ========== ========= ========= ========== Earnings before property transactions $ 4,411 $ 4,592 $ 4,905 $ 4,319 Provision for loss on real estate (75) - (195) (84) Gains on property transactions 238 899 336 21 ---------- --------- ---------- --------- Net earnings $ 4,574 $ 5,491 $ 5,046 $ 4,256 ========== ========= ========== ========= Net earnings per limited partnership unit $ .32 $ .39 $ .36 $ .30 ========== ========= ========== =========
Net earnings per unit is computed separately for each period and, therefore, the sum of such quarterly per unit amounts may differ from the total for the year.
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12. COMMITMENTS AND CONTINGENCIES
a. On January 4, 1991, Best Products Co., Inc., a tenant in a property owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. On June 14, 1994 the tenant came out of bankruptcy and affirmed the leases. The tenant has remained and is current in its obligations under the lease. As of December 31, 1994, the property had a carrying value of approximately $3,742,000 and is encumbered by a nonrecourse mortgage payable of approximately $256,000.
b. On September 16, 1991, the Company brought suit against Alco Standard Corporation and its affiliates, a former tenant of an industrial facility located in Rome, Georgia whose lease expired in October 1990. The action was brought against the defendants in the United States District Court Northern District of Georgia, Rome Division for reimbursement of costs that could be incurred for clean-up of hazardous materials on the site and certain deferred maintenance. In July 1994, this litigation was settled and the property was sold for $525,000. A gain of approximately $100,000 was recognized in the year ended December 31, 1994. In addition, Alco reimbursed the Company for $150,000 of expenses incurred and indemnified the Company against any future liability in connection with any site contamination. The expense reimbursement has been included in "Property expenses" in the financial statements for the year ended December 31, 1994.
c. On July 31, 1992, Chipwich, Inc. ("Chipwich"), parent of Peltz Food Corporation, a tenant in a property owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. Chipwich then filed a motion for rejection of the lease and, pursuant to an order of the Bankruptcy Court, the lease was rejected on September 29, 1992. There is a guarantor of the lease and the Company is currently proceeding to enforce all obligations under such guaranty including settlement of an unsecured proof of claim filed by the Company. At December 31, 1994, the property has a carrying value of approximately $937,000 and is encumbered by a nonrecourse mortgage payable of approximately $314,000. Based on the existence of the guaranty, the Company believes that the carrying value of the asset is fairly stated at December 31, 1994.
d. On December 31, 1994, the Company held a mortgage note receivable in the principal amount of $462,712. The mortgage encumbers four properties together with a collateral assignment of ground leases and rents. The properties are tenanted by Gino's and Foodarama. The mortgage had been taken back by a Predecessor Partnership in connection with the sale of these properties. The tenants remained current in their lease obligations.
The terms of the mortgage called for a balloon payment of $1,100,000 on January 1, 1992 which was not received. On January 9, 1992, the Company gave written notice of default to Sheldon Lowe and Joseph T. Comras, the mortgagors and the current owners of the properties. As
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of December 31, 1994, the Company has commenced foreclosure actions on the four properties as follows: two each in Pennsylvania and New Jersey. The Company foreclosed on the property in Michigan on October 7, 1993 and real estate with carrying value of approximately $70,000 was recorded in the year ended December 31, 1993. On February 25, 1994 the Company foreclosed on the previously encumbered property formerly tenanted by Lionel Leisure located in Pennsylvania. In September 1994, this property was sold and no gain or loss was incurred upon disposition. In October 1994, the Company foreclosed on two properties located in Massachusetts and real estate with a carrying value of approximately $102,000 was recorded in the year ended December 31, 1994. No gain or loss was incurred or is anticipated upon foreclosure because the estimated fair value of the properties exceeds their carrying value.
e. On January 26, 1993, Be-Mac Transport Company, Inc. ("Be- Mac"), a tenant in a property owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. Be-Mac then filed a motion for rejection of the lease and, pursuant to an order of the Bankruptcy Court, the lease was rejected on February 24, 1993. There is a guarantor of the lease and the Company is currently proceeding to enforce all obligations under such guaranty including settlement of an unsecured proof of claim filed by the Company. The rejected lease contains a purchase option exercisable by the guarantor. Based on the purchase option price, the Company wrote the property down by incurring a provision for loss on real estate in the amount of $196,000 in the year ended December 31, 1993. At December 31, 1994, the property has a carrying value of approximately $948,000 and is unencumbered by any mortgage. The Company has re-let the property effective March 1, 1994 at an annual rental of $120,000.
f. Lockheed Missile and Space Company, Inc. ("Lockheed"), a tenant of the Company's leasehold property in Palo Alto, California, has entered into a consent decree with the California Department of Toxic Substances Control ("CDTS") to undertake certain environmental remediation at this property. Lockheed has estimated that the environmental remediation costs may be up to approximately $14,000,000. In a non-binding determination by the CDTS, Lockheed was found responsible for approximately 75% of such costs and the balance was allocated to other parties. The Company was allocated no responsibility for any such costs.
Lockheed has served a notice that it may exercise its statutory right to have its liability reassessed in a binding arbitration proceeding. In connection with this notice, Lockheed has stated that it will attempt to have allocated to the Company and to the Company's ground- lessor (which may claim a right of indemnity against the Company) approximately 9% and 17%, respectively, of the total remediation costs. The Company believes that it has no liability for any of such costs, and in any proceeding in which such liability is asserted against it, the Company will vigorously contest such liability. In the event any of such liability is allocated to the Company, it will seek indemnification from Lockheed in accordance with its lease.
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13. PROPERTY HELD FOR SALE
At December 31, 1994, the Company owned four properties that were being actively marketed for sale. At December 31, 1994, these properties have been stated at the lower of their carrying value or net realizable value. The aggregate value of the properties is estimated to be approximately $413,000, after incurring a provision for loss on real estate in the amount of $85,000 in the year ended December 31, 1994. At December 31, 1993, the aggregate value of the properties was estimated to be approximately $2,327,000 after incurring a provision for loss on real estate in the amount of approximately $84,000 in the year then ended.
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14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable, and Accounts ------------------------------------------------------------ Payable and Accrued Expenses ----------------------------
The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments.
Mortgages Receivable --------------------
The fair values of the mortgages receivable past due, in process of foreclosure, or for which foreclosure proceedings are pending, are based on the discounted cash flows of the underlying lease. The fair values of the mortgages receivable satisfied subsequent to year end are based on the amount of the net proceeds received.
