As
filed with the Securities and Exchange Commission on
June 21, 2007
Registration
No.
333-
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
S-4
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF
1933
AMERICAN
REAL ESTATE PARTNERS, L.P.
(Exact
name of co-registrant as specified in its charter)
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Delaware
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6512
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13-3398766
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(State
or Other Jurisdiction of
Incorporation or
Organization)
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(Primary
Standard Industrial
Classification Code
Number)
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(I.R.S.
Employer
Identification Number)
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______________
AMERICAN
REAL
ESTATE FINANCE CORP.
(Exact
name of co-registrant as specified in its charter)
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Delaware
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6512
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20-1059842
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(State
or Other Jurisdiction of
Incorporation or
Organization)
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(Primary
Standard Industrial
Classification Code
Number)
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(I.R.S.
Employer
Identification Number)
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______________
AMERICAN
REAL
ESTATE HOLDINGS LIMITED PARTNERSHIP
(Exact
name of registrant of guarantee as specified in its
charter)
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Delaware
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6512
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13-3398767
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(State
or Other Jurisdiction of
Incorporation or
Organization)
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(Primary
Standard Industrial
Classification Code
Number)
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(I.R.S.
Employer
Identification Number)
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767
Fifth Avenue, Suite 4700
New York, New York
10153
(212) 702-4300
(Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Registrants’ Principal Executive
Offices)
Keith
A. Meister
Principal Executive Officer and Vice
Chairman of the Board
767 Fifth Avenue, Suite 4700
New York, New York
10153
(Name, Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Agent For Service)
Copies
to:
Julie
M. Allen, Esq.
Proskauer Rose LLP
1585
Broadway
New York, New York 10036
Telephone: (212) 969-3000
Facsimile:
(212) 969-2900
Approximate
date of commencement of the proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If
the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. ¨
If
this form is filed to register additional securities for an offering pursuant
to
Rule 462(b) under the Securities Act of 1933, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If
this form is a post-effective amendment filed pursuant to Rule 462(d) under
the
Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ¨
CALCULATION
OF REGISTRATION FEE
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Title of Each
Class of
Securities to be Registered
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Amount to be
Registered(1)
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Proposed
Maximum
Offering Price
Per Note(1)
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Proposed
Maximum
Aggregate
Offering Price(1)
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Amount of
Registration
Fee(2)
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7
1/8% Senior Notes due 2013
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$500,000,000
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100%
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$500,000,000
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$15,113.43
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Guarantee(3)
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—
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—
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—
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—
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(1)
Estimated
solely for the purpose of calculating the registration fee pursuant to Rule
457
under the Securities Act of 1933, as amended.
(2)
Pursuant
to Rule 457(f)(2) of the Securities Act of 1933, as amended, the registration
fee has been estimated based on the book value, as of March 31, 2007, of
$492,294,000 of the private notes to be received by the registrant in exchange
for the new notes to be issued hereunder in the exchange offer described
herein.
(3)
Pursuant
to Rule 457(n) under the Securities Act, no separate fee is payable with respect
to the guarantee.
The Registrants
hereby amend this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrants shall file a further
amendment that specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933, as amended, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), determines.
The
information in this Preliminary
Prospectus is not complete and may be changed. We may not exchange these
securities until the Registration Statement filed with the Securities and
Exchange Commission is effective. This Preliminary Prospectus is not an offer
to
exchange these securities and is not soliciting offers to exchange these
securities in any State where the exchange is not permitted.
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SUBJECT
TO COMPLETION, DATED
JUNE 21, 2007
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$500,000,000
AMERICAN
REAL ESTATE PARTNERS, L.P.
AMERICAN
REAL ESTATE FINANCE CORP.
OFFER
TO EXCHANGE OUR 7 1/8% SENIOR NOTES DUE 2013, WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ANY AND ALL OF OUR
OUTSTANDING 7 1/8% SENIOR NOTES DUE 2013
_________________
MATERIAL
TERMS OF THE EXCHANGE OFFER
We are
jointly and severally offering to exchange, upon the terms and subject to the
conditions set forth in this prospectus and the accompanying letter of
transmittal (which together constitute the exchange offer), $500,000,000 in
aggregate principal amount of our 7 1/8% senior exchange notes due 2013, or
the
new notes, for $500,000,000 in aggregate principal amount of our issued and
outstanding 7 1/8% senior notes due 2013, or the private notes, and,
collectively with the new notes, the notes.
·
The
terms of the new notes are
substantially identical to the private notes, except that the transfer
restrictions and registration rights relating to the private notes will not
apply to the new notes and the new notes will not provide for the payment of
liquidated damages under circumstances related to the timing and completion
of
the exchange offer.
·
Expires
5:00 p.m., New York City time, on
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2007, unless extended.
·
Subject
to the satisfaction or waiver of
specified conditions, we will exchange your validly tendered unregistered
private notes that have not been withdrawn prior to the expiration of the
exchange offer for an equal principal amount of new notes which have been
registered under the Securities Act of 1933, as amended, or the Securities
Act.
·
The
exchange offer is not subject to any
condition other than that the exchange offer not violate applicable law or
any
applicable interpretation of the staff of the Securities and Exchange
Commission, or the SEC, and other customary conditions.
·
You
may withdraw your tender of notes at
any time before the exchange offer expires.
·
The
exchange of notes should not be a
taxable exchange for U.S. federal income tax purposes.
·
We
will not receive any proceeds from the
exchange offer.
·
The
new notes will not be traded on any
national securities exchange and, therefore, we do not anticipate that an active
public market in the new notes will develop.
Please
refer to “Risk Factors” beginning on page 7 of this document for certain
important information.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of the notes to be issued in the exchange offer or
passed upon the adequacy or accuracy of this prospectus. Any representation
to
the contrary is a criminal offense.
The date
of
this prospectus
,
2007
i
This
prospectus is part of a registration statement that we have filed with the
SEC.
This prospectus does not contain all of the information included in the
registration statement. The registration statement filed with the SEC includes
exhibits that provide more details about the matters discussed in this
prospectus. You should carefully read this prospectus, the related exhibits
filed with the SEC and any prospectus supplement, together with the additional
information described below under the headings “Where You Can Find More
Information” and “Incorporation by Reference.” This prospectus incorporates
important business and financial information about us that is not included
in or
delivered with this prospectus. We will provide without charge to each person
to
whom a copy of this prospectus is delivered, upon written or oral request of
that person, a copy of any and all of this information. Requests for copies
should be directed to Investor Relations Department, American Real Estate
Partners, L.P., 769 Fifth Avenue, Suite 4700, New York, New York 10153;
(212) 702-4300. Our web site address is http://www.AREP.com. You should request
this information at least five business days in advance of the date on which
you
expect to make your decision with respect to the exchange offer.
In
any
event, in order to obtain timely delivery, you must request this information
prior to
,
2007, which is five business days before the expiration date of the exchange
offer.
You
should rely only on the information contained or incorporated by reference
in
this prospectus and in any accompanying prospectus supplement. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely
on
it. You should assume that the information appearing in this prospectus, any
prospectus supplement and any other document incorporated by reference is
accurate only as of the date on the front cover of those documents. We do not
imply that there has been no change in the information contained in this
prospectus or in our affairs since that date by delivering this
prospectus.
NOTICE
TO UNITED KINGDOM RESIDENTS
THE NOTES
WILL NOT BE OFFERED OR SOLD TO PERSONS IN THE UNITED KINGDOM, EXCEPT TO PERSONS
WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR
DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR
BUSINESSES OR OTHERWISE IN CIRCUMSTANCES WHICH HAVE NOT RESULTED AND WILL NOT
RESULT IN AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM WITHIN THE MEANING OF
THE
PUBLIC OFFERS OF SECURITIES REGULATIONS 1995. THIS OFFERING MEMORANDUM MAY
ONLY
BE ISSUED OR PASSED ON, IN OR INTO THE UNITED KINGDOM TO A PERSON WHO IS OF
A
KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986 (INVESTMENT
ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996 OR IS A PERSON TO WHOM SUCH DOCUMENT
MAY
OTHERWISE LAWFULLY BE ISSUED OR PASSED ON.
NOTICE
TO NEW HAMPSHIRE RESIDENTS
NEITHER
THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS
BEEN
FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT
A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE
OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE
OF
NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND
NOT
MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION
IS
AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE
OF
THE STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY
OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
ii
This
prospectus and the information incorporated herein by reference contain
“forward-looking statements” within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act; Section 27A of the
Securities Act; and pursuant to the Private Securities Litigation Reform Act.
These forward-looking statements are not historical facts, but rather our
beliefs and expectations based on our current expectations, estimates,
projections, beliefs and assumptions about our company and industry. Words
such
as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions are intended to identify forward-looking
statements. There statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors, some of which are beyond
our
control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward-looking statements.
These risks include those set forth in the section of this prospectus called
“Risk Factors.”
Those
risks are representative of factors that could affect the outcome of the
forward-looking statements. These and the other factors discussed elsewhere
in
this prospectus and the documents incorporated by reference herein are not
necessarily all of the important factors that cause our results to differ
materially from those expressed in our forward-looking statements. We caution
you not to place undue reliance on these forward-looking statements, which
reflect our view only as of the respective dates of this prospectus and the
documents incorporated herein by reference or other dates that are specified
in
those documents.
iii
This
summary highlights information contained in the documents incorporated herein
by
reference. This summary does not contain all of the information that you should
consider before deciding to make an investment decision. You should read this
entire prospectus carefully, including the “Risk Factors” section in this
prospectus; the financial statements and related notes contained in our Annual
Report on Form 10-K and Form 10-K/A for the fiscal year ended December 31,
2006, filed with the SEC on March 6, 2007 and March 16, 2007,
respectively; our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2007 filed with the SEC on May 10, 2007; and the documents
incorporated herein by reference . As used in this prospectus, “we,” “our,”
“ours,” “us,” “company” and “AREP” mean American Real Estate Partners, L.P. and,
unless the context otherwise indicates, include our consolidated
subsidiaries.
Our
Company
American
Real Estate Partners, L.P., or AREP, is a master limited partnership formed
in
Delaware on February 17, 1987. We are a diversified holding company owning
subsidiaries engaged in the following operating businesses: gaming, real
estate and home fashion. On April 22, 2007, American Entertainment
Properties Corp., or AEP, a wholly owned indirect subsidiary of AREP, entered
into a Membership Interest Purchase Agreement with W2007/ACEP Holdings, LLC,
an
affiliate of Whitehall Street Real Estate Funds, a series of real estate
investment funds affiliated with Goldman, Sachs & Co., or Whitehall Street
Real Estate Funds, to sell all of the issued and outstanding membership
interests of American Casino & Entertainment Properties, LLC, or ACEP, which
comprises our gaming operations. The parties expect to close the transaction
in
approximately December 2007. On February 9, 2007, we entered into an
agreement and plan of merger, pursuant to which we would acquire Lear
Corporation, or Lear, a publicly traded company that provides automotive
interior systems worldwide, for an aggregate consideration of approximately
$5.2 billion, including the assumption by the surviving entity of certain
outstanding indebtedness of Lear and refinancing of Lear’s existing term loan
and credit facility. The consummation of the transaction is subject to
regulatory approvals and shareholder vote.
Our
primary business strategy is to continually evaluate our existing operating
businesses with a view to maximizing value to our unitholders. We may also
seek
to acquire additional businesses that are distressed or in out-of-favor
industries and will consider the divestiture of businesses. In addition, we
invest our available liquidity in debt and equity securities with a view to
enhancing returns as we continue to assess further acquisitions of operating
businesses.
Our
general partner is American Property Investors, Inc., the general partner,
or
API, a Delaware corporation, which is indirectly wholly owned by Carl C. Icahn.
We own our businesses and conduct our investment activities through a subsidiary
limited partnership, American Real Estate Holdings Limited Partnership, or
AREH,
in which we own a 99% limited partnership interest, and its subsidiaries. API
also acts as the general partner for AREH. API has a 1% general partnership
interest in each of us and AREH. As of March 31, 2007, affiliates of
Mr. Icahn beneficially owned 55,655,382 units representing AREP limited
partner interests, or the depositary units, representing approximately 90.0%
of
the outstanding depositary units, and 10,304,013 cumulative pay-in-kind
redeemable preferred units, representing AREP limited partner interests, or
the
preferred units, representing approximately 86.5% of the outstanding preferred
units.
Our
depositary units, representing limited partnership interests, trade on the
New
York Stock Exchange under the symbol “ACP.”
Our
principal executive offices are located at 767 Fifth Avenue, Suite 4700, New
York, New York 10153. Our phone number is (212) 702-4300. Our web site address
is http://www.AREP.com.
American
Real Estate Finance Corp., or AREP Finance, a Delaware corporation, is our
wholly owned subsidiary. AREP Finance was incorporated on April 19, 2004
and was formed solely for the purpose of serving as co-issuer of debt securities
of AREP. AREP Finance does not and will not have any operations or assets and
does not and will not have any revenues. AREP Finance’s principal business
address is 767 Fifth Avenue, Suite 4700, New York, New York 10153 and its
telephone number is (212) 702-4300.
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The
Offering of the Private Notes
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On
January 17, 2007, we issued $500 million in aggregate principal
amount of our private notes in an offering not registered under the
Securities Act. At the time we issued the private notes on
January 17, 2007, we entered into a registration rights agreement in
which we agreed to offer to exchange the private notes for new notes
which
have been registered under the Securities Act. This exchange offer
is
intended to satisfy that obligation. The private notes issued
January 17, 2007 were additional notes issued under an indenture
dated February 7, 2005 as described elsewhere in this prospectus. On
February 1, 2005, we issued and sold $480.0 million of 7 1/8%
senior notes due 2013, or the existing notes.
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The
Exchange Offer
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We
are
offering to exchange the new notes which have been registered under
the
Securities Act for the private notes. As of this date, there is
$500 million aggregate principal amount of private notes
outstanding.
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Required
Representations
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In
order to participate in this exchange offer, you will be required
to make
certain representations to us in a letter of transmittal, including
that:
·
any
new notes will be acquired by you
in the ordinary course of your business;
·
you
have not engaged in, do not
intend to engage in, and do not have an arrangement or understanding
with
any person to participate in a distribution of the new notes;
and
·
you
are not an affiliate of our
company.
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Resale
of New Notes
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We
believe that, subject to limited exceptions, the new notes may be
freely
traded by you without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that:
·
you
are acquiring new notes in the
ordinary course of your business;
·
you
are not participating, do not
intend to participate and have no arrangement or understanding with
any
person to participate in the distribution of the new notes;
and
·
you
are not an affiliate of our
company.
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If
our
belief is inaccurate and you transfer any new note issued to you
in the
exchange offer without delivering a prospectus meeting the requirements
of
the Securities Act or without an exemption from registration of your
new
notes from such requirements, you may incur liability under the Securities
Act. We do not assume, or indemnify you against, such
liability.
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Each
broker-dealer that is issued new notes for its own account in exchange
for
private notes which were acquired by such broker-dealer as a result
of
market-making or other trading activities also must acknowledge that
it
has not entered into any arrangement or understanding with us or
any of
our affiliates to distribute the new notes and will deliver a prospectus
meeting the requirements of the Securities Act in connection with
any
resale of the new notes issued in the exchange offer.
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We
have agreed in the registration rights agreement that a broker-dealer
may
use this prospectus for an offer to resell, resale or other retransfer
of
the new notes issued to it in the exchange offer.
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Expiration
Date
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The
exchange offer will expire at 5:00 p.m., New York City time, on
,
2007, unless extended, in which case the term “expiration date” shall mean
the latest date and time to which we extend the exchange
offer.
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Conditions
to the Exchange Offer
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The
exchange offer is subject to certain customary conditions, which
may be
waived by us. The exchange offer is not conditioned upon any minimum
principal amount of private notes being tendered.
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Procedures
for Tendering Private Notes
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If you wish to
tender
your private notes for exchange, you must transmit to Wilmington
Trust
Company, as exchange agent, at the address set forth in this prospectus
under the heading “The Exchange Offer — Exchange Agent,” and on the front
cover of the letter of transmittal, on or before the expiration date,
a
properly completed and duly executed letter of transmittal, which
accompanies this prospectus, or a facsimile of the letter of transmittal
and either:
·
the
private notes and any other
required documentation, to the exchange agent; or
·
a
computer generated message
transmitted by means of DTC’s Automated Tender Offer Program system and
received by the exchange agent and forming a part of a confirmation
of
book entry transfer in which you acknowledge and agree to be bound
by the
terms of the letter of transmittal.
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If
either of these procedures cannot be satisfied on a timely basis,
then you
should comply with the guaranteed delivery procedures described below.
By
executing the letter of transmittal, each holder of private notes
will
make certain representations to us described under “The Exchange Offer —
Procedures for Tendering.”
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Special
Procedures for Beneficial Owners
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If
you
are a beneficial owner whose private notes are registered in the
name of a
broker, dealer, commercial bank, trust company or other nominee and
you
wish to tender your private notes in the exchange offer, you should
contact such registered holder promptly and instruct such registered
holder to tender on your behalf. If you wish to tender on your own
behalf,
you must, prior to completing and executing the letter of transmittal
and
delivering your private notes, either make appropriate arrangements
to
register ownership of the private notes in your name or obtain a
properly
completed bond power from the registered holder. The transfer of
registered ownership may take considerable time and may not be able
to be
completed prior to the expiration date.
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Guaranteed
Delivery Procedures
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If
you
wish to tender private notes and time will not permit the documents
required by the letter of transmittal to reach the exchange agent
prior to
the expiration date, or the procedure for book-entry transfer cannot
be
completed on a timely basis, you must tender your private notes according
to the guaranteed delivery procedures described under “The Exchange Offer
— Guaranteed Delivery Procedures.”
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Acceptance
of Private Notes and Delivery of New Notes
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Subject
to
the conditions described under “The Exchange Offer — Conditions,” we will
accept for exchange any and all private notes which are validly tendered
in the exchange offer and not withdrawn, prior to 5:00 p.m., New York
City time, on the expiration date.
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Withdrawal
Rights
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You
may withdraw your tender of private notes at any time prior to
5:00 p.m., New York City time, on the expiration date, subject to
compliance with the procedures for withdrawal described in this prospectus
under the heading “The Exchange Offer — Withdrawal of
Tenders.”
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Federal
Income Tax Consequences
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For
a
discussion of the material federal income tax considerations relating
to
the exchange of private notes for the new notes as well as the ownership
of the new notes, see “Certain U.S. Federal Income Tax
Consequences.”
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Exchange
Agent
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The
Wilmington Trust Company is serving as the exchange agent. The address,
telephone number and facsimile number of the exchange agent are set
forth
in this prospectus under the heading “The Exchange Offer — Exchange
Agent.”
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Consequences
of Failure to Exchange Private Notes
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If
you
do not exchange private notes for new notes, you will continue to
be
subject to the restrictions on transfer provided in the private notes
and
in the indenture governing the private notes. In general, the unregistered
private notes may not be offered or sold, unless they are registered
under
the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state
securities laws.
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The terms
of the new notes we are issuing in this exchange offer and the private notes
that are outstanding are identical in all material respects except:
·
The
new notes will be registered under the
Securities Act;
·
The
new notes will not contain transfer
restrictions and registration rights that relate to the private
notes.
The new
notes will evidence the same debt as the private notes and will be governed
by
the same indenture. References to the notes include both private notes and
new
notes.
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Issuer
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AREP
is a holding company. Its operations are conducted through its
subsidiaries and substantially all of its assets consist of a 99%
limited
partnership interest in its subsidiary, AREH, which is a holding
company
for its operating subsidiaries and investments. The new notes will
be guaranteed by AREH.
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Co-Issuer
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AREP
Finance is a wholly owned subsidiary of AREP. It was formed solely
for the
purpose of serving as a co-issuer of debt securities of AREP in order
to
facilitate offerings of the debt securities. Other than as a co-issuer
of
the notes, AREP Finance does not and will not have any operations
or
assets and will not have any revenues. As a result, holders of the
notes
should not expect AREP Finance to participate in servicing any obligations
on the new notes.
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Notes
Offered
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$500 million
in aggregate principal amount of 7 1/8% senior notes due 2013.
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Maturity
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February 15,
2013.
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Interest
Payment Dates
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February 15
and August 15 of each year, commencing February 15,
2007.
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Guarantee
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If
we
cannot make payments on the new notes when they are due, AREH must
make
them instead. Other than AREH, none of our subsidiaries will guarantee
payments on the new notes.
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Ranking
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The
new notes and the guarantee will rank equally with all of our and
the
guarantor’s existing and future senior unsecured indebtedness, including
our existing notes, and will rank senior to all of our and the guarantor’s
existing and future subordinated indebtedness. The new notes and
the
guarantee will be effectively subordinated to all of our and the
guarantor’s existing and future secured indebtedness, to the extent of the
collateral securing such indebtedness. The new notes and the guarantee
also will be effectively subordinated to all indebtedness and other
liabilities, including trade payables, of all our subsidiaries other
than
AREH. As of March 31, 2007, the new notes and the guarantee would
have been effectively subordinated to an aggregate of $375.5 million
of AREH’s secured debt and our subsidiaries’ debt, excluding trade
payables.
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Optional
Redemption
|
|
We
may, at our option, redeem some or all of the new notes at any time
on or
after February 15, 2009, at the redemption prices listed under
“Description of Notes — Optional Redemption.”
|
| |
|
In
addition, prior to February 15, 2008, we may, at our option, redeem
up to 35% of the new notes with the proceeds of certain sales of
our
equity at the redemption price listed under “Description of Notes —
Optional Redemption.” We may make the redemption only if, after the
redemption, at least 65% of the aggregate principal amount of the
notes
issued remains outstanding.
|
5
|
|
|
|
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Redemption
Based on Gaming Laws
|
|
The
new notes are subject to mandatory disposition and redemption requirements
following certain determinations by applicable gaming authorities.
On
April 22, 2007, AEP entered into a Membership Interest Purchase
Agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall
Street
Real Estate Funds, to sell all of the issued and outstanding membership
interests of ACEP which comprises our gaming operations. If the sale
is
consummated, the new notes will no longer be subject to redemption
based
on gaming laws.
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|
Certain
Covenants
|
|
We
will issue the new notes under the indenture with AREH and Wilmington
Trust Company, as trustee acting on your behalf, dated February 7,
2005, which was established in connection with our existing notes.
The
indenture, among other things, restricts our and AREH’s ability to:
·
incur
additional debt;
·
pay
dividends and make
distributions;
·
repurchase
equity
securities;
·
create
liens;
·
enter
into transactions with
affiliates; and
·
merge
or
consolidate.
|
| |
|
Our
subsidiaries other than AREH will not be restricted in their ability
to
incur debt, create liens or merge or consolidate.
|
|
Absence
of Established Market for Notes
|
|
The
new notes will be new securities for which there is currently no
market.
We cannot assure you that a liquid market for the new notes will
develop
or be maintained.
|
6
You
should consider carefully each of the following risks and all other information
contained in this prospectus before deciding to invest in the notes.
Risks
Relating to the Exchange Offer
Holders who fail
to
exchange their private notes will continue to be subject to restrictions on
transfer.
If you
do
not exchange your private notes for new notes in the exchange offer, you will
continue to be subject to the restrictions on transfer of your private notes
described in the legend on your private notes. The restrictions on transfer
of
your private notes arise because we issued the private notes under exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, you may only
offer or sell the private notes if they are registered under the Securities
Act
and applicable state securities laws, or are offered and sold under an exemption
from these requirements. We do not plan to register the private notes under
the
Securities Act.
Broker-dealers
or
holders of notes may become subject to the registration and prospectus delivery
requirements of the Securities Act.
Any
broker-dealer that:
·
exchanges
its private notes in the exchange
offer for the purpose of participating in a distribution of the new notes
or
·
resells
new notes that were received by it
for its own account in the exchange offer
may be deemed to have
received restricted securities and may be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction by that broker-dealer. Any profit on
the
resale of the new notes and any commission or concessions received by a
broker-dealer may be deemed to be underwriting compensation under the Securities
Act. In addition to broker-dealers, any holder of notes that exchanges its
private notes in the exchange offer for the purpose of participating in a
distribution of the new notes may be deemed to have received restricted
securities and may be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction by that holder.
We cannot guarantee
that there will be a trading market for the new notes.
The new
notes are a new issue of securities and currently there is no market for them.
We do not intend to apply to have the new notes listed or quoted on any exchange
or quotation system. Accordingly, we cannot assure you that a liquid market
will
develop for the new notes.
The
liquidity of any market for the new notes will depend on a variety of factors,
including:
·
the
number of holders of the new
notes;
·
our
performance; and
·
the
market for similar securities and the
interest of securities dealers in making a market in the new notes.
A liquid trading
market may not develop for the new notes.
Historically,
the market for non-investment grade debt has been subject to disruptions that
have caused substantial volatility in the prices of securities similar to the
new notes. The market, if any, for the new notes may experience similar
disruptions that may adversely affect the prices at which you may sell your
new
notes. If an active trading market does not develop or is not maintained, the
market price and liquidity of the new notes may be adversely affected.
To the
extent private notes are tendered and accepted in the exchange offer, the
trading market, if any, for the private notes that are not so tendered would
be
adversely affected.
7
Our general partner
and its control person could exercise their influence over us to your
detriment.
Mr. Icahn,
through affiliates, currently owns 100% of API, our general partner, and
approximately 86.5% of our outstanding preferred units and approximately 90%
of
our depositary units and, as a result, has the ability to influence many aspects
of our operations and affairs. API also is the general partner of AREH.
The
interests of Mr. Icahn, including his interests in entities in which he and
we have invested or may invest in the future, may differ from your interests
as
a noteholder and, as such, he may take actions that may not be in your interest.
For example, if we encounter financial difficulties or are unable to pay our
debts as they mature, Mr. Icahn’s interests might conflict with your
interests as a noteholder.
In
addition, if Mr. Icahn were to sell, or otherwise transfer, some or all of
his interests in us to an unrelated party or group, a change of control could
be
deemed to have occurred under the terms of the indenture governing the notes
which would require us to offer to repurchase all outstanding notes at 101%
of
their principal amount plus accrued and unpaid interest and liquidated damages,
if any, to the date of repurchase. However, it is possible that we will not
have
sufficient funds at the time of the change of control to make the required
repurchase of notes.
We have engaged,
and in the future may engage, in transactions with our
affiliates.
We have
invested and may in the future invest in entities in which Mr. Icahn also
invests. We also have purchased and may in the future purchase entities or
investments from him or his affiliates. Although API has never received fees
in
connection with our investments, our partnership agreement allows for the
payment of these fees. Mr. Icahn may pursue other business opportunities in
industries in which we compete and there is no requirement that any additional
business opportunities be presented to us.
We have
entered into an agreement and plan of merger pursuant to which we would acquire
all of the issued and outstanding common stock of Lear for an aggregate
consideration of approximately $5.2 billion, including the assumption by the
surviving entity of certain outstanding indebtedness of Lear and the refinancing
of Lear’s existing term loan and credit facility. Mr. Icahn beneficially
owns approximately 16.0% of Lear’s outstanding common stock. The consummation of
the transaction is subject to regulatory approvals and shareholder vote.
Mr. Icahn
previously proposed that we acquire his interest in American Railcar, Inc., or American Railcar, and Philip
Services Corporation, or Philip Services. American Railcar is a publicly traded company that is primarily engaged in the
business of manufacturing covered hoppers and tank railcars. Philip Services is an industrial services company that
provides industrial outsourcing, environmental services and metal services to major industry sectors throughout North
America. A committee of independent directors of the board was formed to consider those proposals. Currently, at Mr.
Icahn’s request, only the proposal regarding the potential acquisition of the metal services business of Philip Services
is being considered by the committee. Any acquisition would be subject to, among other things, the negotiation, execution
and closing of a definitive agreement and the receipt of a fairness opinion. We continuously identify, evaluate and
engage in discussions concerning potential investments and acquisitions, including potential investments in and
acquisitions of affiliates of Mr. Icahn. There cannot be any assurance that any potential transactions that we consider
will be completed.
Certain of our
management are committed to the management of other
businesses.
Certain
of the individuals who conduct the affairs of API, including the chairman of
our
board of directors, Mr. Icahn, our principal executive officer, Keith A.
Meister, and our president, Peter K. Shea, are, and will be, committed to the
management of other businesses owned or controlled by Mr. Icahn and his
affiliates. Accordingly, these individuals may focus significant amounts of
time
and attention on managing these other businesses. Conflicts may arise in the
future between our interests and other entities or business activities in which
such individuals are involved. Conflicts of interest may arise as we may compete
with such affiliates for the same assets, purchasers and sellers of assets
or
financings.
We and AREH are
holding companies and will depend on the businesses of our subsidiaries to
satisfy our obligations under the notes.
We and
AREH are holding companies. In addition to cash and cash equivalents, U.S.
government and agency obligations, marketable equity and debt securities and
other short-term investments, our assets consist primarily of investments in
our
subsidiaries. Moreover, if we make significant investments in operating
businesses, it is likely
8
Back to Table of Contents
that
we will reduce the liquid assets at AREP and AREH in order to fund those
investments and the ongoing operations of our subsidiaries. Consequently, our
cash flow and our ability to meet our debt service obligations likely will
depend on the cash flow of our subsidiaries and the payment of funds to us
by
our subsidiaries in the form of dividends, distributions, loans or
otherwise.
The
operating results of our subsidiaries may not be sufficient to make
distributions to us. In addition, our subsidiaries are not obligated to make
funds available to us for payment on the notes or otherwise, and distributions
and intercompany transfers from our subsidiaries to us may be restricted by
applicable law or covenants contained in debt agreements and other agreements
to
which these subsidiaries may be subject or enter into in the future. The terms
of any borrowings of our subsidiaries or other entities in which we own equity
may restrict dividends, distributions or loans to us. For example, the notes
issued by our indirect wholly owned subsidiary, ACEP, contain restrictions
on
dividends and distributions and loans to us, as well as on other transactions
with us. ACEP also has a credit agreement which contains financial covenants
that have the effect of restricting dividends or distributions. This agreement
precludes our receiving payments from the operations of our gaming properties
which account for a significant portion of our revenues and cash flows. We
have
credit facilities for WestPoint International, Inc., or WPI, our majority owned
subsidiary, and our real estate development properties that also restrict
dividends, distributions and other transactions with us. To the degree any
distributions and transfers are impaired or prohibited, our ability to make
payments on the notes and other debt will be limited.
We, AREH or our
subsidiaries may be able to incur substantially more debt.
We, AREH
or our subsidiaries may be able to incur substantial additional indebtedness
in
the future. The terms of the indenture governing the notes described herein,
as
well as the indentures governing our 8.125% senior notes due 2012 and our
Variable Rate Senior Convertible Notes due 2013, do not prohibit us or our
subsidiaries from doing so. We and AREH may incur additional indebtedness if
we
comply with certain financial tests contained in the indentures that govern
these notes, including the indenture governing the notes described herein.
As of
March 31, 2007, based upon these tests, we and AREH could have incurred up
to approximately $1.4 billion of additional indebtedness. If we complete
the acquisition of Lear, and fund the acquisition with borrowings, as we
currently contemplate, under the financial tests contained in the indentures
(including the indenture governing the notes described herein), AREP and AREH
will not be able to incur additional indebtedness. However, our subsidiaries,
other than AREH are not subject to any of the covenants contained in the
indentures (including the indenture governing the notes described herein),
including the covenant restricting debt incurrence. If new debt is added to
our,
AREH’s and our subsidiaries’ current debt levels, the related risks that we,
AREH and they now face could intensify.
The notes will
be
effectively subordinated to any secured indebtedness, and all the indebtedness
and liabilities of our subsidiaries other than AREH.
The notes
will be effectively subordinated to our and AREH’s existing and future secured
indebtedness to the extent of the collateral securing such indebtedness. We
and
AREH may be able to incur substantial additional secured indebtedness in the
future. The terms of the indenture permit us and AREH to do so. The notes will
also be effectively subordinated to all the indebtedness and liabilities,
including trade payables, of all of our subsidiaries, other than AREH. In the
event of a bankruptcy, liquidation or reorganization of any of our subsidiaries,
other than AREH, holders of their indebtedness and their trade creditors will
generally be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to us.
Our subsidiaries,
other than AREH, will not be subject to any of the covenants in the indenture
for the notes and only AREH will guarantee the notes. We may not be able to
rely
on the cash flow or assets of our subsidiaries to pay our
indebtedness.
Our
subsidiaries, other than AREH, will not be subject to the covenants under the
indenture for the notes. We may form additional subsidiaries in the future
which
will not be subject to the covenants under the indenture for the notes. Of
our
existing and future subsidiaries, only AREH is required to guarantee the notes.
Our existing and future non-guarantor subsidiaries may enter into financing
arrangements that limit their ability to make dividends, distributions, loans
or
other payments to fund payments in respect of the notes. Accordingly, we may
not
be able to rely on the cash flow or assets of our subsidiaries to pay the
notes.
9
Our failure to
comply with the covenants contained under any of our debt instruments, including
the indenture governing the notes (including our failure as a result of events
beyond our control), could result in an event of default which would materially
and adversely affect our financial condition.
If there
were an event of default under one of our debt instruments, the holders of
the
defaulted debt could cause all amounts outstanding with respect to that debt
to
be due and payable immediately. In addition, any event of default or declaration
of acceleration under one debt instrument could result in an event of default
under one or more of our other debt instruments, including the notes. It is
possible that, if the defaulted debt is accelerated, our assets and cash flow
may not be sufficient to fully repay borrowings under our outstanding debt
instruments and we cannot assure you that we would be able to refinance or
restructure the payments on those debt securities.
To service our
indebtedness, we will require a significant amount of cash. Our ability to
maintain our current cash position or generate cash depends on many factors
beyond our control.
Our
ability to make payments on and to refinance our indebtedness, including the
notes, and to fund operations will depend on existing cash balances and our
ability to generate cash in the future. This, to a certain extent, is subject
to
general economic, financial, competitive, regulatory and other factors that
are
beyond our control.
Our
current businesses and businesses that we acquire may not generate sufficient
cash to service our debt, including the notes. In addition, we may not generate
sufficient cash flow from operations or investments and future borrowings may
not be available to us in an amount sufficient to enable us to service our
indebtedness, including the notes, or to fund our other liquidity needs. We
may
need to refinance all or a portion of our indebtedness, including the notes,
on
or before maturity. We cannot assure you that we will be able to refinance
any
of our indebtedness, including the notes, on commercially reasonable terms
or at
all.
The indenture
does
not restrict our ability to change our lines of business or invest the proceeds
of asset sales and allows for the sale of all or substantially all of our and
AREH’s assets without the notes being assumed by the
acquirers.
The
indenture does not restrict in any way the businesses in which we may engage
and
if we were to change our current lines of business, in whole or in part, you
would not be entitled to accelerated repayment of the notes. We also are not
required to offer to purchase notes with the proceeds from asset sales,
including in the event of the sale of all or substantially all of our assets
or
AREH’s assets, and we may reinvest the proceeds without the approval of
noteholders. In addition, we and AREH may sell all or substantially all of
our
and its assets without the notes being assumed by the acquirers.
We may not have
sufficient funds necessary to finance the change of control offer required
by
the indenture.
Upon
the
occurrence of certain specific kinds of change of control events, we will be
required to offer to repurchase all outstanding notes at 101% of their principal
amount plus accrued and unpaid interest and liquidated damages, if any, to
the
date of repurchase. Mr. Icahn, through affiliates, currently owns 100% of
API and approximately 90.0% of our outstanding depositary units and 86.5% of
our
outstanding preferred units. If he were to sell or otherwise transfer some
or
all of his interests in us to unrelated parties, a change of control could
be
deemed to have occurred under the terms of the indenture governing the notes.
However, it is possible that we will not have sufficient funds at the time
of
the change of control to make the required repurchase of notes.
Federal and state
statutes allow courts, under specific circumstances, to void guarantees and
require noteholders to return payments received from the
guarantor.
Under
the
federal bankruptcy law and comparable provisions of state fraudulent transfer
laws, a guarantee could be voided, or claims in respect of a guarantee could
be
subordinated to all other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by its
guarantee:
·
received
less than reasonably equivalent
value or fair consideration for the incurrence of such guarantee;
and
·
was
insolvent or rendered insolvent by
reason of such incurrence; or
10
·
was
engaged in a business or transaction
for which the guarantor’s remaining assets constituted unreasonably small
capital; or
·
intended
to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they
mature.
In
addition, any payment by that guarantor pursuant to its guarantee could be
voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor.
The
measures of insolvency for purposes of these fraudulent transfer laws will
vary
depending upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
·
the
sum of its debts, including contingent
liabilities, was greater than the fair saleable value of all of its assets;
or
·
the
present fair saleable value of its
assets was less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature; or
·
it
could not pay its debts as they become
due.
On the
basis of historical financial information, recent operating history and other
factors, we believe that AREH, after giving effect to its guarantee of these
notes, will not be insolvent, will not have unreasonably small capital for
the
businesses in which it is engaged and will not have incurred debts beyond its
ability to pay such debts as they mature. We cannot assure you, however, as
to
what standard a court would apply in making these determinations or that a
court
would agree with our conclusions in this regard.
As a noteholder
you
may be required to comply with licensing, qualification or other requirements
under gaming laws and could be required to dispose of the
notes.
Currently,
ACEP’s casino assets are comprised of the Stratosphere Casino Hotel & Tower,
the Arizona Charlie’s Decatur, the Arizona Charlie’s Boulder and the Aquarius
Casino Resort. We may be required to disclose the identities of the holders
of
the notes to the Nevada gaming authorities upon request. The Nevada Gaming
Commission may, in its discretion, require a holder of the notes to file an
application, be investigated and be found suitable to hold the notes. In
addition, the Nevada Gaming Commission may, in its discretion, require the
holder of any debt security of a company registered by the Nevada Gaming
Commission as a publicly-traded corporation to file an application, be
investigated and be found suitable to own such debt security.
If
a record or beneficial holder of a note is required by the Nevada Gaming
Commission to be found suitable, such owner will be required to apply for a
finding of suitability within 30 days after request of such gaming authority
or
within such earlier time prescribed by such gaming authority. The applicant
for
a finding of suitability must pay all costs of the application and investigation
for such finding of suitability. If the Nevada Gaming Commission determines
that
a person is unsuitable to own such security, then, pursuant to the Nevada Gaming
Control Act, we can be sanctioned, including the loss of our approvals, if,
without the prior approval of the Nevada Gaming Commission, we:
·
pay
to the unsuitable person any dividend,
interest, or any distribution whatsoever;
·
recognize
any voting right of the
unsuitable person with respect to such securities;
·
pay
the unsuitable person remuneration in
any form; or
·
make
any payment to the unsuitable person
by way of principal, redemption, conversion, exchange, liquidation or similar
transaction.
Each
holder of the notes will be deemed to have agreed, to the extent permitted
by
law, that if the Nevada gaming authorities determine that a holder or beneficial
owner of the notes must be found suitable, and if that holder or beneficial
owner either refuses to file an application or is found unsuitable, that holder
shall, upon our request, dispose of its notes within 30 days after receipt
of
our request, or earlier as may be ordered by the Nevada gaming authorities.
We
will also have the right to call for the redemption of notes of any holder
at
any time to prevent the loss or material impairment of a gaming license or
an
application for a gaming license at a redemption price equal to:
11
·
the
lesser of the cost paid by the holder or
the fair market value of the notes, in each case, plus accrued and unpaid
interest and liquidated damages, if any, to the earlier of the date of
redemption, or earlier as may be required by the Nevada gaming authorities
or
the finding of unsuitability by the Nevada gaming authorities; or
·
such
other lesser amount as may be ordered
by the Nevada gaming authorities.
We will
notify the trustee under the indenture in writing of any redemption as soon
as
practicable. We will not be responsible for any costs or expenses you may incur
in connection with your application for a license, qualification or a finding
of
suitability, or your compliance with any other requirement of a gaming
authority. The indenture also provides that as soon as a gaming authority
requires you to sell your notes, you will, to the extent required by applicable
gaming laws, have no further right:
·
to
exercise, directly or indirectly, any
right conferred by the notes or the indenture; or
·
to
receive from us any interest, dividends
or any other distributions or payments, or any remuneration in any form,
relating to the notes, except the redemption price we refer to
above.
On
April 22, 2007, AEP entered into a Membership Interest Purchase Agreement
with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real Estate
Funds, to sell all of the issued and outstanding membership interests of ACEP
which comprises our gaming operations.
Since we are
a
limited partnership, you may not be able to pursue legal claims against us
in
U.S. federal courts.
We are
a
limited partnership organized under the laws of the state of Delaware. Under
the
rules of federal civil procedure, you may not be able to sue us in federal
court
on claims other than those based solely on federal law, because of lack of
complete diversity. Case law applying diversity jurisdiction deems us to have
the citizenship of each of our limited partners. Because we are a publicly
traded limited partnership, it may not be possible for you to sue us in a
federal court because we have citizenship in all 50 U.S. states and operations
in many states. Accordingly, you will be limited to bringing any claims in
state
court. Furthermore, AREP Finance, our corporate co-issuer for the notes, has
only nominal assets and no operations. While you may be able to sue the
corporate co-issuer in federal court, you are not likely to be able to realize
on any judgment rendered against it.
We may be subject
to the pension liabilities of our affiliates.
Mr. Icahn,
through certain affiliates, currently owns 100% of API and approximately 90%
of
our outstanding depositary units and 86.5% of our outstanding preferred units.
Applicable pension and tax laws make each member of a “controlled group” of
entities, generally defined as entities in which there are at least an 80%
common ownership interest, jointly and severally liable for certain pension
plan
obligations of any member of the controlled group. These pension obligations
include ongoing contributions to fund the plan, as well as liability for any
unfunded liabilities that may exist at the time the plan is terminated. In
addition, the failure to pay these pension obligations when due may result
in
the creation of liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, or the PBGC, against the assets of each member of the
controlled group.
As a
result of the more than 80% ownership interest in us by Mr. Icahn’s
affiliates, we and our subsidiaries are subject to the pension liabilities
of
all entities in which Mr. Icahn has a direct or indirect ownership interest
of at least 80%. One such entity, ACF Industries LLC, or ACF, is the sponsor
of
several pension plans which, as of December 31, 2006, were not underfunded
on an ongoing actuarial basis but would be underfunded by approximately
$87.2million if those plans were terminated, as most recently reported by the
plans’ actuaries. These liabilities could increase or decrease, depending on a
number of factors, including future changes in promised benefits, investment
returns, and the assumptions used to calculate the liability. As members of
the
controlled group, we would be liable for any failure of ACF to make ongoing
pension contributions or to pay the unfunded liabilities upon a termination
of
the ACF pension plans. In addition, other entities now or in the future within
the controlled group that includes us may have pension plan obligations that
are, or may become, underfunded and we would be liable for any failure of such
entities to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of such plans.
The
current underfunded status of the ACF pension plans requires ACF to notify
the
PBGC of certain “reportable events,” such as if we cease to be a member of the
ACF controlled group, or if we make certain extraordinary dividends or stock
redemptions. The obligation to report could cause us to seek to delay or
reconsider the occurrence of such reportable events.
12
Starfire
Holding Corporation, or Starfire, which is 100% owned by Mr. Icahn, has
undertaken to indemnify us and our subsidiaries from losses resulting from
any
imposition of certain pension funding or termination liabilities that may be
imposed on us and our subsidiaries or our assets as a result of being a member
of the Icahn controlled group. The Starfire indemnity (which does not extend
to
pension liabilities of our subsidiaries that would be imposed on us as a result
of our interest in these subsidiaries and not as a result of Mr. Icahn’s
and his affiliates’ more than 80% ownership interest in us) provides, among
other things, that so long as such contingent liabilities exist and could be
imposed on us, Starfire will not make any distributions to its stockholders
that
would reduce its net worth to below $250.0 million. Nonetheless, Starfire
may not be able to fund its indemnification obligations to us.
We are subject
to
the risk of possibly becoming an investment company.
Because
we are a holding company and a significant portion of our assets may, from
time
to time, consist of investments in companies in which we own less than a 50%
interest, we run the risk of inadvertently becoming an investment company that
is required to register under the Investment Company Act of 1940, as amended,
or
the Investment Company Act. Registered investment companies are subject to
extensive, restrictive and potentially adverse regulation relating to, among
other things, operating methods, management, capital structure, dividends and
transactions with affiliates. Registered investment companies are not permitted
to operate their business in the manner in which we operate our business, nor
are registered investment companies permitted to have many of the relationships
that we have with our affiliated companies.
In
order not to become an investment company required to register under the
Investment Company Act, we monitor the value of our investments and structure
transactions with an eye toward the Investment Company Act. As a result, we
may
structure transactions in a less advantageous manner than if we did not have
Investment Company Act concerns, or we may avoid otherwise economically
desirable transactions due to those concerns. In addition, events beyond our
control, including significant appreciation or depreciation in the market value
of certain of our publicly traded holdings, or adverse developments with respect
to our ownership of certain of our subsidiaries, such as our loss of control
of
WPI, could result in our inadvertently becoming an investment company.
If
it were established that we were an investment company, there would be a risk,
among other material adverse consequences, that we could become subject to
monetary penalties or injunctive relief, or both, in an action brought by the
SEC, that we would be unable to enforce contracts with third parties or that
third parties could seek to obtain rescission of transactions with us undertaken
during the period it was established that we were an unregistered investment
company.
We may become
taxable as a corporation.
We
believe that we have been and are properly treated as a partnership for federal
income tax purposes. This allows us to pass through our income and deductions
to
our partners. However, the Internal Revenue Service, or IRS, could challenge
our
partnership status and we could fail to qualify as a partnership for past years
as well as future years. Qualification as a partnership involves the application
of highly technical and complex provisions of the Internal Revenue Code of
1986,
as amended, or the Code. For example, a publicly traded partnership is generally
taxable as a corporation unless 90% or more of its gross income is “qualifying”
income, which includes interest, dividends, oil and gas revenues, real property
rents, gains from the sale or other disposition of real property, gain from
the
sale or other disposition of capital assets held for the production of interest
or dividends, and certain other items. We believe that in all prior years of
our
existence at least 90% of our gross income was qualifying income and we intend
to structure our business in a manner such that at least 90% of our gross income
will constitute qualifying income this year and in the future. However, there
can be no assurance that such structuring will be effective in all events to
avoid the receipt of more than 10% of non-qualifying income. If less than 90%
of
our gross income constitutes qualifying income, we may be subject to corporate
tax on our net income at a federal rate of up to 35% plus possible state taxes.
Further, if less than 90% of our gross income constituted qualifying income
for
past years, we may be subject to corporate level tax plus interest and possibly
penalties. In addition, if we register under the Investment Company Act, it
is
likely that we would be treated as a corporation for U.S. federal income tax
purposes. The cost of paying federal and possibly state income tax, either
for
past years or going forward, could be a significant liability and would reduce
our funds available to make interest and principal payments on our debt
securities, including the notes. To meet the qualifying income test, we may
structure transactions in a manner that is less advantageous than if this were
not a consideration, or we may avoid otherwise economically desirable
transactions. Recently proposed legislation may affect the status of publicly
traded partnerships such as AREP. Although as proposed the legislation would
not
impact AREP’s status as a partnership for tax purposes, it is unclear whether
such legislation would be enacted or, if enacted, what its final form and effect
would be.
13
General
In
addition to the following risk factors specific to each of our businesses,
all
of our businesses are subject to the effects of the following:
·
the
continued threat of
terrorism;
·
economic
downturn;
·
loss
of any of our or our subsidiaries’ key
personnel;
·
the
unavailability, as needed, of
additional financing; and
·
the
unavailability of insurance at
acceptable rates.
Our acquisition
of
Lear will require a significant investment or may not be successfully
completed.
On
February 9, 2007, we entered into an agreement and plan of merger, pursuant
to which we would acquire Lear, a publicly traded company that provides
automotive interior systems worldwide, for aggregate consideration of
approximately $5.2 billion, including the assumption by the surviving
entity of certain outstanding indebtedness of Lear and the refinancing of Lear’s
existing term loan and credit facility. The consummation of the transaction
is
subject to regulatory approvals and shareholders vote. If we complete the
acquisition of Lear, it would require a significant investment by us, including
approximately $1.3 billion in cash. Under the financial tests contained in
the indentures that govern our notes described herein and the notes due 2012,
AREP and AREH will not be able to incur additional indebtedness as a result
of
borrowings to finance the Lear acquisition, which may limit our flexibility
in
entering into future financing arrangements, including those to support our
existing businesses or to acquire new businesses. Lear also has significant
pension and related liabilities for which we could become liable as a member
of
a controlled group of entities.
Our
agreement with Lear permitted Lear to solicit proposals from other potential
purchasers for 45 days after the signing of the agreement and to respond to
offers after that date and until Lear’s stockholders approve the transaction
with us. No competing proposals were received as of the date of this prospectus.
We cannot assure you that we will be able to complete the transaction or that
the completion of the transaction will be for the consideration described
above.
Furthermore,
the proposed transaction is subject to additional risks and uncertainties,
including, but not limited to, the satisfaction of conditions to closing, which
requires Lear stockholder approval and U.S. and foreign antitrust approval.
If
we were to complete the acquisition, Lear’s business and operations would be
subject to various risks, including the uncertainty of its financial performance
following completion of the proposed transaction; general conditions affecting
the automotive industry, particularly in the United States; and general domestic
and international market conditions.
In addition, we have been named as defendants in various lawsuits challenging
the transaction. Specifically, a consolidated action is pending in the Court
of Chancery of the State of Delaware which alleges, among other things, that
the purchase price is unfair to Lear stockholders. A preliminary injunction
was issued requiring supplemental disclosure. The supplemental disclosure
requirement has been satisfied and, consequently, the injunction has been
dissolved. A consolidated action filed in Michigan state court making virtually
identical allegations was dismissed by the court because of the prior-filed
Delaware action. Plaintiffs in the Michigan state action have filed a motion
for reconsideration which is pending. Finally, a complaint is pending in the
United States District Court for the Eastern District of Michigan, which alleges
that the transaction would violate certain provisions of the Employment Retirement
Income Security Act (referred to as the Federal Action). Motions to dismiss
the Federal Action have been fully briefed and await disposition, as does
plaintiff’s application for preliminary injunction. Based upon the above
there is a risk that the transaction may be enjoined, or, if the transaction
is completed, liability may nevertheless be imposed thereafter.
14
Our sale of ACEP
may not be successfully completed.
On
April 22, 2007, AEP entered into a Membership Interest Purchase Agreement
with Whitehall Street Real Estate Funds to sell all of the issued and
outstanding membership interests of ACEP, which comprises our gaming operations.
The transaction is subject to the approval of the Nevada Gaming Commission
and
the Nevada State Gaming Control Board, as well as customary conditions. The
parties expect to close the transaction in approximately December 2007; however,
we cannot assure you that we will be able to consummate the transaction.
The
following risks relate to our current gaming operations.
The gaming industry
is highly regulated. The gaming authorities and state and municipal licensing
authorities have significant control over our operations.
Our
properties currently conduct licensed gaming operations in Nevada. Various
regulatory authorities, including the Nevada State Gaming Control Board and
the
Nevada Gaining Commission, require our properties to hold various licenses
and
registrations, findings of suitability, permits and approvals to engage in
gaming operations and to meet requirements of suitability. These gaming
authorities also control approval of ownership interests in gaming operations.
These gaming authorities may deny, limit, condition, suspend or revoke our
gaming licenses, registrations, findings of suitability or the approval of
any
of our ownership interests in any of our licensed gaming operations, any of
which could have a significant adverse effect on our business, financial
condition and results of operations, for any cause they may deem reasonable.
If
we violate gaming laws or regulations that are applicable to us, we may have
to
pay substantial fines or forfeit assets. If, in the future, we operate or have
an ownership interest in casino gaming facilities located outside of Nevada,
we
would also be subject to the gaming laws and regulations of those other
jurisdictions.
The sale
of alcoholic beverages at our gaming properties is subject to licensing and
regulation by local authorities. Any limitation, condition, suspension or
revocation of, or disciplinary action with respect to, any such license would
reduce the number of visitors to our casinos to the extent the availability
of
alcoholic beverages is important to them. Any reduction in our number of
visitors will reduce our revenue and cash flow.
Rising operating
costs for our gaming properties could have a negative impact on our
profitability.
The
operating expenses associated with our gaming properties could increase due
to
some of the following factors:
·
our
properties use significant amounts of
electricity, natural gas and other forms of energy, and energy price increases
may reduce our profitability;
·
our
properties use significant amounts of
water and a water shortage may adversely affect our operations;
·
some
of our employees are covered by
collective bargaining agreements and we may incur higher costs or work
slow-downs or stoppages due to union activities; and
·
our
reliance on slot machine revenues and
the concentration of manufacturing of slot machines in certain companies could
impose additional costs on us.
We face substantial
competition in the gaming industry.
The
gaming industry in general, and the markets in which we compete in particular,
are highly competitive:
·
we
compete with many world-class
destination resorts with greater name recognition and different attractions,
amenities and entertainment options;
·
we
compete with the continued growth of
gaming on Native American tribal lands;
·
the
existence of legalized gambling in
other jurisdictions may reduce the number of visitors to our
properties;
15
·
certain
states have legalized, and others
may legalize, casino gaming in specific venues, including race tracks and/or
in
specific areas, including metropolitan areas from which we traditionally attract
customers; and
·
our
properties also compete, and will in
the future compete, with all forms of legalized gambling.
Many
of
our competitors have greater financial, selling and marketing, technical and
other resources than we do. We may not be able to compete effectively with
our
competitors and we may lose market share, which could reduce our revenue and
cash flow.
We cannot guarantee
that we will be able to recover our investment made in connection with the
acquisition of the Aquarius.
On
May 19, 2006, our wholly owned subsidiary, AREP Laughlin Corporation,
acquired the Aquarius Casino Resort, or the Aquarius, from affiliates of
Harrah’s Operating Company, Inc., or Harrah’s, for approximately
$113.6 million, including working capital. Acquisitions generally involve
significant risks, including difficulties in the assimilation of the operations,
services and corporate culture of the acquired company.
Pursuant
to Membership Interest Purchase Agreement that AEP has entered into with
Whitehall Street Real Estate Funds to sell the issued and outstanding membership
interests of ACEP, we have agreed to make capital expenditures, including
$10.5 million through 2007 to refurbish rooms, upgrade amenities and
acquire new gaming equipment for the Aquarius.
There
can
be no assurance that this acquisition will be profitable or that we will be
able
to recover our investments either upon the sale of ACEP or, if the sale is
not
consummated, in our future gaming operations.
Real Estate
Operations
Our investment
in
property development may be more costly than anticipated.
We have
invested and expect to continue to invest in unentitled land, undeveloped land
and distressed development properties. These properties involve more risk than
properties on which development has been completed. Unentitled land may not
be
approved for development. These investments do not generate any operating
revenue, while costs are incurred to obtain government approvals and develop
the
properties. Construction may not be completed within budget or as scheduled
and
projected rental levels or sales prices may not be achieved and other
unpredictable contingencies beyond our control could occur. We will not be
able
to recoup any of such costs until such time as these properties, or parcels
thereof, are either disposed of or developed into income-producing assets.
We may be subject
to environmental liability as an owner or operator of development and rental
real estate.
Under
various federal, state and local laws, ordinances and regulations, an owner
or
operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances, pollutants and contaminants
released on, under, in or from its property. These laws often impose liability
without regard to whether the owner or operator knew of, or was responsible
for,
the release of such substances. To the extent any such substances are found
in
or on any property invested in by us, we could be exposed to liability and
be
required to incur substantial remediation costs. The presence of such substances
or the failure to undertake proper remediation may adversely affect the ability
to finance, refinance or dispose of such property. We generally conduct a Phase
I environmental site assessment on properties in which we are considering
investing. A Phase I environmental site assessment involves record review,
visual site assessment and personnel interviews, but does not typically include
invasive testing procedures such as air, soil or groundwater sampling or other
tests performed as part of a Phase II environmental site assessment.
Accordingly, there can be no assurance that these assessments will disclose
all
potential liabilities or that future property uses or conditions or changes
in
applicable environmental laws and regulations or activities at nearby properties
will not result in the creation of environmental liabilities with respect to
a
property.
16
Pending legal
proceedings may result in our ownership of WPI’s common stock being reduced to
less than 50%. A legal action in Delaware challenges the issuance to of the
preferred stock of WPI. Uncertainties arising from these proceedings may
adversely affect WPI’s operations and prospects and the value of our investment
in it.
We
currently own approximately 67.7% of the outstanding shares of common stock
and
100% of the preferred stock of WPI. As a result of the decision of the U.S.
District Court for the Southern District of New York reversing certain
provisions of the Bankruptcy Court order pursuant to which we acquired our
ownership of a majority of the common stock of WPI, the proceedings in the
Bankruptcy Court on remand and the proceedings in the Delaware action, our
percentage of the outstanding shares of common stock of WPI could be reduced
to
less than 50% and perhaps substantially less and our ownership of the preferred
stock of WPI could also be affected. The Bankruptcy Court entered a stay of
its
order on remand. On May 9, 2007, the District Court issued an order conditioning
the continuation of the Bankrupcty Court’s stay on the posting of a bond. No
bond was posted. On May 22, 2007, WPI, its subsidiary WestPoint Home, Inc.,
and
we filed a Petition for a Writ of Mandamus in the U.S. Court of Appeals for
the
Second Circuit requesting, among other relief, the reinstatement of the Sale
Order. The Second Circuit scheduled oral argument on the Petition for Mandamus
for June 26, 2007 and reinstated the stay pending its decision.
If we
were to lose control of WPI, it could adversely affect the business and
prospects of WPI and the value of our investment in it. In addition, we
consolidated the balance sheet of WPI as of March 31, 2007 and WPI’s results of
operations for the period from the date of acquisition through March 31, 2007.
If we were to own less than 50% of the outstanding common stock or the challenge
to our preferred stock ownership is successful, we would have to evaluate
whether we should consolidate WPI and if so our financial statements could
be
materially different than as presented as of March 31, 2007, December 31, 2006
and December 31, 2005 and for the periods then ended.
WPI acquired
its
business from the former owners through bankruptcy proceedings. We cannot assure
you that it will be able to operate profitably.
WPI
acquired the assets of WestPoint Stevens Inc., or WestPoint Stevens, as part
of
its bankruptcy proceedings. Certain of the issues that contributed to WestPoint
Stevens’ filing for bankruptcy, such as intense industry competition, the
inability to produce goods at a cost competitive with overseas suppliers, the
increasing prevalence of direct sourcing by principal customers and continued
incurrence of overhead costs associated with an enterprise larger than the
current business can profitably support, continue to exist and may continue
to
affect WPI’s business operations and financial condition adversely. In addition,
during the protracted bankruptcy proceedings of WestPoint Stevens, several
of
its customers reduced the volume of business done with WestPoint Stevens. We
have installed new management to address these issues, but we cannot assure
you
that new management will be effective.
WPI
operated at a loss during fiscal year 2006 as well as for the three months
ended
March 31, 2007, and we expect that WPI will continue to operate at a loss
during fiscal year 2007. We cannot assure you that it will be able to operate
profitably in the future.
The loss of any
of
WPI’s large customers could have an adverse effect on WPI’s
business.
During
fiscal year 2006 and the three-month period ended March 31, 2007, WPI’s six
largest customers accounted for approximately 50% and 52%, respectively, of
its
net sales. Other retailers have indicated that they intend to significantly
increase their direct sourcing of home fashion products from foreign sources.
The loss of any of WPI’s largest accounts, or a material portion of sales to
those accounts, would have an adverse effect upon its business, which could
be
material.
A portion of
WPI’s
sales are derived from licensed designer brands. The loss of a significant
license could have an adverse effect on WPI’s business.
A portion
of WPI’s sales is derived from licensed designer brands. The license agreements
for WPI’s designer brands generally are for a term of two or three years. Some
of the licenses are automatically renewable for additional periods, provided
that sales thresholds set forth in the license agreements are met. The loss
of a
significant license could have an adverse effect upon WPI’s business, which
effect could be material. Under certain circumstances, these licenses can be
terminated without WPI’s consent due to circumstances beyond WPI’s
control.
17
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A
shortage of the principal raw materials WPI uses to manufacture its products
could force WPI to pay more for those materials and, possibly, cause WPI to
increase its prices, which could have an adverse effect on WPI’s
operations.
Any
shortage in the raw materials WPI uses to manufacture its products could
adversely affect its operations. The principal raw materials that WPI uses
in
the manufacture of its products are cotton of various grades and staple lengths
and polyester and nylon in staple and filament form. Since cotton is an
agricultural product, its supply and quality are subject to weather patterns,
disease and other factors. The price of cotton is also influenced by supply
and
demand considerations, both domestically and worldwide, and by the cost of
polyester. Although WPI has been able to acquire sufficient quantities of cotton
for its operations in the past, any shortage in the cotton supply by reason
of
weather patterns, disease or other factors, or a significant increase in the
price of cotton, could adversely affect its operations. The price of man-made
fibers, such as polyester and nylon, is influenced by demand, manufacturing
capacity and costs, petroleum prices, cotton prices and the cost of polymers
used in producing these fibers. In particular, the effect of increased energy
prices may have a direct impact upon the cost of dye and chemicals, polyester
and other synthetic fibers. Any significant prolonged petrochemical shortages
could significantly affect the availability of man-made fibers and could cause
a
substantial increase in demand for cotton. This could result in decreased
availability of cotton and possibly increased prices and could adversely affect
WPI’s operations.
