================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 August 6, 2004 ------------------------------------------------ Date of Report (Date of earliest event reported) American Real Estate Partners, L.P. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-9516 13-3398766 -------- ------ ---------- (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 100 South Bedford Road Mt. Kisco, NY 10549 --------------------------------------------------------- (Address of principal executive offices including zip code) Registrant's telephone number, including area code: (914) 242-7700 -------------------------- Not applicable -------------------------------- (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ==========================================================================
Item 8.01. Other Events. As a result of the reclassification of certain real estate to properties held for sale during the first quarter of 2004 and in connection with the recent filing of a Form S-4, we have reclassified the income and expenses of such properties to discontinued operations for the first quarter of 2004 and for prior periods. These reclassifications had no effect on our reported net income or net income per limited partnership unit. Accordingly, we are providing updated information for the following: Selected Financial Data, Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Exhibits, Financial Statement Schedules and Reports on Form 8-K for the periods contained in our Annual Report on Form 10-K for the year ended December 31, 2003 ("Form 10-K"). All other items of the Form 10-K remain unchanged. Item 9.01. Financial Statements and Exhibits. (c) Exhibits. 31.1 Certification of Chief Executive Officer--pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer--pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer--pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Financial Officer--pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Item 6. Selected Financial Data of Form 10-K. 99.2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of Form 10-K. 99.3 Item 8. Financial Statements of Form 10-K. 99.4 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K of Form 10-K.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMERICAN REAL ESTATE PARTNERS, L.P. By: American Property Investors, Inc., the general partner of American Real Estate Partners, L.P. By: /s/ John P. Saldarelli ----------------------------------- John P. Saldarelli Treasurer, Chief Financial Officer and Principal Accounting Officer Dated: August 30, 2004
Exhibit Index Exhibit No. Description - ----------- ------------ 31.1 Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer--pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer--pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Financial Officer--pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Item 6. Selected Financial Data of Form 10-K. 99.2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of Form 10-K. 99.3 Item 8. Financial Statements of Form 10-K. 99.4 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K of Form 10-K.
EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. 1350 SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002 I, Keith A. Meister certify that: 1. I have reviewed this Current Report on Form 8-K of American Real Estate Partners, L.P. (the "Report"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and; c) disclosed in this Report any changes in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ KEITH A. MEISTER ---------------------------------------- KEITH A. MEISTER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF AMERICAN PROPERTY INVESTORS, INC., THE GENERAL PARTNER OF Date: August 30, 2004 AMERICAN REAL ESTATE PARTNERS, L.P.
EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002 I, John P. Saldarelli, certify that: 1. I have reviewed this Current Report on Form 8-K of American Real Estate Partners, L.P. (the "Report"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and; c) disclosed in this Report any changes in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ JOHN P. SALDARELLI ---------------------------------------- JOHN P. SALDARELLI TREASURER AND CHIEF FINANCIAL OFFICER OF AMERICAN PROPERTY INVESTORS, INC., THE GENERAL PARTNER OF Date: August 30, 2004 AMERICAN REAL ESTATE PARTNERS, L.P.
EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Keith A. Meister, President and Chief Executive Officer (Principal Executive Officer) of American Property Investors, Inc., the General Partner of American Real Estate Partners, L.P. (the "Registrant"), certify that to the best of my knowledge, based upon a review of the Current Report of the Registrant on Form 8-K as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ KEITH A. MEISTER ---------------------------------------- KEITH A. MEISTER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF AMERICAN PROPERTY INVESTORS, INC., THE GENERAL PARTNER OF Date: August 30, 2004 AMERICAN REAL ESTATE PARTNERS, L.P.
EXHIBIT 32.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, John P. Saldarelli, Treasurer and Chief Financial Officer (Principal Financial Officer) of American Property Investors, Inc., the General Partner of American Real Estate Partners, L.P. (the "Registrant"), certify that to the best of my knowledge, based upon a review of the Current Report of the Registrant on Form 8-K as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ JOHN P. SALDARELLI ------------------------------------- JOHN P. SALDARELLI TREASURER AND CHIEF FINANCIAL OFFICER AMERICAN PROPERTY INVESTORS, INC., THE GENERAL PARTNER OF Date: August 30, 2004 AMERICAN REAL ESTATE PARTNERS, L.P.
. . . Exhibit 99.1 ITEM 6. SELECTED FINANCIAL DATA YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (IN THOUSANDS) OPERATING DATA: Total revenues ......................... $ 276,556 $ 346,380 $ 322,322 $ 294,267 $ 279,489 ========= ========= ========= ========= ========= Operating income ....................... $ 62,891 $ 83,730 $ 63,788 $ 65,802 $ 65,369 Other gains and (losses): Provision for loss on real estate .... (750) (3,212) (3,184) (1,351) (1,946) Gain on sale of marketable equity and debt securities ......... 2,607 -- 6,749 -- 28,590 Write-down of equity securities available for sale ................. (961) (8,476) -- -- -- Write-down of mortgages and notes receivable ................... (18,798) -- -- -- -- Gain on sales and disposition of real estate ..................... 7,121 8,990 1,737 6,763 13,971 (Loss) gain on limited partnership interests ............ -- (3,750) -- 3,461 -- Minority interest in net earnings of Stratosphere Corporation ........ -- (1,943) (450) (2,747) (1,002) --------- --------- --------- --------- --------- Income from continuing operations before income taxes .................. 52,110 75,339 68,640 71,928 104,982 Income tax benefit (expense) ........... 6,495 (7,480) 30,077 (2,533) (775) --------- --------- --------- --------- --------- Income from continuing operations ...... 58,605 67,859 98,717 69,395 104,207 Discontinued operations: Income from discontinued operations .. 6,139 6,007 6,117 5,755 3,522 Gain on sales and disposition of real estate ........................ 3,353 -- -- -- -- --------- --------- --------- --------- --------- Income from discontinued operations .... 9,492 6,007 6,117 5,755 3,522 --------- --------- --------- --------- --------- Net earnings ........................... $ 68,097 $ 73,866 $ 104,834 $ 75,150 $ 107,729 ========= ========= ========= ========= ========= (IN $000'S EXCEPT PER UNIT AMOUNTS) YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 2001 2000 1999 ---- ------- ------- ---- ---- Net Earnings attributable to: (see note below) Limited partners .......................... $ 59,360 $ 63,168 $ 66,190 $ 72,225 $ 93,909 General Partner ........................... 8,737 10,698 38,644 2,925 13,820 ----------- ----------- ----------- ----------- ----------- Net Earnings ................................ $ 68,097 $ 73,866 $ 104,834 $ 75,150 $ 107,729 =========== =========== =========== =========== =========== Net earnings per limited partnership unit: Basic earnings: Income from continuing operations ....... $ 1.03 $ 1.15 $ 1.21 $ 1.36 $ 1.88 Income from discontinued operations ..... 0.20 0.12 0.13 0.12 0.07 ----------- ----------- ----------- ----------- ----------- Basic earnings per LP Unit ................ $ 1.23 $ 1.27 $ 1.34 $ 1.48 $ 1.95 =========== =========== =========== =========== =========== Weighted average limited partnership units outstanding ......................... 46,098,284 46,098,284 46,098,284 46,098,284 46,098,284 =========== =========== =========== =========== =========== Diluted earnings: Income from continuing operations ....... $ 0.96 $ 1.02 $ 1.09 $ 1.19 $ 1.61 Income from discontinued operations ..... 0.17 0.10 0.10 0.10 0.06 ----------- ----------- ----------- ----------- ----------- Diluted earnings per LP unit .............. $ 1.13 $ 1.12 $ 1.19 $ 1.29 $ 1.67 =========== =========== =========== =========== =========== Weighted average limited partnership units and equivalent partnership units outstanding ......................... 54,489,943 56,466,698 55,599,112 56,157,079 56,078,394 =========== =========== =========== =========== =========== I-1
Note: Earnings of National Energy Group, Inc. (October 2003) and Bayswater (March 2000), prior to their acquisitions by the Company have been allocated to the General Partner At year end: Real estate leased to others ................ $ 213,799 $ 359,700 $ 358,597 $ 379,396 $ 375,268 Properties held for sale .................... 128,813 4,300 -- -- -- Hotel, casino and resort operating properties ................................ 215,775 215,775 228,181 185,253 141,829 U.S. Government and agency obligations ...... 61,573 336,051 313,641 475,267 468,529 Cash and cash equivalents ................... 467,704 54,871 64,105 147,705 142,697 Note receivable due from affiliate .......... -- 250,000 250,000 -- -- Marketable equity and debt securities ....... 80,522 26,728 35,253 54,736 67,397 Mortgages and notes receivable .............. 50,328 56,216 35,529 19,946 10,955 Investment in NEG Holdings LLC .............. 69,346 108,880 97,654 -- -- Equity interest in GB Holdings, Inc. ........ 30,854 37,280 39,936 38,359 -- Land and construction-in-progress ........... 43,459 40,415 69,429 75,952 99,252 Deferred tax asset .......................... 82,450 25,522 30,589 -- -- Total assets ................................ 1,489,930 1,560,476 1,584,351 1,422,987 1,364,861 Mortgages payable ........................... 180,969 171,848 166,808 182,049 179,387 Due to affiliate ............................ -- -- 68,805 77,521 -- Senior notes-Due affiliate .................. -- 148,637 148,637 -- -- Liability for Preferred Limited Partnership Units ......................... 101,649 -- -- -- -- Minority interest ........................... -- -- 67,433 64,907 66,307 Partners' Equity ............................ 1,153,448 1,130,176 1,018,224 1,042,725 1,029,308 I-2
Exhibit 99.2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a diversified holding company engaged in a variety of businesses. Our primary business strategy is to seek to acquire undervalued assets and companies that are distressed or out of favor. Our businesses currently include rental real estate; real estate development; hotel and resort operations; hotel and casino operations; investments in equity and debt securities; and oil and gas exploration and production. We intend to continue to invest in our core businesses, including real estate, gaming and entertainment, and oil and gas. We may also seek opportunities in other sectors, including energy, industrial manufacturing and insurance and asset management. To capitalize on favorable real estate market conditions and the mature nature of our commercial real estate portfolio, we are offering for sale our rental real estate portfolio. No assurance can be given that either the attempt to market our real estate portfolio will be successful or that, if successful, the proceeds thereof can be used to acquire businesses and investments at prices or at projected returns which are deemed favorable. Historically, substantially all of our real estate assets leased to others have been net-leased to single corporate tenants under long-term leases. With certain exceptions, these tenants are required to pay all expenses relating to the leased property and therefore we are not typically responsible for payment of expenses, such as maintenance, utilities, taxes and insurance associated with such properties. Expenses relating to environmental clean-up have not had a material effect on our earnings, capital expenditures, or competitive position. We believe that substantially all such costs would be the responsibility of the tenants pursuant to lease terms. While most tenants have assumed responsibility for the environmental conditions existing on their leased property, there can be no assurance that we will not be deemed to be a responsible party or that the tenant will bear the costs of remediation. Also, as we acquire more operating properties, our exposure to environmental clean-up costs may increase. We have completed Phase I environmental site assessments on most of our properties through third-party consultants. Based on the results of these Phase I environmental site assessments, the environmental consultant has recommended that certain sites may have environmental conditions that should be further reviewed. We have notified each of the responsible tenants to attempt to ensure that they cause any required investigation and/or remediation to be performed and most tenants continue to take appropriate action. However, if the tenants fail to perform responsibilities under their leases referred to above, we could potentially be liable for these costs. Based on the limited number of Phase II environmental site assessments that have been conducted by the consultants, there can be no accurate estimation of the need for or extent of any required remediation, or the costs thereof. In addition, we have notified all tenants of the Resource Conservation and Recovery Act's, or RCRA, December 22, 1998 requirements for regulated underground storage tanks. We may, at our own cost, have to cause compliance with RCRA's requirements in connection with vacated properties, bankrupt tenants and new acquisitions. Phase I environmental site assessments will also be performed in connection with new acquisitions and with such property refinancings as we may deem necessary and appropriate. We are in the process of updating our Phase I site assessments for certain of our environmentally sensitive properties including properties with open RCRA requirements. Approximately 75 updates were completed in 2003. No additional material environmental conditions were discovered. II-1
We have in recent years made investments in the gaming industry through our ownership of Stratosphere Casino Hotel & Tower in Las Vegas, Nevada and through our purchase of securities of the entity which owns the Sands Hotel in Atlantic City, New Jersey. One of our subsidiaries, formed for this purpose, entered into an agreement in January 2004 to acquire two Las Vegas casino/hotels, Arizona Charlie's Decatur and Arizona Charlie's Boulder from Mr. Icahn and an entity affiliated with Mr. Icahn, for an aggregate consideration of $125.9 million. The closing of the acquisition was subject to certain conditions, including among other things, obtaining all approvals necessary under the Nevada gaming laws. Our subsidiary issued and sold debt securities aggregating $215.0 million in principal amount to finance the acquisition and the proceeds of this sale remained in escrow pending completion of the acquisition. The amount raised in excess of the acquisition cost and expenses was used to repay intercompany debt and make a distribution to us. We are considering additional gaming industry investments. These investments may include acquisitions from, or be made in conjunction with, our affiliates, provided that the terms thereof are fair and reasonable to us. We recently made an investment in the oil and gas industry. In October 2003, we acquired and presently hold 50.01% of the outstanding equity and all of the outstanding debt securities of National Energy Group, Inc. which we acquired from an affiliate of Mr. Icahn. RESULTS OF OPERATIONS CALENDAR YEAR 2003 COMPARED TO CALENDAR YEAR 2002 Gross revenues decreased by $69.8 million, or 20.2%, during the year ended December 31, 2003 as compared to the year ended December 31, 2002. This decrease reflects decreases of (1) $62.8 million in land, house and condominium sales, (2) $7.8 million in interest income on U.S. government and agency obligations and other investments, (3) $3.8 million in equity in earnings of GB Holdings, Inc., (4) $2.7 million in accretion of investment in NEG Holding LLC, (5) $1.6 million in financing lease income and (6) $0.3 million in hotel and resort operating income, partially offset by increases of $7.4 million in hotel and casino operating income, $1.1 million in rental income, $0.3 million in dividend and other income and $0.3 million in NEG management fee. The decrease in land, house and condominium sales is primarily due to a decrease in the number of units sold, as the Grassy Hollow, Gracewood and Stone Ridge properties were depleted by sales. During 2003, Hammond Ridge received necessary approvals and, along with Penwood, have commenced lot sales. As a result, we expect land, house and condominium sales to moderately increase in 2004 and additional increased sales in 2005. The decrease in interest income on U.S. government and agency obligations and other investments is primarily attributable to the prepayment of the loan to Mr. Icahn in 2003 and a decline in interest rates on U.S. government and agency obligations as higher rate bonds were called in 2002. The decrease in equity in earnings of GB Holdings, Inc. is due to decreased casino revenue primarily attributable to a reduction in the number of table games as new slot machines II-2
were added in 2002. This business strategy had a negative effect on casino operations and was changed in 2003 to focus on the mid to high-end slot customer with a balanced table game business. The decrease in accretion of investment in NEG Holding is primarily attributable to priority distributions received from NEG Holding in 2003. The decrease in financing lease income is the result of lease expirations, reclassifications of financing leases and normal financing lease amortization. The increase in hotel and casino operating income is primarily attributable to an increase in hotel, food and beverage revenues and a decrease in promotional allowances. The average daily rate, or ADR, increased $3 to $51 and percentage occupancy increased approximately 0.2% to 89.8%. The increase in rental income is primarily attributable to a property acquisition and reclassifications of financing leases to operating leases. Expenses decreased by $49.0 million or 18.7%, during the year ended December 31, 2003 as compared to the year ended December 31, 2002. This decrease reflects decreases of $45.5 million in the cost of land, house and condominium sales, $6.7 million in interest expense, $1.4 million in hotel and resort operating expenses and $0.1 million in general and administrative expenses partially offset by increases of $3.8 million in hotel and casino operating expenses, $0.8 million in rental property expenses and $0.1 million in depreciation and amortization. The decrease in the cost of land, house and condominium sales is due to decreased sales. Costs as a percentage of sales decreased from 72% in 2002 to 69% in 2003. The decrease in interest expense is primarily due to repayment of debt by NEG and our purchase of the NEG notes in October 2003. The decrease in hotel and resort operating expenses is due to a decrease in payroll and related expenses. The increase in hotel and casino operating expenses is primarily attributable to increased costs associated with increased revenues. Costs as a percentage of sales decreased from 84% in 2002 to 83% in 2003. Operating income decreased during the year ended December 31, 2003 by $20.8 million compared to the year ended December 31, 2002 as detailed above. Earnings from land, house and condominium operations decreased significantly in the year ended December 31, 2003 compared to the year ended December 31, 2002 due to a decline in inventory of completed units available for sale. Based on current information, sales will increase moderately during 2004. However, municipal approval of land inventory or the purchase of approved land is required to continue this upward trend into 2005 and beyond. Earnings from hotel, casino and resort properties could be constrained by recessionary pressures, international tensions and competition. Gain on property transactions from continuing operations decreased by $1.9 million during the year ended December 31, 2003 as compared to the year ended December 31, 2002 due to the size and number of transactions. A provision for loss on real estate of $0.8 million was recorded in the year ended December 31, 2003 as compared to $3.2 million in 2002. In 2002, there were more properties vacated due to tenant bankruptcies than in 2003. A write-down of marketable equity securities available for sale of $1.0 million was recorded in the year ended December 31, 2003 as compared to a write-down of $8.5 million in 2002. These write-downs relate to our investment in Philip Services Corp. which filed for bankruptcy protection in June 2003. A write-down of mortgages and notes receivable of $18.8 million, pertaining to our investment in the Philip notes, was recorded in the year ended December 31, 2003. There was no such write-down in the year ended December 31, 2002. In 2003, we reviewed Philip's financial statements and other data and determined this investment to be impaired. A write-down of a limited partnership investment of $3.8 million was recorded in the year ended December 31, 2002. There was no such write-down in 2003. A gain on sale of marketable equity securities of $2.6 million was recorded in the year ended December 31, 2003. There was no such gain in 2002. Minority interest in the net earnings of Stratosphere Corporation was $1.9 million during the year ended II-3
December 31, 2002. As a result of the acquisition of the minority interest in December 2002, there was no minority interest in Stratosphere in 2003 and none thereafter. Income from continuing operations before income taxes decreased by $23.2 million in the year ended December 31, 2003 as compared to the year ended December 31, 2002 as detailed above. An income tax benefit of $6.5 million was recorded in the year ended December 31, 2003 as compared to an expense of $7.5 million in 2002. The effective tax rate on earnings of taxable subsidiaries was positively affected in 2003 by a reduction in the valuation allowance in deferred tax assets. We expect our effective tax rate on earnings of taxable subsidiaries to increase significantly in 2004. Income from continuing operations decreased by $9.3 million in the year ended December 31, 2003 as compared to 2002 primarily as detailed above. Income from discontinued operations increased by $3.5 million in the year ended December 31, 2003 as compared to 2002 primarily due to gains on property dispositions. Net earnings for the year ended December 31, 2003 decreased by $5.8 million as compared to the year ended December 31, 2002 primarily due to a write-down of mortgages and notes receivable of $18.8 million, decreased earnings from land, house and condominium operations of $17.2 million, decreased interest income of $7.8 million and decreased equity in earnings of GB Holdings of $3.8 million, partially offset by decreased income tax expense of $14.0 million, a decrease in write-down of equity securities available for sale of $7.5 million, decreased interest expense of $6.7 million, decreased write-down of limited partnership interests of $3.8 million, increased earnings from hotel and casino operations of $3.6 million, increased gain on the sale of marketable equity securities of $2.6 million and an increase in income from discontinued operations of $3.5 million. CALENDAR YEAR 2002 COMPARED TO CALENDAR YEAR 2001 Gross revenues increased by $24.1 million, or 7.5%, during the year ended December 31, 2002 as compared to the year ended December 31, 2001. This increase reflects increases of $23.0 million in accretion of investment in NEG Holding, $20.5 million in land, house and condominium sales, $12.0 million in hotel and casino operating income, $4.9 million in NEG management fee, $2.6 million in hotel and resort operating income and $0.1 million in rental income partially offset by decreases of $33.2 million in oil and gas operating income, $2.2 million in financing lease income, $2.2 million in dividend and other income, $1.5 million in equity in earnings of GB Holdings and $23,000 in interest income on U.S. government and agency obligations and other investments. The increase in accretion of investment in NEG Holding and the management fee are due to the partial year of 2001 which began May 1 as a result of the bankruptcy reorganization. Prior to that time, NEG directly owned and operated oil and natural gas properties. The increase in land, house and condominium sales is primarily attributable to higher selling prices and an increase in the number of units sold, due to a strong residential housing market and low mortgage rates. The increase in hotel and casino operating income is primarily attributable to an increase in gaming and hotel revenues as a result of increased capacity brought about by the hotel expansion. ADR remained at $48 during the years ended December 31, 2002 and 2001; however, percentage occupancy decreased 4% to 89.6%. The increase in hotel and resort operating income is primarily attributable to increased revenues at New Seabury as prior year's revenues were negatively impacted by construction activities. The decrease in financing lease income is the result of lease expirations, reclassification of financing leases and normal financing lease amortization. The decrease in dividend and other income is primarily due to lease termination and deferred maintenance payments received from tenants in 2001. The decrease in equity earnings of GB Holdings is due to decreased casino revenue, primarily attributable to a reduction in the number of table games as new slot machines were added in 2002, which was partially offset by decreased promotional allowances and decreased casino expenses. In addition, GB Holdings recorded an impairment loss on certain property expansion costs determined to be unusable. Expenses increased by $4.1 million, or 1.6%, during the year ended December 31, 2002 as compared to 2001. This increase reflects increases of $12.0 million in the cost of land, house and condominium sales, $3.7 million in hotel and casino operating expenses, $1.7 million in rental property expenses, $1.8 million in hotel and resort operating expenses and $1.1 million in general and administrative expenses partially offset by decreases of $7.4 million in interest expense, $5.6 million in oil and gas operating expenses and $3.2 million in depreciation II-4