The fair values of the mortgages receivable which are current are based on the discounted cash flows of their respective payment streams.
The approximate estimated fair values of the mortgages receivable held as of December 31, 1994 are summarized as follows:
At December 31, 1994 ------------------------- Collateralized by Net Estimated Property Tenanted by Investment Fair Value -------------------- ----------- ----------- Gino's, Inc., and Foodarama Supermarkets, Inc. $ 293,000 $ 334,000 Hardee's Food Systems, Inc. 51,000 186,000 Bank of Virginia 342,000 400,000 Best Products Co., Inc. 249,000 253,000 Data 100 Corp. 807,000 1,028,000 Easco Corp. 972,000 3,482,000 Winchester Partnership 2,086,000 2,023,000
The net investment at December 31, 1994 is equal to the carrying amount of the mortgage receivable less any deferred income recorded.
Senior Indebtedness
The approximate fair value and carrying value of the Company's senior indebtedness at December 31, 1994 is $47,653,000 and $45,231,000, respectively. The estimated fair value is based on the amount of future cash flows associated with the instrument discounted using the rate at which the Company believes it could currently replace the senior indebtedness.
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Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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15. DISTRIBUTIONS PAYABLE
Distributions payable represent amounts accrued and unpaid due to non-consenting investors ("Non-consents"). Non-consents are those investors who have not yet exchanged their limited partnership interest in the various Predecessor Partnerships for limited partnership units of American Real Estate Partners, L.P.
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16. SUBSEQUENT EVENTS
a. On January 25, 1995, the Grand Union Company, a tenant leasing eight properties owned by the Company, filed a prepackaged voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. These eight properties' annual rentals total approximately $1,450,000 (including two properties which are sub-let, representing approximately $58,000 in annual rentals). The tenant has not yet determined whether it will exercise its right to reject or affirm the leases which will require an order of the Bankruptcy Court. The tenant is current in its obligations under the leases.
b. During the end of March and early April 1995 the Company anticipates completing the Rights Offering through which it will raise approximately $109,000,000 net of related expenses. Pursuant to the terms of the Rights Offering, holders of depositary units representing limited partner interests (the "Depositary Units") on the record date received one transferable subscription right (each a "Right") for each seven Depositary Units held. Each Right was exercisable for a combination of securities consisting of six Depositary Units and one 5% cumulative pay-in-kind redeemable preferred unit representing limited partner interests (the "Preferred Units"). High Coast Limited Partnership, a Delaware Limited Partnership which is controlled by Carl C. Icahn ("Icahn"), has acted as guarantor of the offering (the "Guarantor"). Through the Guarantor, Icahn will exercise certain subscription rights and an over-subscription privilege to acquire additional Depositary Units and Preferred Units. A registration statement on Form S-3 relating to the Rights Offering (Registration No. 33- 54767) was filed with the Securities and Exchange Commission and declared effective February 23, 1995.
c. On February 1, 1995, the Penske Corp. exercised its purchase option on three properties leased from the Company (two in New Jersey and one in New York). The selling price was approximately $4,535,000 and a gain of approximately $1,030,000 will be recognized in the three months ended March 31, 1995. Each property was encumbered by first and second mortgages which totalled approximately $1,162,000 and which were paid from the sales proceeds.
d. The Company has executed a contract for the sale of the property tenanted by Pace Membership Warehouse, Inc. In addition, the purchaser is obligated to pay the Company $50,000 should it default on its obligations under the contract. The Company expects to complete the sale by the end of March 1995. The sale price is $9,300,000 and the Company expects to record a gain of approximately $3,300,000 in the three months ended March 31, 1995. The property is encumbered by a nonrecourse mortgage payable of approximately $4,346,000, which the purchaser will assume.
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Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ---------------------------------------------
None.
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PART III
Item 10.

Item 10. Directors and Executive Officers of AREP. ----------------------------------------
The names, offices held and the ages of the directors and executive officers of the General Partner are as follows:
Name Age Office ---- --- ------
Carl C. Icahn 59 Chairman of the Board
Alfred D. Kingsley 52 Director
Mark H. Rachesky 36 Director and Vice President
William A. Leidesdorf 49 Director
Jack G. Wasserman 58 Director
John P. Saldarelli 53 Vice President, Secretary and Treasurer
Carl C. Icahn has been Chairman of the Board of the General Partner since November 15, 1990. He was Chief Executive Officer and Member of the Office of the Chairman of Trans World Airlines, Inc. ("TWA") from November 8, 1988 to January 8, 1993; Chairman of the Board of Directors of TWA from January 3, 1986 to January 8, 1993 and Director of TWA from September 27, 1985 to January 8, 1993. He is also Chairman of the Board of Directors and President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered broker-dealer and a member of The New York Stock Exchange, Inc. Mr. Icahn has also been Chairman of the Board of Directors of ACF since October 29, 1984 and a Director of ACF since June 29, 1984. ACF is a railroad freight and tank car leasing, sales and manufacturing company. In 1979, Mr. Icahn acquired control and presently serves as Chairman of the Board of Directors of Bayswater Realty & Capital Corp., which is a real estate investment and development company. ACF, Icahn & Co., Inc. and Bayswater Realty & Capital Corp. are deemed to be directly or indirectly owned and controlled by Carl C. Icahn. Mr. Icahn also has substantial equity interests in and controls various partnerships and corporations which invest in publicly traded securities.
Alfred D. Kingsley has served as Director of the General Partner since November 15, 1990. He was also Vice Chairman of the Board of Directors of TWA from February 1, 1989 to January 8, 1993 and a Member of the Office of the Chairman from November 8, 1988 to January 8, 1993. Mr. Kingsley was a Director of TWA from September 27, 1985 to January 8, 1993. He also was a Director and Executive Officer and Director of Research at Icahn & Co., Inc. and related entities from 1968 until December 1994. He also has been Vice Chairman of the Board of Directors of ACF since October 29, 1984 and a Director of ACF
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since June 29, 1984. Mr. Kingsley has also been a Senior Managing Director of Greenway Partners, L.P. since May 1993, which invests in publicly traded securities.
Mark H. Rachesky has served as Director of the General Partner since November 15, 1990 and as Vice President since November 29, 1990. Since February 1, 1990, Mr. Rachesky has been employed at Icahn & Co., Inc., where he is involved in the finance and investments areas. Mr. Rachesky was formerly with Robert M. Bass Group, Inc., where he also was involved in financing and investment activities. Prior thereto, Mr. Rachesky was employed at Goldman, Sachs & Co.