The home fashion
industry is highly competitive and WPI’s success depends on WPI’s ability to
compete effectively in the market.
The home
fashion industry is highly competitive. WPI’s future success will, to a large
extent, depend on its ability to remain a low-cost producer and to remain
competitive. WPI competes with both foreign and domestic companies on, among
other factors, the basis of price, quality and customer service. In the home
fashion market, WPI competes with many companies. WPI’s future success depends
on its ability to remain competitive in the areas of marketing, product
development, price, quality, brand names, manufacturing capabilities,
distribution and order processing. We cannot assure you of WPI’s ability to
compete effectively in any of these areas. Any failure to compete effectively
could adversely affect WPI’s sales and, accordingly, its operations.
Additionally, the easing of trade restrictions over time has led to growing
competition from low priced products imported from Asia and Latin America.
The
lifting of import quotas in 2005 has accelerated the loss of WPI’s market share.
There can be no assurance that the foreign competition will not grow to a level
that could have an adverse effect upon WPI’s ability to compete
effectively.
WPI intends to
increase the percentage of its products that are made overseas. There is no
assurance that WPI will be successful in obtaining goods of sufficient quality
on a timely basis and on advantageous terms. WPI will be subject to additional
risks relating to doing business overseas.
WPI
intends to increase the percentage of its products that are made overseas and
may face additional risks associated with these efforts. Adverse factors that
WPI may encounter include:
·
logistical
challenges caused by
distance;
·
language
and cultural
differences;
·
legal
and regulatory
restrictions;
·
the
difficulty of enforcing agreements with
overseas suppliers;
·
currency
exchange rate
fluctuations;
·
political
and economic instability;
and
·
potential
adverse tax
consequences.
There has been
consolidation of retailers of WPI’s products that may reduce its
profitability.
Retailers
of consumer goods have become fewer and more powerful over time. As buying
power
has become more concentrated, pricing pressure on vendors has grown. With the
ability to buy imported products directly from foreign sources, retailers’
pricing leverage has increased and also allowed for growth in private label
brands that displace and compete with WPI proprietary brands. Retailers’ pricing
leverage has resulted in a decline in WPI’s
18
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unit
pricing and margins and resulted in a shift in product mix to more private
label
programs. If WPI is unable to diminish the decline in its pricing and margins,
it may not be able to achieve or maintain profitability.
WPI is subject
to
various federal, state and local environmental and health and safety laws and
regulations. If it does not comply with these regulations, it may incur
significant costs in the future to become compliant.
WPI is
subject to various federal, state and local laws and regulations governing,
among other things, the discharge, storage, handling, usage and disposal of
a
variety of hazardous and non-hazardous substances and wastes used in, or
resulting from, its operations, including potential remediation obligations
under those laws and regulations. WPI’s operations are also governed by federal,
state and local laws and regulations relating to employee safety and health
which, among other things, establish exposure limitations for cotton dust,
formaldehyde, asbestos and noise, and which regulate chemical, physical and
ergonomic hazards in the workplace. Consumer product safety laws, regulations
and standards at the federal and state level govern the manufacture and sale
of
products by WPI. Although WPI does not expect that compliance with any of these
laws and regulations will adversely affect its operations, we cannot assure
you
that regulatory requirements will not become more stringent in the future or
that WPI will not incur significant costs to comply with those
requirements.
Investments
We may not be
able
to identify suitable investments, and our investments may not result in
favorable returns or may result in losses.
Our
partnership agreement allows us to take advantage of investment opportunities
we
believe exist outside of our operating businesses. The equity securities in
which we may invest may include common stock, preferred stock and securities
convertible into common stock, as well as warrants to purchase these securities.
The debt securities in which we may invest may include bonds, debentures, notes,
or non-rated mortgage-related securities, municipal obligations, bank debt
and
mezzanine loans. Certain of these securities may include lower rated or
non-rated securities which may provide the potential for higher yields and
therefore may entail higher risk and may include the securities of bankrupt
or
distressed companies. In addition, we may engage in various investment
techniques, including derivatives, options and futures transactions, foreign
currency transactions, “short” sales and leveraging for either hedging or other
purposes. We may concentrate our activities by owning significant or controlling
interest in certain investments. We may not be successful in finding suitable
opportunities to invest our cash and our strategy of investing in undervalued
assets may expose us to numerous risks.
Our investments
may
be subject to significant uncertainties.
Our
investments may not be successful for many reasons including, but not limited
to:
·
fluctuation
of interest rates;
·
lack
of control in minority
investments;
·
worsening
of general economic and market
conditions;
·
lack
of diversification;
·
fluctuation
of U.S. dollar exchange rates;
and
·
adverse
legal and regulatory developments
that may affect particular businesses.
19
We will
not receive any proceeds from the exchange of the new notes for the private
notes pursuant to the exchange offer. On January 17, 2007, we issued and
sold the private notes in a private offering, receiving net proceeds of
approximately $492.1 million, after deducting selling and offering
expenses.
We intend
to use the net proceeds of the private offering for general business purposes,
including to pursue our primary business strategy of acquiring undervalued
assets in either our existing lines of business or other businesses and to
provide additional capital to grow our existing business.
We will
use the net proceeds of the private offering and conduct our activities in
a
manner so as not to be deemed an investment company under the Investment Company
Act. Generally, this means that we do not intend to enter the business of
investing in securities and that no more than 40% of our total assets will
be
invested in securities. The portion of our assets invested in each type of
security or any single issuer or industry will not be limited.
20
Purpose of the
Exchange Offer
In
connection with the sale of the private notes, we and the initial purchaser
entered into a registration rights agreement in which we and AREH agreed
to:
·
file
a registration statement with the SEC
with respect to the exchange of the private notes for new notes, or the exchange
offer registration statement, no later than July 16, 2007;
·
use
all commercially reasonable efforts to
have the exchange offer registration statement declared effective by the SEC
on
or prior to November 13, 2007; and
·
commence
the offer to exchange new notes
for the private notes and use all commercially reasonable efforts to issue
on or
prior to 30 business days, or longer if required by the federal securities
laws,
after the date on which the exchange offer registration statement was declared
effective by the SEC, new notes in exchange for all private notes tendered
prior
to that date in the exchange offer.
We are
making the exchange offer to satisfy certain of our obligations under the
registration rights agreement. We filed a copy of the registration rights
agreement as an exhibit to the exchange offer registration statement that
includes this prospectus.
Resale of Exchange
Notes
Under
existing interpretations of the Securities Act by the staff of the SEC contained
in several no-action letters to third parties, we believe that the new notes
will generally be freely transferable by holders who have validly participated
in the exchange offer without further registration under the Securities Act
(assuming the truth of certain representations required to be made by each
holder of notes, as set forth below). For additional information on the staff’s
position, we refer you to the following no-action letters: Exxon Capital
Holdings Corporation, available April 13, 1988; Morgan Stanley & Co.
Incorporated, available June 5, 1991; and Shearman & Sterling,
available July 2, 1993. However, any purchaser of private notes who is one
of our “affiliates” or who intends to participate in the exchange offer for the
purpose of distributing the new notes or who is a broker-dealer who purchased
private notes from us to resell pursuant to Rule 144A or any other available
exemption under the Securities Act:
·
will
not be able to tender its private
notes in the exchange offer;
·
will
not be able to rely on the
interpretations of the staff of the SEC; and
·
must
comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of the private notes unless such sale or transfer is made
pursuant to an exemption from these requirements.
If you
wish to exchange private notes for new notes in the exchange offer, you will
be
required to make representations in a letter of transmittal which accompanies
this prospectus, including that:
·
you
are not our “affiliate” (as defined in
Rule 405 promulgated under the Securities Act);
·
any
new notes to be received by you will be
acquired in the ordinary course of your business;
·
you
have no arrangement or understanding
with any person to participate in the distribution of the new notes in violation
of the provisions of the Securities Act;
·
if
you are not a broker-dealer, you are not
engaged in, and do not intend to engage in, a distribution of new notes;
and
·
if
you are a broker-dealer, you acquired
the private notes for your own account as a result of market-making or other
trading activities (and as such, you are a “participating broker-dealer”), you
have not entered into any arrangement or understanding with AREP or an affiliate
of AREP to distribute the new notes and you will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of the
new
notes.
21
Rule
405 promulgated under the Securities Act provides that an “affiliate” of, or
person “affiliated” with, a specified person, is a person that directly, or
indirectly through one or more intermediaries, controls or is controlled by,
or
is under common control with, the person specified.
The SEC
has taken the position that participating broker-dealers may be deemed to be
“underwriters” within the meaning of the Securities Act, and accordingly may
fulfill their prospectus delivery requirements with respect to the new notes,
other than a resale of an unsold allotment from the original sale of the notes,
with the prospectus contained in the exchange offer registration statement.
Under the registration rights agreement, we have agreed to use commercially
reasonable efforts to allow participating broker-dealers and other persons,
if
any, subject to similar prospectus delivery requirements, to use the prospectus
contained in the exchange offer registration statement in connection with the
resale of the new notes for a period of 270 days from the issuance of the new
notes.
Terms of the Exchange
Offer
This
prospectus and the accompanying letter of transmittal contain the terms and
conditions of the exchange offer. Upon the terms and subject to the conditions
set forth in this prospectus and in the accompanying letter of transmittal,
we
will accept for exchange all private notes which are properly tendered and
not
withdrawn on or prior to 5:00 p.m., New York City time, on the expiration date.
After authentication of the new notes by the trustee or an authentication agent,
we will issue and deliver $1,000 principal amount of new notes in exchange
for
each $1,000 principal amount of outstanding private notes accepted in the
exchange offer. Holders may tender some or all of their private notes in the
exchange offer in denominations of $1,000 and integral multiples thereof.
The form
and terms of the new notes are identical in all material respects to the form
and terms of the private notes, except that:
1.
the offering of the new notes has
been registered under the Securities Act;
2.
the new notes generally will not
be
subject to transfer restrictions or have registration rights; and
3.
certain provisions relating to
liquidated damages on the private notes provided for under certain circumstances
will be eliminated.
The new
notes will evidence the same debt as the private notes. The new notes will
be
issued under and entitled to the benefits of the indenture.
As of
the
date of this prospectus, $500 million in aggregate principal amount of the
additional private notes issued on January 17, 2007 is outstanding. In
connection with the issuance of the private notes, we made arrangements for
the
private notes to be issued and transferable in book-entry form through the
facilities of DTC, acting as a depositary. The new notes will also be issuable
and transferable in book-entry form through the DTC.
The
exchange offer is not conditioned upon any minimum aggregate principal amount
of
private notes being tendered. However, our obligation to accept private notes
for exchange pursuant to the exchange offer is subject to certain customary
conditions that we describe under “— Conditions” below.
Holders
who tender private notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter
of
transmittal, transfer taxes with respect to the exchange of private notes
pursuant to the exchange offer. We will pay all charges and expenses, other
than
certain applicable taxes, in connection with the exchange offer. See “—
Solicitation of Tenders; Fees and Expenses” for more detailed information
regarding the expenses of the exchange offer.
By
executing or otherwise becoming bound by the letter of transmittal, you will
be
making the representations described under “— Procedures for Tendering”
below.
Expiration Date;
Extensions; Amendments
The
term “expiration date” will mean 5:00 p.m., New York City time, on
, 2007, unless we, in our sole
discretion, extend the exchange offer, in which case the term “expiration date”
will mean the latest date and time to which we extend the exchange offer.
To extend
the exchange offer, we will:
22
·
notify
the exchange agent of any extension
orally or in writing; and
·
notify
the registered holders of the
private notes by means of a press release or other public announcement, each
before 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
We
reserve the right, in our reasonable discretion:
·
to
delay accepting any private
notes;
·
to
extend the exchange offer;
or
·
if
any conditions listed below under “—
Conditions” are not satisfied, to terminate the exchange offer by giving oral or
written notice of the delay, extension or termination to the exchange
agent.
We will
follow any delay in acceptance, extension or termination as promptly as
practicable by oral or written notice to the registered holders. If we amend
the
exchange offer in a manner we determine constitutes a material change, we will
promptly disclose the amendment in a prospectus supplement that we will
distribute to the registered holders.
Interest on the New
Notes
Interest
on the new notes will accrue from the last interest payment date on which
interest was paid on the private notes surrendered in exchange for new notes
or,
if no interest has been paid on the private notes, from the issue date of the
private notes, January 17, 2007. Interest on the new notes will be payable
semi-annually on February 15 and August 15 of each year, commencing on
February 15, 2007.
Procedures for
Tendering
You may
tender your private notes in the exchange offer only if you are a registered
holder of private notes. To tender in the exchange offer, you must:
·
complete,
sign and date the letter of
transmittal or a facsimile of the letter of transmittal;
·
have
the signatures thereof guaranteed if
required by the letter of transmittal; and
·
mail
or otherwise deliver the letter of
transmittal or such facsimile to the exchange agent, at the address listed
below
under “— Exchange Agent” for receipt prior to the expiration date.
In
addition, either:
·
the
exchange agent must receive
certificates for the private notes along with the letter of transmittal into
its
account at DTC pursuant to the procedure described under “— Book-Entry Transfer”
before the expiration date;
·
the
exchange agent must receive a timely
confirmation of a book-entry transfer, if the procedure is available, into
its
account at DTC pursuant to the procedure described under “— Book-Entry Transfer”
before the expiration date; or
·
you
must comply with the procedures
described under “Guaranteed Delivery Procedures.”
Your
tender, if not withdrawn before the expiration date, will constitute an
agreement between you and us in accordance with the terms and subject to the
conditions described in this prospectus and in the letter of transmittal.
The
method of delivery of private notes and the letter of transmittal and all other
required documents to the exchange agent is at your election and risk. We
recommend that, instead of delivery by mail, you use an overnight or hand
delivery service. In all cases, you should allow sufficient time to ensure
delivery to the exchange agent prior to the expiration date. You should not
send
letters of transmittal or private notes to us. You may request that your
respective brokers, dealers, commercial banks, trust companies or nominees
effect the transactions described above for you.
If you
are a beneficial owner whose private notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish
to
tender your private notes, you should contact such registered
23
Back to Table of Contents
holder
promptly and instruct such registered holder to tender on your behalf. If you
wish to tender on your own behalf, prior to completing and executing the letter
of transmittal and delivering your private notes, you must either:
·
make
appropriate arrangements to register
ownership of your private notes in your name; or
·
obtain
a properly completed bond power from
the registered holder.
The
transfer of record ownership may take considerable time unless private notes
are
tendered:
·
by
a registered holder who has not
completed the box entitled “Special Registration Instructions” or “Special
Delivery Instruction” on the letter of transmittal; or
·
for
the account of an “Eligible
Institution” which is either:
·
a
member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc.;
·
a
commercial bank or trust company located
or having an office or correspondent in the United States; or
·
otherwise
an “eligible guarantor
institution” within meaning of Rule 17Ad-15 under the Exchange Act.
An
Eligible Institution must guarantee the signatures on a letter of transmittal
or
a notice of withdrawal described below under “— Withdrawal of Tenders.”
If the
letter of transmittal is signed by a person other than the registered holder,
such private notes must be endorsed or accompanied by appropriate bond powers
which authorize such person to tender the private notes on behalf of the
registered holder, in either case signed as the name of the registered holder
or
holders appears on the private notes.
If the
letter of transmittal or any private notes or bond powers are signed or endorsed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such
persons should so indicate when signing, and unless waived by us, they must
submit evidence satisfactory to us of their authority to so act with the letter
of transmittal.
The
letter of transmittal will include representations to us as set forth under
“Resale of Exchange Notes.”
You
should note that:
·
all
questions as to the validity, form,
eligibility, including time of receipt, acceptance and withdrawal of the
tendered private notes will be determined by us in our sole discretion, which
determination will be final and binding;
·
we
reserve the absolute right to reject any
and all private notes not properly tendered or any private notes the acceptance
of which would, in our judgment or the judgment of our counsel, be
unlawful;
·
we
also reserve the absolute right to waive
any irregularities or conditions of tender as to particular private notes.
Our
interpretation of the terms and conditions of the exchange offer, including
the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of private notes must be cured within such time as we shall
determine;
·
although
we intend to notify holders of
defects or irregularities with respect to any tender of private notes, neither
we, the exchange agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to tenders of private
notes, nor shall any of them incur any liability for failure to give such
notification; and
·
tenders
of private notes will not be deemed
to have been made until such irregularities have been cured or waived. Any
private notes received by the exchange agent that we determine are not properly
tendered or the tender of which is otherwise rejected by us and as to which
the
defects or irregularities have not been cured or waived by us will be returned
by the exchange agent to the tendering holder unless otherwise provided in
the
letter of transmittal, as soon as practicable following the expiration
date.
24
The
exchange agent will make a request promptly after the date of this prospectus
to
establish accounts with respect to the private notes at DTC for the purpose
of
facilitating the exchange offer. Any financial institution that is a participant
in DTC’s system may make book-entry delivery of private notes by causing DTC to
transfer such private notes into the exchange agent’s account with respect to
the private notes in accordance with DTC’s Automated Tender Offer Program
procedures for such transfer. However, the exchange for the private notes so
tendered will only be made after timely confirmation of such book-entry transfer
of private notes into the exchange agent’s account, and timely receipt by the
exchange agent of an agent’s message and any other documents required by the
letter of transmittal. The term “agent’s message” means a message, transmitted
by DTC and received by the exchange agent and forming a part of the confirmation
of a book-entry transfer, which states that DTC has received an express
acknowledgment from a participant that is tendering private notes that such
participant has received the letter of transmittal and agrees to be bound by
the
terms of the letter of transmittal, and that we may enforce such agreement
against the participant.
Although
delivery of private notes may be effected through book-entry transfer into
the
exchange agent’s account at DTC, you must transmit and the exchange agent must
receive, the letter of transmittal (or facsimile thereof) properly completed
and
duly executed with any required signature guarantee and all other required
documents prior to the expiration date, or you must comply with the guaranteed
delivery procedures described below. Delivery of documents to DTC does not
constitute delivery to the exchange agent.
Guaranteed Delivery
Procedures
If you
wish to tender your private notes but your private notes are not immediately
available, or time will not permit your private notes or other required
documents to reach the exchange agent before the expiration date, or the
procedure for book-entry transfer cannot be completed on a timely basis, you
may
affect a tender if:
1.
the tender is made through an
Eligible Institution;
2.
prior to the expiration date, the
exchange agent receives from such Eligible Institution a properly completed
and
duly executed notice of guaranteed delivery, by facsimile transmittal, mail
or
hand delivery:
·
stating
the name and address of the holder,
the certificate number or numbers of such holder’s private notes and the
principal amount of such private notes tendered;
·
stating
that the tender is being made
thereby; and
·
guaranteeing
that, within three New York
Stock Exchange trading days after the expiration date, the letter of
transmittal, or a facsimile thereof, together with the certificate(s)
representing the private notes to be tendered in proper form for transfer,
or
confirmation of a book-entry transfer into the exchange agent’s account at DTC
of private notes delivered electronically, and any other documents required
by
the letter of transmittal, will be deposited by the Eligible Institution with
the exchange agent; and
3.
such properly completed and
executed letter of transmittal, or a facsimile thereof, together with the
certificate(s) representing all tendered private notes in proper form for
transfer, or confirmation of a book-entry transfer into the exchange agent’s
account at DTC of private notes delivered electronically and all other documents
required by the letter of transmittal are received by the exchange agent within
three New York Stock Exchange trading days after the expiration date.
Upon
request, the exchange agent will send to you a notice of guaranteed delivery
if
you wish to tender your private notes according to the guaranteed delivery
procedures described above.
Withdrawal of
Tenders
Except
as
otherwise provided in this prospectus, you may withdraw tenders of private
notes
at any time prior to the expiration date.
For a
withdrawal to be effective, the exchange agent must receive a written or
facsimile transmission notice of withdrawal at its address set forth this
prospectus prior to the expiration date. Any such notice of withdrawal
must:
·
specify
the name of the person who
deposited the private notes to be withdrawn;
25
·
identify
the private notes to be withdrawn,
including the certificate number or number and principal amount of such private
notes or, in the case of private notes transferred by book-entry transfer,
the
name and number of the account at DTC to be credited; and
·
be
signed in the same manner as the
original signature on the letter of transmittal by which such private notes
were
tendered, including any required signature guarantee.
We will
determine in our sole discretion all questions as to the validity, form and
eligibility, including time of receipt, of such withdrawal notices, and our
determination shall be final and binding on all parties. We will not deem any
properly withdrawn private notes to have been validly tendered for purposes
of
the exchange offer, and we will not issue new notes with respect those private
notes unless you validly retender the withdrawn private notes. You may retender
properly withdrawn private notes following one of the procedures described
above
under
“— Procedures for Tendering” at any time prior to the expiration
date.
Conditions
Notwithstanding
any other term of the exchange offer, we will not be required to accept for
exchange, or exchange the new notes for, any private notes, and may terminate
the exchange offer as provided in this prospectus before the acceptance of
the
private notes, if:
·
the
exchange offer violates applicable law,
rules or regulations or an applicable interpretation of the staff of the
SEC;
·
an
action or proceeding has been instituted
or threatened in any court or by any governmental agency which might materially
impair our ability to proceed with the exchange offer;
·
there
has been proposed, adopted or enacted
any law, rule or regulation that, in our reasonable judgment would impair
materially our ability to consummate the exchange offer; or
·
all
governmental approvals which we deem
necessary for the completion of the exchange offer have not been
obtained.
If we
determine in our reasonable discretion that any of these conditions are not
satisfied, we may:
·
refuse
to accept any private notes and
return all tendered private notes to you;
·
extend
the exchange offer and retain all
private notes tendered before the exchange offer expires, subject, however,
to
your rights to withdraw the private notes; or
·
waive
the unsatisfied conditions with
respect to the exchange offer and accept all properly tendered private notes
that have not been withdrawn.
If the
waiver constitutes a material change to the exchange offer, we will promptly
disclose the waiver by means of a prospectus supplement that we will distribute
to the registered holders of the private notes.
Exchange
Agent
We have
appointed Wilmington Trust Company, the trustee under the indenture, as exchange
agent for the exchange offer. You should send all executed letters of
transmittal to the exchange agent at one of the addresses set forth below.
In
such capacity, the exchange agent has no fiduciary duties and will be acting
solely on the basis of directions of our company. You should direct questions,
requests for assistance and requests for additional copies of this prospectus
or
of the letter of transmittal and requests for a notice of guaranteed delivery
to
the exchange agent addressed as follows:
By
Certified or Registered Mail:
Wilmington Trust Company
Rodney
Square North
1100 North Market Street
Wilmington, DE
19890-1626
Attention: Alisha Clendaniel
26
Back to Table of Contents
By
Overnight Courier or Hand Delivery:
Wilmington Trust
Company
Rodney Square North
1100 North Market Street
Wilmington, DE
19890-1626
Attention: Alisha Clendaniel
By
Facsimile:
(302) 636-4139
Attention: Exchanges
Confirm
By Telephone:
(302)
636-6470
For Information Call
(302) 636-6470
Delivery
to an address or facsimile number other than those listed above will not
constitute a valid delivery.
The
trustee does not assume any responsibility for and makes no representation
as to
the validity or adequacy of this prospectus or the notes.
Solicitation of
Tenders; Fees and Expenses
We
will pay all expenses of soliciting tenders pursuant to the exchange offer.
We
are making the principal solicitation by mail. Our officers and regular
employees may make additional solicitations in person or by telephone or
telecopier.
We
have not retained any dealer-manager in connection with the exchange offer
and
will not make any payments to brokers, dealers or other persons soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and will reimburse the exchange
agent for its reasonable out-of-pocket costs and expenses in connection
therewith.
We
also may pay brokerage houses and other custodians, nominees and fiduciaries
the
reasonable out-of-pocket expenses incurred by them in forwarding copies of
this
prospectus, letters of transmittal and related documents to the beneficial
owners of the private notes and in handling or forwarding tenders for
exchange.
We
will pay the expenses to be incurred in connection with the exchange offer,
including fees and expenses of the exchange agent and trustee and accounting
and
legal fees and printing costs.
We
will pay all transfer taxes, if any, applicable to the exchange of private
notes
for new notes pursuant to the exchange offer. If, however, certificates
representing new notes or private notes for principal amounts not tendered
or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the private
notes
tendered, or if tendered private notes are registered in the name of any person
other than the person signing the letter of transmittal, or if a transfer tax
is
imposed for any reason other than the exchange of private notes pursuant to
the
exchange offer, then the amount of any such transfer taxes, whether imposed
on
the registered holder or any other persons, will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the letter of transmittal, the amount of such transfer
taxes will be billed by us directly to such tendering holder.
Consequences of
Failure to Exchange
Participation
in the exchange offer is voluntary. We urge you to consult your financial and
tax advisors in making your decisions on what action to take. Private notes
that
are not exchanged for new notes pursuant to the exchange offer will remain
restricted securities. Accordingly, those private notes may be resold
only:
·
to
a person whom the seller reasonably
believes is a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A promulgated under the Securities Act;
·
in
a transaction meeting the requirements
of Rule 144 promulgated under the Securities Act;
·
outside
the United States to a foreign
person in a transaction meeting the requirements of Rule 903 or 904 of
Regulation S promulgated under the Securities Act;
27
·
in
accordance with another exemption from
the registration requirements of the Securities Act and based upon an opinion
of
counsel if we so request;
·
to
us; or
·
pursuant
to an effective registration
statement.
In
each case, the private notes may be resold only in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.
28
The
following table contains (1) our selected consolidated statement of operations
and other financial data for the fiscal years ended December 31, 2006,
2005, 2004, 2003 and 2002 and our selected consolidated balance sheet data
at December 31, 2006, 2005, 2004, 2003 and 2002, which have been
derived from our audited consolidated financial statements not included in
this
prospectus and which are incorporated by reference herein and (2) our selected
consolidated statement of operations and other financial data for the three
months ended March 31, 2007 and 2006 and our selected consolidated balance
sheet data at March 31, 2007, which have been derived from our unaudited
consolidated financial statements not included in this prospectus and which
are
incorporated by reference herein. You should read the selected consolidated
financial data of AREP in conjunction with its financial statements and the
related notes and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” incorporated by reference herein from our (i) Annual
Reports on Form 10-K for the years ended December 31, 2006, 2005, 2004,
2003 and 2002 and (ii) Quarterly Report on Form 10-Q for the three months ended
March 31, 2007 (referred to herein as the 2007 three-month period). The
selected consolidated financial data as of March 31, 2007 and for the three
months ended March 31, 2007 and 2006 are unaudited. For the three months
ended March 31, 2007 and 2006, all adjustments, consisting only of normal
and recurring adjustments, except for the adoption of SFAS No. 159 as described
in Note 1 to our consolidated financial statements included in our Quarterly
Report on Form 10-Q for the 2007 three-month period, which are, in our opinion,
necessary for a fair presentation of the interim consolidated financial
statements, have been included. Results for the 2007 three-month period
are not necessarily indicative of the results for the full year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three
Months
Ended
March 31,
|
|
Year
Ended December 31,
|
|
| |
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
| |
|
(in
000s, except per unit amounts and ratio)
|
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
351,379
|
|
$
|
350,147
|
|
$
|
1,477,930
|
|
$
|
900,962
|
|
$
|
361,538
|
|
$
|
309,213
|
|
$
|
358,109
|
|
|
Income
(loss) from continuing operations
|
|
$
|
68,717
|
|
$
|
(9,416
|
)
|
$
|
23,069
|
|
$
|
(22,656
|
)
|
$
|
65,176
|
|
$
|
42,415
|
|
$
|
53,046
|
|
|
Total
income (loss) from discontinued operations
|
|
$
|
27,861
|
|
$
|
59,146
|
|
$
|
775,764
|
|
$
|
(3,013
|
)
|
$
|
88,578
|
|
$
|
26,005
|
|
$
|
(4,320
|
)
|
|
Earnings
(loss) before cumulative effect of
accounting change
|
|
$
|
96,578
|
|
$
|
49,730
|
|
$
|
798,833
|
|
$
|
(25,669
|
)
|
$
|
153,754
|
|
$
|
68,420
|
|
$
|
48,726
|
|
|
Cumulative
effect of accounting change
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,912
|
|
|
—
|
|
|
Net
earnings (loss)
|
|
$
|
96,578
|
|
$
|
49,730
|
|
$
|
798,833
|
|
$
|
(25,669
|
)
|
$
|
153,754
|
|
$
|
70,332
|
|
$
|
48,726
|
|
|
Net
earnings (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partners
|
|
$
|
94,656
|
|
$
|
48,741
|
|
$
|
782,936
|
|
$
|
(20,292
|
)
|
$
|
130,850
|
|
$
|
51,074
|
|
$
|
63,168
|
|
|
General
partner
|
|
|
1,922
|
|
|
989
|
|
|
15,897
|
|
|
(5,377
|
)
|
|
22,904
|
|
|
19,258
|
|
|
(14,442
|
)
|
|
Net
earnings (loss)
|
|
$
|
96,578
|
|
$
|
49,730
|
|
$
|
798,833
|
|
$
|
(25,669
|
)
|
$
|
153,754
|
|
$
|
70,332
|
|
$
|
48,726
|
|
|
Basic
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations per
LP Unit
|
|
$
|
1.09
|
|
$
|
(0.15
|
)
|
$
|
0.40
|
|
$
|
(0.31
|
)
|
$
|
0.96
|
|
$
|
0.50
|
|
$
|
1.37
|
|
|
Income
from (loss) discontinued operations
per LP Unit
|
|
|
0.44
|
|
|
0.94
|
|
|
12.29
|
|
|
(0.05
|
)
|
|
1.88
|
|
|
0.55
|
|
|
(0.10
|
)
|
|
Basic
earnings (loss) per LP Unit
|
|
$
|
1.53
|
|
$
|
0.79
|
|
$
|
12.69
|
|
$
|
(0.36
|
)
|
$
|
2.84
|
|
$
|
1.05
|
|
$
|
1.27
|
|
|
Weighted
average limited partnership units outstanding
|
|
|
61,857
|
|
|
61,857
|
|
|
61,857
|
|
|
54,085
|
|
|
46,098
|
|
|
46,098
|
|
|
46,098
|
|
|
Diluted
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
1.09
|
|
$
|
(0.15
|
)
|
$
|
0.40
|
|
$
|
(0.31
|
)
|
$
|
0.95
|
|
$
|
0.50
|
|
$
|
1.20
|
|
|
Income
(loss) from discontinued operations
per LP Unit
|
|
|
0.44
|
|
|
0.94
|
|
|
12.29
|
|
|
(0.05
|
)
|
|
1.69
|
|
|
0.55
|
|
|
(0.08
|
)
|
|
Diluted
earnings (loss) per LP Unit
|
|
$
|
1.53
|
|
$
|
0.79
|
|
$
|
12,69
|
|
$
|
(0.36
|
)
|
$
|
2.64
|
|
$
|
1.05
|
|
$
|
1.12
|
|
|
Weighted
average limited partnership units and equivalent partnership units
outstanding
|
|
|
61,857
|
|
|
61,857
|
|
|
61,857
|
|
|
54,085
|
|
|
51,542
|
|
|
46,098
|
|
|
56,467
|
|
|
Other
financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared (per LP Unit)
|
|
$
|
0.15
|
|
$
|
0.10
|
|
$
|
0.40
|
|
$
|
0.20
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ratio
of earnings to fixed charges(1)
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
2.0
|
|
|
2.2
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As
of
March 31,
|
|
As
of December 31,
|
| |
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003(1)
|
|
2002
|
| |
|
(in
$000s)
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,331,521
|
|
$
|
1,912,235
|
|
$
|
460,091
|
|
$
|
762,708
|
|
$
|
487,498
|
|
$
|
79,540
|
|
Investments
|
|
|
765,495
|
|
|
719,047
|
|
|
820,817
|
|
|
350,527
|
|
|
167,727
|
|
|
395,495
|
|
Property,
plant and equipment, net
|
|
|
898,594
|
|
|
907,071
|
|
|
749,712
|
|
|
580,428
|
|
|
597,487
|
|
|
735,236
|
|
Total
assets
|
|
|
4,622,667
|
|
|
4,244,747
|
|
|
3,963,545
|
|
|
2,861,153
|
|
|
2,156,892
|
|
|
2,002,493
|
|
Long
term debt (including current portion
and debt related to assets held
for sale)
|
|
|
1,699,118
|
|
|
1,208,960
|
|
|
1,435,821
|
|
|
759,807
|
|
|
374,421
|
|
|
435,675
|
|
Liability
for preferred limited partnership
units(2)
|
|
|
119,073
|
|
|
117,656
|
|
|
112,067
|
|
|
106,731
|
|
|
101,649
|
|
|
—
|
|
Partners’
equity
|
|
|
2,347,478
|
|
|
2,310,655
|
|
|
1,495,532
|
|
|
1,641,755
|
|
|
1,527,396
|
|
|
1,387,253
|
——————
(1)
Represents
our ratio of earnings to fixed charges for the periods indicated. For purposes
of computing the ratio of earnings to fixed charges, earnings represent earnings
from continuing operations before income taxes, equity in earnings (loss) of
investees and minority interest plus fixed charges. Fixed charges include
(a) interest on indebtedness (whether expensed or capitalized),
(b) amortization premiums, discounts and capitalized expenses related to
indebtedness and (c) the portion of rent expense we believe to be
representative of interest. For fiscal years 2006 and 2005, fixed charges
exceeded earnings by $44.4 million and $15.9 million, respectively. For the
three months ended March 31, 2006, fixed charges exceeded earnings by $19.3
million.
(2)
On
July 1, 2003, we 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,
our
preferred units, which are an unconditional obligation, have been reclassified
from “Partners equity” to a liability account in the consolidated balance
sheets.
30
Back to Table of Contents
AMERICAN
REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined financial statements that
follow are presented to give effect to:
·
the
pending acquisition of Lear for an
aggregate cash purchase price of approximately $2.9 billion, funded in part
by approximately $1.3 billion from our cash and cash equivalents and
investments;
·
the
issuance of $2.6 billion of notes
to be issued to finance a portion of the Lear acquisition and finance and
replace a portion of Lear’s existing credit facilities; and
·
the
pending sale of American Casino &
Entertainment Properties LLC, or ACEP, our indirect wholly owned
subsidiary.
The
unaudited pro forma condensed combined financial statements are based on the
historical financial statements of AREP, ACEP and Lear, as well as the
assumptions and adjustments described below and in the accompanying notes to
the
unaudited pro forma condensed combined financial statements.
The
unaudited pro forma condensed combined balance sheet as of March 31, 2007
is presented as if the pending acquisition of Lear and the notes to be issued
to
finance the Lear acquisition occurred on March 31, 2007. The unaudited pro
forma condensed combined statements of operations for the three months ended
March 31, 2007 and the fiscal year ended December 31, 2006 has been
prepared to give effect to the unaudited pro forma adjustments necessary as
if
the pending acquisition of Lear and the notes to be issued to finance the Lear
acquisition had taken place on January 1, 2006.
As
described in Note 3 to the pro forma condensed combined financial statements,
on
October 16, 2006 and March 31, 2007, Lear completed the divestiture of
substantially all of its European and North American interior businesses,
respectively. Accordingly, the unaudited pro forma condensed combined statement
of operations for the three months ended March 31, 2007 gives effect to the
IAC
North America Transaction (as defined below) as if it had occurred as of January
1, 2007. The unaudited pro forma condensed combined statement of operations
for
the year ended December 31, 2006 gives effect to the IAC Europe Transaction
(as
defined below) and North America Transaction as if they had occurred as of
January 1, 2006.
The
unaudited pro forma condensed combined balance sheet as of March 31, 2007
is presented as if the pending sale of ACEP occurred on March 31, 2007. The
unaudited pro forma condensed combined statements of operations for the three
months ended March 31, 2007 and the years ended December 31, 2006,
2005 and 2004 has been prepared to give effect to the unaudited pro forma
adjustments necessary as if the pending sale of ACEP had taken place on
January 1, 2004. In accordance with SEC guidelines, such historical pro
forma statements of operations are presented for discontinued operations that
are not yet required to be reflected in historical statements.
The
preliminary allocation of the purchase price of Lear used in the unaudited
pro
forma condensed combined financial statements is based upon preliminary
estimates. The estimates and assumptions, some of which cannot be made prior
to
completion of the Lear acquisition, are subject to change upon the acquisition
date and finalization of the valuation of Lear’s assets and liabilities. Upon
completion of the acquisition, AREP expects to make additional adjustments,
and
these valuations could change significantly from those used in the pro forma
condensed combined financial data presented below. The final determination
of
the allocation of the purchase price will be based on the actual tangible and
intangible assets of Lear that exist as of the acquisition date.
The
unaudited pro forma condensed combined results do not purport to be indicative
of the financial position and results of operations that we will obtain in
the
future, or that we would have obtained if the pending sale of ACEP and
acquisition of Lear were effective as of the dates indicated above. The pro
forma adjustments are based upon currently available information and upon
certain assumptions that we believe are reasonable. The unaudited pro forma
condensed combined financial statements should be read in conjunction with
the
historical consolidated financial statements of AREP and Lear included in their
respective annual reports on Form 10-K and quarterly reports on Form 10-Q,
and
related amendments.
31
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE
SHEETS
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March
31, 2007
|
| |
|
Historical
|
|
Pro
Forma Adjustments
|
|
AREP
|
|
LEAR
|
Acquisition
of
Lear
|
|
|
|
Sale
of
ACEP
|
|
|
|
|
Pro
Forma
Results
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,331,521
|
|
$
|
330,400
|
|
$
|
(1,456,491
|
)
|
(4a)
|
|
$
|
1,004,450
|
|
(5a)
|
|
|
$
|
2,209,880
|
|
Investments
|
|
|
563,552
|
|
|
—
|
|
|
—
|
|
|
|
|
(3,159
|
)
|
(5b)
|
|
|
|
560,393
|
|
Inventories,
net
|
|
|
235,358
|
|
|
599,000
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
834,358
|
|
Trade,
notes and other receivables, net
|
|
|
169,841
|
|
|
2,412,700
|
|
|
—
|
|
|
|
|
(6,348
|
)
|
(5b)
|
|
|
|
2,576,193
|
|
Other
current assets
|
|
|
124,594
|
|
|
355,900
|
|
|
—
|
|
|
|
|
(18,535
|
)
|
(5b)
|
|
|
|
461,959
|
|
Total
current assets
|
|
|
3,424,866
|
|
|
3,698,000
|
|
|
(1,456,491
|
)
|
|
|
|
976,408
|
|
|
|
|
|
6,642,783
|
|
Property,
plant and equipment, net
|
|
|
898,594
|
|
|
1,425,900
|
|
|
—
|
|
|
|
|
(417,978
|
)
|
(5b)
|
|
|
|
1,906,516
|
|
Investments
|
|
|
201,943
|
|
|
183,200
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
385,143
|
|
Goodwill
|
|
|
—
|
|
|
2,006,600
|
|
|
2,182,900
|
|
(4b)
|
|
|
—
|
|
|
|
|
|
4,189,500
|
|
Intangible
assets
|
|
|
25,772
|
|
|
40,900
|
|
|
—
|
|
|
|
|
(2,370
|
)
|
(5b)
|
|
|
|
64,302
|
|
Other
assets
|
|
|
71,492
|
|
|
306,400
|
|
|
—
|
|
|
|
|
(41,631
|
)
|
(5b)
|
|
|
|
336,261
|
|
Total
assets
|
|
$
|
4,622,667
|
|
$
|
7,661,000
|
|
$
|
726,409
|
|
|
|
$
|
514,429
|
|
|
|
|
$
|
13,524,505
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
PARTNERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
66,497
|
|
$
|
2,480,300
|
|
$
|
—
|
|
|
|
$
|
(6,749
|
)
|
(5b)
|
|
|
$
|
2,540,048
|
|
Accrued
expenses and other
current liabilities
|
|
|
168,744
|
|
|
1,181,000
|
|
|
—
|
|
|
|
|
210,981
|
|
(5b)
|
|
|
|
1,560,725
|
|
Current
portion of long-term debt
|
|
|
23,620
|
|
|
26,400
|
|
|
—
|
|
|
|
|
(502
|
)
|
(5b)
|
|
|
|
49,518
|
|
Total
current liabilities
|
|
|
258,861
|
|
|
3,687,700
|
|
|
—
|
|
|
|
|
203,730
|
|
|
|
|
|
4,150,291
|
|
Long-term
debt
|
|
|
1,675,498
|
|
|
2,431,800
|
|
|
1,481,600
|
|
(4c)
|
|
|
(257,202
|
)
|
(5b)
|
(5c)
|
|
|
5,331,696
|
|
Other
non-current liabilities
|
|
|
23,738
|
|
|
820,100
|
|
|
—
|
|
|
|
|
(6,144
|
)
|
(5b)
|
|
|
|
837,694
|
|
Preferred
limited partnership units
|
|
|
119,073
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
119,073
|
|
Total
long-term liabilities
|
|
|
1,818,309
|
|
|
3,251,900
|
|
|
1,481,600
|
|
|
|
|
(263,346
|
)
|
|
|
|
|
6,288,463
|
|
Total
Liabilities
|
|
|
2,077,170
|
|
|
6,939,600
|
|
|
1,481,600
|
|
|
|
|
(59,616
|
)
|
|
|
|
|
10,438,754
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
198,019
|
|
|
28,900
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
226,919
|
|
Partners’
equity
|
|
|
2,347,478
|
|
|
692,500
|
|
|
(755,191
|
)
|
(4d)
|
|
|
574,045
|
|
(5d)
|
|
|
|
2,858,832
|
|
Total
liabilities and partners’ equity
|
|
$
|
4,622,667
|
|
$
|
7,661,000
|
|
$
|
726,409
|
|
|
|
$
|
514,429
|
|
|
|
|
$
|
13,524,505
|
32
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended March 31, 2007
|
|
| |
|
Historical
|
|
Pro
Forma Adjustments
|
|
| |
|
AREP
|
|
LEAR
|
|
Acquisition
of
Lear
|
|
|
|
Lear
IAC
Transaction
(4f)
|
|
|
Sale
of
ACEP
(5e)
|
|
Pro
Forma
Results
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lear
Automotive
|
|
$
|
—
|
|
$
|
4,406,100
|
|
$
|
—
|
|
|
|
$
|
(580,500
|
)
|
|
$
|
—
|
|
$
|
3,825,600
|
|
|
Gaming
|
|
|
112,888
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
(112,888
|
)
|
|
—
|
|
|
Real
Estate
|
|
|
27,887
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
27,887
|
|
|
Home
Furnishings
|
|
|
210,604
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
210,604
|
|
| |
|
|
351,379
|
|
|
4,406,100
|
|
|
—
|
|
|
|
|
(580,500
|
)
|
|
|
(112,888
|
)
|
|
4,064,091
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lear
Automotive
|
|
|
—
|
|
|
4,220,700
|
|
|
—
|
|
|
|
|
(579,600
|
)
|
|
|
—
|
|
|
3,641,100
|
|
|
Loss
on divestiture of Lear’s Interior business
|
|
|
—
|
|
|
25,600
|
|
|
—
|
|
|
|
|
(25,600
|
)
|
|
|
—
|
|
|
—
|
|
|
Gaming
|
|
|
89,661
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
(89,661
|
)
|
|
—
|
|
|
Real
Estate
|
|
|
23,606
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
23,606
|
|
|
Home
Furnishings
|
|
|
249,619
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
249,619
|
|
|
Holding
Company Expenses
|
|
|
7,679
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
7,679
|
|
| |
|
|
370,565
|
|
|
4,246,300
|
|
|
—
|
|
|
|
|
(605,200
|
)
|
|
|
(89,661
|
)
|
|
3,922,004
|
|
|
Operating
income (loss)
|
|
|
(19,186
|
)
|
|
159,800
|
|
|
—
|
|
|
|
|
24,700
|
|
|
|
(23,227
|
)
|
|
142,087
|
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(32,977
|
)
|
|
(51,500
|
)
|
|
(27,743
|
)
|
(4e)
|
|
|
200
|
|
|
|
5,436
|
|
|
(106,584
|
)
|
|
Interest
and other income
|
|
|
31,458
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
(419
|
)
|
|
31,039
|
|
|
Other
income (expense), net
|
|
|
84,781
|
|
|
(17,200
|
)
|
|
—
|
|
|
|
|
3,100
|
|
|
|
—
|
|
|
70,681
|
|
|
Equity
on earnings of affiliate
|
|
|
—
|
|
|
1,300
|
|
|
—
|
|
|
|
|
(400
|
)
|
(4g)
|
|
—
|
|
|
900
|
|
|
Income
(loss) from continuing operations before
income taxes and minority
interests
|
|
|
64,076
|
|
|
92,400
|
|
|
(27,743
|
)
|
|
|
|
27,600
|
|
|
|
(18,210
|
)
|
|
138,123
|
|
|
Income
tax expense
|
|
|
(6,949
|
)
|
|
(32,400
|
)
|
|
—
|
|
|
|
|
1,600
|
|
(4h)
|
|
6,192
|
|
|
(31,557
|
)
|
|
Minority
interests
|
|
|
11,590
|
|
|
(10,100
|
)
|
|
—
|
|
|
|
|
(300
|
)
|
|
|
—
|
|
|
1,190
|
|
|
Income
(loss) from continuing operations
|
|
|
68,717
|
|
|
49,900
|
|
|
(27,743
|
)
|
|
|
|
28,900
|
|
|
|
(12,018
|
)
|
|
107,756
|
|
|
Income
(loss) from discontinued operations
|
|
|
27,861
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
|
12,018
|
|
|
39,879
|
|
|
Net
earnings
|
|
$
|
96,578
|
|
$
|
49,900
|
|
$
|
(27,743
|
)
|
|
|
$
|
28,900
|
|
|
$
|
—
|
|
$
|
147,635
|
|
|
Net
earnings (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partner
|
|
$
|
94,656
|
|
$
|
48,907
|
|
$
|
(27,191
|
)
|
|
|
$
|
28,325
|
|
|
$
|
—
|
|
$
|
144,697
|
|
|
General
partner
|
|
|
1,922
|
|
|
993
|
|
|
(552
|
)
|
|
|
|
575
|
|
|
|
—
|
|
|
2,938
|
|
| |
|
$
|
96,578
|
|
$
|
49,900
|
|
$
|
(27,743
|
)
|
|
|
$
|
28,900
|
|
|
$
|
—
|
|
$
|
147,635
|
|
|
Net earnings
per limited partnership unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.71
|
|
|
Income from discontinued operations
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.63
|
|
|
Basic
earnings per LP unit
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.34
|
|
|
Weighted average limited
partnership units outstanding:
|
|
|
61,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,857
|
|
|
Diluted earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.70
|
|
|
Income from discontinued operations
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.62
|
|
|
Diluted earnings per LP unit
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.32
|
|
|
Weighted average LP units
and equivalent partnership units outstanding
|
|
|
61,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,920
|
|
See accompanying notes
33
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year
Ended December 31, 2006
|
|
| |
Historical
|
|
Pro
Forma Adjustments
|
|
| |
AREP
|
|
LEAR
|
|
Acquisition
of
Lear
|
|
|
Lear
IAC
Transactions
(4f)
|
|
Sale
of
ACEP
(5e)
|
|
Pro
Forma
Results
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lear
Automotive
|
|
$
|
—
|
|
$
|
17,838,900
|
|
$
|
—
|
|
|
$
|
(3,067,200
|
)
|
$
|
—
|
|
$
|
14,771,700
|
|
|
Gaming
|
|
|
385,699
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(385,699
|
)
|
|
—
|
|
|
Real
Estate
|
|
|
134,575
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
134,575
|
|
|
Home
Furnishings
|
|
|
957,656
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
957,656
|
|
| |
|
|
1,477,930
|
|
|
17,838,900
|
|
|
—
|
|
|
$
|
(3,067,200
|
)
|
|
(385,699
|
)
|
|
15,863,931
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lear
Automotive
|
|
|
—
|
|
|
17,545,500
|
|
|
—
|
|
|
|
(3,247,300
|
)
|
|
—
|
|
|
14,298,200
|
|
|
Loss
on divestiture of Lear’s Interior business
|
|
|
—
|
|
|
636,000
|
|
|
—
|
|
|
|
(636,000
|
)
|
|
—
|
|
|
—
|
|
|
Gaming
|
|
|
326,984
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(326,984
|
)
|
|
—
|
|
|
Real
Estate
|
|
|
106,621
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
106,621
|
|
|
Home
Furnishings
|
|
|
1,108,293
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
1,108,293
|
|
|
Holding
Company Expenses
|
|
|
25,822
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
25,822
|
|
| |
|
|
1,567,720
|
|
|
18,181,500
|
|
|
—
|
|
|
|
(3,883,300
|
)
|
|
(326,984
|
)
|
|
15,538,936
|
|
|
Operating
income (loss)
|
|
|
(89,790
|
)
|
|
(342,600
|
)
|
|
—
|
|
|
|
816,100
|
|
|
(58,715
|
)
|
|
324,995
|
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(106,612
|
)
|
|
(209,800
|
)
|
|
(110,972
|
)
|
(4e)
|
|
400
|
|
|
21,314
|
|
|
(405,670
|
)
|
|
Interest
and other income
|
|
|
52,672
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(2,239
|
)
|
|
50,433
|
|
|
Other
income (expense), net
|
|
|
99,277
|
|
|
(101,000
|
)
|
|
—
|
|
|
|
6,000
|
|
|
239
|
|
|
4,516
|
|
|
Equity
on earnings of affiliate
|
|
|
12,620
|
|
|
16,200
|
|
|
—
|
|
|
|
(43,400
|
)(4g)
|
|
—
|
|
|
(14,580
|
)
|
|
Loss
from continuing operations before income taxes and minority
interests
|
|
|
(31,833
|
)
|
|
(637,200
|
)
|
|
(110,972
|
)
|
|
|
779,100
|
|
|
(39,401
|
)
|
|
(40,306
|
)
|
|
Income
tax expense
|
|
|
(13,271
|
)
|
|
(54,900
|
)
|
|
—
|
|
|
|
(13,700
|
)(4h)
|
|
12,758
|
|
|
(69,113
|
)
|
|
Minority
interests
|
|
|
68,173
|
|
|
(18,300
|
)
|
|
—
|
|
|
|
(1,100
|
)
|
|
—
|
|
|
48,773
|
|
|
Income
(loss) from continuing operations
|
|
|
23,069
|
|
|
(710,400
|
)
|
|
(110,972
|
)
|
|
|
764,300
|
|
|
(26,643
|
)
|
|
(60,646
|
)
|
|
Income
(loss) from discontinued operations
|
|
|
775,764
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
26,643
|
|
|
802,407
|
|
|
Income
(loss) before cumulative effect of a change in accounting
principle
|
|
|
798,833
|
|
|
(710,400
|
)
|
|
(110,972
|
)
|
|
|
764,300
|
|
|
—
|
|
|
741,761
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
2,900
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
2,900
|
|
|
Net
earnings (loss)
|
|
$
|
798,833
|
|
$
|
(707,500
|
)
|
$
|
(110,972
|
)
|
|
$
|
764,300
|
|
$
|
—
|
|
$
|
744,661
|
|
|
Net
earnings (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partner
|
|
$
|
782,936
|
|
$
|
(693,420
|
)
|
$
|
(108,764
|
)
|
|
|
749,090
|
|
$
|
—
|
|
$
|
729,842
|
|
|
General
partner
|
|
|
15,897
|
|
|
(14,080
|
)
|
|
(2,208
|
)
|
|
|
15,210
|
|
|
—
|
|
|
14,819
|
|
| |
|
$
|
798,833
|
|
$
|
(707,500
|
)
|
$
|
(110,972
|
)
|
|
$
|
764,300
|
|
$
|
—
|
|
$
|
744,661
|
|
|
Net
earnings per limited partnership unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.93
|
)
|
|
Income
from discontinued operations
|
|
|
12.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.71
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.05
|
|
|
Basic
earnings (loss) per LP unit
|
|
$
|
12.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.83
|
|
|
Weighted
average limited partnership units outstanding:
|
|
|
61,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,857
|
|
|
Diluted
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.93
|
)
|
|
Income
from discontinued operations
|
|
|
12.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.71
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.05
|
|
|
Diluted
earnings per LP unit
|
|
$
|
12.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.83
|
|
|
Weighted
average LP units and equivalent partnership units outstanding:
|
|
|
61,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,857
|
|
See accompanying notes
34
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year
Ended December 31, 2005
|
|
| |
|
Historical
|
|
Pro
Forma
Adjustments
|
|
|
|
| |
|
AREP
|
|
Sale
of
ACEP (5e)
|
|
Pro
Forma
Results
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
327,982
|
|
$
|
(327,982
|
)
|
$
|
—
|
|
|
Real
Estate
|
|
|
100,299
|
|
|
—
|
|
|
100,299
|
|
|
Home
Furnishings
|
|
|
472,681
|
|
|
—
|
|
|
472,681
|
|
| |
|
|
900,962
|
|
|
(327,982
|
)
|
|
572,980
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
260,955
|
|
|
(260,955
|
)
|
|
—
|
|
|
Real
Estate
|
|
|
82,512
|
|
|
—
|
|
|
82,512
|
|
|
Home
Furnishings
|
|
|
495,110
|
|
|
—
|
|
|
495,110
|
|
|
Holding
Company Expenses
|
|
|
12,478
|
|
|
—
|
|
|
12,478
|
|
|
Acquisition
costs
|
|
|
4,664
|
|
|
—
|
|
|
4,664
|
|
| |
|
|
855,719
|
|
|
(260,955
|
)
|
|
594,764
|
|
|
Operating
income (loss)
|
|
|
45,243
|
|
|
(67,027
|
)
|
|
(21,784
|
)
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(91,174
|
)
|
|
18,846
|
|
|
(72,328
|
)
|
|
Interest
and other income
|
|
|
42,791
|
|
|
(1,617
|
)
|
|
41,174
|
|
|
Other
income (expense), net
|
|
|
(12,861
|
)
|
|
(25
|
)
|
|
(12,886
|
)
|
|
Equity
on earnings of affiliate
|
|
|
1,375
|
|
|
—
|
|
|
1,375
|
|
|
Loss
from continuing operations before income taxes and minority
interests
|
|
|
(14,626
|
)
|
|
(49,823
|
)
|
|
(64,449
|
)
|
|
Income
tax expense
|
|
|
(18,170
|
)
|
|
16,789
|
|
|
(1,381
|
)
|
|
Minority
interests
|
|
|
10,140
|
|
|
—
|
|
|
10,140
|
|
|
Loss
from continuing operations
|
|
|
(22,656
|
)
|
|
(33,034
|
)
|
|
(55,690
|
)
|
|
Income
(loss) from discontinued operations
|
|
|
(3,013
|
)
|
|
33,034
|
|
|
30,021
|
|
|
Net
loss
|
|
$
|
(25,669
|
)
|
$
|
—
|
|
$
|
(25,669)
|
|
|
Net
loss attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partner
|
|
$
|
(20,292
|
)
|
$
|
—
|
|
$
|
(20,292
|
)
|
|
General
partner
|
|
|
(5,377
|
)
|
|
—
|
|
|
(5,377
|
)
|
| |
|
$
|
(25,669
|
)
|
$
|
—
|
|
$
|
(25,669
|
)
|
|
Net loss
per limited partnership unit:
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.31
|
)
|
|
|
|
$
|
(0.90
|
)
|
|
Income from discontinued operations
|
|
|
(0.05
|
)
|
|
|
|
|
0.54
|
|
|
Basic
loss per LP unit
|
|
$
|
(0.36
|
)
|
|
|
|
$
|
(0.36
|
)
|
|
Weighted average limited
partnership units outstanding:
|
|
|
54,085
|
|
|
|
|
|
54,085
|
|
|
Diluted earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(0.31
|
)
|
|
|
|
$
|
(0.90
|
)
|
|
Income (loss) from discontinued operations
|
|
|
(0.05
|
)
|
|
|
|
|
0.54
|
|
|
Diluted loss per LP unit
|
|
$
|
(0.36
|
)
|
|
|
|
$
|
(0.36
|
)
|
|
Weighted average LP units
and equivalent partnership units outstanding
|
|
|
54,085
|
|
|
|
|
|
54,085
|
|
See accompanying notes
35
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS
(amounts in 000s except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year
Ended December 31, 2004
|
|
| |
|
Historical
|
|
Pro
Forma
Adjustments
|
|
|
|
| |
|
AREP
|
|
Sale
of
ACEP (5e)
|
|
Pro
Forma
Results
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
299,981
|
|
$
|
(299,981
|
)
|
$
|
—
|
|
|
Real
Estate
|
|
|
61,557
|
|
|
—
|
|
|
61,557
|
|
| |
|
|
361,538
|
|
|
(299,981
|
)
|
|
61,557
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
251,119
|
|
|
(251,119
|
)
|
|
—
|
|
|
Real
Estate
|
|
|
49,681
|
|
|
—
|
|
|
49,681
|
|
|
Holding
Company Expenses
|
|
|
4,327
|
|
|
—
|
|
|
4,327
|
|
|
Acquisition
costs
|
|
|
414
|
|
|
—
|
|
|
414
|
|
| |
|
|
305,541
|
|
|
(251,119
|
)
|
|
54,422
|
|
|
Operating
income (loss)
|
|
|
55,997
|
|
|
(48,862
|
)
|
|
7,135
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(47,320
|
)
|
|
18,939
|
|
|
(28,381
|
)
|
|
Interest
and other income
|
|
|
42,145
|
|
|
(1,049
|
)
|
|
41,096
|
|
|
Other
income (expense), net
|
|
|
24,453
|
|
|
—
|
|
|
24,453
|
|
|
Income
(Loss) from continuing operations before income taxes
|
|
|
75,275
|
|
|
(30,972
|
)
|
|
44,303
|
|
|
Income tax expense
|
|
|
(10,099
|
)
|
|
10,099
|
|
|
—
|
|
|
Income
(loss) from continuing operations
|
|
|
65,176
|
|
|
(20,873
|
)
|
|
44,303
|
|
|
Income
from discontinued operations
|
|
|
88,578
|
|
|
20,873
|
|
|
109,451
|
|
|
Net
earnings
|
|
$
|
153,754
|
|
$
|
—
|
|
$
|
153,754
|
|
|
Net
earnings attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partner
|
|
$
|
130,850
|
|
$
|
—
|
|
$
|
130,850
|
|
|
General
partner
|
|
|
22,904
|
|
|
—
|
|
|
22,904
|
|
| |
|
$
|
153,754
|
|
$
|
—
|
|
$
|
153,754
|
|
|
Net earnings
per limited partnership unit:
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.96
|
|
|
|
|
$
|
0.51
|
|
|
Income from discontinued operations
|
|
|
1.88
|
|
|
|
|
|
2.33
|
|
|
Basic
earnings per LP unit
|
|
$
|
2.84
|
|
|
|
|
$
|
2.84
|
|
|
Weighted average limited
partnership units outstanding:
|
|
|
46,098
|
|
|
|
|
|
46,098
|
|
|
Diluted earnings:
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.95
|
|
|
|
|
$
|
0.51
|
|
|
Income from discontinued operations
|
|
|
1.69
|
|
|
|
|
|
2.33
|
|
|
Diluted earnings per LP unit
|
|
$
|
2.64
|
|
|
|
|
$
|
2.84
|
|
|
Weighted average LP units
and equivalent partnership units outstanding
|
|
|
51,542
|
|
|
|
|
|
46,098
|
|
See accompanying notes
36
1. DESCRIPTION OF
TRANSACTIONS
Potential
Acquisition
On
February 9, 2007, we entered into an agreement and plan of merger pursuant
to
which we would acquire Lear for an aggregate consideration of approximately
$5.2
billion, including the assumption by the surviving entity of certain outstanding
indebtedness of Lear and the refinancing of Lear’s existing term loan and credit
facility. In connection with the planned merger, our subsidiary, AREP Car
Holdings Corp., entered into a commitment letter with Bank of America, N.A.,
and
Banc of America Securities LLC on February 8, 2007, pursuant to which Bank
of
America would act as the initial lender under two senior secured credit
facilities in an aggregate principal amount of $3.6 billion, consisting of
a
$1.0 billion senior secured revolving facility and a $2.6 billion senior secured
term loan B facility. The credit facilities, along with cash on hand, are
intended to refinance and replace Lear’s existing credit facilities and to fund
the transactions contemplated by the merger. We intend to fund approximately
$1.3 billion of the purchase price from our cash and cash equivalents and
investments. The transaction is conditioned upon (i) clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the applicable foreign
antitrust laws of certain other jurisdictions, (ii) approval of the merger
and
adoption of the merger agreement by Lear stockholders and (iii) other customary
closing conditions. AREP expects that the transaction will close on or about
July 1, 2007, or shortly thereafter, provided the foregoing conditions which
have not yet been satisfied or waived are satisfied or waived. There can be
no
assurance that we will be able to consummate the transaction.