and amortization. The increase in the cost of land, house and condominium sales is due to increased sales as explained above. Costs as a percentage of sales declined from 77% in 2001 to 72% in 2002 primarily due to higher margin sales in 2002. The increase in hotel and casino operating expenses is primarily attributable to increased costs associated with increased revenues. Costs as a percentage of sales declined from 89% in 2001 to 84% in 2002 as hotel and casino revenues increased at a greater rate than hotel and casino expenses due to the hotel expansion. The increase in property expenses is primarily due to an increase in expenses related to off-lease properties and expenses of the New Seabury development litigation of approximately $1 million. The increase in hotel and resort operating expenses is primarily attributable to increased costs associated with increased revenues at New Seabury. Costs as a percentage of sales decreased from 88% in 2001 to 84% in 2002. The decrease in interest expense is primarily due to the repayment of debt to affiliates in May 2002 in connection with the Sands repurchase obligation, as well as decreased interest rates prior to repayment of this debt. The decrease in oil and gas operating expenses is due to the partial year of 2001. The decrease in depreciation and amortization expense is primarily attributable to NEG contributing its operating properties to NEG Holding in May 2001. Earnings from land, house and condominium operations increased in the year ended December 31, 2002 as compared to the same period in 2001. However, the decrease in land inventory in approved sub-divisions is expected to negatively impact earnings from this business segment. As a result of the completion of Stratosphere's additional 1,000 rooms and related amenities in June 2001, hotel and casino operating revenues and expenses have increased. Increased room capacity provided more hotel guests thereby increasing revenues. Earnings from hotel, casino and resort properties are expected to be constrained by recessionary pressures, international tensions and competition. Operating income increased during the year ended December 31, 2002 by $20.0 million as compared to 2001. Gain on sale of real estate increased by $7.3 million, during the year ended December 31, 2002 as compared to 2001 due to the size and number of transactions. During the years ended December 31, 2002 and 2001, we recorded a provision for loss on real estate of $3.2 million. A substantial portion of the 2002 provision resulted from vacated properties where leases were not renewed or were rejected by tenants in bankruptcy. A write-down of equity securities available for sale of $8.5 million was recorded in the year ended December 31, 2002. The market value of Philip's common stock has declined steadily since it was acquired by us. In 2002, based on a review of Philip's financial statements, we deemed the decrease in value to be other than temporary. As a result, we wrote down our investment in Philips' common stock by a charge to earnings. There was no such write-down in 2001. Gain on sale of marketable equity and debt securities was $6.8 million, in the year ended December 31, 2001. There was no such income in 2002. A write-down of a limited partnership investment of $3.8 million was recorded in the year ended December 31, 2002. We invested $6.0 million in an unaffiliated limited partnership. Upon review of this investment in 2002, we determined that the investment was impaired and wrote down its value by a charge to earnings. There was no such write-down in 2001. Minority interest in the net earnings of Stratosphere increased by $1.5 million during the year ended December 31, 2002 as compared to the same period in 2001, due to an increase in Stratosphere's net hotel and casino operating income. As a result of the acquisition of the minority interest in December 2002, there will be no minority interest in net earnings of Stratosphere in 2003 and thereafter. Income from operations before income taxes increased by $6.7 million in the year ended December 31, 2002 as compared to the same period in 2001 as detailed above. The income tax expense was $7.5 million for the year ended December 31, 2002 as compared to an income tax II-5
benefit of $30.1 million for 2001. Income from continuing operations decreased by $30.9 million in the year ended December 31, 2002 as compared to 2001. Income from discontinued operations decreased by $0.1 million for the year ended December 31, 2002 as compared to 2001. Net earnings for the year ended December 31, 2002 decreased by $31.0 million as compared to the year ended December 31, 2001 primarily due to increased income tax expense of $37.6 million, a write-down of equity securities available for sale of $8.5 million, decreased gain on sale of marketable equity securities of $6.7 million and the write-down of a limited partnership investment of $3.8 million partially offset by increased earnings from land house and condominium operations of $8.4 million, increased earnings from hotel and casino operations of $8.3 million and increased gain on sale of real estate of $7.3 million. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $18.5 million for the year ended December 31, 2003 as compared to $100.1 million in 2002. This decrease resulted primarily from a decrease in the land, house and condominium operations of $45.6 million and the payment of accrued interest on senior notes of $41.7 million partially offset by an increase in cash flow from other operations of $5.7 million. The following table reflects our contractual cash obligations, as of December 31, 2003, due during the indicated periods (dollars in millions): LESS THAN 1 AFTER 5 YEAR 1-3 YEARS 4-5 YEARS YEARS TOTAL(1) ---- --------- --------- ----- -------- Mortgages payable ...................... $ 6.5 $ 28.2 $ 68.0 $ 78.3 $ 181.0 Mezzanine loan commitments ............. 20.0 -- -- -- 20.0 Construction and development obligations 23.0 -- -- -- 23.0 -------- ------- ------- -------- ---------- Total .................................. $ 49.5 $ 28.2 $ 68.0 $ 78.3 $ 224.0 ======== ======= ======= ======== ========== (1) In addition, see note 25 to consolidated financial statements for preferred limited partnership redemption. II-6
On March 15, 2004, we announced that no distributions on our depositary units are expected to be made in 2004. We continue to believe that we should continue to hold and invest, rather than distribute, cash. We intend to continue to apply available cash flow toward its operations, repayment of maturing indebtedness, tenant requirements, investments, acquisitions and other capital expenditures. In January 2004, American Casino closed on its offering of senior secured notes due 2012. The notes, in the aggregate principal amount of $215 million, bear interest at the rate of 7.85% per annum. American Casino used the proceeds of the offering for the Arizona Charlie's acquisitions to repay intercompany indebtedness and for distributions to AREH. In 2003, 17 leases covering 17 properties and representing approximately $2.2 million in annual rentals expired. Twelve leases originally representing $1.6 million in annual rental income were renewed for $1.4 million in annual rentals. Such renewals are generally for a term of five years. Five properties with annual rental income of $0.6 million were not renewed. In 2004, 11 leases covering 11 properties and representing approximately $1.8 million in annual rentals are scheduled to expire. Eight leases representing $1.5 million in annual rental income were renewed for $1.5 million in annual rentals. Such renewals are generally for a term of five years. Three properties with annual rentals of $0.3 million were not renewed. On March 31, 2003, we distributed to holders of record of our preferred units as of March 14, 2003, 466,548 additional preferred units. Pursuant to the terms of the preferred units, on February 23, 2004, we declared our scheduled annual preferred unit distribution payable in additional preferred units at the rate of 5% of the liquidation preference of $10.00. The distribution of 489,657 preferred units was paid on March 31, 2004 to holders of record as of March 12, 2004. In February 2004, the number of authorized preferred units was increased to 10,400,000. Our preferred units are subject to redemption at our option on any payment date, and the preferred units must be redeemed by us on or before March 31, 2010. The redemption price is payable, at our option, subject to the indenture, either all in cash or by the issuance of depositary units, in either case, in an amount equal to the liquidation preference of the preferred units plus any accrued but unpaid distributions thereon. The types of investments we are pursuing, including assets that may not be readily financeable or generating positive cash flow, such as development properties, non-performing mortgage loans or securities of companies which may be undergoing restructuring or require significant capital investments, require us to maintain a strong capital base in order to own, develop and reposition these assets. Sales proceeds from the sale or disposal of portfolio properties totaled approximately $20.6 million in 2003. During 2002, such sales proceeds totaled approximately $20.5 million. In May 2003, we obtained mortgage II-7
financing in the principal amount of $20 million on a distribution facility located in Windsor Locks, Connecticut. In 2002, mortgage financing proceeds were $12.7 million. In October 2003, pursuant to a purchase agreement dated as of May 16, 2003, we acquired all of the debt and 50% of the equity securities of NEG from entities affiliated with Mr. Icahn for an aggregate consideration of approximately $148.1 million plus approximately $6.7 million of accrued interest on the debt securities. Capital expenditures for real estate and hotel, casino and resort operations were approximately $20.1 million during 2003. During 2002, such expenditures totaled approximately $4.8 million. In 2004, capital expenditures are estimated to be approximately $13 million. During the year ended December 31, 2003, approximately $10.3 million of principal payments were repaid. During the year ended December 31, 2002, approximately $7.6 million of principal payments were repaid. Our cash and cash equivalents and investment in U.S. government and agency obligations increased by $138.3 million during the year ended December 31, 2003, primarily due to affiliate loan repayment of $250 million, property sales and refinancing proceeds of $40.6 million, priority distribution from NEG Holding of $40.5 million, net cash flow from operations of $18.5 million, guaranteed payment from NEG Holding of $18.2 million and other items of $14.9 million partially offset by the purchase of NEG interests of $148.1 million, purchase of debt securities of $45.1 million, increase in mezzanine loans of $31.1 million and capital expenditures for real estate and hotel, casino and resort operating properties of $20.1 million. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in accordance with generally accepted accounting principals in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Among others, estimates are used when accounting for valuation of investments, recognition of casino revenues and promotional allowances and estimated costs to complete our land, house and condominium developments. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. We accounted for our acquisition of NEG as assets transferred between entities under common control which requires that they be accounted for at historical costs similar to a pooling of interests. NEG's investment in NEG Holding constitutes a variable interest entity. In accordance with generally accepted accounting principles, we have determined that NEG is not the primary beneficiary of NEG Holding and therefore we do not consolidate NEG Holding in our consolidated financial statements. We believe the following accounting policies are critical to our business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF Long-lived assets held and used by us and long-lived assets to be disposed of, are reviewed for impairment whenever events or changes in circumstances, such as vacancies and rejected leases, indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the carrying amount of the asset an impairment loss is recognized. Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. II-8
COMMITMENTS AND CONTINGENCIES-LITIGATION On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we make estimates of the amount of insurance recoveries, if any. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we have previously made. MARKETABLE EQUITY AND DEBT SECURITIES AND INVESTMENT IN U.S. GOVERNMENT AND AGENCY OBLIGATIONS Investments in equity and debt securities are classified as either held-to-maturity or available for sale for accounting purposes. Investment in U.S. government and agency obligations are classified as available for sale. Available for sale securities are carried at fair value on our balance sheet. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of partners' equity. Held-to-maturity securities are recorded at amortized cost. A decline in the market value of any held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend income is recorded when declared and interest income is recognized when earned. MORTGAGES AND NOTES RECEIVABLE We have generally not recognized any profit in connection with the property sales in which certain purchase money mortgages receivable were taken back. Such profits are being deferred and will be recognized when the principal balances on the purchase money mortgages are received. We engage in real estate lending, including making second mortgage or secured mezzanine loans to developers for the purpose of developing single-family homes, luxury garden apartments or commercial properties. These loans are subordinate to construction financing and we target an interest rate in excess of 20% per annum. However interest is not paid periodically and is due at maturity or earlier from unit sales or refinancing proceeds. We defer recognition of interest income on mezzanine loans pending receipt of principal and interest payments. REVENUE RECOGNITION Revenue from real estate sales and related costs are recognized at the time of closing primarily by specific identification. We follow the guidelines for profit recognition set forth by Financial Accounting Standards Board (FASB) Statement No. 66, Accounting for Sales of Real Estate. CASINO REVENUES AND PROMOTIONAL ALLOWANCES We recognize revenues in accordance with industry practice. Casino revenue is the net win from gaming activities, the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. Revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. A corresponding amount is deducted as promotional allowances. The cost of such complimentaries is included in "Hotel and casino operating expenses." INCOME TAXES No provision has been made for Federal, state or local income taxes on the results of operations generated by partnership activities as such taxes are the responsibility of the partners. Stratosphere and NEG, our corporate II-9
subsidiaries, account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management periodically evaluates all evidence, both positive and negative, in determining whether a valuation allowance to reduce the carrying value of deferred tax assets is still needed. In 2003, it concluded, based on the projected allocations of taxable income, our corporate subsidiaries, NEG and Stratosphere, more likely than not will realize a partial benefit from its deferred tax assets and loss carryforwards. Ultimate realization of the deferred tax asset is dependent upon, among other factors, their ability to generate sufficient taxable income within the carryforward periods and is subject to change depending on the tax laws in effect in the years in which the carryforwards are used. PROPERTIES Properties held for investment, other than those accounted for under the financing method, are carried at cost less accumulated depreciation unless declines in the value of the properties are considered other than temporary at which time the property is written down to net realizable value. A property is classified as held for sale at the time we determine that the criteria in SFAS 144 have been met. Properties held for sale are carried at the lower of cost or net realizable value. Such properties are no longer depreciated and their operations are included in discontinued operations. II-10
Exhibit 99.3 ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Partners American Real Estate Partners, L.P.: We have audited the accompanying consolidated balance sheets of American Real Estate Partners, L.P. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of earnings, changes in partners' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2003. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the Index at Item 15(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 the standards of the Public Company Accounting Oversight Board (United States). 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 subsidiaries as of December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with U.S. 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. /s/ KPMG LLP New York, New York March 12, 2004 F-1
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (IN $000'S EXCEPT PER UNIT AMOUNTS) DECEMBER 31, ------------------------------------- 2003 2002 ------------ ------------ ASSETS Real estate leased to others: Accounted for under the financing method (Notes 4, 14 and 15) ............ $ 137,356 $ 155,458 Accounted for under the operating method, net of accumulated depreciation (Notes 5, 14 and 15) .................................................... 76,443 204,242 Properties held for sale (Notes 5 and 14) ................................. 128,813 4,300 Investment in U.S. Government and Agency obligations (Note 6) ............. 61,573 336,051 Note receivable due from affiliate (Note 12) .............................. -- 250,000 Cash and cash equivalents (Note 2) ........................................ 467,704 54,871 Marketable equity and debt securities (Note 7) ............................ 80,522 26,728 Mortgages and notes receivable (Note 11) .................................. 50,328 56,216 Investment in NEG Holding LLC (Note 10) ................................... 69,346 108,880 Equity interest in GB Holdings, Inc. (Note 8) ............................. 30,854 37,280 Hotel, casino and resort operating properties net of accumulated depreciation: Stratosphere Corporation hotel and casino (Note 9) ....................... 174,249 171,430 Hotel and resort (Notes 5 and 13) ........................................ 41,526 44,346 Land and construction-in-progress ......................................... 43,459 40,415 Deferred tax asset (Note 19) .............................................. 82,450 25,522 Receivables and other assets .............................................. 45,307 44,737 ------------ ------------ Total ................................................................... $ 1,489,930 $ 1,560,476 ============ ============ LIABILITIES AND PARTNERS' EQUITY Mortgages payable (Notes 4, 5 and 15): Real estate leased to others ............................................. $ 98,128 $ 171,848 Properties held for sale ................................................. 82,861 -- ------------ ------------ 180,989 171,848 Credit facility due affiliates (Notes 10 and 16) .......................... -- 10,940 Senior notes due affiliates (Notes 10 and 16) ............................. -- 148,637 Interest payable-senior notes (Note 16) ................................... -- 44,360 Accounts payable, accrued expenses and other liabilities .................. 53,844 54,515 Preferred limited partnership units: $10 liquidation preference, 5% cumulative pay-in-kind; 9,900,000 authorized; 9,796,607 issued and outstanding as of December 31, 2003 (Note 18) ............................................................... 101,649 -- ------------ ------------ 336,482 430,300 ------------ ------------ Commitments and contingencies (Notes 3 and 22) Limited partners: Preferred units, $10 liquidation preference, 5% cumulative pay-in-kind redeemable; 9,400,000 authorized; 9,330,963 issued and outstanding as of December 31, 2002 (Note 18) ............................................. -- 96,808 Depositary units; 47,850,000 authorized; 47,235,484 outstanding .......... 1,184,870 1,071,857 General partner ........................................................... (19,501) (26,568) Treasury units at cost: 1,137,200 depositary units (Note 25) ...................................... (11,921) (11,921) ------------ ------------ Partners' equity (Notes 2, 3 and 17) ...................................... 1,153,448 1,130,176 ------------ ------------ Total ................................................................... $ 1,489,930 $ 1,560,476 ============ ============ See notes to consolidated financial statements. F-2