William A. Leidesdorf has served as Director of the General Partner since March 26, 1991. Since January 1, 1994, Mr. Leidesdorf has been Managing Director of RFG Financial, Inc., a commercial mortgage company. From September 30, 1991 to December 31, 1993, Mr. Leidesdorf was Senior Vice President of Palmieri Asset Management Group. From May 1, 1990 to September 30, 1991, Mr. Leidesdorf was Senior Vice President of Lowe Associates, Inc., a real estate development company, where he was involved in the acquisition of real estate and the asset management workout and disposition of business areas. He also acted as the Northeast Regional Director for Lowe Associates, Inc. From June 1985 to January 30, 1990, Mr. Leidesdorf was Senior Vice President and stockholder of Eastdil Realty, Inc., a real estate company, where he was involved in the asset management workout, disposition of business and financing areas. During the interim period from January 30, 1990 through May 1, 1990, Mr. Leidesdorf was an independent contractor for Eastdil Realty, Inc. on real estate matters.
Jack G. Wasserman has served as a Director of the General Partner since December 3, 1993. Mr. Wasserman is an attorney and a member of the New York State Bar and has been with the New York based law firm of Wasserman, Schneider & Babb since 1966, where he is currently a senior partner.
John P. Saldarelli has served as Vice President, Secretary and Treasurer of the General Partner since March 18, 1991. Mr. Saldarelli was also President of Bayswater Realty Brokerage Corp. from June 1987 until November 19, 1993 and Vice President of Bayswater Realty & Capital Corp. from September 1979 until April 15, 1993, both of which are deemed to be directly or indirectly owned and controlled by Carl C. Icahn.
William Leidesdorf and Jack G. Wasserman are on the Audit Committee of the Board of Directors of the General Partner.
Each of Messrs. Icahn and Kingsley served on the Board of Directors of TWA. On January 31, 1992, TWA filed a petition for bankruptcy in the U.S. Bankruptcy Court in Delaware, seeking reorganization under Chapter 11 of the Bankruptcy Code. In connection therewith, the Pension Benefit Guaranty
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Corporation asserted that there existed in the TWA defined benefit plans an underfunding deficiency, and that if the Plans were terminated, TWA and all members of the controlled group of which TWA was a member, including the General Partner, would be liable, jointly and severally, for approximately $1.2 billion. On January 8, 1993, TWA, the Pension Benefit Guaranty Corporation, Mr. Icahn and the members of the controlled group, among others, settled all claims and potential claims which they had against each other.
Each executive officer and director will hold office until the next annual meeting of the General Partner and until his or her successor is elected and qualified. Effective June 15, 1993, directors who are not employed by AREP or certain affiliates, receive fees of $3,000 for attendance at each quarterly meeting of the Board of Directors. Mr. Kingsley, Mr. Leidesdorf and Mr. Wasserman each received $12,000 for attendance at meetings in 1994.
Each of the executive officers of the General Partner, other than John P. Saldarelli, performs services for other affiliates of the General Partner.
There are no family relationships between or among any of the directors and/or executive officers of the General Partner.
If distributions (which are payable in kind) are not made to the holders of Preferred Units on any two Payment Dates (which need not be consecutive), the holders of more than 50% of all outstanding Preferred Units, including the General Partner and its affiliates, voting as a class, shall be entitled to appoint two nominees for the Board of Directors of the General Partner. Holders of Preferred Units owning at least 10% of all outstanding Preferred Units, including the General Partner and its affiliates to the extent that they are holders of Preferred Units, may call a meeting of the holders of Preferred Units to elect such nominees. Once elected, the nominees will be appointed to the Board of Directors of the General Partner by Icahn. As directors, the nominees will, in addition to their other duties as directors, be specifically charged with reviewing all future distributions to the holders of the Preferred Units. Such additional directors shall serve until the full distributions accumulated on all outstanding Preferred Units have been declared and paid or set apart for payment. If and when all accumulated distributions on the Preferred Units have been declared and paid or set aside for payment in full, the holders of Preferred Units shall be divested of the special voting rights provided by the failure to pay such distributions, subject to revesting in the event of each and every subsequent default. Upon termination of such special voting rights attributable to all holders of Preferred Units with respect to payment of distributions, the term of office of each director nominated by the holders of Preferred Units (the "Preferred Unit Directors") pursuant to such special voting rights shall terminate and the number of directors constituting the entire Board of Directors shall be reduced by the number of Preferred Unit Directors. The holders of the Preferred Units will have no
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other rights to participate in the management of AREP and will not be entitled to vote on any matters submitted to a vote of the holders of Depositary Units.
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AREP has adopted a Nonqualified Unit Option Plan (the "Plan") pursuant to which options to purchase an aggregate of 1,416,910 Depositary Units at an option price equal to the market price on the date of grant may be granted to officers and key employees of the General Partner and AREP who provide services to AREP. To date, no options have been granted under the Plan.
In February 1993, AREP adopted a 401K plan pursuant to which AREP will make a matching contribution to an employee's individual plan account in the amount of one-third (1/3) of the first six (6%) percent of gross salary contributed by the employee.
Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------
As discussed below, effective February 22, 1995 the General Partner and its affiliates contributed all of their Depositary Units to the Guarantor in exchange for a general partner interest in the Guarantor. As a result, as of February 22, 1995, the Guarantor owned 1,365,768 Depositary Units, or approximately 9.89% of the outstanding Depositary Units then outstanding, prior to giving effect to the Rights Offering. There were no outstanding Preferred Units on that date. The foregoing is exclusive of a 1.99% ownership interest in AREP which the General Partner held by virtue of its 1% General Partner interest in each of AREP and the Subsidiary. Prior to May 1993, Icahn's ownership of the General Partner was through his affiliate, Meadowstar Holding Company, Inc. ("Meadowstar"). Meadowstar had originally purchased all of the outstanding shares of common stock of (i) the General Partner and (ii) API Nominee Corp., a Delaware corporation ("Nominee"), pursuant to an Acquisition Agreement, dated as of September 13, 1990 (the "Acquisition Agreement") between Meadowstar and Integrated Resources, Inc. In May 1993, Icahn purchased all of the outstanding shares of the General Partner from Meadowstar. As a result, Icahn became the beneficial owner of the 1,254,280 Depositary Units owned by the General Partner. Icahn may also be deemed to be the beneficial owner of the 159,894 Depositary Units owned of record by Nominee (the Units owned by Nominee are Depositary Units of holders who have not yet exchanged their limited partner interests); however, Icahn disclaims such beneficial ownership.