Pending Sale
of
American Casino & Entertainment Properties LLC
On April
22, 2007, American Entertainment Properties Corp, or AEP, a wholly owned
indirect subsidiary of AREP, entered into a Membership Interest Purchase
Agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real
Estate Funds, a series of real estate investment funds affiliated with Goldman,
Sachs & Co., to sell all of the issued and outstanding membership interests
of ACEP, which comprises our gaming operations, for $1.3 billion, plus or minus
certain adjustments such as working capital, more fully described in the
agreement. Pursuant to the terms of the agreement, AEP is required to cause
ACEP
to repay, from funds provided by AEP, the principal, interest, prepayment
penalty or premium due on ACEP’s 7.85% senior secured notes due 2012 and ACEP’s
senior secured credit facility. With this transaction, we anticipate realizing
a
gain of approximately $0.57 billion on our investments in ACEP, after income
taxes. ACEP’s casino assets are comprised of the Stratosphere Casino Hotel &
Tower, the Arizona Charlie’s Decatur, the Arizona Charlie’s Boulder and the
Aquarius Casino Resort. The transaction is subject to the approval of the Nevada
Gaming Commission and the Nevada State Gaming Control Board, as well as
customary conditions. The parties expect to close the transaction in
approximately December 2007; however, there can be no assurance that we will
be
able to consummate the transaction.
2. BASIS OF
PRESENTATION
AREP
accounts for acquisitions under Financial Accounting Standards Board Statement
No. 141, Business Combinations. In accordance with business combination
accounting, AREP will allocate the purchase price of Lear to the tangible and
intangible assets acquired and liabilities assumed based on their estimated
fair
values. AREP’s management has not yet determined the fair value of the assets
and liabilities to be acquired as the acquisition has not yet been consummated.
The final determination of such assumptions and estimates cannot be made until
AREP completes the acquisition of Lear. Therefore, for purposes of the pro
forma
financial statements, the excess of the purchase price over the book value
of
Lear’s assets and liabilities has been allocated to goodwill.
3. LEAR
ACQUISITION
The
purchase price and purchase price allocation below are preliminary estimates
as
the acquisition has not been completed and the date for which the assets to
be
acquired and liabilities to be assumed has not been determined.
37
3. LEAR ACQUISITION
–
(continued)
Preliminary
Purchase Price
The
total preliminary purchase price to be allocated is comprised of:
|
|
|
|
|
|
| |
|
(in
000s)
|
|
|
Purchase
of outstanding common stock of Lear at $36.00 per
share
|
|
$
|
2,857,991
|
|
|
Less:
amount to be allocated to the general partner(1)
|
|
|
(62,691
|
)
|
|
Total
preliminary purchase price to be allocated
|
|
$
|
2,795,300
|
|
——————
(1)
As
of
March 31, 2007, Icahn Partners LP, Icahn Partners Master Fund LP, Koala Holding
Limited Partnership and High River Limited Partnership, which are affiliates
of
Mr. Icahn, beneficially owned approximately 16% of Lear’s outstanding common
stock. In accordance with generally accepted accounting principles, in
connection with the acquisition of Lear stock, the excess of cash disbursed
over
the historical cost of the shares beneficially owned by Mr. Icahn, which amounts
to approximately $62.7 million, will be charged to AREP’s general partner’s
equity.
Preliminary
Purchase Price Allocation
For
purposes of the pro forma financial statements, AREP has used Lear’s assets and
liabilities as of March 31, 2007 as the basis for developing AREP’s fair value
estimates.
The
total preliminary purchase price will be allocated to Lear’s tangible and
intangible assets acquired, and liabilities assumed based on their estimated
fair values as of the acquisition date. The excess of the purchase price over
the net tangible and identifiable intangible assets will be recorded as
goodwill. For purposes of the accompanying pro forma financial statements,
the
total preliminary purchase price was allocated as follows:
|
|
|
|
|
|
| |
|
(in
000s)
|
|
|
Current
assets
|
|
$
|
3,579,600
|
|
|
Property,
plant & equipment, net
|
|
|
1,425,900
|
|
|
Investments
|
|
|
183,200
|
|
|
Other
non current assets
|
|
|
347,300
|
|
|
Goodwill,
net
|
|
|
4,189,500
|
|
|
Current
liabilities
|
|
|
(3,671,000
|
)
|
|
Long-term
debt
|
|
|
(2,431,800
|
)
|
|
Other
non current liabilities and minority interests
|
|
|
(827,400
|
)
|
|
Total
preliminary purchase price
allocation
|
|
$
|
2,795,300
|
|
Lear IAC
Transaction
On
October 16, 2006, Lear completed the contribution of substantially all of its
European interior business to International Automotive Components Group, LLC
(“IAC Europe”), its joint venture with WL Ross & Co. LLC and Franklin Mutual
Advisers, LLC, in exchange for a one-third equity interest in IAC Europe (the
“IAC Europe Transaction”). On March 31, 2007, Lear completed the transfer
of substantially all of the assets of its North American interior business
(as
well as its interests in two China joint ventures) to International Automotive
Components Group North America, Inc. (“IAC North America Transaction”). In
addition, a wholly owned subsidiary of Lear contributed approximately $27
million in cash to International Automotive Components Group North America,
LLC
(“IACNA”) in exchange for a 25% equity interest in IACNA and warrants for an
additional 7% of the current outstanding common equity of IACNA. In connection
with the IAC North America Transaction, International Automotive Components
Group North America, Inc. assumed the ordinary course liabilities of Lear’s
North American interior business, and Lear retained certain pre-closing
liabilities, including pension and postretirement liabilities incurred through
the closing date of the transaction.
For
accounting purposes, Lear’s interests in IACNA and IAC Europe will be accounted
for under the equity method of accounting. The pro forma adjustments related
to
Lear’s accounting for these equity investments do not
38
3. LEAR ACQUISITION
–
(continued)
reflect purchase accounting
adjustments to be recorded by IACNA and IAC Europe and do not reflect the
operations of other businesses acquired by IAC Europe. Consequently, the amounts
reflected in Lear’s unaudited pro forma condensed consolidated financial
statements are subject to change.
4. PRO FORMA
ADJUSTMENTS – LEAR ACQUISITION
The
following pro forma adjustments are included in the unaudited pro forma
condensed combined balance sheet:
4a
To
record the following adjustments to cash:
|
|
|
|
|
|
| |
|
(in
000s)
|
|
|
Estimated
proceeds from borrowings
|
|
$
|
2,600,000
|
|
|
Estimated
cash paid for Lear common
stock
|
|
|
(2,857,991
|
)
|
|
Estimated
transaction costs – Lear
|
|
|
(80,100
|
)
|
|
Estimated
repayment of Lear debt
|
|
|
(1,118,400
|
)
|
|
Total
adjustments to cash
|
|
$
|
(1,456,491
|
)
|
4b
To
record the following adjustments to goodwill:
|
|
|
|
|
| |
|
(in
000s)
|
|
Preliminary
fair
value
|
|
$
|
4,189,500
|
|
Historical
amount
|
|
|
2,006,600
|
|
Increase
|
|
$
|
2,182,900
|
4c
To
record the following adjustments to long-term debt:
|
|
|
|
|
|
| |
|
(in
000s)
|
|
|
Estimated
proceeds from
borrowings
|
|
$
|
2,600,000
|
|
|
Estimated
repayment of Lear debt
|
|
|
(1,118,400
|
)
|
|
Increase
|
|
$
|
1,481,600
|
|
4d
To eliminate Lear’s historical
stockholders’ equity and to record $62.7 million of the purchase price of Lear
stock allocated to the General Partner.
4e
To record additional interest
expense associated with the net increase in debt as per Note 4c above.
4f
To eliminate the results of
operations arising from the IAC North America Transaction and the IAC Europe
Transaction.
4g
To reflect Lear’s estimated equity
loss of $0.4 million and $42.1 million for the three months ended March 31,
2007
and the year ended December 31, 2006, respectively, related to its 25% ownership
interest in IACNA and Lear’s estimated equity loss of $1.3 million for the year
ended December 31, 2006 related to its one-third equity interest in IAC Europe.
These adjustments do not reflect purchase accounting adjustments to be made
by
IACNA and IAC Europe and do not reflect the operations of other businesses
acquired by IAC Europe.
4h
Primarily reflects the elimination
of tax expense relating to the IAC North America Transaction for the three
months ended March 31, 2007, and the elimination of tax benefits relating to
the
IAC North America Transaction and the IAC Europe transaction for the year ended
December 31, 2006.
39
5. PRO FORMA
ADJUSTMENTS – DISPOSITION OF ACEP
5a
To
record the following adjustments to cash:
|
|
|
|
|
|
| |
|
(in
000s)
|
|
|
Estimated
gross proceeds from sale of ACEP
|
|
$
|
1,300,000
|
|
|
Add:
net working capital
|
|
|
50,335
|
|
|
Total
proceeds
|
|
|
1,350,335
|
|
|
Repayment
of long-term debt (including redemption
fees)
|
|
|
(263,600
|
)
|
|
Net
proceeds
|
|
|
1,086,735
|
|
|
Estimated
transaction costs
|
|
|
(6,757
|
)
|
|
Stay
bonuses
|
|
|
(5,000
|
)
|
|
ACEP’s
cash balance included in net working capital
|
|
|
(70,528
|
)
|
|
Total
adjustments to cash
|
|
$
|
1,004,450
|
|
5b
Reflects the elimination of the
March 31, 2007 carrying value of the assets and liabilities of ACEP.
5c
Reflects the payment of ACEP’s
long-term debt by AREP of $255 million.
5d
Reflects the amount of the
estimated net gain on the transaction, net of income taxes.
5e
Reflects the reversal of revenues
and expenses included in income from continuing operations attributable to
the
sale of ACEP, net of income taxes.
40
General
You
can find the definitions of certain terms used in this description under the
subheading “Certain Definitions.” In this description, the word “AREP” refers
only to American Real Estate Partners, L.P., the words “AREP Finance” refer only
to AREP Finance, the word “AREH” refers only to American Real Estate Holdings
Limited Partnership, and the word “API” refers only to American Property
Investors, Inc., and, in each case, not to any of their respective Subsidiaries.
In addition, the word “notes” refers to the notes issued on January 17,
2007 together with the Existing Notes. For the avoidance of doubt, AREH will
be
deemed to be a Subsidiary of AREP for so long as AREH remains a Guarantor.
The
term “Issuers” refers to AREP and AREP Finance, collectively.
The
Issuers issued the private notes, and will issue the new notes, under the
indenture dated February 7, 2005 among the Issuers, AREH, as guarantor, and
Wilmington Trust Company, as trustee. The terms of the notes include those
stated in the indenture and those made part of the indenture by reference to
the
Trust Indenture Act of 1939. The notes issued on January 17, 2007 were
additional notes issued under the indenture described above. On February 1,
2005, the Issuers issued and sold $480.0 million of the Existing Notes. The
notes issued on January 17, 2007 are pari passu with, of the same series
as, and vote on any matter submitted to the noteholders with, the Existing
Notes. Subsequent to the consummation of the exchange offer, the publicly
registered exchange notes will be identical to, and will trade as a single
class
with, the Existing Notes.
The
following description is a summary of the material provisions of the indenture.
It does not restate the indenture in entirety. We urge you to read the indenture
because it and not this description, defines your rights as holders of the
notes. Copies of the indenture are available as set forth below under “—
Additional Information.” Certain defined terms used in this description but not
defined below under “— Certain Definitions” have the meanings assigned to them
in the indenture and the registration rights agreement.
For the
avoidance of doubt, the inclusion of exceptions to the provisions (including
covenants and definitions) set forth herein will not be interpreted to imply
that the matters permitted by the exception would be limited by the terms of
such provisions but for such exceptions.
The
registered holder of a note will be treated as the owner of it for all purposes.
Only registered holders will have rights under the indenture.
Brief Description
of
the Notes and the Note Guarantee
The
Notes
The notes
are:
·
the
general unsecured obligation of each of
the Issuers;
·
pari
passu in right of payment to all
existing and future senior Indebtedness of each of the Issuers;
·
senior
in right of payment to any future
subordinated Indebtedness of each of the Issuers; and
·
effectively
subordinated to the secured
Indebtedness of the Issuers to the extent of the value of the collateral
securing such Indebtedness. As of March 31, 2007, the Issuers did not have
any secured Indebtedness.
The Note
Guarantee
The
Guarantee of the notes is:
·
the
general unsecured obligation of
AREH;
·
pari
passu in right of payment to all
existing and future senior Indebtedness of AREH;
·
senior
in right of payment to any future
subordinated Indebtedness of AREH; and
·
effectively
subordinated to the secured
Indebtedness of AREH to the extent of the value of the collateral securing
such
Indebtedness. As of March 31, 2007, AREH had $108.0 million of secured
Indebtedness.
41
The
operations of AREP are conducted through its Subsidiaries (including AREH)
and,
therefore, AREP depends on the cash flow of AREP’s Subsidiaries and AREH to meet
its obligations, including its obligations under the notes. The notes will
not
be guaranteed by any of AREP’s Subsidiaries other than AREH. The notes and the
guarantee will be effectively subordinated in right of payment to all
Indebtedness and other liabilities and commitments (including trade payables
and
lease obligations) of AREP’s Subsidiaries (other than AREH). Any right of the
Issuers or AREH to receive assets of any of their Subsidiaries (other than
AREH)
upon that Subsidiary’s liquidation or reorganization (and the consequent right
of the holders of the notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary’s creditors, except to the extent
that any of the Issuers or AREH is itself recognized as a creditor of that
Subsidiary, in which case the claims of the Issuers and AREH would still be
subordinate in right of payment to any security in the assets of the Subsidiary
and any Indebtedness of the Subsidiary senior to that held by the Issuers or
AREH. The covenants of the notes do not restrict the ability of AREP’s
Subsidiaries, other than AREH, from incurring additional Indebtedness or
creating liens, nor do the covenants of the notes restrict the ability of AREH,
AREP or its Subsidiaries from making investments or entering into sale and
leaseback transactions. See “Risk Factors The notes will be effectively
subordinated to any secured indebtedness, and the indebtedness and liabilities
of our subsidiaries other than AREH” and “Risk Factors Our subsidiaries, other
than AREH, will not be subject to any of the covenants in the indenture for
the
notes and only AREH will guarantee the notes. We may not be able to rely on
the
cash flow or assets of our subsidiaries to pay our indebtedness.”
Principal, Maturity
and Interest
The
Issuers issued $500.0 million in aggregate principal amount of private
notes and will issue $500.0 million in aggregate principal amount of new
notes. The Issuers may issue additional notes (“Additional Notes”) from time to
time. Any offering of Additional Notes is subject to the covenant “— Certain
Covenants — Incurrence of Indebtedness and Issuance of Preferred Stock.” In the
case of each series, the notes and any Additional Notes subsequently issued
under the indenture will be treated as a single class for all purposes under
the
indenture, including, without limitation, waivers, amendments, redemption and
offers to purchase. The Issuers will issue notes in denominations of $1,000
and
integral multiples of $1,000. The notes will mature on February 15,
2013.
Interest
on the notes will accrue at the rate of 7 1/8% per annum and is payable
semi-annually in arrears on February 15 and August 15, commencing on
February 15, 2007. Interest on overdue principal and interest and
Liquidated Damages, if any, will accrue at a rate that is 1% higher than the
then applicable interest rate on the notes. The Issuers will make each interest
payment to the holders of record on the immediately preceding February 1
and August 1.
Interest
on the notes will accrue from the date of original issuance or, if interest
has
already been paid, from the date it was most recently paid. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Methods of Receiving
Payments on the Notes
If a
noteholder holds at least $2.0 million aggregate principal amount of notes,
such holder may give wire transfer instructions to AREP and the Issuers will
instruct the trustee to pay all principal, interest and premium and Liquidated
Damages, if any, on that holder’s notes in accordance with those instructions.
All other payments on the notes will be made at the office or agency of the
paying agent and registrar within the City and State of New York unless the
Issuers elect to make interest payments by check mailed to the noteholders
at
their address set forth in the register of holders. In addition, all payments
will be subject to the applicable rules and procedures of the settlement systems
(including, if applicable, those of Euroclear and Clearstream), which may change
from time to time.
Paying Agent and
Registrar for the Notes
The
trustee will initially act as paying agent and registrar. The Issuers may change
the paying agent or registrar without prior notice to the holders of the notes,
and the Issuers or any of their Subsidiaries (including AREH) may act as paying
agent or registrar.
42
A holder
may transfer or exchange notes in accordance with the provisions of the
indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents in connection
with a transfer of notes. Holders will be required to pay all taxes due on
transfer. The Issuers will not be required to transfer or exchange any note
selected for redemption. Also, the Issuers will not be required to transfer
or
exchange any note for a period of 15 days before a selection of notes to be
redeemed.
Note
Guarantee
The notes
will be guaranteed by AREH. AREP may, at its option, add subsidiary Guarantors
to the notes. Each Guarantor’s obligations under its Note Guarantee will be
limited as necessary to prevent the Note Guarantee from constituting a
fraudulent conveyance under applicable law. See “Risk Factors — Federal and
state statutes allow courts, under specific circumstances, to void guarantees
and require noteholders to return payments received from the guarantor.”
Any
Guarantor’s Note Guarantee will be released:
(1)
upon the substitution of a successor to AREH or other release as described
under
the heading “Certain Covenants — Merger, Consolidation or Sale of Assets”;
and
(2)
upon legal defeasance or satisfaction and discharge of the indenture as provided
below under the captions “— Covenant Defeasance” and “— Satisfaction and
Discharge.”
Optional
Redemption
At any
time prior to February 15, 2008, the Issuers may on one or more occasions
redeem up to 35% of the aggregate principal amount of notes (including
Additional Notes) issued under the indenture at a redemption price of 107 1/8%
of the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the redemption date, with the net cash proceeds of one
or
more Equity Offerings; provided, however, that:
(1)
at least 65% of the aggregate principal amount of notes issued under the
indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by AREP and its Subsidiaries (including any
Guarantor)); and
(2)
the redemption occurs within 60 days of the date of the closing of such Equity
Offering.
Except
pursuant to the preceding paragraph, the notes will not be redeemable at the
Issuers’ option prior to February 15, 2009.
On
or
after February 15, 2009, the Issuers may redeem all or a part of the notes
upon not less than 15 nor more than 60 days’ notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued
and
unpaid interest and Liquidated Damages, if any, on the notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on one of the years indicated below:
|
|
|
|
|
|
Year
|
|
Percentage
|
|
| |
|
|
|
|
2009
|
|
103.563
|
%
|
|
2010
|
|
101.781
|
%
|
|
2011
and thereafter
|
|
100.000
|
%
|
Mandatory Disposition
Pursuant to Gaming Laws
If any
Gaming Authority requires that a holder or Beneficial Owner of notes be
licensed, qualified or found suitable under any applicable Gaming Law and such
holder or Beneficial Owner:
(1)
fails to apply for a license, qualification or a finding of suitability within
30 days (or such shorter period as may be required by the applicable Gaming
Authority) after being requested to do so by the Gaming Authority; or
43
(2)
is denied such license or qualification or not found suitable; AREP shall then
have the right, at its option:
(a)
to require each such holder or Beneficial Owner to dispose of its notes within
30 days (or such earlier date as may be required by the applicable Gaming
Authority) of the occurrence of the event described in clause (1) or (2) above,
or
(b)
to redeem the notes of each such holder or Beneficial Owner, in accordance
with
Rule 14e-1 of the Exchange Act, if applicable, at a redemption price equal
to
the lowest of:
(i)
the principal amount thereof, together with accrued and unpaid interest and
Liquidated Damages, if any, to the earlier of the date of redemption, the date
30 days after such holder or Beneficial Owner is required to apply for a
license, qualification or finding of suitability (or such shorter period that
may be required by any applicable Gaming Authority) if such holder or Beneficial
Owner fails to do so (“Application Date”) or of the date of denial of license or
qualification or of the finding of unsuitability by such Gaming Authority;
(ii)
the price at which such holder or Beneficial Owner acquired the notes, together
with accrued and unpaid interest and Liquidated Damages, if any, to the earlier
of the date of redemption, the Application Date or the date of the denial of
license or qualification or of the finding of unsuitability by such Gaming
Authority; and
(iii)
such other lesser amount as may be required by any Gaming Authority.
Immediately
upon a determination by a Gaming Authority that a holder or Beneficial Owner
of
the notes will not be licensed, qualified or found suitable and must dispose
of
the notes, the holder or Beneficial Owner will, to the extent required by
applicable Gaming Laws, have no further right:
(1)
to exercise, directly or indirectly, through any trustee or nominee or any
other
person or entity, any right conferred by the notes, the Note Guarantee or the
indenture; or
(2)
to receive any interest, Liquidated Damages, dividend, economic interests or
any
other distributions or payments with respect to the notes and the Note Guarantee
or any remuneration in any form with respect to the notes and the Note Guarantee
from the Issuers, any Note Guarantor or the trustee, except the redemption
price
referred to above.
AREP
shall notify the trustee in writing of any such redemption as soon as
practicable. Any holder or Beneficial Owner that is required to apply for a
license, qualification or a finding of suitability will be responsible for
all
fees and costs of applying for and obtaining the license, qualification or
finding of suitability and of any investigation by the applicable Gaming
Authorities and the Issuers and any Note Guarantor will not reimburse any holder
or Beneficial Owner for such expense.
Mandatory
Redemption
The
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Repurchase at the
Option of Holders
Change of
Control
If a
Change of Control occurs, each holder of notes will have the right to require
the Issuers to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that holder’s notes pursuant to a Change of Control offer
on the terms set forth in the indenture. In the Change of Control offer, the
Issuers will offer a Change of Control payment in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid interest
and Liquidated Damages, if any, on the notes repurchased, to the date of
purchase. Within 30 days following any Change of Control, the Issuers will
mail
a notice to each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control payment date specified in the notice, which date will be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice.
44
On
the Change of Control payment date, the Issuers will, to the extent
lawful:
(1)
accept for payment all notes or portions of notes properly tendered and not
withdrawn pursuant to the Change of Control offer;
(2)
deposit with the paying agent an amount equal to the Change of Control payment
in respect of all notes or portions of notes properly tendered; and
(3)
deliver or cause to be delivered to the trustee the notes properly accepted
together with an Officers’ Certificate stating the aggregate principal amount of
notes or portions of notes being purchased by the Issuers.
The
paying agent will promptly mail to each holder of notes properly tendered the
Change of Control payment for such notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each new note will be in a principal amount
of $1,000 or an integral multiple of $1,000. The Issuers will publicly announce
the results of the Change of Control offer on or as soon as practicable after
the Change of Control payment date.
The
provisions described above that require the Issuers to make a Change of Control
offer following a Change of Control will be applicable whether or not any other
provisions of the indenture are applicable. Except as described above with
respect to a Change of Control, the indenture does not contain provisions that
permit the holders of the notes to require that the Issuers repurchase or redeem
the notes in the event of a takeover, recapitalization or similar
transaction.
The
Issuers will not be required to make a Change of Control offer upon a Change
of
Control if a third party makes the Change of Control offer in the manner, at
the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control offer made by the Issuers and
purchases all notes properly tendered and not withdrawn under the Change of
Control offer.
The
definition of Change of Control includes a phrase relating to the sale, lease,
transfer, conveyance or other disposition by AREP or AREH of “all or
substantially all” of its properties or assets. Although there is a limited body
of case law interpreting the phrase “substantially all,” there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of notes to require the Issuers to repurchase its notes
as a
result of a sale, lease, transfer, conveyance or other disposition of less
than
all of the assets of AREP or AREH to another Person or group may be uncertain.
In addition, under certain circumstances the definition of Change of Control
excludes certain sales, leases transfers, conveyances or other dispositions
even
if they constitute “all or substantially all” of the properties or assets of
AREP or AREH.
Certain
Covenants
Restricted
Payments
AREP
will
not, and will not permit any of its Subsidiaries (including any Guarantor)
to:
(1)
declare or pay any dividend or make any other distribution on account of AREP’s
or any of its Subsidiaries’ (including any Guarantor’s) Equity Interests or to
the holders of AREP’s or any of its Subsidiaries’ (including AREH’s) Equity
Interests in their capacity as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of AREP or to AREP
or a Subsidiary of AREP (including AREH));
(2)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving AREP)
any
Equity Interests of AREP; or
(3)
make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness of AREP or any Guarantor
that is contractually subordinated to the notes or to any Note Guarantee
(excluding any intercompany Indebtedness between or among AREP and any of its
Subsidiaries (including any Guarantor)), except a payment of interest, Other
Liquidated Damages or principal at the Stated Maturity on such subordinated
Indebtedness (all such payments and other actions set forth in these clauses
(1) through (3) (except as excluded therein) above being collectively
referred to as “Restricted Payments”),
45
unless,
at the time of and after giving effect to such Restricted Payment:
(1)
no Default or Event of Default has occurred and is continuing or would occur
as
a consequence of such Restricted Payment;
(2)
AREP or any Guarantor would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at
the beginning of the most recently ended four-quarter period for which financial
statements are available, have been permitted to incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of the covenant
described below under the caption
“— Incurrence of Indebtedness and Issuance
of Preferred Stock”; and
(3)
such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by AREP and its Subsidiaries (including any
Guarantor) after May 12, 2004 (excluding Restricted Payments permitted by
clauses (2), (3), (4), (6) and (8) of the next succeeding paragraph) is less
than the sum, without duplication, of:
(a)
50% of the Consolidated Net Income of AREP for the period (taken as one
accounting period) from July 1, 2006 to the end of AREP’s most recently
ended fiscal quarter for which financial statements are available at the time
of
such Restricted Payment (or, if such Consolidated Net Income for such period
is
a deficit, less 100% of such deficit); provided, however, that to the
extent any payments of Tax Amounts were not deducted in the calculation of
Consolidated Net Income during the applicable period, for purposes of this
clause (a), such payments of Tax Amounts will be deducted from Consolidated
Net
Income, plus
(b)
100% of the aggregate net cash proceeds received by AREP since May 12, 2004
as a contribution to its equity capital or from the issue or sale of Equity
Interests of AREP (excluding Disqualified Stock) or from the issue or sale
of convertible or exchangeable Disqualified Stock or convertible or exchangeable
debt securities of AREP that have been converted into or exchanged for such
Equity Interests (other than Equity Interests or Disqualified Stock or debt
securities sold to a Subsidiary of AREP (including AREH)).
So long
as no Default or Event of Default has occurred and is continuing or would be
caused thereby (except with respect to clauses (6) and (8), which payments
will
be permitted notwithstanding an Event of Default), the preceding provisions
will
not prohibit:
(1)
the payment of any dividend or the consummation of any irrevocable redemption
or
payment within 60 days after the date of declaration of the dividend or
giving of the redemption notice or becoming irrevocably obligated to make such
payment, as the case may be, if at the date of declaration or notice or becoming
irrevocably obligated to make such payment, the dividend or payment would have
complied with the provisions of the indenture;
(2)
the making of any Restricted Payment in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a Subsidiary of
AREP (including any Guarantor)) of, Equity Interests (other than Disqualified
Stock) or from the substantially concurrent contribution of equity capital
to AREP; provided, however, that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance
or
other acquisition will be excluded from clause (3)(b) of the preceding
paragraph;
(3)
the repurchase, redemption, defeasance or other acquisition or retirement for
value of Indebtedness of AREP or any Guarantor that is contractually
subordinated to the notes with the net cash proceeds from a substantially
concurrent incurrence of Permitted Refinancing Indebtedness;
(4)
the declaration or payment of any dividend or distribution by a Subsidiary
of
AREP (including any Guarantor) to the holders of its Equity Interests; provided,
that if any such dividend or distribution is paid to an Affiliate of the
Principal (other than AREP or any of its Subsidiaries (including any
Guarantor)), that any such dividend or distribution is paid on a pro rata basis
to all holders (including AREP or any of its Subsidiaries (including any
Guarantor)) that hold securities whose terms (either contractually or by law)
entitle them to the same distribution upon which such dividend or distribution
is paid;
(5)
the repurchase, redemption or other acquisition or retirement for value of
any
Equity Interests of AREP or any Subsidiary of AREP (including any Guarantor)
held by any member of AREP’s (or any of its Subsidiaries’ (including any
Guarantors)) management pursuant to any management equity subscription
46
agreement,
stock option agreement or similar agreement; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $2.0 million;
(6)
for so long as AREP is a partnership or otherwise a pass-through entity for
federal income tax purposes for any period, AREP may make cash distributions
to
its equity holders or partners in an amount not to exceed the Tax Amount for
such period; provided that a distribution of the Tax Amount shall be made no
earlier than 20 days prior to the due date for such tax (or the date that
quarterly estimated taxes are required to be paid) that would be payable by
AREP
if it were a Delaware corporation;
(7)
the purchase, redemption or retirement for value of Capital Stock of AREP not
owned by the Principal or any Affiliate of the Principal, provided that (a)
AREP
would, at the time of such Restricted Payment and after giving pro forma effect
thereto as if such Restricted Payment had been made at the beginning of the
most
recently ended four-quarter period for which financial statements are available,
have been permitted to incur at least $1.00 of additional Indebtedness pursuant
to the first paragraph of the covenant described below under the caption “—
Incurrence of Indebtedness and Issuance of Preferred Stock” and (b) after giving
effect to such purchase, redemption or retirement, the Partners’ Equity is at
least $1.0 billion;
(8)
the payment of dividends on the Preferred Units in the form of additional
Preferred Units or other Capital Stock of AREP (that is not Disqualified Stock)
or the payment of cash dividends on the Preferred Units in lieu of fractional
Preferred Units; provided that the aggregate amount of cash under this clause
(8) does not exceed $100,000 in any calendar year;
(9)
the purchase, redemption or retirement for value of the Preferred Units on
or
before March 31, 2010, provided that (a) AREP would, at the time of such
Restricted Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the most recently ended
four-quarter period for which financial statements are available, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described below under the caption “— Incurrence
of Indebtedness and Issuance of Preferred Stock” and (b) after giving effect to
such purchase, redemption or retirement, the Partners’ Equity is at least
$1.0 billion; and
(10)
other Restricted Payments in an aggregate amount not to exceed
$50.0 million since the date of the indenture.
For
purposes of determining compliance with this covenant, in the event that a
proposed Restricted Payment meets the criteria of more than one of the
categories of Restricted Payments described in clauses (1) through (10) above,
or is permitted to be made pursuant to the first paragraph of this covenant,
AREP shall, in its sole discretion, classify (or later reclassify, in whole
or
in part, in its sole discretion) such Restricted Payment in any manner that
complies with this covenant.
The
amount of all Restricted Payments (other than cash) will be the Fair Market
Value on the date of the Restricted Payment of the assets, property or
securities proposed to be transferred or issued by AREP or such Subsidiary
(including AREH), as the case may be, pursuant to the Restricted Payment.
Incurrence of
Indebtedness and Issuance of Preferred Stock
Neither
AREP nor any Guarantor will create, incur, issue, assume, guarantee or otherwise
become liable, contingently or otherwise, with respect to (collectively,
“incur”) any Indebtedness (including Acquired Debt), and neither AREP nor any
Guarantor will issue any Disqualified Stock; provided, however, that AREP or
any
Guarantor may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, if immediately after giving effect to the incurrence of additional
Indebtedness (including Acquired Debt) or issuance of Disqualified Stock
(including a pro forma application of the net proceeds therefrom), the ratio
of
the aggregate principal amount of all outstanding Indebtedness (excluding
Indebtedness incurred pursuant to clauses (4), (7) and (8) of the following
paragraph and any Hedging Obligations of AREP’s Subsidiaries that are not
Guarantors) of AREP and its Subsidiaries (including any Guarantor) on a
consolidated basis determined in accordance with GAAP (including an amount
of
Indebtedness equal to the principal amount of any Guarantees by AREP or its
Subsidiaries (including any Guarantor) of any Indebtedness of a Person (that
is
not AREP or a Subsidiary) to the extent such Guarantees were not included in
computing AREP’s or its Subsidiaries’ (including any Guarantor’s) outstanding
Indebtedness) to the Tangible Net Worth of AREP and its Subsidiaries (including
any Guarantor) on a consolidated basis, would have been less than 1.75 to
1.
47
The
preceding paragraph of this covenant will not prohibit the incurrence of any
of
the following items of Indebtedness (collectively, “Permitted Debt”):
(1)
the incurrence by AREP or any Guarantor of Indebtedness represented by the
notes
to be issued on the date of the indenture and the exchange notes to be issued
pursuant to the registration rights agreement;
(2)
the incurrence by AREP or any Guarantor of Permitted Refinancing Indebtedness
in
exchange for, or the net proceeds of which are used to refund, refinance or
replace Indebtedness (other than intercompany Indebtedness) that was incurred
under the first paragraph of this covenant or clauses (1), (2) or (9) of this
paragraph or any Existing Indebtedness;
(3)
the incurrence by AREP or any Guarantor of intercompany Indebtedness between
or
among AREP and any of its Subsidiaries (including AREH) or the issuance of
Disqualified Stock by any Guarantor to AREP;
(4)
the incurrence by AREP or any Guarantor of Hedging Obligations that are incurred
in the normal course of business;
(5)
the incurrence by AREP or any Guarantor of Indebtedness arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds, so long as such
Indebtedness is covered within five business days;
(6)
the incurrence by AREP or any Guarantor of the Existing Indebtedness;
(7)
Indebtedness arising from any agreement entered into by AREP or AREH providing
for indemnification, purchase price adjustment or similar obligations, in each
case, incurred or assumed in connection with an asset sale;
(8)
Indebtedness of AREP or any Guarantor attributable to Bad Boy Guarantees;
and
(9)
the incurrence by AREP or any Guarantor of additional Indebtedness in an
aggregate principal amount at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (9), not to exceed
$10.0 million at any one time outstanding.
Neither
AREP nor any Guarantor will incur any Indebtedness (including Permitted Debt)
that is contractually subordinated in right of payment to any other Indebtedness
of AREP or any Guarantor unless such Indebtedness is also contractually
subordinated in right of payment to the notes and the Note Guarantee, as
applicable, on substantially identical terms; provided, however, that no
Indebtedness of AREP or any Guarantor shall be deemed to be contractually
subordinated in right of payment to any other Indebtedness of AREP or any
Guarantor for purposes of this paragraph solely by virtue of being unsecured
or
secured to a lesser extent or on a junior Lien basis.
To the
extent AREP or any Guarantor incurs any intercompany Indebtedness, (a) if AREP
or any Guarantor is the obligor on such Indebtedness, such Indebtedness (other
than intercompany Indebtedness of any Guarantor to or from AREP or another
Guarantor) must be expressly subordinated to the prior payment in full in cash
of all Obligations with respect to the notes and (b)(i) any subsequent issuance
or transfer of Equity Interests that results in any such Indebtedness being
held
by a Person other than AREP or a Subsidiary of AREP (including any Guarantor)
and (ii) any sale or other transfer of any such Indebtedness to a Person that
is
not either AREP or a Subsidiary of AREP (including any Guarantor) shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by AREP
or any Guarantor, that is not intercompany Indebtedness; provided that in the
case of clause (a), that no restriction on the payment of principal, interest
or
other obligations in connection with such intercompany Indebtedness shall be
required by such subordinated terms except during the occurrence and
continuation of a Default or Event of Default.
For
purposes of determining compliance with this covenant, in the event that an
item
of Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (9) above or is entitled to
be
incurred pursuant to the first paragraph of this covenant, in each case, as
of
the date of incurrence thereof, AREP shall, in its sole discretion, classify
(or
later reclassify in whole or in part, in its sole discretion) such item of
Indebtedness in any manner that complies with this covenant and such
Indebtedness will be treated as having been incurred pursuant to such clauses
or
the first paragraph hereof, as the case may be, designated by AREP.
48
The
accrual of interest, the accretion or amortization of original issue discount,
the payment of interest or Other Liquidated Damages on any Indebtedness in
the
form of additional Indebtedness with the same terms, the reclassification of
preferred stock as Indebtedness due to a change in accounting principles, and
the payment of dividends on Disqualified Stock in the form of additional shares
of the same class of Disqualified Stock will not be deemed to be an incurrence
of Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant. Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that AREP or any Guarantor may incur pursuant to this
covenant shall not be deemed to be exceeded solely as a result of fluctuations
in exchange rates or currency values.
The
amount of any Indebtedness outstanding as of any date will be:
(1)
the accreted value of the Indebtedness, in the case of any Indebtedness issued
with original issue discount;
(2)
the principal amount of the Indebtedness, in the case of any other Indebtedness;
and
(3)
in respect of Indebtedness of another Person secured by a Lien on the assets
of
the specified Person, the lesser of:
(a)
the Fair Market Value of such assets at the date of determination; and
(b)
the amount of the Indebtedness of the other Person.
Limitation on
Liens
Neither
AREP nor any Guarantor will, (a) issue, assume or guarantee any Indebtedness
if
such Indebtedness is secured by a Lien upon, or (b) secure any then outstanding
Indebtedness by granting a Lien upon, any Principal Property of AREP or any
Guarantor, now owned or hereafter acquired by AREP or any Guarantor, without
effectively providing that the notes and the Note Guarantee shall be secured
equally and ratably with such Indebtedness, except that the foregoing
restrictions shall not apply to:
(1)
Liens on any Principal Property acquired after the Issuance Date to secure
or
provide for the payment of the purchase price or acquisition cost thereof;
(2)
Liens on Principal Property acquired after the Issuance Date existing at the
time such Principal Property is acquired;
(3)
Liens on any Principal Property acquired from a corporation merged with or
into
AREP or any Guarantor;
(4)
Liens in favor of AREP or any Guarantor;
(5)
Liens in existence on any Principal Property on the Issuance Date;
(6)
Liens on any Principal Property constituting unimproved real property
constructed or improved after the Issuance Date to secure or provide for the
payment or cost of such construction or improvement;
(7)
Liens in favor of, or required by, governmental authorities;
(8)
pledges or deposits in connection with workers’ compensation, unemployment
insurance and other social security legislation and deposits securing liability
to insure carriers under insurance arrangements;
(9)
Liens for taxes, assessments or governmental charges or statutory liens of
landlords, carriers, warehousemen, mechanics, suppliers, materialmen, repairmen
or other similar Liens arising in the ordinary course of business or in the
improvement or repair of any Principal Property not yet due or which are being
contested in good faith by appropriate proceedings;
(10)
any judgment attachment or judgment Lien not constituting an Event of
Default;
(11)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the
ordinary course of business and in the improvement or repair of any Principal
Property and which obligations are not expressly prohibited by the
indenture;
49
(12)
Liens to secure Indebtedness of AREP or any Guarantor attributable to Bad Boy
Guarantees;
(13)
Liens in favor of the trustee and required by the covenant “Maintenance of
Interest Coverage”;
(14)
Liens to secure margin Indebtedness; provided that such Liens are secured solely
by the applicable margin securities; or
(15)
any extension, renewal, substitution or replacement (or successive extensions,
renewals, substitutions or replacements), in whole or in part, of any Lien
referred to in the foregoing clauses (i) through (xiv), inclusive;
provided that in the case
of
clauses (1), (2) and (3) such Liens shall only extend to the Principal Property
so acquired (including through any merger or consolidation) and not to any
other
Principal Property of AREP or any Guarantor.
Maintenance of
Interest Coverage
On each
Quarterly Determination Date, the Fixed Charge Coverage Ratio of AREP and the
Guarantors will be at least 1.5 to 1.0 for the four consecutive fiscal quarters
most recently completed prior to such Quarterly Determination Date; provided
that, in the event that the Fixed Charge Coverage Ratio of AREP and the
Guarantors is less than 1.5 to 1.0 for such four consecutive fiscal quarters,
the Issuers shall be deemed to have satisfied this maintenance test if there
is
deposited, within 2 Business Days of such Quarterly Determination Date, an
amount in cash such that the deposited funds, together with any funds previously
deposited pursuant to this covenant (and that have not been paid out or
otherwise released) are in an amount equal to the Issuers’ obligations to pay
interest on the notes for one year; provided further, that the Issuers shall
grant to the trustee, on behalf of the holders of the notes, a first priority
security interest in such deposited funds. At any subsequent Quarterly
Determination Date, if the Fixed Charge Coverage Ratio of AREP and the
Guarantors is at least 1.5 to 1.0 for the four consecutive fiscal quarters
most
recently completed prior to such Quarterly Determination Date, such deposited
funds will be released from the security interest granted to the trustee and
paid to or at the direction of AREP.
Maintenance of
Total Unencumbered Assets
On each
Quarterly Determination Date, the ratio of Total Unencumbered Assets to the
then
outstanding principal amount of the Unsecured Indebtedness will be greater
than
1.5 to 1.0 as of the last day of the fiscal quarter most recently
completed.
Compliance with
Law
AREP
will, and will cause its Subsidiaries (including any Guarantor) to, comply
in
all material respects with all applicable laws, rules and regulations.
No Investment
Company
Neither
AREP nor any Guarantor will register as an “investment company” as such term is
defined in the Investment Company Act.
Merger,
Consolidation or Sale of Assets
AREP
will
not: (1) consolidate or merge with or into another Person (whether or not AREP,
is the surviving entity) or (2) sell, assign, transfer, convey or otherwise
dispose of all or substantially all of the properties or assets of AREP in
one
or more related transactions, to another Person; unless:
(1)
either: (a) AREP is the surviving entity, or (b) the Person formed by or
surviving any such consolidation or merger (if other than AREP) or to which
such
sale, assignment, transfer, conveyance or other disposition has been made is
a
corporation, limited liability company or limited partnership entity organized
or existing under the laws of the United States, any state of the United States
or the District of Columbia;
(2)
the Person formed by or surviving any such consolidation or merger (if other
than AREP) or the Person to which such sale, assignment, transfer, conveyance
or
other disposition has been made assumes all the obligations of AREP under the
notes, the indenture and the registration rights agreement and upon such
assumption such Person will become the successor to, and be substituted for,
AREP thereunder and all
50
references
to AREP in each thereof shall then become references to such Person and such
Person shall thereafter be able to exercise every right and power of AREP
thereunder;
(3)
immediately after such transaction no Default or Event of Default exists;
(4)
AREP or the Person formed by or surviving any such consolidation or merger
(if
other than AREP), or to which such sale, assignment, transfer, conveyance or
other disposition has been made would, on the date of such transaction after
giving pro forma effect thereto and any related financing transactions as if
the
same had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described above under the caption “— Incurrence
of Indebtedness and Issuance of Preferred Stock; and
(5)
AREP has delivered to the trustee an Officers’ Certificate and opinion of
counsel, which may be an opinion of in-house counsel of AREP or an Affiliate,
each stating that such transaction complies with the terms of the
indenture.
Clauses
(1), (2) or (4) above will not apply to or be required to be complied with
in
connection with any merger or consolidation or the sale, assignment, transfer,
conveyance or other disposition of all or substantially all of AREP’s properties
or assets to:
(1)
an Affiliate that has no material assets or liabilities where the primary
purpose of such transaction is to change AREP into a corporation or other form
of business entity or to change the jurisdiction of formation of AREP and such
transaction does not cause the realization of any material federal or state
tax
liability that will be paid by AREP or any of its Subsidiaries (including AREH).
For purposes of this paragraph, the term material refers to any assets,
liabilities or tax liabilities that are greater than 5.0% of the Tangible Net
Worth of AREP and its Subsidiaries (including AREH) on a consolidated basis;
or
(2)
any Person; provided that AREP receives consideration in Cash Equivalents and
marketable securities with an aggregate Fair Market Value determined at the
time
of the execution of such relevant agreement of at least $1.0 billion for
such merger or consolidation or the sale, assignment, transfer, conveyance
or
other disposition of all or substantially all of AREP’s properties or assets. In
any transaction referred to in this clause (2), and subject to the terms and
conditions thereof, the trustee shall, without the need of any action by the
noteholders, (x) confirm that such Person shall not be liable for and release
such Person from, any obligation of AREP’s under the indenture and the notes and
(y) release any Guarantor from all obligations under its Note Guarantee if
such
Guarantor was directly or indirectly sold, assigned, transferred, conveyed
or
otherwise disposed of to such Person in such transaction.
AREP
or
the Person formed by or surviving any merger or consolidation will not have
to
comply with clause (4) above in connection with any merger or consolidation
if
the effect of the merger or consolidation is to cause the Capital Stock of
AREP
not owned by the Principal or any Affiliate of the Principal to be retired
or
extinguished for consideration that was provided by the Principal or an
Affiliate of the Principal (other than AREP or its Subsidiaries (including
AREH)
or the Person formed by or surviving any merger or consolidation) and the
Partners’ Equity immediately after giving effect to the merger or consolidation
is not less than the Partners’ Equity immediately prior to such merger or
consolidation.
In
addition, AREP may not lease all or substantially all of its properties or
assets, in one or more related transactions, to any other Person. In the case
of
a lease of all or substantially all of the assets of AREP, AREP will not be
released from its obligations under the notes or the indenture, as
applicable.
AREH
will
not: (1) consolidate or merge with or into another Person (whether or not AREH,
is the surviving entity) or (2) sell, assign, transfer, convey or otherwise
dispose of all or substantially all of the properties or assets of AREH in
one
or more related transactions, to another Person; unless:
(1)
either: (a) AREH is the surviving entity, or (b) the Person formed by or
surviving any such consolidation or merger (if other than AREH) or to which
such
sale, assignment, transfer, conveyance or other disposition has been made is
a
corporation, limited liability company or limited partnership entity organized
or existing under the laws of the United States, any state of the United States
or the District of Columbia;
(2)
the Person formed by or surviving any such consolidation or merger (if other
than AREH) or the Person to which such sale, assignment, transfer, conveyance
or
other disposition has been made assumes all the
51
obligations
of AREH under the Note Guarantee (and becomes a Guarantor), the notes, the
indenture and the registration rights agreement, and upon such assumption such
Person will become the successor to, and be substituted for, AREH thereunder,
and all references to AREH in each thereof shall than become references to
such
Person and such Person shall thereafter be able to exercise every right and
power of AREH thereunder;
(3)
immediately after such transaction no Default or Event of Default exists;
(4)
AREH or the Person formed by or surviving any such consolidation or merger
(if
other than AREP), or to which such sale, assignment, transfer, conveyance or
other disposition has been made would, on the date of such transaction after
giving pro forma effect thereto and any related financing transactions as if
the
same had occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of the covenant described above under the caption
“—
Incurrence of Indebtedness and Issuance of Preferred Stock; and
(5) AREH
has delivered to the trustee an Officers’ Certificate and opinion of counsel
which may be an opinion of in-house counsel of AREP or an Affiliate, each
stating that such transaction complies with the terms of the indenture.
Clauses
(1), (2) or (4) above will not apply to or be required to be complied with
in
connection with any merger or consolidation or the sale, assignment, transfer,
conveyance or other disposition of all or substantially all of AREH’s properties
or assets to:
(1) an
Affiliate that has no material assets or liabilities where the primary purpose
of such transaction is to change AREH into a corporation or other form of
business entity or to change the jurisdiction of formation of AREH and such
transaction does not cause the realization of any material federal or state
tax
liability that will be paid by AREH or any of its Subsidiaries. For purposes
of
this paragraph, the term material refers to any assets, liabilities or tax
liabilities that are greater than 5.0% of the Tangible Net Worth of AREP and
its
Subsidiaries (including AREH) on a consolidated basis;
(2) any
Person; provided that AREP receives consideration in Cash Equivalents and
marketable securities with an aggregate Fair Market Value determined at the
time
of the execution of such relevant agreement of at least $1.0 billion for
such merger or consolidation or the sale, assignment, transfer, conveyance
or
other disposition of all or substantially all of AREH’s properties or assets;
or
(3) any
Person; provided that AREH receives consideration in Cash Equivalents and
marketable securities with an aggregate Fair Market Value determined at the
time
of the execution of such relevant agreement of at least $1.0 billion for
such merger or consolidation or the sale, assignment, transfer, conveyance
or
other disposition of all or substantially all of AREH’s properties or assets and
AREH remains a Subsidiary of AREP.
In any
transaction referred to in clause (2) or (3) above, and subject to the terms
and
conditions thereof, the trustee shall, without the need of any action by the
noteholders, (x) confirm that such other Person shall not be liable for and
shall be released from any obligation of AREP’s or AREH’s under the indenture,
the notes and the Note Guarantees, and (y) release any Guarantor from all
obligations under its Note Guarantee if such Guarantor was directly or
indirectly sold, assigned, transferred, conveyed or otherwise disposed of to
such Person in such transaction.
This
“Merger, Consolidation or Sale of Assets” covenant will not apply to:
(1)
any consolidation or merger, or any sale, assignment, transfer, conveyance,
lease or other disposition of assets between or among AREP, AREH or any one
or
more Guarantors; or
(2)
any sale, assignment, transfer, conveyance or other disposition of Cash
Equivalents, including, without limitation, any investment or capital
contribution of Cash Equivalents, or any purchase of property and assets,
including, without limitation, securities, debt obligations or Capital Stock,
with Cash Equivalents.
Transactions
with
Affiliates
AREP
will
not, and will not permit any of its Subsidiaries (including any Guarantor)
to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of
its
properties or assets to, or purchase any property or assets
52
Back to Table of Contents
from,
or enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, any Affiliate of AREP (each,
an
“
Affiliate Transaction”), unless:
(1)
the Affiliate Transaction is on terms that are not materially less favorable
to
AREP or the relevant Subsidiary (including any Guarantor) than those that would
have been obtained in a comparable transaction by AREP or such Subsidiary
(including any Guarantor) with an unrelated Person as determined in good faith
by the Board of Directors of AREP; and
(2)
AREP delivers to the trustee:
(a)
with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $2.0 million, a
resolution of the Board of Directors of AREP set forth in an Officers’
Certificate certifying that such Affiliate Transaction complies with this
covenant and that such Affiliate Transaction has been approved by a majority
of
the disinterested members of the Board of Directors of AREP; and
(b)
with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million,
an opinion as to the fairness to AREP or such Subsidiary (including any
Guarantor) of such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal or investment banking firm of recognized
standing.
The
following items will not be deemed to be Affiliate Transactions and, therefore,
will not be subject to the provisions of the prior paragraph:
(1)
any employment agreement, employee benefit plan, officer or director
indemnification agreement or any similar arrangement entered into by AREP or
any
of its Subsidiaries (including any Guarantor) in the ordinary course of business
and payments pursuant thereto including payments or reimbursement of payments
by
API with respect to any such agreement, plan or arrangement entered into by
API
with respect to or for the benefit of officers or directors of API (other than
any such agreements, plans or arrangements entered into by AREP or any of its
Subsidiaries (including AREH) with Carl Icahn (other than employee benefit
plans
and officer or director indemnification agreements generally applicable to
officers and directors of API, AREP or its Subsidiaries (including AREH));
(2)
transactions between or among AREP, any Guarantor and/or their respective
Subsidiaries (except any Subsidiaries of which Carl Icahn or Affiliates of
Carl
Icahn (other then AREP, AREH or their Subsidiaries) own more than 10% of the
Voting Stock);
(3)
payment (or reimbursement of payments by API) of directors’ fees to Persons who
are not otherwise Affiliates of AREP;
(4)
any issuance of Equity Interests (other than Disqualified Stock) and Preferred
Unit Distributions of AREP to Affiliates of AREP;
(5)
Restricted Payments that do not violate the provisions of the indenture
described above under the caption “— Restricted Payments”;
(6)
transactions between AREP and/or any of its Subsidiaries (including any
Guarantor), on the one hand, and other Affiliates, on the other hand, for the
provision of goods or services in the ordinary course of business by such other
Affiliates; provided that such other Affiliate is in the business of providing
such goods or services in the ordinary course of business to unaffiliated third
parties and the terms and pricing for such goods and services overall are not
less favorable to AREP and/or its Subsidiaries (including AREH) than the terms
and pricing upon which such goods and services are provided to unaffiliated
third parties;
(7)
the provision or receipt of accounting, financial, management, information
technology and other ancillary services to or from Affiliates, provided that
AREP or its Subsidiaries (including any Guarantor) in the case of the provision
of such services, are paid a fee not less than its out of pocket costs and
allocated overhead (including a portion of salaries and benefits) and in the
case of the receipt of such services, paid a fee not more than such Person’s
out-of-pocket costs and allocated overhead (including a portion of salaries
and
benefits), in each case, as determined by AREP in its reasonable judgment;
53
(8)
the license of a portion of office space pursuant to a license agreement, dated
as of February 1, 1997, between AREP and an Affiliate of API and any
renewal thereof;
(9)
the payment to API and reimbursements of payments made by API of expenses
relating to AREP’s, AREH’s or any Guarantors’ status as a public company;
(10)
services provided and payments received by NEG from NEG Operating LLC,
TransTexas Gas Corporation and Panaco, Inc. pursuant to the NEG Management
Agreements;
(11)
the pledge by NEG of its interest in the Capital Stock of NEG Holding LLC
pursuant to the NEG Credit Agreement;
(12)
the exchange by AREH of its GB Securities for other securities of GB Holdings,
Inc.; provided that such exchange is on terms no less favorable to AREH as
the
exchange of GB Securities offered to other non-Affiliated Persons;
(13)
payments by AREH, AREP or any Subsidiary to API in connection with services
provided to AREH, AREP or any Subsidiary in accordance with the AREP Partnership
Agreement; and
(14)
the Acquisitions.
Reports
Whether
or not required by the rules and regulations of the SEC, so long as any notes
are outstanding, the Issuers will furnish to the holders of notes or cause
the
trustee to furnish to the holders of notes, within the time periods specified
in
the SEC’s rules and regulations:
(1)
all quarterly and annual reports that would be required to be filed with the
SEC
on Forms 10-Q and 10-K if the Issuers were required to file such reports;
and
(2)
all current reports that would be required to be filed with the SEC on Form
8-K
if the Issuers were required to file such reports.
All such
reports will be prepared in all material respects in accordance with all of
the
rules and regulations applicable to such reports. Each annual report on Form
10-K will include a report on the Issuers’ consolidated financial statements by
the Issuers’ certified independent accountants. In addition, the Issuers will
file a copy of each of the reports referred to in clauses (1) and (2) above
with
the SEC for public availability within the time periods specified in the rules
and regulations applicable to such reports (unless the SEC will not accept
such
a filing) and, if the SEC will not accept such a filing, will post the reports
on its website within those time periods.
If, at
any time, the Issuers are no longer subject to the periodic reporting
requirements of the Exchange Act for any reason, the Issuers will nevertheless
continue filing the reports specified in the preceding paragraphs of this
covenant with the SEC within the time periods specified above unless the SEC
will not accept such a filing. The Issuers will not take any action for the
purpose of causing the SEC not to accept any such filings. If, notwithstanding
the foregoing, the SEC will not accept the Issuers’ filings for any reason, the
Issuers will post the reports referred to in the preceding paragraphs on its
website within the time periods that would apply if the Issuers were required
to
file those reports with the SEC.
In
addition, the Issuers agree that, for so long as any notes remain outstanding,
if at any time they are not required to file with the SEC the reports required
by the preceding paragraphs, they will furnish to the holders of notes and
to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
Events of Default
and
Remedies
The
following constitutes an Event of Default:
(1)
default in payment when due and payable, upon redemption or otherwise, of
principal or premium, if any, on the notes;
(2)
default for 30 days or more in the payment when due of interest or Liquidated
Damages on the notes;
54
(3)
failure by the Issuers to call or cause to be called for redemption or to
purchase or cause to be called any notes, in each case when required under
the
indenture;
(4)
failure by AREP or any Guarantor for 30 days after written notice from the
trustee to comply with the provisions described under the captions “— Restricted
Payments” or “— Incurrence of Indebtedness and Issuance of Preferred
Stock”;
(5)
failure by AREP or any Guarantor for 30 days after written notice from the
trustee to comply with the provisions described under the captions “—
Maintenance of Interest Coverage” or “— Maintenance of Total Unencumbered
Assets”;
(6)
failure by the Issuers or any Guarantor for 60 days after notice from the
trustee or the holders of at least 25% in aggregate principal amount of the
notes then outstanding to comply with any of their other agreements in the
indenture or the notes or the Note Guarantee;
(7)
default under any mortgage, indenture or instrument under which there is issued
or by which there is secured or evidenced any Indebtedness for money borrowed
by
the Issuers or any Guarantor or default on any Guarantee by the Issuers or
AREH
of Indebtedness, whether such Indebtedness or Guarantee now exists or is created
after the Issuance Date, which default (a) is caused by a failure to pay when
due at final maturity (giving effect to any grace period or waiver related
thereto) the principal of such Indebtedness (a “Payment Default”) or (b) results
in the acceleration of such Indebtedness prior to its express maturity and,
in
each case, the principal amount of any such Indebtedness as to which AREP or
any
Guarantor is obligated to pay, together with the principal amount of any other
such Indebtedness under which a Payment Default then exists or with respect
to
which the maturity thereof has been so accelerated or which has not been paid
at
maturity as to which AREP or any Guarantor is obligated to pay, aggregates
$10.0 million or more;
(8)
failure by the Issuers or any Guarantor to pay final judgments aggregating
in
excess of $10.0 million, which final judgments remain unpaid, undischarged
or unstayed for a period of more than 60 days after such judgment becomes a
final judgment;
(9)
except as permitted by the indenture, any Note Guarantee is held in any judicial
proceeding to be unenforceable or invalid or ceases for any reason to be in
full
force and effect, or AREH or any other Guarantor, or any Person acting on behalf
of any Guarantor, denies or disaffirms its obligations under its Note Guarantee;
and
(10)
certain events of bankruptcy or insolvency with respect to AREP or any Guarantor
that is a Significant Subsidiary.
If any
Event of Default (other than by reason of bankruptcy or insolvency) occurs
and
is continuing, the holders of more than 25% in principal amount of the then
outstanding notes may declare the principal, premium, if any, interest,
Liquidated Damages, if any, and any other monetary obligations on all the notes
to be due and payable immediately. Notwithstanding the foregoing, in the case
of
an Event of Default arising from certain events of bankruptcy or insolvency,
with respect to the Issuers or any Guarantor that is a Significant Subsidiary
all outstanding notes will become due and payable without further action or
notice. Holders of the notes may not enforce the indenture or the notes except
as provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power conferred on it. However, the
trustee may refuse to follow any direction that conflicts with law or the
indenture that the trustee determines may be unduly prejudicial to the rights
of
other holders of notes or that may involve the trustee in personal liability.
The trustee may withhold from holders of notes notice of any continuing Default
or Event of Default (except a Default or Event of Default relating to the
payment of principal or interest) if it determines that withholding notice
is in
the interests of the holders of the notes. In addition, the trustee shall have
no obligation to accelerate the notes if in the best judgment of the trustee
acceleration is not in the best interest of the holders of the notes.
At any
time after a declaration of acceleration with respect to the notes and subject
to certain conditions, the holders of a majority in aggregate principal amount
of notes outstanding may rescind and cancel such acceleration and its
consequences.
The
holders of at least a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of
the
notes waive any existing Default or Event of Default and its
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consequences
under the indenture except a continuing Default or Event of Default in the
payment of interest on, premium, if any, or the principal of, any note held
by a
non-consenting holder.
The
Issuers will be required to deliver to the trustee annually a statement
regarding compliance with the indenture, and the Issuers will be required,
within ten Business Days, upon becoming aware of any Default or Event of Default
to deliver to the trustee a statement specifying such Default or Event of
Default.
No Personal Liability
of Directors, Officers, Employees, Incorporators and Stockholders
No
director, officer, employee, incorporator, manager (or managing member) direct
or indirect member, partner or stockholder of the Issuers, AREH, API or any
additional Guarantor shall have any liability for any obligations of the
Issuers, AREH, API or any additional Guarantor under the notes, the indenture,
any Note Guarantee or for any claim based on, in respect of, or by reason of
such obligations or its creation. Each holder of the notes by accepting a note
waives and releases all such liability. The waiver and release are part of
the
consideration for issuance of the notes.
Covenant
Defeasance
The
Issuers may, at their option and at any time, elect to have their obligations
and the obligations of any of their Subsidiaries or AREH released with respect
to certain covenants that are described in the indenture (“Covenant
Defeasance”) and, thereafter, any omission to comply with such obligations
shall not constitute a Default or Event of Default with respect to the notes
or
any Note Guarantee. In the event Covenant Defeasance occurs, certain events
(not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under “Events of Default” will no longer constitute an Event
of Default with respect to the notes.
In order
to exercise Covenant Defeasance:
(1)
the Issuers must irrevocably deposit, or cause to be deposited, with the
trustee, in trust, for the benefit of the holders of the notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient to pay the principal of, premium, if any, interest
and Liquidated Damages, if any, due on the outstanding notes on the stated
maturity date or on the applicable redemption date, as the case may be, in
accordance with the terms of the indenture;
(2)
no Default or Event of Default shall have occurred and be continuing with
respect to certain Events of Default on the date of such deposit;
(3)
such Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under any material agreement or instrument (other than
the
indenture) to which the Issuers or any of their Subsidiaries is a party or
by
which the Issuers or any of their Subsidiaries is bound;
(4)
the Issuers shall have delivered to the trustee an opinion of counsel, which
may
be an opinion of in-house counsel to AREP or an Affiliate, containing customary
assumptions and exceptions, to the effect that upon and immediately following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors’
rights generally under any applicable law;
(5)
the Issuers shall have delivered to the trustee an Officers’ Certificate stating
that the deposit was not made by the Issuers with the intent of defeating,
hindering, delaying or defrauding any creditors of AREP or others; and
(6)
the Issuers shall have delivered to the trustee an Officers’ Certificate and an
opinion of counsel in the United States, which may be an opinion of in-house
counsel to AREP or an Affiliate (which opinion of counsel may be subject to
customary assumptions and exclusions) each stating that all conditions precedent
provided for or relating to the Covenant Defeasance have been complied
with.