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S EXCEPT PER UNIT AMOUNTS) YEARS ENDED DECEMBER 31, -------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Revenues: Hotel and casino operating income (Note 9) ....... $ 163,701 $ 156,315 $ 144,354 Land, house and condominium sales ................ 13,265 76,024 55,566 Interest income on financing leases .............. 13,115 14,722 16,935 Interest income on U.S. Government and Agency obligations and other investments (Notes 11 and 12) ......................................... 22,543 30,344 30,367 Rental income .................................... 11,636 10,516 10,431 Hotel and resort operating income (Note 13) ...... 14,592 14,918 12,276 Accretion of investment in NEG Holding LLC (Note 10) ....................................... 30,142 32,879 9,834 Oil and gas operating income ..................... -- -- 33,176 NEG management fee ............................... 7,967 7,637 2,699 Dividend and other income (Notes 7 and 11) ....... 3,061 2,720 4,877 Equity in earnings (loss) of GB Holdings, Inc. (Note 8) ................................... (3,466) 305 1,807 ------------ ------------ ------------ 276,556 346,380 322,322 ------------ ------------ ------------ Expenses: Hotel and casino operating expenses (Note 9) ..... 135,429 131,659 127,956 Cost of land, house and condominium sales ........ 9,129 54,640 42,599 Hotel and resort operating expenses (Note 13) .... 11,138 12,553 10,792 Interest expense (Notes 7, 14, 15 and 18) ........ 20,640 27,369 34,765 Oil and gas operating expenses ................... -- -- 5,569 Depreciation and amortization .................... 17,773 17,613 20,814 General and administrative expenses (Note 3) ..... 14,081 14,134 13,011 Property expenses ................................ 5,475 4,682 3,028 ------------ ------------ ------------ 213,665 262,650 258,534 ------------ ------------ ------------ Operating income .................................. 62,891 83,730 63,788 Other gains and (losses): Provision for loss on real estate ................ (750) (3,212) (3,184) Gain on sale of marketable equity and debt securities ...................................... 2,607 -- 6,749 Write-down of equity securities available for sale (Note 7) ................................... (961) (8,476) -- Write-down of mortgages and notes receivable (Note 7) ........................................ (18,798) -- -- Gain on sales and disposition of real estate (Note 14) ....................................... 7,121 8,990 1,737 Loss on limited partnership interests ........... -- (3,750) -- Minority interest in net earnings of Stratosphere Corporation (Note 9) ............... -- (1,943) (450) ------------ ------------ ------------ Income from continuing operations before income taxes .................................... 52,110 75,339 68,640 Income tax benefit (expense) (Note 19) ........... 6,495 (7,480) 30,077 ------------ ------------ ------------ Income from continuing operations ................ 58,605 67,859 98,717 ------------ ------------ ------------ Discontinued operations: Income from discontinued operations .............. 6,139 6,007 6,117 Gain on sales and disposition of real estate ..... 3,353 -- -- ------------ ------------ ------------ Income from discontinued operations ............... 9,492 6,007 6,117 ------------ ------------ ------------ Net earnings ...................................... $ 68,097 $ 73,866 $ 104,834 ============ ============ ============ Net earnings attributable to (Note 3): Limited partners ................................ $ 59,360 $ 63,168 $ 66,190 General partners ................................ 8,737 10,698 38,644 ------------ ------------ ------------ $ 68,097 $ 73,866 $ 104,834 ============ ============ ============ Net earnings per limited partnership unit (Note 2): Basic earnings: Income from continuing operations ............... $ 1.03 $ 1.15 $ 1.21 Income from discontinued operations ............. 0.20 0.12 0.13 ------------ ------------ ------------ Basic earnings per LP unit ....................... $ 1.23 $ 1.27 $ 1.34 ============ ============ ============ Weighted average limited partnership units outstanding ..................................... 46,098,284 46,098,284 46,098,284 ============ ============ ============ Diluted earnings: Income from continuing operations ............... $ 0.96 $ 1.02 $ 1.09 Income from discontinued operations ............. 0.17 0.10 0.10 ------------ ------------ ------------ Diluted earnings per LP unit ..................... $ 1.13 $ 1.12 $ 1.19 ============ ============ ============ Weighted average limited partnership units and equivalent partnership units outstanding ........ 54,489,943 56,466,698 55,599,112 ============ ============ ============ See notes to consolidated financial statements. F-3
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S) GENERAL LIMITED PARTNERS' EQUITY PARTNER'S ------------------------ HELD IN TREASURY TOTAL EQUITY DEPOSITARY PREFERRED ------------------------ PARTNERS' (DEFICIT) UNITS UNITS AMOUNTS UNITS EQUITY ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2000 (as previously reported) .................................. $ 22,498 $ 944,340 $ 87,808 $ (11,921) 1,137 $1,042,725 NEG, Inc. acquisition (Note 1) ............... (119,705) -- -- -- -- (119,705) ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2000 (Restated) ........ (97,207) 944,340 87,808 (11,921) 1,137 923,020 Comprehensive income: Net earnings ................................. 38,644 66,190 -- -- -- 104,834 Reversal of unrealized loss on sale of debt securities ................................. 78 3,818 -- -- -- 3,896 Net unrealized losses on securities available for sale ................................... (269) (13,257) -- -- -- (13,526) ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income ......................... 38,453 56,751 -- -- -- 95,204 Pay-in-kind distribution (Note 18) ........... -- (4,390) 4,390 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2001 (Restated) ........ (58,754) 996,701 92,198 (11,921) 1,137 1,018,224 Comprehensive income: Net earnings ................................. 10,698 63,168 -- -- -- 73,866 Reversal of unrealized loss on sale of debt securities ................................. 211 10,384 -- -- -- 10,595 Adjustment to reverse unrealized loss on investment securities reclassified to notes receivable ................................. 131 6,451 -- -- -- 6,582 Net unrealized losses on securities available for sale ................................... (5) (237) -- -- -- (242) ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income ......................... 11,035 79,766 -- -- -- 90,801 Net adjustment for acquisition of minority interest (Note 9(a)) ....................... 21,151 -- -- -- -- 21,151 Pay-in-kind distribution (Note 18) ........... -- (4,610) 4,610 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2002 (Restated) ........ (26,568) 1,071,857 96,808 (11,921) 1,137 1,130,176 Comprehensive income: Net earnings ................................. 8,737 59,360 -- -- -- 68,097 Reversal of unrealized loss on sale of debt securities ................................. 15 746 -- -- -- 761 Net unrealized gains on securities available for sale ................................... 183 8,991 -- -- -- 9,174 Sale of marketable equity securities available for sale ................................... (6) (274) -- -- -- (280) ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income ......................... 8,929 68,823 -- -- -- 77,752 Pay-in-kind distribution (Note 18) ........... -- (2,391) 2,391 -- -- -- Recognition of deferred tax asset at date of bankruptcy (Note 19) ....................... 946 46,581 -- -- -- 47,527 Capital distribution (Note 1) ................ (2,808) -- -- -- -- (2,808) Reclassification of Preferred LP units to liabilities (Note 18) ...................... -- -- (99,199) -- -- (99,199) ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 2003 ................... $ (19,501) $1,184,870 $ -- $ (11,921) 1,137 $1,153,448 ========== ========== ========== ========== ========== ========== Accumulated other comprehensive gain (loss) at December 31, 2003, 2002 and 2001 was $9,174, ($242) and ($17,178), respectively. See notes to consolidated financial statements. F-4
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN $000'S) YEARS ENDED DECEMBER 31, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Cash flows from operating activities: Income from continuing operations ............................... $ 58,605 $ 67,859 $ 98,717 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization .................................. 17,773 17,613 20,814 Preferred LP interest expense .................................. 2,450 -- -- Gain on sale of marketable equity securities ................... (2,607) -- (6,749) Gain on sales and disposition of real estate ................... (7,121) (8,990) (1,737) Loss on limited partnership interests .......................... -- 3,750 -- Provision for loss on real estate .............................. 750 3,212 3,184 Write-down of equity securities available for sale ............. 961 8,476 -- Write-down of mortgages and notes receivable ................... 18,798 -- -- Minority interest in net earnings of Stratosphere Corporation .. -- 1,943 450 Equity in losses (earnings) of GB Holdings, Inc ................ 3,466 (305) (1,807) Deferred gain amortization ..................................... (2,038) (2,038) (849) Accretion of investment in NEG Holding LLC ..................... (30,142) (32,879) (9,834) Deferred income tax (benefit) expense .......................... (7,147) 7,480 (30,077) Change in fair market value of derivative contracts ............ -- -- 716 Changes in operating assets and liabilities: (Increase) decrease in land and construction-in-progress .... (6,556) 24,215 7,753 Decrease in accounts payable, accrued expenses and other liabilities ....................................... (40,503) (3,037) (1,359) Decrease in receivables and other assets ..................... 1,424 4,068 4,570 ---------- ---------- ---------- Net cash provided by continuing operations ................... 8,113 91,367 83,792 ---------- ---------- ---------- Income from discontinued operations ............................. 9,492 6,007 6,117 Depreciation and amortization .................................. 4,212 3,616 3,383 Net gain from property transactions ............................ (3,353) -- -- ---------- ---------- ---------- Net cash provided by discontinued operations .................. 10,351 9,623 9,500 ---------- ---------- ---------- Net cash provided by operating activities ..................... 18,464 100,990 93,292 ---------- ---------- ---------- Cash flows from investing activities: Increase in mortgages and notes receivable ...................... (31,112) (23,200) (15,583) Repayments of mortgages and notes receivable .................... 12,200 23,000 -- Net proceeds from the sales and disposition of real estate ...... 15,290 20,513 3,656 Principal payments received on leases accounted for under the financing method ............................................... 5,310 5,941 6,858 Additions to hotel, casino and resort operating property ....... (19,734) (4,577) (62,662) Acquisitions of rental real estate .............................. -- (18,226) -- Additions to rental real estate ................................. (413) (181) (1,064) Decrease (increase) in investment in U.S. Government and Agency Obligations (Note 2) ........................................... 274,478 (22,410) 162,046 Disposition of marketable equity & debt securities............... 3,843 -- 17,929 Disposition proceeds on sale mortgages and notes receivable ..... 2,621 -- -- Increase in marketable equity & debt securities ................. (45,140) (4,415) -- Decrease (increase) in note receivable from affiliate ........... 250,000 -- (250,000) Decrease in minority interest in Stratosphere Corp............... -- (44,744) -- Decrease in investment in Stratosphere Corp ..................... 788 -- -- Investment in NEG, Inc .......................................... (148,101) -- -- Investment in NEG Holding LLC ................................... -- -- (4,379) Guaranteed payment from NEG Holding LLC ......................... 18,229 21,653 3,625 Priority distribution from NEG Holding LLC ...................... 40,506 -- -- Oil and natural gas acquisition, exploration and development expenditures ................................................... -- -- (26,432) Decrease in due to affiliate .................................... -- (68,815) (8,716) Increase in investment in joint ventures ........................ -- -- (5,856) Other ........................................................... 589 197 (29) ---------- ---------- ---------- Net cash provided by (used in) continuing operations .......... 379,354 (115,264) (180,607) Cash flows from discontinued operations: Net proceeds from the sales and disposition of real estate .... 5,336 -- -- ---------- ---------- ---------- Net cash provided by (used in) investing activities ........... 384,690 (115,264) (180,607) ---------- ---------- ---------- (table continued on next page) F-5
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) YEARS ENDED DECEMBER 31, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Cash Flows from financing activities: Debt: Repayment of credit facility ......................................... -- -- (25,000) Proceeds from credit facility ........................................ -- -- 10,940 Repayment of senior notes ............................................ -- -- (10,500) Proceeds from mortgages payable ...................................... 20,000 12,700 -- Payments on mortgages payable ........................................ (3,837) (462) (6,457) Periodic principal payments .......................................... (6,484) (7,198) (6,840) Balloon payments ..................................................... -- -- (1,756) ---------- ---------- ---------- Net cash provided by (used in) financing activities ................. 9,679 5,040 (39,613) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ................... 412,833 (9,234) (126,928) Cash and cash equivalents, beginning of year ........................... 54,871 64,105 191,033 ---------- ---------- ---------- Cash and cash equivalents at end of year ............................... $ 467,704 $ 54,871 $ 64,105 ========== ========== ========== Supplemental information: Cash payments for interest, net of amounts capitalized............... $ 62,324 $ 36,646 $ 51,910 ========== ========== ========== Cash payments for income taxes ....................................... $ -- $ -- $ 1,200 ========== ========== ========== Supplemental schedule of noncash investing and financing activities: Reclassification of real estate to operating lease ..................... $ 5,065 $ 13,403 $ 3,082 Reclassification from hotel and resort operating properties ............ -- -- (1,167) Reclassification of real estate from financing lease ................... (5,065) (13,503) (9,754) Reclassification of real estate from operating lease ................... (126,263) -- -- Reclassification of real estate to property held for sale............... 126,263 100 6,672 Decrease in mortgages and notes receivable ............................. (3,453) -- -- Decrease in deferred income ............................................ 2,565 -- -- Increase in real estate accounted for under the operating method ....... 888 -- -- Reclassification of real estate to (from) construction-in-progress ..... -- -- 1,167 Reclassification from marketable equity and debt securities ............ -- (20,494) -- Reclassification from receivable and other assets ...................... (1,631) -- -- Reclassification to mortgages and notes receivable ..................... 1,631 20,494 -- ---------- ---------- ---------- $ -- $ -- $ -- ========== ========== ========== Net unrealized gains (losses) on securities available for sale ......... $ 9,174 $ (242) $ (13,526) ========== ========== ========== Increase in equity and debt securities ............................. $ 1,200 $ 2,890 $ 2,500 ========== ========== ========== Contribution of note from NEG Holding LLC .......................... $ 10,940 $ -- $ -- ========== ========== ========== Transfer of assets and liabilities to NEG Holding LLC............... $ -- $ -- $ 87,066 ========== ========== ========== See notes to consolidated financial statements. F-6
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 1. DESCRIPTION OF BUSINESS 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 thirteen separate limited partnerships (collectively, the "Predecessor Partnerships"), pursuant to which the Subsidiary acquired all the assets, subject to the liabilities of the Predecessor Partnerships. 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. American Property Investors, Inc. (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. The General Partner is owned and controlled by Mr. Carl C. Icahn ("Icahn" or "Mr. Icahn"). On August 16, 1996 the Company amended its Partnership Agreement to permit non-real estate related acquisitions and investments which has allowed and continues to permit the Company to take advantage of investment opportunities it believes exist outside of the real estate market in order to seek to enhance unitholder value and further diversify its assets. The Amendment permits the Company to invest in securities issued by companies that are not necessarily engaged as one of their primary activities in the ownership, development or management of real estate to further diversify its investments while remaining in the real estate business and continuing to pursue suitable investments in the real estate markets. Under the Amendment, investments may include equity and debt securities of domestic and foreign issuers. The portion of the Company's assets invested in any one type of security or any single issuer will not be limited. The Company will conduct its activities in such a manner so as not to be deemed an investment company under the Investment Company Act of 1940 (the "1940 Act"). Generally, this means that no more than 40% of the Company's total assets will be invested in investment securities as such is defined in the 1940 Act. In addition, the Company does not intend to invest in securities as its primary business and will structure its investments to continue to be taxed as a partnership rather than as a corporation under the applicable publicly traded partnership rules of the Internal Revenue Code. The Company and its consolidated subsidiaries are engaged in the following operating businesses: (i) rental real estate, (ii) hotel, casino and resort operations, (iii) land, house and condominium development, (iv) participation and management of oil and gas operating properties and (v) investment in securities including investment in other entities and marketable equity and debt securities. In March 2000, the Company purchased an additional 50,000 shares of the Stratosphere Corporation ("Stratosphere") from an affiliate of the General Partner resulting in the Company owning approximately 51% of Stratosphere and has included its accounts on a consolidated basis. In December 2002, the Company purchased the remaining 49% minority interest. See Note 9. In October 2003, the Company acquired certain debt and equity securities of National Energy Group, Inc. ("NEG") from entities affiliated with Icahn for an aggregate consideration of $148.1 million. NEG owns a 50% interest in NEG Holding LLC ("Holding LLC") which owns oil and gas properties managed by NEG. The other 50% interest in Holding LLC is held by an Icahn affiliate and managing member. In connection with the acquisition of stock in NEG, the excess of cash disbursed over the historical cost which amounted to $2.8 million was charged to the General Partner's equity. In accordance with generally accepted accounting principles, assets transferred between entities under common control are accounted for at historical costs similar to a pooling of interests, and the financial statements of previously separate companies for periods prior to the acquisition are restated on a combined basis. There is no minority interest allocated to the other NEG stockholders because of NEG's negative equity. See Note 10. F-7
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Statements and Principles of Consolidation -- The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and include only those assets, liabilities and results of operations, which relate to the Company and its wholly owned and majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for its investments in subsidiaries that are less than 50% owned under the equity method of accounting. Net Earnings Per Limited Partnership Unit -- Basic earnings per share are based on earnings after the preferred pay-in-kind distribution to Preferred Unitholders. The resulting net earnings available for limited partners are divided by the weighted average number of shares of limited partnership units outstanding. Diluted earnings per share uses net earnings attributable to limited partner interests as the numerator with the denominator based on the weighted average number of units and equivalent units outstanding. The Preferred units are considered to be unit equivalents. The number of limited partnership units used in the calculation of diluted income per limited partnership unit increased as follows: 8,391,659, 10,368,414 and 9,500,828 limited partnership units for the years ended December 31, 2003, 2002 and 2001, respectively, to reflect the effects of the conversion of preferred units. For accounting purposes, NEG's earnings prior to the NEG acquisition in October 2003 have been allocated to the General Partner and therefore excluded from the computation of basic and diluted earnings per limited partnership unit. Cash and Cash Equivalents -- The Company considers short-term investments, which are highly liquid with original maturities of three months or less at date of purchase, to be cash equivalents. Included in cash and cash equivalents at December 31, 2003 and 2002 are investments in government backed securities of approximately $378,000,000 and $5,467,000, respectively. Marketable Equity and Debt Securities and Investment in U.S. Government and Agency Obligations -- Investments in equity and debt securities are classified as either held-to-maturity or available for sale for accounting purposes. Investments in U.S. Government and Agency Obligations are classified as available for sale. Available for sale securities are carried at fair value on the balance sheet of the Company. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Partners' Equity. Held-to-maturity securities are recorded at amortized cost. A decline in the market value of any held-to-maturity or available for sale security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend income is recorded when declared and interest income is recognized when earned. MORTGAGES AND NOTES RECEIVABLE a. The Company has generally not recognized any profit in connection with the property sales in which certain purchase money mortgages receivable were taken back. Such profits are being deferred and will be recognized when the principal balances on the purchase money mortgages are received. b. The Company has provided development financing for certain real estate projects. The security for these loans is either a second mortgage or a pledge of the developers' ownership interest in the properties. Such loans are subordinate to construction financing and are generally referred to as mezzanine loans. Current mezzanine loans accrue interest at approximately 22% per annum. Generally interest is not paid periodically but is due at maturity or earlier from unit sales or refinancing proceeds. The Company defers recognition of interest income on mezzanine loans pending receipt of principal and interest payments. Income Taxes -- No provision has been made for Federal, state or local income taxes on the results of operations generated by partnership activities as such taxes are the responsibility of the partners. Stratosphere and NEG, the Company's corporate subsidiaries, account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and F-8
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 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 an 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. Properties -- Properties held for investment, other than those accounted for under the financing method, are carried at cost less accumulated depreciation unless declines in the values of the properties are considered other than temporary at which time the property is written down to net realizable value. A property is classified as held for sale at the time management determines that the criteria in SFAS 144 have been met. Properties held for sale are carried at the lower of cost or net realizable value. Such properties are no longer depreciated and their operations are included in discontinued operations. Depreciation -- Depreciation is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 3 to 45 years. Use of Estimates -- Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The more significant estimates include the valuation of (i) long-lived assets, (ii) mortgages and notes receivable, (iii) marketable equity and debt securities, (iv) costs to complete for land, house and condominium developments, (v) gaming-related liability and loyalty programs and (vi) deferred tax assets. Revenue Recognition 1. Revenue from real estate sales and related costs are recognized at the time of closing primarily by specific identification. The Company follows the guidelines for profit recognition set forth by Financial Accounting Standards Board (FASB) Statement No. 66, "Accounting for Sales of Real Estate." 2. Casino revenues and promotional allowances -- The Company recognizes revenues in accordance with industry practice. Casino revenue is the net win from gaming activities (the difference between gaming wins and losses). Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. Revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. A corresponding amount is deducted as promotional allowances. The cost of such complimentaries is included in "Hotel and casino operating expenses". 3. Sales, advertising and promotion -- These costs are expensed as incurred. Land and Construction-in-Progress -- These costs are stated at the lower of cost or net realizable value. Interest is capitalized on expenditures for long-term projects until a salable condition is reached. The capitalization rate is based on the interest rate on specific borrowings to fund the projects. F-9