In connection with the Rights Offering, the Guarantor was formed. The general partner of the Guarantor is the General Partner. The limited partners of the Guarantor are ACF Industries, Incorporated ("ACF"), a New Jersey corporation, and Tortoise Corp. ("Tortoise"), a New York corporation. Both ACF and Tortoise are controlled by Icahn. Each of the General Partner, ACF and Tortoise contributed to the Guarantor all Depositary Units and related rights, privileges and benefits owned by them or their affiliates, including the right to receive the Rights Offering. As a result of the above transactions, the Guarantor received 1,365,768 Depositary Units (which includes 76,088 Depositary Units Icahn acquired
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through participation in AREP's Dividend Reinvestment Plan which is available to all Unitholders, and 35,400 Depositary Units which were originally owned by Unicorn Associates Corporation, an affiliate of Icahn), representing approximately 9.89% of the outstanding Depositary Units prior to the Rights Offering which entitled the Guarantor to receive 195,110 Rights in the Offering.
Pursuant to the terms of the Rights Offering and a subscription guaranty agreement entered into in connection with the Rights Offering, the Guarantor agreed to subscribe for and purchased (i) 1,176,660 Depositary Units and 195,110 Preferred Units through the exercise of its Rights and (ii) all of the available Depositary Units and Preferred Units pursuant to the exercise of an over-subscription privilege. The Guarantor received certain registration rights with respect to its Depositary Units and Preferred Units for providing the subscription guaranty but was not otherwise compensated. As a result of the Guarantor's participation in the Rights Offering, AREP expects that Icahn will increase his percentage ownership in the Partnership and obtain a substantial portion of the Preferred Units being offered.
The affirmative vote of Unitholders holding more than 75% of the total number of all Units then outstanding, including Depositary Units held by the General Partner and its affiliates, is required to remove the General Partner. Thus, if Icahn, through the Guarantor, holds 25% or more of the Depositary Units outstanding after giving effect to the Rights Offering, the General Partner will not be able to be removed pursuant to the terms of the Partnership Agreement without Icahn's consent. Moreover, under the Partnership Agreement, the affirmative vote of the General Partner and Unitholders owning more than 50% of the total number of all outstanding Depositary Units then held by Unitholders, including the Guarantor, is required to approve, among other things, selling or otherwise disposing of all or substantially all of AREP's assets in a single sale or in a related series of multiple sales, dissolving AREP or electing to continue AREP in certain instances, electing a successor general partner, making certain amendments to the Partnership Agreement or causing AREP, in its capacity as sole limited partner of the Subsidiary, to consent to certain proposals submitted for the approval of the limited partners of the Subsidiary. Accordingly, if Icahn, through the Guarantor, holds 50% or more of the Depositary Units outstanding after giving effect to the Rights Offering, Icahn, through the Guarantor, will have effective control over such approval rights.
As of March 17, 1995, to the best knowledge of AREP, Tweedy, Browne Company L.P., a Delaware limited partnership, TBK Partners L.P., a Delaware limited partnership and Vanderbilt Partners, L.P., a Delaware limited partnership, who collectively filed an amended Form 13-D on November 30, 1993, owned 945,010 Depositary Units, or approximately 6.83% of the outstanding Depositary Units.
The following table provides information, as of March 17, 1995, as to the beneficial ownership of the Depositary Units of AREP for each
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director of the General Partner, and all directors and executive officers of the General Partner as a group.
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Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
Related Transactions with the General Partner and its Affiliates ----------------------------------------------------------------
In November 1993 AREP replaced a letter of credit obtained by Meadowstar for the benefit of AREP in 1990 (the "Letter of Credit") with respect to AREP's Lockheed Electronics property in New Jersey relating to environmental clean-up costs, with a self-guaranty by AREP (the "Guaranty"). The Audit Committee approved the replacement of the Letter of Credit with the Guaranty as permitted under New Jersey law. The clean-up costs are the tenant's responsibility.
For the year ended December 31, 1994, AREP made no payments with respect to the Depositary Units owned by the General Partner. For the year ended December 31, 1993, AREP paid the General Partner (i) $641,360 ($0.50 per Unit) with respect to the Depositary Units owned by the General Partner (see ITEM 12) and (ii) $140,848 with respect to the aggregate 1.99% general partner interest of the General Partner in AREP. Based on distributions payable in respect of 1993, the General Partner acquired 76,088 Depositary Units through participation in the DRIP. In addition, AREP paid Unicorn Associates Corporation $17,700 ($0.50 per Unit) with respect to the 35,400 Depositary Units owned by it.
AREP entered into a lease, effective June 1, 1991, for approximately 6,900 square feet of office space with Riverdale Investors Corp., Inc., an affiliate of the General Partner (the "Lessor"). The terms of this lease were reviewed for fairness by the Audit Committee, which determined that the terms of such transaction were fair and reasonable to AREP. In evaluating the transaction, the Audit Committee consulted with an independent appraiser regarding the terms of the lease. The lease is for a ten-year term and provides for initial monthly rent (inclusive of charges for utilities) of $11,642, which amount increases to $12,936 on June 1, 1994 and $14,804 on June 1, 1997. For the year ended December 31, 1992, AREP paid $139,704 in rent to the Lessor. On December 29, 1992, the Lessor assigned its rights in the lease to an unaffiliated third party.
Property Management and Other Related Transactions --------------------------------------------------
The General Partner and its affiliates benefited from the Rights Offering because, in their capacity as Exercising Rights Holders, they were entitled to the same right to increase their investment in AREP as other Unitholders, including acquiring additional Depositary Units. The Guarantor also received certain registration rights with respect to its Depositary Units and Preferred Units for providing the Subscription Guaranty.