56
The
indenture will be discharged and will cease to be of further effect as to all
notes issued thereunder, when:
(1)
either:
(a)
all notes that have been authenticated, except lost, stolen or destroyed notes
that have been replaced or paid and notes for whose payment money has been
deposited in trust and thereafter repaid to AREP, have been delivered to the
trustee for cancellation; or
(b)
all notes that have not been delivered to the trustee for cancellation (1)
have
become due and payable by reason of the mailing of a notice of redemption or
otherwise, (2) will become due and payable within one year or (3) are to be
called for redemption within 12 months under arrangements reasonably
satisfactory to the trustee for the giving of notice of redemption by the
trustee in the name, and at the reasonable expense of the Issuers, and the
Issuers or any Guarantor have irrevocably deposited or caused to be deposited
with the trustee as trust funds in trust solely for the benefit of the holders,
cash in U.S. dollars, non-callable Government Securities, or a combination
of
cash in U.S. dollars and non-callable Government Securities, in amounts as
will
be sufficient without consideration of any reinvestment of interest, to pay
and
discharge the entire Indebtedness on the notes not delivered to the trustee
for
cancellation for principal and premium, if any, and accrued but unpaid interest
to the date of maturity or redemption;
(2)
no Default of Event of Default has occurred and is continuing on the date of
the
deposit or will occur as a result of the deposit and the deposit will not result
in a breach or violation of, or constitute a default under, any other material
instrument to which the Issuers are a party or by which the Issuers are
bound;
(3)
the Issuers have paid or caused to be paid all sums payable by it under the
indenture; and
(4)
the Issuers or any Guarantor have
delivered irrevocable instructions to the trustee under the indenture to apply
the deposited money toward the payment of the notes at maturity or the
redemption date, as the case may be.
In
addition, the Issuers must deliver an Officers’ Certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction
and
discharge have been satisfied.
Amendment, Supplement
and Waiver
Except
as
provided in the next two succeeding paragraphs, the indenture, the notes or
the
Note Guarantee may be amended or supplemented with the consent of the holders
of
at least a majority in principal amount of the notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for
notes), and any existing default or compliance with any provision of the
indenture, the notes or the Note Guarantee may be waived with the consent of
the
holders of a majority in principal amount of the then outstanding notes
(including consents obtained in connection with a tender offer or exchange
offer
for notes).
Without
the consent of each holder affected, an amendment or waiver may not (with
respect to any notes held by a nonconsenting holder of notes):
(1)
reduce the principal amount of notes whose holders must consent to an amendment,
supplement or waiver;
(2)
reduce the principal of or change the fixed maturity of any note or alter or
waive the provisions with respect to the redemption of the notes;
(3)
reduce the rate of or change the time for payment of interest on any note;
(4)
waive a Default or Event of Default in the payment of principal of, premium
or
interest on the notes (except a rescission of acceleration of the notes by
the
holders of at least a majority in aggregate principal amount of the notes and
a
waiver of the payment default that resulted from such acceleration);
(5)
make any note payable in money other than that stated in the notes;
(6)
make any change in the provisions of the indenture relating to waivers of past
Defaults or the rights of holders of notes to receive payments of principal
of
or premium, if any, or interest on the notes;
57
(7)
release AREH or any other Guarantor from any of its obligations under its Note
Guarantee or the indenture, except in accordance with the terms of the
indenture; or
(8)
make any change in the foregoing amendment and waiver provisions.
Notwithstanding
the foregoing, without the consent of any holder of notes, the Issuers, the
Guarantors and the trustee together may amend or supplement the indenture,
any
Note Guarantee or the notes to cure any ambiguity, defect or inconsistency,
to
comply with the covenant relating to mergers, consolidations and sales of
assets, to provide for uncertificated notes in addition to or in place of
certificated notes, to provide for the assumption of the Issuers’ or any
Guarantor’s obligations to holders of the notes and any Note Guarantee in the
case of a merger, consolidation or asset sale, to make any change that would
provide any additional rights or benefits to the holders of the notes or that
does not adversely affect the legal rights under the indenture of any such
holder.
Concerning the
Trustee
The
indenture will contain certain limitations on the rights of the trustee, should
it become a creditor of the Issuers or AREH, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such
claim as security or otherwise. The trustee will be permitted to engage in
other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days or resign.
The
holders of a majority in aggregate principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting
any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture will provide that in case an Event of Default
shall occur (which shall not be cured), the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent person in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of notes, unless such holder shall have offered
to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Governing
Law
The
indenture and the notes will be, subject to certain exceptions, governed by
and
construed in accordance with the internal laws of the State of New York, without
regard to the choice of law rules thereof.
The
issuance of the notes and the Note Guarantee will also be subject to a certain
extent to the laws of the jurisdiction of formation of AREP.
Additional
Information
Any
holder of the notes may obtain a copy of the indenture without charge by writing
to American Real Estate Partners, L.P., Attn: Chief Financial Officer at 765
Fifth Avenue, New York, NY 10153.
Book-Entry, Delivery
and Form
The new
notes will be issued in one or more notes in global form or Global Notes. Except
as set forth below, the notes will be issued in registered, global form in
minimum denominations of $1,000 and integral multiples of $1,000 in excess
of
$1,000. The Global Notes will be deposited upon issuance with the trustee as
custodian for DTC or its nominee, in each case for credit to an account of
a
direct or indirect participant in DTC, as described below.
Except
as
set forth below, the Global Notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
Beneficial interests in the Global Notes may not be exchanged for definitive
notes in registered certificated form (“Certificated Notes”) except in the
limited circumstances described below. See “— Exchange of Global Notes for
Certificated Notes.” Except in the limited circumstances described below, owners
of beneficial interests in the Global Notes will not be entitled to receive
physical delivery of notes in certificated form.
In
addition, transfers of beneficial interests in the Global Notes will be subject
to the applicable rules and procedures of DTC and its direct and indirect
participants (including, if applicable, those of Euroclear and Clearstream),
which may change from time to time.
58
Prospective
purchasers are advised that the laws of some states require that certain Persons
take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note
to
such Persons will be limited to such extent.
So long
as the Global Note Holder is the registered owner of any notes, the Global
Note
Holder will be considered the sole holder under the indenture of any notes
evidenced by the Global Notes. Beneficial owners of notes evidenced by the
Global Notes will not be considered the owners of holders of the notes under
the
indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee thereunder. Neither the
issuers nor the trustee will have any responsibility or liability for any aspect
of the records of DTC or for maintaining, supervising or reviewing any record
of
DTC relating to the notes.
Depository
Procedures
The
following description of the operations and procedures of DTC, Euroclear and
Clearstream are provided solely as a matter of convenience. These operations
and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them. The Issuers take no responsibility for
these
operations and procedures and urge investors to contact the system or their
participants directly to discuss these matters.
DTC has
advised the Issuers that DTC is a limited-purpose trust company created to
hold
securities for its participating organizations (collectively, the
“Participants”) and to facilitate the clearance and settlement of transactions
in those securities between the Participants through electronic book-entry
changes in accounts of its Participants. The Participants include securities
brokers and dealers (including the initial purchaser), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC’s system is
also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the “Indirect
Participants”). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of
the
Participants and Indirect Participants.
Except
as described below, owners of interests in the Global Notes will not have notes
registered in their names, will not receive physical delivery of notes in
certificated form and will not be considered the registered owners or “holders”
thereof under the indenture for any purpose.
Payments
in respect of the principal of, and interest and premium, if any, and Liquidated
Damages, if any, on, a Global Note registered in the name of DTC or its nominee
will be payable to DTC in its capacity as the registered holder under the
indenture. Under the terms of the indenture, the Issuers and the trustee will
treat the Persons in whose names the notes, including the Global Notes, are
registered as the owners of the notes for the purpose of receiving payments
and
for all other purposes. Consequently, neither the Issuers or the trustee nor
any
agent of the Issuers or the trustee has or will have any responsibility or
liability for:
(1)
any aspect of DTC’s records or any Participant’s or Indirect Participant’s
records relating to or payments made on account of beneficial ownership interest
in the Global Notes or for maintaining, supervising or reviewing any of DTC’s
records or any Participant’s or Indirect Participant’s records relating to the
beneficial ownership interests in the Global Notes; or
(2)
any other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants.
DTC has
advised the Issuers that its current practice, upon receipt of any payment
in
respect of securities such as the notes (including principal and interest),
is
to credit the accounts of the relevant Participants with the payment on the
payment date unless DTC has reason to believe that it will not receive payment
on such payment date. Each relevant Participant is credited with an amount
proportionate to its beneficial ownership of an interest in the principal amount
of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will
be
the responsibility of the Participants or the Indirect Participants and will
not
be the responsibility of DTC, the trustee or the Issuers. Neither the Issuers
nor the trustee will be liable for any delay by DTC or any of the Participants
or the Indirect Participants in identifying the beneficial owners of the notes,
and the Issuers and the trustee may conclusively rely on and will be protected
in relying on instructions from DTC or its nominee for all purposes.
59
Transfers
between the Participants will be effected in accordance with DTC’s procedures,
and will be settled in same-day funds, and transfers between participants in
Euroclear and Clearstream will be effected in accordance with their respective
rules and operating procedures.
Cross-market
transfers between the Participants, on the one hand, and Euroclear or
Clearstream participants, on the other hand, will be effected through DTC in
accordance with DTC’s rules on behalf of Euroclear or Clearstream, as the case
may be, by their respective depositaries; however, such cross-market
transactions will require delivery of instructions to Euroclear or Clearstream,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf
by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositories for
Euroclear or Clearstream.
DTC has
advised the Issuers that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the notes as to which
such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange
the
Global Notes for legended notes in certificated form, and to distribute such
notes to its Participants.
Although
DTC, Euroclear and Clearstream have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Notes among participants in
DTC,
Euroclear and Clearstream, they are under no obligation to perform or to
continue to perform such procedures, and may discontinue such procedures at
any
time. None of the Issuers, the trustee and any of their respective agents will
have any responsibility for the performance by DTC, Euroclear or Clearstream
or
their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Exchange of Global
Notes for Certificated Notes
A Global
Note is exchangeable for Certificated Notes if:
(1)
DTC (a) notifies the Issuers that it is unwilling or unable to continue as
depositary for the Global Notes or (b) has ceased to be a clearing agency
registered under the Exchange Act and, in either case, the Issuers fail to
appoint a successor depositary;
(2)
the Issuers, at their option, notify the trustee in writing that it elects
to
cause the issuance of the Certificated Notes; or
(3)
there has occurred and is continuing a Default or Event of Default with respect
to the notes.
In
addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated
Notes
delivered in exchange for any Global Note or beneficial interests in Global
Notes will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
Exchange of
Certificated Notes for Global Notes
Certificated
Notes may not be exchanged for beneficial interests in any Global Note unless
the transferor first delivers to the trustee a written certificate (in the
form
provided in the indenture) to the effect that such transfer will comply with
the
appropriate transfer restrictions applicable to such notes.
Same Day Settlement
and Payment
The
Issuers will make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, interest and Liquidated Damages,
if
any) by wire transfer of immediately available funds to the accounts specified
by DTC or its nominee. The Issuers will make all payments of principal, interest
and premium, if any, and Liquidated Damages, if any, with respect to
Certificated Notes by wire transfer of immediately available funds to the
accounts specified by the holders of the Certificated Notes or, if no such
account is specified, by
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mailing
a check to each such holder’s registered address. The notes represented by the
Global Notes are expected to be eligible to trade in DTC’s Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
notes will, therefore, be required by DTC to be settled in immediately available
funds. The Issuers expect that secondary trading in any Certificated Notes
will
also be settled in immediately available funds.
Because
of time zone differences, the securities account of a Euroclear or Clearstream
participant purchasing an interest in a Global Note from a Participant will
be
credited, and any such crediting will be reported to the relevant Euroclear
or
Clearstream participant, during the securities settlement processing day (which
must be a business day for Euroclear and Clearstream) immediately following
the
settlement date of DTC. DTC has advised the Issuers that cash received in
Euroclear or Clearstream as a result of sales of interests in a Global Note
by
or through a Euroclear or Clearstream participant to a Participant will be
received with value on the settlement date of DTC but will be available in
the
relevant Euroclear or Clearstream cash account only as of the business day
for
Euroclear or Clearstream following DTC’s settlement date.
Certain
Definitions
Set forth
below are certain defined terms used in the indenture. Reference is made to
the
indenture for full disclosure of all such terms, as well as any other
capitalized terms used herein for which no definition is provided.
“Acquired
Debt” means, with respect to any specified Person:
(1)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, whether
or
not such Indebtedness is incurred in connection with, or in contemplation of,
such other Person merging with or into, or becoming a Subsidiary of, such
specified Person; and
(2)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
“Affiliate”
of any specified Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such specified Person. For purposes of this definition, “control,” as used with
respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the Voting
Stock
of a Person will be deemed to be control. For purposes of this definition,
the
terms “controlling,” “controlled by” and “under common control with” have
correlative meanings.
“API”
means American Property Investors, Inc.
“AREH”
means American Real Estate Holdings Limited Partnership.
“AREP”
means American Real Estate Partners, L.P.
“AREP
Finance” means American Real Estate Finance Corp.
“AREP
Partnership Agreement” means AREP’s Amended and Restated Agreement of
Limited Partnership, dated May 12, 1987 as amended February 22, 1995
and August 16, 1996.
“Bad
Boy Guarantees” means the Indebtedness of any specified Person attributable
to “bad boy” indemnification or Guarantees, which Indebtedness would be
non-recourse to AREP and AREH other than recourse relating to the specific
events specified therein, which such events shall be usual and customary
exceptions typically found in non-recourse financings at such time as determined
by management in its reasonable judgment.
“Beneficial
Owner” has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5
under the Exchange Act, except that in calculating the beneficial ownership
of
any particular “person” (as that term is used in Section 13(d)(3) of the
Exchange Act), such “person” will be deemed to have beneficial ownership of all
securities that such “person” has the right to acquire by conversion or exercise
of other securities, whether such right is currently exercisable or is
exercisable only after the passage of time. The terms “Beneficially Owns” and
“Beneficially Owned” have a corresponding meaning.
61
“Board
of Directors” means:
(1)
with respect to a corporation, the
board of directors of the corporation or any committee thereof duly authorized
to act on behalf of such board;
(2)
with respect to a partnership, the
Board of Directors of the general partner of the partnership;
(3)
with respect to a limited liability
company, the managing member or members or any controlling committee of managing
members thereof or the Board of Directors of the managing member; and
(4)
with respect to any other Person,
the board or committee of such Person serving a similar function.
“Business
Day” means any day excluding Saturday, Sunday and any day which is a legal
holiday under the laws of the State of New York or is a day on which banking
institutions located in such jurisdictions are authorized or required by law
or
other governmental action to close.
“Capital
Lease Obligation” means, at the time any determination is to be made, the
amount of the liability in respect of a capital lease that would at that time
be
required to be capitalized on a balance sheet prepared in accordance with GAAP,
and the Stated Maturity thereof shall be the date of the last payment of rent
or
any other amount due under such lease prior to the first date upon which such
lease may be prepaid by the lessee without payment of a penalty.
“Capital
Stock” means:
(1)
in the case of a corporation, corporate stock;
(2)
in the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of corporate
stock;
(3)
in the case of a partnership or limited liability company, partnership interests
(whether general or limited) or membership interests; and
(4)
any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the
issuing Person but excluding from all of the foregoing any debt securities
convertible into Capital Stock, whether or not such debt securities include
any
right of participation with Capital Stock.
“Cash
Equivalents” means:
(1)
United States dollars;
(2)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality of the United States
government (provided that the full faith and credit of the United States is
pledged in support of those securities) having maturities of not more than
one
year from the date of acquisition;
(3)
certificates of deposit and eurodollar time deposits with maturities of one
year
or less from the date of acquisition, bankers’ acceptances with maturities not
exceeding one year and overnight bank deposits, in each case, with any domestic
commercial bank having capital and surplus in excess of $500.0 million and
a Thomson Bank Watch Rating of “B” or better;
(4)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (2) and (3) above entered into
with
any financial institution meeting the qualifications specified in clause (3)
above;
(5)
commercial paper having one of the two highest ratings obtainable from Moody’s
Investors Service, Inc. or Standard & Poor’s Rating Services and, in each
case, maturing within one year after the date of acquisition; and
(6)
money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5) of this
definition.
62
“Cash
Flow of AREP and the Guarantors” means, with respect to any period, the Net
Income of AREP and the Guarantors for such period plus, without
duplication:
(1)
provision for taxes based on income or profits of AREP and the Guarantors or
any
payments of Tax Amounts by AREP for such period, to the extent that such
provision for taxes or such payments of Tax Amounts were deducted in computing
such Net Income of AREP or any Guarantor; plus
(2)
the Fixed Charges of AREP or any Guarantor for such period, to the extent that
such Fixed Charges of AREP and such Guarantor were deducted in computing such
Net Income of AREP and such Guarantor; plus
(3)
depreciation, amortization (including amortization of intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent
that
it represents an accrual of or reserve for cash expenses in any future period
or
amortization of a prepaid cash expense that was paid in a prior period) of
AREP
and any Guarantor for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such Net
Income of AREP and any Guarantor; minus
(4)
non-cash items increasing such Net Income of AREP and any Guarantor for such
period, other than the accrual of revenue in the ordinary course of
business,
in each
case, consolidating such amounts for AREP and any Guarantor but excluding any
net income, provision for taxes, fixed charges, depreciation, amortization
or
other amounts of any of the Subsidiaries of AREP (other than any Guarantor)
and
otherwise determined in accordance with GAAP; provided, further, that the Net
Income of AREP and any Guarantor shall include income from investments or
Subsidiaries of AREP (other than any Guarantor) but only to the extent such
income is realized in Cash Equivalents by AREP or any Guarantor.
“Change
of
Control” means the occurrence of any of the following:
(1)
the sale, lease, transfer, conveyance or other disposition by AREP or AREH
(other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the properties or assets of AREP
or
AREH to any “person” (as that term is used in Section 13(d) of the Exchange Act)
other than the Principal or a Related Party; provided, however, that (x) if
AREP
or AREH receives consideration in Cash Equivalents and marketable securities
with an aggregate Fair Market Value determined at the time of the execution
of
each relevant agreement of at least $1.0 billion for such sale, lease,
transfer, conveyance or other disposition of properties or assets, then such
transaction shall not be deemed a Change of Control and (y) any sale,
assignment, transfer or other disposition of Cash Equivalents, including,
without limitation, any investment or capital contribution of Cash Equivalents
or purchase of property, assets or Capital Stock with Cash Equivalents, will
not
constitute a sale, assignment, transfer, conveyance or other disposition of
all
or substantially all of the properties or assets for purposes of this clause
(1);
(2)
the adoption of a plan relating to the liquidation or dissolution of AREP;
(3)
the consummation of any transaction (including, without limitation, any merger
or consolidation), the result of which is that any “person” (as defined above),
other than the Principal or the Related Parties, becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the Voting Stock of a Controlling
Entity of AREP, measured by voting power rather than number of shares;
(4)
the first day on which a majority of the members of the Board of Directors
of
the Controlling Entity are not Continuing Directors; or
(5)
for so long as AREP is a partnership, upon any general partner of AREP ceasing
to be an Affiliate of the Principal or a Related Party.
“Change
of
Control Offer” has the meaning assigned to that term in the indenture
governing the notes.
“Consolidated
Net Income” means, with respect to any specified Person for any period, the
aggregate of net income (loss) of such Person, on a consolidated basis with
its
Subsidiaries, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends; provided that:
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(1)
the Net Income of any Person that is accounted for by the equity method of
accounting or that is a Subsidiary will be included only to the extent of the
amount of dividends or similar distributions paid in cash to the specified
Person or a Subsidiary of the Person;
(2)
the Net Income of any of its Subsidiaries will be excluded to the extent that
the declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders; and
(3)
the cumulative effect of a change in accounting principles will be
excluded.
“Continuing
Directors” means, as of any date of determination, any member of the Board
of Directors of AREP who:
(1)
was a member of such Board of Directors on the date of the indenture; or
(2)
was nominated for election or elected to such Board of Directors with the
approval of the Principal or any of the Related Parties or with the approval
of
a majority of the Continuing Directors who were members of such Board of
Directors at the time of such nomination or election.
“Control”
means the possession, directly or indirectly, of the power to direct or cause
the direction of management and policies of a Person, whether through the
ownership of Voting Stock, by agreement or otherwise.
“Controlling
Entity” means (1) for so long as AREP is a partnership, any general partner
of AREP, (2) if AREP is a limited liability company, any managing member of
AREP
or (3) if AREP is a corporation, AREP.
“Default”
means any event that is, or with the passage of time or the giving of notice
or
both would be, an Event of Default.
“Disqualified
Stock” means any Capital Stock that, by its terms (or by the terms of any
security into which it is convertible, or for which it is exchangeable, in
each
case, at the option of the holder of the Capital Stock), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder of the
Capital Stock, in whole or in part, on or prior to the date that is 91 days
after the date on which the notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely
because the holders of the Capital Stock have the right to require AREP or
any
Guarantor to repurchase such Capital Stock upon the occurrence of a change
of
control, event of loss, an asset sale or other special redemption event will
not
constitute Disqualified Stock if the terms of such Capital Stock provide that
AREP or any Guarantor may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption “— Certain Covenants — Restricted
Payments” or where the funds to pay for such repurchase was from the net cash
proceeds of such Capital Stock and such net cash proceeds was set aside in
a
separate account to fund such repurchase. Furthermore, any Capital Stock that
would constitute Disqualified Stock solely because the holders of the Capital
Stock have the right to require AREP or any Guarantor to redeem such Capital
Stock, including, without limitation, upon maturity will not constitute
Disqualified Stock if the terms of such Capital Stock provide that AREP or
any
Guarantor may redeem such Capital Stock for other Capital Stock that is not
Disqualified Stock. The amount of Disqualified Stock deemed to be outstanding
at
any time for purposes of the indenture will be the maximum amount that AREP
and
its Subsidiaries (including any Guarantor) may become obligated to pay upon
the
maturity of, or pursuant to any mandatory redemption provisions of, such
Disqualified Stock, exclusive of accrued dividends. For the avoidance of doubt,
and by way of example, the Preferred Units, as in effect on the date of the
indenture, do not constitute Disqualified Stock.
“Equity
Interests” means Capital Stock and all warrants, options or other rights to
acquire Capital Stock (but excluding any debt security that is convertible
into,
or exchangeable for, Capital Stock).
“Equity
Offering” means an offer and sale of Capital Stock (other than Disqualified
Stock) of AREP (other than an offer and sale relating to equity securities
issuable under any employee benefit plan of AREP) or a capital contribution
in
respect of Capital Stock (other than Disqualified Stock) of AREP.
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“Existing
Indebtedness” means up to $394.4 million in aggregate principal amount
of Indebtedness of AREP and any Guarantor, in existence on the Issuance Date,
until such amounts are repaid.
“Existing
Notes” means the 7 1/8% Senior Notes due 2013 issued and sold by the Issuers
on February 1, 2005.
“Fair
Market Value” means the value that would be paid by a willing buyer to an
unaffiliated willing seller in a transaction not involving distress or necessity
of either party, determined in good faith by the Board of Directors of AREP
(unless otherwise provided in the indenture).
“Fixed
Charge Coverage Ratio of AREP and the Guarantors” means the ratio of the
Cash Flow of AREP and the Guarantors for such period to the Fixed Charges of
AREP and the Guarantors for such period. In the event that AREP, the Guarantors
or any Guarantor incurs, assumes, guarantees, repays, repurchases, redeems,
defeases or otherwise discharges any Indebtedness (other than ordinary working
capital borrowings) or issues, repurchases or redeems preferred stock subsequent
to the commencement of the period for which the Fixed Charge Coverage Ratio
of
AREP and the Guarantors is being calculated and on or prior to the Quarterly
Determination Date for which the calculation of the Fixed Charge Coverage Ratio
of AREP and the Guarantors is being made (the “Calculation Date”), then the
Fixed Charge Coverage Ratio of AREP and the Guarantors will be calculated giving
pro forma effect to such incurrence, assumption, Guarantee, repayment,
repurchase, redemption, defeasance or other discharge of Indebtedness, or such
issuance, repurchase or redemption of preferred stock, and the use of the
proceeds therefrom, as if the same had occurred at the beginning of the
applicable four-quarter reference period.
In
addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1)
acquisitions that have been made by the specified Person, including through
mergers or consolidations, or any Person acquired by the specified Person,
and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date will be given pro forma effect (in accordance with Regulation S-X under
the
Securities Act) as if they had occurred on the first day of the four-quarter
reference period;
(2)
the Cash Flow of AREP and the Guarantors attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
(and ownership interests therein) disposed of prior to the Calculation Date,
will be excluded;
(3)
the Fixed Charges of AREP and the Guarantors attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
(and ownership interests therein) disposed of prior to the Calculation Date,
will be excluded, but only to the extent that such Fixed Charges of AREP and
the
Guarantors are equal to or less than the Cash Flow of AREP and the Guarantors
from the related discontinued operation excluded under clause (3) for such
period; and
(4)
if any Indebtedness bears a floating rate of interest, the interest expense
on
such Indebtedness will be calculated as if the rate in effect on the Calculation
Date had been the applicable rate for the entire period (taking into account
any
Hedging Obligation applicable to such Indebtedness if such Hedging Obligation
has a remaining term as at the Calculation Date in excess of 12 months).
“Fixed
Charges of AREP and the
Guarantors” means, with respect to any period, the sum, without
duplication, of:
(1)
the interest expense of AREP, and any
Guarantor for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in
respect of letter of credit or bankers’ acceptance financings, and net of the
effect of all payments made or received pursuant to Hedging Obligations in
respect of interest rates; plus
(2)
the interest expense of AREP and any Guarantor that was capitalized during
such
period; plus
(3)
any interest on Indebtedness of another
Person that is guaranteed by AREP or any Guarantor (other than Bad Boy
Guarantees unless such Bad Boy Guarantee is called upon) or secured by a Lien
on
assets of AREP or any additional Guarantor, whether or not such Guarantee or
Lien is called upon; provided that for purposes of calculating interest with
respect to Indebtedness that is Guaranteed or secured by a Lien, the principal
amount of Indebtedness will be calculated in accordance with the last two
paragraphs of the definition of Indebtedness; plus
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(4)
the product of (a) all dividends, whether paid or accrued and whether or not
in
cash, on any series of preferred equity of AREP, other than dividends on
preferred stock to the extent payable in Equity Interests of AREP (other than
Disqualified Stock) or dividends on preferred equity payable to AREP, times
(b)
a fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory income tax
rate of AREP (however, for so long as AREP is a partnership or otherwise a
pass-through entity for federal income tax purposes, the combined federal,
state
and local income tax rate shall be the rate that was utilized to calculate
the
Tax Amount of AREP to the extent that the Tax Amount was actually distributed
with respect to such period (and if less than the Tax Amount is distributed,
such rate shall be proportionately reduced) and if no Tax Amount was actually
distributed with respect to such period, such combined federal, state and local
income tax rate shall be zero), expressed as a decimal; provided that this
clause (4) will not include any Preferred Unit Distribution paid in additional
Preferred Units,
in each
case, determined on a consolidated basis between AREP and any Guarantor but
on a
non-consolidated basis with the Subsidiaries of AREP (other than any Guarantor)
and otherwise in accordance with GAAP.
“GAAP”
means generally accepted accounting principles in the United States set forth
in
the statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as have been approved by a
significant segment of the accounting profession, which are in effect on the
Issuance Date. For the purposes of the indenture, the term “consolidated” with
respect to any Person shall mean such Person consolidated with its
Subsidiaries.
“Gaming
Authority” means any agency, authority, board, bureau, commission,
department, office or instrumentality of any nature whatsoever of the United
States or other national government, any state, province or any city or other
political subdivision, including, without limitation, the State of Nevada or
the
State of New Jersey, whether now or hereafter existing, or any officer or
official thereof and any other agency with authority thereof to regulate any
gaming operation (or proposed gaming operation) owned, managed or operated
by
the Principal, its Related Parties, the Issuers or any of their respective
Subsidiaries or Affiliates.
“Gaming
Law” means any gaming law or regulation of any jurisdiction or jurisdictions
to which the Issuers or any of their Subsidiaries (including AREH) is, or may
at
any time after the issue date be, subject.
“Government
Instrumentality” means any national, state or local government (whether
domestic or foreign), any political subdivision thereof or any other
governmental, quasi-governmental, judicial, public or statutory instrumentality,
authority, body, agency, court, tribunal, commission, bureau or entity or any
arbitrator with authority to bind a party at law.
“Government
Securities” means securities that are (1) direct obligations of the United
States of America for the timely payment of which its full faith and credit
is
pledged or (2) obligations of a Person controlled or supervised by and acting
as
an agency or instrumentality of the United States of America the timely payment
of which is unconditionally guaranteed as a full faith and credit obligation
by
the United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act), as custodian with respect to any such Government Security
or a
specific payment of principal of or interest on any such Government Security
held by such custodian for the account of the holder of such depository receipt;
provided, that (except as required by law) such custodian is not authorized
to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Security or the specific payment of principal of or interest on the Government
Security evidenced by such depository receipt.
“Guarantee”
means a guarantee (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), direct or indirect, in any
manner (including, without limitation, by way of a pledge of assets or through
letters of credit or reimbursement agreements in respect thereof), of all or
any
part of any Indebtedness (whether arising by virtue of partnership arrangements,
or by agreements to keep-well, to purchase assets, goods, securities or
services, to take or pay or to maintain financial statement conditions or
otherwise).
“Guarantor”
means any Subsidiary of AREP (initially only AREH) that executes a Note
Guarantee in accordance with the provisions of the indenture, and their
respective successors and assigns, in each case, until the Note Guarantee of
such Person has been released in accordance with the provisions of the
indenture.
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“Hedging
Obligations” means, with respect to any specified Person, the obligations of
such Person under:
(1)
interest rate swap agreements (whether from fixed to floating or from floating
to fixed), interest rate cap agreements and interest rate collar
agreements;
(2)
other agreements or arrangements designed to manage interest rates or interest
rate risk; and
(3)
other agreements or arrangements designed to protect such Person against
fluctuations in currency exchange rates or commodity prices.
“Indebtedness”
means, with respect to any specified Person, any indebtedness of such Person
(excluding accrued expenses and trade payables), whether or not
contingent:
(1)
in respect of borrowed money;
(2)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof);
(3)
in respect of banker’s acceptances;
(4)
representing Capital Lease Obligations;
(5)
representing the balance deferred and unpaid of the purchase price of any
property or services due more than six months after such property is acquired
or
such services are completed; or
(6)
representing any Hedging Obligations,
if and
to
the extent any of the preceding items (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of the specified
Person prepared in accordance with GAAP. In addition, the term “Indebtedness”
includes all Indebtedness of others secured by a Lien on any asset of the
specified Person (whether or not such Indebtedness is assumed by the specified
Person) and, to the extent not otherwise included, the Guarantee by the
specified Person of any Indebtedness of any other Person.
The
amount of any Indebtedness outstanding as of any date attributable to a
Guarantee shall be the maximum principal amount guaranteed by such specified
Person as of such date.
The
amount of any Indebtedness outstanding as of any date shall be (a) the accreted
value thereof, in the case of any Indebtedness with original issue discount,
(b)
the principal amount thereof, together with any interest thereon that is more
than 30 days past due, in the case of any other Indebtedness and (c) in respect
of Indebtedness of another Person secured by a Lien on the assets of the
specified Person, the lesser of (x) the Fair Market Value of such assets at
the
date of determination and (y) the amount of the Indebtedness of the other Person
to the extent so secured. Notwithstanding anything in the indenture to the
contrary, Indebtedness of AREP, AREH or any Note Guarantor shall not include
any
Indebtedness that has been either satisfied and discharged or defeased through
covenant defeasance or legal defeasance.
“Issuance
Date” means the closing date for the sale and original issuance of the
Existing Notes.
“Issuers”
means AREP and AREP Finance, collectively.
“Lien”
means, with respect to any asset, any mortgage, lien, pledge, charge, security
interest or encumbrance of any kind in respect of such asset, whether or not
filed, recorded or otherwise perfected under applicable law, including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest
in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
“Liquidated
Damages” means all liquidated damages then owing pursuant to the
registration rights agreement.
“Net
Income” means, with respect to any specified Person for any four consecutive
fiscal quarter period, the net income (loss) of such Person determined in
accordance with GAAP and before any reduction in respect of preferred stock
dividends.
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“Note
Guarantee” means the Guarantee by any Subsidiary of AREP of the Issuers’
obligations under the indenture and the notes, executed pursuant to the
provisions of the indenture which initially will only be by AREH.
“Notes”
means AREP’s 7 1/8% senior notes issued under the indenture, including any
Additional Notes issued.
“Obligations”
means any principal, interest, penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any Indebtedness.
“Officer”
means with respect to any Person, the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Operating Officer, the Chief Financial
Officer, the Treasurer, an Assistant Treasurer, the Controller, the Secretary
or
any Vice President of such Person.
“Officers’
Certificate” means a certificate signed on behalf of API or AREP Finance by
two Officers (or if a limited liability company, two Officers of the managing
member of such limited liability company) of API or AREP Finance, one of whom
must be the principal executive officer, the principal financial officer, the
treasurer or the principal accounting officer of API or AREP Finance that meets
the requirements set forth in the indenture.
“Other
Liquidated Damages” means liquidated damages arising from a registration
default under a registration rights agreement with respect to the registration
of subordinated Indebtedness permitted to be incurred under the indenture.
“Partners’
Equity” with respect to any Person means as of any date, the partners’
equity as of such date shown on the consolidated balance sheet of such
Person
and its Subsidiaries or if such Person is not a partnership, the comparable
line-item on a balance sheet, each prepared in accordance with GAAP.
“Permitted
Refinancing Indebtedness” means any Indebtedness of AREP or any Guarantor
issued in exchange for, or the net proceeds of which are used to renew, refund,
refinance, replace, defease or discharge other Indebtedness of AREP or any
Guarantor (other than intercompany Indebtedness); provided that:
(1)
the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness renewed, refunded, refinanced,
replaced, defeased or discharged (plus all accrued interest on the Indebtedness
and the amount of all fees and expenses, including premiums, and Other
Liquidated Damages, incurred in connection therewith);
(2)
in the case of any Indebtedness other than notes redeemed in accordance with
“—
Mandatory Disposition Pursuant to Gaming Laws,” such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being renewed, refunded,
refinanced, replaced, defeased or discharged; and
(3)
if the Indebtedness being renewed, refunded, refinanced, replaced, defeased
or
discharged is subordinated in right of payment to the notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the notes on terms at
least
as favorable to the holders of notes as those contained in the documentation
governing the Indebtedness being renewed, refunded, refinanced, replaced,
defeased or discharged.
“Person”
means any individual, corporation, partnership, limited liability company,
joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other
entity.
“Preferred
Stock” means any Equity Interest with preferential right of payment of
dividends or upon liquidation, dissolution, or winding up.
“Preferred
Units” means AREP’s 5% Cumulative Pay-in-Kind Redeemable Preferred Units
payable on or before March 31, 2010.
“Preferred
Unit Distribution” means the scheduled annual Preferred Unit distribution,
payable on March 31 of each year in additional Preferred Units at the rate
of 5% of the liquidation preference of $10.00 per Preferred Unit.
“Principal”
means Carl Icahn.
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“Principal
Property” of a specified Person means any property, assets or revenue of
such Person now owned or hereafter acquired.
“Quarterly
Determination Date” means, in connection with AREP’s first, second and third
fiscal quarters, the earlier of (i) the date AREP would have been required
to
file a quarterly report with the SEC on Form 10-Q if AREP were required to
file
such reports and (ii) the date AREP files its quarterly report with the SEC
on
Form 10-Q. In connection with AREP’s fourth fiscal quarter, the earlier of (i)
the date AREP would have been required to file an annual report with the SEC
on
Form 10-K if AREP were required to file such a report and (ii) the date AREP
files its annual report with the SEC on Form 10-K.
“Related
Parties” means (1)
Carl Icahn, any spouse and any child, stepchild, sibling or descendant of Carl
Icahn, (2) any estate of Carl Icahn or any person under clause (1), (3) any
person who receives a beneficial interest in any estate under clause (2) to
the
extent of such interest, (4) any executor, personal administrator or trustee
who
holds such beneficial interest in AREP for the benefit of, or as fiduciary
for,
any person under clauses (1), (2) or (3) to the extent of such interest and
(5)
any corporation, partnership, limited liability company, trust, or similar
entity, directly or indirectly owned or Controlled by Carl Icahn or any other
person or persons identified in clauses (1), (2) or (3).
“SEC”
means the United States
Securities and Exchange Commission.
“Secured
Indebtedness” of any specified Person means any Indebtedness secured by a
Lien upon the property of such Person.
“Securities
Act” means the Securities Act of 1933, as amended.
“Significant
Subsidiary” means any Subsidiary which would be a “significant subsidiary”
as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant
to
the Securities Act, as such regulation is in effect on the Issuance Date.
“Stated
Maturity” means, with respect to any installment of interest or principal on
any series of Indebtedness, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing
such
Indebtedness, and shall not include any contingent obligations to repay, redeem
or repurchase any such interest, accreted value, or principal prior to the
date
originally scheduled for the payment or accretion thereof.
“Subordinated
Indebtedness” means any Indebtedness that by its terms is expressly
subordinated in right of payment in any respect (either in the payment of
principal or interest) to the payment of principal, Liquidated Damages or
interest on the notes.
“Subsidiary”
means, with respect to any specified Person:
(1)
any corporation, association or other business entity of which more than 50%
of
the total Voting Stock is at the time owned or Controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
(2)
any partnership (a) the sole general partner or the managing general partner
of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are that Person or one or more Subsidiaries of that Person
(or
any combination thereof).
For the
avoidance of doubt, AREH will be deemed to be a Subsidiary of AREP so long
as
AREH remains a Guarantor.
“Tangible
Net Worth” of any specified Person as of any date means, the total
shareholders’ equity (or if such Person were not a corporation, the equivalent
account) of such Person and its Subsidiaries on a consolidated basis determined
in conformity with GAAP less any and all goodwill and other intangible assets
reflected on the consolidated balance sheet of such Person as of the last day
of
the fiscal quarter most recently completed before the date of determination
for
which financial statements are then available, but taking into account any
change in total shareholders’ equity (or the equivalent account) as a result of
any (x) Restricted Payments made, (y) asset sales or (z) contributions to equity
or from the issuance or sale of Equity Interests (excluding Disqualified Stock)
or from the exchange or conversion (other than to Disqualified Stock) of
Disqualified Stock or debt securities, completed since such fiscal quarter
end.
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“Tax
Amount” means, for any period, the combined federal, state and local income
taxes, including estimated taxes, that would be payable by AREP if it were
a
Delaware corporation filing separate tax returns with respect to its Taxable
Income for such period and owned 100% of AREH; provided, that in determining
the
Tax Amount, the effect thereon of any net operating loss carryforwards or other
carryforwards or tax attributes, such as alternative minimum tax carryforwards,
that would have arisen if AREP were a Delaware corporation shall be taken into
account; provided, further that (i) if there is an adjustment in the amount
of
the Taxable Income for any period, an appropriate positive or negative
adjustment shall be made in the Tax Amount, and if the Tax Amount is negative,
then the Tax Amount for succeeding periods shall be reduced to take into account
such negative amount until such negative amount is reduced to zero and (ii)
any
Tax Amount other than amounts relating to estimated taxes shall be computed
by a
nationally recognized accounting firm (but, including in any event, AREP’s
auditors). Notwithstanding anything to the contrary, the Tax Amount shall not
include taxes resulting from AREP’s change in the status to a corporation for
tax purposes.
“Taxable
Income” means, for any period, the taxable income or loss of AREP for such
period for federal income tax purposes.
“Total
Unencumbered Assets” means, as of any Quarterly Determination Date, the book
value of all of the assets of AREP and any Guarantor (including, without
limitation, the Capital Stock of their Subsidiaries, but excluding goodwill
and
intangibles) that do not secure, by a Lien, any portion of any Indebtedness
(other than assets secured by a Lien in favor of the notes and such assets
are
not secured by a Lien in favor of any other Indebtedness) as of such date
(determined on a consolidated basis between AREP and any Guarantor but not
on a
consolidated basis with their Subsidiaries and otherwise in accordance with
GAAP).
“Unsecured
Indebtedness” of AREP, AREH and any additional Guarantor means any
Indebtedness of such Person that is not Secured Indebtedness.
“Voting
Stock” means, with respect to any Person that is (a) a corporation, any
class or series of capital stock of such Person that is ordinarily entitled
to
vote in the election of directors thereof at a meeting of stockholders called
for such purpose, without the occurrence of any additional event or contingency,
(b) a limited liability company, membership interests entitled to manage, or
to
elect or appoint the Persons that will manage the operations or business of
the
limited liability company, or (c) a partnership, partnership interests entitled
to elect or replace the general partner thereof.
“Weighted
Average Life to Maturity” means, when applied to any Indebtedness or
Disqualified Stock, as the case may be, at any date, the number of years
(calculated to the nearest one-twelfth) obtained by dividing (1) the sum of
the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal or liquidation preference, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such payment,
by (2) the then outstanding principal amount or liquidation preference, as
applicable, of such Indebtedness or Disqualified Stock, as the case may
be.
70
The
following general discussion summarizes certain material U.S. federal income
tax
consequences that apply to beneficial owners of the private notes who:
(1)
acquired the private notes at their original issue price for cash,
(2)
exchange the private notes for new notes in this exchange offer, and
(3)
held the private notes and hold the new notes as “capital assets” (generally,
for investment) as defined in the Code.
This
summary, however, does not consider state, local or foreign tax laws. In
addition, it does not include all of the rules which may affect the U.S. tax
treatment of your investment in the notes. For example, special rules not
discussed here may apply to you if you are:
·
A
broker-dealer, a dealer in securities or
a financial institution;
·
An
S corporation;
·
A
bank;
·
A
thrift;
·
An
insurance company;
·
A
tax-exempt organization;
·
A
partnership or other pass-through
entity;
·
Subject
to the alternative minimum tax
provisions of the Code;
·
Holding
the private notes or the new notes
as part of a hedge, straddle or other risk reduction or constructive sale
transaction;
·
A
person with a “functional currency” other
than the U.S. dollar; or
·
A
U.S. expatriate.
If you
are a partner in a partnership which holds the new notes, you should consult
your own tax advisor regarding special rules that may apply.
This
summary is based on the Code and applicable Treasury Regulations, rulings,
administrative pronouncements and decisions as of the date hereof, all of which
are subject to change or differing interpretations at any time with possible
retroactive effect. We have not sought and will not seek any rulings from the
Internal Revenue Service, or the IRS, with respect to the statements made and
the conclusions reached in this summary, and there can be no assurance that
the
IRS will agree with such statements and conclusions.
Each
holder is urged to consult his tax advisor regarding the specific federal,
state, local, and foreign income and other tax considerations of participating
in this exchange offer and holding the new notes.
Exchange of Private
Notes for New Notes
The
exchange of the private notes for the new notes pursuant to this exchange offer
should not be a taxable event for U.S. federal income tax purposes. Accordingly,
holders participating in this exchange offer should not recognize any income,
gain or loss in connection with the exchange. In addition, immediately after
the
exchange, any such holder should have the same adjusted tax basis and holding
period in the new notes as it had in the private notes, immediately before
the
exchange.
Consequences of
Holding the New Notes
U.S.
Holders
If you
are a “U.S. Holder,” as defined below, this section applies to you. Otherwise,
the section “Non-U.S. Holders” applies to you.
71
You are
a
“U.S. Holder” if you are the beneficial owner of a new note and you are, for
U.S. federal income tax purposes:
·
an
individual who is a citizen or resident
of the United States;
·
a
corporation or an entity, treated as a
corporation for U.S. federal income tax purposes, created or organized under
the
laws of the United States or any political subdivision thereof;
·
an
estate the income of which is subject to
U.S. federal income tax regardless of its sources; or
·
a
trust (i) if a court within the United
States can exercise primary supervision over the administration of the trust
and
one or more U.S. persons has authority to control all substantial decisions
of
the trust, or (ii) if the trust was in existence on August 20, 1996, and
treated as a domestic trust on August 19, 1996, and it has elected to
continue to be treated as a U.S. person.
Taxation of Stated
Interest
Generally,
you
must include the interest on the new notes in your gross income as ordinary
income:
·
when
it accrues, if you use the accrual
method of accounting for U.S. federal income tax purposes; or
·
when
you receive it, if you use the cash
method of accounting for U.S. federal income tax purposes.
Sale or Other Taxable
Disposition of the New Notes
You will
generally recognize taxable gain or loss on the sale, exchange, redemption,
retirement or other taxable disposition of a new note. The amount of your gain
or loss will equal the difference between the amount you receive for the new
note (in cash or other property, valued at fair market value), except to the
extent amounts received are attributable to accrued interest on the note, and
your adjusted tax basis in the new note. Your tax basis in the new note
generally will equal the price you paid for the private note that was exchanged
for the new note. Your gain or loss will generally be long-term capital gain
or
loss if your holding period for the new note is more than one year at the time
of the sale, exchange, redemption, retirement or other taxable disposition.
Otherwise, it will be short-term capital gain or loss. For this purpose, your
holding period for the new note should include your holding period for the
private note that was exchanged for the new note. Long-term capital gains
recognized in years beginning before December 31, 2008 by certain
non-corporate holders are generally taxed at a maximum rate of 15%. The ability
to deduct capital losses is subject to limitations. Payments attributable to
accrued interest which you have not yet included in income will be taxed as
ordinary interest income.
Information Reporting
and Backup Withholding
We will
report to certain holders of the new notes and to the IRS the amount of any
interest paid on the new notes in each calendar year and the amounts of tax
withheld, if any, with respect to such payments. You may be subject to a backup
withholding tax when you receive interest payments on a new note or proceeds
upon the sale or other disposition of the new note. Certain holders (including,
among others, corporations, financial institutions and certain tax-exempt
organizations) are generally not subject to information reporting or backup
withholding. In addition, the backup withholding tax will not apply to you
if
you provide to us or our paying agent your correct social security or other
taxpayer identification number, or TIN, in the prescribed manner unless:
·
the
IRS notifies us or our paying agent
that the TIN you provided is incorrect;
·
you
underreport interest and dividend
payments that you receive on your tax return and the IRS notifies us or our
paying agent that withholding is required; or
·
you
fail, under certain circumstances, to
certify under penalties of perjury that you are not subject to backup
withholding.
The
backup withholding tax rate is currently 28%. Any amounts withheld from a
payment to you under the backup withholding rules may be credited against your
U.S. federal income tax liability, and may entitle you to a refund, provided
the
required information is properly furnished to the IRS on a timely basis.
72
You
should consult your tax advisor as to your qualification for exemption from
backup withholding and the procedures for obtaining such exemption.
Non-U.S.
Holders
The
following general discussion is limited to the U.S. federal income tax
consequences relevant to a “Non-U.S. Holder.” A “Non-U.S. Holder” is any
beneficial owner of a new note if such owner is, for U.S. federal income tax
purposes, a nonresident alien, or a corporation, estate, or trust that is not
a
U.S. Holder.
Interest
Portfolio
Interest Exemption. You will generally not be subject to U.S. federal income
tax or withholding tax on interest paid or accrued on the new notes if:
·
you
do not own, actually or constructively,
10% or more of our capital or profits interests;
·
you
are not a controlled foreign
corporation with respect to which we are a “related person” within the meaning
of Section 864(d)(4) of the Code;
·
you
are not a bank receiving interest
described in Section 881(c)(3)(A) of the Code;
·
such
interest is not effectively connected
with the conduct by you of a trade or business in the United States;
and
·
either
(i) you represent that you are not a
United States person for U.S. federal income tax purposes and you provide your
name and address to us or our paying agent on a properly executed IRS Form
W-8BEN (or a suitable substitute form) signed under penalties of perjury, or
(ii) a securities clearing organization, bank, or other financial institution
that holds customers’ securities in the ordinary course of its business holds
the new note on your behalf, certifies to us or our paying agent under penalties
of perjury that it has received IRS Form W-8BEN (or a suitable substitute form)
from you or from another qualifying financial institution intermediary, and
provides a copy of the Form W-8BEN (or a suitable substitute form) to us or
our
paying agent.
U.S.
Federal Income or Withholding Tax If Interest Is Not Portfolio Interest. If
you do not claim, or do not qualify for, the benefit of the portfolio interest
exemption described above, you may be subject to a 30% withholding tax on the
gross amount of interest payments, unless reduced or eliminated by an applicable
income tax treaty.
However,
income from payments or accruals of interest that is effectively connected
with
the conduct by you of a trade or business in the United States will be subject
to U.S. federal income tax on a net basis at a rate applicable to United States
persons generally (and, if paid to corporate holders, may also be subject to
a
branch profits tax at a rate of 30% or lower applicable treaty rate). If
payments are subject to U.S. federal income tax on a net basis in accordance
with the rules described in the preceding sentence, such payments will not
be
subject to United States withholding tax so long as you provide us or our paying
agent with a properly executed IRS Form W-8ECI.
Non-U.S.
Holders should consult any applicable income tax treaties, which may provide
for
a lower rate of withholding tax, exemption from or reduction of the branch
profits tax, or other rules different from those described above. Generally,
in
order to claim any treaty benefits you must submit a properly executed IRS
Form
W-8BEN.
Reporting.
We may report annually to the IRS and to you the amount of interest paid to
you,
and the tax withheld, if any, with respect to you.
Sale or Other
Disposition of New Notes
You will
generally not be subject to U.S. federal income tax or withholding tax on gain
recognized on a sale, exchange, redemption, retirement, or other disposition
of
a new note unless such gain is effectively connected with the conduct by you
of
a trade or business within the United States. Any gain that is effectively
connected with the conduct by you of a trade or business within the United
States will be subject to U.S. federal income tax on a net basis at the rates
generally applicable to U.S. persons as described above.
73
Payments
From U.S. Office. If you receive payment of interest or principal directly
from us or through the U.S. office of a custodian, nominee, agent or broker,
you
may be subject to both backup withholding and information reporting.
With
respect to interest payments made on the new notes, however, backup withholding
and information reporting will not apply if you certify, generally on a Form
W-8BEN (or Form W-8ECI) or suitable substitute form, that you are not a U.S.
person in the manner described above under the heading “Non-U.S. Holders —
Interest,” or you otherwise establish an exemption.
Moreover,
with respect to proceeds received on the sale, exchange, redemption, or other
disposition of a new note, backup withholding or information reporting generally
will not apply if you properly provide, generally on Form W-8BEN (or Form
W-8ECI) or a suitable substitute form, a statement that you are an “exempt
foreign person” for purposes of the broker reporting rules, and other required
information. If you are not subject to United States federal income or
withholding tax on the sale or other disposition of a new note, as described
above under the heading “Non-U.S. Holders-Interest — Sale or Other Disposition
of New Notes,” you will generally qualify as an “exempt foreign person” for
purposes of the broker reporting rules.
Payments
From Foreign Office. If payments of principal and interest are made to you
outside the United States by or through the foreign office of your foreign
custodian, nominee or other agent, or if you receive the proceeds of the sale
of
a new note through a foreign office of a “broker,” as defined in the pertinent
U.S. Treasury Regulations, you will generally not be subject to backup
withholding or information reporting. You will however, be subject to backup
withholding and information reporting if the foreign custodian, nominee, agent
or broker has actual knowledge or reason to know that you are a U.S. person.
You
will also be subject to information reporting, but not backup withholding,
if
the payment is made by a foreign office of a custodian, nominee, agent or broker
that has certain relationships to the United States unless the broker has in
its
records documentary evidence that you are a Non-U.S. Holder and certain other
conditions are met.
Refunds.
Any amounts withheld from a payment to you under the backup withholding rules
may be credited against your U.S. federal income tax liability and may entitle
you to a refund, provided the required information is properly furnished to
the
IRS on a timely basis.
The
information reporting requirements may apply regardless of whether withholding
is required. Copies of the information returns reporting interest and
withholding also may be made available to the tax authorities in the country
in
which a Non-U.S. Holder is a resident under the provisions of an applicable
income tax treaty or other agreement.
The
preceding summary is for general information only and is not tax advice. Please
consult your own tax advisor to determine the tax consequences of purchasing,
holding and disposing of the notes under your particular circumstances.
74
Each
broker-dealer that receives new notes for its own account pursuant to the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for private notes where such
private notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, starting on the expiration date and
ending on the close of business 270 days after the expiration date (or such
shorter period during which participating broker-dealers are required by law
to
deliver such prospectus), we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such
resale. In addition, until
,
200_ all dealers effecting transactions in the new notes may be required to
deliver a prospectus.
We
will not receive any proceeds from any sale of new notes by broker-dealers.
New
notes received by broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation
in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such new notes. Any broker-dealer that resells new notes
that
were received by it for its own account pursuant to the exchange offer and
any
broker or dealer that participates in a distribution of such new notes may
be
deemed to be an “underwriter” within the meaning of the Securities Act and any
profit of any such resale of new notes and any commissions or concessions
received any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging
that
it will deliver, and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an “underwriter” within the meaning of the Securities
Act.
Furthermore,
any broker-dealer that acquired any of its private notes directly from us:
·
may
not rely on the applicable
interpretation of the staff of the Commission’s position contained in Exxon
Capital Holdings Corp., SEC no-action letter (May 13, 1988), Morgan,
Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman
& Sterling, SEC no-action letter (July 2, 1983); and
·
must
also be named as a selling noteholder
in connection with the registration and prospectus delivery requirements of
the
Securities Act relating to any resale transaction.
For a
period of 270 days after the expiration date, we will promptly send additional
copies of this prospectus and any amendment or supplement to this prospectus
to
any broker-dealer that requests such documents in the letter of transmittal.
We
have agreed to pay all expenses incident to the exchange offer (including the
expenses of one counsel for the holder of the private notes) other than
commissions or concessions of any brokers or dealers and will indemnify the
holders of the private notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
75
The
validity of the notes offered by this prospectus and certain legal matters
in
connection with the exchange offer will be passed upon for us by Proskauer
Rose
LLP, New York, New York.
The consolidated
financial statements of American Real Estate Partners, L.P. and Subsidiaries
as of December 31, 2006 and 2005 and for each of the three years in the
period ended December 31, 2006 and management’s assessment of effectiveness
of internal control over financial reporting as of December 31, 2006, incorporated
by reference in this prospectus have been audited by Grant Thornton LLP, independent
registered public accountants, as indicated in their reports with respect thereto,
(which report on the consolidated financial statements refers to the change
in accounting for the Partnership’s investment in ImClone Systems Incorporated
and Subsidiary from an available for sale security to the equity method) and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
reports.
The
consolidated financial statements of American Real Estate Holdings Limited
Partnership and Subsidiaries as of December 31, 2006, and for each of the three
years in the period ended December 31, 2006 included in this prospectus, have
been audited by Grant Thornton LLP, independent registered public accountants,
as stated in its report with respect thereto, (which report on the consolidated financial statements refers to the change
in accounting for the Partnership’s investment in ImClone Systems Incorporated
and Subsidiary from an available for sale security to the equity method) and are included herein
in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
The
balance sheet of American Property Investors, Inc., as of December 31, 2006,
included in this prospectus has been audited by Grant Thornton LLP, independent
accountants, as stated in its report with respect thereto, and is included
herein in reliance upon the authority of said firm as experts in accounting
and
auditing in giving said report.
The
consolidated financial statements of ImClone Systems Incorporated and subsidiary
as of December 31, 2006 and 2005, and for each of the years in the three-year
period ended December 31, 2006, have been included and incorporated by reference
herein in reliance upon the report of KPMG LLP, independent registered public
accounting firm, included in this registration statement and incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The audit report covering the December 31, 2006 consolidated
financial statements refers to the Company’s adoption of the provisions of
Statement of Financial Accounting Standards No. 123R, “Share-Based
Payment.”
The consolidated
financial statements of GB Holdings, Inc. and subsidiaries for the year ended
December 31, 2004 have been included and incorporated by reference herein
in reliance upon the report of KPMG LLP, independent registered public accounting
firm, included and incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing.
The
consolidated financial statements and financial statement schedule of Lear
Corporation as of December 31, 2006 and 2005 and for each of the three
years in the period ended December 31, 2006 included elsewhere in this
prospectus have been audited by Ernst & Young LLP, independent registered
public accounting firm, as set forth in their report thereon appearing elsewhere
herein and are included in reliance upon such report given on the authority
of
such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the SEC a registration statement on Form S-4 under the Securities
Act. This prospectus is part of the registration statement. This prospectus
does
not contain all the information contained in the registration statement because
we have omitted certain parts of the registration statement in accordance with
the rules and regulations of the SEC. For further information, we refer you
to
the registration statement, which you may read and copy at the public reference
facilities maintained by the SEC at 100 F Street, N. E. Room 1580, Washington,
D.C. 20549. You may obtain copies at the prescribed rates from the Public
Reference Section of the SEC at its principal office in Washington, D.C. You
may
call the SEC at 1-800-SEC-0330 for further information about the public
76
Back to Table of Contents
reference
rooms. The SEC maintains a web site that contains reports, proxy and information
statements and other information regarding us. You may access the SEC’s web site
at http://www.sec.gov.
We
are subject to the informational requirements of the Exchange Act. As a result,
we are required to file reports, proxy statements and other information with
the
SEC. These materials can be copied and inspected at the locations described
above. Copies of these materials can be obtained from the Public Reference
Section of the SEC at 100 F Street, N. E. Room 1580, Washington, D.C. 20549,
at
prescribed rates. Our depositary units are listed on the New York Stock Exchange
under the symbol “ACP.”
77
The SEC
allows us to “incorporate by reference” the information we file with them, which
means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is considered to
be
part of this prospectus, and information that we file later with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below, all filings made pursuant to the Exchange Act after
the date of the initial registration statement and prior to effectiveness of
the
registration statement and any other future filings we will make with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act (other than Current
Reports on Form 8-K containing disclosure furnished under Items 2.02, 7.01
or
8.01 of Form 8-K, unless otherwise indicated therein):
·
Our
Annual Report on Form 10-K and Form
10-K/A, Amendment No. 1 for the fiscal year ended December 31, 2006, filed
with the SEC on March 6, 2007 and March 16, 2007, respectively (SEC
File No. 001-09516);
·
Our
Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2007, filed with the SEC on May 10,
2007 (SEC File No. 001-09516); and
·
Our
Current Reports on Form 8-K, filed with
the SEC on April 3, 2007, April 5, 2007, April 17, 2007,
April 24, 2007, April 27, 2007 and May 10, 2007 (SEC File No.
001-09516).
You may
request a copy of these filings (not including the exhibits to such documents
unless the exhibits are specifically incorporated by reference in the
information contained in this prospectus), at no cost, by writing or telephoning
us at the following address:
American
Real
Estate Partners, L.P.
767 Fifth Avenue, Suite 4700
New York, New York
10153
Attn: Chief Financial Officer
Telephone requests may be directed to
(212) 702-4300
This
prospectus is part of a registration statement we filed with the SEC. You should
rely only on the information or representations provided in this prospectus.
We
have authorized no one to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted.
You
should not assume that the information in this prospectus is accurate as of
any
date other than the date on the front of the document.
Statements
contained in this prospectus as to the contents of any contract or document
are
not necessarily complete and in each instance reference is made to the copy
of
that contract or document filed as an exhibit to the registration statement
or
as an exhibit to another filing, each such statement being qualified in all
respects by such reference and the exhibits and schedules thereto.
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F-1
Back
to Index
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Board of Directors and
Partners of
American Real Estate Holdings Limited Partnership
We have
audited the accompanying consolidated balance sheets of American Real Estate
Holdings Limited Partnership and Subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of operations, changes in partners’
equity and comprehensive income, and cash flows for each of the three years
in
the period ended December 31, 2006. These consolidated financial statements
are
the responsibility of the Partnership’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not
audit the financial statements of GB Holdings, Inc. and Subsidiaries for the
year ended December 31, 2004, which statements reflect losses of $12,822,000
included in the discontinued operations. Those statements were audited by other
auditors, whose report thereon has been furnished to us, and our opinion,
insofar as it relates to the amounts included for GB Holdings, Inc. and
Subsidiaries, is based solely on the report of the other auditors. Those
auditors expressed an unqualified opinion with emphasis on a going concern
matter on those financial statements in their report dated March 11, 2005.
Also,
we did not audit the financial statements of ImClone Systems Incorporated and
Subsidiary, the investment in which, as discussed in Notes 2 and 7 to the
financial statements, is accounted for by the equity method of accounting.
The
investment in ImClone Systems Incorporated and Subsidiary was $164,307,000
and
$97,255,000 as of December 31, 2006 and 2005, respectively, and the equity
in
its net income was $12,620,000 and $1,375,000 respectively, for the years then
ended. The financial statements of ImClone Systems Incorporated and Subsidiary
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for ImClone Systems
Incorporated and Subsidiary, is based solely on the reports of the other
auditors.
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 and the reports
of
the other auditors provide a reasonable basis for our opinion.
In our
opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of American Real Estate
Holdings Limited Partnership and Subsidiaries as of December 31, 2006 and 2005,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States
of
America.