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Investment in NEG Holding LLC -- Due to the substantial uncertainty that the Company will receive any distribution above the priority and guaranteed payment amounts, the Company accounts for its investment in Holding LLC as a preferred investment whereby guaranteed payment amounts received and receipts of the priority distribution amount are recorded as reductions in the investment and income is recognized from accretion of the investment up to the priority distribution amount, including the guaranteed payments (based on the interest method) (see Note 10). Following receipt of the guaranteed payments and priority distributions, the residual interest in the investment will be valued at zero. The Company periodically evaluates the propriety of the carrying amount of its investment in Holding LLC to determine whether current events or circumstances warrant adjustments to the carrying value and/or revisions to accretion of income. The Company currently believes that no such impairment has occurred and that no revision to the accretion of income is warranted. Accounting for Impairment of a Loan -- If it is probable that based upon current information the Company will be unable to collect all amounts due according to the contractual terms of a loan agreement, the Company considers the asset to be "impaired". Reserves are established against impaired loans in amounts equal to the difference between the recorded investment in the asset and either the present value of the cash flows expected to be received, or the fair value of the underlying collateral if foreclosure is deemed probable or if the loan is considered collateral dependent. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of -- Long-lived assets held and used by the Company and long-lived assets to be disposed of, are reviewed for impairment whenever events or changes in circumstances, such as vacancies and rejected leases, indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset an impairment loss is recognized. Measurement of an impairment loss for long-lived assets that the Company expects to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Recent Accounting Standards: 1. In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS 150 on July 1, 2003 and has reclassified its preferred units to a liability account. See Note 18. 2. In January 2003, the FASB issued FASB Interpretation 46 (revised December 2003), Consolidation of Variable Interest Entities, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R, issued in December 2003 as a revision to the original interpretation, clarifies the application of ARB 51, Consolidated Financial Statements, to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company is required to apply FIN 46R to variable interests created after January 2003. For variable interest entities created prior to January 2003, for which FIN 46 has not been applied prior to December 24, 2003, the interpretation will be applied in reporting periods ending after March 15, 2004. The Company has an investment in a variable interest entity, which owns oil and natural gas operating properties. The variable interest entity has net assets of $161 million. The Company has determined that it is not the primary beneficiary of the variable interest entity. The maximum exposure to losses as a result of its involvement with the variable interest entity is $69 million. 3. RELATED PARTY TRANSACTIONS F-10
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a. At December 31, 2002, the Company had a $250 million note receivable from Mr. Icahn, Chairman of the General Partner, which was repaid in October 2003. (See Note 12). b. In addition, in 1997 the Company entered into a license agreement for a portion of office space from an affiliate. The license agreement dated as of February 1, 1997 expires May 22, 2004 unless sooner terminated in accordance with the agreement. Pursuant to the license agreement, the Company has the non- exclusive use of 3,547 square feet of office space and common areas (of an aggregate 21,123 rentable square feet sublet by such affiliate) for which it paid $17,068 per month, together with 16.79% of certain "additional rent". In November 2000, the Company reduced its office size to approximately 2,275 square feet, which decreased its monthly rental to $11,185 plus 10.77% of certain additional rent. In the years ended December 31, 2003, 2002 and 2001, the Company paid such affiliate approximately $159,000, $153,000 and $147,000 of rent, respectively, in connection with this licensing agreement. The terms of such sublease were reviewed and approved by the Audit Committee. The agreement expires in May 2004. If the Company must vacate the space, it believes there will be adequate alternative space available. c. Stratosphere received as reimbursement from affiliates of the General Partner approximately $2,993,000, $1,675,000 and $1,343,000 in the years ended December 31, 2003, 2002 and 2001, respectively, for administrative services performed by Stratosphere personnel. Stratosphere received hotel revenue of approximately $3,000, $123,000 and $600,000 in the years ended December 31, 2003, 2002 and 2001, respectively, in connection with a tour and travel agreement entered into with an affiliate of the General Partner. Stratosphere also received approximately $101,000 in hotel and food revenue from an affiliate of the General Partner in the year ended December 31, 2003 in connection with a conference held at Stratosphere. d. 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 Company'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 Company 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 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. There were no significant fees paid in the years ended December 31, 2003, 2002, and 2001. e. NEG received management fees from an affiliate of approximately $7,967,000, $7,637,000 and $2,699,000 in the years ended December 31, 2003, 2002 and 2001, respectively. f. NEG entered into an agreement to manage TransTexas Gas Corporation, an Icahn affiliate, for a fee of $312,500 per month. g. For the year ended December 31, 2003, the Company paid approximately $81,000 to an affiliate of the General Partner for telecommunication services. h. See Note 26 in connection with the acquisition of Arizona Charlie's Decatur and Arizona Charlie's Boulder from Icahn and an entity affiliated with Icahn. F-11
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 (in $000's): DECEMBER 31, ------------------------- 2003 2002 ---------- ---------- Minimum lease payments receivable $ 161,785 $ 180,943 Unguaranteed residual value ..... 74,651 87,160 ---------- ---------- 236,436 268,103 Less unearned income ............ 99,080 112,645 ---------- ---------- $ 137,356 $ 155,458 ========== ========== The following is a summary of the anticipated future receipts of the minimum lease payments receivable at December 31, 2003 in ($000's): YEAR ENDING DECEMBER 31, AMOUNT --------------- ---------- 2004............ $ 17,797 2005............ 15,686 2006............ 15,491 2007............ 14,577 2008............ 13,221 Thereafter...... 85,013 --------- $ 161,785 ========= At December 31, 2003, approximately $107,543,000 of the net investment in financing leases was pledged to collateralize the payment of nonrecourse mortgages payable. 5. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD a. Real estate leased to others accounted for under the operating method is summarized as follows (in $000's): DECEMBER 31, ------------------------- 2003 2002 ---------- ---------- Land ........................ $ 24,040 $ 55,034 Commercial Buildings ........ 83,252 194,521 ---------- ---------- 107,292 249,555 Less accumulated depreciation 30,849 45,313 ---------- ---------- $ 76,443 $ 204,242 ========== ========== As of December 31, 2003 and 2002, accumulated depreciation on the hotel and resort operating properties (not included above) amounted to approximately $12,341,000 and $9,665,000, respectively (See Note 13). F-12
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of the anticipated future receipts of minimum lease payments under non-cancelable leases at December 31, 2003 (in $000's): YEAR ENDING DECEMBER 31, AMOUNT ------------ -------- 2004........ $ 9,967 2005........ 8,802 2006........ 5,443 2007........ 3,874 2008........ 2,810 Thereafter.. 5,799 -------- $ 36,695 ======== At December 31, 2003, approximately $15,630,000 of net real estate leased to others was pledged to collateralize the payment of non-recourse mortgages payable. b. Real estate held for sale (in $000's): DECEMBER 31, ------------------------- 2003 2002 ---------- ---------- Leased to others ............ $ 146,416 $ -- Vacant ...................... 2,550 4,300 ---------- ---------- 148,966 4,300 Less accumulated depreciation 20,153 -- ---------- ---------- $ 128,813 $ 4,300 ========== ========== The following is a summary of income from discontinued operations (in $000's): DECEMBER 31, ---------------------------------- 2003 2002 2001 -------- -------- -------- Rental income ......................... $ 18,548 $ 17,409 $ 16,456 Hotel & resort operating income ....... 3,912 3,679 4,142 -------- -------- -------- 22,460 21,088 20,598 -------- -------- -------- Mortgage interest expense ............. 6,247 5,691 5,599 Depreciation and amortization ......... 4,212 3,616 3,383 Property expenses ..................... 2,546 2,589 2,127 Hotel and resort operating expenses ... 3,316 3,185 3,372 -------- -------- -------- 16,321 15,081 14,481 -------- -------- -------- Income from discontinued operations $ 6,139 $ 6,007 $ 6,117 ======== ======== ======== At December 31, 2003, approximately $105,984,000, respectively, of real estate held for sale was pledged to collateralize the payment of non-recourse mortgages payable. F-13
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INVESTMENT IN U.S. GOVERNMENT AND AGENCY OBLIGATIONS The Company has investments in U.S. Government and Agency Obligations whose maturities range from 2004 to December 2008 as follows (in $millions): DECEMBER 31, ----------------------------------------------- 2003 2002 --------------------- --------------------- COST CARRYING COST CARRYING BASIS VALUE BASIS VALUE -------- -------- -------- -------- Available for Sale: Matures in: less than 1 year . $ 52.8 $ 52.8 $ 292.9 $ 292.9 2-5 years ........ 9.0 8.8 39.7 39.7 Thereafter ....... -- -- 3.4 3.4 -------- -------- -------- -------- $ 61.8 $ 61.6 $ 336.0 $ 336.0 ======== ======== ======== ======== 7. MARKETABLE EQUITY AND DEBT SECURITIES DECEMBER 31, ----------------------------------------------- 2003 2002 --------------------- --------------------- COST CARRYING COST CARRYING (IN $MILLIONS) BASIS VALUE BASIS VALUE -------- -------- -------- -------- Available for Sale: Philip Service Corporation (b): Equity ...................... $ -- $ -- $ 9.4 $ 0.2 Corporate bonds (c) ........... 45.1 51.6 -- -- Other ......................... 1.3 4.2 2.5 3.0 -------- -------- -------- -------- 46.4 55.8 11.9 3.2 Held-to-maturity: GB Notes(a) .................. 21.3 24.7 21.3 23.5 -------- -------- -------- -------- Total ....................... $ 67.7 $ 80.5 $ 33.2 $ 26.7 ======== ======== ======== ======== a. In 1998 and 1999, the Company acquired an interest in the Sands Hotel and Casino (the "Sands") located in Atlantic City, New Jersey by purchasing the principal amount of approximately $31.4 million of First Mortgage Notes ("Notes") issued by GB Property Funding Corp. ("GB Property"). GB Property was organized as a special purpose entity for the borrowing of funds by Greate Bay Hotel and Casino, Inc. ("Greate Bay"). The purchase price for such notes was approximately $25.3 million. An affiliate of the General Partner also made an investment in the Notes of GB Property. A total of $185 million of such Notes were issued. Greate Bay owned and operated the Sands, a destination resort complex, located in Atlantic City, New Jersey. On January 5, 1998, GB Property and Greate Bay filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code to restructure its long term debt. Furthermore, in 1998 and 1999, the Company acquired an interest in the Claridge Hotel and Casino (the "Claridge Hotel") located in Atlantic City, New Jersey by purchasing the principal amount of $16.7 million of First Mortgage Notes of the Claridge Hotel and Casino Corporation (the "Claridge Corporation"). The purchase price of such notes was approximately $15.1 million. A total of $85 million of such notes were issued. An affiliate of the General Partner also made an investment in the Notes of the Claridge Corporation. In August 1999, the Claridge Corporation announced that it had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code to facilitate a financial restructuring. The Company, the General Partner, and the directors and officers of the General Partner were in the process of pursuing gaming applications to obtain licenses from the New Jersey Casino Control Commission. In March 2000, in an effort to facilitate the consummation of the reorganization process of Greate Bay and Claridge Hotel, the Company entered into separate agreements to transfer its interests in such entities to an affiliate of the General Partner for $40.5 million, which was equal to the Company's cost for F-14
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) such Notes. The affiliate of the General Partner was obligated to sell back to the Company, and the Company was obligated to repurchase such interests at the same price (together with a commercially reasonable interest factor), when the appropriate licenses were obtained by the Company. The Company would also acquire its proportionate share of all sale proceeds, stock rights, acquired shares and other benefits, if any, that may have accreted to or obtained in connection with such interests while held by the affiliate of the General Partner. Subsequent to the transfer, the affiliate of the General Partner purchased $1.7 million of the Claridge Notes for approximately $0.9 million on the Company's behalf. In July 2000, the U.S. Bankruptcy Court ruled in favor of the reorganization plan proposed by affiliates of the General Partner which provided for an additional investment of $65 million by the Icahn affiliates in exchange for a 46% equity interest, with bondholders (which also includes the Icahn affiliates) to receive $110 million in new notes and a 54% ownership position. The plan, which became effective September 29, 2000, provided the Icahn affiliates with a controlling interest. In February 2001, the Icahn affiliates sold their entire Claridge Corporation portfolio ($37.1 million face amount of Claridge Notes) for the following additional interest in GB Holdings, Inc. ("GB Holdings"): (i) 779,861 common shares of GB Holdings ("GBH") and (ii) $15.96 million face amount of GB Property First Mortgage Notes ("GB Notes"), plus $21.56 million in cash. The Company recognized a gain of approximately $1.3 million as a result of this sale in the year ended December 31, 2001. As a result, affiliates of the General Partner were, in effect, holding on behalf of the Company (i) approximately 3.6 million common shares of GBH and (ii) $26.9 million face amount of GB Notes, to which the Company would become entitled and obligated to purchase when it was fully licensed. As of February 2001, the Company no longer had any interests in the Claridge. In May 2002, the Company was qualified as a holding company by the New Jersey Casino Control Commission (the "Casino Control Commission") and in accordance with the prior agreement repurchased its interest in the Sands, located in Atlantic City, New Jersey, from affiliates of the General Partner. As a result, the Company acquired approximately 3.6 million common shares (36%) of GBH and $26.9 million face amount of GB Notes. The Company paid approximately $68.8 million to reacquire its interests representing the affiliates' advances plus accrued interest of approximately $11 million. In accordance with the agreement, interest was accrued from March 2000 to May 2002 at an annual rate of 1 1/2% over the prime rate. Interest expense of approximately $919,000, and $5,306,000 for the years ended December 31, 2002 and 2001, respectively, has been included in "Interest expense" in the Consolidated Statements of Earnings. As required by the New Jersey Casino Control Act (the "Casino Control Act"), the Partnership Agreement was amended to provide that securities of the Company are held subject to the condition that if a holder thereof is found to be disqualified by the Casino Control Commission, pursuant to the provisions of the Casino Control Act, such holder shall dispose of his interest in the Company in accordance with the Casino Control Act. In July 2003, GBH announced that its Board of Directors, acting through a special committee, approved an exchange offer for the GB Notes. The proposed transaction is subject to the consent of the holders of a majority in principal amount of the GB notes, the approval of stockholders owning a majority of the common stock of GBH, the effectiveness of required filings under applicable securities laws and the receipt of all required governmental and third party approvals. Mr. Icahn and his affiliated companies hold in excess of 77% of the GBH stock and 58% of the existing debt, of which the Company owns approximately 36% of the common stock and 24% of the debt. The Company and Mr. Icahn intend to support the proposed transaction. The GB Notes in the face amount of $110 million are due in September 2005 and bear interest at 11% per annum. The proposed transaction would involve the following: - An amendment to the existing note indenture to remove certain provisions and covenants and release the liens on the Sands assets; thereby allowing the transfer of these assets and those now held at GBH to a wholly-owned indirect subsidiary of GBH, Atlantic Coast Entertainment Holdings, Inc. ("Atlantic Holdings"). - The solicitation of an exchange of the existing notes for new notes due September 2008, which will bear interest at 3% per annum payable at maturity. - The payment of $100 per $1,000 in principal amount of the existing notes exchanged plus accrued interest on the existing notes. F-15
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - The holders of a majority of the new notes will have an option to convert into 72.5% of the Atlantic Holdings stock if all of the existing notes participate in the exchange. - The distribution to the GBH common stockholders of warrants (following the occurrence of certain events) for 27.5% of the common stock of Atlantic Holdings (on a fully diluted basis). As the exchange will be accounted for as a modification of debt for accounting purposes, this transaction is not expected to have a significant impact on the Company's consolidated financial statements. For accounting purposes, the Company reflects its interest in the GB Notes as held to maturity. The Company reflects its pro rata equity interest in Greate Bay as "Equity interest in GB Holdings, Inc." in the Consolidated Balance Sheets (See Note 8). b. At December 31, 2002, the Company owned the following approximate interests in Philip Service Corporation ("Philip"): (i) 1.8 million common shares, (ii) $14.2 million in secured term debt, and (iii) $10.9 million in accreted secured convertible payment-in-kind debt. The Company had an approximate 7% equity interest in Philip and an Icahn affiliate had an approximate 38% equity interest. Icahn affiliates also owned term and payment-in-kind debt. The secured term debt matures March 31, 2005 and bears interest at 9% per annum. Interest was payable quarterly, in arrears, beginning July 1, 2000. The secured convertible payment-in-kind debt matures March 31, 2005 and bears interest at 10% per annum. Interest was accreted quarterly with interest on the accreted interest also calculated at the rate of 10% per annum. The market value of Philip's common stock declined steadily since it was acquired by the Company. In 2002, based on a review of Philip's financial statements, management of the Company deemed the decrease in value to be other than temporary. As a result, the Company wrote down its investment in Philip's common stock by charges to earnings of $8,476,000 and charges to other comprehensive income ("OCI") of $761,000 in the year ended December 31, 2002. This investment had been previously written down by approximately $6.8 million in charges to earnings. The Company's adjusted carrying value of Philip's common stock was approximately $200,000 at December 31, 2002. In June 2003, Philip announced that it and most of its wholly owned U.S. subsidiaries filed voluntary petitions under Chapter 11 of the Federal Bankruptcy Code. In the year ended December 31, 2003, management of the Company determined that it was appropriate to write-off the balance of its investment in the Philip's common stock by a charge to earnings of approximately $961,000; of this amount $761,000 was previously charged to other comprehensive income in 2002, which was reversed in 2003, and included in the $961,000 charge to earnings. The Company also has a participation in Philip's debt with an original cost at the date of their acquisition of approximately $19.7 million. At December 31, 2001, such notes were classified as available-for-sale securities and were written down through charges to OCI, to an estimated fair market value of approximately $13.2 million. In 2002, upon concluding its review of these investments, management determined that such investments were more properly classified as notes receivable. Approximately $6.6 million of charges to OCI were reversed and the investments were reclassified at their original cost to "Mortgages and notes receivable" at December 31, 2002. These adjustments had no effect on the Company's reported earnings for the year ended December 31, 2002. In 2003, the cost basis of the debt was approximately $22.1 million. As previously mentioned, Philip filed for bankruptcy protection in June 2003. Management of the Company reviewed Philip's financial statements, bankruptcy documents and the prices of recent purchases and sales of the debt and determined this investment to be impaired. Based upon this review, management concluded the fair value of the debt to be approximately $3.3 million; therefore, the Company recorded a write-down of approximately $18.8 million by a charge to earnings which was included in "Write-down of mortgages and notes receivable" in the Consolidated F-16
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Statements of Earnings in the year ended December 31, 2003. In December 2003, the Company sold two-thirds of its term and PIK debt with a basis of $2.2 million for $2.6 million generating a gain of $0.4 million. Philip emerged from bankruptcy on December 31, 2003 as a private company controlled by an Icahn affiliate. The Company's remaining interest in the notes will be delivered and exchanged for approximately 443,000 common shares representing a 4.4% equity interest in the new Philip valued at the carrying value of the debt at December 31, 2003 of $1.1 million. Subsequent to December 31, 2003, the Company received a bankruptcy distribution of approximately $350,000. c. In December 2003, the Company acquired approximately $86.9 million principal amount of corporate bonds for approximately $45.1 million. Such bonds were classified as available for sale securities. Available for sale securities are carried at fair value on the Balance Sheet. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of Partners' Equity. At December 31, 2003, the carrying value of the bonds was approximately $51.6 million and accumulated other comprehensive gain was approximately $6.5 million. 8. EQUITY INTEREST IN GB HOLDINGS, INC. The Company reflects its pro rata equity interest in GB Holdings, Inc., which is approximately 36%, under this caption in the Consolidated Balance Sheets. "Equity in the earnings (losses) of GB Holdings, Inc." of approximately ($3.4 million), $0.3 million and $1.8 million have been recorded in the Consolidated Statements of Earnings in the years ended December 31, 2003, 2002 and 2001, respectively (See Note 7). 9. HOTEL AND CASINO OPERATING PROPERTY In September 2000, Stratosphere Corp.'s Board of Directors approved a going private transaction proposed by the Company and an affiliate of Icahn. On February 1, 2001 the Company entered into a merger agreement with Stratosphere Corp. ("Stratosphere") under which the Company would acquire the remaining shares of Stratosphere that it did not currently own. The Company owned approximately 51% of Stratosphere and Mr. Icahn owned approximately 38.6%. The Company, subject to certain conditions, agreed to pay approximately $44.3 million for the outstanding shares of Stratosphere not currently owned by it. Stratosphere stockholders not affiliated with Icahn would receive a cash price of $45.32 per share and Icahn related stockholders would receive a cash price of $44.33 per share. This transaction was completed in December 2002 after shareholders' approval. The acquisition by the Company of the minority shares not owned by an Icahn affiliate has been accounted for as a purchase in accordance with Financial Accounting Standards Board ("FASB") Statement No. 141, "Business Combinations." The acquisition by the Company of the common stock held by an Icahn affiliate has been recorded at historical cost. The excess of the historical cost over the amount of the cash disbursed, which amounted to $21,151,000, has been accounted for as a net addition to the General Partner's equity. The Company indirectly owns 100% of Stratosphere and consolidates Stratosphere in its financial statements. The Stratosphere which offers the tallest free-standing observation tower in the United States, is situated on approximately 31 acres of land located at the northern end of the Las Vegas Strip. The facility is a tourist-oriented gaming and entertainment destination property, which has approximately 80,000 square feet of gaming space, 2,444 hotel rooms, eight restaurants and approximately 110,000 square feet of developed retail space. The Stratosphere features three of the most visible amusement rides in Las Vegas. Stratosphere has invested approximately $95 million for the construction of an additional 1,000 hotel rooms and related amenities and to purchase the leasehold interest in the shopping center located on its premises. The improvements were substantially completed in June 2001. F-17