The General Partner and its affiliates may receive fees in connection with the acquisition, sale, financing, development and management of new properties acquired by AREP. As development and other
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new properties are acquired, developed, constructed, operated, leased and financed, the General Partner or its affiliates may perform acquisition functions, including the review, verification and analysis of data and documentation with respect to potential acquisitions, and perform development and construction oversight and other land development services, property management and leasing services, either on a day-to-day basis or on an asset management basis, and may perform other services and be entitled to fees and reimbursement of expenses relating thereto, provided the terms of such transactions are fair and reasonable to AREP in accordance with AREP Agreement and customary to the industry. It is not possible to state precisely what role, if any, the General Partner or any of its affiliates may have in the acquisition, development or management of any new investments. Consequently, it is not possible to state the amount of the income, fees or commissions the General Partner or its affiliates might be paid in connection with the investment of the Rights Offering proceeds since the amount thereof is dependent upon the specific circumstances of each investment, including the nature of the services provided, the location of the investment and the amount customarily paid in such locality for such services. However, investors may expect that, subject to the specific circumstances surrounding each transaction and the overall fairness and reasonableness thereof to AREP, the fees charged by the General Partner and its affiliates for the services described below generally will be within the ranges set forth below:
-- Property Management and Asset Management Services. To the extent that AREP acquires any properties requiring active management (e.g., operating properties that are not net leased) or asset management services, including on-site services, it may enter into management or other arrangements with the General Partner or its affiliates. Generally, it is contemplated that under property management arrangements, the entity managing the property would receive a property management fee (generally 3% to 6% of gross rentals for direct management, depending upon the location) and under asset management arrangements, the entity managing the asset would receive an asset management fee (generally .5% to 1% of the appraised value of the asset for asset management services, depending upon the location) in payment for its services and reimbursement for costs incurred.
-- Brokerage and Leasing Commissions. AREP also may pay affiliates of the General Partner real estate brokerage and leasing commissions (which generally may range from 2% to 6% of the purchase price or rentals depending on location; this range may be somewhat higher for problem properties or lesser-valued properties).
-- Lending Arrangements. The General Partner or its affiliates may lend money to, or arrange loans for, AREP. Fees payable to the General Partner or its affiliates in connection with such activities include mortgage brokerage fees (generally .5% to 3% of the loan amount), mortgage origination
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fees (generally .5% to 1.5% of the loan amount) and loan servicing fees (generally .10% to .12% of the loan amount), as well as interest on any amounts loaned by the General Partner or its affiliates to AREP.
-- Development and Construction Services. The General Partner or its affiliates may also receive fees for development services, generally 1% to 4% of development costs, and general contracting services or construction management services, generally 4% to 6% of construction costs.
-- Reinvestment Incentive Fees. Subject to the limitations described below, the General Partner is entitled to receive a reinvestment incentive fee (a "Reinvestment Incentive Fee") for performing acquisition services equal to a percentage of the purchase price (whether paid in cash, Depositary Units, other securities and/or with mortgage financing) of properties (other than Predecessor Properties) acquired from July 1, 1987 through July 1, 1997. This percentage is 1% for the first five years and 1/2% for the second five years. Although a Reinvestment Incentive Fee accrues each time a property is acquired, Reinvestment Incentive Fees are only payable on an annual basis, within 45 days after the end of each calendar year, if the following subordination provisions are satisfied. Reinvestment Incentive Fees accrued in any year will only be payable if the sum of (x) the sales price of all Predecessor Properties (net of associated debt which encumbered these Properties at the consummation of the Exchange) sold through the end of that year and (y) the appraised value of all Predecessor Properties which have been financed or refinanced (and not subsequently sold), net of the amount of any refinanced debt through the end of that year determined at the time of such financings or refinancings, exceeds the aggregate values assigned to those Predecessor Properties for purposes of the Exchange. If the subordination provisions are not satisfied in any year, payment of Reinvestment Incentive Fees for that year will be deferred. At the end of each year a new determination will be made with respect to subordination requirements (reflecting all sales, financings and refinancings from the consummation of the Exchange through the end of that year) in order to ascertain whether Reinvestment Incentive Fees may be payable irrespective of whether distributions have been made or are projected to be made to Unitholders. Through December 31, 1994, an aggregate of (i) 126 Predecessor Properties were sold or disposed of for an aggregate of approximately $56,879,000 net of associated indebtedness which encumbered these Properties at the consummation of the Exchange and (ii) 25 Predecessor Properties were refinanced at an aggregate appraised value, net of the amount of the refinanced debt, of approximately $44,431,000 for a sum total of approximately $101,310,000. Aggregate appraised values attributable to these Predecessor Properties for purposes of the Exchange were approximately $88,322,000. Accordingly, through December 31, 1994, AREP satisfied the subordination requirements detailed above.
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Nonqualified Unit Option Plan -----------------------------
AREP has adopted the Plan, under which options to purchase an aggregate of 1,416,910 Depositary Units may be granted to officers and key employees of the General Partner and AREP who provides services to AREP. To date, no options have been granted under the Plan. See ITEM 11

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ---------------------------------------
(a) (1) Financial Statements: --------------------
The following financial statements of American Real Estate Partners, L.P. are included in Part II, ITEM 8:
Page Number ------
Independent Auditors' Report II-15
Consolidated Balance Sheets -- II-16 December 31, 1994 and 1993
Consolidated Statements of Earnings -- II-17 Years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Partners' Equity -- II-18 Years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -- II-19-20 Years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements II-21-51
(a) (2) Financial Statement Schedules: -----------------------------
Schedule III - Real Estate Owned and Revenues IV-4-22 Earned (by tenant or guarantor as applicable)
All other Financial Statement schedules have been omitted because the required financial information is not applicable or the information is shown in the Financial Statements or Notes thereto.
(a) (3) Exhibits: --------
3.1 Certificate of Limited Partnership of AREP, dated February 17, 1987 (filed as Exhibit No. 3.1 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
3.2 Amended and Restated Agreement of Limited Partnership of AREP, dated as of May 12, 1987 (filed as Exhibit No. 3.2 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
3.3 Amendment No. 1 to the Partnership Agreement.
IV-1
3.4 Certificate of Limited Partnership of American Real Estate Holdings Limited Partnership (the "Subsidiary"), dated February 17, 1987 and amendment thereto, dated March 12, 1987 (filed as Exhibit No. 3.3 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
3.5 Amended Restated Agreement of Limited Partnership of the Subsidiary, dated as of July 1, 1987 (filed as Exhibit No. 3.4 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.1 Depositary Agreement among AREP, the General Partner and Registrar and Transfer Company, dated as of July 1, 1987 (filed as Exhibit No. 4.1 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.2 Amendment No. 1 to the Depositary Agreement.
4.3 Specimen Depositary Receipt (filed as Exhibit No. 4.2 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.4 Form of Transfer Application (filed as Exhibit No. 4.3 to AREP's Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference).