As
discussed in Notes 2 and 7, in 2006, the Partnership changed the accounting
for
its investment in ImClone Systems Incorporated and Subsidiary from an available
for sale security to the equity method.
/s/ GRANT THORNTON LLP
New York, New York
March
2, 2007
F-2
Back
to Index
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of GB
Holdings, Inc.
We have
audited the consolidated statements of operations, changes in shareholders’
equity and cash flows for the year ended December 31, 2004 of GB Holdings,
Inc.
and subsidiaries. These consolidated financial statements are the responsibility
of the company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We
conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and cash flows of GB Holdings,
Inc.
and subsidiaries for the year ended December 31, 2004, in conformity with US
generally accepted accounting principles.
The
consolidated financial statements have been prepared assuming that GB Holdings,
Inc. will continue as a going concern. As discussed in Notes 1 and 2 to the
consolidated financial statements, the Company has suffered recurring net
losses, has a net working capital deficiency and has significant debt
obligations which are due within one year that raise substantial doubt about
its
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Notes 1 and 2. The consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/ KPMG LLP
Short Hills, New
Jersey
March 11, 2005
F-3
Back
to Index
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and
Stockholders
ImClone Systems Incorporated:
We have
audited the consolidated balance sheets of ImClone Systems Incorporated and
subsidiary as of December 31, 2006 and 2005, and the related consolidated
statements of operations, stockholders’ equity (deficit) and comprehensive
income, and cash flows for the years then ended, not presented separately
herein. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements 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 ImClone Systems Incorporated
and subsidiary as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
As
discussed in notes 2(i) and 11(d) to the consolidated financial statements,
the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123R, “Share-Based Payment,” effective January 1, 2006.
/s/
KPMG LLP
Princeton, New
Jersey
March 1, 2007
F-4
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December 31, 2006 and
2005
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
(in
$000s)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
1,912,134
|
|
$
|
459,315
|
|
Investments
|
|
|
539,115
|
|
|
720,526
|
|
Inventories,
net
|
|
|
245,502
|
|
|
244,239
|
|
Trade,
notes and other receivables, net
|
|
|
176,496
|
|
|
195,321
|
|
Other
current assets
|
|
|
134,987
|
|
|
214,860
|
|
Assets
held for sale
|
|
|
47,503
|
|
|
1,177,397
|
|
Total
current assets
|
|
|
3,055,737
|
|
|
3,011,658
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
Gaming
|
|
|
422,715
|
|
|
295,432
|
|
Real
Estate
|
|
|
283,974
|
|
|
288,254
|
|
Home
Fashion
|
|
|
200,382
|
|
|
166,026
|
|
Total
property, plant and equipment, net
|
|
|
907,071
|
|
|
749,712
|
|
Equity
investment and other
|
|
|
177,682
|
|
|
98,041
|
|
Intangible
assets
|
|
|
25,916
|
|
|
23,402
|
|
Other
assets
|
|
|
85,237
|
|
|
85,406
|
|
Total
assets
|
|
$
|
4,251,643
|
|
|
3,968,219
|
| |
|
|
|
|
|
|
|
LIABILITIES
AND PARTNERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
69,854
|
|
$
|
57,602
|
|
Accrued
expenses and other current liabilities
|
|
|
197,792
|
|
|
143,427
|
|
Current
portion of long-term debt
|
|
|
23,970
|
|
|
18,103
|
|
Securities
sold not yet purchased
|
|
|
25,398
|
|
|
75,883
|
|
Margin
liability on marketable securities
|
|
|
—
|
|
|
131,061
|
|
Liabilities
of discontinued operations held for sale
|
|
|
—
|
|
|
489,598
|
|
Total
current liabilities
|
|
|
317,014
|
|
|
915,674
|
|
Long-term
debt
|
|
|
1,175,271
|
|
|
1,100,220
|
|
Other
non-current liabilities
|
|
|
22,212
|
|
|
24,006
|
|
Total
long-term liabilities
|
|
|
1,197,483
|
|
|
1,124,226
|
|
Total
liabilities
|
|
|
1,514,497
|
|
|
2,039,900
|
|
Minority
interests
|
|
|
292,221
|
|
|
304,599
|
|
Commitments
and contingencies (Note 17)
|
|
|
|
|
|
|
|
Partners’
equity
|
|
|
|
|
|
|
|
Limited
partner
|
|
|
2,420,476
|
|
|
1,607,483
|
|
General
partner
|
|
|
24,449
|
|
|
16,237
|
|
Partners’
equity
|
|
|
2,444,925
|
|
|
1,623,720
|
|
Total
liabilities and partners’ equity
|
|
$
|
4,251,643
|
|
$
|
3,968,219
|
See notes
to
consolidated financial statements.
F-5
AMERICAN REAL
ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years Ended
December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years
Ended December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
(in
$000s)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
385,699
|
|
$
|
327,982
|
|
$
|
299,981
|
|
|
Real
Estate
|
|
|
134,575
|
|
|
100,299
|
|
|
61,557
|
|
|
Home
Fashion
|
|
|
957,656
|
|
|
472,681
|
|
|
—
|
|
| |
|
|
1,477,930
|
|
|
900,962
|
|
|
361,538
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
326,984
|
|
|
260,955
|
|
|
251,119
|
|
|
Real
Estate
|
|
|
106,621
|
|
|
82,512
|
|
|
49,681
|
|
|
Home
Fashion
|
|
|
1,108,293
|
|
|
495,110
|
|
|
—
|
|
|
Holding
Company
|
|
|
25,822
|
|
|
12,478
|
|
|
4,327
|
|
|
Acquisition
costs
|
|
|
—
|
|
|
4,664
|
|
|
414
|
|
| |
|
|
1,567,720
|
|
|
855,719
|
|
|
305,541
|
|
|
Operating
(loss) income
|
|
|
(89,790
|
)
|
|
45,243
|
|
|
55,997
|
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(100,514
|
)
|
|
(85,418
|
)
|
|
(42,209
|
)
|
|
Interest
income
|
|
|
52,656
|
|
|
42,791
|
|
|
42,145
|
|
|
Other
income (expense), net
|
|
|
99,277
|
|
|
(12,861
|
)
|
|
24,453
|
|
|
Equity
in earnings of affiliate
|
|
|
12,620
|
|
|
1,375
|
|
|
—
|
|
|
(Loss)
income from continuing operations before income taxes and
minority
interests
|
|
|
(25,751
|
)
|
|
(8,870
|
)
|
|
80,386
|
|
|
Income
tax expense
|
|
|
(13,271
|
)
|
|
(18,170
|
)
|
|
(10,099
|
)
|
|
Minority
interests
|
|
|
68,173
|
|
|
10,140
|
|
|
—
|
|
|
Income
(loss) from continuing operations
|
|
|
29,151
|
|
|
(16,900
|
)
|
|
70,287
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of income taxes
|
|
|
154,831
|
|
|
(28,544
|
)
|
|
11,307
|
|
|
Gain
on sales of assets, net of income taxes
|
|
|
676,444
|
|
|
21,849
|
|
|
75,197
|
|
|
Minority
interests
|
|
|
(55,511
|
)
|
|
3,682
|
|
|
2,074
|
|
|
Income
(loss) from discontinued operations
|
|
|
775,764
|
|
|
(3,013
|
)
|
|
88,578
|
|
|
Net
earnings (loss)
|
|
$
|
804,915
|
|
$
|
(19,913
|
)
|
$
|
158,865
|
|
|
Net
earnings (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
Limited
partners
|
|
$
|
796,866
|
|
$
|
(19,714
|
)
|
$
|
157,276
|
|
|
General
partner
|
|
|
8,049
|
|
|
(199
|
)
|
|
1,589
|
|
| |
|
$
|
804,915
|
|
$
|
(19,913
|
)
|
$
|
158,865
|
|
See notes
to
consolidated financial statements.
F-6
AMERICAN REAL
ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN PARTNERS’
EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2006, 2005 and
2004
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
General
Partner’s
Equity
|
|
Limited
Partners’
Equity
|
|
Total
Partners’
Equity
|
|
| |
|
(in
$000s)
|
|
|
Balance,
December 31, 2003
|
|
$
|
16,447
|
|
$
|
1,628,268
|
|
$
|
1,644,715
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
1,589
|
|
|
157,277
|
|
|
158,865
|
|
|
Reclassification
of unrealized gains on marketable securities sold
|
|
|
(96
|
)
|
|
(9,472
|
)
|
|
(9,568
|
)
|
|
Net
unrealized gains on securities available for sale
|
|
|
0
|
|
|
33
|
|
|
33
|
|
|
Comprehensive
income
|
|
|
1,493
|
|
|
147,837
|
|
|
149,330
|
|
|
Capital
distribution from American Casino
|
|
|
(179
|
)
|
|
(17,737
|
)
|
|
(17,916
|
)
|
|
Capital
contribution to American Casino
|
|
|
228
|
|
|
22,572
|
|
|
22,800
|
|
|
Arizona
Charlies acquisition
|
|
|
(1,259
|
)
|
|
(124,641
|
)
|
|
(125,900
|
)
|
|
Change
in deferred tax asset related to acquisition of Arizona Charlies
|
|
|
25
|
|
|
2,465
|
|
|
2,490
|
|
|
Net
adjustment for Panaco acquisition
|
|
|
916
|
|
|
90,645
|
|
|
91,561
|
|
|
Distribution
to general partner
|
|
|
(19
|
)
|
|
(1,900
|
)
|
|
(1,919
|
)
|
|
Other
|
|
|
(10
|
)
|
|
(966
|
)
|
|
(976
|
)
|
|
Balance,
December 31, 2004
|
|
|
17,642
|
|
|
1,746,544
|
|
|
1,764,185
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
|
(199
|
)
|
|
(19,714
|
)
|
|
(19,913
|
)
|
|
Net
unrealized gains (loss) on securities available for sale
|
|
|
(42
|
)
|
|
(4,155
|
)
|
|
(4,197
|
)
|
|
Other
comprehensive income (loss)
|
|
|
(1
|
)
|
|
(76
|
)
|
|
(77
|
)
|
|
Comprehensive
loss
|
|
|
(242
|
)
|
|
(23,945
|
)
|
|
(24,187
|
)
|
|
General
partner contribution
|
|
|
93
|
|
|
9,186
|
|
|
9,279
|
|
|
AREP
Oil & Gas acquisitions
|
|
|
(1,717
|
)
|
|
(170,025
|
)
|
|
(171,742
|
)
|
|
GBH/Atlantic
Coast acquisitions
|
|
|
582
|
|
|
57,667
|
|
|
58,249
|
|
|
Change
in reporting entity and other
|
|
|
24
|
|
|
2,426
|
|
|
2,450
|
|
|
CEO
LP unit options
|
|
|
5
|
|
|
487
|
|
|
492
|
|
|
Return
of capital to GB Holdings, Inc.
|
|
|
(26
|
)
|
|
(2,572
|
)
|
|
(2,598
|
)
|
|
Partnership
distributions
|
|
|
(126
|
)
|
|
(12,496
|
)
|
|
(12,622
|
)
|
|
Equity
in ImClone capital transactions
|
|
|
2
|
|
|
210
|
|
|
212
|
|
|
Balance,
December 31, 2005
|
|
|
16,237
|
|
|
1,607,483
|
|
|
1,623,720
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
8,049
|
|
|
796,866
|
|
|
804,915
|
|
|
Net
unrealized gains on securities available for sale
|
|
|
297
|
|
|
29,387
|
|
|
29,684
|
|
|
Other
comprehensive income
|
|
|
1
|
|
|
149
|
|
|
150
|
|
|
Comprehensive
Income
|
|
|
8,347
|
|
|
826,402
|
|
|
834,749
|
|
|
CEO
LP unit options
|
|
|
62
|
|
|
6,186
|
|
|
6,248
|
|
|
Atlantic
Coast bond conversion
|
|
|
22
|
|
|
2,189
|
|
|
2,211
|
|
|
Partnership
distributions
|
|
|
(252
|
)
|
|
(24,993
|
)
|
|
(25,245
|
)
|
|
Equity
in ImClone capital transactions
|
|
|
32
|
|
|
3,210
|
|
|
3,242
|
|
|
Balance,
December 31, 2006
|
|
$
|
24,449
|
|
$
|
2,420,476
|
|
$
|
2,444,925
|
|
Accumulated
other comprehensive income (loss) at December 31, 2006, 2005 and 2004 was $25.4
million, $(4.5) million and $(0.1) million, respectively.
See notes
to
consolidated financial statements.
F-7
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years Ended
December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years
Ended December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
(in
$000s)
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing
operations
|
|
$
|
29,151
|
|
$
|
(16,900
|
)
|
$
|
70,287
|
|
|
Adjustments
to reconcile net earnings to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
70,945
|
|
|
48,188
|
|
|
28,975
|
|
|
Investment
(gains) losses
|
|
|
(91,308
|
)
|
|
21,260
|
|
|
(16,540
|
)
|
|
Minority
interest
|
|
|
(68,173
|
)
|
|
(10,140
|
)
|
|
—
|
|
|
Equity
in earnings of affiliate
|
|
|
(12,620
|
)
|
|
(1,375
|
)
|
|
—
|
|
|
Stock
based compensation expense
|
|
|
6,248
|
|
|
492
|
|
|
—
|
|
|
Deferred
income tax expense
|
|
|
2
|
|
|
8,364
|
|
|
7,507
|
|
|
Impairment
loss on fixed assets
|
|
|
33,701
|
|
|
—
|
|
|
—
|
|
|
Net
cash provided by activities on trading securities
|
|
|
70,636
|
|
|
28,560
|
|
|
—
|
|
|
Other,
net
|
|
|
(5,927
|
)
|
|
(2,571
|
)
|
|
(9,690
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in trade notes and other receivables
|
|
|
49,710
|
|
|
10,671
|
|
|
(7,921
|
)
|
|
Decrease
(increase) in other assets
|
|
|
34,118
|
|
|
(9,684
|
)
|
|
(124,004
|
)
|
|
(Increase)
decrease in inventory
|
|
|
8,822
|
|
|
17,880
|
|
|
—
|
|
|
Increase
(decrease) in accounts payable, accrued expenses and
other
liabilities
|
|
|
(7,570
|
)
|
|
(51,399
|
)
|
|
89,477
|
|
|
Net
cash provided by continuing operations
|
|
|
117,735
|
|
|
43,346
|
|
|
38,091
|
|
|
Cash
Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
775,764
|
|
|
(3,013
|
)
|
|
88,578
|
|
|
Depreciation,
depletion and amortization
|
|
|
106,936
|
|
|
108,496
|
|
|
77,458
|
|
|
Change
in fair market value of Oil & Gas derivative contracts
|
|
|
(99,707
|
)
|
|
69,254
|
|
|
9,179
|
|
|
Impairment
loss on GBH
|
|
|
—
|
|
|
52,366
|
|
|
15,600
|
|
|
Net
(gain) from sales of businesses and properties
|
|
|
(676,444
|
)
|
|
(21,849
|
)
|
|
(75,197
|
)
|
|
Other,
net
|
|
|
65,904
|
|
|
(30,441
|
)
|
|
9,661
|
|
|
Net
cash provided by discontinued operations
|
|
|
172,453
|
|
|
174,813
|
|
|
125,279
|
|
|
Net
cash provided by operating activities
|
|
|
290,188
|
|
|
218,159
|
|
|
163,370
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(61,338
|
)
|
|
(36,380
|
)
|
|
(109,532
|
)
|
|
Purchases
of marketable equity and debt securities
|
|
|
(243,162
|
)
|
|
(764,271
|
)
|
|
(283,615
|
)
|
|
Proceeds
from sales of marketable equity and debt securities
|
|
|
566,575
|
|
|
190,287
|
|
|
93,556
|
|
|
Net
proceeds from the sale and disposition of real estate
|
|
|
—
|
|
|
8,414
|
|
|
43,590
|
|
|
Net
proceeds from the sale and disposition of fixed assets
|
|
|
21,867
|
|
|
—
|
|
|
—
|
|
|
Purchase
of debt securities of affiliates
|
|
|
—
|
|
|
—
|
|
|
(101,500
|
)
|
|
Acquisitions
of businesses, net of cash acquired
|
|
|
(208,645
|
)
|
|
(293,649
|
)
|
|
(125,900
|
)
|
|
Other,
net
|
|
|
—
|
|
|
9,586
|
|
|
50,848
|
|
|
Net
cash provided by (used in) investing activities –
continuing
operations
|
|
|
75,297
|
|
|
(886,013
|
)
|
|
(432,553
|
)
|
|
Cash
Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(306,696
|
)
|
|
(326,309
|
)
|
|
(132,220
|
)
|
|
Net
proceeds from the sales and disposition of assets
|
|
|
1,308,713
|
|
|
54,752
|
|
|
202,344
|
|
|
Other,
net
|
|
|
(18,427
|
)
|
|
4,704
|
|
|
21,090
|
|
|
Net
cash provided by (used in) investing activities –
discontinued
operations
|
|
|
983,590
|
|
|
(266,853
|
)
|
|
91,214
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
1,058,887
|
|
|
(1,152,866
|
)
|
|
(341,339
|
)
|
See notes
to
consolidated financial statements.
F-8
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS –
(continued)
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years
Ended December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
(in
$000s)
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Partners’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
Members
contribution
|
|
$
|
—
|
|
$
|
9,279
|
|
$
|
22,800
|
|
|
Partnership
distributions
|
|
|
(25,245
|
)
|
|
(12,622
|
)
|
|
(17,916
|
)
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of senior notes payable
|
|
|
—
|
|
|
474,000
|
|
|
557,594
|
|
|
Proceeds
from credit facilities
|
|
|
60,000
|
|
|
—
|
|
|
|
|
|
Repayment
of credit facilities
|
|
|
(21,034
|
)
|
|
—
|
|
|
—
|
|
|
Net
change in due to/from affiliates
|
|
|
674
|
|
|
21,636
|
|
|
(16,468
|
)
|
|
Proceeds
from mortgages payable
|
|
|
34,250
|
|
|
4,425
|
|
|
10,000
|
|
|
Mortgages
paid upon disposition of properties
|
|
|
—
|
|
|
(3,777
|
)
|
|
(26,800
|
)
|
|
Periodic
principal payments
|
|
|
(6,473
|
)
|
|
(3,941
|
)
|
|
(5,248
|
)
|
|
Debt
issuance costs
|
|
|
(8,257
|
)
|
|
(8,952
|
)
|
|
(18,111
|
)
|
|
Other,
net
|
|
|
—
|
|
|
4,258
|
|
|
(3
|
)
|
|
Net
cash provided by financing activities – continuing operations
|
|
|
33,915
|
|
|
484,306
|
|
|
505,848
|
|
|
Cash
Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities – discontinued
operations
|
|
|
(24,276
|
)
|
|
219,568
|
|
|
(74,797
|
)
|
|
Net
cash provided by financing activities
|
|
|
9,639
|
|
|
703,874
|
|
|
431,051
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,358,714
|
|
|
(230,833
|
)
|
|
253,082
|
|
|
Net
change in cash of assets held for sale
|
|
|
94,104
|
|
|
(72,432
|
)
|
|
22,125
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
459,316
|
|
|
762,581
|
|
|
487,374
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,912,134
|
|
$
|
459,316
|
|
$
|
762,581
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
information
|
|
|
|
|
|
|
|
|
|
|
|
Cash
payments for interest, net of amounts capitalized
|
|
$
|
106,635
|
|
$
|
77,745
|
|
$
|
60,472
|
|
|
Cash
payments for income taxes, net of refunds
|
|
$
|
15,439
|
|
$
|
10,194
|
|
$
|
2,912
|
|
|
Conversion
of bonds in connection with acquisition of WPI
|
|
$
|
—
|
|
$
|
205,850
|
|
$
|
—
|
|
|
Net
unrealized gains (losses) on securities available for sale
|
|
$
|
29,684
|
|
$
|
(4,197
|
)
|
$
|
33
|
|
|
LP
unit issuance
|
|
$
|
—
|
|
$
|
456,998
|
|
$
|
—
|
|
|
Change
in tax asset related to acquisitions
|
|
$
|
—
|
|
$
|
7,329
|
|
$
|
2,490
|
|
|
Debt
conversion relating to Atlantic Coast
|
|
$
|
2,211
|
|
$
|
29,500
|
|
$
|
—
|
|
|
Equity
received in consideration for sale of oil and gas operations
|
|
$
|
231,156
|
|
$
|
—
|
|
$
|
—
|
|
See notes
to
consolidated financial statements.
F-9
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
1. Description of
Business and Basis of Presentation
General
American
Real Estate Holdings Limited Partnership, or the Company or AREH, is a
diversified holding company owning subsidiaries engaged in the following
continuing operating businesses: Gaming; Real Estate; and Home Fashion. In
November 2006, we divested our Oil and Gas operating business and our Atlantic
City gaming properties. Further information regarding our reportable segments
is
contained in Note 15.
AREH
is a
limited partnership formed in Delaware on February 17, 1987. American Real
Estate Partners, L.P. (“AREP” or the “Limited Partner”) is a master limited
partnership formed in Delaware on February 17, 1987. AREP owns a 99% limited
partner interest in the Company. American Property Investors, Inc. (the “General
Partner”) owns a 1% general partner interest in both AREH and AREP representing
an aggregate 1.99% general partner interest in the Company and AREP. The General
Partner is owned and controlled by Mr. Carl C. Icahn (“Icahn” or
“Mr. Icahn”).
Under
our
amended Partnership Agreement we are permitted to make non-real estate related
acquisitions and investments to enhance our partners’ value and further
diversify our assets. 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 are not limited.
We will
conduct our activities in such a manner as not to be deemed an investment
company under the Investment Company Act of 1940, or 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 term is defined in the 1940 Act. In addition,
we do not intend to invest in securities as our primary business. We will
structure our 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.
Acquisitions
On August
8, 2005, WestPoint International, Inc., or WPI, our indirect majority-owned
subsidiary, completed the acquisition of substantially all of the assets of
WestPoint Stevens Inc., or WPS. Operating results for WPI are included with
AREP’s results beginning as of August 8, 2005. In December 2006, WPI acquired a
manufacturing facility in Bahrain for an aggregate cash consideration of $98.6
million and a seller note of $10.6 million. The purchase price is subject to
working capital adjustments.
On May
19, 2006, our wholly-owned subsidiaries, AREP Laughlin Corporation, and AREP
Boardwalk Properties LLC, completed the purchases, respectively, of the Flamingo
Laughlin Hotel and Casino, now known as the Aquarius Casino Resort, or the
Aquarius, in Laughlin, Nevada, and 7.7 acres of land adjacent to The Sands
Hotel
and Casino in Atlantic City, New Jersey, known as the Traymore site, from
affiliates of Harrah’s Operating Company, Inc., or Harrah’s. Operating results
for the Aquarius are included with AREH’s results beginning as of May 19,
2006.
Discontinued
Operations
On
November 17, 2006, our indirect majority owned subsidiary, Atlantic Coast
Entertainment Holdings, Inc., completed the sale to Pinnacle Entertainment,
Inc., or Pinnacle, of the outstanding membership interests in ACE Gaming LLC,
the owner of The Sands and 100% of the equity interests in certain subsidiaries
of AREH which own parcels of real estate adjacent to The Sands, including the
Traymore site to Pinnacle. See Note 5 for additional information regarding
the
sale.
F-10
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
1. Description of
Business and Basis of Presentation – (continued)
On
November 21, 2006, our indirect wholly-owned subsidiary, AREP O & G Holdings
LLC, consummated the sale of all of the issued and outstanding membership
interests of NEG Oil & Gas LLC to SandRidge Energy, Inc formerly Riata
Energy, Inc. See Note 5 for additional information regarding the sale.
Certain
of our real estate properties are classified as discontinued operations. The
properties classified as discontinued operations have changed during 2006 and,
accordingly, certain amounts in the accompanying 2005 and 2004 financial
statements have been reclassified to conform to the current classification
of
properties.
The
financial position and results of these operations are presented as assets
and
liabilities of discontinued operations held for sale in the consolidated balance
sheets and discontinued operations in the consolidated statements of operations,
respectively, for all periods presented in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.
Filing Status
of
Subsidiaries
National
Energy Group, Inc., or NEGI, and Atlantic Coast are reporting companies under
the Securities Exchange Act of 1934. In addition, American Casino &
Entertainment Properties LLC, or American Casino or ACEP, voluntarily files
annual, quarterly and current reports. Each of these reports is separately
filed
with the Securities and Exchange Commission and are publicly available.
2. Summary of
Significant Accounting Policies
As
discussed in Note 1, we operate in several diversified segments. The accounting
policies related to the specific segments or industries are differentiated,
as
required, in the list of significant accounting policies set out below.
Principles of
Consolidation
The
accompanying consolidated financial statements include the accounts of AREH
and
the majority-owned subsidiaries in which AREH has a controlling financial
interest as of the financial statement date. We are considered to have control
if we have a direct or indirect ability to make decisions about an entity’s
activities through voting or similar rights. We use the guidance set forth
in
AICPA Statement of Position No. 78-9, Accounting for Investments in Real
Estate Ventures, and Emerging Issues Task Force Issue No. 04-05,
Investor’s Accounting for an Investment in a Limited Partnership when the
Investor is the Sole General Partner and the Limited Partners have Certain
Rights, with respect to our investments in partnerships and limited
liability companies. All intercompany balance and transactions are
eliminated.
We
utilize the equity method of accounting with respect to investments where we
exercise significant influence, but not control, over the operating and
financial policies of the investee. A voting interest of at least 20% and no
greater than 50% is normally a prerequisite for utilizing the equity method.
However, we may apply the equity method with less than 20% voting interests
based upon the facts and circumstances including representation on the
investee’s Board of Directors, contractual veto or approval rights,
participation in policy making processes and the existence or absence of other
significant owners. In applying the equity method, investments are recorded
at
cost and subsequently increased or decreased by our proportionate share of
the
net earnings or losses of the investee. We also record our proportionate share
of other comprehensive income items of the investee as a component of our
comprehensive income. Dividends or other equity distributions are recorded
as a
reduction of the investment.
In
accordance with generally accepted accounting principles, assets and liabilities
transferred between entities under common control are accounted for at
historical cost in a manner similar to a pooling of interests, and the financial
statements of previously separate companies for periods prior to their
acquisition are retrospectively adjusted on a combined basis.
F-11
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
As
required by FIN 46R, Consolidation of Variable Interest Entities, we
evaluate our investments and other financial relationships to determine whether
any further entities are required to be consolidated.
Retrospective
Application of Change in Accounting for Investment in ImClone Systems
Incorporated
In the
fourth quarter of 2006 we changed our method of accounting for our investment
in
ImClone Systems Incorporated, or ImClone, to the equity method of accounting.
Previously, we accounted for our investment in ImClone as an available for
sale
security. In accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, available for sale securities are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
in a separate component of shareholders’ equity as “Other Comprehensive Income.”
We record our proportionate equity in the ImClone’s earnings and capital
transactions on a one calendar quarter time lag.
From
the
first quarter of 2005 through the third quarter of 2006, AREH and certain other
affiliates of Mr. Icahn purchased shares of common stock of ImClone. As of
September 30, 2006, the total shares of ImClone held by AREH as a percentage
of
ImClone’s total outstanding shares was 5.4%. Also, in October 2006,
Mr. Icahn was appointed Chairman of the board of directors of ImClone and
certain other changes to ImClone’s board of directors took place which resulted
in Mr. Icahn having the ability to exercise significant influence over the
operating and financial policies of ImClone.
In
assessing the applicability of Accounting Principles Board Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock, we have
determined that, because of the ability of Mr. Icahn to exercise
significant influence over ImClone’s operating and financial policies, we were
required to adopt the equity method of accounting for our investment in ImClone,
and accordingly the 2005 financial statements have been adjusted to apply the
new method retrospectively. See Note 7 for information regarding the effect
of
this change on net income and total partners equity.
Use of Estimates
in
Preparation of Financial Statements
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities at
the
date of the financial statements and the reported amount of revenues and
expenses during the period.
The
more significant estimates include (1) the valuation allowances of accounts
receivable and inventory,
(2) the valuation of long-lived assets, mortgages
and notes receivable, marketable equity and debt securities and other
investments, (3) costs to complete for land, house and condominium developments,
(4) gaming-related liability and promotional programs, (5) deferred tax assets,
(6) oil and gas reserve estimates, (7) asset retirement obligations and (8)
fair
value of derivatives. Actual results may differ from the estimates and
assumptions used in preparing the consolidated financial statements.
Cash and Cash
Equivalents
We
consider short-term investments, which are highly liquid with original
maturities of three months or less at date of purchase, to be cash
equivalents.
Restricted
Cash
Restricted
cash results primarily from escrow deposits, funds held in connection with
collateralizing letters of credit and proceeds from securities sold but not
yet
purchased that require cash to be on deposit with the relevant brokerage
institution. Restricted cash was $87.4 million and $161.2 million at December
31, 2006 and 2005, respectively, and is included as a component of other current
assets in the accompanying consolidated balance sheets.
F-12
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
Investments
Investments
in
equity and debt securities are classified as either trading or available for
sale based upon whether we intend to hold the investment for the foreseeable
future. Trading securities are valued at quoted market value at each balance
sheet date with the unrealized gains or losses reflected in the consolidated
statements of operations. Available for sale securities are carried at fair
value on our balance sheet. Unrealized holding gains and losses on available
for
sale securities are excluded from earnings and reported as a separate component
of partners’ equity and when sold are reclassified out of partners’ equity. For
purposes of determining gains and losses, the cost of securities is based on
specific identification.
A decline
in the market value of any available for sale security below cost that is deemed
to be other than temporary results in an impairment that is charged to earnings
and the establishment of a new cost basis for the investment. Dividend income
is
recorded when declared and interest income is recognized when earned.
Accounts
Receivable
An
allowance for doubtful accounts is determined through analysis of the aging
of
accounts receivable at the date of the consolidated financial statements,
assessments of collectibility based on an evaluation of historic and anticipated
trends, the financial condition of our customers, and an evaluation of the
impact of economic conditions. Our allowance for doubtful accounts is an
estimate based on specifically identified accounts as well as general reserves
based on historical experience.
Inventories
Inventories are stated at
the lower of cost (first-in, first-out method) or market. The cost of
manufactured goods, which are held only by WPI, includes material, labor and
factory overhead. We maintain reserves for estimated excess, slow moving and
obsolete inventory as well as inventory whose carrying value is in excess of
net
realizable value.
Inventories
consisted of the following (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Raw
materials and
supplies
|
|
$
|
32,059
|
|
$
|
33,083
|
|
Goods
in process
|
|
|
83,592
|
|
|
100,337
|
|
Finished
goods
|
|
|
129,851
|
|
|
110,819
|
| |
|
$
|
245,502
|
|
$
|
244,239
|
Property, Plant
and
Equipment
Land
and
construction-in-progress 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 interest capitalization rate is based on
the
interest rate on specific borrowings to fund the projects.
Buildings,
furniture and equipment are stated at cost less accumulated depreciation unless
declines in the values of the fixed assets are considered other than temporary,
at which time the property is written down to net realizable value. Depreciation
is principally computed using the straight-line method over the estimated useful
lives of the particular property or equipment, as follows: buildings and
improvements, 4 to 40 years; furniture, fixtures and equipment, 1 to 18 years.
Leasehold improvements are amortized over the life of the lease or the life
of
the improvement, whichever is shorter.
F-13
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
Maintenance
and repairs are charged to expense as incurred. The cost of additions and
improvements is capitalized and depreciated over the remaining useful lives
of
the assets. The cost and accumulated depreciation of assets sold or retired
are
removed from our consolidated balance sheet, and any gain or loss is recognized
in the year of disposal.
Real
estate properties held for use or investment, other than those accounted for
under the financing method, are carried at cost less accumulated depreciation.
Where declines in the values of the properties are determined to be other than
temporary, the cost basis of 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 No. 144 Accounting for the
Impairmentor Disposal of Long-Lived Assets 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 results of operations are
included in discontinued operations. As a result of the reclassification of
certain real estate to properties held for sale during the year ended December
31, 2006, income and expenses of such properties are reclassified to
discontinued operations for all prior periods. If management determines that
a
property classified as held for sale no longer meets the criteria in SFAS 144,
the property is reclassified as held for use.
Intangible
Assets
Intangible
assets consist of trademarks of WPI (Note 4). In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, goodwill and intangible assets with
indefinite lives are no longer amortized, but instead tested for
impairment.
Accounting for
the
Impairment of Long-Lived Assets
We
evaluate our long-lived assets in accordance with the application of SFAS No.
144. Accordingly, we evaluate the realizability of our long-lived assets
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable. Inherent in the reviews of the carrying amounts
of the above assets are various estimates, including the expected usage of
the
asset. Assets must be tested at the lowest level for which identifiable cash
flows exist. Future cash flow estimates are, by their nature, subjective and
actual results may differ materially from our estimates. If our ongoing
estimates of future cash flows are not met, we may have to record impairment
charges in future accounting periods. Our estimates of cash flows are based
on
the current regulatory, social and economic climates, recent operating
information and budgets of the operating property.
Accounting for
Asset Retirement Obligations
Effective
January 1, 2003, we adopted the provisions of SFAS No. 143, Accounting for
Asset Retirement Obligations. SFAS No. 143 provides accounting requirements
for costs associated with legal obligations to retire tangible, long-lived
assets. Under SFAS No. 143, an asset retirement obligation is recorded at fair
value in the period in which it is incurred by increasing the carrying amount
for the related long-lived asset which is depreciated over its useful life.
In
each subsequent period, the liability is adjusted to reflect the passage of
time
and changes in the estimated future cash flows underlying the obligation. Our
asset retirement obligations relate to our oil and gas operating unit, which
was
sold to SandRidge in November 2006.
Oil and Natural
Gas
Properties
We
utilized the full cost method of accounting for our crude oil and natural gas
properties. Under the full cost method, all productive and nonproductive costs
incurred in connection with the acquisition, exploration and development of
crude oil and natural gas reserves are capitalized and amortized on the
units-of-production method based upon total proved reserves. The costs of
unproven properties are excluded from the amortization calculation until the
individual properties are evaluated and a determination is made as to whether
reserves exist. Conveyances of properties, including gains or losses on
abandonment of properties, are treated as adjustments to the cost of crude
oil
and natural gas properties, with no gain or loss recognized.
F-14
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
Under
the
full cost method, the net book value of oil and natural gas properties, less
related deferred income taxes, may not exceed the estimated after-tax future
net
revenues from proved oil and natural gas properties, discounted at 10% per
year
(the ceiling limitation). In arriving at estimated future net revenues,
estimated lease operating expenses, development costs, abandonment costs, and
certain production related and ad-valorem taxes are deducted. In calculating
future net revenues, prices and costs in effect at the time of the calculation
are held constant indefinitely, except for changes which are fixed and
determinable by existing contracts. The net book value of oil and gas properties
is compared to the ceiling limitation on a quarterly basis. We did not incur
a
ceiling write-down in 2006, 2005 or 2004.
We have
capitalized internal general and administrative costs of $1.5 million, $1.1
million and $1.0 million for the period from January 1, 2006 to November 21,
2006 and the years ended December 31, 2005 and 2004, respectively, with respect
to our oil and gas activities. We have not capitalized interest expense. In
November 2006, we sold our oil and gas operating units to SandRidge. Therefore,
as of December 31, 2006 we have no capitalized costs relating to these
operations.
Our oil
and natural gas properties are subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require us
to
remove or mitigate the environment effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations
and
that have no future economic benefits are expensed. Liabilities for expenditures
of a non-capital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Derivatives
From
time
to time our subsidiaries enter into derivative contracts, including (a)
commodity price collar agreements entered into by our Oil & Gas segment to
reduce our exposure to price risk in the spot market for natural gas and oil
and
(b) commodity futures contracts, forward purchase commodity contracts and option
contracts entered into by our Home Fashion segment primarily to manage our
exposure to cotton commodity price risk. We follow SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which was amended by SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. These pronouncements established accounting and reporting
standards for derivative instruments and for hedging activities, which generally
require recognition of all derivatives as either assets or liabilities in the
balance sheet at their fair value. The accounting for changes in fair value
depends on the intended use of the derivative and its resulting designation.
Through December 31, 2006, we did not use hedge accounting and accordingly,
all
unrealized gains and losses are reflected in our consolidated statement of
operations.
Revenue and Expense
Recognition
Home
Fashion— WPI records revenue when the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the price to the
customer is fixed and determinable and collectibility is reasonably assured.
Unless otherwise agreed in writing, title and risk of loss pass from WPI to
the
customer when WPI delivers the merchandise to the designated point of delivery,
to the designated point of destination, or to the designated carrier, free
on
board. Provisions for certain rebates, sales incentives, product returns and
discounts to customers are recorded in the same period the related revenue
is
recorded.
Customer
incentives are provided to WPI customers primarily for new sales programs.
These
incentives begin to accrue when a commitment has been made to the customer
and
are recorded as a reduction to sales.
F-15
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
Gaming—
Gaming segment revenue consists of casino, hotel and restaurant revenues. 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. Gross revenues include the estimated retail
value of hotel 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 costs of such complimentary revenues are included
in
gaming expenses. Hotel and restaurant revenue is recognized when services are
performed.
We also
reward our customers, through the use of loyalty programs with points based
on
amounts wagered, that can be redeemed for a specified period of time for cash.
We deduct the cash incentive amounts from casino revenue.
Oil
and Gas— Revenues from the natural gas and oil produced are recognized upon
the passage of title, net of royalties. We account for natural gas production
imbalances using the sales method, whereby we recognize revenue on all natural
gas sold to our customers notwithstanding the fact its ownership may be less
than 100% of the natural gas sold. Liabilities are recorded by us for imbalances
greater than our proportionate share of remaining natural gas reserves. We
had
$0 million and $1.1 million in gas balancing liabilities as of December 31,
2006
and 2005, respectively.
Revenues
from the sale of oil and natural gas are shown net of the impact of realized
and
unrealized derivative losses.
Real
Estate— 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 SFAS No. 66, Accounting for
Sales of Real Estate.
Leases—
Substantially all of the property comprising our net lease portfolio is leased
to others under long-term net leases and we account for these leases in
accordance with the provisions of SFAS 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. Under
the financing 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. Under the operating method, revenue is recognized
as rentals become due, and expenses (including depreciation) are charged to
operations as incurred.
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. Provision has been made for Federal, state
or
local income taxes on the results of operations generated by our corporate
subsidiaries. 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.
Deferred
tax assets are limited to amounts considered to be realizable in future periods.
A valuation allowance is recorded against deferred tax assets if management
does
not believe that we have met the “more likely than not” standard imposed by SFAS
No. 109 Accounting for Income Taxes to allow recognition of such an
asset.
F-16
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
Share-Based
Compensation
In
December 2004, SFAS No. 123 (Revised 2004), Share-Based Payment (“SFAS
No. 123R”) was issued. This accounting standard eliminated the ability to
account for share-based compensation transactions using the intrinsic value
method in accordance with APB Opinion No. 25 and requires instead that such
transactions be accounted for using a fair-value-based method. SFAS No. 123R
requires public entities to record non-cash compensation expense related to
payment for employee services by an equity award, such as stock options, in
their financial statements over the requisite service period. We have adopted
SFAS No. 123R as of June 30, 2005. The adoption of SFAS No. 123R did not have
any impact on our consolidated financial statements since there were no
pre-existing unit options.
Recently Issued
Accounting Pronouncements
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on
how to evaluate prior period financial statement misstatements for purposes
of
assessing their materiality in the current period. If the prior period effect
is
material to the current period, then the prior period is required to be
corrected. Correcting prior year financial statements would not require an
amendment of prior year financial statements, but such corrections would be
made
the next time the company files the prior year financial statements. Upon
adoption, SAB 108 allows a one-time transitional cumulative effect adjustment
to
retained earnings for corrections of prior period misstatements required under
this statement. SAB 108 is effective for fiscal years ending after November
15,
2006. The adoption of SAB 108 did not have a material affect on our consolidated
financial statements.
In
September 2006, the FASB issued FAS 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement applies under other accounting pronouncements
that require or permit fair value measurements and, accordingly, SFAS 157 does
not require any new fair value measurements. We are currently evaluating the
impact this standard will have on our operating income and statement of
financial position. This statement is effective for fiscal years beginning
after
November 15, 2007, and interim periods within those fiscal years. We will adopt
SFAS 157 as of January 1, 2008, as required.
In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes — an Interpretation of FASB Statement 109 (“FIN 48”), which
clarifies the accounting for uncertainty in tax positions taken or expected
to
be taken in a tax return, including issues relating to financial statement
recognition and measurement. FIN 48 provides that the tax effects from an
uncertain tax position can be recognized in the financial statements only if
the
position is “more-likely-than-not” of being sustained if the position were to be
challenged by a taxing authority. The assessment of the tax position is based
solely on the technical merits of the position, without regard to the likelihood
that the tax position may be challenged. If an uncertain tax position meets
the
“more-likely-than-not” threshold, the largest amount of tax benefit that is
greater than 50 percent likely of being recognized upon ultimate settlement
with
the taxing authority, is recorded. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect
of
the change in accounting principle recorded as an adjustment to opening retained
earnings. FIN 48 is effective for fiscal years beginning after December 15,
2006, and will be adopted by the Company on January 1, 2007. The Company has
not
been able to complete its evaluation of the impact of adopting FIN 48 and as
a
result, is not able to estimate what effect the adoption will have on its
financial position and results of operations, including its ability to comply
with current debt covenants.
F-17
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
2. Summary of
Significant Accounting Policies – (continued)
On
February 16, 2006, the FASB issued Statement No. 155, Accounting for Certain
Hybrid Instruments — an amendment of FASB Statements No. 133 and 140. The
statement amends Statement 133 to permit fair value measurement for certain
hybrid financial instruments that contain an embedded derivative, provides
additional guidance on the applicability of Statement 133 and 140 to certain
financial instruments and subordinated concentrations of credit risk. The new
standard is effective for the first fiscal year beginning after September 15,
2006. We are currently evaluating the impact this new standard will have on
our
financial statements.
In
February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option
for
Financial Assets and Financial Liabilities — Including an Amendment of FASB
Statement No. 115 (“SFAS 159”). The fair value option established by SFAS 159
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings
(or
another performance indicator if the business entity does not report earnings)
at each subsequent reporting date after adoption. The fair value option: (a)
may
be applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a
new
election date occurs); and (c) is applied only to entire instruments and not
to
portions of instruments. FASB No. 159 is effective as of the beginning of fiscal
years beginning after November 15, 2007, but early adoption is permitted. We
are
currently evaluating the impact of adopting SFAS 159.
3. Operating
Units
Through
the second quarter of 2006, we conducted our continuing operating businesses
in
four principal areas: Oil and Gas, Gaming, Real Estate and Home Fashion. As
described above, in November 2006, we sold our Oil and Gas operations. As a
result, our Oil and Gas operations are now classified as discontinued operations
and thus are not considered a reportable segment of our continuing operations.
We now conduct our operating businesses in three principal areas: Gaming, Real
Estate and Home Fashion.
a.
Gaming
We own
and operate gaming properties in Nevada. Our properties include the Stratosphere
Casino Hotel and Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder
in Las Vegas and the Aquarius Casino Resort in Laughlin. Results for the
Aquarius are included from the date of its acquisition, May 19, 2006. As
described above, in November 2006, we sold our Atlantic City gaming property.
As
a result, such operations are now classified as discontinued operations.
Summary
balance sheets for our Gaming segment as of December 31, 2006 and 2005, included
in the consolidated balance sheet, are as follows (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Current
assets
|
|
$
|
85,583
|
|
$
|
130,625
|
|
Property,
plant and equipment,
net
|
|
|
422,715
|
|
|
295,432
|
|
Other
assets
|
|
|
44,455
|
|
|
43,719
|
|
Total
assets
|
|
$
|
552,753
|
|
$
|
469,776
|
|
Current
liabilities
|
|
$
|
54,763
|
|
$
|
37,890
|
|
Long
term debt
|
|
|
257,329
|
|
|
217,335
|
|
Other
liabilities
|
|
|
5,993
|
|
|
10,327
|
|
Total
liabilities
|
|
$
|
318,085
|
|
$
|
265,552
|
F-18
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
3. Operating Units
–
(continued)
Summarized
income statement information for the years ended December 31, 2006, 2005 and
2004 is as follows (in $000s):
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
220,814
|
|
$
|
182,938
|
|
$
|
167,972
|
|
Hotel
|
|
|
75,587
|
|
|
61,862
|
|
|
54,653
|
|
Food
and beverage
|
|
|
83,667
|
|
|
70,060
|
|
|
66,953
|
|
Tower,
retail and other income
|
|
|
35,912
|
|
|
35,413
|
|
|
33,778
|
|
Gross
Revenues
|
|
|
415,980
|
|
|
350,273
|
|
|
323,356
|
|
Less
promotional allowances
|
|
|
30,281
|
|
|
22,291
|
|
|
23,375
|
|
Net
revenues
|
|
|
385,699
|
|
|
327,982
|
|
|
299,981
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
80,060
|
|
|
63,216
|
|
|
61,985
|
|
Hotel
|
|
|
33,419
|
|
|
26,957
|
|
|
24,272
|
|
Food
and beverage
|
|
|
60,052
|
|
|
51,784
|
|
|
48,495
|
|
Tower,
retail and other
|
|
|
16,856
|
|
|
15,372
|
|
|
14,035
|
|
Selling,
general and administrative
|
|
|
108,977
|
|
|
81,321
|
|
|
78,816
|
|
Depreciation
and amortization
|
|
|
27,620
|
|
|
22,305
|
|
|
23,516
|
|
Total
costs and expenses
|
|
|
326,984
|
|
|
260,955
|
|
|
251,119
|
|
Operating
income
|
|
$
|
58,715
|
|
$
|
67,027
|
|
$
|
48,862
|
b. Real
Estate
Our Real
Estate operations consist of rental real estate, property development, and
associated resort activities.
Summarized
income statement information attributable to real estate operations is as
follows (in $000s):
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Rental
real estate:
|
|
|
|
|
|
|
|
|
|
|
Interest
income on financing
leases
|
|
$
|
6,736
|
|
$
|
7,299
|
|
$
|
9,880
|
|
Rental
income
|
|
|
8,177
|
|
|
7,083
|
|
|
6,686
|
|
Property
development
|
|
|
90,955
|
|
|
58,270
|
|
|
27,073
|
|
Resort
operations
|
|
|
28,707
|
|
|
27,647
|
|
|
17,918
|
|
Total
revenues
|
|
|
134,575
|
|
|
100,299
|
|
|
61,557
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Rental
real estate
|
|
|
5,015
|
|
|
4,588
|
|
|
8,171
|
|
Property
development
|
|
|
73,041
|
|
|
48,679
|
|
|
22,949
|
|
Resort
operations
|
|
|
28,565
|
|
|
29,245
|
|
|
18,561
|
|
Total
expenses
|
|
|
106,621
|
|
|
82,512
|
|
|
49,681
|
|
Operating
income
|
|
$
|
27,954
|
|
$
|
17,787
|
|
$
|
11,876
|
F-19
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
3. Operating Units
–
(continued)
Rental Real
Estate
As of
December 31, 2006, we owned 37 rental real estate properties. These primarily
consist of fee and leasehold interests in real estate in 19 states. Most of
these properties are net-leased to single corporate tenants. Approximately
89%
of these properties are currently net-leased, 3% are operating properties and
8%
are vacant.
Property
Development and Associated Resort Activities
We own,
primarily through our Bayswater subsidiary, residential development properties.
Bayswater, a real estate investment, management and development company, focuses
primarily on the construction and sale of single-family houses, multi-family
homes and lots in subdivisions and planned communities and raw land for
residential development. Our New Seabury development property in Cape Cod,
Massachusetts, and our Grand Harbor and Oak Harbor development property in
Vero
Beach, Florida each include land for future residential development of more
than
400 and 1,000 units of residential housing, respectively. Both developments
operate golf and resort activities.
A
summary of real estate assets as of December 31, 2006 and 2005, included in
the
consolidated balance sheet, is as follows (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Rental
Properties:
|
|
|
|
|
|
|
|
Finance
leases,
net
|
|
$
|
66,335
|
|
$
|
73,292
|
|
Operating
leases
|
|
|
46,170
|
|
|
52,572
|
|
Property
development
|
|
|
126,537
|
|
|
116,007
|
|
Resort
properties
|
|
|
44,932
|
|
|
46,383
|
|
Total
real estate
|
|
$
|
283,974
|
|
$
|
288,254
|
In
addition to the above are properties held for sale which amounted to $23.7
million and $27.2 million at December 31, 2006 and 2005, respectively. The
operating results of certain of these properties are classified as discontinued
operations.
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 $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Minimum
lease payments
receivable
|
|
$
|
69,366
|
|
$
|
79,849
|
|
Unguaranteed
residual value
|
|
|
39,843
|
|
|
43,429
|
| |
|
|
109,209
|
|
|
123,278
|
|
Less
unearned income
|
|
|
39,341
|
|
|
46,239
|
| |
|
|
69,868
|
|
|
77,039
|
|
Less
current portion of lease amortization
|
|
|
3,533
|
|
|
3,747
|
| |
|
$
|
66,335
|
|
$
|
73,292
|
F-20
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
3. Operating Units
–
(continued)
The
following is a summary of the anticipated future receipts of the minimum lease
payments receivable at December 31, 2006 (in $000s):
|
|
|
|
|
|
2007
|
|
$
|
9,570
|
|
2008
|
|
|
8,214
|
|
2009
|
|
|
7,993
|
|
2010
|
|
|
5,067
|
|
2011
|
|
|
4,973
|
|
Thereafter
|
|
|
33,549
|
| |
|
$
|
69,366
|
At
December 31, 2006 and 2005, $60.6 million and $65.4 million, respectively,
of
the net investment in financing leases was pledged to collateralize the payment
of nonrecourse mortgages payable.
Real Estate Leased
to Others Accounted for Under the Operating Method
Real
estate leased to others accounted for under the operating method is summarized
as follows (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Land
|
|
$
|
8,605
|
|
$
|
12,449
|
|
Commercial
Buildings
|
|
|
52,246
|
|
|
58,816
|
| |
|
|
60,851
|
|
|
71,265
|
|
Less
accumulated depreciation
|
|
|
14,681
|
|
|
18,693
|
| |
|
$
|
46,170
|
|
$
|
52,572
|
The
following is a summary of the anticipated future receipts of minimum lease
payments under non-cancelable leases at December 31, 2006 (in $000s):
|
|
|
|
|
|
2007
|
|
$
|
11,963
|
|
2008
|
|
|
11,637
|
|
2009
|
|
|
10,606
|
|
2010
|
|
|
9,532
|
|
2011
|
|
|
8,468
|
|
Thereafter
|
|
|
24,635
|
| |
|
$
|
76,841
|
At
December 31, 2006 and 2005, $22.7 million and $21.0 million, respectively,
of
net real estate leased to others were pledged to collateralize the payment
of
non-recourse mortgages payable.
F-21
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
3. Operating Units
–
(continued)
Property Held
for
Sale
We
market for sale portions of our commercial real estate portfolio. Sales activity
was as follows (in $000s, except unit data):
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Properties
sold
|
|
|
18
|
|
|
14
|
|
|
57
|
|
Proceeds
received
|
|
$
|
25,340
|
|
$
|
52,525
|
|
$
|
254,424
|
|
Mortgage
debt repaid
|
|
$
|
—
|
|
$
|
10,702
|
|
$
|
93,845
|
|
Total
gain recorded
|
|
$
|
12,776
|
|
$
|
16,315
|
|
$
|
80,459
|
|
Gain
recorded in continuing operations
|
|
$
|
—
|
|
$
|
176
|
|
$
|
5,262
|
|
Gain
recorded in discontinued operations(1)
|
|
$
|
12,776
|
|
$
|
16,139
|
|
|
75,197
|
——————
(1)
In
addition to gains on the rental portfolio of $16.1 million, a gain of $5.7
million on the sale of a resort property was recognized in 2005.
The
following is a summary of property held for sale (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Leased
to
others
|
|
$
|
28,668
|
|
$
|
29,230
|
|
Vacant
|
|
|
50
|
|
|
1,049
|
| |
|
|
28,718
|
|
|
30,279
|
|
Less
accumulated depreciation
|
|
|
5,053
|
|
|
3,046
|
| |
|
$
|
23,665
|
|
$
|
27,233
|
At
December 31, 2006 and 2005, $19.8 million of real estate held for sale was
pledged to collateralize the payment of non-recourse mortgages payable.
Other
In July
2004, we purchased two Vero Beach, Florida waterfront communities, Grand Harbor
and Oak Harbor, “Grand Harbor”, including their respective golf courses, tennis
complex, fitness center, beach club and clubhouses. The acquisition also
included properties in various stages of development, including land for future
residential development, improved lots and finished residential units ready
for
sale. The purchase price was $75.0 million, which included $62.0 million of
land
and construction in progress. We plan to invest in the further development
of
these properties and the enhancement of the existing infrastructure.
c. Home
Fashion
WPI is
engaged in the business of manufacturing, sourcing, marketing and distributing
bed and bath home fashion products including, among others, sheets, pillowcases,
comforters, blankets, bedspreads, pillows, mattress pads, towels and related
products. WPI recognizes revenue primarily through the sale of home fashion
products to a variety of retail and institutional customers. WPI currently
operates 32 retail outlet stores that sell home fashion products, including,
but
not limited to, WPI’s home fashion products. In addition, WPI receives a small
portion of its revenues through the licensing of its trademarks.
F-22
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
3. Operating Units
–
(continued)
Summary
balance sheets for Home Fashion as of December 31, 2006 and 2005 as included
in
the consolidated balance sheets are as follows (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
2006
|
|
December
31,
2005
|
| |
|
|
|
|
|
|
|
Current
assets
|
|
$
|
567,419
|
|
$
|
560,853
|
|
Assets
held for sale
|
|
|
23,838
|
|
|
22,643
|
|
Property,
plant and equipment, net
|
|
|
200,382
|
|
|
166,026
|
|
Other
assets
|
|
|
38,199
|
|
|
23,402
|
|
Total
assets
|
|
$
|
829,838
|
|
$
|
772,924
|
|
Current
liabilities
|
|
$
|
101,609
|
|
$
|
103,931
|
|
Other
liabilities
|
|
|
8,980
|
|
|
5,214
|
|
Total
liabilities
|
|
$
|
110,589
|
|
$
|
109,145
|
Summarized
statement of operations for the year ended December 31, 2006 and the period
from
August 8, 2005 (acquisition date) to December 31, 2005 is as follows (in
$000s):
|
|
|
|
|
|
|
|
|
| |
|
Year
Ended
December 31,
2006
|
|
Period
August
8, 2005
to December
31,
2005
|
|
| |
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
957,656
|
|
$
|
472,681
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
901,735
|
|
|
421,408
|
|
|
Selling,
general and administrative
|
|
|
160,911
|
|
|
72,044
|
|
|
Restructuring
and impairment charges
|
|
|
45,647
|
|
|
1,658
|
|
|
Total
costs and expenses
|
|
|
1,108,293
|
|
|
495,110
|
|
|
Operating
loss
|
|
$
|
(150,637
|
)
|
$
|
(22,429
|
)
|
A
relatively small number of customers have historically accounted for a
significant portion of WPI’s net revenue. During the year ended December 31,
2006 and the period August 8, 2005 to December 31, 2005, sales to six customers
amounted to approximately 49.9% of net revenues. One customer accounted for
15%
or more of WPI’s net revenue in both periods.
For the
year ended December 31, 2006, total depreciation was $31.6 million, of which
$25.5 million was included in cost of sales and $6.1 million was included in
selling, general and administrative expenses. Total expenses for the year
included $33.3 million of impairment charges related to the fixed assets of
plants that have been or will be closed and $12.3 million of restructuring
charges (of which approximately $3.4 million relates to severance and $8.9
million relates to continuing costs of closed plants).
Impairment
and
restructuring charges for the year ended December 31, 2006 are included in
Home
Fashion operating expenses in the accompanying consolidated statements of
operations.
To
improve WPI’s competitive position, we intend to continue to restructure its
operations to significantly reduce its cost of goods sold by closing certain
plants located in the United States, sourcing goods from lower cost overseas
facilities, and acquiring overseas manufacturing facilities. The Company has
incurred impairment charges to write-down the value of WPI plants taken out
of
service to their estimated liquidation value. As of December 31, 2006,
approximately $139.5 million of WPI’s assets are located outside of the United
States, primarily in Bahrain.
F-23
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
3. Operating Units
–
(continued)
Included
in restructuring expenses are cash charges associated with the ongoing costs
of
closed plants, employee severance, benefits and related costs. The amount of
accrued restructuring costs at December 31, 2005 was $0.1 million. During the
year ended December 31, 2006, we incurred additional restructuring costs of
$12.3 million, of which $11.2 million was paid during the period. As of
December 31, 2006, the accrued liability balance was $1.2 million which is
included in accounts payable and accrued expenses in our consolidated balance
sheet.
Total
cumulative impairment and restructuring charges for the period from acquisition,
August 5, 2005, through December 31, 2006, were $47.3 million.
We
expect that restructuring charges will continue to be incurred throughout 2007.
As of December 31, 2006, WPI expects to incur additional restructuring costs
and
impairment charges over the next year relating to the current restructuring
plan
of between $25.0 million and $30.0 million. Restructuring costs could be
affected by, among other things, our decision to accelerate or delay
restructuring efforts. As a result, actual costs incurred could vary materially
from these amounts.
4.
Acquisitions
Gaming
As
described above, on May 19, 2006, our wholly-owned subsidiaries, AREP Laughlin
and AREP Boardwalk Properties, completed the purchases of the Aquarius and
the
Traymore site, respectively, from affiliates of Harrah’s. The transactions were
completed pursuant to an asset purchase agreement, dated as of November 28,
2005, between AREP Laughlin, AREP Boardwalk LLC, Harrah’s and certain affiliates
of Harrah’s. Under the agreement, AREP Laughlin acquired the Aquarius and AREP
Boardwalk Properties, an assignee of AREP Boardwalk LLC, acquired the Traymore
site for an aggregate purchase price of approximately $170 million (excluding
transaction costs and working capital of approximately $5.7 million). On
November 17, 2006, we sold the Traymore site to Pinnacle.
The
Aquarius is located on approximately 18 acres of land located next to the
Colorado River in Laughlin, Nevada and is a tourist-oriented gaming and
entertainment destination property. The Aquarius is the largest hotel in
Laughlin, with 1,907 rooms in two 15-story towers, a 57,000 square-foot casino,
five fast food franchise restaurants and four restaurants, a parking garage
with
capacity for 2,420 cars, over 35,000 square-feet of meeting space and a
3,300-seat amphitheater. The property also features an outdoor pool, fitness
center and lighted tennis courts.
The
following table summarizes the estimated fair values of the net assets acquired
on May 19, 2006 (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
May
19, 2006
Fair Value
|
|
| |
|
Aquarius
|
|
Traymore
Site
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
7,172
|
|
$
|
—
|
|
$
|
7,172
|
|
|
Land
|
|
|
13,000
|
|
|
61,651
|
|
|
74,651
|
|
|
Building
and equipment
|
|
|
95,336
|
|
|
—
|
|
|
95,336
|
|
|
Intangible
assets
|
|
|
2,939
|
|
|
—
|
|
|
2,939
|
|
|
Assets
acquired
|
|
|
118,447
|
|
|
61,651
|
|
|
180,098
|
|
|
Liabilities
assumed
|
|
|
(4,874
|
)
|
|
—
|
|
|
(4,874
|
)
|
|
Net
assets acquired
|
|
$
|
113,573
|
|
$
|
61,651
|
|
$
|
175,224
|
|
The
purchase price allocations for the Aquarius are based on estimated fair values
as determined by independent appraisers. If the acquisitions of the Aquarius
and
the Traymore site had occurred at the beginning of 2006, our consolidated
unaudited pro forma net revenue, net income and diluted earnings per share
for
the year ended December 31, 2006 would not have been materially different than
the amounts we reported, and, therefore, pro forma results are not
presented.
F-24
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
4. Acquisitions –
(continued)
The
results of operations of the Aquarius from May 19, 2006 to December 31, 2006
are
included in the Company’s consolidated results of operations for the year ended
December 31, 2006.
Home
Fashion
On August
8, 2005, we acquired 13.2 million, or 67.7%, of the 19.5 million outstanding
common shares of WPI. In consideration for the shares, we paid $219.9 million
in
cash and received the balance in respect of a portion of the debt of WestPoint
Stevens owned by us. Pursuant to the asset purchase agreement between WPI and
WestPoint Stevens, rights to subscribe for an additional 10.5 million shares
of
common stock at a price of $8.772 per share, or the rights offering, were
allocated among former creditors of WestPoint Stevens. Under the asset purchase
agreement and the bankruptcy court order approving the sale, we would have
received rights to subscribe for 2.5 million of such shares and we agreed to
purchase up to an additional 8.0 million shares of common stock to the extent
that any rights were not exercised by the holders of such rights. Accordingly,
upon completion of the rights offering and depending upon the extent to which
the other holders exercise certain subscription rights, we would beneficially
own between 15.7 million and 23.7 million shares of WPI common stock
representing between 52.3% and 79.0% of the 30.0 million shares that would
then
be outstanding.