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stratosphere's property and equipment consist of the following as of and December 31, 2003 and 2002 (in $000's): DECEMBER 31, ----------------------- 2003 2002 --------- --------- Land and improvements, including land held for development $ 20,625 $ 20,110 Building and improvements ................................ 140,922 135,989 Furniture, fixtures and equipment ........................ 58,577 57,158 Construction in progress ................................. 4,179 329 --------- --------- 224,303 213,586 Less accumulated depreciation and amortization ........... (50,054) (42,156) --------- --------- $ 174,249 $ 171,430 ========= ========= Included in property and equipment at December 31, 2002 are assets recorded under capital leases of $1.9 million. Stratosphere's operations for the years ended December 31, 2003, 2002 and 2001 have been included in "Hotel and casino operating income and expenses" in the consolidated Statements of Earnings. Hotel and casino operating expenses include all expenses except for approximately $12,276,000, $13,328,000 and $11,257,000 of depreciation and amortization for the years ended December 31, 2003, 2002 and 2001, respectively, and $2,259,000 of income tax benefit for the year ended December 31, 2003 and $2,412,000 and $513,000 of income tax provision for the years ended December 31, 2002 and 2001, respectively. Such amounts have been included in "Depreciation and amortization expense" and "Income tax benefit (expense)" in the Consolidated Statements of Earnings. F-18
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. NATIONAL ENERGY GROUP a. National Energy Group, Inc. In October 2003, pursuant to a Purchase Agreement dated as of May 16, 2003, the Company acquired certain debt and equity securities of National Energy Group, Inc. ("NEG") from entities affiliated with Mr. Icahn for an aggregate consideration of approximately $148.1 million plus approximately $6.7 million of accrued interest on the debt securities. The agreement was reviewed and approved by the Audit Committee who were advised by its independent financial advisor and legal counsel. The securities acquired were $148,637,000 in principal amount of outstanding 10 3/4% Senior Notes due 2006 of NEG and 5,584,044 shares of common stock of NEG. As a result of the foregoing transaction and the acquisition by the Company of additional securities of NEG prior to the closing, the Company beneficially owns in excess of 50% of the outstanding common stock of NEG. NEG owns a 50% interest in NEG Holding LLC ("Holding LLC"), the other 50% interest in Holding LLC is held by Gascon Partners ("Gascon") an Icahn affiliate and managing member. Holding LLC owns NEG Operating LLC ("Operating LLC") which owns operating oil and gas properties managed by NEG. Under the Holding LLC operating agreement NEG is to receive guaranteed payments of approximately $47.9 million in addition to a priority distribution of approximately $148.6 million before the Icahn affiliate receives any monies. Due to the substantial uncertainty that NEG will receive any distribution above the priority and guaranteed payments amounts, NEG accounts for its investment in Holding LLC as a preferred investment. The Company consolidates NEG in its financial statements. In connection with a credit facility obtained by Holding LLC, NEG and Gascon have pledged as security their respective interests in Holding LLC. b. Investment in NEG Holding LLC As explained below, NEG's investment in Holding LLC is recorded as a preferred investment. The initial investment was recorded at historical carrying value of the net assets contributed with no gain or loss recognized on the transfer. Summarized financial information for Holding LLC for the years ended December 31, is as follows (in $000's): DECEMBER 31, -------------------- 2003 2002 -------- -------- Current assets ...................... $ 33,415 $ 42,126 Noncurrent assets(1) ................ 189,988 180,611 -------- -------- Total assets ........................ $223,403 $222,737 ======== ======== Current liabilities ................. $ 14,253 $ 20,927 Noncurrent liabilities .............. 48,640 1,968 -------- -------- Total liabilities ................... 62,893 22,895 Member's equity ..................... 160,510 199,842 -------- -------- Total liabilities and member's equity $223,403 $222,737 ======== ======== - ---------- (1) Primarily oil and gas properties F-19
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, ---------------------------------- 2003 2002 2001 -------- -------- -------- (IN $000'S) Total revenues ....... $ 80,475 $ 39,509 $ 12,637 Costs and expenses ... (47,277) (32,064) (9,988) -------- -------- -------- Operating income ..... 33,198 7,445 2,649 Other income (expense) (2,855) 6,481 (3,940) -------- -------- -------- Net income (loss) .... $ 30,343 $ 13,926 $ (1,291) ======== ======== ======== Under Holding LLC Operating Agreement, NEG is to receive guaranteed payments in addition to a priority distribution amount of $202.2 million before Gascon receives any monies. The priority distribution is to be made on or before November 1, 2006. Guaranteed payments are to be paid, on a semi annual basis, based on an annual interest rate of 10.75% of the outstanding priority distribution amount. After the payments to NEG, Gascon is to receive distributions equivalent to the priority distribution amount and guaranteed payments plus other amounts as defined. Following the above distributions to NEG and Gascon, additional distributions, if any, are to be made in accordance with their respective capital accounts. The order of distributions is listed below. Because of the substantial uncertainty that NEG will receive any distributions above the priority and guaranteed payment amounts, NEG accounts for its investment in Holding LLC as a preferred investment. Prior to September 2001, NEG owned and operated certain oil and gas properties. At inception (September 12, 2001), NEG recorded the investment in Holding LLC at the historical cost of the oil and gas properties that NEG contributed into the partnership (in exchange for Holding LLC obligation to pay NEG the priority distribution and guaranteed payments). Subsequently, NEG accretes its investment in Holding LLC from the initial investment recorded up to the priority distribution amount, including the guaranteed payments, at the implicit rate of interest, recognizing the accretion income in earnings. Accretion income is periodically adjusted for changes in the timing of cash flows, if necessary due to unscheduled cash distributions. Receipt of guaranteed payments and the priority distribution are recorded as reductions in the preferred investment. The preferred investment is evaluated quarterly for other than temporary impairment. Because of the substantial uncertainty that NEG will receive any distributions in excess of the priority distribution and the guaranteed payments ("residual interest"), the residual interest attributable to the investment in Holding LLC is valued at zero. Upon payment of the priority distribution in 2006, NEG's investment in Holding LLC will be zero. Cash receipts, if any, after the priority distribution and the guaranteed payments will be reported in income as earned. The following is a roll forward of the Investment in Holding LLC as of December 31, 2003 (in $000s): DECEMBER 31, 2003 --------- Investment in Holding LLC at beginning of period $ 108,880 Priority distribution from Holding LLC ......... (51,446) Guaranteed payment from Holding LLC ............ (18,230) Accretion of investment in Holding LLC ......... 30,142 --------- Investment in Holding LLC at end of period ..... $ 69,346 ========= Holding LLC Operating Agreement requires that distributions shall be made to both NEG and Gascon as follows: 1. Guaranteed payments are to be paid to NEG, calculated on an annual interest rate of 10.75% on the outstanding priority distribution amount. The priority distribution amount includes all outstanding debt owed to entities owned or controlled by Carl C. Icahn, including the amount of NEG's 10.75% Senior Notes. As of December 31, 2003, the priority distribution amount F-20
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was $148.6 million which equals the amount of NEG's 10.75% Senior Notes due the Company. The guaranteed payments will be made on a semi-annual basis. 2. The priority distribution amount is to be paid to NEG. Such payment is to occur by November 6, 2006. 3. An amount equal to the priority distribution amount and all guaranteed payments paid to NEG, plus any additional capital contributions made by Gascon, less any distribution previously made by NEG to Gascon, is to be paid to Gascon. 4. An amount equal to the aggregate annual interest (calculated at prime plus 1/2% on the sum of the guaranteed payments), plus any unpaid interest for prior years (calculated at prime plus 1/2% on the sum of the guaranteed payments), less any distributions previously made by NEG to Gascon, is to be paid to Gascon. 5. After the above distributions have been made, any additional distributions will be made in accordance with the ratio of NEG's and Gascon's respective capital accounts. In addition, the Holding LLC Operating Agreement contains a provision that allows Gascon at any time, in its sole discretion, to redeem the NEG membership interest in Holding LLC at a price equal to the fair market value of such interest determined as if Holding LLC had sold all of its assets for fair market value and liquidated. Since all of the NEG's operating assets and oil and natural gas properties have been contributed to Holding LLC, as noted above, following such a redemption, NEG's principal assets would consist solely of its cash balances. 11. MORTGAGES AND NOTES RECEIVABLE BALANCE AT DECEMBER 31, BALANCE MONTHLY (IN $000'S) COLLATERALIZED BY PROPERTY INTEREST MATURITY AT PAYMENT --------------------- TENANTED BY OR DEBTOR RATE DATE MATURITY AMOUNT 2003 2002 - -------------------------- -------- -------- -------- ------- --------- --------- Peninsula/Hampton & Alex Hotel(b) Various Various -- -- $ 42,030 $ 23,200 Philip debt(c) .................. -- -- -- -- 1,091 20,494 Other ........................... -- -- -- -- 7,207 12,522 --------- --------- $ 50,328 $ 56,216 ========= ========= The Company has provided development financing for certain real estate projects. The security for these loans is a pledge of the developers' ownership interest in the properties. Such loans are subordinate to construction financing and are generally referred to as mezzanine loans. The Company's mezzanine loans accrue interest at approximately 22% per annum. However interest is not paid periodically and is due at maturity or earlier from unit sales or refinancing proceeds. The Company defers recognition of interest income on mezzanine loans pending receipt of principal and interest payments. a. On November 30, 2000, the Company entered into a mezzanine loan agreement to fund $23 million in two tranches to an unaffiliated borrower. The funds were to be used for certain initial development costs associated with a 65 unit condominium property located at 931 1st Avenue in New York City. The first tranche of $10 million was funded on November 30, 2000 and provided for interest accruing at a rate of 25% per annum, with principal and interest due at maturity, May 29, 2003. Also, in November 2000, approximately $3.7 million of the second tranche of the loan was funded. The balance of approximately $9.3 million was funded in installments during 2001. The second tranche provided for interest accruing at a rate of 21.5% per annum with principal and interest due at maturity, November 29, 2002. The loans were payable at any time from the proceeds of unit sales after satisfaction of senior debt of approximately $45 million. The loans were secured by the pledge of membership interests in the entity that owns the real estate. In May 2002, the Company received approximately $31.3 million for prepayment of the mezzanine loans. The balance of the prepayment of $8.3 million represented accrued interest ($7.9 million) and exit fees ($0.4 million) which amounts were recognized as "Interest income on U.S. Government and Agency obligations and other investments" and "Other income" respectively, in the Consolidated Statements of Earnings for the year ended December 31, 2002. b. At December 31, 2002, the Company had funded two mezzanine loans for approximately $23.2 million and had F-21
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commitments to fund, under certain conditions, additional advances of approximately $5 million. Both loans have an interest rate of 22% per annum compounded monthly. The Peninsula loan, for a Florida condominium development, which had a term of 24 months from the date of funding, February 2002, was repaid in full in 2003. Approximately $6.8 million of interest income was recorded and is included in "Interest income on U.S. Government and Agency obligations and other investments" in the Consolidated Statements of Earnings. The Alex Hotel loan, for a New York City hotel with approximately 200 rooms, has a term of 36 months from the closing date, April 2002. At December 31, 2003, accrued interest of approximately $4.4 million has been deferred for financial statement purposes pending receipt of principal and interest payments in connection with this loan. Origination fees of $3.0 million have been received in connection with one of the mezzanine loans and approximately $1.5 million and $1.1 million has been recognized as "Other income" in the Consolidated Statements of Earnings in the years ended December 31, 2003 and 2002 respectively. In February 2003, the Company funded the Hampton mezzanine loan for approximately $30 million on a Florida condominium development. The loan is due in 18 months with one six month extension and has an interest rate of 22% per annum compounded monthly. The Company has committed to fund an additional $15 million if required by the borrower to complete the project. At December 31, 2003 accrued interest of approximately $6.7 million has been deferred for financial statement purposes pending receipt of principal and interest payments in connection with this loan. c. See Note 7 with respect to Philip debt. 12. NOTE RECEIVABLE DUE FROM AFFILIATE On October 17, 2003 Mr. Icahn, Chairman of the Board of the General Partner, repaid the $250 million loan which had been made to him by the Company on December 27, 2001. The Company made the two-year $250 million loan to Mr. Icahn, secured by securities consisting of (i) 21,136,044 and 8,073,466 of the Company's depositary units and preferred units, respectively, owned by Mr. Icahn, such units having an aggregate market value on that date of $250 million and (ii) shares of a private company owned by Mr. Icahn, which shares were represented to have an aggregate book value of at least $250 million, together with an irrevocable proxy on sufficient additional shares of the private company so that the pledged shares and the shares covered by the proxy equal in excess of 50% of the private company's shares. The interest on the loan was payable semi-annually, at a per annum rate equal to the greater of (i) 3.9% and (ii) 200 basis points over 90 day LIBOR to be reset each calendar quarter. The applicable rate in 2003 was 3.9% and in 2002 ranged from 3.9% to 4.03%. Interest income of approximately $7.9 million, $9.9 million and $0.1 million was earned on this loan in the years ended December 31, 2003, 2002 and 2001, respectively, and is included in "Interest income on U.S. Government and Agency obligations and other investments" in the Consolidated Statements of Earnings. The Company entered into this transaction to earn interest income on a secured investment. The terms of this transaction were reviewed and approved by the Audit Committee. 13. HOTEL AND RESORT OPERATING PROPERTIES a. The Company owns a hotel and resort property that is part of a master planned community situated in the town of Mashpee located on Cape Cod in Massachusetts. This property includes two golf courses, other recreational facilities, condominium and time share units and land for future development. Total initial costs of approximately $28 million were classified as follows: approximately $17.4 million as "Hotel and resort properties", $8.9 million as "Land and construction-in-progress" and $1.7 million as "Other assets" on the Consolidated Balance Sheet. Resort operations have been included in the "Hotel and resort operating income and expenses" in the Consolidated Statements of Earnings. Net hotel and resort operations for this property ("hotel and resort operating income" less "hotel and resort operating expenses") resulted in F-22
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) income of approximately $3,033,000, $1,909,000 and $712,000 for the years ended December 31, 2003, 2002, and 2001, respectively. Hotel and resort operating expenses include all expenses except for approximately $2,451,000, $1,833,000 and $970,000 for the years ended December 31, 2003, 2002 and 2001 of depreciation and amortization, respectively, which is included in such caption in the Consolidated Statements of Earnings. Resort operations are highly seasonal in nature with peak activity occurring from June to September. b. The Company owns a hotel located in Miami, Florida which has a carrying value of approximately $6.4 million and $6.3 million at December 31, 2003 and 2002, respectively, and is unencumbered by any mortgages. Approximately $1.3 million of capital improvements were completed in the year ended December 31, 2002. The Company has a management agreement for the operation of the hotel with a national management organization. As a result of the decision to sell the property in 2004, net hotel and resort operations ("hotel and resort operating revenues" less "hotel and resort operating expenses") totaled approximately $596,000, $494,000 and $770,000 for the years ended December 31, 2003, 2002 and 2001, respectively and have been included in discontinued operations. Depreciation expense of $210,000, $374,000 and $342,000 for the years ended December 31, 2003, 2002 and 2001, respectively, have been included in discontinued operations. 14. SIGNIFICANT PROPERTY TRANSACTIONS Information on significant property transactions during the three-year period ended December 31, 2003 is as follows: a. In September 2002, the Company purchased an industrial building located in Nashville, Tennessee for approximately $18.2 million. The building was constructed in 2001 and is fully leased to two tenants, Alliance Healthcare and Jet Equipment & Tools Inc., with leases expiring in 2011. The annual net operating income is anticipated to be approximately $1.6 million increasing to approximately $1.9 million by 2011. In October 2002, the Company closed a $12.7 million non-recourse mortgage loan on the Nashville, Tennessee property. The loan bears interest at 6.4% per annum and matures in ten years. Required payments are interest only for the first three years and then principal amortization will commence based on a thirty-year amortization schedule. At December 31, 2003 and 2002, the property had a carrying value of approximately $18,066,000 and $17,584,000 respectively, and was encumbered by a non-recourse mortgage in the amount of $12,700,000. b. In October 2002, the Company sold a property located in North Palm Beach, Florida for a selling price of $3.5 million. A gain of approximately $2.4 million was recognized in the year ended December 31, 2002. c. In October 2003, the Company sold a property located in Columbia, Maryland to its tenant for a selling price of $11 million. A gain of approximately $5.8 million was recognized in the year ended December 31, 2003. d. Due to favorable real estate market conditions and the mature nature of the Company's real portfolio, the Company has engaged C.B. Richard Ellis, Inc. to assist it in obtaining offers for its rental real estate portfolio. The Company intends to utilize proceeds from any asset sales to continue to invest in its core businesses, including real estate, gaming and entertainment and oil and gas. The Company may also seek opportunities in other sectors including industrial, manufacturing and insurance and asset management. In total, the Company is marketing for sale properties with a book value of approximately $340 million individually encumbered by mortgage debt which in the aggregate is approximately $180 million, a portion of which portfolio meets the criteria as held for sale under SFAS 144 at December 31, 2003. There can be no assurance that offers satisfactory to the Company will be received and, if received, that the properties will ultimately be sold at prices acceptable to the Company. The Company had properties under contract or as to which letters of intent had been executed by potential purchasers, all of which contracts or letters of intent are subject to purchaser's due diligence and other closing conditions. Selling prices for the properties covered by the contracts or letters of intent would total approximately $323 million but the F-23
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) properties are encumbered by aggregate mortgage debt of approximately $142 million which would have to be repaid out of the proceeds of the sales or assumed by the purchaser. In 2003, net income from these properties totaled approximately $7 million; interest expense was approximately $11 million; and depreciation and amortization expense was approximately $4.2 million. In accordance with generally accepted accounting principles, only the real estate operating properties under contract or letter of intent, but not the financing lease properties, were reclassified to "Properties held for sale" and the related income and expense reclassified to "Income from discontinued operations." 15. MORTGAGES PAYABLE Mortgages payable, all of which are nonrecourse to the Company, are summarized as follows (in $000's): ANNUAL PRINCIPAL RANGE OF INTEREST RATES RANGE OF MATURITIES AND INTEREST PAYMENT BALANCE AT DECEMBER 31, - ----------------------- ------------------- -------------------- 2003 2002 -------- --------- 5.630% -- 8.430%....... 10/15/07 - 12/31/18 $19,328 $180,989 $166,287 9.000 -- 9.500......... 11/30/03 - 11/30/09 -- -- 5,561 ------- -------- -------- $19,328 $180,989 $171,848 ======= ======== ======== The following is a summary of the anticipated future principal payments of the mortgages (in 000's): YEAR ENDING DECEMBER 31, AMOUNT - ---------------- --------- 2004............ $ 6,489 2005............ 6,702 2006............ 7,360 2007............ 14,176 2008............ 58,817 2009 - 2013..... 66,905 2014 - 2018..... 20,540 ----------- $ 180,989 =========== a. See Note 14(a) for Mid-South Logistics financing in October 2002. b. On May 16, 2003, the Company executed a mortgage note secured by a distribution facility located in Windsor Locks, Connecticut and obtained funding in the principal amount of $20 million. The loan bears interest at 5.63% per annum and matures on June 1, 2013. Annual debt service is approximately $1,382,000 per annum based on a 30 year amortization schedule. 16. SENIOR NOTES AND CREDIT FACILITY DUE AFFILIATES F-24