4.5 Form of Certificate representing Preferred Units.
10.1 Nonqualified Unit Option Plan (filed as Exhibit No. 10.2 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
10.2 Distribution Reinvestment Plan (filed as Exhibit No. 10.3 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
10.3 Note Purchase Agreements, dated as of May 27, 1988 among AREP, the Subsidiary and The Prudential Insurance Company of America (the "Note Agreements") (filed as Exhibit Nos. 2a and 2b to AREP's Current Report on Form 8-K dated May 27, 1988 and incorporated herein by reference).
10.4 Amendment No. 1 to the Note Agreements dated November 17, 1988 (filed as Exhibit No. 10.2 to AREP's
IV-2
Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.5 Amendment No. 2 to the Note Agreements dated November 17, 1988 (filed as Exhibit No. 10.3 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.6 Amendment No. 3 to the Note Agreements dated as of June 21, 1994 (filed as Exhibit No. 10.4 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.7 Amendment No. 4 to the Note Agreements dated as of August 12, 1994 (filed as Exhibit No. 10.5 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.8 9.6% Senior Promissory Note of AREP and the Subsidiary due May 27, 1998 payable to The Prudential Insurance Company of America (filed as Exhibit No. 2c to AREP's Current Report on Form 8-K dated May 27, 1988 and incorporated herein by reference).
10.9 9.6% Senior Promissory Note of AREP and the Subsidiary due May 27, 1998 payable to Prudential Property and Casualty Insurance Company (filed as Exhibit No. 2d to AREP's Current Report on Form 8-K dated May 27, 1988 and incorporated herein by reference).
10.10 Subscription Guaranty Agreement between AREP and High Coast Limited Partnership (the "Guarantor").
10.11 Registration Rights Agreement between AREP and the Guarantor.
16 Letter dated September 27, 1991 of Deloitte & Touche regarding change in accountants (filed as Exhibit No. A to AREP's Current Report on Form 8-K dated October 3, 1991 and incorporated herein by reference).
22 List of Subsidiaries (filed as Exhibit No. 22 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
(b) Reports on Form 8-K: ------------------- AREP filed a Current Report on Form 8-K (the "Form 8-K") with the Securities and Exchange Commission on March 17, 1995. Pursuant to Item 5 of the Form 8-K, AREP release its earnings for the fourth quarter and fiscal year ended December 31, 1994 and also announced that no distribution would be made for the fiscal quarter ending March 31, 1995.
IV-3
IV-4
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1994 -----------------------------------------------------------------------------
1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel operating properties, was carried at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1994 $ 176,050,393 Additions during period 12,496,354 Write downs (322,000) Reclassifications during period to assets held for sale (1,340,935) Disposals during period (1,556,204) -------------- Balance - December 31, 1994 $ 185,327,608 ==============
b. A reconciliation of the total amount of accumulated depreciation at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1994 $ 45,040,784 Depreciation during period 4,501,318 Disposals during period (709,930) Reclassifications during period to property held for sale (597,450) -------------- Balance - December 31, 1994 $ 48,234,722 ==============
IV-11
(continued)
Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years.
2. A reconciliation of the total amount at which real estate owned, accounted for under the financing method, was carried at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1994 $ 327,470,322 Additions during period 41,256 Write downs (110,000) Disposals during period (6,432,148) Amortization of unearned income 31,990,262 Minimum lease rentals received (38,698,906) ------------ Balance - December 31, 1994 $314,260,786 ============
3. The aggregate cost of real estate owned for federal income tax purposes is $402,624,341.
4. Net income applicable to the period in Schedule III is reconciled with net earnings as follows:
Net income applicable to financing and operating leases $ 26,648,827 Add interest income - other 1,438,491 ------------ 28,087,318 ------------ Deduct expenses not allocated: General and administrative expenses 2,791,123 Nonmortgage interest expense 4,731,517 Other 987,979 ------------ 8,510,619 ------------ Earnings before gain on property transactions 19,576,699 Provision for loss on property (582,000) Gain on sales of real estate 4,173,865 ------------ Net earnings $ 23,168,564 ============
IV-12
(Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1993 -------------------------------------------------------------------------------
1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel operating properties, was carried at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1993 $162,201,694 Additions during period 20,347,239 Write downs (247,000) Reclassifications during period from financing leases 800,429 Reclassifications during period to assets held for sale (2,212,215) Disposals during period (4,839,754) ------------ Balance - December 31, 1993 $176,050,393 ============
b. A reconciliation of the total amount of accumulated depreciation at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1993 $ 44,105,825 Depreciation during period 3,992,036 Disposals during period (1,896,524) Reclassifications during period to assets held for sale (1,160,553) ----------- Balance - December 31, 1993 $45,040,784 ===========
Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years.
IV-13 (continued)
2. A reconciliation of the total amount at which real estate owned, accounted for under the financing method, was carried at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1993 $330,322,814 Additions during period 4,130,942 Reclassifications during period (800,429) Disposals during period (116,994) Amortization of unearned income 32,851,135 Minimum lease rentals received (38,917,146) ------------ Balance - December 31, 1993 $327,470,322 ============
3. The aggregate cost of real estate owned for federal income tax purposes is $398,245,532.
4. Net income applicable to the period in Schedule III is reconciled with net earnings as follows:
Net income applicable to financing and operating leases $ 24,390,249 Add interest income - other 2,009,598 ------------ 26,399,847 ============ Deduct expenses not allocated: General and administrative expenses 2,454,786 Nonmortgage interest expense 5,070,729 Other 495,561 ------------ 8,021,076 ============
Earnings before gain on property transactions 18,378,771 Provision for loss on property (462,000) Gain on sales of real estate 4,759,983 ------------ Net earnings $22,676,754 ============
IV-14
(Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1992 -----------------------------------------------------------------------------
1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel operating properties was carried at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1992 $159,169,561 Additions during period 160,748 Write downs (8,847,165) Reclassifications during period from financing leases 21,902,382 Reclassifications during period to assets held for sale (9,090,374) Disposals during period (1,093,458) ------------ Balance - December 31, 1992 $162,201,694 ============
b. A reconciliation of the total amount of accumulated depreciation at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1992 $ 42,315,717 Depreciation during period 4,073,691 Disposals during period (385,164) Reclassifications during period to assets held for sale (1,898,419) ------------ Balance - December 31, 1992 $ 44,105,825 ============
Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years.