The
foregoing description assumes that the subscription rights are allocated and
exercised in the manner set forth in the asset purchase agreement and the sale
order. However, certain of the first lien creditors of WestPoint Stevens
appealed portions of the bankruptcy court’s ruling. In connection with that
appeal, the subscription rights distributed to the second lien lenders at
closing were placed in escrow. Additionally, the first lien creditors and Beal
Bank, S.S.B have filed a complaint in Delaware seeking among other relief,
an
order to “unwind” the issuance of the preferred stock, or, alternatively,
directing that such stock be held in escrow. We are vigorously contesting the
Delaware action and any changes to the sale order. As a result of the bankruptcy
proceedings and the Delaware proceedings, we may own less than a majority of
WPI’s shares of common stock and our ownership of the preferred stock may also
be affected. If we were to lose control of WPI, it could adversely affect
WPI’s business and the value of our investment.
On
December 20, 2006, we acquired (1) 1,000,000 shares of Series A-1 Preferred
Stock for a purchase price of $100 per share, for an aggregate purchase price
of
$100.0 million, and (2) 1,000,000 shares of Series A-2 Preferred Stock for
a
purchase price of $100.0 per share, for an aggregate purchase price of $100.0
million. Each of the Series A-1 Preferred Stock and Series A-2 Preferred Stock
have a 4.50% annual dividend rate which is paid quarterly. For the first two
years after issuance, the dividends are paid in the form of additional preferred
stock. Thereafter, the dividends are to be paid in either cash or in additional
preferred stock at the option of WPI. Each of Series A-1 Preferred Stock and
Series A-2 Preferred Stock is convertible into common shares of WPI at a rate
of
$10.50 per share, subject to certain anti-dilution provisions. Assuming full
conversion of both series of preferred stock into common shares, prior to
completion of the rights offering, we would have owned, as of December 31,
2006,
32.2 million shares, representing 83.7% of the 38.5 million shares that
would then have been outstanding. Assuming the rights offering were to have
been
completed as of December 31, 2006, we would have owned between 32.7 million
shares or 69.5% and 34.0 million shares or 84.4% of the 47.0 million shares
or
40.3 million shares of WPI common stock, respectively, that would be outstanding
depending upon the extent to which the other shareholders exercised their
subscription rights.
We
consolidated the operating results and balance sheets of WPI as of December
31,
2006 and 2005 and for the period from the date of acquisition through December
31, 2006. If we were to own less than 50% of the outstanding common stock and
lose control of WPI, we no longer would consolidate it and our financial
statements could be materially different than those presented as of December
31,
2006 and 2005 and for the periods then ended.
F-25
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
4. Acquisitions –
(continued)
The
aggregate consideration paid for the acquisition was as follows (in
$000s):
|
|
|
|
|
|
Book
value of first and second lien
debt
|
|
$
|
205,850
|
|
Cash
purchases of additional equity
|
|
|
187,000
|
|
Exercise
of rights
|
|
|
32,881
|
|
Transaction
costs
|
|
|
2,070
|
| |
|
$
|
427,801
|
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed on August 8, 2005. The purchase price allocations are based
on estimated fair values as determined by independent appraisers (in
$000s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
August
8,
2005
Fair Value
|
|
Excess
Fair
Value
Over Cost
|
|
Basis
August
8,
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
588,000
|
|
$
|
—
|
|
$
|
588,000
|
|
|
Property
and equipment
|
|
|
294,360
|
|
|
(98,399
|
)
|
|
195,961
|
|
|
Intangible
assets
|
|
|
35,700
|
|
|
(12,298
|
)
|
|
23,402
|
|
|
Assets
acquired
|
|
|
918,060
|
|
|
(110,697
|
)
|
|
807,363
|
|
|
Current
liabilities
|
|
|
111,363
|
|
|
—
|
|
|
111,363
|
|
|
Other
liabilities
|
|
|
11,044
|
|
|
—
|
|
|
11,044
|
|
|
Liabilities
assumed
|
|
|
122,407
|
|
|
—
|
|
|
122,407
|
|
|
Net
assets acquired
|
|
$
|
795,653
|
|
$
|
(110,697
|
)
|
$
|
684,956
|
|
|
Minority
interest at acquisition
|
|
|
|
|
|
|
|
|
(257,155
|
)
|
| |
|
|
|
|
|
|
|
$
|
427,801
|
|
The
amount allocated to intangible assets was attributed to trademarks, which have
been determined to have an indefinite life.
Our basis
in WPI is less than our share of the equity in WPI by $110.7 million as of
August 8, 2005. The excess of fair value over cost of net assets acquired has
been reflected as a reduction of long-lived assets in our consolidated balance
sheet. Fixed assets were reduced by $98.4 million and intangible assets were
reduced by $12.3 million. As a result, the financial statements of WPI
presented herein could be materially different from the results reflected in
the
books and records of WPI.
The
following table summarizes unaudited pro forma financial information assuming
the acquisition of WPI had occurred on January 1, 2004. This unaudited pro
forma
financial information does not necessarily represent what would have occurred
if
the transaction had taken place on the dates presented and should not be taken
as representative of our future consolidated results of operations or financial
position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve
Months Ended December 31,
2005
|
|
| |
|
AREH
|
|
WPI
|
|
Pro
Forma
Adjustments
|
|
Total
|
|
| |
|
|
|
|
(January
1, 2005
to August 7, 2005)
|
|
|
|
|
|
|
|
| |
|
(In
$000s)
|
|
|
Revenues
|
|
$
|
900,962
|
|
$
|
728,362
|
|
$
|
—
|
|
$
|
1,629,324
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(16,900
|
)
|
$
|
(157,935
|
)
|
$
|
98,487
|
|
$
|
(76,348
|
)
|
F-26
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
4. Acquisitions
–
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve
Months Ended December 31,
2004
|
|
| |
|
AREH
|
|
WPI
|
|
Pro
Forma
Adjustments
|
|
Total
|
|
| |
|
(In
$000s)
|
|
|
Revenues
|
|
$
|
361,538
|
|
$
|
1,618,684
|
|
$
|
—
|
|
$
|
1,980,222
|
|
|
Income
(loss) income from continuing operations
|
|
$
|
70,287
|
|
$
|
(183,275
|
)
|
$
|
178,954
|
|
$
|
65,966
|
|
The pro
forma adjustments relate, principally, to the elimination of interest expense,
bankruptcy expense and other expenses at WPI, a reduction in interest income
of
AREH and adjustments to reflect AREH’s depreciation expense based on values
assigned in applying purchase accounting. WPI balances included in the pro
forma
table for the twelve months ended December 31, 2004 are derived from the audited
financial statements of WestPoint for that period. Unaudited WPI balances
included in the pro forma table for the twelve months ended December 31, 2005
are for the period from January 1, 2005 to August 7, 2005. Data for the period
from August 8, 2005, the acquisition date, to December 31, 2005 are included
in
AREH’s results.
As
discussed in Note 20, legal proceedings with respect to the acquisition are
ongoing.
5. Discontinued
Operations and Assets Held for Sale
The Sands and
Related Assets
On
November 17, 2006, Atlantic Coast, ACE, AREH, and certain other entities owned
by or affiliated with AREH completed the sale to Pinnacle of the outstanding
membership interests in ACE and 100% of the equity interests in certain
subsidiaries of AREH which own parcels of real estate adjacent to The Sands,
including 7.7 acres of land adjacent to The Sands known as the Traymore site.
We
own, through subsidiaries, approximately 67.6% of Atlantic Coast, which owned
100% of ACE. The aggregate price was approximately $274.8 million, of which
approximately $200.6 million was paid to Atlantic Coast and approximately $74.2
million was paid to affiliates of AREH for subsidiaries which own the Traymore
site and the adjacent properties. Under the terms of the agreement, $50.0
million of the purchase price paid to Atlantic Coast was deposited into escrow
to fund indemnification obligations with regard to the GBH creditors’ claims. In
February 2007 we resolved all outstanding litigation involving our interest
in
our Atlantic City gaming operations. See Note 20. Subsequent Events.
Oil and Gas
Operations
On
November 21, 2006, our indirect wholly-owned subsidiary, AREP O & G
Holdings, consummated the sale of all of the issued and outstanding membership
interests of NEG Oil & Gas to SandRidge, for consideration consisting of
$1.025 billion in cash, 12,842,000 shares of SandRidge’s common stock, valued,
at the date of closing, at $18 per share, and the repayment by SandRidge of
$300.0 million of debt of NEG Oil & Gas.
SandRidge
is a working interest owner and the operator of a majority of the Longfellow
Ranch area oil and gas properties. The interest in Longfellow Ranch was the
single largest oil and gas property owned by NEG Oil & Gas.
On
November 21, 2006, pursuant to an agreement dated October 25, 2006 among AREH,
NEG Oil & Gas and NEGI, NEGI`1 sold its membership interest in NEG Holding
to NEG Oil & Gas for consideration of approximately $261.1 million. Of that
amount, $149.6 million was used to repay the principal of and accrued interest
with respect to the NEGI 10.75% senior notes due 2007, all of which was held
by
us.
Real
Estate
Certain
of our real estate properties are classified as discontinued operations. The
properties classified as discontinued operations have changed during 2006 and,
accordingly, certain amounts in the accompanying 2005 and 2004 financial
statements have been reclassified to conform to the current classification
of
properties.
F-27
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
5. Discontinued
Operations and Assets Held for Sale – (continued)
Results of
Operations and Assets Held for Sale
The
financial position and results of our Oil and Gas, Real Estate and our Atlantic
City Gaming operations described above are presented as assets and liabilities
of discontinued operations held for sale in the consolidated balance sheets
and
discontinued operations in the consolidated statements of operations,
respectively, for all periods presented in accordance with SFAS No. 144.
A
summary of the results of operations for our discontinued operations for years
ended December 31, 2006, 2005 and 2004 is as follows (in $000’s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas
|
|
$
|
353,539
|
|
$
|
198,854
|
|
$
|
137,988
|
|
|
Atlantic
City gaming
|
|
|
138,378
|
|
|
162,339
|
|
|
170,855
|
|
|
Real
estate
|
|
|
5,143
|
|
|
6,940
|
|
|
20,757
|
|
|
Total
revenues
|
|
$
|
497,060
|
|
$
|
368,133
|
|
$
|
329,600
|
|
|
Net
operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas
|
|
$
|
183,281
|
|
$
|
37,521
|
|
$
|
33,053
|
|
|
Atlantic
City Gaming
|
|
|
(13,091
|
)
|
|
(6,848
|
)
|
|
2,373
|
|
|
Real
estate
|
|
|
4,144
|
|
|
4,179
|
|
|
11,294
|
|
|
Total
operating income
|
|
|
174,334
|
|
|
34,852
|
|
|
46,720
|
|
|
Interest
expense
|
|
|
(26,266
|
)
|
|
(14,005
|
)
|
|
(18,303
|
)
|
|
Interest
and other income
|
|
|
11,004
|
|
|
5,897
|
|
|
6,703
|
|
|
Impairment
loss on GBH bankruptcy
|
|
|
—
|
|
|
(52,366
|
)
|
|
(15,600
|
)
|
|
Income
(loss) from discontinued operation before income taxes and
minority
interest
|
|
|
159,072
|
|
|
(25,622
|
)
|
|
19,520
|
|
|
Income
tax (expense) benefit
|
|
|
(4,241
|
)
|
|
(2,922
|
)
|
|
(8,213
|
)
|
|
Income
(loss) from discontinued operations
|
|
|
154,831
|
|
|
(28,544
|
)
|
|
11,307
|
|
|
Gain
on sales of discontinued operations, net of income tax expense
of
$22,637 in 2006
|
|
|
676,444
|
|
|
21,849
|
|
|
75,197
|
|
|
Minority
interests
|
|
|
(55,511
|
)
|
|
3,682
|
|
|
2,074
|
|
| |
|
$
|
775,764
|
|
$
|
(3,013
|
)
|
$
|
88,578
|
|
Derivative
Contracts
We
record derivative contracts as assets or liabilities in the balance sheet at
fair value. As of December 31, 2005, these derivatives were recorded as a
liability of discontinued operations held for sale of $85.0 million. We have
elected not to designate any of these instruments as hedges for accounting
purposes and, accordingly, both realized and unrealized gains and losses are
included in the oil and gas revenues for discontinued operations. Our realized
and unrealized losses on our derivative contracts for the periods indicated
were
as follows (in $000’s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years
Ended December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Realized
loss (net cash
payments)
|
|
$
|
(25,948
|
)
|
$
|
(51,263
|
)
|
$
|
(16,625
|
)
|
|
Unrealized
gain (loss)
|
|
|
99,707
|
|
|
(69,254
|
)
|
|
(9,179
|
)
|
| |
|
$
|
73,759
|
|
$
|
(120,517
|
)
|
$
|
(25,804
|
)
|
F-28
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
5. Discontinued
Operations and Assets Held for Sale – (continued)
GBH Impairment
On
September 29, 2005, GBH filed a voluntary petition for bankruptcy relief under
Chapter 11 of the U.S. Bankruptcy Code. As a result of this filing, we
determined that we no longer control GBH and have deconsolidated our investment
effective the date of the bankruptcy filing. As a result of GBH’s bankruptcy, we
recorded impairment charges of $52.4 million related to the write-off of the
remaining carrying amount of our investment ($6.7 million) and also to reflect
a
dilution in our effective ownership percentage of Atlantic Coast, 41.7% of
which
is owned directly by GBH ($45.7 million).
In the
year ended December 31, 2004, we recorded an impairment loss of $15.6 million
on
our equity investment in GBH. The purchase price pursuant to an agreement to
purchase additional shares of GBH in 2005 indicated that the fair value of
our
investment was less than our carrying value. An impairment charge was recorded
to reduce the carrying value to the value implicit in the purchase
agreement.
We
recorded $34.5 million of income tax benefits in the third quarter of 2006
as a
result of the reversal of deferred tax valuation allowances for our oil and
gas
and Atlantic City gaming operations. See Note 16, Income Taxes, for further
information.
A
summary of assets held for sale and liabilities of discontinued operations
held
for sale as of December 31, 2006 and 2005 is as follows (in $000’s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
—
|
|
$
|
116,032
|
|
Trade,
notes and other receivables
|
|
|
—
|
|
|
57,133
|
|
Other
current assets
|
|
|
47,503
|
|
|
73,125
|
|
Property,
plant and equipment
|
|
|
—
|
|
|
888,086
|
|
Other
assets
|
|
|
—
|
|
|
43,021
|
|
Assets
held for sale
|
|
$
|
47,503
|
|
$
|
1,177,397
|
|
Accounts
payable and accrued expenses
|
|
$
|
—
|
|
|
118,468
|
|
Long-term
debt
|
|
|
—
|
|
|
306,052
|
|
Other
non-current liabilities
|
|
|
—
|
|
|
65,078
|
|
Liabilities
of discontinued operations held for sale
|
|
$
|
—
|
|
$
|
489,598
|
Oil and Gas
Disclosures
Capitalized Costs
Capitalized
costs as of December 31, 2005 relating to oil and gas producing activities
are
as follows (in $000s):
|
|
|
|
|
| |
|
December
31,
2005
|
| |
|
|
|
|
Proved
properties
|
|
$
|
1,229,923
|
|
Other
property and equipment
|
|
|
6,029
|
|
Total
|
|
|
1,235,952
|
|
Less:
Accumulated depreciation, depletion and amortization
|
|
|
493,493
|
| |
|
$
|
742,459
|
F-29
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
5. Discontinued
Operations and Assets Held for Sale – (continued)
Costs
incurred in connection with property acquisition, exploration and development
activities for the period from January 1, 2006 to November 21, 2006 and the
years ended December 31, 2005 and 2004 were as follows (in $000s, except
depletion rate):
|
|
|
|
|
|
|
|
|
|
|
| |
|
January
1 –
November 21,
|
|
Years
Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
$
|
14,113
|
|
$
|
114,244
|
|
$
|
128,673
|
|
Exploration
costs
|
|
|
83,463
|
|
|
75,357
|
|
|
62,209
|
|
Development
costs
|
|
|
133,459
|
|
|
124,305
|
|
|
52,765
|
|
Total
|
|
$
|
231,035
|
|
$
|
313,906
|
|
$
|
243,647
|
|
Depletion
rate per Mcfe
|
|
$
|
2.10
|
|
$
|
2.33
|
|
$
|
2.11
|
As of
December 31, 2005, all capitalized costs relating to oil and gas activities
have
been included in the full cost pool.
Supplemental Reserve
Information (Unaudited)
The
accompanying tables present information concerning our oil and natural gas
producing activities during the period from January 1, 2006 to November 21,
2006
and the years ended December 31, 2005 and 2004 and are prepared in accordance
with SFAS No. 69, Disclosures about Oil and Gas Producing
Activities.
Estimates
of our proved reserves and proved developed reserves were prepared by
independent firms of petroleum engineers, based on data supplied to them by
NEG
Oil & Gas. Estimates relating to oil and gas reserves are inherently
imprecise and may be subject to substantial revisions due to changing prices
and
new information, such as reservoir performance, production data, additional
drilling and other factors becomes available.
F-30
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
5. Discontinued
Operations and Assets Held for Sale – (continued)
Proved
reserves are estimated quantities of oil, natural gas, condensate and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Natural gas liquids and condensate are
included in oil reserves. Proved developed reserves are those proved reserves
that can be expected to be recovered through existing wells with existing
equipment and operating methods. Proved undeveloped reserves include those
reserves expected to be recovered from new wells on undrilled acreage or
existing wells on which a relatively major expenditure is required for
recompletion. Natural gas quantities represent gas volumes which include amounts
that will be extracted as natural gas liquids. Our estimated net proved reserves
and proved developed reserves of oil and condensate and natural gas for the
period from January 1, 2006 to November 21, 2006 and the years ended December
31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
| |
|
Crude
Oil
|
|
Natural
Gas
|
|
| |
|
(Barrels)
|
|
(Thousand
cubic
feet)
|
|
| |
|
|
|
|
|
|
December
31, 2003
|
|
8,165,562
|
|
206,259,821
|
|
|
Reserves
of National Offshore purchased from affiliate of general partner
|
|
5,203,599
|
|
25,981,749
|
|
|
Sales
of reserves in place
|
|
(15,643
|
)
|
(344,271
|
|
|
Extensions
and discoveries
|
|
524,089
|
|
50,226,279
|
|
|
Revisions
of previous estimates
|
|
204,272
|
|
9,810,665
|
|
|
Production
|
|
(1,484,005
|
)
|
(18,895,077
|
)
|
|
December
31, 2004
|
|
12,597,874
|
|
273,039,166
|
|
|
Purchase
of reserves in place
|
|
483,108
|
|
94,937,034
|
|
|
Sales
of reserves in place
|
|
(624,507
|
)
|
(7,426,216
|
)
|
|
Extensions
and discoveries
|
|
743,019
|
|
79,591,588
|
|
|
Revisions
of previous estimates
|
|
494,606
|
|
17,015,533
|
|
|
Production
|
|
(1,789,961
|
)
|
(28,106,819
|
)
|
|
December
31, 2005
|
|
11,904,139
|
|
429,050,286
|
|
|
Purchase
of reserves in place
|
|
282,267
|
|
9,597,085
|
|
|
Extensions
and discoveries
|
|
2,169,222
|
|
73,753,558
|
|
|
Revisions
of previous estimates
|
|
(201,907
|
|
(58,470,950
|
)
|
|
Production
|
|
(1,655,516
|
)
|
(31,094,079
|
)
|
|
Sale
of properties to SandRidge
|
|
(12,498,206
|
)
|
(422,835,900
|
)
|
|
November
21, 2006
|
|
—
|
|
—
|
|
| |
|
|
|
|
|
|
Proved
developed reserves:
|
|
|
|
|
|
|
December
31, 2004
|
|
8,955,300
|
|
151,765,372
|
|
|
December
31, 2005
|
|
8,340,077
|
|
200,519,972
|
|
Asset Retirement
Obligations — Oil and Gas
Our asset
retirement obligations represent expected future costs to plug and abandon
our
wells, dismantle facilities, and reclamate sites at the end of the related
assets’ useful lives.
F-31
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
5. Discontinued
Operations and Assets Held for Sale – (continued)
As
of
December 31, 2005, we had $24.3 million held in various escrow accounts relating
to the asset retirement obligations for certain offshore properties. The escrow
accounts and the asset retirement obligations were transferred to the purchaser
in connection with the sale of our Oil and Gas business. The following table
summarizes changes in the Company’s asset retirement obligations during the
period from January 1, 2006 to November 21, 2006 and the year ended December
31,
2005 (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
January
1 –
November 21,
2006
|
|
Year
Ended
December 31,
2005
|
|
| |
|
|
|
|
|
|
|
|
Beginning
of
year
|
|
$
|
41,228
|
|
$
|
56,524
|
|
|
Add:
Accretion
|
|
|
2,537
|
|
|
3,019
|
|
|
Drilling
additions/Purchases
|
|
|
4,269
|
|
|
2,067
|
|
|
Less:
Revisions
|
|
|
—
|
|
|
(2,813
|
)
|
|
Settlements
|
|
|
—
|
|
|
(431
|
)
|
|
Dispositions
|
|
|
(48,034
|
)
|
|
(17,138
|
)
|
|
End
of period
|
|
$
|
—
|
|
$
|
41,228
|
|
6. Related Party
Transactions
We have
entered into several transactions with entities affiliated with Mr. Icahn.
The transactions include purchases by us of businesses and business interests,
including debt, of the affiliated entities. Additionally, other transactions
have occurred as described below.
All
related party transactions are reviewed and approved by our Audit Committee.
Where appropriate, our Audit Committee will obtain independent financial advice
and counsel on the transactions.
In
accordance with generally accepted accounting principles, assets transferred
between entities under common control are accounted for at historical cost
similar to a pooling of interest, and the financial statements of previously
separate companies for periods prior to the acquisition are restated on a
combined basis. Additionally, the earnings, losses, capital contribution and
distributions of the acquired entities are allocated to the general partner
as
an adjustment to equity, as is the difference between the consideration paid
and
the book basis of the entity acquired.
a.
Acquisitions
Oil and
Gas
In
October 2003, pursuant to a purchase agreement dated as of May 16, 2003, we
acquired certain debt and equity securities of NEGI from entities affiliated
with Mr. Icahn for an aggregate cash consideration of $148.1 million plus
$6.7 million in cash for accrued interest on the debt securities. The securities
acquired were $148.6 million in principal amount of outstanding 10.75% senior
notes due 2006 of NEGI and 5,584,044 shares of common stock of NEGI. As a result
of the foregoing transaction and the acquisition by us of additional securities
of NEGI prior to the closing, we beneficially owned in excess of 50% of the
outstanding common stock of NEGI. In connection with the acquisition of stock
in
NEGI, the excess of cash disbursed over the historical cost, which amounted
to
$2.8 million, was charged to the general partner’s equity. NEGI owned a 50%
interest in NEG Holdings; the other 50% interest in NEG Holdings was held by
an
affiliate of Mr. Icahn prior to our acquisition of the interest during the
second quarter of 2005. NEG Holdings owned NEG Operating LLC (“Operating LLC”)
which owned operating oil and gas properties managed by NEGI.
F-32
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
6. Related Party
Transactions – (continued)
On
December 6, 2004, we purchased from affiliates of Mr. Icahn $27.5 million
aggregate principal amount, or 100% of the outstanding term notes issued by
TransTexas, (the “TransTexas Notes”). The purchase price was $28.2 million in
cash, which equaled the principal amount of the TransTexas Notes plus accrued
but unpaid interest.
In
December 2004, we purchased all of the membership interests of MidRiver LLC,
or
MidRiver, from affiliates of Mr. Icahn for an aggregate purchase price of
$38.0 million. The assets of Mid River consist of $38.0 million principal amount
of term loans of Panaco.
In
January 2005, we entered into an agreement to acquire TransTexas (subsequently
known as National Onshore), Panaco (subsequently known as National Offshore)
and
the membership interest in NEG Holdings other than that already owned by NEGI
for cash consideration of $180.0 million and depositary units valued, in the
aggregate, at $445.0 million, from affiliates of Mr. Icahn. The acquisition
of TransTexas was completed on April 6, 2005 for $180.0 million in cash. The
acquisition of Panaco and the membership interest in NEG Holdings was completed
on June 30, 2005 for 15,344,753 depository units, valued at $445.0
million.
As
discussed above, on November 21, 2006, our indirect wholly-owned subsidiary,
AREP O & G Holdings, consummated the sale of all of the issued and
outstanding membership interests of NEG Oil & Gas to SandRidge. See Note 5
for additional information regarding the sale.
Gaming
Las Vegas
Properties
In
January 2004, ACEP entered into an agreement to acquire Arizona Charlie’s
Decatur and Arizona Charlie’s Boulder, from Mr. Icahn and an entity
affiliated with Mr. Icahn, for aggregate consideration of $125.9 million.
The acquisition was completed on May 26, 2004.
Atlantic City
Property
In 1998
and 1999, we acquired an interest in The Sands, by purchasing the principal
amount of $31.4 million of first mortgage notes issued by GB Property Funding
Corp. or GB Property. The purchase price for the notes was $25.3 million. GB
Property was organized as a special purpose entity by Greate Bay Hotel and
Casino, Inc. or Greate Bay for the purpose of borrowing funds. Greate Bay was
a
wholly-owned subsidiary of GBH. An affiliate of the general partner also made
an
investment. A total of $185.0 million in notes were issued.
In
January 1998, GB Property and Greate Bay filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code to restructure its long-term debt.
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 $65.0 million by the Icahn affiliates in exchange for a 46% equity
interest in GBH, with bondholders (which also included the Icahn affiliates)
to
receive $110.0 million principal amount of new notes of GB Property First
Mortgage, or the GB Notes, and a 54% equity interest in GBH. Interest on the
GB
Notes was payable at the rate of 11% per annum on March 29 and September 29,
beginning March 29, 2001. The outstanding principal was due September 29, 2005.
The principal and interest that was due on September 29, 2005 was not paid.
On
September 29, 2005, GBH filed for bankruptcy for protection under Chapter 11
of
the Bankruptcy Code.
Until
July 22, 2004, Greate Bay was the owner and operator of The Sands. Atlantic
Coast was a wholly-owned subsidiary of Greate Bay which was a wholly-owned
subsidiary of GBH. ACE is a wholly-owned subsidiary of Atlantic Coast. Atlantic
Coast and ACE were formed in connection with a transaction (the “Transaction”),
which included a Consent Solicitation and Offer to Exchange in which holders
of
the GB Notes were given the opportunity to exchange such notes, on a dollar
for
dollar basis, for $110.0 million of 3% Notes due 2008 (the “3% Notes”),
F-33
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
6. Related Party
Transactions – (continued)
issued by Atlantic Coast.
The Transaction and the Consent Solicitation and Offer to Exchange were
consummated on July 22, 2004, and holders of $66.3 million of GB Notes exchanged
such notes for $66.3 million Atlantic Coast 3% Notes. Also on July 22, 2004,
in
connection with the Consent Solicitation and Offer to Exchange, the indenture
governing the GB Notes was amended to eliminate certain covenants and to release
the liens on the collateral securing such notes. The Transaction included,
among
other things, the transfer of substantially all of the assets of GBH to Atlantic
Coast.
The
Atlantic Coast 3% Notes are guaranteed by ACE. Also on July 22, 2004, in
connection with the consummation of the Transaction and the Consent Solicitation
and Offer to Exchange, GB Property and Greate Bay merged into GBH, with GBH
as
the surviving entity. In connection with the transfer of the assets and certain
liabilities of GBH, including the assets and certain liabilities of Greate
Bay,
Atlantic Coast issued 2,882,937 shares of common stock, par value $0.01 per
share, to Greate Bay which, following the merger of Greate Bay became the sole
asset of GBH. Substantially all of the assets and liabilities of GBH and Greate
Bay (with the exception of the remaining GB Notes and accrued interest thereon,
the Atlantic Coast Common Stock, and the related pro rata share of deferred
financing costs) were transferred to Atlantic Coast or ACE. As part of the
Transaction, an aggregate of 10,000,000 warrants were distributed on a pro
rata
basis to the stockholders of GBH upon the consummation of the Transaction.
Such
warrants allow the holders to purchase from Atlantic Coast at an exercise price
of $0.01 per share, an aggregate of 2,750,000 shares of Atlantic Coast Common
Stock and are only exercisable following the earlier of (a) either the 3% Notes
being paid in cash or upon conversion, in whole or in part, into Atlantic Coast
Common Stock, (b) payment in full of the outstanding principal of the GB Notes
exchanged, or (c) a determination by a majority of the board of directors of
Atlantic Coast (including at least one independent director of Atlantic Coast)
that the Warrants may be exercised. A gaming license to operate The Sands was
granted to ACE by the New Jersey Casino Control Commission.
On
December 27, 2004, we purchased $37.0 million principal amount of Atlantic
Coast
3% Notes from two Icahn affiliates for cash consideration of $36.0 million.
We
already owned $26.9 million principal amount of 3% Notes.
On May
17, 2005, we (1) converted $28.8 million in principal amount of 3% Notes into
1,891,181 shares of Atlantic Coast common stock and (2) exercised warrants
to
acquire 997,620 shares of Atlantic Coast common stock. Also on May 17, 2005,
affiliates of Mr. Icahn exercised warrants to acquire 1,133,284 shares of
Atlantic Coast common stock. Prior to May 17, 2005, GBH owned 100% of the
outstanding Common Stock of Atlantic Coast.
On June
30, 2005, we completed the purchase of 4,121,033 shares of common stock of
GBH
and 1,133,284 shares of Atlantic Coast from affiliates of Mr. Icahn in
consideration of 413,793 of our depositary units. The agreement provided that
up
to an additional 206,897 depositary units could be issued if Atlantic Coast
met
certain earnings targets during 2005 and 2006. The depositary units issued
in
consideration for the acquisitions were valued at $12.0 million. Based on the
2005 and 2006 operating performance of The Sands, no additional depositary
units
have been issued.
After
the
purchases from affiliates of Mr. Icahn, we owned 77.5% of the common stock
of GBH and 58.2% of the common stock of Atlantic Coast. As a result, we obtained
control of GBH and Atlantic Coast. The period of common control for GBH and
Atlantic Coast began prior to January 1, 2002. The financial statements give
retroactive effect to the consolidation of GBH and Atlantic Coast. We had
previously accounted for GBH on the equity method. On September 29, 2005, GBH
filed for bankruptcy.
On
November 17, 2006, we completed the sale to Pinnacle of the outstanding
membership interests in ACE which owns The Sands and 100% of the equity
interests in certain subsidiaries of AREH which own parcels of real estate
adjacent to The Sands, including the Traymore site. See Note 5 for additional
information regarding the sale.
F-34
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
6. Related Party
Transactions – (continued)
b. Administrative
Services
In 1997,
we entered into a license agreement with an affiliate of API for office space.
The license agreement expired in June 2005. In July 2005, we entered into a
new
license agreement with an API affiliate for the non-exclusive use of
approximately 1,514 square feet for which we pay monthly base rent of $13,000
plus 16.4% of certain “additional rent.” The license agreement expires in May
2012. Under the agreement, base rent is subject to increases in July 2008 and
December 2011. Additionally, we are entitled to certain annual rent credits
each
December beginning December 2005 and continuing through December 2011. For
the
years ended December 31, 2006, 2005 and 2004, we paid such affiliate $162,000,
$138,000 and $162,000, respectively, in connection with this licensing
agreement.
An
affiliate occupies a portion of certain office space leased by us. Monthly
payments from the affiliate for the use of the space began on October 12, 2006.
For the period beginning October 12, 2006 and ending December 31, 2006, we
received $17,000 for the use of such space.
For the
years ended December 31, 2006, 2005 and 2004, we paid $783,000, $1,016,000
and
$506,000, respectively, to XO Holdings, Inc., formerly known as XO
Communications, Inc., an affiliate of the general partner, for telecommunication
services.
An
affiliate of the general partner provided certain professional services to
us
for which we incurred charges from the affiliate of $344,986 and $81,600 for
the
years ended December 31, 2005 and 2004, respectively. No charges were incurred
in 2006.
We
provided certain professional services to an affiliate of the general partner
for which we charged $695,000, $324,548 and $80,000 for the years ended December
31, 2006, 2005 and 2004, respectively. In October 2006, an affiliate remitted
$355,691 to us as an advance payment for future services. As of December 31,
2006, current liabilities in the consolidated balance sheet included $287,380
to
be applied to our charges to the affiliate for services to be supplied to
it.
An
affiliate provided certain professional services to WPI for which it incurred
charges of approximately $218,000 for the year ended December 31, 2006.
c. Related Party
Debt
Transactions
In
connection with TransTexas’ plan of reorganization on September 1, 2003,
TransTexas as borrower, entered into the Restructured Oil and Gas (O&G) Note
with Thornwood, an affiliate of Mr. Icahn, as lender. The Restructured
O&G Note was a term loan in the amount of $32.5 million with interest at a
rate of 10% per annum. Interest was payable semi-annually commencing six months
after the effective date. Annual principal payments in the amount of $5.0
million was due on the first through fourth anniversary dates of the effective
date with the final principal payment of $12.5 million due on the fifth
anniversary of the effective date. The Restructured O&G Note was purchased
by us in December 2004 and is eliminated in consolidation.
During
fiscal year 2002, Fresca, LLC, which was acquired by American Casino in May
2004, entered into an unsecured line of credit in the amount of $25.0 million
with Starfire Holding Corporation, or Starfire, an affiliate of Mr. Icahn.
The outstanding balance, including accrued interest, was due and payable on
January 2, 2007. As of December 31, 2003, Fresca, LLC had $25.0 million
outstanding. The note bore interest on the unpaid principal balance from January
2, 2002 until maturity at the rate per annum equal to the prime rate, as
established by Fleet Bank, from time to time, plus 2.75%. Interest was payable
semi-annually in arrears on the first day of January and July, and at maturity.
The note was guaranteed by Mr. Icahn. The note was repaid during May 2004.
The interest rate at December 31, 2003 was 6.75%.
F-35
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
7. Investments and
Related Matters
Investments
consist of the following (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31, 2006
|
|
December
31, 2005
|
| |
|
Amortized
Cost
|
|
Carrying
Value
|
|
Amortized
Cost
|
|
Carrying
Value
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity and debt
securities
|
|
$
|
—
|
|
$
|
—
|
|
$
|
33,301
|
|
$
|
39,232
|
|
Other
investments
|
|
|
—
|
|
|
20,538
|
|
|
—
|
|
|
—
|
|
Total
current trading
|
|
|
—
|
|
|
20,538
|
|
|
33,301
|
|
|
39,232
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
|
|
—
|
|
|
—
|
|
|
3,346
|
|
|
3,346
|
|
Marketable
equity and debt securities
|
|
|
242,080
|
|
|
265,411
|
|
|
650,986
|
|
|
646,666
|
|
Other
securities
|
|
|
251,131
|
|
|
253,166
|
|
|
31,282
|
|
|
31,282
|
|
Total
current available for sale
|
|
|
493,211
|
|
|
518,577
|
|
|
685,614
|
|
|
681,294
|
|
Total
current investments
|
|
$
|
493,211
|
|
$
|
539,115
|
|
$
|
718,915
|
|
$
|
720,526
|
Proceeds
from the sales of available for sale securities were $726,807, $96,848 and
$82,300 for the years ended December 31, 2006, 2005 and 2004, respectively.
The
gross realized gains on available for sale securities sold for the years ended
December 31, 2006, 2005 and 2004 were $47,522, $8,552 and $37,200, respectively.
For purposes of determining gains and losses, the cost of securities is based
on
specific identification. Net unrealized holding gains (losses) on available
for
sale securities in the amount of $29,684, $(4,197) and $(9,535) for the years
ended December 31, 2006, 2005 and 2004, respectively, have been included in
accumulated other comprehensive income.
In the
third quarter of 2005, we began using the services of an unaffiliated third
party investment manager to manage certain fixed income investments. At December
31, 2006 and 2005, $163.7 million and $448.8 million, respectively, had been
invested at the discretion of such manager in a diversified portfolio consisting
predominantly of short-term investment grade debt securities. Investments
managed by the third party investment manager are classified as available for
sale securities in the accompanying consolidated balance sheets. As of December
31, 2006, accrued expenses and other current liabilities included $46.4 million
relating to unsettled trades of securities.
Included
in other securities are 12,842,000 shares of SandRidge’s common stock, received
as consideration for the sale of our Oil & Gas operations, and which are
valued at $231.2 million as of December 31, 2006. There is no readily available
market for such securities.
Investment in
ImClone Systems Incorporated
As
described in Note 2 above, in the fourth quarter of 2006 we changed our method
of accounting for our investment in ImClone Systems Incorporated to the equity
method of accounting. As a result, the financial statements of prior years
have
been adjusted to apply the new method retrospectively.
The effect of the change
increased our 2006 net income by $12.6 million. The financial statements for
2005 have been retrospectively adjusted for the change, which resulted in an
increase of net income for 2005 of $1.4 million. The cumulative effect of the
change resulted in an increase and decrease in our total partners’ equity by
$42.2 million and $2.9 million at December 31, 2006 and 2005, respectively,
as a
result of recording our proportionate share of ImClone’s net income, other
comprehensive income and other changes in ImClone’s stockholders’ equity.
F-36
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
7. Investments and
Related Matters – (continued)
At
December 31, 2006 and 2005 our carrying value of our equity investment in
ImClone was $164.3 million and $97.3 million, respectively. As of December
31,
2006, the market value of our ImClone shares held was $122.2 million. As of
September 30, 2006 our underlying equity in the net assets of ImClone was
approximately $36.3 million. While we recognize that the carrying value of
our
investment in ImClone as of December 31, 2006 is greater than the market value
of our shares held, we do not believe that this is an other than temporary
decline and accordingly no impairment has been recognized.
The
equity method of accounting requires an evaluation comparing the company’s
investment to the fair value of ImClone’s underlying net assets at each
acquisition date. Since the Company changed its method of accounting in the
fourth quarter of 2006, we have not yet been able to evaluate all of the factors
required in order to complete this analysis. We anticipate that such evaluation
will be completed in 2007.
The
combined results of operations and financial position of ImClone for the periods
indicated are as follows (in $000s):
|
|
|
|
|
|
|
|
| |
|
Nine
Months
Ended
September 30,
2006
|
|
Year
Ended
December 31, 2005
|
| |
|
|
|
|
|
|
|
Condensed
Income Statement Information:
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
545,684
|
|
$
|
383,673
|
|
Operating
Income
|
|
$
|
240,196
|
|
$
|
66,779
|
|
Net
Income
|
|
$
|
324,116
|
|
$
|
86,496
|
|
Condensed
Balance Sheet Information:
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
1,187,060
|
|
$
|
909,118
|
|
Non-Current
Assets
|
|
|
597,728
|
|
|
434,297
|
|
Total
Assets
|
|
$
|
1,784,788
|
|
$
|
1,343,415
|
|
Current
Liabilities
|
|
$
|
237,304
|
|
$
|
242,119
|
|
Non-Current
Liabilities
|
|
|
874,900
|
|
|
848,892
|
|
Equity
|
|
|
672,584
|
|
|
252,404
|
|
Total
Liabilities and Equity
|
|
$
|
1,784,788
|
|
$
|
1,343,415
|
Other
Investments
The
carrying value of other noncurrent investments was $13.4 million and $0.8
million as of December 31, 2006 and 2005, respectively. Included in other
securities is an investment of 4.4% of the common stock of Philip Services
Corp., an entity controlled by related parties. The investment has a cost basis
of $0.7 million, which is net of significant impairment charges taken in prior
years.
Margin Liability
on
Marketable Securities
At
December 31, 2005, a liability of $13.1 million was recorded related to
purchases of securities from a broker that had been made on margin. There was
no
margin liability outstanding at December 31, 2006. The margin liability is
secured by the securities we purchased and cannot exceed certain pre-established
percentages of the fair market value of the securities collateralizing the
liability. If the balance of the margin exceeds certain pre-established
percentages of the fair market value of the securities collateralizing the
liability, we will be subject to a margin call and required to fund the account
to return the margin balance to certain pre-established percentages of the
fair
market value of the securities collateralizing the liability.
F-37
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
8. Trade, Notes and
Other Receivables, Net
Trade,
notes and other receivables, net consist of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Trade
receivables – Home
Fashion
|
|
$
|
134,111
|
|
$
|
173,050
|
|
|
Allowance
for doubtful accounts – Home Fashion
|
|
|
(8,303
|
)
|
|
(8,313
|
)
|
|
Other
|
|
|
50,688
|
|
|
30,584
|
|
| |
|
$
|
176,496
|
|
$
|
195,321
|
|
9. Other Current
Assets
Other
current assets consist of the following (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
87,428
|
|
$
|
161,210
|
|
Other
|
|
|
47,559
|
|
|
53,650
|
| |
|
$
|
134,987
|
|
$
|
214,860
|
Restricted
cash is primarily composed of funds required as collateral for the outstanding
short security position. Additionally, there are restricted cash balances for
escrow deposits and funds held in connection with collateralizing letters of
credit. As of December 31, 2006, restricted cash included $50.8 million relating
to cash placed in escrow relating to our sale of ACE to Pinnacle.
10. Property, Plant
and Equipment, Net
Property,
plant and equipment consist of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Land
|
|
$
|
129,729
|
|
$
|
122,586
|
|
|
Buildings
and improvements
|
|
|
446,878
|
|
|
324,917
|
|
|
Machinery,
equipment and furniture
|
|
|
333,741
|
|
|
255,807
|
|
|
Assets
leased to others
|
|
|
123,398
|
|
|
141,997
|
|
|
Construction
in progress
|
|
|
90,672
|
|
|
69,669
|
|
| |
|
|
1,124,418
|
|
|
914,976
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(217,347
|
)
|
|
(165,264
|
)
|
| |
|
$
|
907,071
|
|
$
|
749,712
|
|
Depreciation
and amortization expense from continuing operations related to property, plant
and equipment for the years ended December 31, 2006, 2005 and 2004 was $65.3
million, $46.8 million and $28.8 million, respectively.
F-38
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
11. Other Non-Current
Assets
Other
non-current assets consist of the following (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Deferred
income taxes
|
|
$
|
48,976
|
|
$
|
51,509
|
|
Deferred
finance costs, net of accumulated amortization of $4,827 and $0 as
of
December 31, 2006 and 2005, respectively
|
|
|
11,684
|
|
|
6,544
|
|
Other
|
|
|
24,577
|
|
|
27,353
|
| |
|
$
|
85,237
|
|
$
|
85,406
|
12. Minority
Interests
Minority
interests consist of the following (in $000s):
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
WPI
|
|
$
|
178,843
|
|
$
|
247,015
|
|
Atlantic
Coast
|
|
|
70,563
|
|
|
57,584
|
|
NEGI
|
|
|
42,815
|
|
|
—
|
| |
|
$
|
292,221
|
|
$
|
304,599
|
13. Long-Term
Debt
Long-term
debt consists of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Senior
unsecured 7.125% notes due 2013 –
AREP
|
|
$
|
475,500
|
|
$
|
474,750
|
|
|
Senior
unsecured 8.125% notes due 2012 – AREP, net of discount
|
|
|
346,027
|
|
|
344,726
|
|
|
Senior
secured 7.85% notes due 2012 – ACEP
|
|
|
215,000
|
|
|
215,000
|
|
|
Borrowings
under credit facilities – ACEP
|
|
|
40,000
|
|
|
—
|
|
|
Borrowings
under credit facilities – NEG Oil & Gas
|
|
|
—
|
|
|
300,000
|
|
|
Mortgages
payable
|
|
|
109,289
|
|
|
81,512
|
|
|
Other
|
|
|
13,425
|
|
|
8,387
|
|
|
Total
long-term debt
|
|
|
1,199,241
|
|
|
1,424,375
|
|
|
Less:
current portion, including debt related to assets held for sale
|
|
|
(23,970
|
)
|
|
(324,155
|
)
|
| |
|
$
|
1,175,271
|
|
$
|
1,100,220
|
|
Senior unsecured
notes — AREP
Senior unsecured 7.125%
notes due 2013
On
February 7, 2005, AREP and American Real Estate Finance Corp., or AREF,
completed their offering of senior notes due 2013. AREF, a wholly-owned
subsidiary of the Company, was formed solely for the purpose of serving as
a
co-issuer of debt securities. AREF does not have any operations or assets and
does not have any revenues. The notes, in the aggregate principal amount of
$480.0 million, were priced at 100% of principal amount. The notes have a fixed
annual interest rate of 7 1/8%, which will be paid every six months on February
15 and August 15. The notes will mature on February 15, 2013. AREH is a
guarantor of the debt. No other subsidiaries guarantee payment on the
notes.
F-39
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
13. Long-Term Debt
–
(continued)
As
described below, the notes restrict the ability of AREP and AREH, subject to
certain exceptions, to, among other things: incur additional debt; pay dividends
or make distributions; repurchase depository units; create liens; and enter
into
transactions with affiliates.
Senior unsecured 8.125%
notes due 2012
On May
12, 2004, AREP and AREF closed on their offering of senior notes due 2012.
The
notes, in the aggregate principal amount of $353 million, were priced at 99.266%
of principal amount. The notes have a fixed annual interest rate of 8 1/8%,
which will be paid every six months on June 1 and December 1, commencing
December 1, 2004. The notes will mature on June 1, 2012. AREH is a guarantor
of
the debt. No other subsidiaries guarantee payment on the notes.
As
described below, the notes restrict the ability of AREP and AREH, subject to
certain exceptions, to, among other things; incur additional debt; pay dividends
or make distributions; repurchase depository units; create liens; and enter
into
transactions with affiliates.
Senior unsecured notes
restrictions and covenants
Both
issuances of our senior unsecured notes restrict the payment of cash
distributions, the purchase of equity interests or the purchase, redemption,
defeasance or acquisition of debt subordinated to the senior unsecured notes.
The notes also restrict the incurrence of debt or the issuance of disqualified
stock, as defined, with certain exceptions, provided that we may incur debt
or
issue disqualified stock if, immediately after such incurrence or issuance,
the
ratio of the aggregate principal amount of all outstanding indebtedness of
AREP
and its subsidiaries on a consolidated basis to the tangible net worth of AREP
and its subsidiaries on a consolidated basis would have been less than 1.75
to
1.0. As of December 31, 2006, such ratio was less than 1.75 to 1.0. Based on
this ratio, we and AREH could have incurred up to approximately $1.6 billion
of
additional indebtedness.
In
addition, both issuances of notes require that on each quarterly determination
date we and the guarantor of the notes (currently only AREH) maintain a minimum
ratio of cash flow to fixed charges each as defined, of 1.5 to 1.0, for the
four
consecutive fiscal quarters most recently completed prior to such quarterly
determination date. For the four quarters ended December 31, 2006, the ratio
of
cash flow to fixed charges was greater than 1.5 to 1.0.
The notes
also require, on each quarterly determination date, that the ratio of total
unencumbered assets, as defined, to the principal amount of unsecured
indebtedness, as defined, be greater than 1.5 to 1.0 as of the last day of
the
most recently completed fiscal quarter. As of December 31, 2006, such ratio
was
in excess of 1.5 to 1.0.
The notes
also restrict the creation of liens, mergers, consolidations and sales of
substantially all of our assets, and transactions with affiliates.
As of
December 31, 2006, we were in compliance with each of the covenants contained
in
our senior unsecured notes. We expect to be in compliance with each of the
debt
covenants for the period of at least twelve months from December 31, 2006.
AREP Senior Secured
Revolving Credit Facility
On August
21, 2006, we and AREP Finance as the Borrowers, and certain of our subsidiaries,
as Guarantors, entered into a credit agreement with Bear Stearns Corporate
Lending Inc., as Administrative Agent, and certain other lender parties. Under
the credit agreement, we are permitted to borrow up to $150.0 million, including
a $50.0 million sub-limit that may be used for letters of credit. Borrowings
under the agreement, which are based on our credit rating, bear interest at
LIBOR plus 1.0% to 2.0%. We pay an unused line fee of 0.25% to 0.5%. As of
December 31, 2006, there were no borrowings under the facility.
F-40
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
13. Long-Term Debt
–
(continued)
Obligations
under the credit agreement are guaranteed by and secured by liens on
substantially all of the assets of certain of our indirect wholly-owned holding
company subsidiaries. The credit agreement has a term of four years and all
amounts will be due and payable on August 21, 2010. The credit agreement
includes covenants that, among other things, restrict the creation of liens
and
certain dispositions of property by our wholly-owned holding company
subsidiaries that are guarantors. Obligations under the credit agreement are
immediately due and payable upon the occurrence of certain events of
default.
Senior secured
7.85% notes due 2012 — ACEP
In
January 2004, ACEP issued senior secured notes due 2012. The notes, in the
aggregate principal amount of $215.0 million, bear interest at the rate of
7.85%
per annum, which will be paid every six months, on February 1 and August
1.
ACEP’s
7.85% senior secured notes due 2012 restrict the payment of cash dividends
or
distributions by ACEP, the purchase of its equity interests, the purchase,
redemption, defeasance or acquisition of debt subordinated to ACEP’s notes and
investments as “restricted payments.” ACEP’s notes also prohibit the incurrence
of debt or the issuance of disqualified or preferred stock, as defined, by
ACEP,
with certain exceptions, provided that ACEP may incur debt or issue disqualified
stock if, immediately after such incurrence or issuance, the ratio of
consolidated cash flow to fixed charges (each as defined) for the most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional indebtedness
is incurred or disqualified stock or preferred stock is issued would have been
at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt
incurrence or issuance. As of December 31, 2006, such ratio was in excess of
2.0
to 1.0. The ACEP notes also restrict the creation of liens, the sale of assets,
mergers, consolidations or sales of substantially all of its assets, the lease
or grant of a license, concession, other agreements to occupy, manage or use
ACEP’s assets, the issuance of capital stock of restricted subsidiaries and
certain related party transactions. The ACEP notes allow it to incur
indebtedness, among other things, of up to $50.0 million under credit
facilities, non-recourse financing of up to $15.0 million to finance the
construction, purchase or lease of personal or real property used in its
business, permitted affiliate subordinated indebtedness (as defined), the
issuance of additional 7.85% senior secured notes due 2012 in an aggregate
principal amount not to exceed 2.0 times net cash proceeds received from equity
offerings and permitted affiliate subordinated debt, and additional indebtedness
of up to $10.0 million.
ACEP Senior Secured
Revolving Credit Facility
Effective
May 11, 2006, ACEP, and certain of ACEP’s subsidiaries, as Guarantors, entered
into an amended and restated credit agreement with Wells Fargo Bank N.A., as
syndication agent, Bear Stearns Corporate Lending Inc., as administrative agent,
and certain other lender parties. As of December 31, 2006, the interest rate
on
the outstanding borrowings under the credit facility was 6.85% per annum. The
credit agreement amends and restates, and is on substantially the same terms
as,
a credit agreement entered into as of January 29, 2004. Under the credit
agreement, ACEP will be permitted to borrow up to $60.0 million. Obligations
under the credit agreement are secured by liens on substantially all of the
assets of ACEP and its subsidiaries. The credit agreement has a term of four
years and all amounts will be due and payable on May 10, 2010. As of December
31, 2006, there were $40.0 million of borrowings under the credit agreement.
The
borrowings were incurred to finance a portion of the purchase price of the
Aquarius.
The
credit agreement includes covenants that, among other things, restrict the
incurrence of additional indebtedness by ACEP and its subsidiaries, the issuance
of disqualified or preferred stock, as defined, the creation of liens by ACEP
or
its subsidiaries, the sale of assets, mergers, consolidations or sales of
substantially all of ACEP’s assets, the lease or grant of a license or
concession, other agreements to occupy, manage or use ACEP’s assets, the
issuance of capital stock of restricted subsidiaries and certain related party
transactions. The credit agreement also requires that, as of the last date
of
each fiscal quarter, ACEP’s ratio of consolidated first lien debt to
consolidated cash flow not be more than 1.0 to 1.0. As of December 31, 2006,
such ratio was less than 1.0 to 1.0. As of December 31, 2006, ACEP was in
compliance with each of the covenants.
F-41
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
13. Long-Term Debt
–
(continued)
The
restrictions imposed by ACEP’s senior secured notes and the credit facility
likely will limit our receiving payments from the operations of our hotel and
gaming properties.
NEG Oil & Gas
LLC Senior Secured Revolving Credit Facility
On
December 22, 2005, NEG Oil & Gas entered into a credit facility, dated as of
December 20, 2005, with Citicorp USA, Inc. as administrative agent, Bear Stearns
Corporate Lending Inc., as syndication agent, and certain other lender
parties.
Under
the
credit facility, NEG Oil & Gas was permitted to borrow up to $500.0 million.
Borrowings under the revolving credit facility was subject to a borrowing base
determination based on the oil and gas properties of NEG Oil & Gas and its
subsidiaries and the reserves and production related to those properties.
Obligations under the credit facility were secured by liens on all of the assets
of NEG Oil & Gas and its wholly-owned subsidiaries. The credit facility had
a term of five years and all amounts were due and payable on December 20, 2010.
Advances under the credit facility will be in the form of either base rate
loans
or Eurodollar loans, each as defined. At December 31, 2005, the interest rate
on
the outstanding amount under the credit facility was 6.44%. Commitment fees
for
the unused credit facility range from 0.375% to 0.50% and are payable
quarterly.
NEG Oil
& Gas used the proceeds of the initial $300.0 million borrowings to (1)
purchase the existing obligations of its indirect subsidiary, NEG Operating,
from the lenders under NEG Operating’s credit facility with Mizuho Corporate
Bank, Ltd., as administrative agent; (2) repay a National Onshore loan borrowed
from AREP of approximately $85.0 million used to purchase properties in the
Minden Field; (3) pay a distribution to AREP of $78.0 million; and (4) pay
transaction costs.
As
discussed above, on November 21, 2006, our indirect wholly-owned subsidiary,
AREP O & G Holdings LLC, consummated the sale of all of the issued and
outstanding membership interests of NEG Oil & Gas LLC to SandRidge Energy,
Inc. for consideration consisting of $1.025 billion in cash, 12,842,000 shares
of SandRidge’s common stock, valued at $18 per share on the date closing, and
the repayment by SandRidge of the outstanding borrowings under the NEG Oil
&
Gas $300.0 million credit facility.
Mortgages
Payable
Mortgages
payable, all of which are nonrecourse to us, are summarized below. The mortgages
bear interest at rates between 4.97 and 7.99% and have maturities between
September 1, 2008 and July 1, 2016. The following is a summary of mortgages
payable (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Total
mortgages
|
|
$
|
109,289
|
|
$
|
81,512
|
|
|
Less
current portion and mortgages on properties held for sale
|
|
|
(18,174
|
)
|
|
(18,104
|
)
|
| |
|
$
|
91,115
|
|
$
|
63,408
|
|
On June
30, 2006, certain of our indirect subsidiaries engaged in property development
and associated resort activities entered into a $32.5 million loan agreement
with Textron Financial Corp. The loan is secured by a mortgage on our New
Seabury golf course and resort in Mashpee, Massachusetts. The loan bears
interest at the rate of 7.96% per annum and matures in five years with a balloon
payment due of $30.0 million. Annual debt service payments of $3.0 million
are
required, which are payable in monthly installment amounts based on a 25-year
amortization schedule.
F-42
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
13. Long-Term Debt
–
(continued)
WestPoint Home
Secured Revolving Credit Agreement
On June
16, 2006, WestPoint Home, Inc., an indirect wholly-owned subsidiary of WPI,
entered into a $250.0 million loan and security agreement with Bank of America,
N.A., as Administrative Agent and lender. On September 18, 2006, The CIT
Group/Commercial Services, Inc., General Electric Capital Corporation and Wells
Fargo Foothill, LLC were added as lenders under this credit agreement. Under
the
five-year agreement, borrowings are subject to a monthly borrowing base
calculation and include a $75.0 million sub-limit that may be used for letters
of credit. Borrowings under the agreement bear interest, at the election of
WestPoint Home, either at the prime rate adjusted by an applicable margin
ranging from minus 0.25% to plus 0.50% or LIBOR adjusted by an applicable margin
ranging from plus 1.25% to 2.00%. WestPoint Home pays an unused line fee of
0.25% to 0.275%. Obligations under the agreement are secured by WestPoint Home’s
receivables, inventory and certain machinery and equipment.
The
agreement contains covenants including, among others, restrictions on the
incurrence of indebtedness, investments, redemption payments, distributions,
acquisition of stock, securities or assets of any other entity and capital
expenditures. However, WestPoint Home is not precluded from effecting any of
these transactions if excess availability, after giving effect to such
transaction, meets a minimum threshold.
As of
December 31, 2006, there were no borrowings under the agreement, but there
were
outstanding letters of credit of approximately $40.1 million, the majority
of
which relate to trade obligations.
Maturities
The
following is a summary of the maturities of our debt obligations (in
$000s):
|
|
|
|
|
|
2007
|
|
$
|
23,970
|
|
2008
|
|
|
29,227
|
|
2009
|
|
|
6,670
|
|
2010
|
|
|
1,684
|
|
2011
|
|
|
31,446
|
|
2012
– 2017
|
|
|
1,115,963
|
| |
|
$
|
1,208,960
|
14. Other Income
(Expense), Net
Other
Income (Expense), net, is comprised of the following (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains on sales of marketable
securities
|
|
$
|
69,099
|
|
$
|
10,120
|
|
$
|
40,159
|
|
|
Unrealized
gains (losses) on marketable securities
|
|
|
21,288
|
|
|
9,856
|
|
|
(4,812
|
)
|
|
Net
realized losses on securities sold short
|
|
|
(17,146
|
)
|
|
(37,058
|
)
|
|
—
|
|
|
Unrealized
gains (losses) on securities sold short
|
|
|
18,067
|
|
|
(4,178
|
)
|
|
(18,807
|
)
|
|
Gain
on sale assets
|
|
|
3,372
|
|
|
201
|
|
|
5,262
|
|
|
Other
|
|
|
4,597
|
|
|
8,198
|
|
|
2,651
|
|
| |
|
$
|
99,277
|
|
$
|
(12,861
|
)
|
$
|
24,453
|
|
F-43
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
15. Segment
Reporting
Through
the second quarter of 2006, we maintained the following six reportable segments:
(1) Oil and Gas; (2) Gaming; (3) Rental Real Estate; (4) Property Development;
(5) Associated Resort Activities; and (6) Home Fashion. Our three real estate
related operating and reportable segments are all individually immaterial and
have been aggregated for purposes of the accompanying consolidated balance
sheets and statements of operations. WPI markets a broad range of manufactured
and sourced bed, bath and basic bedding products, including sheets, pillowcases,
bedspreads, quilts, comforters and duvet covers, bath towels, bath rugs, beach
towels, shower curtains, bath accessories, bedskirts, bed pillows, flocked
blankets, woven blankets and throws, and heated blankets and mattress
pads.
As
described above, on November 21, 2006, we sold all of our Oil and Gas operations
to SandRidge Energy, Inc. As a result, our Oil and Gas operations are now
classified as discontinued operations and thus are not considered a reportable
segment of our continuing operations. We now maintain the five remaining
reportable segments.
We assess
and measure segment operating results based on segment earnings from operations
as disclosed below. Segment earnings from operations are not necessarily
indicative of cash available to fund cash requirements nor synonymous with
cash
flow from operations. As discussed above, the terms of financings for the
Gaming, Home Fashion and Resorts segments impose restrictions on their ability
to transfer funds to us, including restrictions on dividends, distributions,
loans and other transactions.
Our
operating businesses are organized based on the nature of products and services
provided. The accounting policies of the segments are the same as those
described in Note 2.
F-44
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
15. Segment Reporting
– (continued)
The
revenues, net segment operating income, assets and capital expenditures for
each
of the reportable segments are summarized as follows for the years ended
December 31, 2006, 2005 and 2004 (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
385,699
|
|
$
|
327,982
|
|
$
|
299,981
|
|
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
Property
development
|
|
|
90,955
|
|
|
58,270
|
|
|
27,073
|
|
|
Rental
real estate
|
|
|
14,913
|
|
|
14,382
|
|
|
16,566
|
|
|
Resort
operations
|
|
|
28,707
|
|
|
27,647
|
|
|
17,918
|
|
|
Total
real estate
|
|
|
134,575
|
|
|
100,299
|
|
|
61,557
|
|
|
Home
Fashion
|
|
|
957,656
|
|
|
472,681
|
|
|
—
|
|
|
Total
revenues
|
|
$
|
1,477,930
|
|
$
|
900,962
|
|
$
|
361,538
|
|
|
Net
segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
58,715
|
|
$
|
67,027
|
|
$
|
48,862
|
|
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
Property
development
|
|
|
17,914
|
|
|
9,591
|
|
|
4,124
|
|
|
Rental
real estate
|
|
|
9,898
|
|
|
9,794
|
|
|
8,395
|
|
|
Resort
operations
|
|
|
142
|
|
|
(1,598
|
)
|
|
(643
|
)
|
|
Total
real estate
|
|
|
27,954
|
|
|
17,787
|
|
|
11,876
|
|
|
Home
Fashion
|
|
|
(150,637
|
)
|
|
(22,429
|
)
|
|
—
|
|
|
Total
segment earnings (loss)
|
|
|
(63,968
|
)
|
|
62,385
|
|
|
60,738
|
|
|
Holding
Company costs(i)
|
|
|
(25,822
|
)
|
|
(17,142
|
)
|
|
(4,741
|
)
|
|
Total
operating income (loss)
|
|
|
(89,790
|
)
|
|
45,243
|
|
|
55,997
|
|
|
Interest
expense
|
|
|
(100,514
|
)
|
|
(85,418
|
)
|
|
(42,209
|
)
|
|
Interest
income
|
|
|
52,656
|
|
|
42,791
|
|
|
42,145
|
|
|
Other
income (expense)
|
|
|
99,277
|
|
|
(12,861
|
)
|
|
24,453
|
|
|
Equity
on earnings of affiliate
|
|
|
12,620
|
|
|
1,375
|
|
|
—
|
|
|
Income
tax expense
|
|
|
(13,271
|
)
|
|
(18,170
|
)
|
|
(10,099
|
)
|
|
Minority
Interest
|
|
|
68,173
|
|
|
10,140
|
|
|
—
|
|
|
Income
(loss) from continuing operations
|
|
$
|
29,151
|
|
$
|
(16,900
|
)
|
$
|
70,287
|
|
——————
(i)
Holding
Company costs include general and administrative expenses and acquisition (legal
and professional) costs at the holding company level. Certain real estate
expenses are included in the Holding Company to the extent they relate to
administration of our various real estate holdings. Selling, general and
administrative expenses of the segments are included in their respective
operating expenses in the accompanying consolidated statements of
operations.