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a. The Senior Notes of National Energy Group, Inc. ("Notes") were held in their entirety by affiliates of Icahn at December 31, 2002. The Notes bear interest at an annual rate of 10 3/4%, payable semiannually in arrears on May 1 and November 1 of each year. The Notes are senior, unsecured obligations of NEG, ranking pari passu with all existing and future senior indebtedness of NEG, and senior in right of payment to all future subordinated indebtedness of NEG. Subject to certain limitations set forth in the indenture covering the Senior Notes (the "Indenture"), NEG and its subsidiaries may incur additional senior indebtedness and other indebtedness. The Indenture contains certain covenants limiting NEG with respect to the following: (i) asset sales; (ii) restricted payments; (iii) the incurrence of additional indebtedness and the issuance of certain redeemable preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of business; (vii) dividend and other payment restrictions affecting subsidiaries; (viii) mergers and consolidations; and (ix) transactions with affiliates. NEG was unable to reasonably determine the fair value of the Notes at December 31, 2002, due to a lack of available market quotations, credit ratings and inability to determine an appropriate discount rate. In August 2001, NEG redeemed both $16.4 million of principal outstanding under the notes and $4.8 million of Reinstated Interest for a cash consideration of $10.5 million. NEG paid two Icahn affiliates approximately $0.4 million in current interest on the redeemed senior note obligations at the date of redemption related to interest owed from the last semi-annual interest payment date of May 1, 2001, to the date of redemption. As this was a partial redemption of the Notes, it has been accounted for as a modification of terms that changes the amounts of future cash payments. Accordingly, the excess of redeemed principal and interest over the redemption payment of $10.5 million is being amortized as a reduction to interest expense over the remaining life of the bonds. In connection with this transaction, NEG borrowed $10.9 million under its existing credit facility with an Icahn affiliate. In October 2003, the Company acquired these Notes. At December 31, 2003, these Notes were eliminated in consolidation (See Note 10). b. At December 31, 2002, NEG had $10.9 million outstanding under its existing $100 million credit facility with Arnos, an Icahn affiliate. Arnos continued to be the holder of the credit facility; however, the $10.9 million note outstanding under the credit facility was contributed to Holding LLC as part of Gascon's contribution to Holding LLC on September 12, 2001. In December 2001, the maturity date of the credit facility was extended to December 31, 2003 and NEG was given a waiver of compliance with respect to any and all covenant violations. NEG was not in compliance with the minimum interest coverage ratio at September 30, 2002; and December 31, 2002 and the current ratio at December 31, 2002, however, in December 2001, NEG was given a waiver of compliance with respect to any and all covenant violations through December 31, 2003. On March 26, 2003, Holding LLC distributed the $10.9 million note outstanding under NEG'S revolving credit facility as a priority distribution to NEG, thereby canceling the note. Also, on March 26, 2003, NEG, Arnos and Operating LLC entered into an agreement to assign the credit facility to Operating LLC. Effective with this assignment, Arnos amended the credit facility to increase the revolving commitment to $150 million, increase the borrowing base to $75 million and extend the revolving due date until June 30, 2004. Concurrently, Arnos extended a $42.8 million loan to Operating LLC under the amended credit facility. Operating LLC then distributed $42.8 million to Holding LLC who, thereafter, made a $40.5 million priority distribution and a $2.3 million guaranteed payment to NEG. NEG utilized these funds to pay the entire amount of the long-term interest payable on the Notes and interest accrued thereon outstanding on March 27, 2003. The Arnos facility was canceled on December 29, 2003 in conjunction with a third party bank financing. F-25
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. RIGHTS OFFERINGS a. A registration statement relating to the 1995 Rights Offering (the "1995 Offering") was filed with the Securities and Exchange Commission and declared effective February 23, 1995. On March 1, 1995, the Company issued to record holders of its Depositary Units one transferable subscription right (a "Right"), for each seven Depositary Units of the Company held on February 24, 1995, the record date. The Rights entitled the holders thereof (the "Rights Holders") to acquire during the subscription period at a subscription price of $55, six Depositary Units and one 5% cumulative pay-in-kind redeemable preferred unit representing a limited partner interest ("Preferred Units"). The subscription period commenced on March 1, 1995 and expired at the close of business on March 30, 1995. The Preferred Units have certain rights and designations, generally as follows. Each Preferred Unit has a liquidation preference of $10.00 and entitles the holder thereof to receive distributions thereon, payable solely in additional Preferred Units, at the rate of $.50 per Preferred Unit per annum (which is equal to a rate of 5% of the liquidation preference thereof), payable annually on March 31 of each year (each, a "Payment Date"). On any Payment Date commencing with the Payment Date on March 31, 2000, the Company with the approval of the Audit Committee of the Board of Directors of the General Partner may opt to redeem all, but not less than all, of the Preferred Units for a price, payable either in all cash or by issuance of additional Depositary Units, equal to the liquidation preference of the Preferred Units, plus any accrued but unpaid distributions thereon. On March 31, 2010, the Company must redeem all, but not less than all, of the Preferred Units on the same terms as any optional redemption. On April 12, 1995, the Company received approximately $108.7 million, the gross proceeds of the 1995 Offering, from its subscription agent and a capital contribution of approximately $2.2 million from its General Partner. The Company issued 1,975,640 Preferred Units and an additional 11,853,840 Depositary Units. Trading in the Preferred Units commenced March 31, 1995 on the New York Stock Exchange ("NYSE") under the symbol "ACP PR". The Depositary Units trade on the NYSE under the symbol "ACP". b. In September 1997, the Company completed its 1997 Rights Offering (the "1997 Offering") to holders of its Depositary Units. The aggregate amount raised in the 1997 Rights Offering was approximately $267 million. The Preferred and Depositary Units issued under the 1997 Rights Offering carry the same rights and designations as those issued in 1995. On September 25, 1997, the Company received approximately $267 million, the gross proceeds of the 1997 Offering, from its subscription agent and a capital contribution of approximately $5.4 million from its General Partner. Expenses incurred in connection with the 1997 Offering were approximately $400,000. The Company issued an additional 5,132,911 Preferred Units and 20,531,644 Depositary Units. The Preferred and Depositary Units trade on the New York Stock Exchange under the symbols "ACP PR" and "ACP", respectively. At December 31, 2003, affiliates of the General Partner owned 8,477,139 Preferred Units and 39,896,836 Depositary Units. 18. PREFERRED UNITS Pursuant to the terms of the Preferred Units, on February 21, 2003, the Company declared its scheduled annual preferred unit distribution payable in additional Preferred Units at the rate of 5% of the liquidation preference of $10. The distribution was payable March 31, 2003 to holders of record as of March 14, 2003. A total of 466,548 additional Preferred Units were issued. At December 31, 2003 and 2002, 9,796,607 and 9,330,963 Preferred Units are issued and outstanding, respectively. Pursuant to the terms of the Preferred Units, on February 25, 2004, the Company declared its scheduled annual preferred unit distribution payable in additional Preferred Units at the rate of 5% of the liquidation preference of $10. The distribution is payable on F-26
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) March 31, 2004 to holders of record as of March 12, 2004. In addition, the Company increased the number of authorized Preferred Units to 10,400,000. On July 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 150 (SFAS 150) "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 requires that a financial instrument, which is an unconditional obligation, be classified as a liability. Previous guidance required an entity to include in equity financial instruments that the entity could redeem in either cash or stock. Pursuant to SFAS 150 the Company's Preferred Units, which are an unconditional obligation, have been reclassified from "Partners' equity" to a liability account in the consolidated Balance Sheets and the preferred pay-in-kind distribution for the period from July 1, 2003 to December 31, 2003 of $2,449,000 and all future distributions have been and will be recorded as "Interest expense" in the Consolidated Statements of Operations. 19. INCOME TAXES DECEMBER 31, ------------ (IN $000'S) 2003 2002 ------------- ------------- a. The difference between the book basis and the tax basis of the net assets of the Company, not directly subject to income taxes, is as follows: Book basis of American Real Estate Partners' net assets excluding Stratosphere Corp. and NEG, Inc.......................................................... $ 1,149,418 $ 1,177,329 Excess of tax over book (Excess of book over tax basis)........................ 79,238 (1,778) ------------- ------------- Tax basis of net assets........................................................ $ 1,228,656 $ 1,175,551 ============= ============= b. Corporate income taxes (i) The Company's corporations recorded the following income tax (expense) benefit attributable to continuing operations for Stratosphere and NEG for the years ended December 31, 2003, 2002 and 2001 (in $000's): DECEMBER 31, ---------------------------------- 2003 2002 2001 -------- -------- -------- Current $ (723) $ -- $ -- Deferred 7,218 (7,480) 30,077 -------- -------- -------- $ 6,495 $ (7,480) $ 30,077 ======== ======== ======== (ii) The tax effect of significant differences representing net deferred tax assets (the difference between financial statement carrying values and the tax basis of assets and liabilities) for the Company is as follows at December 31, 2003 and 2002 (in $000's): DECEMBER 31, ----------------------- 2003 2002 --------- --------- Deferred tax assets: Depreciation ................... $ 40,191 $ 61,628 Net operating loss carryforwards 30,942 45,958 Investment in NEG Holding LLC .. 18,845 8,440 Other .......................... 8,347 9,950 --------- --------- 98,325 125,976 Valuation allowance ........... (15,875) (100,454) --------- --------- Net deferred tax assets ....... $ 82,450 $ 25,522 ========= ========= At December 31, 2003, Stratosphere had net operating loss carryforwards available for federal income tax purposes of approximately $28.5 million which begin expiring in 2019. SFAS 109 requires a "more likely than not" criterion be applied when evaluating the realizability of a deferred tax asset. As of December 31, 2002, given Stratosphere's history of losses for income tax purposes, the volatility of the industry within which the F-27
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stratosphere operates, and certain other factors, Stratosphere had established a valuation allowance for the deductible temporary differences, including the excess of the tax basis of the Stratosphere's assets over the basis of such assets for financial statement purposes and the tax carryforwards. However, at December 31, 2003, based on various factors including the current earnings trend and future taxable income projections, Stratosphere determined that it was more likely than not that the deferred tax assets will be realized and removed the valuation allowance. In accordance with SFAS 109, the tax benefit of any deferred tax asset that existed on the effective date of a reorganization should be reported as a direct addition to contributed capital. Stratosphere has deferred tax assets relating to both before and after Stratosphere emerged from bankruptcy in September of 1998. The net decrease in the valuation allowance was $79.3 million of which a net amount of $47.5 million was credited to partners' capital in the year ended December 31, 2003. At December 31, 2003, NEG had net operating loss carryforwards available for federal income tax purposes of approximately $58 million, which expire in 2009. Net operating loss limitations may be imposed as a result of subsequent changes in stock ownership of NEG. Prior to the formation of Holding LLC, the income tax benefit associated with the loss carryforwards had not been recognized since, in the opinion of management, there was not sufficient positive evidence of future taxable income to justify recognition of a benefit. Upon the formation of Holding LLC, management again evaluated all evidence, both positive and negative, in determining whether a valuation allowance to reduce the carrying value of deferred tax assets was still needed and concluded, based on the projected allocations of taxable income by Holding LLC, NEG more likely than not will realize a partial benefit from the loss carryforwards. In accordance with SFAS 109, NEG recorded a deferred tax asset of $31.9 million in September 2001, $25.5 million as of December 31, 2002, and $25.9 million as of December 31, 2003. Ultimate realization of the deferred tax asset is dependent upon, among other factors, NEG's ability to generate sufficient taxable income within the carryforward periods and is subject to change depending on the tax laws in effect in the years in which the carryfowards are used. As a result of the recognition of expected future income tax benefits, subsequent periods will reflect a full effective tax rate provision. 20. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN $000'S, EXCEPT PER UNIT DATA) THREE MONTHS ENDED(1) -------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, -------------------- -------------------- -------------------- -------------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- -------- Revenues ........................ $ 69,030 $ 82,995 $ 67,016 $ 89,008 $ 71,492 $ 80,906 $ 69,018 $ 93,471 ======== ======== ======== ======== ======== ======== ======== ======== Operating Income ................ $ 14,524 $ 19,810 $ 15,033 $ 26,106 $ 14,811 $ 17,802 $ 18,523 $ 20,012 Gains (losses) on property transactions .................. 1,138 1,639 (272) -- 501 2,891 5,754 4,460 Gain on sale of marketable equity and debt securities .... -- -- -- -- 2,168 -- 439 -- Provision for loss on real estate (200) -- -- (926) (100) -- (450) (2,286) Write-down of equity securities available for sale ............ (961) -- -- (8,476) -- -- -- -- Write-down write-up of mortgages & notes receivable ............ -- -- (18,798) -- -- -- -- -- Loss on limited partnership interest ...................... -- -- -- -- -- -- -- (3,750) Minority interest in net earnings of Stratosphere Corp. -- (407) -- (589) -- (612) -- (335) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income tax .. 14,501 21,042 (4,037) 16,115 17,380 20,081 24,266 18,101 Income tax (expense) benefit .... (2,878) (1,595) (2,158) (1,854) (2,568) (2,031) 14,099 (2,000) -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations .................... 11,623 19,447 (6,195) 14,261 14,812 18,050 38,365 16,101 Income from discontinued operations .................... 1,629 1,502 3,427 1,502 2,933 1,502 1,503 1,501 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings (loss) ............. $ 13,252 $ 20,949 $ (2,768) $ 15,763 $ 17,745 $ 19,552 $ 39,868 $ 17,602 ======== ======== ======== ======== ======== ======== ======== ======== Net Earnings (loss) per limited Partnership unit(2): Basic earnings: F-28
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) THREE MONTHS ENDED(1) -------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, -------------------- -------------------- -------------------- -------------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations .................. $ .17 $ .35 $ (.20) $ .24 $ .26 $ .31 $ .82 $ .26 Income from discontinued operations .................. .03 .03 .07 .03 .06 .03 .03 .03 -------- -------- -------- -------- -------- -------- -------- -------- Basic earnings (loss) per LP unit ......................... $ .20 $ .38 $ (.13) $ .27 $ .32 $ .34 $ .85 $ .29 ======== ======== ======== ======== ======== ======== ======== ======== Diluted earnings: Income (loss) from continuing operations .................. $ .15 $ .30 $ (.20) $ .21 $ .24 $ .27 $ .71 $ .22 Income from discontinued operations .................. .03 .03 .07 .03 .05 .03 .03 .03 -------- -------- -------- -------- -------- -------- -------- -------- Diluted earnings (loss) per LP unit ......................... $ .18 $ .33 $ (.13) $ .24 $ .29 $ .30 $ .74 $ .25 ======== ======== ======== ======== ======== ======== ======== ======== - ---------- (1) All quarterly amounts have been restated for the effects of the acquisition of NEG and the reporting of discontinued operations. (2) Net earnings (loss) 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. 21. SEGMENT REPORTING The Company is engaged in six operating segments consisting of the ownership and operation of (i) rental real estate, (ii) hotel and resort operating properties, (iii) hotel and casino operating property, (iv) property development, (v) investment in securities including investment in other limited partnerships and marketable equity and debt securities and (vi) investment in oil and gas operating properties. The Company's reportable segments offer different services and require different operating strategies and management expertise. Non-segment revenue to reconcile to total revenue consists primarily of interest income on treasury bills and other investments. Non-segment assets to reconcile to total assets includes investment in U.S. Government and Agency obligations, cash and cash equivalents, receivables and other assets. The accounting policies of the segments are the same as those described in Note 2. The Company assesses and measures segment operating results based on segment earnings from operations as disclosed below. Segment earnings from operations is not necessarily indicative of cash available to fund cash requirements nor synonymous with cash flow from operations. The revenues, net earnings, assets and real estate investment capital expenditures for each of the reportable segments are summarized as follows for the years ended and as of December 31, 2003, 2002, and 2001 (in $000's): DECEMBER 31, ----------------------------------------- 2003 2002 2001 --------- --------- --------- Revenues: Hotel & casino operating properties .... $ 160,235 $ 156,620 $ 146,161 Land, house and condominium sales ...... 13,265 76,024 55,566 Rental real estate ..................... 24,751 25,238 27,366 Hotel & resort operating properties .... 14,592 14,918 12,276 Oil & gas operating properties ......... 38,109 40,516 45,709 Other investments ...................... 13,874 15,283 7,097 --------- --------- --------- Subtotal .............................. 264,826 328,599 294,175 F-29
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, ----------------------------------------- 2003 2002 2001 --------- --------- --------- Reconciling items ........................ 11,730(1) 17,781(1) 28,147(1) --------- --------- --------- Total revenues ........................ $ 276,556 $ 346,380 $ 322,322 ========= ========= ========= Net earnings: Segment earnings: Hotel & casino operating property ...... $ 24,806 $ 24,961 $ 18,205 Land, house and condominium sales ...... 4,136 21,384 12,967 Oil & gas operating properties ......... 38,109 40,516 40,140 Rental real estate ..................... 19,276 20,556 24,338 Hotel and resort operating properties .. 3,454 2,365 1,484 Other investments ...................... 13,874 15,283 7,097 --------- --------- --------- Total segment earnings ................ 103,655 125,065 104,231 Interest income .......................... 11,730 17,781 28,147 Interest expense ......................... (20,640) (27,369) (34,765) General and administrative expenses ...... (14,081) (14,134) (13,011) Depreciation and amortization ............ (17,773) (17,613) (20,814) --------- --------- --------- Operating Income ....................... 62,891 83,730 63,788 Gain on sales and disposition of real estate from continuing operations ...... 7,121 8,990 1,737 Loss on sale of limited partnership interests .............................. -- (3,750) -- Write-down of mortgages and notes receivable ............................. (18,798) -- -- Provision for loss on real estate ........ (750) (3,212) (3,184) Write-down of equity securities available for sale ............................... (961) (8,476) -- Gain on sale of marketable equity securities ............................. 2,607 -- 6,749 Minority interest in net earnings of Stratosphere Corp ...................... -- (1,943) (450) Income tax benefit (expense) ............. 6,495 (7,480) 30,077 Income from discontinued operations ...... 9,492 6,007 6,117 General partner's share of net income .... (8,737) (10,698) (38,644) --------- --------- --------- Net earnings-limited partners' unitholders $ 59,360 $ 63,168 $ 66,190 ========= ========= ========= - ---------- (1) Primarily interest income on U.S. Government and Agency obligations and other short-term investments and Icahn note receivable. DECEMBER 31, ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- Assets: Rental real estate ....................... $ 340,062 $ 359,700 $ 358,597 Hotel and casino operating property ...... 174,249 171,430 184,191 Land and construction-in-progress ........ 43,459 40,415 69,429 Hotel and resort operating properties .... 41,526 44,346 43,990 Other investments ........................ 231,050 479,104 458,372 ---------- ---------- ---------- 830,346 1,094,995 1,114,579 Reconciling items ........................ 659,584 465,481 469,772 ---------- ---------- ---------- Total ................................... $1,489,930 $1,560,476 $1,584,351 ========== ========== ========== Real estate investment capital expenditures: Acquisitions: Rental real estate ....................... $ -- $ 18,226 $ -- Land and construction-in-progress ........ -- -- -- Hotel and casino operating property ...... -- -- -- Hotel and resort operating properties .... -- -- -- ---------- ---------- ---------- $ -- $ 18,226 $ -- ========== ========== ========== Developments: Rental real estate ....................... $ 413 $ 181 $ 1,064 Land and construction-in-progress ........ -- 1,138 3,804 Hotel and casino operating property ...... 18,667 2,582 48,909 Hotel and resort operating properties .... 1,067 1,995 13,753 ---------- ---------- ---------- $ 20,147 $ 5,896 $ 67,530 ========== ========== ========== F-30
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. COMMITMENTS AND CONTINGENCIES a. In January 2002, Kmart Corp., a tenant leasing seven properties owned by the Company which represent approximately $1,374,000 in annual rentals, filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. Pursuant to an order of the Bankruptcy Court, four leases have been rejected representing approximately $713,000 in annual rents. The Company recorded a provision for loss of approximately $1.9 million on the four properties, whose leases were rejected, for the year ended December 31, 2001. The Company has not been notified regarding the three remaining leases representing approximately $661,000 in annual rents. At December 31, 2003 and 2002, the carrying value of the seven properties was approximately $5,482,000 and $6,529,000, respectively, which management believes is less than the estimate of net realizable value. Tiffiny Decorating Company ("Tiffiny"), a subcontractor to Great Western Drywall ("Great Western"), filed a legal action against Stratosphere Corporation, Stratosphere Development, LLC, American Real Estate Holdings Limited Partnership (collectively referred to as the "Stratosphere Parties"), Great Western, Nevada Title and Safeco Insurance, Case No. A443926 in the Eighth Judicial District Court of the State of Nevada. The legal action asserts claims that include breach of contract, unjust enrichment and foreclosure of lien. The Stratosphere Parties have filed a cross-claim against Great Western in that action. Additionally, Great Western has filed a separate legal action against the Stratosphere Parties setting forth the same disputed issues. That separate action, Case No. A448299 in the Eighth Judicial Court of the State of Nevada, has been consolidated with the case brought by Tiffiny. The initial complaint brought by Tiffiny asserts that Tiffiny performed certain construction services at the Stratosphere and was not fully paid for those services. Tiffiny claims the sum of $521,562 against Great Western, the Statosphere Parties, and the other defendants, which the Stratosphere Parties contend has been paid to Great Western for payment to Tiffiny. Great Western is alleging that it is owed payment from the Stratosphere Parties for work performed and for delay and disruption damages. Great Western is claiming damages in the sum of $3,935,438 plus interest, costs and legal fees from the Stratosphere Parties. This amount apparently includes the Tiffiny claim. The Stratosphere Parties have evaluated the project and have determined that the amount of $1,004,059, of which $195,953 and $371,973 were disbursed to Tiffiny and Great Western in 2002, respectively, is properly due and payable to satisfy all claims for the work performed, including the claim by Tiffiny. The remaining amount has been segregated in a separate interest bearing account. The Stratosphere Parties intend to vigorously defend the action for claims in excess of $1,004,059. c. In January 2002, the Cape Cod Commission, (the "Commission"), a Massachusetts regional planning body created in 1989, concluded that AREP's New Seabury development is within its jurisdiction for review and approval (the "Administrative Decision"). It is the Company's position that the proposed residential, commercial and recreational development is in substantial compliance with a special permit issued for the property in 1964 and is therefore exempt from the Commission's jurisdiction and that Commission is barred from exercising jurisdiction pursuant to a 1993 settlement agreement between the Commission and a prior owner of the New Seabury property (the "Settlement Agreement"). In February 2002, New Seabury Properties LLC ("New Seabury"), an AREP subsidiary and owner of the property, filed in Barnstable County Massachusetts Superior Court, a civil complaint appealing the Administrative Decision by the Commission, and a separate civil complaint to find the Commission in contempt of the Settlement Agreement. The Court subsequently consolidated the two complaints into one proceeding. In July 2003, New Seabury and the Commission filed cross motions for summary judgment. F-31