IV-15
(continued)
2. A reconciliation of the total amount at which real estate owned, accounted for under the financing method, was carried at the beginning of the period, with the total at the close of the period, is shown below:
Balance - January 1, 1992 $358,005,265 Additions during period - Reclassifications during period (21,902,382) Disposals during period (187,607) Amortization of unearned income 34,121,308 Minimum lease rentals received (39,713,770) ------------ Balance - December 31, 1992 $330,322,814 ============
3. The aggregate cost of real estate owned for federal income tax purposes is $382,975,157.
4. Net income applicable to the period in Schedule III is reconciled with net earnings as follows:
Net income applicable to financing and operating leases $ 26,101,004 Add interest income - other 2,234,035 ------------ 28,335,039 ============ Deduct expenses not allocated: General and administrative expenses 2,318,856 Nonmortgage interest expense 5,142,818 Other 292,155 ------------ 7,753,829 ============ Earnings before gain on property transactions and extraordinary item 20,581,210 Provision for loss on property (8,847,165) Gain on sales of real estate 342,372 ------------ Extraordinary item, gain from early extinguishment of debt (784,540) ------------ Net earnings $11,291,877 ============
IV-16 (Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1994 -----------------------------------------------------------------------------
Net State Investment ------ -------------------------- Alabama $ 10,774,730 California 14,865,499 Colorado 403,433 Connecticut 24,956,415 Florida 26,193,440 Georgia 6,611,153 Illinois 5,752,708 Indiana 673,807 Iowa 1,472,651 Kentucky 226,439 Louisiana 20,516,823 Maryland 6,868,375 Massachusetts 29,728,840 Michigan 14,742,376 Minnesota 1,907,837 Missouri 5,605,609 Nevada 903,509 New Hampshire 4,817,099 New Jersey 17,144,885 New York 15,551,206 North Carolina 7,045,840 Ohio 9,184,634 Oklahoma 129,943 Oregon 54,039,101 Pennsylvania 14,088,469 Rhode Island 1,102,181 South Carolina 325,975 Texas 3,391,052 Virginia 9,543,506 West Virginia 3,636,597 Wisconsin 2,056,654 ------------------- $314,260,786 ===================
IV-17 (Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE (ACCOUNTED FOR UNDER THE OPERATING METHOD) DECEMBER 31, 1994 -----------------------------------------------------------------------------
Amount at which Carried at Reserve for State Close of Year Depreciation --------- ---------------- ------------- Alabama $ 1,707,913 $ - Arizona 8,661,230 780,739 California 13,574,684 3,702,517 Connecticut 1,549,805 1,027,553 Florida 14,474,746 5,007,024 Georgia 8,219,782 612,349 Illinois 8,849,567 2,836,885 Indiana 8,635,584 2,645,196 Kansas 460,490 - Kentucky 14,470,363 691,180 Louisiana 12,638,536 2,975,581 Maryland 1,864,304 518,658 Massachusetts 2,916,915 1,349,837 Michigan 19,225,223 3,394,696 Minnesota 7,072,018 1,474,020 Missouri 1,946,471 289,549 New Jersey 4,293,403 1,471,681 New York 22,393,357 5,858,402 North Carolina 3,191,685 1,030,096 Ohio 3,635,192 299,308 Oregon 298,451 - Pennsylvania 10,273,909 5,843,239 South Carolina 3,101,170 857,047 Tennessee 335,368 196,998 Texas 4,302,872 2,730,561 Virginia 1,986,638 948,210 Washington 4,190,632 1,337,294 Canada 1,057,300 356,102 ------------ ----------- $185,327,608 $48,234,722 ============ ===========
IV-18 (Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1993 --------------------------------------------------------------------------
Net State Investment --------- ----------- Alabama $ 11,067,060 California 17,888,934 Colorado 544,251 Connecticut 25,308,131 Florida 26,800,208 Georgia 6,769,438 Illinois 5,905,143 Indiana 233,369 Iowa 1,501,626 Kentucky 233,369 Louisiana 21,056,026 Maryland 7,009,645 Massachusetts 30,296,481 Michigan 14,950,167 Minnesota 1,943,843 Missouri 5,568,962 Nevada 921,680 New Hampshire 4,935,607 New Jersey 21,248,834 New York 16,253,711 North Carolina 7,355,915 Ohio 9,415,352 Oklahoma 133,802 Oregon 54,546,141 Pennsylvania 14,491,751 Rhode Island 1,121,598 South Carolina 342,233 Texas 3,534,796 Virginia 9,807,705 West Virginia 3,742,187 Wisconsin 2,094,811 ------------ $327,470,322 ============
IV-19 (Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE (ACCOUNTED FOR UNDER THE OPERATING METHOD) DECEMBER 31, 1993 -----------------------------------------------------------------------------
Amount at which Carried at Reserve for State Close of Year Depreciation ------- ---------------- ------------- Alabama $ 736,694 $ 87,325 Arizona 8,419,901 432,415 California 12,931,574 3,463,370 Connecticut 1,549,805 965,696 Florida 14,636,201 4,438,112 Georgia 9,238,378 1,029,031 Illinois 8,850,494 2,604,653 Indiana 8,635,584 2,410,912 Kansas 460,490 - Kentucky 7,860,177 389,534 Louisiana 13,125,806 2,884,385 Maryland 1,238,325 474,818 Massachusetts 2,814,867 1,270,340 Michigan 19,225,223 3,044,807 Minnesota 6,776,010 1,243,786 Missouri 2,335,344 455,296 New Jersey 4,293,403 1,434,545 New York 21,711,796 5,430,334 North Carolina 1,591,685 1,008,960 Ohio 3,876,312 351,221 Oregon 298,451 - Pennsylvania 10,274,362 5,531,108 South Carolina 3,101,170 806,722 Tennessee 449,753 248,129 Texas 4,384,018 2,650,621 Virginia 1,986,638 920,929 Washington 4,190,632 1,129,111 Canada 1,057,300 334,624 --------------- -------------- $176,050,393 $45,040,784 =============== ==============
IV-20 (Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1992 ---------------------------------------------------------------------
Net State Investment ----------- ----------- Alabama $11,323,580 California 18,426,291 Colorado 571,985 Connecticut 25,629,109 Florida 27,350,648 Georgia 6,912,260 Illinois 5,123,971 Indiana 696,217 Iowa 1,528,040 Kentucky 239,682 Louisiana 21,534,147 Maryland 7,139,145 Massachusetts 30,013,085 Michigan 15,133,474 Minnesota 1,977,036 Missouri 6,273,577 Nevada 938,304 New Hampshire 5,044,563 New Jersey 21,672,020 New York 15,515,259 North Carolina 7,638,332 Ohio 9,620,021 Oklahoma 137,321 Oregon 55,011,975 Pennsylvania 14,862,614 Rhode Island 1,140,167 South Carolina 357,160 Texas 2,464,953 Virginia 10,079,084 West Virginia 3,838,951 Wisconsin 2,129,843 ----------- $330,322,814 ============
IV-21 (Continued)