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
552,753
|
|
$
|
469,776
|
|
Real
estate
|
|
|
382,220
|
|
|
415,361
|
|
Home
Fashion
|
|
|
806,000
|
|
|
750,281
|
|
Subtotal
|
|
|
1,740,973
|
|
|
1,635,418
|
|
Assets
held for sale
|
|
|
47,503
|
|
|
1,177,398
|
|
Reconciling
items(ii)
|
|
|
2,463,167
|
|
|
1,155,403
|
|
Total
assets
|
|
$
|
4,251,643
|
|
$
|
3,968,219
|
F-45
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
15. Segment
Reporting – (continued)
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization (D&A):
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
27,620
|
|
$
|
22,305
|
|
$
|
23,516
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
Rental
real estate
|
|
|
2,010
|
|
|
1,944
|
|
|
2,281
|
|
Property
Development
|
|
|
374
|
|
|
—
|
|
|
—
|
|
Resort
operations
|
|
|
3,666
|
|
|
3,158
|
|
|
2,989
|
|
Total
real estate
|
|
|
6,050
|
|
|
5,102
|
|
|
5,270
|
|
Home
Fashion
|
|
|
31,584
|
|
|
19,406
|
|
|
—
|
|
D&A
in operating expenses
|
|
|
65,254
|
|
|
46,813
|
|
|
28,786
|
|
Amortization
in interest expense
|
|
|
5,691
|
|
|
1,375
|
|
|
189
|
| |
|
$
|
70,945
|
|
$
|
48,188
|
|
$
|
28,975
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
46,852
|
|
$
|
28,219
|
|
$
|
14,009
|
|
Rental
real estate
|
|
|
1,262
|
|
|
187
|
|
|
11,783
|
|
Property
Development
|
|
|
—
|
|
|
—
|
|
|
67,843
|
|
Resort
operations
|
|
|
2,115
|
|
|
2,256
|
|
|
15,897
|
|
Home
Fashion
|
|
|
11,109
|
|
|
5,718
|
|
|
—
|
| |
|
$
|
61,338
|
|
$
|
36,380
|
|
$
|
109,532
|
——————
(ii)
Reconciling
items relate principally to cash and investments of the Holding Company.
16. Income
Taxes
The
difference between the book basis and the tax basis of our net assets, not
directly subject to income taxes, is as follows (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Book
basis of AREH net assets excluding corporate
entities
|
|
$
|
1,954,251
|
|
$
|
2,156,608
|
|
|
Book/tax
basis difference
|
|
|
(15,084
|
)
|
|
(559,043
|
)
|
|
Tax
basis of net assets
|
|
$
|
1,939,167
|
|
$
|
1,597,565
|
|
Our
corporate subsidiaries recorded the following income tax (expense) benefit
attributable to our taxable subsidiaries (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(13,269
|
)
|
$
|
(8,323
|
)
|
$
|
(2,670
|
)
|
|
Deferred
|
|
|
(2
|
)
|
|
(9,847
|
)
|
|
(7,429
|
)
|
| |
|
$
|
(13,271
|
)
|
$
|
(18,170
|
)
|
$
|
(10,099
|
)
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(28,589
|
)
|
$
|
(2,639
|
)
|
$
|
(1,346
|
)
|
|
Deferred
|
|
|
1,711
|
|
|
(283
|
)
|
|
(6,867
|
)
|
| |
|
$
|
(26,878
|
)
|
$
|
(2,922
|
)
|
$
|
(8,213
|
)
|
F-46
AMERICAN REAL ESTATE HOLDINGS
LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
16. Income Taxes
–
(continued)
In 2006,
the income tax expense attributable to income from discontinued operations
was
$4.2 million and the income tax expense attributable to the gain on sale of
assets was $22.6 million.
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) is as follows (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Property,
plant and
equipment
|
|
$
|
63,308
|
|
$
|
26,219
|
|
|
Net
operating loss
|
|
|
70,504
|
|
|
54,583
|
|
|
Other
|
|
|
17,507
|
|
|
21,802
|
|
| |
|
|
151,319
|
|
|
102,604
|
|
|
Valuation
allowance
|
|
|
(95,754
|
)
|
|
(48,788
|
)
|
|
Net
deferred tax assets
|
|
$
|
55,565
|
|
$
|
53,816
|
|
|
Less:
Current portion
|
|
|
(6,589
|
)
|
|
(2,307
|
)
|
|
Deferred
tax asset – Non-current
|
|
$
|
48,976
|
|
$
|
51,509
|
|
A
reconciliation of the effective tax rate on continuing operations as shown
in
the consolidated statement of operations to the federal statutory rate is as
follows:
|
|
|
|
|
|
|
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
Federal
statutory
rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
|
Valuation
allowance
|
|
(104.1
|
)
|
(110.9
|
)
|
(2.3
|
)
|
|
Income
not subject to taxation
|
|
15.4
|
|
(137.6
|
)
|
(22.0
|
)
|
|
Other
|
|
2.1
|
|
8.6
|
|
1.9
|
|
| |
|
(51.6
|
)%
|
(204.9
|
)%
|
12.6
|
%
|
For the
year ended December 31, 2006, the valuation allowance on deferred tax assets
increased approximately $47.0 million. The increase is primarily attributable
to
an $81.5 million increase attributable to the additional valuation allowance
established on the deferred tax assets of WPI, offset by a $25.7 million
reversal of the valuation allowance at Atlantic Coast, and an $8.8 million
reversal of the valuation allowance at NEG.
Gaming
Segment
SFAS
No.
109 requires that a “more likely than not” criterion be applied when evaluating
the realizability of a deferred tax asset. As of December 31, 2005, given
Atlantic Coast’s history of losses for income tax purposes and certain other
factors, Atlantic Coast had established a valuation allowance of $27.7 million
on its deferred tax assets. However, at December 31, 2006, based on various
factors including the sale of its gaming operations and the future taxable
income projections from the reinvestment of the sales proceeds, Atlantic Coast
determined that it was more likely than not that a significant portion of
the deferred tax assets will be realized and removed $25.7 million of the
valuation allowance.
At
December 31, 2006, Atlantic Coast had federal net operating loss carryforwards
totaling approximately $41.7 million, which will expire in the years 2023
through 2025. We also had New Jersey net operating loss carryforwards totaling
approximately $0.6 million as of December 31, 2006, which will begin expiring
in
the year 2012. Additionally, Atlantic Coast had general business credit
carryforwards of approximately $1.4 million which expire in 2009 through 2026,
and New Jersey alternative minimum assessment (AMA) credit carryforwards of
approximately $1.9 million, which can be carried forward indefinitely.
F-47
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
16. Income Taxes
–
(continued)
Oil and Gas
Operations
As
of December 31, 2005, NEGI had established a valuation allowance of
approximately $8.8 million due to the uncertainty that it would generate enough
future taxable income in order to utilize all of its deferred tax assets. During
the year ended December 31, 2006, NEGI generated enough taxable income,
primarily from the gain on its sale of its interest in NEG Holdings, to utilize
all of its net operating loss carryforwards, and as of December 31, 2006 has
no
remaining deferred tax assets. Accordingly, during the year ended December
31,
2006, the valuation allowance of $8.8 million was also reversed.
17. Commitments and
Contingencies
We
are from time to time parties to various legal proceedings arising out of our
businesses. We believe however, that other than the proceedings discussed below,
there are no proceedings pending or threatened against us which, if determined
adversely, would have a material adverse effect on our business, financial
condition, results of operations or liquidity.
Lear
Corporation
We
have been named as a defendant in various actions recently filed in connection
with our agreement and plan of merger to acquire Lear Corporation (See Note
20).
The following actions have been filed in the Court of Chancery of State of
Delaware, New Castle County; Market Street Securities, Inc. v. Rossiter, et
al; Harry Massie, Jr. v. Lear Corporation, et al; and Emilio Valentine v. Lear
Corporation, et al. Some of the actions also name certain of our affiliates,
AREP Car Holdings, Corp. and AREP Car Acquisition Corp., and one of our
directors as defendants. The above referenced actions generally allege that
members of Lear’s board of directors breached their fiduciary duties to Lear and
that we, and in some cases our named affiliates, aided and abetted the Lear
directors. All of these cases were filed in February 2007 and thus are in the
very preliminary stages. We intend to vigorously defend against these
claims.
WPI
Litigation
In
November and December 2005, the U.S. District Court for the Southern District
of
New York rendered a decision in Contrarian Funds Inc. v. WestPoint Stevens,
Inc. et al., and issued orders reversing certain provisions of the
Bankruptcy Court order, or the Sale Order, pursuant to which we acquired our
ownership of a majority of the common stock of WPI. WPI acquired substantially
all of the assets of WestPoint Stevens, Inc. On April 13, 2006, the Bankruptcy
Court entered a remand order, or the Remand Order, which provides, among other
things, that all of the shares of common stock and rights to acquire shares
of
common stock of WPI issued to us and the other first lien lenders or held in
escrow pursuant to the Sale Order constituted “replacement collateral”, other
than 5,250,000 shares of common stock that we acquired for cash. The 5,250,000
shares represent approximately 27% of the 19,498,389 shares of common stock
of
WPI now outstanding. According to the Remand Order, we would share pro
rata with the other first lien lenders in proceeds realized from the
disposition of the replacement collateral and, to the extent there is remaining
replacement collateral after satisfying first lien lender claims, we would
share
pro rata with the other second lien lenders in any further proceeds. We
were holders of approximately 39.99% of the outstanding first lien debt and
approximately 51.21% of the outstanding second lien debt. On April 13, 2006,
the
Bankruptcy Court also entered an order staying the Remand Order pending appeal.
The parties filed cross-appeals of the Remand Order and Contrarian Funds and
certain other first lien lenders, or the Contrarian Group, filed a motion to
lift the stay of the Remand Order pending appeal. Oral argument was held in
the
District Court on October 19, 2006. As of the date hereof, no decision has
been
issued.
On
December 11, 2006, the Contrarian Group filed a motion in the District Court
seeking a temporary restraining order, or the NY TRO, restraining WPI from
proceeding with a stockholders’ meeting scheduled for December 20, 2006, which
was to consider corporate actions relating to a proposed offering of $200
million of preferred stock of WPI, and for related relief. The District Court
held a hearing on December 15, 2006, at which it entered an order denying the
Contrarian Group’s application for the NY TRO.
F-48
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
17. Commitments and
Contingencies – (continued)
On
December 18, 2006, the Contrarian Group filed an action in the Court of Chancery
of the State of Delaware, New Castle County, Contrarian Funds, LLC, et al v.
WestPoint International Inc., et al., seeking, among other things, a
temporary order restraining the stockholders’ meeting and the preferred stock
offering. The application was denied by order dated December 19, 2006. The
stockholders’ meeting took place on December 20, 2006, the preferred stock
offering was approved, and other corporate actions were taken. We purchased
all
of the $200.0 million of preferred stock.
On
January 19, 2007, Beal Bank and the Contrarian Group filed an Amended Complaint,
captioned Beal Bank, S.S.B. et al v. WestPoint International, Inc., et
al. Plaintiffs seek, among other relief, an order declaring that WPI is obliged
to register the common stock (other than the 5,250,000 shares purchased by
us)
in Beal Bank’s name, an order declaring certain corporate governance changes
implemented in 2005 invalid, an order declaring invalid the actions taken at
the
December 20, 2006 stockholders’ meeting and an order to “unwind” the issuance of
the preferred stock, or, alternatively, directing that such preferred stock
be
held in trust. The Delaware action remains pending and we intend to vigorously
defend against such claims.
We
currently own approximately 67.7% of the outstanding shares of common stock
and
100% of the preferred stock of WPI. As a result of the District Court’s order in
the Bankruptcy case, the proceedings on remand, and the proceedings in the
Delaware action, our percentage of the outstanding shares of common stock of
WPI
could be reduced to less than 50% and perhaps substantially less and our
ownership of the preferred stock of WPI could also be affected. If we were
to
lose control of WPI, it could adversely affect the business and prospects of
WPI
and the value of our investment in it. In addition, we consolidated the balance
sheet of WPI as of December 31, 2006 and WPI’s results of operations for the
period from the date of acquisition through December 31, 2006. If we were to
own
less than 50% of the outstanding common stock or the challenge to our preferred
stock ownership is successful, we would have to evaluate whether we should
consolidate WPI and if so our financial statements could be materially different
than as presented as of December 31, 2006 and December 31, 2005 and for the
periods then ended.
We cannot
predict the outcome of these proceedings or the ultimate impact on our
investment in WPI or the business prospects of WPI.
GBH
On
September 29, 2005, GBH filed a voluntary petition for bankruptcy relief under
Chapter 11 of the Bankruptcy Code. As a result of this filing, we determined
that we no longer control GBH for accounting purposes, and deconsolidated our
investment in GBH effective September 30, 2005.
An
Official Committee of Unsecured Creditors, or the Committee, of GBH, was formed
and, on October 13, 2006, was granted standing by the Bankruptcy Court to
commence litigation in the name of GBH against us, ACE, Atlantic Coast and
other
entities affiliated with Carl C. Icahn, as well as the directors of GBH. The
Committee challenged the transaction in July 2004 that, among other things,
resulted in the transfer of The Sands to ACE, a wholly owned subsidiary of
Atlantic Coast, the exchange by certain holders of GBH’s 11% notes for Atlantic
Coast 3% senior secured convertible notes due 2008, or the 3% notes, the
issuance to the holders of GBH’s common stock of warrants allowing the holders
to purchase shares of Atlantic Coast common stock and, ultimately, our ownership
of approximately 67.6% of the outstanding shares of Atlantic Coast common stock
and ownership by GBH ^ of approximately 30.7% of such stock. We also maintained
ownership of approximately 77.5% of the outstanding shares of GBH common stock.
The Committee originally filed an objection to the allowance of our claims
against GBH. The Bankruptcy Court placed the consideration of the Committee’s
Proposed Plan of Liquidation and Disclosure Statement in abeyance until the
resolution of the proposed litigation.
F-49
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
17. Commitments and
Contingencies – (continued)
Additionally,
on September 2, 2005, Robino Stortini Holdings, LLC, or RSH, which claimed
to
own beneficially 1,652,590 shares of common stock of GBH, filed a complaint
in
the Court of Chancery of the State of Delaware against GBH and its Board of
Directors seeking appointment of a custodian and receiver for GBH and a
declaration that the director defendants breached their fiduciary duties.
During
the fourth quarter of 2006, we and other entities affiliated with Mr. Icahn
entered into a term sheet with the Committee, GBH and RSH which outlined the
resolution of claims relating to the July 2004 transactions. The provisions
of
the term sheet were incorporated in the Committee’s Eighth Modified Chapter 11
Plan of Liquidation of GBH. On January 30, 2007, the Bankruptcy Court approved
the plan. On February 22, 2007, in accordance with the plan, we acquired (1)
all
of the Atlantic Coast common stock owned by GBH for a cash payment of
approximately $52.0 million and in satisfaction of all claims arising under
the
Loan and Security Agreement, dated as of July 25, 2005, between GBH and us
and
(2) all of the warrants to acquire Atlantic Coast common stock and the Atlantic
Coast common stock owned by RSH for a cash payment of $3.7 million. As a result,
Atlantic coast is our indirect wholly-owned subsidiary. In accordance with
the
Plan, GBH used the $52.0 million to pay amounts owed to its creditors, including
the holders of GBH’s 11% notes and holders of administrative claims and to
establish an approximate $330,000 fund to be distributed pro rata to holders
of
equity interests in GBH other than us and other Icahn affiliated entities.
In
addition, we and other Icahn affiliated entities received releases of all direct
and derivative claims that could be asserted by GBH, its creditors and
stockholders, including RSH. All issues relating to GBH have now been resolved.
See Note 20, Subsequent Events.
Leases
Future minimum lease
payments under operating leases and capital leases with initial or remaining
terms of one or more years consist of the following at December 31, 2006 (in
$000s):
|
|
|
|
|
|
|
|
| |
|
Operating
Leases
|
|
Capital
Leases
|
| |
|
|
|
|
|
|
|
2007
|
|
$
|
18,872
|
|
$
|
660
|
|
2008
|
|
|
16,121
|
|
|
660
|
|
2009
|
|
|
13,102
|
|
|
963
|
|
2010
|
|
|
9,921
|
|
|
85
|
|
2011
|
|
|
6,928
|
|
|
85
|
|
Thereafter
|
|
|
31,974
|
|
|
7,233
|
|
Total
minimum lease payments
|
|
$
|
96,918
|
|
|
9,686
|
|
Less
imputed interest costs
|
|
|
|
|
|
6,860
|
|
Present
value of net minimum capital lease
payments
|
|
|
|
|
$
|
2,826
|
Other
In the
ordinary course of business, we, our subsidiaries and other companies in which
we invest are parties to various legal actions. In management’s opinion, the
ultimate outcome of such legal actions will not have a material effect on our
consolidated financial statements taken as a whole.
18. Employee Benefit
Plans
Employees
of our subsidiaries who are members of various unions are covered by
union-sponsored, collectively bargained, multi-employer health and welfare
and
defined benefit pension plans. Our subsidiaries recorded expenses for such
plans
of $14.0 million, $14.7 million and $13.3 million for the years ended December
31, 2006, 2005 and 2004, respectively.
F-50
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
18. Employee Benefit
Plans – (continued)
We and
certain of our subsidiaries have retirement savings plans under Section 401(k)
of the Internal Revenue Code covering our non-union employees. The plans allow
employees to defer, within prescribed limits, a portion of their income on
a
pre-tax basis through contributions to the plans. We currently match the
deferrals based upon certain criteria, including levels of participation by
our
employees. We recorded charges for matching contributions of $1,197,000,
$824,000 and $840,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
19. Fair Value of
Financial Instruments
The
estimated fair values of our financial instruments as of December 31, 2006
and
2005 are as follows (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Carrying
Value
|
|
Fair
Value
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
716,797
|
|
$
|
818,567
|
|
$
|
674,613
|
|
$
|
834,413
|
|
Long-term
debt
|
|
|
1,175,271
|
|
|
1,100,220
|
|
|
1,180,083
|
|
|
1,125,377
|
In
determining fair value of financial instruments, we used quoted market prices
when available. For instruments where quoted market prices were not available,
we estimated the present values utilizing current risk adjusted market rates
of
similar instruments. The carrying values of cash and cash equivalents, accounts
receivable and payable, other accruals, securities sold under agreements to
repurchase and other liabilities are deemed to be reasonable estimates of their
fair values because of their short-term nature.
Considerable
judgment is necessarily required in interpreting market data used to develop
the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value.
20. Subsequent
Events
Debt
Offering
On
January 16, 2007, we issued $500.0 million principal amount of 7 1/8% senior
notes due 2013. The notes were issued pursuant to an indenture dated February
7,
2005, between us, as issuer, AREP Finance as co-issuer, AREH, as Guarantor,
and
Wilmington Trust Company, as trustee. The notes were issued by us at 99.5%
of
par or a 0.5% discount and the amount paid to us included accrued interest
from
August 15, 2006 through the issue date. The notes have a fixed annual interest
rate of 7 1/8% per annum, which will be paid every six months on February 15
and
August 15 commencing on February 15, 2007. The notes will mature on February
15,
2013.
Potential
Acquisition of Lear Corporation
On
February 9, 2007, we entered into an agreement and plan of merger pursuant
to
which we would acquire Lear Corporation for aggregate consideration of
approximately $5.2 billion, including the assumption of debt. Lear is a publicly
traded company that provides automotive interior systems worldwide. Our
agreement with Lear permits Lear to solicit proposals from other potential
purchasers for 45 days after the signing of the agreement, until March 26,
2007,
after which Lear may continue discussions with any party that has made a bona
fide acquisition proposal and respond to unsolicited acquisition proposals
until
Lear’s stockholders approve the transaction with us. Mr. Icahn beneficially
owns approximately 15.8% of Lear’s outstanding common stock.
Consummation
of the Merger is subject to various conditions, including receipt of the
affirmative vote of the holders of a majority of the outstanding shares of
Lear,
antitrust approvals, and other customary closing conditions. Mr. Icahn
beneficially owns approximately 15% of Lear’s outstanding common stock.
F-51
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006, 2005 and
2004
20. Subsequent Events
– (continued)
On
February 8, 2007, our subsidiary, AREP Car Holdings Corp. entered into a
commitment letter with Bank of America, N.A. and Banc of America Securities
LLC,
pursuant to which Bank of America will act as the initial lender under two
senior secured credit facilities in an aggregate amount of $3.6 billion,
consisting of a $1.0 billion senior secured revolving facility and a $2.6
billion senior secured term loan B facility. The credit facilities, along with
cash on hand, are intended to refinance and replace Lear’s existing credit
facilities and to fund the transactions contemplated by the merger.
Settlement of
GBH
Bankruptcy Proceedings
On
January 30, 2007, the Eighth Modified Chapter 11 Plan of Liquidation of GBH
was
approved. On February 22, 2007, in accordance with the plan, we acquired (1)
all
of the Atlantic Coast common stock owned by GBH for a cash payment of
approximately $52.0 million and in satisfaction of all claims arising under
the
Loan and Security Agreement, dated as of July 25, 2005, between GBH and us
and
(2) all of the warrants to acquire Atlantic Coast common stock and the Atlantic
Coast common stock owned by RSH for a cash payment of $3.7 million. As a result,
Atlantic Coast is our indirect wholly-owned subsidiary. In accordance with
the
plan, GBH used the $52.0 million to pay amounts owed to its creditors, including
the holders of GBH’s 11% notes and holders of administrative claims and to
establish an approximate $330,000 fund to be distributed pro rata to
holders of equity interests in GBH other than us and other Icahn affiliated
entities. In addition, we and other Icahn affiliated entities received releases
of all direct and derivative claims that could be asserted by GBH, its creditors
and stockholders, including RSH. We expect to record a gain of $18 million
in
the first quarter of 2007 in connection with the settlement of these claims.
All
claims relating to GBH asserted by its creditors and RSH have now been
resolved.
Declaration of
Dividend on Depositary Units
On
February 27, 2007, the Board of Directors of AREP approved payment of a
quarterly cash distribution of $0.10 per unit on its depositary units for the
first quarter of 2007 consistent with the distribution policy established in
2005. The distribution is payable on March 29, 2007 to depositary unitholders
of
record at the close of business on March 14, 2007.
F-52
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in $000s)
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
|
| |
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,331,421
|
|
$
|
1,912,134
|
|
|
Investments
|
|
|
563,552
|
|
|
539,115
|
|
|
Inventories,
net
|
|
|
235,358
|
|
|
245,502
|
|
|
Trade,
notes and other receivables, net
|
|
|
169,841
|
|
|
176,496
|
|
|
Other
current assets
|
|
|
76,389
|
|
|
134,987
|
|
|
Assets
of discontinued operations held for sale
|
|
|
48,205
|
|
|
47,503
|
|
|
Total
current assets
|
|
|
3,424,766
|
|
|
3,055,737
|
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
417,978
|
|
|
422,715
|
|
|
Real
Estate
|
|
|
273,852
|
|
|
283,974
|
|
|
Home
Fashion
|
|
|
206,764
|
|
|
200,382
|
|
|
Total
property, plant and equipment, net
|
|
|
898,594
|
|
|
907,071
|
|
|
Investments
|
|
|
199,693
|
|
|
177,682
|
|
|
Intangible
assets
|
|
|
25,772
|
|
|
25,916
|
|
|
Other
assets
|
|
|
81,314
|
|
|
85,237
|
|
|
Total
assets
|
|
$
|
4,630,139
|
|
$
|
4,251,643
|
|
|
LIABILITIES
AND PARTNERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
66,497
|
|
$
|
69,854
|
|
|
Accrued
expenses and other current liabilities
|
|
|
160,062
|
|
|
197,792
|
|
|
Current
portion of long-term debt
|
|
|
23,620
|
|
|
23,970
|
|
|
Securities
sold not yet purchased
|
|
|
8,682
|
|
|
25,398
|
|
|
Total
current liabilities
|
|
|
258,861
|
|
|
317,014
|
|
|
Long-term
debt
|
|
|
1,666,211
|
|
|
1,175,271
|
|
|
Other
non current liabilities
|
|
|
23,738
|
|
|
22,212
|
|
|
Total
long-term liabilities
|
|
|
1,689,949
|
|
|
1,197,483
|
|
|
Total
liabilities
|
|
|
1,948,810
|
|
|
1,514,497
|
|
|
Minority
interests
|
|
|
198,019
|
|
|
292,221
|
|
|
Commitments
and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Partners’
equity:
|
|
|
|
|
|
|
|
|
Limited
partners
|
|
|
2,458,477
|
|
|
2,420,476
|
|
|
General
partner
|
|
|
24,833
|
|
|
24,449
|
|
|
Partners’
equity
|
|
|
2,483,310
|
|
|
2,444,925
|
|
|
Total
liabilities and partners’ equity
|
|
$
|
4,630,139
|
|
$
|
4,251,643
|
|
F-53
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three Months Ended
March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
(unaudited)
(in
$000s)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
112,888
|
|
$
|
85,945
|
|
|
Real
Estate
|
|
|
27,887
|
|
|
20,712
|
|
|
Home
Fashion
|
|
|
210,604
|
|
|
243,490
|
|
| |
|
|
351,379
|
|
|
350,147
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
89,661
|
|
|
67,322
|
|
|
Real
Estate
|
|
|
23,606
|
|
|
17,238
|
|
|
Home
Fashion
|
|
|
249,619
|
|
|
281,448
|
|
|
General
and administrative expenses
|
|
|
7,668
|
|
|
11,145
|
|
| |
|
|
370,554
|
|
|
377,153
|
|
| |
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(19,175
|
)
|
|
(27,006
|
)
|
| |
|
|
|
|
|
|
|
|
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(31,432
|
)
|
|
(23,692
|
)
|
|
Interest
income
|
|
|
31,458
|
|
|
11,554
|
|
|
Other
income (expense), net
|
|
|
84,781
|
|
|
21,309
|
|
|
Equity
in earnings of affiliate
|
|
|
—
|
|
|
24
|
|
|
Income
(loss) from continuing operations before income taxes and minority
interests
|
|
|
65,632
|
|
|
(17,811
|
)
|
|
Income
tax expense
|
|
|
(6,949
|
)
|
|
(5,211
|
)
|
|
Minority
interests
|
|
|
11,590
|
|
|
15,069
|
|
|
Income
(loss) from continuing operations
|
|
|
70,273
|
|
|
(7,953
|
)
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net of income taxes
|
|
|
16,470
|
|
|
58,841
|
|
|
Minority
interest
|
|
|
(1,794
|
)
|
|
54
|
|
|
Gain
on sales of assets, net of income taxes
|
|
|
13,185
|
|
|
251
|
|
|
Income
from discontinued operations, net of income taxes
|
|
|
27,861
|
|
|
59,146
|
|
|
Net
earnings
|
|
$
|
98,134
|
|
$
|
51,193
|
|
|
Net
earnings attributable to:
|
|
|
|
|
|
|
|
|
Limited
partners
|
|
$
|
97,153
|
|
$
|
50,681
|
|
|
General
partner
|
|
|
981
|
|
|
512
|
|
| |
|
$
|
98,134
|
|
$
|
51,193
|
|
F-54
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES
IN PARTNERS’ EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended March 31,
2007
(Unaudited) (In $000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
General
Partner’s
Equity
(Deficit)
|
|
Limited
Partners’
Equity
Depositary
Units
|
|
|
Total
Partners’
Equity
|
|
|
|
| |
|
|
|
Balance,
December 31, 2006
|
|
$
|
24,449
|
|
$
|
2,420,476
|
|
|
$
|
2,444,925
|
|
|
Cumulative
effect of adjustment from adoption of SFAS No. 159
|
|
|
(422
|
)
|
|
(41,762
|
)
|
|
|
(42,184
|
)
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
981
|
|
|
97,153
|
|
|
|
98,134
|
|
|
Net
unrealized losses on securities available for sale
|
|
|
(114
|
)
|
|
(11,315
|
)
|
|
|
(11,429
|
)
|
|
Comprehensive
income
|
|
|
867
|
|
|
85,838
|
|
|
|
86,705
|
|
|
Partnership
distribution
|
|
|
(63
|
)
|
|
(6,248
|
)
|
|
|
(6,311
|
)
|
|
Other
|
|
|
2
|
|
|
173
|
|
|
|
175
|
|
|
Balance,
March 31, 2007
|
|
$
|
24,833
|
|
$
|
2,458,477
|
|
|
$
|
2,483,310
|
|
Accumulated
other comprehensive income at March 31, 2007 was $13.9 million.
F-55
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Three Months Ended
March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
| |
|
2007
|
|
2006
|
|
| |
|
(unaudited)
(in
$000s)
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Cash
Flows from Continuing Operations:
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
70,273
|
|
$
|
(7,953
|
)
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,166
|
|
|
18,355
|
|
|
Investment
gains
|
|
|
(79,410
|
)
|
|
(13,750
|
)
|
|
Minority
interests
|
|
|
(11,590
|
)
|
|
(15,069
|
)
|
|
Equity
in earnings of affiliate
|
|
|
—
|
|
|
(24
|
)
|
|
Stock-based
compensation expense
|
|
|
—
|
|
|
6,248
|
|
|
Deferred
income tax expense (benefit)
|
|
|
362
|
|
|
(384
|
)
|
|
Impairment
loss on fixed assets
|
|
|
313
|
|
|
7,828
|
|
|
Net
cash used in activities on trading securities
|
|
|
(14,866
|
)
|
|
(40,671
|
)
|
|
Other,
net
|
|
|
4,785
|
|
|
2,802
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in trade notes and other receivables
|
|
|
(6,602
|
)
|
|
20,107
|
|
|
Increase
in other assets
|
|
|
(1,164
|
)
|
|
(32,228
|
)
|
|
Decrease
(increase) in inventory
|
|
|
10,144
|
|
|
(31,246
|
)
|
|
Increase
(decrease) in accounts payable, accrued expenses and other
liabilities
|
|
|
63
|
|
|
(2,743
|
)
|
|
Net
cash used in continuing operations
|
|
|
(11,526
|
)
|
|
(88,728
|
)
|
|
Cash
Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
27,861
|
|
|
59,146
|
|
|
Depreciation,
depletion and amortization
|
|
|
194
|
|
|
28,124
|
|
|
Change
in fair market value of Oil and Gas derivative contracts
|
|
|
—
|
|
|
(37,252
|
)
|
|
Changes
in operating assets and liabilities
|
|
|
—
|
|
|
5,240
|
|
|
Gains
on sales of assets
|
|
|
(13,185
|
)
|
|
—
|
|
|
Other,
net
|
|
|
(15,471
|
)
|
|
3,708
|
|
|
Net
cash (used in) provided by discontinued operations
|
|
|
(601
|
)
|
|
58,966
|
|
|
Net
cash used in operating activities
|
|
|
(12,126
|
)
|
|
(29,762
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Cash
Flows from Continuing Operations:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(16,898
|
)
|
|
(5,221
|
)
|
|
Purchases
of marketable equity and debt securities
|
|
|
(75,671
|
)
|
|
(72,378
|
)
|
|
Proceeds
from sales of marketable equity and debt securities
|
|
|
51,471
|
|
|
44,056
|
|
|
Net
proceeds from sales and disposition of fixed assets
|
|
|
6,775
|
|
|
7,094
|
|
|
Other
|
|
|
—
|
|
|
(18
|
)
|
|
Net
cash used in investing activities – continuing operations
|
|
|
(34,323
|
)
|
|
(26,467
|
)
|
|
Cash
Flows from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
—
|
|
|
(51,476
|
)
|
|
Net
proceeds from the sales of real estate
|
|
|
4,359
|
|
|
991
|
|
|
Purchase
of minority interest of investment in subsidiary
|
|
|
(47,283
|
)
|
|
—
|
|
|
Release
of escrow funds relating to asset sales
|
|
|
50,000
|
|
|
—
|
|
|
Other
|
|
|
(7,319
|
)
|
|
(387
|
)
|
|
Net
cash used in investing activities – discontinued operations
|
|
|
(243
|
)
|
|
(50,872
|
)
|
|
Net
cash used in investing activities
|
|
|
(34,566
|
)
|
|
(77,339
|
)
|
F-56
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS –
(continued)
Three Months Ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
| |
|
2007
|
|
2006
|
|
| |
|
(unaudited)
(in
$000s)
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
Cash
Flows Continuing Operations:
|
|
|
|
|
|
|
|
|
Partners’
equity:
|
|
|
|
|
|
|
|
|
Partnership
distributions
|
|
$
|
(6,311
|
)
|
$
|
—
|
|
|
Dividend
paid to minority holders of subsidiary
|
|
|
(18,451
|
)
|
|
—
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
Net
change in due to/from affiliates
|
|
|
679
|
|
|
(3
|
)
|
|
Proceeds
from senior notes payable
|
|
|
492,130
|
|
|
—
|
|
|
Repayment
of credit facilities
|
|
|
(127
|
)
|
|
—
|
|
|
Periodic
principal payments
|
|
|
(1,262
|
)
|
|
(1,098
|
)
|
|
Net
cash provided by (used in) financing activities – continuing
operations
|
|
|
466,658
|
|
|
(1,101
|
)
|
|
Net
cash used in financing activities – discontinued operations
|
|
|
—
|
|
|
(3,075
|
)
|
|
Net
Cash Provided by (used in) Financing Activities
|
|
|
466,658
|
|
|
(4,176
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
419,965
|
|
|
(111,277
|
)
|
|
Net
change in cash of assets held for sale
|
|
|
—
|
|
|
37,112
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,911,456
|
|
|
459,315
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,331,421
|
|
$
|
385,150
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
information
|
|
|
|
|
|
|
|
|
Cash
payments for interest
|
|
$
|
45,982
|
|
$
|
26,950
|
|
|
Cash
payments for income taxes, net of refunds
|
|
$
|
3,429
|
|
$
|
798
|
|
|
Net
unrealized losses on securities available for sale
|
|
$
|
(11,429
|
)
|
$
|
(10,751
|
)
|
F-57
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 1 —
General
American
Real Estate Holdings Limited Partnership, or the Company or AREH, is a
diversified holding company owning subsidiaries engaged in the following
continuing operating businesses: Gaming; Real Estate; and Home Fashion. In
November 2006, we divested our Oil and Gas operating business and our Atlantic
City gaming properties. Further information regarding our reportable segments
is
contained in Note 14.
AREH
is a
limited partnership formed in Delaware on February 17, 1987. American Real
Estate Partners, L.P. (“AREP” or the “Limited Partner”) is a master limited
partnership formed in Delaware on February 17, 1987. AREP owns a 99% limited
partner interest in the Company. American Property Investors, Inc. (the “General
Partner”) owns a 1% general partner interest in both AREH and AREP representing
an aggregate 1.99% general partner interest in the Company and AREP. The General
Partner is owned and controlled by Mr. Carl C. Icahn (“Icahn or Mr. Icahn”).
Under
our
amended Partnership Agreement we are permitted to make non-real estate
acquisitions and investments to enhance our partners’ value and further
diversify our assets. 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 is not limited.
We will
conduct our activities in such a manner as not to be deemed an investment
company under the Investment Company Act of 1940, or 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 term is defined in the 1940 ACT. In addition,
we do not intend to invest in securities as our primary business. We will
structure our 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.
Gaming Acquisition
and Pending Divestiture
On
November 28, 2005, AREP Laughlin Corporation entered into an agreement to
purchase the Flamingo Laughlin Hotel and Casino, now known as the Aquarius
Casino Resort, or the Aquarius, in Laughlin, Nevada from Harrah’s Operating
Company, Inc. AREP Laughlin Corporation was formed by AREH to acquire, own
and
operate the Aquarius, and AREH contributed 100% of the stock of AREP Laughlin
to
American Casino and Entertainment Properties LLC, or ACEP, our indirect wholly
owned subsidiary, on April 4, 2006. The transaction was approved by the Nevada
Gaming Commission upon recommendation of the Nevada Gaming Control Board and
closed on May 19, 2006. Accordingly, our financial statements include the
financial position and results of operations of the Aquarius from May 19, 2006
forward.
As
discussed in Note 18, on April 22, 2007, we entered into an agreement to sell
all of the issued and outstanding membership interests of ACEP, which comprise
all of our current gaming properties. Accordingly, in the second quarter of
fiscal 2007 the financial position and the results of ACEP’s operations will be
presented as assets and liabilities of discontinued operations held for sale
in
the consolidated balance sheets and discontinued operations in the consolidated
statements of operations for all periods in accordance with SFAS No. 144.
F-58
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 1 — General –
(continued)
Discontinued
Operations
On
November 17, 2006, our indirect majority owned subsidiary, Atlantic Coast
Entertainment Holdings, Inc., or Atlantic Coast, completed the sale to Pinnacle
Entertainment, Inc., or Pinnacle, of the outstanding membership interests in
ACE
Gaming LLC or ACE, the owner of The Sands Hotel and Casino, or The Sands, in
Atlantic City, New Jersey, and 100% of the equity interests in certain
subsidiaries of AREH that owned parcels of real estate adjacent to The Sands,
including the Traymore site, to Pinnacle.
On
November 21, 2006, our indirect wholly owned subsidiary, AREP O & G Holdings
LLC, consummated the sale of all of the issued and outstanding membership
interests of NEG Oil & Gas LLC, or NEG Oil & Gas, to SandRidge Energy,
Inc. or SandRidge, formerly Riata Energy, Inc.
Operating
properties of our real estate segment are reclassified to held for sale when
subject to a contract or letter of intent. The operations of such properties
are
classified as discontinued operations. The properties classified as discontinued
operations have changed during fiscal 2007 and, accordingly, certain amounts
in
the statement of operations and cash flows for the three months ended
March 31, 2007 and 2006 have been reclassified to conform to the current
classification of properties. During the first quarter of 2007 two properties
were reclassified to held for sale.
The
financial position and results of these operations are presented as assets
and
liabilities of discontinued operations held for sale in the consolidated balance
sheets and discontinued operations in the consolidated statements of
operations.
Filing Status
of
Subsidiaries
National
Energy Group, Inc., or NEGI, and Atlantic Coast are reporting companies under
the Securities Exchange Act of 1934, as amended, or the, ‘34 Act. In addition,
ACEP voluntarily files annual, quarterly and current reports under the, ‘34
Act.
New Accounting
Pronouncements
SFAS
No. 155. On February 16, 2006, the FASB issued Statement No. 155,
Accounting for Certain Hybrid Instruments – an Amendment of FASB Statements
No. 133 and 140 (“SFAS 155”). The statement amends Statement 133 to permit
fair value measurement for certain hybrid financial instruments that contain
an
embedded derivative, provides additional guidance on the applicability of SFAS
133 and 140 to certain financial instruments and subordinated concentrations
of
credit risk. The new standard is effective for the first fiscal year beginning
after September 15, 2006. The adoption of SFAS 155 as of January 1, 2007 did
not
have any impact on our consolidated financial statements.
EITF
06-3. In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF
06-3, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus
Net Presentation)” to clarify diversity in practice on the presentation of
different types of taxes in the financial statements. The EITF concluded that,
for taxes within the scope of the issue, a company may adopt a policy of
presenting taxes either gross within revenue or net. That is, it may include
charges to customers for taxes within revenues and the charge for the taxes
from
the taxing authority within cost of sales, or, alternatively, it may net the
charge to the customer and the charge from the taxing authority. If taxes are
reported on a gross basis, and are significant, an entity should disclose the
amounts of those taxes subject to EITF 06-3. The guidance is effective for
periods beginning after December 15, 2006. We present sales tax on a net basis
in our consolidated financial statements, and the adoption of EITF 06-3 did
not
have any impact on our financial position, results of operations, or cash
flows.
F-59
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 1 — General –
(continued)
FIN
No. 48. In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB
Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in
tax positions taken or expected to be taken in a tax return, including issues
relating to financial statement recognition and measurement. FIN 48 provides
that the tax effects from an uncertain tax position can be recognized in the
financial statements only if the position is “more-likely-than-not” to be
sustained if the position were to be challenged by a taxing authority. The
assessment of the tax position is based solely on the technical merits of the
position, without regard to the likelihood that the tax position may be
challenged. If an uncertain tax position meets the “more-likely-than-not”
threshold, the largest amount of tax benefit that is greater than 50 percent
likely to be recognized upon ultimate settlement with the taxing authority
is
recorded. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. We adopted
FIN
48 as of January 1, 2007. The adoption of FIN 48 did not have a material impact
on our consolidated financial statements. See Note 15 for additional
information.
SFAS
No. 157. In September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements (“SFAS 157”), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement applies under other accounting pronouncements that require or
permit fair value measurements and, accordingly, SFAS 157 does not require
any
new fair value measurements. We adopted SFAS 157 as of January 1, 2007, in
conjunction with the adoption of SFAS No. 159, as required. The adoption of
SFAS
157 did not have any impact on our consolidated financial statements.
SFAS
No. 159. In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
Amendment of FASB Statement No. 115 (“SFAS 159”), which gives entities the
option to measure eligible financial assets, financial liabilities and firm
commitments at fair value (i.e., the fair value option), on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other accounting standards. The election to use the
fair
value option is available when an entity first recognizes a financial asset
or
financial liability or upon entering into a firm commitment. Subsequent changes
in fair value must be recorded in earnings. Additionally, SFAS 159 allows for
a
one-time election for existing positions upon adoption, with the transition
adjustment recorded to beginning partners’ equity.
We adopted
SFAS 159 as of January 1, 2007 and elected to apply the fair value option to
our
investment in ImClone Systems Incorporated, or ImClone. In the fourth quarter
of
the fiscal year ended December 31, 2006, we first applied the equity method
of
accounting to our investment in ImClone due to changes in ImClone’s board
resulting in our having the ability to exercise significant influence over
ImClone. We believe that the quality of the earnings and the value of the
investment that we report over time relating to our investment in ImClone is
more accurately reflected by the market value methodology of SFAS 159 rather
than the equity method of accounting. The equity method of accounting would
require an appraisal of the fair values of ImClone’s assets and liabilities at
the dates that we acquired shares of common stock of ImClone as well as future
appraisals should there be any material indications of impairment. We believe
that such an appraisal would be subjective given the nature of ImClone’s
pharmaceutical operations.
As of the
date of adoption, the carrying value of our investment in ImClone was
approximately $164.3 million and the fair value of our investment was
approximately $122.2 million. In accordance with the transition requirements
of
SFAS 159, we recorded a cumulative effect adjustment to beginning partners’
equity for the difference between the fair value and carrying value on the
date
of adoption, which reduced partners’ equity by approximately $42.2
million.
As a result
of the adoption of SFAS 159, we are required to record unrealized gains or
losses for the change in fair value of our investment in ImClone. During the
three-month period ended March 31, 2007, we recorded approximately $63.9
million of unrealized gains resulting from the change in the market value of
ImClone’s stock which is recorded as a component of other income (expense), net
in the consolidated statement of operations.
F-60
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 2 — Operating
Units
Through
the second quarter of the fiscal year ended December 31, 2006, or fiscal 2006,
we had four principal operating businesses: Oil and Gas, Gaming, Real Estate
and
Home Fashion. As described in Note 3, in November 2006 we divested our Oil
and
Gas operating businesses and our Atlantic City Gaming properties. As a result,
our Oil and Gas operations and our Atlantic City Gaming properties are now
classified as discontinued operations and thus are not considered a reportable
segment of our continuing operations. We now have three principal operating
businesses: Gaming, Real Estate and Home Fashion.
a.
Gaming
We own
and operate gaming properties in Nevada. Our properties include the Stratosphere
Casino Hotel and Tower, Arizona Charlie’s Decatur, and Arizona Charlie’s Boulder
in Las Vegas and the Aquarius Casino Resort in Laughlin. Results for the
Aquarius are included from the date of acquisition, May 19, 2006. As described
above, in November 2006, we sold our Atlantic City Gaming properties. As a
result, such operations are now classified as discontinued operations.
Summary
balance sheets for the continuing operations of our Gaming segment as of
March 31, 2007 and December 31, 2006 as included in the consolidated
balance sheets are as follows (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Current
assets
|
|
$
|
98,667
|
|
$
|
85,583
|
|
|
Property,
plant and equipment, net
|
|
|
417,978
|
|
|
422,715
|
|
|
Other
non-current assets
|
|
|
44,001
|
|
|
44,455
|
|
|
Total
assets
|
|
$
|
560,646
|
|
$
|
552,753
|
|
|
Current
liabilities
|
|
$
|
50,614
|
|
$
|
54,763
|
|
|
Long-term
debt
|
|
|
257,202
|
|
|
257,329
|
|
|
Other
non-current liabilities
|
|
|
6,144
|
|
|
5,993
|
|
|
Total
liabilities
|
|
$
|
313,960
|
|
$
|
318,085
|
|
As
discussed in Note 18, on April 22, 2007, we entered into an agreement to sell
all of the issued and outstanding membership interests of ACEP for $1.3 billion,
plus or minus certain adjustments such as working capital. Accordingly, in
the
second quarter of fiscal 2007 the financial position and the results of ACEP’s
operations will be presented as assets and liabilities of discontinued
operations held for sale in the consolidated balance sheets and discontinued
operations in the consolidated statements of operations for all periods in
accordance with SFAS No. 144.
F-61
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 2 — Operating
Units – (continued)
Summarized
unaudited statements of operations for the continuing operations of our Gaming
segment for the three months ended March 31, 2007 and 2006 are as follows
(in $000s):
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
67,370
|
|
$
|
48,022
|
|
|
Hotel
|
|
|
22,616
|
|
|
17,433
|
|
|
Food
and beverage
|
|
|
23,109
|
|
|
18,070
|
|
|
Tower,
retail and other income
|
|
|
9,311
|
|
|
8,219
|
|
|
Gross
revenues
|
|
|
122,406
|
|
|
91,744
|
|
|
Less
promotional allowances
|
|
|
9,518
|
|
|
5,799
|
|
|
Net
revenues
|
|
|
112,888
|
|
|
85,945
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Casino
|
|
|
22,566
|
|
|
16,488
|
|
|
Hotel
|
|
|
9,063
|
|
|
6,843
|
|
|
Food
and beverage
|
|
|
15,975
|
|
|
13,201
|
|
|
Tower,
retail and other income
|
|
|
4,244
|
|
|
4,248
|
|
|
Selling,
general and administrative
|
|
|
29,472
|
|
|
20,782
|
|
|
Depreciation
and amortization
|
|
|
8,341
|
|
|
5,760
|
|
|
Total
costs and expenses
|
|
|
89,661
|
|
|
67,322
|
|
|
Operating
income from continuing operations
|
|
$
|
23,227
|
|
$
|
18,623
|
|
b. Real
Estate
Our real
estate operations consist of three segments: rental real estate, property
development and associated resort activities.
A
summary of real estate property and equipment as of March 31, 2007 and
December 31, 2006 as included in the consolidated balance sheets is as follows
(in $000s):
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Rental
properties:
|
|
|
|
|
|
|
|
|
Finance
leases, net
|
|
$
|
65,302
|
|
$
|
66,335
|
|
|
Operating
leases
|
|
|
41,653
|
|
|
46,170
|
|
|
Property
development
|
|
|
122,306
|
|
|
126,537
|
|
|
Resort
properties
|
|
|
44,591
|
|
|
44,932
|
|
|
Total
real estate
|
|
$
|
273,852
|
|
$
|
283,974
|
|
F-62
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 2 — Operating
Units – (continued)
Summarized
unaudited statements of operations attributable to our continuing real estate
operations are as follows (in $000s):
|
|
|
|
|
|
|
|
| |
Three Months Ended
March 31,
|
|
| |
2007
|
|
2006
|
|
| |
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Rental
real estate:
|
|
|
|
|
|
|
|
Interest
income on financing leases
|
$
|
1,578
|
|
$
|
1,735
|
|
|
Rental
income
|
|
1,939
|
|
|
1,511
|
|
|
Property
development
|
|
18,145
|
|
|
11,384
|
|
|
Resort
activities
|
|
6,225
|
|
|
6,082
|
|
|
Total
revenues
|
|
27,887
|
|
|
20,712
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Rental
real estate
|
|
1,493
|
|
|
998
|
|
|
Property
development
|
|
15,612
|
|
|
9,976
|
|
|
Resort
activities
|
|
6,501
|
|
|
6,264
|
|
|
Total
expenses
|
|
23,606
|
|
|
17,238
|
|
|
Operating
income
|
$
|
4,281
|
|
$
|
3,474
|
|
Rental
Real Estate
As of
March 31, 2007, we owned 36 rental real estate properties. These primarily
consist of fee and leasehold interests in real estate in 18 states. Most of
these properties are net-leased to single corporate tenants. Approximately
89%
of these properties are currently net-leased, 3% are operating properties and
8%
are vacant.
Property
Held for Sale
The
following is a summary of property held for sale (in $000s):
|
|
|
|
|
|
|
|
| |
March 31,
2007
|
|
December 31,
2006
|
|
| |
(unaudited)
|
|
|
|
|
|
Leased
to others
|
$
|
34,653
|
|
$
|
28,015
|
|
|
Vacant
|
|
703
|
|
|
703
|
|
| |
|
35,356
|
|
|
28,718
|
|
|
Less:
accumulated depreciation
|
|
(8,097
|
)
|
|
(5,053
|
)
|
|
Total
|
$
|
27,259
|
|
$
|
23,665
|
|
At
March 31, 2007 and December 31, 2006, $19.8 million of real estate held for
sale was pledged to collateralize the payment of non-recourse mortgages
payable.
We market
portions of our commercial real estate portfolio for sale. Unaudited sales
activity was as follows (in $000s, except unit data):
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Properties
sold
|
|
|
1
|
|
|
4
|
|
|
Proceeds
received
|
|
$
|
4,359
|
|
$
|
973
|
|
|
Total
gain recorded
|
|
$
|
3,862
|
|
$
|
251
|
|
|
Gain
recorded in discontinued operations
|
|
$
|
3,862
|
|
$
|
251
|
|
F-63
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 2 — Operating
Units – (continued)
Property
Development and Associated Resort Activities
We own,
primarily through our Bayswater subsidiary, residential development properties.
Bayswater, a real estate investment, management and development company, focuses
primarily on the construction and sale of single-family houses, multi-family
homes and lots in subdivisions and planned communities and raw land for
residential development. Our New Seabury development property in Cape Cod,
Massachusetts and our Grand Harbor and Oak Harbor development property in Vero
Beach, Florida each include land for future residential development of more
than
400 and 1,000 units of residential housing, respectively. Both developments
operate golf and resort activities. We are also developing residential
communities in Naples, Florida and Westchester County, New York.
Unaudited
property development sales activity was as follows (in 000s except unit
data):
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Units
sold:
|
|
|
|
|
|
|
|
|
New
Seabury, Massachusetts
|
|
|
6
|
|
|
10
|
|
|
Grand
Harbor/Oak Harbor, Florida
|
|
|
5
|
|
|
2
|
|
|
Falling
Waters, Florida
|
|
|
23
|
|
|
—
|
|
|
Westchester,
New York
|
|
|
2
|
|
|
—
|
|
|
Tampa
Bay, Florida
|
|
|
1
|
|
|
—
|
|
| |
|
|
37
|
|
|
12
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
New
Seabury, Massachusetts
|
|
$
|
3,583
|
|
$
|
9,033
|
|
|
Grand
Harbor/Oak Harbor, Florida
|
|
|
4,349
|
|
|
2,321
|
|
|
Falling
Waters, Florida
|
|
|
5,466
|
|
|
—
|
|
|
Westchester,
New York
|
|
|
3,243
|
|
|
30
|
|
|
Tampa
Bay, Florida
|
|
|
1,504
|
|
|
—
|
|
| |
|
$
|
18,145
|
|
$
|
11,384
|
|
c. Home
Fashion
We
conduct our Home Fashion operations through our majority ownership in West
Point
International Inc., or WPI, a manufacturer and distributor of home fashion
consumer products.
Summary
balance sheets for Home Fashion as of March 31, 2007 and December 31, 2006
as included in the consolidated balance sheets are as follows (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Current
assets
|
|
$
|
533,815
|
|
$
|
567,419
|
|
|
Assets
held for sale
|
|
|
20,946
|
|
|
23,838
|
|
|
Property
plant and equipment, net
|
|
|
206,764
|
|
|
200,382
|
|
|
Intangible
and other assets
|
|
|
38,333
|
|
|
38,199
|
|
|
Total
assets
|
|
$
|
799,858
|
|
$
|
829,838
|
|
|
Current
liabilities
|
|
$
|
107,447
|
|
$
|
101,609
|
|
|
Other
liabilities
|
|
|
6,941
|
|
|
8,980
|
|
|
Total
liabilities
|
|
$
|
114,388
|
|
$
|
110,589
|
|
F-64
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 2 — Operating
Units – (continued)
Unaudited
summarized statements of operations for the three months ended March 31,
2007 and 2006 are as follows (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
210,604
|
|
$
|
243,490
|
|
|
Cost
of goods sold
|
|
|
205,910
|
|
|
228,360
|
|
|
Gross
earnings
|
|
|
4,694
|
|
|
15,130
|
|
|
Selling,
general and administrative expenses
|
|
|
39,398
|
|
|
43,317
|
|
|
Restructuring
and impairment charges
|
|
|
4,311
|
|
|
9,771
|
|
|
Operating
loss
|
|
$
|
(39,015
|
)
|
$
|
(37,958
|
)
|
Total
depreciation for the three months ended March 31, 2007 was $4.8 million, of
which $3.7 million was included in cost of sales and $1.1 million was included
in selling, general and administrative expenses. Total depreciation for the
three months ended March 31, 2006 was $10.4 million, of which $8.6 million
was included in cost of sales and $1.8 million was included in selling, general
and administrative expenses. Total expenses for the three months ended
March 31, 2007 include $4.3 million of restructuring charges (of which
approximately $1.3 million relates to severance and $3.0 million relates to
continuing costs of closed plants). There were no impairment charges recorded
in
the first quarter of fiscal 2007. Total expenses for the three months ended
March 31, 2006 include $9.8 million of restructuring charges (of which
approximately $1.2 million related to severance, $0.9 million related to
continuing costs of closed plants and $7.7 million related to non-cash charges
for impairment of fixed assets).
Impairment
and
restructuring charges for the three months ended March 31, 2007 and 2006
are included in Home Fashion operating expenses in the accompanying consolidated
statements of operations.
To improve
WPI’s competitive position, we intend to continue to restructure its operations
to significantly reduce its cost of goods sold by closing certain plants located
in the United States, sourcing goods from lower cost overseas facilities and,
potentially, acquiring manufacturing facilities outside of the United States.
WPI has incurred impairment charges to write-down the value of WPI plants taken
out of service to its estimated liquidation value.
Included
in
restructuring expenses are cash charges associated with the ongoing costs of
closed plants, employee severance, benefits and related costs. The amount of
the
accrued liability balance was $1.2 million as of December 31, 2006. During
the three months ended March 31, 2007, we incurred additional restructuring
costs of $4.3 million, and $4.5 million was paid during the period. As of
March 31, 2007, the accrued liability balance was $1.0 million, which is
included in accounts payable and accrued expenses in our consolidated balance
sheet.
Total
cumulative impairment and restructuring charges for the period from our
acquisition of WPI on August 8, 2005, through March 31, 2007, were $51.6
million.
We expect
that restructuring charges will continue to be incurred throughout fiscal 2007.
As of March 31, 2007, WPI expects to incur additional restructuring costs
over the next year relating to the current restructuring plan of between $25
million and $30 million.
F-65
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 3 — Discontinued
Operations and Assets Held for Sale
The Sands and
Related Assets
On November
17, 2006, Atlantic Coast, ACE, AREH, and certain other entities owned by or
affiliated with AREH completed the sale to Pinnacle of the outstanding
membership interests in ACE and 100% of the equity interests in certain
subsidiaries of AREH that own parcels of real estate adjacent to The Sands,
including 7.7 acres of land adjacent to The Sands known as the Traymore site.
We
owned, through subsidiaries, approximately 67.6% of Atlantic Coast, which owned
100% of ACE. The aggregate price was approximately $274.8 million, of which
approximately $200.6 million was paid to Atlantic Coast and approximately $74.2
million was paid to affiliates of AREH for subsidiaries that owned the Traymore
site and the adjacent properties. Under the terms of the agreement, $51.8
million of the purchase price paid to Atlantic Coast was deposited into escrow
to fund indemnification obligations with regard to the claims of creditors
and
stockholders of GB Holdings, Inc., or GB Holdings. On February 22, 2007 we
resolved all outstanding litigation involving our interest in our Atlantic
City
gaming operations resulting in a release of all claims against us. As a result
of the settlement, our ownership of Atlantic Coast increased from 67.6% to
96.9%
and $50.0 million of the amount placed into escrow was released to us.
Oil and Gas
Operations
On November
21, 2006, our indirect wholly owned subsidiary, AREP O & G Holdings, LLC,
consummated the sale of all of the issued and outstanding membership interests
of NEG Oil & Gas to SandRidge, for consideration consisting of $1.025
billion in cash, 12,842,000 shares of SandRidge’s common stock valued, at the
date of closing, at $18 per share, and the repayment by SandRidge of $300.0
million of debt of NEG Oil & Gas. On April 4, 2007, we sold our entire
position in SandRidge for cash consideration of approximately $243.2
million.
On November
21, 2006, pursuant to an agreement dated October 25, 2006 among AREH, NEG Oil
& Gas and National Energy Group, Inc., or NEGI, NEGI sold its membership
interest in NEG Holding LLC to NEG Oil & Gas for consideration of
approximately $261.1 million paid in cash. Of that amount, $149.6 million was
used to repay the principal of and accrued interest with respect to the NEGI
10.75% senior notes due 2007, all of which were held by us.
Real
Estate
Operating
properties are reclassified to held for sale when subject to a contract or
letter of intent. The operations of such properties are classified as
discontinued operations. The properties classified as discontinued operations
have changed during fiscal 2007 and, accordingly, certain amounts in the
statement of operations and cash flows for the three months ended March 31,
2007 and 2006 have been reclassified to conform to the current classification
of
properties. During the first quarter of 2007 two properties were reclassified
to
held for sale.
Results of Operations
and Assets Held for Sale
The
financial position and results of our Oil and Gas and Real Estate operations
and
of our Atlantic City Gaming operations described above are presented as assets
and liabilities of discontinued operations held for sale in the consolidated
balance sheets and discontinued operations in the consolidated statements of
operations, respectively, for all periods presented in accordance with SFAS
No.
144.
F-66
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 3 —
Discontinued Operations
and Assets Held for Sale – (continued)
A
summary of the results of operations for our discontinued operations for the
three months ended March 31, 2007 and 2006 is as follows (in $000s)
(unaudited):
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Oil
and Gas
|
|
$
|
—
|
|
$
|
108,292
|
|
|
Atlantic
City Gaming
|
|
|
—
|
|
|
40,773
|
|
|
Rental
Real Estate
|
|
|
1,238
|
|
|
1,718
|
|
|
Total
revenues
|
|
$
|
1,238
|
|
$
|
150,783
|
|
| |
|
|
|
|
|
|
|
|
Operating
income from discontinued operations:
|
|
|
|
|
|
|
|
|
Oil
and Gas
|
|
$
|
—
|
|
$
|
64,988
|
|
|
Atlantic
City Gaming
|
|
|
—
|
|
|
732
|
|
|
Rental
Real Estate
|
|
|
1,079
|
|
|
962
|
|
|
Total
operating income
|
|
|
1,079
|
|
|
66,682
|
|
|
Interest
expense
|
|
|
(270
|
)
|
|
(5,435
|
)
|
|
Interest
and other income
|
|
|
18,642
|
|
|
1,040
|
|
|
Income
tax expense
|
|
|
(2,981
|
)
|
|
(3,446
|
)
|
|
Income
from discontinued operations
|
|
|
16,470
|
|
|
58,841
|
|
|
Minority
interest
|
|
|
(1,794
|
)
|
|
54
|
|
|
Gain
on sales of discontinued operations, net of income taxes
|
|
|
13,185
|
|
|
251
|
|
| |
|
$
|
27,861
|
|
$
|
59,146
|
|
Interest
and other income for the three months ended March 31, 2007 includes
approximately $8.5 million relating to a real estate tax refund received by
Atlantic Coast and approximately $10.1 million representing the net gain on
the
settlement of litigation relating to GB Holdings.