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Also, in July 2003, in accordance with a Court ruling, the Commission reconsidered the question of its jurisdiction over the initial development proposal and over a modified development proposal that New Seabury filed in March 2003. The Commission concluded that both proposals are within its jurisdiction (the Second Administrative Decision). In August 2003, New Seabury filed in Barnstable County Massachusetts Superior Court another civil complaint appealing the Second Administrative Decision to find the Commission in contempt of the Settlement Agreement. In November 2003, the Court ruled in New Seabury's favor on its July 2003 motion for partial summary judgment, finding that the special permit remains valid and that the modified development proposal is in substantial compliance with the Special Permit and therefore exempt from the Commission's jurisdiction (the Court did not yet rule on the initial proposal). Under the modified development proposal New Seabury could potentially develop up to 278 residential units and 145,000 square feet of commercial space. In March 2004, New Seabury moved for Summary Judgment to dispose of remaining claims under all three complaints and to obtain a final judgment from the Court. Also in March 2004, the Commission cross-moved for summary judgment on certain claims under each complaint. Under the initial proposal, New Seabury could potentially build up to 675 residential/hotel units and 80,000 square feet of commercial space. The Company cannot predict the effect on the development process if it loses any appeal or if the Commission is ultimately successful in asserting jurisdiction over any of the development proposals. The General Partner monitors all tenant bankruptcies and defaults and may, when it deems it necessary or appropriate, establish additional reserves for such contingencies. In addition, in the ordinary course of business, the Company, its subsidiaries and other companies in which the Company has invested are parties to various legal actions. In management's opinion, the ultimate outcome of such legal actions will not have a material effect on the Company's consolidated financial statements taken as a whole. 23. FAIR VALUE OF FINANCIAL INSTRUMENTS CASH AND CASH EQUIVALENTS, RECEIVABLES, NOTE RECEIVABLE DUE FROM AFFILIATE, ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES AND THE PREFERRED LIMITED PARTNERSHIP UNITS LIABILITY The carrying amount of cash and cash equivalents, receivables, note receivable due from affiliate, and accounts payable, accrued expenses and other liabilities and the Preferred Limited Partnership Units Liability are carried at cost, which approximates their fair value. MORTGAGES AND NOTES RECEIVABLE The fair values of the mortgages and notes 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 and notes receivable satisfied after year end are based on the amount of the net proceeds received. The fair values of the mortgages and notes receivable which are current are based on the discounted cash flows of their respective payment streams. The approximate estimated fair values of the mortgages and notes receivable held as of December 31, 2003 and 2002 are summarized as follows (in $000's): AT DECEMBER 31, 2003 AT DECEMBER 31, 2002 -------------------- -------------------- NET ESTIMATED NET ESTIMATED INVESTMENT FAIR VALUE INVESTMENT FAIR VALUE ---------- ---------- ---------- ---------- Total $ 50,272 $ 55,000 $ 51,449 $ 53,973 ======== ======== ======== ======== The net investment at December 31, 2003 and 2002 is equal to the carrying amount of the mortgage receivable less any deferred income recorded. F-32
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) MORTGAGES PAYABLE The approximate estimated fair values of the mortgages payable as of December 31, 2003 and 2002 are summarized as follows (in $000's): AT DECEMBER 31, 2003 AT DECEMBER 31, 2002 -------------------- -------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE ----- ---------- ----- ---------- Total $180,989 $185,000 $171,848 $190,000 ======== ======== ======== ======== 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. 24. EMPLOYEE BENEFIT PLANS a. Employees of the Company who are members of various unions are covered by union-sponsored, collectively bargained, multi-employer health and welfare and defined benefit pension plans. The Company recorded expenses for such plans of approximately $7,600,000, $6,500,000 and $4,900,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Sufficient information is not available from the plans' sponsors to permit the Company to determine the adequacy of the plans' funding status. b. The Company has retirement savings plans under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plans allow employees to defer, within prescribed limits, up to 15% of their income on a pre-tax basis through contributions to the plans. The Company currently matches, within prescribed limits, up to 6% of eligible employees' compensation at rates ranging from 33% to 50%. The Company recorded charges for matching contributions of approximately $422,000, $433,000 and $477,000, for the years ended December 31, 2003, 2002 and 2001, respectively. 25. REPURCHASE OF DEPOSITARY UNITS The Company has previously been authorized to repurchase up to 1,250,000 Depositary Units. As of December 31, 2003, the Company has purchased 1,137,200 Depositary Units at an aggregate cost of approximately $11,921,000. 26. SUBSEQUENT EVENTS On January 5, 2004, American Casino & Entertainment Properties LLC ("American Casino"), an indirect wholly-owned subsidiary of the Company, entered into an agreement to acquire two Las Vegas casino/hotels, Arizona Charlie's Decatur and Arizona Charlie's Boulder from Carl C. Icahn and an entity affiliated with Mr. Icahn, for an aggregate consideration of $125.9 million. The closing of the acquisition is subject to certain conditions, including among other things, obtaining all approvals necessary under the gaming laws. The terms of the transaction were approved by the Audit Committee, who received an opinion from its financial advisor as to the fairness of the consideration to be paid from a financial point of view. Upon receiving all approvals necessary under gaming laws and upon closing of the acquisition, the AREH will transfer 100% of the common stock of Stratosphere Corporation ("Stratosphere") to American Casino. As a result, following the acquisition and contribution, American Casino will own and operate three gaming and entertainment properties in the Las Vegas metropolitan area. Also, in January 2004, American Casino closed on its offering of Senior Secured Notes Due 2012. The Notes, in the aggregate principal amount of $215 million, bear interest at the rate of 7.85% per annum. The proceeds will be held in escrow pending receipt of all approvals necessary under gaming laws and certain other conditions in connection with the acquisition of Arizona Charlie's Decatur and Boulder. The amount raised in excess of the acquisition cost and expenses will be used to repay intercompany debt and for general business purposes by the Company and its subsidiaries. Arizona Charlie's Decatur is located on approximately 17 acres of land, four miles west of the Las Vegas strip. An estimated 500,000 people live within a five-mile radius of the property. The property is easily accessible from Route 95, a major highway in Las Vegas. Arizona Charlie's Decatur contains approximately 52,000 square feet of gaming space, 258 hotel rooms, four restaurants and three bars. The property targets repeat customers from the surrounding communities. In 2003, revenues were $67.9 million. Arizona Charlie's Boulder is located on approximately 24 acres of land, seven miles east of the Las Vegas strip, near an I-515 interchange. The I-515 is the most heavily traveled east/west highway in Las Vegas. An estimated 423,000 people live within a five-mile radius of the property. Arizona Charlie's Boulder contains approximately 41,000 square feet of gaming space, 303 hotel rooms, four restaurants and a 202-space recreational vehicle park. As with the Arizona Charlie's Decatur property, the property targets repeat customers from the surrounding communities. In 2003, revenues were $31.2 million. F-33
Exhibit 99.4 ITEM 15. 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 Item 8 (Exhibit 99.3 to this Form 8-K): Report of Independent Registered Public Accounting Firm .....................F-1 Consolidated Balance Sheets -- December 31, 2003 and 2002....................F-2 Consolidated Statements of Earnings -- Years ended December 31, 2003, 2002 and 2001...................................................................F-3 Consolidated Statements of Changes in Partners' Equity and Comprehensive Income -- Years ended December 31, 2003, 2002, and 2001....................F-4 Consolidated Statements of Cash Flows -- Years ended December 31, 2003, 2002 and 2001..............................................................F-5 Notes to Consolidated Financial Statements...................................F-7 (a)(2) Financial Statement Schedules: Schedule III: Real Estate Owned and Revenues Earned (by tenant or guarantor, as applicable) is included herein. 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 (incorporated by reference to AREP's Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004). 3.2 -- Amended and Restated Agreement of Limited Partnership of AREP, dated as of May 12, 1987 (incorporated by reference to AREP's Exhibit 3.2 to Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004). 3.3 -- Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of AREP (filed as Exhibit 3.3 to AREP's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 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 (incorporated by reference to AREP's Exhibit 3.4 to Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004.). 3.5 -- Amended and Restated Agreement of Limited Partnership of the Subsidiary, dated as of July 1, 1987 (incorporated by reference to AREP's Exhibit 3.5 to Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004). 3.6 -- Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of AREP dated as of August 16, 1996 and filed as Exhibit 10.1 to 8-K filed on August 16, 1996 and incorporated herein by reference. 3.7 -- Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of the Subsidiary dated August 16, 1996 filed as Exhibit 10.2 to the 8-K dated August 16, 1996 and incorporated herein by reference. 3.8 -- Amendment No. 3. To the Amended and Restated Agreement of Limited Partnership of AREP dated May 9, 2002. (Included in the annual report on 10-K for the year ended December 31, 2002 and incorporated herein by reference) 3.9 -- Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership of the Subsidiary IV-1
dated June 14, 2002. (Included in the annual report on 10-K for the year ended December 31, 2002 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 (incorporated by reference to AREP's Exhibit 4.1 to Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004). 4.2 -- Amendment No. 1 to the Depositary Agreement (filed as Exhibit 4.2 to AREP's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 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 -- Specimen 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). 10.10 -- Subscription Guaranty Agreement between AREP and High Coast Limited Partnership (the "Guarantor") (filed as Exhibit 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 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 (filed as Exhibit 10.12 to AREP's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.13 -- Subscription Agent Agreement (filed as Exhibit 10.13 to AREP's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.14 -- Subscription Guaranty Agreement between AREP and the Guarantor (filed as Exhibit 4.10 to Amendment No. 1 to AREP's Registration Statement on Form S-3 (Registration No. 333-31561) and incorporated herein by reference). 10.15 -- Registration Rights Agreement between AREP and the Guarantor (filed as Exhibit 4.11 to Amendment No. 1 to AREP's Registration Statement on Form S-3 (Registration No. 333-31561) and incorporated herein by reference). 10.16 -- Subscription Agent Agreement filed as Exhibit 99.1 to AREP's Registration Statement on Form S-3 (Registration No. 333-31561) and incorporated herein by reference). 10.17 -- Note dated December 27, 2001 from Carl Icahn to American Real Estate Holdings, L.P. in the amount of $250 million and incorporated herein by reference. 10.18 -- Pledge Agreement dated December 27, 2001 between American Real Estate Holdings, L.P. and Carl Icahn and incorporated herein by reference. 10.19 -- Accommodation Pledge Agreement dated December 27, 2001, between American Real Estate Holdings, L.P. and various pledgors and incorporated herein by reference. 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). 21 -- List of Subsidiaries (incorporated by reference to AREP's Exhibit 21 to Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004). 31.1 -- Certification of Chief Executive Officer - pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. IV-2
31.2 -- Certification of Chief Financial Officer - pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 -- Certification of Principal Executive Officer - pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Principal Financial Officer - pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 -- Audit Committee Charter was adopted on March 12, 2004 and is incorporated herein as Exhibit 99.1. 99.2 -- Code of Ethics for Principal Executive Officer and Senior Financial Officers of American Property Investors, Inc. and American Real Estate Partners, L.P. is incorporated herein as Exhibit 99.2. (b) Reports on Form 8-K: (1) A Form 8-K was filed on October 2, 2003 -- American Real Estate Partners, L.P. Acquires Certain Securities of NEG Inc. (2) A Form 8-K was filed on November 14, 2003 -- American Real Estate Partners, L.P. reports Third Quarter and Nine Months Results. (3) A Form 8-K was filed on November 19, 2003 -- American Real Estate Partners, L.P. Comments on Trading Activity. IV-3
SCHEDULE III
AMERICAN REAL ESTATE PARTNERS, L.P. a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED No. of Amount of State Locations Encumberances ----- --------- ------------- COMMERCIAL PROPERTY LAND AND BUILDING - ------------------------------------- Acme Markets, Inc. and FPBT of Penn. PA 1 Alabama Power Company AL 5 Amer Stores, Eckerd & Marburn NJ 1 Atrium VA 1 $ 18,716,286 Best Products Co., Inc. VA 1 Chesebrough-Pond's Inc. CN 1 Collins Foods International, Inc. OR 3 Collins Foods International, Inc. CA 1 Dillon Companies, Inc. MO 1 Dragon court MA 1 Duke Power Co. NC 1 Easco Corp. NC 1 European American Bank and Trust Co. NY 1 Farwell Bldg. MN 1 First National Supermarkets, Inc. CT 1 19,848,351 Fisher Scientific Company IL 1 Forte Hotels International, Inc. NJ 1 Fox Grocery Company WV 1 Gino's, Inc. MO 1 Gino's, Inc. OH 1 Golf Road IL 1 6,682,664 Grand Union Co. MD 1 Grand Union Co. NY 1 Grand Union Co. VA 1 Whalen NY 1 Gunite IN 1 G.D. Searle & Co. IL 1 G.D. Searle & Co. MN 1 G.D. Searle & Co. IL 1 Integra A Hotel and Restaurant Co. AL 1 Integra A Hotel and Restaurant Co. AL 1 Integra A Hotel and Restaurant Co. IL Integra A Hotel and Restaurant Co. IN 1 Integra A Hotel and Restaurant Co. OH 1 Integra A Hotel and Restaurant Co. MO 1 Integra A Hotel and Restaurant Co. TX 1 Integra A Hotel and Restaurant Co. MI 1 Intermountain Color KY 1 J.C. Penney Company, Inc. MA 1 Kings buffet FL 1 K-Mart Corporation LA 1 K-Mart Corporation WI 1 K-Mart Corporation MN 1 K-Mart Corporation FL 1 K-Mart Corporation IA 1 K-Mart Corporation FL 1 K-Mart Corporation FL 1 K-Mart Corporation IL 1 Kobacker Stores, Inc. MI 2 Kobacker Stores, Inc. KY 1 Kobacker Stores, Inc. OH 4 Landmark Bancshares Corporation MO 1 Levitz Furniture Corporation NY 1 Louisiana Power and Light Company LA 6 Louisiana Power and Light Company LA 7 Marsh Supermarkets, Inc. IN 1 Mid-South TN 1 12,700,000 Montgomery Ward, Inc. PA 1 Montgomery Ward, Inc. NJ 1 Morrison, Inc. AL 1 Part 1 - Real estate owned at December 31, 2003 - Accounted for under the: -------------------------------------------------------------------------- Operating Method ---------------- Rent due Amount and accrued Carried or received Initial Cost Cost of at close Reserve for in advance at to Company Improvements of period Depreciation end of period -------------- ------------ --------------- ------------ ------------- COMMERCIAL PROPERTY LAND AND BUILDING - ------------------------------------- Acme Markets, Inc. and FPBT of Penn. $ 2,004,393 $ 165,714 $ 2,170,107 $1,560,784 $14,736 Alabama Power Company Amer Stores, Eckerd & Marburn 2,045,641 2,045,641 (2) 1,632,403 Atrium 27,921,246 8,627 27,929,873 (2) 2,293,391 Best Products Co., Inc. 3,303,553 73,262 3,376,815 128,769 (25,833) Chesebrough-Pond's Inc. 1,549,805 1,549,805 (4) 1,191,062 (11,770) Collins Foods International, Inc. 250,812 250,812 (2) 16,352 Collins Foods International, Inc. 134,253 134,253 (2) 9,289 Dillon Companies, Inc. 546,681 546,681 382,676 (11,217) Dragon court 3,700,000 44,706 3,744,706 176,368 Duke Power Co. 3,464,225 3,464,225 344,114 Easco Corp. 157,560 888,452 1,046,012 44,423 European American Bank and Trust Co. 1,355,210 1,355,210 (2) 1,284,888 Farwell Bldg. 5,081,105 5,081,105 (4) 2,595,341 First National Supermarkets, Inc. Fisher Scientific Company 597,806 597,806 (2) 276,722 13,583 Forte Hotels International, Inc. Fox Grocery Company Gino's, Inc. Gino's, Inc. 314,012 314,012 22,415 Golf Road 9,288,263 11,591 9,299,854 (2) 1,395,053 Grand Union Co. Grand Union Co. 874,765 874,765 83,272 Grand Union Co. 266,468 266,468 (2) 200,472 Whalen 7,934,020 7,934,020 (2) 226,925 670 Gunite 1,134,565 1,134,565 (2) 1,065,034 G.D. Searle & Co. G.D. Searle & Co. 339,358 339,358 169,939 G.D. Searle & Co. 323,559 323,559 (2) 250,581 Integra A Hotel and Restaurant Co. 434,056 434,056 (4) 9,422 Integra A Hotel and Restaurant Co. 458,428 458,428 4,658 Integra A Hotel and Restaurant Co. Integra A Hotel and Restaurant Co. 443,249 443,249 (4) 4,235 1,082 Integra A Hotel and Restaurant Co. 204,192 204,192 (2) 4,082 Integra A Hotel and Restaurant Co. 414,887 414,887 9,503 Integra A Hotel and Restaurant Co. 438,097 438,097 10,465 Integra A Hotel and Restaurant Co. 431,486 431,486 (2) 9,851 1,219 Intermountain Color 560,444 560,444 523,715 J.C. Penney Company, Inc. 2,484,262 2,484,262 1,987,410 (20,854) Kings buffet 910,425 910,425 21,401 (279) K-Mart Corporation K-Mart Corporation K-Mart Corporation K-Mart Corporation K-Mart Corporation K-Mart Corporation 2,636,000 2,636,000 (2) 1,899,765 K-Mart Corporation K-Mart Corporation 600,000 600,000 15,866 Kobacker Stores, Inc. 112,225 112,225 1,068 Kobacker Stores, Inc. 88,364 88,364 769 Kobacker Stores, Inc. 298,496 298,496 2,487 Landmark Bancshares Corporation Levitz Furniture Corporation Louisiana Power and Light Company 5,636,053 5,636,053 483,544 Louisiana Power and Light Company 6,984,806 6,984,806 553,118 Marsh Supermarkets, Inc. 5,001,933 5,001,933 3,097,560 Mid-South 18,226,344 18,226,344 (2) 642,413 Montgomery Ward, Inc. 3,289,166 3,289,166 (4) 2,290,820 Montgomery Ward, Inc. 1,178,030 1,178,030 (4) 12,812 Morrison, Inc. 858,112 858,112 21,353 Part 2 - Revenues earned for the Year ended December 31, 2003 -------------------------------- Financing Method ---------------- Minimum lease Expended payments due Total for interest, and accrued revenue taxes, Net income Net at end applicable repairs and applicable Investment of period to period expenses to period ------------ ------------- -------------- -------------- --------------- COMMERCIAL PROPERTY LAND AND BUILDING - ------------------------------------- Acme Markets, Inc. and FPBT of Penn. $ 224,856 $ 125,712 $ 99,144 Alabama Power Company $ 4,849,942 557,828 0 557,828 Amer Stores, Eckerd & Marburn 565,214 36,898 528,316 Atrium 4,107,462 3,166,166 941,296 Best Products Co., Inc. 232,500 379,156 (146,656) Chesebrough-Pond's Inc. 141,236 9,094 132,142 Collins Foods International, Inc. 32,489 4,088 28,401 Collins Foods International, Inc. 17,646 2,817 14,829 Dillon Companies, Inc. 26,956 9,016 17,940 Dragon court 143,148 748,277 (605,129) Duke Power Co. 797,177 115,171 682,006 Easco Corp. 321,000 58,490 262,510 European American Bank and Trust Co. 175,000 36 174,964 Farwell Bldg. 1,151,819 313,290 838,529 First National Supermarkets, Inc. 19,815,365 1,856,505 874,730 981,775 Fisher Scientific Company 163,000 22,286 140,714 Forte Hotels International, Inc. 5,352,110 494,512 0 494,512 Fox Grocery Company 2,128,666 196,007 450 195,557 Gino's, Inc. 0 0 Gino's, Inc. 51,733 5,604 46,129 Golf Road 943,033 817,663 125,370 Grand Union Co. 0 0 0 Grand Union Co. 108,000 20,840 87,160 Grand Union Co. 24,150 4,464 19,686 Whalen 30,700 1,035,623 (1,004,923) Gunite 0 68,419 (68,419) G.D. Searle & Co. 0 447 (447) G.D. Searle & Co. 37,000 2,562 34,438 G.D. Searle & Co. 47,080 4,516 42,564 Integra A Hotel and Restaurant Co. 108,549 7,537 101,012 Integra A Hotel and Restaurant Co. 145,211 4,659 140,552 Integra A Hotel and Restaurant Co. 87,925 (3) 4,591 (3) 83,334 (3) Integra A Hotel and Restaurant Co. 131,038 4,600 126,438 Integra A Hotel and Restaurant Co. 82,000 3,266 78,734 Integra A Hotel and Restaurant Co. 91,818 7,919 83,899 Integra A Hotel and Restaurant Co. 103,960 11,942 92,018 Integra A Hotel and Restaurant Co. 149,589 10,134 139,455 Intermountain Color 98,422 7,968 90,454 J.C. Penney Company, Inc. 250,244 1,709 248,535 Kings buffet 103,161 37,478 65,683 K-Mart Corporation 0 24,295 (24,295) K-Mart Corporation 0 (119,468) 119,468 K-Mart Corporation 0 111,970 (111,970) K-Mart Corporation 0 8,713 (8,713) K-Mart Corporation 1,046,571 100,422 3,037 97,385 K-Mart Corporation 251,420 13,511 237,909 K-Mart Corporation 113,793 (3) 18,207 (3) 95,586 (3) K-Mart Corporation 58,582 41,145 17,437 Kobacker Stores, Inc. 123,964 $2,412 25,733 111 25,622 Kobacker Stores, Inc. 70,860 1,115 16,480 1,505 14,975 Kobacker Stores, Inc. 299,721 5,531 59,157 0 59,157 Landmark Bancshares Corporation 3,609,872 521,813 317 521,496 Levitz Furniture Corporation 0 0 0 Louisiana Power and Light Company 1,240,853 161,703 1,079,150 Louisiana Power and Light Company 1,299,275 174,703 1,124,572 Marsh Supermarkets, Inc. 506,300 131,844 374,456 Mid-South 1,684,918 1,306,639 378,279 Montgomery Ward, Inc. 314,280 29,294 284,986 Montgomery Ward, Inc. 193,586 12,930 180,656 Morrison, Inc. 0 77,996 (77,996) S-1