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY -------------------------------------------------- REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE (ACCOUNTED FOR UNDER THE OPERATING METHOD) DECEMBER 31, 1992 -----------------------------------------------------------------------
Amount at which Carried at Reserve for State Close of Year Depreciation ------- ---------------- ------------- Alabama $ 736,694 $ 81,154 Arizona 8,009,897 133,108 California 13,694,521 3,671,678 Connecticut 1,549,805 903,840 Florida 12,909,626 3,958,440 Georgia 8,819,331 832,671 Illinois 13,270,355 4,227,516 Indiana 8,635,584 2,201,628 Kansas 460,490 - Kentucky 929,261 330,093 Louisiana 13,125,806 2,674,988 Maryland 1,238,325 452,663 Massachusetts 2,484,262 1,190,844 Michigan 19,154,063 2,658,874 Minnesota 6,776,010 991,465 Missouri 1,806,775 428,289 New Jersey 4,293,404 1,390,643 New York 12,174,966 5,047,805 North Carolina 1,591,685 987,823 Ohio 4,108,388 410,445 Oregon 298,451 - Pennsylvania 10,273,909 5,218,974 South Carolina 3,101,170 756,396 Tennessee 987,111 434,167 Texas 3,966,086 2,570,682 Virginia 2,557,787 1,222,566 Washington 4,190,632 1,015,928 Canada 1,057,300 313,145 --------------- -------------- $162,201,694 $44,105,825 =============== ==============
IV-22
EXHIBIT INDEX -------------
Exhibit Page No. ------- --------
3.1 Certificate of Limited Partnership of AREP, dated February 17, 1987 (filed as Exhibit No. 3.1 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
3.2 Amended and Restated Agreement of Limited Partnership of AREP, dated as of May 12, 1987 (filed as Exhibit No. 3.2 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
3.3 Amendment No. 1 to the Partnership Agreement.
3.4 Certificate of Limited Partnership of American Real Estate Holdings Limited Partnership (the "Subsidiary"), dated February 17, 1987 and amendment thereto, dated March 12, 1987 (filed as Exhibit No. 3.3 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
3.5 Amended Restated Agreement of Limited Partnership of the Subsidiary, dated as of July 1, 1987 (filed as Exhibit No. 3.4 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.1 Depositary Agreement among AREP, the General Partner and Registrar and Transfer Company, dated as of July 1, 1987 (filed as Exhibit No. 4.1 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.2 Amendment No. 1 to the Depositary Agreement.
4.3 Specimen Depositary Receipt (filed as Exhibit No. 4.2 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
Exhibit Page No. ------- --------
4.4 Form of Transfer Application (filed as Exhibit No. 4.3 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
4.5 Specimen of Certificate representing Preferred Units (filed as Exhibit No. 4.9 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.1 Nonqualified Unit Option Plan (filed as Exhibit No. 10.1 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
10.2 Distribution Reinvestment Plan (filed as Exhibit No. 10.3 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
10.3 Note Purchase Agreements, dated as of May 27, 1988 among AREP, the Subsidiary and The Prudential Insurance Company of America (the "Note Agreements") (filed as Exhibit Nos. 2a and 2b to AREP's Current Report on Form 8-K dated May 27, 1988 and incorporated herein by reference).
10.4 Amendment No. 1 to the Note Agreements dated November 17, 1988 (filed as Exhibit No. 10.2 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.5 Amendment No. 2 to the Note Agreements dated November 17, 1988 (filed as Exhibit No. 10.3 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.6 Amendment No. 3 to the Note Agreements dated as of June 21, 1994 (filed as Exhibit No. 10.4 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
Exhibit Page No. ------- --------
10.7 Amendment No. 4 to the Note Agreements dated as of August 12, 1994 (filed as Exhibit No. 10.5 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.8 9.6% Senior Promissory Note of AREP and the Subsidiary due May 27, 1998 payable to The Prudential Insurance Company of America (filed as Exhibit No. 2c to AREP's Current Report on Form 8-K dated May 27, 1988 and incorporated herein by reference).
10.9 9.6% Senior Promissory Note of AREP and the Subsidiary due May 27, 1998 payable to Prudential Property and Casualty Insurance Company (filed as Exhibit No. 2d to AREP's Current Report on Form 8-K dated May 27, 1988 and incorporated herein by reference).
10.10 Subscription Guaranty Agreement between AREP and High Coast Limited Partnership (the "Guarantor") (filed as Exhibit No. 4.10 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.11 Registration Rights Agreement between AREP and the Guarantor (filed as Exhibit No. 4.11 to AREP's Registration Statement on Form S-3 (Registration No. 33-54767) and incorporated herein by reference).
10.12 Amended and Restated Agency Agreement.
10.13 Subscription Agent Agreement.
16 Letter dated September 27, 1991 of Deloitte & Touche regarding change in accountants (filed as Exhibit No. A to AREP's Current Report on Form 8-K dated October 3, 1991 and incorporated herein by reference).
22 List of Subsidiaries (filed as Exhibit No. 22 to AREP's Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference).
27 Financial Data Schedule
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(a) of the Securities Exchange Act of 1934, AREP has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March, 1995.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: AMERICAN PROPERTY INVESTORS, INC. General Partner
By: /s/ Carl C. Icahn --------------------------------- Carl C. Icahn Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of AREP and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/Carl C. Icahn Chairman of the Board March 31, 1995 ----------------------- (Principal Executive Carl C. Icahn Officer)
/s/Alfred Kingsley Director March 31, 1995 ----------------------- Alfred Kingsley
/s/Mark Rachesky Director March 31, 1995 ----------------------- Mark Rachesky
/s/William A. Leidesdorf Director March 31, 1995 ------------------------ William A. Leidesdorf
/s/Jack G. Wasserman Director March 31, 1995 ------------------------ Jack G. Wasserman
/s/John P. Saldarelli Treasurer March 31, 1995 ------------------------ (Principal Financial John P. Saldarelli Officer and Principal Accounting Officer)