AMERICAN REAL ESTATE PARTNERS, L.P. a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED No. of Amount of State Locations Encumberances ----- --------- ------------- Morrison, Inc. GA 1 Morrison, Inc. VA 2 North Carolina National Bank SC 2 Occidental Petroleum Corp. CA 1 Ohio Power Co. Inc. OH 1 Park West KY 1 11,740,990 Park West UPS KY 1 17,605,571 Penske Corp. OH 1 Pneumo Corp. OH 1 Portland General Electric Company OR 1 33,628,639 Rayovac WI 1 15,415,558 Rouse Company MD 1 Safeway Stores, Inc. LA 1 Sams MI 1 Smith's Management Corp. NV 1 Southland Corporation FL 4 Southland Corporation FL 1 Staples NY 1 Stone Container WI 1 5,824,491 Stop & Shop NY 1 Stop & Shop NJ 1 Stop 'N Shop Co., Inc. VA 1 Super Foods Services, Inc. MI 1 4,327,290 SuperValu Stores, Inc. MN 1 SuperValu Stores, Inc. OH 1 SuperValu Stores, Inc. GA 1 SuperValu Stores, Inc. IN 1 Telecom Properties, Inc. OK 1 Telecom Properties, Inc. KY 1 The A&P Company MI 1 The TJX Companies, Inc. IL 1 Tire Distribution Systems Inc. TN 1 Tops Market NY 1 Toys "R" Us, Inc. TX 1 Waban NY 1 Watkins MO 1 Webcraft Technologies MD 1 Wetterau, Inc. PA 1 Wetterau, Inc. NJ 1 Wickes Companies, Inc. CA 1 RESIDENTIAL PROPERTY LAND AND BUILDING - -------------------------------------- Crown Cliffs AL 1 7,233,108 COMMERCIAL PROPERTY - LAND - -------------------------- Foodarama supermarkets, Inc. NY 1 Foodarama supermarkets, Inc. PA 1 Gino's, Inc. PA 1 Gino's, Inc. MA 1 Gino's, Inc. NJ 1 J.C. Penney Company, Inc. NY 1 COMMERCIAL PROPERTY - BUILDING - ------------------------------ AT&T CA 1 Bank of America GA 1 Part 1 - Real estate owned at December 31, 2003 - Accounted for under the: -------------------------------------------------------------------------- Operating Method ---------------- Rent due Amount and accrued Carried or received Initial Cost Cost of at close Reserve for in advance at to Company Improvements of period Depreciation end of period -------------- ------------ --------------- ------------ ------------- Morrison, Inc. Morrison, Inc. 1,765,899 1,765,899 47,355 North Carolina National Bank 1,450,047 1,450,047 646,536 10,092 Occidental Petroleum Corp. Ohio Power Co. Inc. Park West 19,199,296 19,199,296 (2) 2,793,207 Park West UPS 21,109,367 21,109,367 (2) 2,479,441 (1,000) Penske Corp. 524,956 524,956 19,525 (9,533) Pneumo Corp. 1,629,713 1,629,713 68,492 Portland General Electric Company Rayovac 22,065,852 22,065,852 (2) 2,243,143 Rouse Company Safeway Stores, Inc. 1,782,885 1,782,885 (4) 1,134,894 Sams 8,844,225 8,844,225 2,340,082 Smith's Management Corp. Southland Corporation 862,367 862,367 513,035 Southland Corporation Staples 2,391,540 2,391,540 (2) 265,276 Stone Container 9,028,574 9,028,574 1,287,134 Stop & Shop 900,865 900,865 83,272 Stop & Shop 800,770 800,770 74,021 Stop 'N Shop Co., Inc. 2,158,099 2,158,099 57,647 Super Foods Services, Inc. SuperValu Stores, Inc. SuperValu Stores, Inc. SuperValu Stores, Inc. SuperValu Stores, Inc. Telecom Properties, Inc. Telecom Properties, Inc. 340,321 340,321 1,181 The A&P Company 999,172 999,172 13,041 The TJX Companies, Inc. Tire Distribution Systems Inc. 120,946 120,946 (4) 75,200 Tops Market 262,357 262,357 24,249 (15,726) Toys "R" Us, Inc. Waban 8,478,095 8,478,095 (2) 1,164,396 Watkins Webcraft Technologies Wetterau, Inc. (4) Wetterau, Inc. 747,116 747,116 32,088 Wickes Companies, Inc. 700,333 700,333 (4) 195,738 (4,533) RESIDENTIAL PROPERTY LAND AND BUILDING - -------------------------------------- Crown Cliffs 11,457,646 93,253 11,550,899 (1) 3,662,776 COMMERCIAL PROPERTY - LAND - -------------------------- Foodarama supermarkets, Inc. 140,619 140,619 (2) Foodarama supermarkets, Inc. 112,554 112,554 (2) 1,200 Gino's, Inc. 36,271 36,271 (2) Gino's, Inc. 50,904 50,904 (2) Gino's, Inc. 61,050 61,050 (2) J.C. Penney Company, Inc. 51,009 51,009 (4) 458 COMMERCIAL PROPERTY - BUILDING - ------------------------------ AT&T 2,546,139 23,566 2,569,705 (4) 82,237 Bank of America Part 2 - Revenues earned for the Year ended December 31, 2003 -------------------------------- Financing Method ---------------- Minimum lease Expended payments due Total for interest, and accrued revenue taxes, Net income Net at end applicable repairs and applicable Investment of period to period expenses to period ----------- ------------- -------------- -------------- --------------- Morrison, Inc. 183,360 0 183,360 Morrison, Inc. 0 84,818 (84,818) North Carolina National Bank 69,476 69,670 (194) Occidental Petroleum Corp. 0 1,228 (1,228) Ohio Power Co. Inc. 3,221,531 114,600 305,332 0 305,332 Park West 1,559,346 1,473,397 85,949 Park West UPS 1,959,010 1,734,716 224,294 Penske Corp. 63,551 44,467 19,084 Pneumo Corp. 243,750 54,793 188,957 Portland General Electric Company 46,892,351 (414,424) 4,074,139 2,685,000 1,389,139 Rayovac 1,993,330 1,786,171 207,159 Rouse Company 359,392 134,037 225,355 Safeway Stores, Inc. 85,150 11,974 73,176 Sams 1,245,569 161,517 1,084,052 Smith's Management Corp. 32,531 9,856 22,675 Southland Corporation 100,359 3,748 96,611 Southland Corporation 9,993 (3) 330 (3) 9,663 (3) Staples 352,729 120,169 232,560 Stone Container 885,334 678,909 206,425 Stop & Shop 108,000 20,818 87,182 Stop & Shop 96,000 18,505 77,495 Stop 'N Shop Co., Inc. 109,255 179,573 (70,318) Super Foods Services, Inc. 8,670,045 931,980 396,831 535,149 SuperValu Stores, Inc. 0 0 0 SuperValu Stores, Inc. 0 0 0 SuperValu Stores, Inc. 0 3,430 (3,430) SuperValu Stores, Inc. 72,678 14,354 58,324 Telecom Properties, Inc. (252) 3,654 (3,906) Telecom Properties, Inc. 34,672 6,763 27,909 The A&P Company 77,851 106,413 (28,562) The TJX Companies, Inc. 29,575 5,996 23,579 Tire Distribution Systems Inc. 13,200 0 13,200 Tops Market 31,453 6,277 25,176 Toys "R" Us, Inc. 0 136,637 (136,637) Waban 795,285 196,043 599,242 Watkins 0 0 0 Webcraft Technologies 0 (22,313) 22,313 Wetterau, Inc. 0 45,072 (45,072) Wetterau, Inc. 150,800 25,788 125,012 Wickes Companies, Inc. 145,452 38,825 106,627 RESIDENTIAL PROPERTY LAND AND BUILDING - -------------------------------------- Crown Cliffs 2,000,409 1,871,243 129,166 COMMERCIAL PROPERTY - LAND - -------------------------- Foodarama supermarkets, Inc. 16,800 0 16,800 Foodarama supermarkets, Inc. 14,400 0 14,400 Gino's, Inc. 8,571 0 8,571 Gino's, Inc. 8,571 0 8,571 Gino's, Inc. 8,571 0 8,571 J.C. Penney Company, Inc. 5,500 0 5,500 COMMERCIAL PROPERTY - BUILDING - ------------------------------ AT&T 449,548 247,906 201,642 Bank of America 2,798,908 40,573 292,259 26,584 265,675 S-2
AMERICAN REAL ESTATE PARTNERS, LP a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED No. of Amount of State Locations Encumberances ----- --------- ------------- Baptist Hospital 1 TN 1 19,885,664 Baptist Hospital 2 TN 1 7,380,651 Harwood Square IL 1 Safeway Stores, Inc. CA 1 Toys "R" Us, Inc. RI 1 United Life & Accident Ins. Co. NH 1 Wickes Companies, Inc. PA 1 ------------- 180,989,263 ------------- HOTEL AND RESORT OPERATING PROPERTIES - ------------------------------------- New Seabury MA Holiday Inn FL Bayswater FL ------------- 0 ------------- LESS HELD FOR SALE (82,861,069) - ------------------ ------------- $ 98,128,194 ============= Part 1 - Real estate owned at December 31, 2003 - Accounted for under the: -------------------------------------------------------------------------- Operating Method ---------------- Rent due Amount and accrued Carried or received Initial Cost Cost of at close Reserve for in advance at to Company Improvements of period Depreciation end of period -------------- ------------ --------------- ------------ ------------- Baptist Hospital 1 Baptist Hospital 2 Harwood Square 6,943,373 800 6,944,173 (4) 4,186,890 29,900 Safeway Stores, Inc. 558,652 558,652 558,652 Toys "R" Us, Inc. United Life & Accident Ins. Co. Wickes Companies, Inc. ------------ ---------- ------------ ----------- -------- 252,397,367 1,309,971 253,707,338 51,001,774 (23,481) ------------ ---------- ------------ ----------- -------- HOTEL AND RESORT OPERATING PROPERTIES - ------------------------------------- New Seabury 37,490,989 (403,250) 37,087,739 6,704,739 Holiday Inn 11,103,847 365,123 11,468,970 (4) 5,104,068 280,213 Bayswater 5,310,365 5,310,365 531,855 ------------ ---------- ------------ ----------- -------- 53,905,201 (38,127) 53,867,074 12,340,662 280,213 ------------ ---------- ------------ ----------- -------- LESS HELD FOR SALE (146,395,413) (20,218) (146,415,631) (20,152,684) - ------------------ ------------ ---------- ------------ ----------- -------- $159,907,155 $1,251,626 $161,158,781 $43,189,752 $256,732 ============ ========== ============ =========== ======== Part 2 - Revenues earned for the Year ended December 31, 2003 -------------------------------- Financing Method ---------------- Minimum lease Expended payments due Total for interest, and accrued revenue taxes, Net income Net at end applicable repairs and applicable Investment of period to period expenses to period ------------ ------------- -------------- ------------- --------------- Baptist Hospital 1 23,438,376 1,105,517 1,862,951 1,574,065 288,886 Baptist Hospital 2 8,726,374 410,319 691,443 583,409 108,034 Harwood Square 790,838 246,064 544,774 Safeway Stores, Inc. 26,900 495 26,405 Toys "R" Us, Inc. 797,816 10,430 77,173 0 77,173 United Life & Accident Ins. Co. 3,165,914 274,017 950 273,067 Wickes Companies, Inc. 2,347,187 467,454 0 467,454 ------------ ---------- ----------- ----------- ----------- 137,355,573 1,276,073 43,298,285 24,714,252 18,584,033 ------------ ---------- ----------- ----------- ----------- HOTEL AND RESORT OPERATING PROPERTIES - ------------------------------------- New Seabury 11,678,516 10,996,669 681,847 Holiday Inn 3,911,515 3,253,372 658,143 Bayswater 2,914,000 2,789,000 125,000 ------------ ---------- ----------- ----------- ----------- 0 0 18,504,031 17,039,041 1,464,990 ------------ ---------- ----------- ----------- ----------- LESS HELD FOR SALE (22,459,690) (16,320,692) (6,138,998) - ------------------ ------------ ---------- ----------- ----------- ----------- $137,355,573 $1,276,073 $39,342,626 $25,432,601 $13,910,025 ============ ========== =========== =========== =========== - ---------- (1) The Company owns a 70% interest in the joint venture which owns this property. (2) Such properties are being classified as held for sale at 12/31/03. (3) Sold in 2003 and included in discontinued ops. (4) Such properties have been reclassified to held for sale during the quarter ended March 31, 2004. As a result, for the year ended December 31, 2003, such operating lease and hotel and resort operating revenues, expenses and net income have been reclassified to discontinued operations. S-3
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 2003 (IN $000'S) 1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel and resort operating properties and development properties, was carried at the beginning of the period, with the total at the close of the period, is shown below: Balance -- January 1, 2003................................. $ 303,460 Additions during period.................................... 1,675 Reclassifications during period from financing leases...... 5,065 Reclassifications during period to held for sale........... (146,416) Disposals during period.................................... (2,626) ----------- Balance December 31, 2003.................................. $ 161,158 =========== 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, 2003...................................$ 54,978 Depreciation during period................................... 8,605 Reclassifications during period to held for sale............. (20,153) Disposals during period...................................... (240) ----------- Balance -- December 31, 2003.................................$ 43,190 =========== 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 close of the period, is shown below: Balance -- January 1, 2003...................................$ 155,458 Reclassifications during period to operating properties...... (5,065) Disposals during period...................................... (7,708) Amortization of unearned income.............................. 13,115 Minimum lease rentals received............................... (18,444) ----------- Balance -- December 31, 2003.................................$ 137,356 =========== 3. The aggregate cost of real estate owned for Federal income tax purposes is $377,539 before accumulated depreciation. S-4
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED) YEAR ENDED DECEMBER 31, 2003 (IN $000'S) 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 and hotel and resort operating properties........................................................................... $ 13,910 Net income applicable to Stratosphere hotel and casino.................................. 22,716(1) Net income applicable to land, house and condominium sales.............................. 4,136 Net income applicable to NEG, Inc....................................................... 19,522(2) Add: Interest income on U.S. Government and Agency Obligations and other investments........................................................................ 22,543 Dividend and unallocated other income................................................ 3,027 --------- 85,854 --------- Deduct expenses not allocated: General and administrative expenses.................................................. 6,850 Nonmortgage interest expense......................................................... 2,449 Equity in losses of GB Holdings, Inc................................................. 3,466 Other................................................................................ 3,703 --------- 16,468 --------- Operating income after income taxes..................................................... 69,386 Provision for loss on real estate....................................................... (750) Gain on sale of real estate............................................................. 7,121 Loss on sale of securities.............................................................. (961) Write-down of securities................................................................ (18,798) Write-down of mortgages and notes receivable............................................ 2,607 --------- Income from continuing operations....................................................... 58,605 Discontinued Operations: Income from discontinued operations.................................................. 6,139 Net gain on property transactions.................................................... 3,353 --------- Earnings from discontinued operations................................................... 9,492 --------- Net earnings......................................................................... $ 68,097 ========= - -------------- (1) Includes depreciation expense of $12,276 and income tax benefit of $6,720. (2) Includes income tax expense of $225. S-5
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 2002 (IN $000'S) 1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel and resort 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, 2002................................ $ 273,887 Additions during period................................... 20,886 Reclassifications during period from financing leases..... 13,503 Write downs............................................... (1,992) Disposals during period................................... (2,824) ---------- Balance -- December 31, 2002.............................. $ 303,460 ========== 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, 2002................................ $ 48,057 Depreciation during period................................ 7,105 Disposals during period................................... (184) ---------- Balance -- December 31, 2002.............................. $ 54,978 ========= 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 7 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 close of the period, is shown below: Balance -- January 1, 2002............................ $ 176,757 Reclassifications during period....................... (13,503) Write downs........................................... (257) Disposals during period............................... (1,560) Amortization of unearned income....................... 14,722 Minimum lease rentals received........................ (20,663) Other................................................. (38) ---------- Balance -- December 31, 2002.......................... $ 155,458 ========== 3. The aggregate cost of real estate owned for Federal income tax purposes is $382,208 before accumulated depreciation. S-6
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED) YEAR ENDED DECEMBER 31, 2002 (IN $000'S) 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 and hotel and resort operating properties............................................................................ $ 14,128 Net income applicable to Stratosphere hotel and casino................................... 8,916(1) Net income applicable to land, house and condominium sales............................... 20,384 Net income applicable to NEG Inc......................................................... 9,415(2) Add: Interest income on U.S. Government and Agency Obligations and other investments..... 30,344 Dividend and unallocated other income............................................... 2,684 Equity in earnings of GB Holdings, Inc.............................................. 305 --------- 86,176 --------- Deduct expenses not allocated: General and administrative expenses................................................. 7,029 Non-mortgage interest expense....................................................... 1,272 Other............................................................................... 1,625 --------- 9,926 --------- Operating income after income taxes...................................................... 76,250 Provision for loss on real estate........................................................ (3,212) Gain on sale of real estate.............................................................. 8,990 Write down of securities................................................................. (12,226) Minority interest in net earnings of Stratosphere Corporation............................ (1,943) --------- Income from continuing operations........................................................ 67,859 Discontinued Operations: Income from discontinued operations................................................. 6,007 --------- Net earnings........................................................................ $ 73,866 ========= - -------------- (1) Includes depreciation expense of $13,328 and income tax expense of $2,412. (2) Includes income tax expense of $5,068. S-7
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 2001 (IN $000'S) 1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel and resort 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, 2001............................................ $ 262,356 Additions during period............................................... 14,586 Reclassifications during period from financing leases................. 9,755 Write downs........................................................... (3,184) Reclassifications during period to assets held for sale............... (8,072) Other reclassifications............................................... (1,130) Disposals during period............................................... (424) ---------- Balance -- December 31, 2001.......................................... $ 273,887 ========== 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, 2001............................................ $ 43,471 Depreciation during period............................................ 6,252 Disposals during period............................................... (266) Reclassifications during period to assets held for sale............... (1,400) --------- Balance -- December 31, 2001.......................................... $ 48,057 ========= Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated 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, 2001............................................ $ 193,428 Reclassifications during period to operating properties............... (9,755) Disposals during period............................................... (71) Amortization of unearned income....................................... 16,935 Minimum lease rentals received........................................ (23,780) ---------- Balance -- December 31, 2001.......................................... $ 176,757 ========== 3. The aggregate cost of real estate owned for Federal income tax purposes is $399,813 before accumulated depreciation. S-8
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND REVENUES EARNED -- (CONTINUED) YEAR ENDED DECEMBER 31, 2001 (IN $000'S) 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 and hotel and resort operating properties........................................................................... $ 15,733 Net income applicable to Stratosphere hotel and casino.................................. 4,628(1) Net income applicable to land, house and condominium sales.............................. 12,967 Net income applicable to NEG, Inc....................................................... 37,300(2) Add: Interest income on U.S. Government and Agency Obligations and other investments.... 30,367 Dividend and unallocated other income.............................................. 4,989 Equity in earnings of GB Holdings, Inc............................................. 1,807 --------- 107,791 --------- Deduct expenses not allocated: General and administrative expenses................................................ 7,080 Non-mortgage interest expense...................................................... 5,306 Other.............................................................................. 1,540 --------- 13,926 --------- Operating income after income taxes..................................................... 93,865 Provision for loss on real estate....................................................... (3,184) Gain on sale of marketable equity and debt securities................................... 6,749 Gain on sale of real estate............................................................. 1,737 Minority interest in net earnings of Stratosphere Corporation........................... (450) --------- Income from continuing operations....................................................... 98,717 Discontinued Operations: Income from discontinued operations................................................ 6,117 --------- Net Earnings............................................................................ $ 104,834 ========= - -------------- (1) Includes depreciation expense of $11,257 and income tax expense of $513. (2) Includes depreciation expense of $6,163 and income tax benefit of $30,590. S-9
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE (ACCOUNTED FOR UNDER THE OPERATING METHOD) DECEMBER 31, 2003 (IN $000'S) AMOUNT AT WHICH CARRIED AT RESERVE FOR STATE CLOSE OF YEAR DEPRECIATION - ----- --------------- ------------ Alabama..................................... $ 13,301 $ 3,698 California.................................. 3,829 837 Connecticut................................. 1,550 1,191 Florida..................................... 18,553 5,636 Illinois.................................... 7,544 4,203 Indiana..................................... 5,445 3,633 Kentucky.................................... 989 525 Louisiana................................... 14,404 2,172 Massachusetts............................... 43,317 8,869 Michigan.................................... 9,956 2,353 Minnesota................................... 5,420 2,765 Missouri.................................... 962 392 New Jersey.................................. 2,726 119 New York.................................... 2,088 190 North Carolina.............................. 4,510 389 Ohio........................................ 2,767 111 Pennsylvania................................ 5,459 3,852 South Carolina.............................. 1,450 647 Tennessee................................... 121 76 Texas....................................... 438 10 Virginia.................................... 7,301 234 Wisconsin................................... 9,029 1,288 --------- --------- $ 161,159 $ 43,190 ========= ========= S-10
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 2003 (IN $000'S) NET STATE INVESTMENT - ----- ---------- Alabama......................................................... $ 4,850 Connecticut..................................................... 19,815 Georgia......................................................... 2,799 Iowa............................................................ 1,047 Kentucky........................................................ 71 Michigan........................................................ 8,794 Missouri........................................................ 3,610 New Hampshire................................................... 3,166 New Jersey...................................................... 5,352 Ohio............................................................ 3,521 Oregon.......................................................... 46,892 Pennsylvania.................................................... 2,347 Rhode Island.................................................... 798 Tennessee....................................................... 32,165 West Virginia................................................... 2,129 --------- $ 137,356 ========= S-11