The gain
on sales of discontinued operations in the three months ended March 31,
2007 includes approximately $3.9 million of gain on sales of real estate and
$9.3 million relating to the working capital adjustment to the gain recorded
on
the sale of our Oil and Gas operations in November 2006.
Assets
held for sale as of March 31, 2007 and December 31, 2006 totaled $48.2
million and $47.5 million, respectively. These relate to assets of WPI and
Real
Estate that are classified as held for sale in accordance with SFAS 144.
Note 4 — Related Party
Transactions
Administrative
Services
In July
2005, we entered into a license agreement with an affiliate for the
non-exclusive use of approximately 1,514 square feet of office space for which
we pay monthly base rent of $13,000 plus 16.4% of certain “additional rent.” The
license agreement expires in May 2012. Under the agreement, base rent is subject
to increases in July 2008 and December 2011. Additionally, we are entitled
to
certain annual rent credits each December beginning December 2005 and continuing
through December 2011. In each of the three months ended March 31, 2007 and
2006, we paid rent of approximately $40,000.
F-67
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 4 — Related
Party Transactions – (continued)
An affiliate occupies a portion
of
certain office space leased by us. Monthly payments from the affiliate for
the
use of the space began on October 12, 2006. For the three months ended
March 31, 2007, we received $19,000 for the use of such space.
In the
three months ended March 31, 2007 and 2006, we paid approximately $162,000
and $214,500, respectively, to an affiliate for telecommunication
services.
An
affiliate provided certain professional services to WPI for which WPI incurred
charges of approximately $27,000 and $81,000 for the three months ended
March 31, 2007 and 2006, respectively.
We
provided certain professional services to affiliates for which we charged
$175,000 and $113,000 in the three months ended March 31, 2007 and 2006,
respectively. As of March 31, 2007, current liabilities in the consolidated
balance sheet included $116,164 to be applied to our charges to the affiliate
for services to be provided to it.
Note 5 — Investments
and Related Matters
a. Current
Investments
Current
investments consist of the following (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
| |
|
Amortized
Cost
|
|
Carrying
Value
|
|
Amortized
Cost
|
|
Carrying
Value
|
| |
|
(unaudited)
|
|
|
|
|
|
|
|
Current
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
investments
|
|
$
|
—
|
|
$
|
28,727
|
|
$
|
—
|
|
$
|
20,538
|
|
Total
current trading
|
|
|
—
|
|
|
28,727
|
|
|
—
|
|
|
20,538
|
|
Available
for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity and debt securities
|
|
|
236,354
|
|
|
247,880
|
|
|
242,080
|
|
|
265,411
|
|
Other
investments
|
|
|
284,535
|
|
|
286,945
|
|
|
251,131
|
|
|
253,166
|
|
Total
current available for sale
|
|
|
520,889
|
|
|
534,825
|
|
|
493,211
|
|
|
518,577
|
|
Total
current investments
|
|
$
|
520,889
|
|
$
|
563,552
|
|
$
|
493,211
|
|
$
|
539,115
|
We use
the services of an unaffiliated third-party investment manager to manage certain
fixed income investments. As of March 31, 2007 and December 31, 2006,
$162.0 million and $163.7 million, respectively, had been invested at the
discretion of such manager in a diversified portfolio consisting predominantly
of short-term investment grade debt securities. Investments managed by the
third-party investment manager are classified as available for sale securities
in the above table.
F-68
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 5 —
Investments and
Related Matters – (continued)
b. Noncurrent
Investments
Investment
in ImClone Systems Incorporated
As
described in Note 1 above, we adopted SFAS 159 as of January 1, 2007 and elected
to apply the fair value option to our investment in ImClone at the time of
adoption. Previously, we accounted for our investment in ImClone under the
equity method in accordance with APB 18, The Equity Method of Accounting for
Investments in Common Stock. The transition adjustment to beginning
partners’ equity related to the adoption of SFAS 159 was a charge of
approximately $42.2 million. We recorded approximately $63.9 million of
unrealized gains in the first quarter of fiscal 2007 resulting from the change
in the market price of ImClone’s stock.
At
March 31, 2007 and December 31, 2006, our carrying value of our equity
investment in ImClone was $186.1 million based on the fair value method of
accounting and $164.3 million based on the equity method of accounting,
respectively. As of March 31, 2007 and December 31, 2006, the market value
of our ImClone shares held was $186.1 million and $122.2 million, respectively,
which we believe is not material to our total assets. As of March 31, 2007,
the total shares of ImClone common stock held by us as a percentage of ImClone’s
total outstanding shares was 5.4%. ImClone is a registered SEC filer and its
consolidated financial statements are readily available at www.sec.gov.
Other
Noncurrent Investments
The
carrying value of other noncurrent investments was $13.7 million and $13.4
million as of March 31, 2007 and December 31, 2006, respectively. Included
in other securities is an investment of 4.4% of the common stock of Philip
Services Corporation, an entity controlled by related parties. The investment
has a cost basis of $0.7 million, which is net of significant impairment charges
taken in prior years.
Note 6 — Inventories,
Net
Inventories,
net, relate solely to our Home Fashion segment and consist of the following
(in
$000s):
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
| |
|
(unaudited)
|
|
|
|
|
Raw
materials and supplies
|
|
$
|
26,372
|
|
$
|
32,059
|
|
Goods
in process
|
|
|
77,481
|
|
|
83,592
|
|
Finished
goods
|
|
|
131,505
|
|
|
129,851
|
| |
|
$
|
235,358
|
|
$
|
245,502
|
Note 7 — Trade, Notes
and Other Receivables, Net
Trade
notes and other receivables, net, consist of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Trade
receivables – Home Fashion
|
|
$
|
142,827
|
|
$
|
134,111
|
|
|
Allowance
for doubtful accounts – Home Fashion
|
|
|
(8,136
|
)
|
|
(8,303
|
)
|
|
Other
|
|
|
35,150
|
|
|
50,688
|
|
| |
|
$
|
169,841
|
|
$
|
176,496
|
|
F-69
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 8 — Other Current
Assets
Other
current assets consist of the following (in $000s):
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
| |
|
(unaudited)
|
|
|
|
|
Restricted
cash
|
|
$
|
33,090
|
|
$
|
87,428
|
|
Other
|
|
|
43,299
|
|
|
47,559
|
| |
|
|
|
|
|
|
| |
|
$
|
76,389
|
|
$
|
134,987
|
As of
December 31, 2006, restricted cash included $50.0 million placed into escrow
related to our sale of ACE to Pinnacle, which was released in February 2007
in
connection with the settlement of the litigation with GB Holdings. Additionally,
restricted cash consists of balances for escrow deposits and funds held to
collateralize letters of credit.
Note 9 — Property,
Plant and Equipment
Property,
plant and equipment consists of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Land
|
|
$
|
115,236
|
|
$
|
129,729
|
|
|
Buildings
and improvements
|
|
|
443,402
|
|
|
446,878
|
|
|
Machinery,
equipment and furniture
|
|
|
332,614
|
|
|
333,741
|
|
|
Assets
leased to others
|
|
|
117,110
|
|
|
123,398
|
|
|
Construction
in progress
|
|
|
112,480
|
|
|
90,672
|
|
| |
|
|
1,120,842
|
|
|
1,124,418
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(222,248
|
)
|
|
(217,347
|
)
|
|
Net
property, plant and equipment
|
|
$
|
898,594
|
|
$
|
907,071
|
|
Depreciation
and amortization expense related to property, plant and equipment for the three
months ended March 31, 2007 and 2006 were $14.5 million and $17.4 million,
respectively.
Note 10 — Other Non
Current Assets
Other
non current assets consist of the following (in $000s):
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
| |
|
(unaudited)
|
|
|
|
|
Deferred
taxes
|
|
$
|
45,626
|
|
$
|
48,976
|
|
Deferred
finance costs, net of accumulated amortization of $4,945 and
$4,827 as
of March 31, 2007 and December 31, 2006, respectively
|
|
|
10,325
|
|
|
11,684
|
|
Other
|
|
|
25,363
|
|
|
24,577
|
| |
|
$
|
81,314
|
|
$
|
85,237
|
F-70
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 11 — Minority
Interests
Minority
interests consist of the following (in $000s):
|
|
|
|
|
|
|
| |
March 31,
2007
|
|
December 31,
2006
|
| |
(unaudited)
|
|
|
|
|
WPI
|
$
|
166,938
|
|
$
|
178,843
|
|
Atlantic
Coast
|
|
6,969
|
|
|
70,563
|
|
NEGI
|
|
24,112
|
|
|
42,815
|
| |
$
|
198,019
|
|
$
|
292,221
|
The
minority interest in Atlantic Coast was reduced primarily as a result of the
settlement of the litigation relating to GB Holdings. As a result, our ownership
in Atlantic Coast increased from 67.6% to 96.9%.
Note 12 — Long-Term
Debt
Long-term
debt consists of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December
31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
|
|
Senior
unsecured 7.125% notes due 2013 – AREP
|
|
$
|
967,982
|
|
$
|
475,500
|
|
|
Senior
unsecured 8.125% notes due 2012 – AREP
|
|
|
346,352
|
|
|
346,027
|
|
|
Senior
secured 7.85% notes due 2012 – ACEP
|
|
|
215,000
|
|
|
215,000
|
|
|
Borrowings
under credit facility – ACEP
|
|
|
40,000
|
|
|
40,000
|
|
|
Mortgages
payable
|
|
|
108,027
|
|
|
109,289
|
|
|
Other
|
|
|
12,470
|
|
|
13,425
|
|
|
Total
long-term debt
|
|
|
1,689,831
|
|
|
1,199,241
|
|
|
Less
current portion
|
|
|
(23,620
|
)
|
|
(23,970
|
)
|
| |
|
$
|
1,666,211
|
|
$
|
1,175,271
|
|
Senior unsecured
7.125% notes due 2013
On
February 7, 2005, we issued $480.0 million aggregate principal amount of 7.125%
senior unsecured notes due 2013, or the 7.125% notes, priced at 100% of
principal amount. The 7.125% notes were issued pursuant to an indenture dated
February 7, 2005 between us, as issuer, American Real Estate Finance Corp.,
or
AREF, as co-issuer, AREH, as guarantor, and Wilmington Trust Company, as trustee
(referred to herein as the 2005 Indenture). Other than AREH, no other
subsidiaries guarantee payment on the notes. AREF, our wholly owned subsidiary,
was formed solely for the purpose of serving as a co-issuer of the 7.125%
notes.
On
January 16, 2007, we issued an additional $500.0 million aggregate principal
amount of 7.125% notes, or the additional 7.125% senior notes (the 7.125% notes
and the additional 7.125% senior notes being referred to herein as the notes),
priced at 98.4% of par, or at a discount of 1.6%, pursuant to the 2005
Indenture. The notes have a fixed annual interest rate of 7.125%, which will
be
paid every six months on February 15 and August 15 and will mature on February
15, 2013. At the time we issued the additional 7.125% senior notes, we entered
into a new registration rights agreement in which we agreed to permit
noteholders to exchange the notes for new notes which have been registered
under
the Securities Act of 1933, as amended, or the Securities Act.
Senior unsecured
8.125% notes due 2012
On
May 12, 2004, AREP and AREH co-issued senior unsecured 8.125% notes due 2012,
or
the 8.125% notes, in the aggregate principal amount of $353 million. The 8.125%
notes were priced at 99.266% of principal amount and have a fixed annual
interest rate of 8.125%, which will be paid every six months on June 1 and
December 1, commencing December 1, 2004. The 8.125% notes will mature on June
1,
2012. AREH is a guarantor of the debt. No other subsidiaries guarantee payment
on the notes.
F-71
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 12 — Long-Term
Debt – (continued)
Senior unsecured
notes restrictions and covenants — AREP
The
indentures governing our senior unsecured notes restrict the payment of cash
dividends or distributions, the purchase of equity interests or the purchase,
redemption, defeasance or acquisition of debt subordinated to the senior
unsecured notes. The indentures also restrict the incurrence of debt or the
issuance of disqualified stock, as defined, with certain exceptions, provided
that we may incur debt or issue disqualified stock if, immediately after such
incurrence or issuance, the ratio of the aggregate principal amount of all
outstanding indebtedness of AREP and its subsidiaries on a consolidated basis
to
the tangible net worth of AREP and its subsidiaries on a consolidated basis
would be less than 1.75 to 1.0. As of March 31, 2007, such ratio was less
than 1.75 to 1.0.
The
indentures governing our senior unsecured notes require that on each quarterly
determination date we and the guarantor maintain a minimum ratio of cash flow
to
fixed charges, each as defined, of 1.5 to 1.0, for the four consecutive fiscal
quarters most recently completed prior to such quarterly determination date.
For
the first fiscal quarter ended March 31, 2007, the ratio of cash flow to
fixed charges was greater than 1.5 to 1.0.
The
indentures also require, on each quarterly determination date, that the ratio
of
total unencumbered assets, as defined, to the principal amount of unsecured
indebtedness, as defined, be greater than 1.5 to 1.0 as of the last day of
the
most recently completed fiscal quarter. As of March 31, 2007, such ratio
was in excess of 1.5 to 1.0. Based on this ratio, as of March 31, 2007, we
and AREH could have incurred up to approximately $1.4 billion of additional
indebtedness.
AREP Senior Secured
Revolving Credit Facility
On August
21, 2006, we and AREF, as the borrowers, and certain of our subsidiaries, as
guarantors, entered into a credit agreement with Bear Stearns Corporate Lending
Inc., as administrative agent, and certain other lender parties. Under the
credit agreement, we are permitted to borrow up to $150.0 million, including
a
$50.0 million sub-limit that may be used for letters of credit. Borrowings
under the agreement, which are based on our credit rating, bear interest at
LIBOR plus 1.0 % to 2.0 %. We pay an unused line fee of 0.25 % to 0.5 %. As
of
March 31, 2007, there were no borrowings under the facility.
Obligations
under the credit agreement are guaranteed by and secured by liens on
substantially all of the assets of certain of our indirect wholly owned holding
company subsidiaries. The credit agreement has a term of four years and all
amounts are due and payable on August 21, 2010. The credit agreement includes
covenants that, among other things, restrict the creation of liens and certain
dispositions of property by holding company subsidiaries that are guarantors.
Obligations under the credit agreement are immediately due and payable upon
the
occurrence of certain events of default.
Senior secured
7.85% notes due 2012 — ACEP
The
indenture governing ACEP’s 7.85% senior secured notes due 2012 restrict the
payment of cash dividends or distributions by ACEP, the purchase of its equity
interests, the purchase, redemption, defeasance or acquisition of debt
subordinated to ACEP’s notes and investments as “restricted payments.” The
indenture also prohibits the incurrence of debt or the issuance of disqualified
or preferred stock, as defined, by ACEP, with certain exceptions, provided
that
ACEP may incur debt or issue disqualified stock if, immediately after such
incurrence or issuance, the ratio of consolidated cash flow to fixed charges
(each as defined) for the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the
date
on which such additional indebtedness is incurred or disqualified stock or
preferred stock is issued would be at least 2.0 to 1.0, determined on a pro
forma basis giving effect to the debt incurrence or issuance. As of
March 31, 2007, such ratio was in excess of 2.0 to 1.0. The indenture also
restricts the creation of liens, the sale of assets, mergers, consolidations
or
sales of substantially all of ACEP’s assets, the lease or grant of a license,
concession, other agreements to occupy, manage or use ACEP’s assets, the
issuance of capital stock of restricted subsidiaries and certain related party
transactions. The
F-72
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 12 — Long-Term
Debt – (continued)
ACEP notes allow ACEP to incur
indebtedness, among other things, of up to $50.0 million under credit
facilities, non-recourse financing of up to $15.0 million to finance the
construction, purchase or lease of personal or real property used in its
business, permitted affiliate subordinated indebtedness (as defined), the
issuance of additional 7.85% senior secured notes due 2012 in an aggregate
principal amount not to exceed 2.0 times net cash proceeds received from equity
offerings and permitted affiliate subordinated debt, and additional indebtedness
of up to $10.0 million.
ACEP Senior
Secured Revolving Credit Facility
Effective
May 11, 2006, ACEP, and certain of ACEP’s subsidiaries, as guarantors, entered
into an amended and restated credit agreement with Wells Fargo Bank N.A., as
syndication agent, Bear Stearns Corporate Lending Inc., as administrative agent,
and certain other lender parties. As of March 31, 2007, the interest rate
on the outstanding borrowings under the credit facility was 6.82% per annum.
The
credit agreement amends and restates, and is on substantially the same terms
as,
a credit agreement entered into as of January 29, 2004. Under the amended and
restated credit agreement, ACEP will be permitted to borrow up to $60.0 million.
Obligations under the credit agreement are secured by liens on substantially
all
of the assets of ACEP and its subsidiaries. The credit agreement has a term
of
four years and all amounts are due and payable on May 10, 2010. As of
March 31, 2007, there were $40.0 million of borrowings under the credit
agreement. The borrowings were incurred to finance a portion of the purchase
price of the Aquarius.
The credit
agreement includes covenants that, among other things, restrict the incurrence
of additional indebtedness by ACEP and its subsidiaries, the issuance of
disqualified or preferred stock, as defined, the creation of liens by ACEP
or
its subsidiaries, the sale of assets, mergers, consolidations or sales of
substantially all of ACEP’s assets, the lease or grant of a license or
concession, other agreements to occupy, manage or use ACEP’s assets, the
issuance of capital stock of restricted subsidiaries and certain related party
transactions. The credit agreement also requires that, as of the last date
of
each fiscal quarter, ACEP’s ratio of consolidated first lien debt to
consolidated cash flow not be more than 1.0 to 1.0. As of March 31, 2007,
such ratio was less than 1.0 to 1.0. As of March 31, 2007, ACEP was in
compliance with each of the covenants.
The
restrictions imposed by ACEP’s senior secured notes and the credit facility
likely will limit our receiving payments from the operations of our hotel and
gaming properties.
Mortgages
Payable
Mortgages
payable, all of which are non-recourse to us, bear interest at rates between
4.97% and 7.99% and have maturities between September 1, 2008 and July 1,
2016.
WestPoint Home
Secured Revolving Credit Agreement
On June
16,
2006, WestPoint Home, Inc., an indirect wholly owned subsidiary of WPI, entered
into a $250.0 million loan and security agreement with Bank of America,
N.A., as administrative agent and lender. On September 18, 2006, The CIT
Group/Commercial Services, Inc., General Electric Capital Corporation and Wells
Fargo Foothill, LLC were added as lenders under this credit agreement. Under
the
five-year agreement, borrowings are subject to a monthly borrowing base
calculation and include a $75.0 million sub-limit that may be used for letters
of credit. Borrowings under the agreement bear interest, at the election of
WestPoint Home, either at the prime rate adjusted by an applicable margin
ranging from minus 0.25% to plus 0.50% or LIBOR adjusted by an applicable margin
ranging from plus 1.25% to 2.00%. WestPoint Home pays an unused line fee of
0.25% to 0.275%. Obligations under the agreement are secured by WestPoint Home’s
receivables, inventory and certain machinery and equipment.
The
agreement contains covenants including, among others, restrictions on the
incurrence of indebtedness, investments, redemption payments, distributions,
acquisition of stock, securities or assets of any other entity and capital
expenditures. However, WestPoint Home is not precluded from effecting any of
these transactions if excess availability, after giving effect to such
transaction, meets a minimum threshold.
F-73
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 12 — Long-Term
Debt – (continued)
As of
March 31, 2007, there were no borrowings under the agreement, but there
were outstanding letters of credit of approximately $26.6 million, the majority
of which relate to trade obligations.
Note 13 — Other Income
(Expense)
Unaudited
Other Income (Expense), net, is comprised of the following (in $000s):
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Net
realized gains on sales of marketable securities
|
|
$
|
5,177
|
|
$
|
33,431
|
|
|
Unrealized
gains on marketable securities
|
|
|
72,126
|
|
|
15,478
|
|
|
Net
realized losses on securities sold short
|
|
|
(1,510
|
)
|
|
(5,131
|
)
|
|
Unrealized
gains (losses) on securities sold short
|
|
|
3,617
|
|
|
(25,476
|
)
|
|
Gain
on sale of assets
|
|
|
3,612
|
|
|
—
|
|
|
Other
|
|
|
1,759
|
|
|
3,007
|
|
| |
|
$
|
84,781
|
|
$
|
21,309
|
|
We
recorded approximately $63.9 million of unrealized gains in the first quarter
of
fiscal 2007 resulting from the change in the market price of ImClone’s
stock.
Note 14— Segment
Reporting
Through
the second quarter of fiscal 2006, we maintained the following six reportable
segments: (1) Oil and Gas; (2) Gaming; (3) Rental Real Estate; (4) Property
Development; (5) Associated Resort Activities; and (6) Home Fashion. Our three
real estate related operating and reportable segments are all individually
immaterial and have been aggregated for purposes of the accompanying
consolidated balance sheets and statements of operations.
In
November 2006, we divested our Oil and Gas operating units. As a result, our
Oil
and Gas operations are now classified as discontinued operations and thus are
not considered a reportable segment of our continuing operations. We now
maintain the five remaining reportable segments.
We assess
and measure segment operating results based on segment earnings from operations
as disclosed below. Segment earnings from operations are not necessarily
indicative of cash available to fund cash requirements nor synonymous with
cash
flow from operations. As discussed above, the terms of financings for the
Gaming, Home Fashion and Associated Resorts Activities segments impose
restrictions on their ability to transfer funds to us, including restrictions
on
dividends, distributions, loans and other transactions.
F-74
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 14 — Segment
Reporting – (continued)
The
revenues and net segment operating income for each of the reportable segments
of
our continuing operations are summarized as follows for the three months ended
March 31, 2007 and 2006 (in $000s) (unaudited):
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Gaming,
net
|
|
$
|
112,888
|
|
$
|
85,945
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Rental
Real Estate
|
|
|
3,517
|
|
|
3,246
|
|
|
Property
development
|
|
|
18,145
|
|
|
11,384
|
|
|
Resort
operations
|
|
|
6,225
|
|
|
6,082
|
|
|
Total
Real Estate
|
|
|
27,887
|
|
|
20,712
|
|
|
Home
Fashion
|
|
|
210,604
|
|
|
243,490
|
|
|
Total
revenues
|
|
$
|
351,379
|
|
$
|
350,147
|
|
|
Net
segment operating income (loss):
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
23,227
|
|
$
|
18,623
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Rental
Real Estate
|
|
|
2,024
|
|
|
2,248
|
|
|
Property
development
|
|
|
2,533
|
|
|
1,408
|
|
|
Resort
operations
|
|
|
(276
|
)
|
|
(182
|
)
|
|
Total
Real Estate
|
|
|
4,281
|
|
|
3,474
|
|
|
Home
Fashion
|
|
|
(39,015
|
)
|
|
(37,958
|
)
|
|
Total
segment operating loss
|
|
|
(11,507
|
)
|
|
(15,861
|
)
|
|
Holding
Company costs(i)
|
|
|
(7,668
|
)
|
|
(11,145
|
)
|
|
Total
operating loss
|
|
|
(19,175
|
)
|
|
(27,006
|
)
|
|
Interest
expense
|
|
|
(31,432
|
)
|
|
(23,692
|
)
|
|
Interest
income
|
|
|
31,458
|
|
|
11,554
|
|
|
Other
income (expense), net
|
|
|
84,781
|
|
|
21,309
|
|
|
Equity
in earnings of affiliate
|
|
|
—
|
|
|
24
|
|
|
Income
from continuing operations before income taxes & minority
interest
|
|
|
65,632
|
|
|
(17,811
|
)
|
|
Income
tax expense
|
|
|
(6,949
|
)
|
|
(5,211
|
)
|
|
Minority
interests
|
|
|
11,590
|
|
|
15,069
|
|
|
Income
(loss) from continuing operations
|
|
$
|
70,273
|
|
$
|
(7,953
|
)
|
——————
(i)
Holding
Company costs include general and administrative expenses and acquisition (legal
and professional) costs at the Holding Company level. Selling, general and
administrative expenses of the segments are included in their respective
operating expenses in the accompanying statements of operations.
F-75
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 14 — Segment
Reporting – (continued)
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
| |
|
(unaudited)
|
|
(restated)
|
|
Assets
(in $000s):
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
560,646
|
|
$
|
552,753
|
|
Real
Estate
|
|
|
386,833
|
|
|
382,220
|
|
Home
Fashion
|
|
|
778,912
|
|
|
806,000
|
|
Subtotal
|
|
|
1,726,391
|
|
|
1,740,973
|
|
Assets
of discontinued operations held for sale
|
|
|
48,205
|
|
|
47,503
|
|
Reconciling
items(ii)
|
|
|
2,855,543
|
|
|
2,463,167
|
|
Total
assets
|
|
$
|
4,630,139
|
|
$
|
4,251,643
|
——————
(ii)
Reconciling
items relate principally to cash and investments of the Holding Company.
Note 15 — Income
Taxes
Our
corporate subsidiaries recorded the following income tax expense attributable
to
continuing operations for our taxable subsidiaries for the three months ended
March 31, 2007 and 2006 (in $000s) (unaudited):
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
March 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Current
|
|
$
|
(6,587
|
)
|
$
|
(5,595
|
)
|
|
Deferred
|
|
$
|
(362
|
)
|
|
384
|
|
| |
|
$
|
(6,949
|
)
|
|
(5,211
|
)
|
We
recorded income tax provisions of $6.9 million and $5.2 million on pre-tax
income of $64.1 million for the three months ended March 31, 2007 and
pre-tax loss of ($19.3) million for the three months ended March 31, 2006.
Our effective income tax rate was 10.8% and (27.0)% for the respective periods.
The difference between the effective tax rate and the statutory federal rate
of
35% is due principally to income or losses from partnership entities in which
taxes are the responsibility of the partners, as well as changes in valuation
allowances.
We
adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on
January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes
recognized in accordance with SFAS No. 109 , “Accounting for Income Taxes,” and
prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The adoption of FIN 48 did not have a material impact
on
our consolidated financial statements.
As of
the
date of adoption, our unrecognized tax benefits totaled $5.0 million, all of
which, if recognized, would affect the annual effective tax rate. During the
three months ended March 31, 2007, there have been no changes to the amount
of unrecognized tax benefits. We believe it is reasonably possible that the
total amounts of unrecognized tax benefits could materially change as a result
of settlements due to audits and the expiration of statutes of limitations
prior
to March 31, 2008; however, quantification of an estimated amount cannot be
made at this time.
We
recognize interest accrued related to uncertain tax positions in interest
expense. Penalties are recognized as a component of income tax expense. The
amount of accrued interest and penalties on uncertain tax positions was $1.2
million and $1.1 million as of March 31, 2007 and January 1, 2007,
respectively. The amount of interest and penalties accrued during the three
months ended March 31, 2007 was approximately $0.1 million.
F-76
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 15 — Income Taxes
(continued)
We
or certain of our subsidiaries file income tax returns in the U.S. federal
jurisdiction, various state jurisdictions, and various non-U.S. jurisdictions.
We are no longer subject to U.S. federal, state, and non-U.S. income tax
examinations for years prior to 2002.
Note 16 — Commitments
and Contingencies
We are
from time to time parties to various legal proceedings arising out of our
businesses. We believe, however, that other than the proceedings described
below
there are no proceedings pending or threatened against us which, if determined
adversely, would have a material adverse effect on our business, financial
condition, results of operations or liquidity
WPI
Litigation
In August
2005, WPI acquired substantially all of the assets of WestPoint Stevens, Inc.
pursuant to an order of the Bankruptcy Court, or the Sale Order. We were holders
of approximately 39.99% of the outstanding first lien debt and approximately
51.21% of the outstanding second lien debt of WestPoint Stevens, Inc. Since
2005, we have been involved in litigation with certain of the first lien holders
of WestPoint Stevens, Inc., or the Contrarian Group, in the Bankruptcy Court,
the U.S. District Court for the Southern District of New York and, since 2006,
in the Delaware Chancery Court, relating to the Sale Order and our ownership
of
a majority of the common stock of WPI. In late 2005, the District ruled on
the
Contrarian Group’s appeal of the Sale Order and remanded the matter to the
Bankruptcy Court. On April 13, 2006, the Bankruptcy Court entered a remand
order, or the Remand Order, which provides, among other things, that all of
the
shares of common stock and rights to acquire shares of common stock of WPI
issued to us and the other first lien lenders or held in escrow pursuant to
the
Sale Order constituted “replacement collateral”, other than 5,250,000 shares of
common stock that we acquired for cash. The Bankruptcy Court also issued a
stay
of the Remand Order pending the parties’ appeal. Both parties appealed the
Bankruptcy Court’s Remand Order to the District Court. In addition, the
Contrarian Group requested that the stay be lifted or that we be required to
post a bond as a condition to the continuance of the stay. On May 9, 2007,
the
District Court denied the Contrarian Group’s motion to lift the stay of the
Remand Order, but conditioned the continuation of the stay on the posting of
a
bond of $200 million by May 17, 2007. The order is without prejudice to the
right of any party to seek a change in the amount of the bond. We are currently
reviewing the order. As of the date hereof, the District Court has not rendered
a decision on the cross-appeals.
On
January 19, 2007, the trustee for the first lien lenders, Beal Bank, and certain
of the first lien lenders filed an Amended Complaint, captioned Beal Bank,
S.S.B. et al v. WestPoint International, Inc., et al. Plaintiffs seek, among
other relief, an order declaring that WPI is obliged to register the common
stock (other than the 5,250,000 shares purchased by us) in Beal Bank’s name, an
order declaring certain corporate governance changes implemented in 2005
invalid, an order declaring invalid the actions taken at the December 20, 2006
stockholders’ meeting and an order to “unwind” the issuance to us in December
2006 of the preferred stock of WPI, or, alternatively, directing that such
preferred stock be held in trust. We have filed a motion to dismiss the Delaware
action to which the Plaintiffs have objected. Oral argument is scheduled for
May
23, 2007.
F-77
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 16 — Commitments
and Contingencies (continued)
We
currently own approximately 67.7% of the outstanding shares of common stock
and
100% of the preferred stock of WPI. As a result of the District Court’s order in
the Bankruptcy case, the proceedings on remand, and the proceedings in the
Delaware action, our percentage of the outstanding shares of common stock of
WPI
could be reduced to less than 50% and perhaps substantially less and our
ownership of the preferred stock of WPI could also be affected. If we were
to
lose control of WPI, it could adversely affect the business and prospects of
WPI
and the value of our investment in it. In addition, we consolidated the balance
sheet of WPI as of March 31, 2007 and WPI’s results of operations for the period
from the date of acquisition through March 31, 2007. If we were to own less
than
50% of the outstanding common stock or the challenge to our preferred stock
ownership is successful, we would have to evaluate whether we should consolidate
WPI and if so our financial statements could be materially different than as
presented as of March 31, 2007, December 31, 2006 and December 31, 2005 and
for
the periods then ended.
We cannot
predict the outcome of these proceedings or the ultimate impact on our
investment in WPI or the business prospects of WPI.
Note 17 — Fair Value
of Financial Instruments
The
following table sets forth our financial instruments owned, at fair value,
and
financial instruments sold, but not yet purchased, at fair value (in
$000s):
|
|
|
|
|
|
|
|
| |
|
March 31,
2007
|
|
December 31,
2006
|
| |
|
(unaudited)
|
|
|
|
|
Financial
Instruments Owned:
|
|
|
|
|
|
|
Trading
investments
|
|
$
|
28,727
|
|
$
|
20,538
|
|
Available
for sale investments:
|
|
|
|
|
|
|
|
Marketable
equity and debt securities
|
|
|
247,880
|
|
|
265,411
|
|
Other
securities
|
|
|
286,945
|
|
|
253,166
|
|
Investment
in ImClone Systems Incorporated
|
|
|
186,058
|
|
|
122,122
|
| |
|
$
|
749,610
|
|
$
|
661,237
|
|
Securities
sold not yet purchased
|
|
$
|
8,682
|
|
$
|
25,398
|
F-78
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 17 — Fair Value
of Financial Instruments (continued)
The
following table sets forth our financial assets and liabilities that were
accounted for at fair value as of March 31, 2007 by level within the fair
value hierarchy. As required by SFAS 157, financial assets and liabilities
are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
| |
|
Assets
and Liabilities at Fair Value
As of
March 31, 2007 ($000)
|
| |
|
Level
1
|
|
Level
2
|
|
Total
|
| |
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Trading
investments(i)
|
|
$
|
28,727
|
|
$
|
—
|
|
$
|
28,727
|
|
Available
for sale investments:
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity and debt securities(i)
|
|
|
247,880
|
|
|
—
|
|
|
247,880
|
|
Other
securities
|
|
|
23,500
|
(i)
|
|
263,445
|
(ii)
|
|
286,945
|
|
Investment
in ImClone Systems Incorporated(i)
|
|
|
186,058
|
|
|
—
|
|
|
186,058
|
| |
|
$
|
486,165
|
|
$
|
263,445
|
|
$
|
749,610
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Securities
sold not yet purchased(i)
|
|
$
|
8,682
|
|
|
—
|
|
|
8,682
|
——————
(i)
Based
on quoted prices in active markets of the securities.
(ii)
Includes
$243.2 million representing 13,508,666 shares of SandRidge valued at $18.00
per
share based on an appraisal conducted in November 2006. As disclosed in Note
18,
on April 4, 2007, we sold all of our shares of SandRidge common stock to a
consortium of investors for $18.00 per share.
Note 18 — Subsequent
Events
Sale of Common
Stock of SandRidge Energy, Inc.
On
April 4, 2007, our subsidiaries signed agreements to sell their entire position
in the common stock of SandRidge to a consortium of investors in a series
of private transactions. The per share selling price was $18, and total cash
consideration received at closing was approximately $243.2 million.
Issuance of
Convertible Debt
In
April 2007, we sold an aggregate of $600.0 million of Variable Rate Senior
Convertible Notes due 2013, or the Notes. The Notes were sold in a private
placement pursuant to Section 4(2) of the Securities Act. The Notes bear
interest at a rate of three month LIBOR minus 125 basis points, but no less
than
4.0% nor higher than 5.5%, and are convertible into depositary units of AREP
at
a conversion price of $132.595 per share, subject to adjustments in certain
circumstances.
F-79
Back
to Index
AMERICAN
REAL ESTATE HOLDINGS LIMITED PARTNERSHIP AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31,
2007
Note 18 — Subsequent
Events – (continued)
The Notes
have not been and will not be registered under the Securities Act and may not
be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act. In
connection with the sale of the Notes, we and the buyers have entered into
a
registration rights agreement, pursuant to which we have agreed to file one
or
more shelf registration statements with respect to resales of depositary units
issuable upon conversion of the Notes.
Sale of American
Casino & Entertainment Properties LLC
On April
22, 2007, American Entertainment Properties Corp, or AEP, a wholly owned
indirect subsidiary of AREP, entered into a Membership Interest Purchase
Agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real
Estate Funds, a series of real estate investment funds affiliated with Goldman,
Sachs & Co., to sell all of the issued and outstanding membership interests
of ACEP, which comprises our gaming operations, for $1.3 billion, plus or minus
certain adjustments such as working capital, more fully described in the
agreement. Pursuant to the terms of the agreement, AEP is required to cause
ACEP
to repay from funds provided by AEP, the principal, interest, prepayment penalty
or premium due on ACEP’s 7.85% senior secured notes due 2012 and ACEP’s senior
secured credit facility. With this transaction, we anticipate realizing a gain
of approximately $0.8 billion on our investments in ACEP, before income taxes.
ACEP’s casino assets are comprised of the Stratosphere Casino Hotel & Tower,
the Arizona Charlie’s Decatur, the Arizona Charlie’s Boulder and the Aquarius
Casino Resort. The transaction is subject to the approval of the Nevada Gaming
Commission and the Nevada State Gaming Control Board, as well as customary
conditions. The parties expect to close the transaction in approximately eight
months; however, we can not assure you that we will be able to consummate the
transaction.
Declaration
of
Distribution on Depositary Units
On May
4,
2007, the Board of Directors approved a $0.05 increase in our quarterly
distribution policy and payment of a quarterly cash distribution of $0.15 per
unit on our depositary units payable in the second quarter of fiscal 2007.
The
distribution will be paid on June 1, 2007 to depositary unitholders of record
at
the close of business on May 22, 2007. Under the terms of the indenture
dated April 5, 2007 governing our senior convertible notes due 2013, we
will also be making a $0.05 distribution to holders of these notes in accordance
with the formula set forth in the indenture.
Potential
Acquisitions
In
February 2007, we entered into an agreement and plan of merger pursuant to
which
we would acquire Lear Corporation, or Lear, for an aggregate purchase price
of
approximately $5.2 billion. In connection with the planned merger, our
subsidiary, AREP Car Holdings Corp., entered into a commitment letter with
Bank
of America, N.A., and Banc of America Securities LLC on February 8, 2007,
pursuant to which Bank of America would act as the initial lender under two
senior secured credit facilities in an aggregate principal amount of $3.6
billion, consisting of a $1.0 billion senior secured revolving facility and
a
$2.6 billion senior secured term loan B facility. The credit facilities, along
with cash on hand, are intended to refinance and replace Lear’s existing credit
facilities and to fund the transactions contemplated by the merger. We intend
to
fund approximately $1.4 billion of the purchase price from our cash and cash
equivalents and investments.
Mr. Carl
C. Icahn has proposed that we acquire his interests in American Railcar, Inc.,
or ARI, and Philip Services Corporation. A committee of independent directors
of
the board has been formed to consider the proposals. No agreement has been
reached as to price or terms. Any acquisition would be subject to, among other
things, the negotiation, execution and closing of a definitive agreement and
the
receipt of a fairness opinion. We continuously identify, evaluate and engage
in
discussions concerning potential investments and acquisitions, including
potential investments in and acquisitions of affiliates of Mr. Icahn. There
cannot be any assurance that the current proposals or any other potential
transactions that we consider will be completed. ARI is a publicly traded
company that is primarily engaged in the business of manufacturing covered
hoppers and tank railcars. Philip is an industrial services company that
provides industrial outsourcing, environmental services and metal services
to
major industry sectors throughout North America.
F-80
Back
to Index
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors
American Property Investors, Inc.
We have
audited the accompanying balance sheet of American Property Investors, Inc.
as
of December 31, 2006. This financial statement is the responsibility of the
Company’s management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We
conducted our audit 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 balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in that balance sheet.
An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In
our
opinion, the balance sheet referred to above presents fairly, in all material
respects, the financial position of American Property Investors, Inc. as of
December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton
LLP
New York, New York
June
15, 2007
F-81
BALANCE
SHEET
|
|
|
|
|
| |
|
December 31,
2006
|
| |
|
|
|
|
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,204,034
|
|
Investment
in partnerships (Note B)
|
|
|
52,342,623
|
| |
|
$
|
53,546,657
|
| |
|
|
|
|
LIABILITIES
AND STOCKHOLDER’S
EQUITY
|
|
|
|
| |
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
6,059
|
| |
|
|
|
|
Stockholder’s
equity:
|
|
|
|
|
Common
stock – $1 par value, 1,216 shares authorized,
216 shares
outstanding
|
|
|
216
|
|
Additional
paid-in capital
|
|
|
35,507,904
|
|
Note
receivable from affiliate (Note C)
|
|
|
(9,500,000)
|
|
Retained
earnings
|
|
|
26,938,478
|
|
Accumulated
other comprehensive
income
|
|
|
594,000
|
|
Total
stockholder’s equity
|
|
|
53,540,598
|
|
Total
liabilities and stockholder's equity
|
|
$
|
53,546,657
|
See notes
to
balance sheet.
F-82
NOTES
TO BALANCE SHEET
December 31, 2006
Note A — Business and
Summary of Significant Accounting Policies
1.
Organization
American
Property Investors, Inc. (“API” or “the Company”) is the general partner of both
American Real Estate Partners, L.P. (“AREP”) and American Real Estate Holdings
Limited Partnership (“AREH”). API has 1% general partnership interest in both
AREP and AREH. API is a wholly-owned subsidiary of Becton Corporation (“Becton”)
which in turn is owned by Carl C. Icahn. Mr. Icahn also owns, indirectly,
approximately 90% of the limited partnership interests of AREP, a New York
Stock
Exchange master limited partnership.
2. Cash and Cash
Equivalents
The
Company considers all temporary cash investments with maturity at the date
of
purchase of three months or less to be cash equivalents.
3. Use of
Estimates
Management
of
the Company has made certain estimates and assumptions relating to the reporting
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statement to prepare this balance
sheet
in conformity with accounting principles generally accepted in the United States
of America. Actual results could differ from those estimates.
4. Income
Taxes
The
Company and its parent have elected and the stockholders have consented, under
the applicable provisions of the Internal Revenue Code, to report their income
for Federal income tax purposes as a Subchapter S Corporation. The stockholders
report their respective shares of the net taxable income or loss on their
personal tax returns. Accordingly, no liability has been accrued for current
or
deferred Federal income taxes related to the operations of the Company in the
accompanying balance sheet. State and local taxes are de minimus
5. Investments
in
Partnerships
The
Company evaluates its investments in partially-owned entities in accordance
with
FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, or FIN 46R. If the partially-owned entity is a
“variable interest entity,” or a “VIE,” and that the Company is the “primary
beneficiary” as defined in FIN 46R, the Company would account for such
investment as if it were a consolidated subsidiary.
For a
partnership investment which is not a VIE or in which the Company is not the
primary beneficiary, the Company follows the accounting set forth in AICPA
Statement of Position No. 78-9 – Accounting for Investments in Real Estate
Ventures (SOP 78-9). In accordance with this pronouncement, investments in
joint
ventures are accounted for under the equity method when its ownership interest
is less than 50% and it does not exercise direct or indirect control. Factors
that are considered in determining whether or not the Company exercises control
include important rights of partners in significant business decisions,
including dispositions and acquisitions of assets, financing and operating
and
capital budgets, board and management representation and authority and other
contractual rights of the partners. To the extent that the Company is deemed
to
control these entities, these entities would be consolidated.
The
Company has determined that the AREP and AREH partnerships are not VIEs and
therefore it accounts for these investments under the equity method of
accounting as the limited partners have important rights as defined in SOP
78-9.
This investment was recorded initially at cost and was subsequently adjusted
for
equity in earnings or losses and cash contributions and distributions as well
as
other comprehensive income/loss.
F-83
NOTES
TO BALANCE SHEET
December 31, 2006
Note A — Business and
Summary of Significant Accounting Policies – (continued)
On a
periodic basis the Company evaluates whether there are any indicators that
the
value of its investments in partnerships are impaired. An investment is
considered to be impaired if the Company’s estimate of the value of the
investment is less than the carrying amount. The ultimate realization of the
Company’s investments in partnerships is dependent on a number of factors
including the performance of that entity and market conditions. If the Company
determines that a decline in the value of a partnership is other than temporary,
then the Company would record an impairment charge.
Note B — Investment in
Partnerships
The
Company has a 1% general partnership interest in both AREP and AREH. AREP is
the
99% limited partner and holding company of AREH which is involved in the
following operating businesses: (i) Oil & Gas; (ii) Gaming; (iii) Real
Estate; and (iv) Home Fashion.
The
carrying amount of the investment in partnerships on the Company’s balance sheet
exceeds the underlying equity in the net assets of the partnerships by
$254,382,000. This difference is as a result of adjustments reflected in AREP’s
equity to account for certain acquisitions from affiliates of the general
partner. The differences between the historical cost of companies acquired
and
the purchase price paid to the affiliates of the general partner were accounted
for as contributions from or distributions to the general partner.
F-84
NOTES
TO BALANCE SHEET
December 31, 2006
Summarized
financial information for American Real Estate Partners, L.P. and subsidiaries
as of December 31, 2006 is as follows (in thousands of dollars):
|
|
|
|
|
| |
|
December 31,
2006
|
| |
|
|
|
|
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,912,235
|
|
Investments
|
|
|
539,115
|
|
Inventories,
net
|
|
|
245,502
|
|
Trade,
notes and other receivables, net
|
|
|
176,496
|
|
Other
current assets
|
|
|
134,987
|
|
Assets
held for sale
|
|
|
47,503
|
|
Total
current assets
|
|
|
3,055,838
|
|
Property,
plant and equipment, net
|
|
|
|
|
Gaming
|
|
|
422,715
|
|
Real
Estate
|
|
|
283,974
|
|
Home
Fashion
|
|
|
200,382
|
|
Total
property, plant and
equipment
|
|
|
907,071
|
|
Equity
investment and other
|
|
|
179,932
|
|
Intangible
assets
|
|
|
25,916
|
|
Other
assets
|
|
|
75,990
|
|
Total
assets
|
|
$
|
4,244,747
|
| |
|
|
|
|
LIABILITIES
AND PARTNERS’ EQUITY
|
|
|
|
|
Accounts
payable
|
|
$
|
69,853
|
|
Accrued
expenses and other current liabilities
|
|
|
197,792
|
|
Current
portion of long-term debt
|
|
|
23,970
|
|
Securities
sold not yet purchased
|
|
|
25,398
|
|
Margin
liability on marketable securities
|
|
|
—
|
|
Liabilities
of discontinued operations held for sale
|
|
|
—
|
|
Total
current liabilities
|
|
|
317,013
|
|
Long-term
debt
|
|
|
1,184,990
|
|
Other
non-current liabilities
|
|
|
22,212
|
|
Preferred
limited partnership units
|
|
|
117,656
|
|
Minority
interests
|
|
|
292,221
|
|
Partners’
equity
|
|
|
2,310,655
|
|
Total
liabilities and partners’ equity
|
|
$
|
4,244,747
|
Note C — Note
Receivable
The
Company has an unsecured demand note receivable due from Carl C. Icahn, in
the
amount of $9,500,000. Interest on the note accrues at the rate of 3.75% per
annum and is payable on the last day of April and October. Interest has been
paid through December 31, 2006.
F-85
Back
to Index
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of
Lear Corporation
We have
audited the accompanying consolidated balance sheets of Lear Corporation and
Subsidiaries (the Company) as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule for the three years
in
the period ended December 31, 2006, included in Item 8. These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
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 consolidated financial position of the Company
as
of December 31, 2006 and 2005, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
for
the three years in the period ended December 31, 2006, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in
all material respects, the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, in 2006 the
Company changed its method of accounting for stock-based compensation.
As
discussed in Note 10 to the consolidated financial statements, in 2006 the
Company changed its method of accounting for pension and other postretirement
benefit plans.
/s/ Ernst & Young LLP
Detroit,
Michigan
February 20, 2007
F-86
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
| |
|
December
31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
(in
millions,
except share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
$
|
502.7
|
|
$
|
197.3
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
2,006.9
|
|
|
2,000.1
|
|
|
Inventories
|
|
|
581.5
|
|
|
595.6
|
|
|
Current
assets of business held for sale
|
|
|
427.8
|
|
|
607.7
|
|
|
Other
|
|
|
371.4
|
|
|
445.7
|
|
|
Total
current assets
|
|
|
3,890.3
|
|
|
3,846.4
|
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,471.7
|
|
|
1,614.7
|
|
|
Goodwill,
net
|
|
|
1,996.7
|
|
|
1,939.8
|
|
|
Long-term
assets of business held for sale
|
|
|
—
|
|
|
485.2
|
|
|
Other
|
|
|
491.8
|
|
|
402.3
|
|
|
Total
long-term assets
|
|
|
3,960.2
|
|
|
4,442.0
|
|
| |
|
$
|
7,850.5
|
|
|
$8,288.4
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
39.3
|
|
$
|
23.4
|
|
|
Accounts
payable and drafts
|
|
|
2,317.4
|
|
|
2,516.0
|
|
|
Accrued
liabilities
|
|
|
1,099.3
|
|
|
1,008.6
|
|
|
Current
liabilities of business held for sale
|
|
|
405.7
|
|
|
549.3
|
|
|
Current
portion of long-term debt
|
|
|
25.6
|
|
|
9.4
|
|
|
Total
current liabilities
|
|
|
3,887.3
|
|
|
4,106.7
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,434.5
|
|
|
2,243.1
|
|
|
Long-term
liabilities of business held for sale
|
|
|
48.5
|
|
|
27.6
|
|
|
Other
|
|
|
878.2
|
|
|
800.0
|
|
|
Total
long-term liabilities
|
|
|
3,361.2
|
|
|
3,070.7
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.01 per share, 150,000,000 shares
authorized,
81,984,306 shares and 73,281,653 shares issued as of
December 31, 2006
and 2005, respectively
|
|
|
0.7
|
|
|
0.7
|
|
|
Additional
paid-in capital
|
|
|
1,338.1
|
|
|
1,108.6
|
|
|
Common
stock held in treasury, 5,732,316 shares and 6,094,847 shares as
of
December 31, 2006 and 2005, respectively, at
cost
|
|
|
(210.2
|
)
|
|
(225.5
|
)
|
|
Retained
earnings (deficit)
|
|
|
(362.5
|
)
|
|
361.8
|
|
|
Accumulated
other comprehensive loss
|
|
|
(164.1
|
)
|
|
(134.6
|
)
|
|
Total
stockholders’ equity
|
|
|
602.0
|
|
|
1,111.0
|
|
| |
|
$
|
7,850.5
|
|
$
|
8,288.4
|
|
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-87
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
(in
million, except per share data)
|
|
|
Net
sales
|
|
$
|
17,838.9
|
|
$
|
17,089.2
|
|
$
|
16,960.0
|
|
|
Cost
of sales
|
|
|
16,911.2
|
|
|
16,353.2
|
|
|
15,557.9
|
|
|
Selling,
general and administrative expenses
|
|
|
646.7
|
|
|
630.6
|
|
|
633.7
|
|
|
Goodwill
impairment charge
|
|
|
2.9
|
|
|
1,012.8
|
|
|
—
|
|
|
Loss
on divestiture of Interior business
|
|
|
636.0
|
|
|
—
|
|
|
—
|
|
|
Interest
expense
|
|
|
209.8
|
|
|
183.2
|
|
|
165.5
|
|
|
Other
expense, net
|
|
|
85.7
|
|
|
38.0
|
|
|
38.6
|
|
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries, equity in net (income) loss of
affiliates
and cumulative effect of a change in accounting
principle
|
|
|
(653.4
|
)
|
|
(1,128.6
|
)
|
|
564.3
|
|
|
Provision
for income taxes
|
|
|
54.9
|
|
|
194.3
|
|
|
128.0
|
|
|
Minority
interests in consolidated subsidiaries
|
|
|
18.3
|
|
|
7.2
|
|
|
16.7
|
|
|
Equity
in net (income) loss of affiliates
|
|
|
(16.2
|
)
|
|
51.4
|
|
|
(2.6
|
)
|
|
Income
(loss) before cumulative effect of a change in
accounting
principle
|
|
|
(710.4
|
)
|
|
(1,381.5
|
)
|
|
422.2
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
|
Net
income (loss)
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of a change in accounting
principle
|
|
$
|
(10.35
|
)
|
$
|
(20.57
|
)
|
$
|
6.18
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
0.04
|
|
|
—
|
|
|
—
|
|
|
Basic
net income (loss) per share
|
|
$
|
(10.31
|
)
|
$
|
(20.57
|
)
|
$
|
6.18
|
|
|
Diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before cumulative effect of a change in
accounting
principle
|
|
$
|
(10.35
|
)
|
$
|
(20.57
|
)
|
$
|
5.77
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
0.04
|
|
|
—
|
|
|
—
|
|
|
Diluted
net income (loss) per share
|
|
$
|
(10.31
|
)
|
$
|
(20.57
|
)
|
$
|
5.77
|
|
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-88
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
(in
millions, except share data)
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning and end of period
|
|
$
|
0.7
|
|
$
|
0.7
|
|
$
|
0.7
|
|
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
1,108.6
|
|
$
|
1,064.4
|
|
$
|
1,027.7
|
|
|
Net
proceeds from the issuance of 8,695,653 shares of common
stock
|
|
|
199.2
|
|
|
—
|
|
|
—
|
|
|
Stock-based
compensation
|
|
|
30.7
|
|
|
43.8
|
|
|
26.4
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
Tax
benefit of stock options exercised
|
|
|
—
|
|
|
0.4
|
|
|
10.3
|
|
|
Balance
at end of period
|
|
$
|
1,338.1
|
|
$
|
1,108.6
|
|
$
|
1,064.4
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
(225.5
|
)
|
$
|
(204.1
|
)
|
$
|
(110.8
|
)
|
|
Issuances
of 362,531 shares at an average price of $42.40
|
|
|
15.3
|
|
|
—
|
|
|
—
|
|
|
Purchases
of 490,900 shares at an average price of $51.75
|
|
|
—
|
|
|
(25.4
|
)
|
|
—
|
|
|
Issuances
of 126,529 shares at an average price of $31.99
|
|
|
—
|
|
|
4.0
|
|
|
—
|
|
|
Purchases
of 1,834,300 shares at an average price of $53.29
|
|
|
—
|
|
|
—
|
|
|
(97.7
|
)
|
|
Issuances
of 395,126 shares at an average price of $11.12 per share in
settlement of
stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
4.4
|
|
|
Balance
at end of period
|
|
$
|
(210.2
|
)
|
$
|
(225.5
|
)
|
$
|
(204.1
|
)
|
|
Retained
Earnings (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
361.8
|
|
$
|
1,810.5
|
|
$
|
1,441.8
|
|
|
Net
income (loss)
|
|
|
(707.5
|
)
|
|
(1,381.5
|
)
|
|
422.2
|
|
|
Dividends
declared of $0.25 per share in 2006, $1.00 per share in 2005 and
$0.80 per share in 2004
|
|
|
(16.8
|
)
|
|
(67.2
|
)
|
|
(53.5
|
)
|
|
Balance
at end of period
|
|
$
|
(362.5
|
)
|
$
|
361.8
|
|
$
|
1,810.5
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
(115.0
|
)
|
$
|
(72.6
|
)
|
$
|
(62.2
|
)
|
|
Defined
benefit plan adjustments
|
|
|
17.4
|
|
|
(42.4
|
)
|
|
(10.4
|
)
|
|
Adoption
of SFAS No. 158
|
|
|
(166.6
|
)
|
|
—
|
|
|
—
|
|
|
Balance
at end of period
|
|
$
|
(264.2
|
)
|
$
|
(115.0
|
)
|
$
|
(72.6
|
)
|
|
Derivative
Instruments and Hedging Activities
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
9.0
|
|
$
|
17.4
|
|
$
|
(13.7
|
)
|
|
Derivative
instruments and hedging activities adjustments
|
|
|
5.7
|
|
|
(8.4
|
)
|
|
31.1
|
|
|
Balance
at end of period
|
|
$
|
14.7
|
|
$
|
9.0
|
|
$
|
17.4
|
|
|
Cumulative
Translation Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
(86.8
|
)
|
$
|
65.6
|
|
$
|
(61.5
|
)
|
|
Cumulative
translation adjustments
|
|
|
90.7
|
|
|
(152.4
|
)
|
|
127.1
|
|
|
Balance
at end of period
|
|
$
|
3.9
|
|
$
|
(86.8
|
)
|
$
|
65.6
|
|
|
Deferred
Income Tax Asset
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
58.2
|
|
$
|
48.2
|
|
$
|
35.5
|
|
|
Deferred
income tax asset adjustments
|
|
|
23.3
|
|
|
10.0
|
|
|
12.7
|
|
|
Balance
at end of period
|
|
$
|
81.5
|
|
$
|
58.2
|
|
$
|
48.2
|
|
|
Accumulated
other comprehensive income (loss)
|
|
$
|
(164.1
|
)
|
$
|
(134.6
|
)
|
$
|
58.6
|
|
|
Total
Stockholders’ Equity
|
|
$
|
602.0
|
|
$
|
1,111.0
|
|
$
|
2,730.1
|
|
|
Comprehensive
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
Defined
benefit plan adjustments
|
|
|
17.4
|
|
|
(42.4
|
)
|
|
(10.4
|
)
|
|
Derivative
instruments and hedging activities adjustments
|
|
|
5.7
|
|
|
(8.4
|
)
|
|
31.1
|
|
|
Cumulative
translation adjustments
|
|
|
90.7
|
|
|
(152.4
|
)
|
|
127.1
|
|
|
Deferred
income tax asset adjustments
|
|
|
23.3
|
|
|
10.0
|
|
|
12.7
|
|
|
Comprehensive
Income (Loss)
|
|
$
|
(570.4
|
)
|
$
|
(1,574.7
|
)
|
$
|
582.7
|
|
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-89
LEAR CORPORATION
AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
(in
millions)
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities —
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
(2.9
|
)
|
|
—
|
|
|
—
|
|
|
Goodwill
impairment charges
|
|
|
2.9
|
|
|
1,012.8
|
|
|
—
|
|
|
Loss
on divestiture of Interior business
|
|
|
636.0
|
|
|
—
|
|
|
—
|
|
|
Fixed
asset impairment charges
|
|
|
15.8
|
|
|
97.4
|
|
|
3.0
|
|
|
Deferred
tax provision (benefit)
|
|
|
(55.0
|
)
|
|
44.7
|
|
|
8.7
|
|
|
Equity
in net (income) loss of affiliates
|
|
|
(16.2
|
)
|
|
51.4
|
|
|
(2.6
|
)
|
|
Depreciation
and amortization
|
|
|
392.2
|
|
|
393.4
|
|
|
355.1
|
|
|
Net
change in recoverable customer engineering and tooling
|
|
|
194.9
|
|
|
(112.5
|
)
|
|
(32.5
|
)
|
|
Net
change in working capital items
|
|
|
(110.1
|
)
|
|
9.7
|
|
|
(62.4
|
)
|
|
Net
change in sold accounts receivable
|
|
|
(178.0
|
)
|
|
411.1
|
|
|
(70.4
|
)
|
|
Other,
net
|
|
|
113.2
|
|
|
34.3
|
|
|
54.8
|
|
|
Net
cash provided by operating activities
|
|
|
285.3
|
|
|
560.8
|
|
|
675.9
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(347.6
|
)
|
|
(568.4
|
)
|
|
(429.0
|
)
|
|
Cost
of acquisitions, net of cash acquired
|
|
|
(30.5
|
)
|
|
(11.8
|
)
|
|
(103.0
|
)
|
|
Net
proceeds from disposition of businesses and other assets
|
|
|
65.9
|
|
|
33.3
|
|
|
56.3
|
|
|
Other,
net
|
|
|
—
|
|
|
5.3
|
|
|
3.2
|
|
|
Net
cash used in investing activities
|
|
|
(312.2
|
)
|
|
(541.6
|
)
|
|
(472.5
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of senior notes
|
|
|
900.0
|
|
|
—
|
|
|
399.2
|
|
|
Repayment
of senior notes
|
|
|
(1,356.9
|
)
|
|
(600.0
|
)
|
|
—
|
|
|
Primary
credit facility borrowings, net
|
|
|
597.0
|
|
|
400.0
|
|
|
—
|
|
|
Other
long-term debt repayments, net
|
|
|
(36.5
|
)
|
|
(32.7
|
)
|
|
(49.4
|
)
|
|
Short-term
debt repayments, net
|
|
|
(11.8
|
)
|
|
(23.8
|
)
|
|
(29.8
|
)
|
|
Net
proceeds from the sale of common stock
|
|
|
199.2
|
|
|
—
|
|
|
—
|
|
|
Dividends
paid
|
|
|
(16.8
|
)
|
|
(67.2
|
)
|
|
(68.0
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
0.2
|
|
|
4.7
|
|
|
24.4
|
|
|
Repurchase
of common stock
|
|
|
—
|
|
|
(25.4
|
)
|
|
(97.7
|
)
|
|
Increase
(decrease) in drafts
|
|
|
3.0
|
|
|
(3.3
|
)
|
|
(12.6
|
)
|
|
Other,
net
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
277.4
|
|
|
(347.0
|
)
|
|
166.1
|
|
|
Effect
of foreign currency translation
|
|
|
54.9
|
|
|
(59.8
|
)
|
|
46.1
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
305.4
|
|
|
(387.6
|
)
|
|
415.6
|
|
|
Cash
and Cash Equivalents at Beginning of Year
|
|
|
197.3
|
|
|
584.9
|
|
|
169.3
|
|
|
Cash
and Cash Equivalents at End of Year
|
|
$
|
502.7
|
|
$
|
197.3
|
|
$
|
584.9
|
|
|
Changes
in Working Capital:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
153.2
|
|
$
|
(250.3
|
)
|
$
|
(147.7
|
)
|
|
Inventories
|
|
|
29.4
|
|
|
(76.9
|
)
|
|
(7.0
|
)
|
|
Accounts
payable
|
|
|
(358.9
|
)
|
|
298.1
|
|
|
189.8
|
|
|
Accrued
liabilities and other
|
|
|
66.2
|
|
|
38.8
|
|
|
(97.5
|
)
|
|
Net
change in working capital items
|
|
$
|
(110.1
|
)
|
$
|
9.7
|
|
$
|
(62.4
|
)
|
|
Supplementary
Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
218.5
|
|
$
|
172.6
|
|
$
|
153.5
|
|
|
Cash
paid
for income taxes, net of refunds received of $30.7 in 2006,
$76.7 in
2005 and $52.7 in 2004
|
|
$
|
84.8
|
|
$
|
112.7
|
|
$
|
140.0
|
|
The
accompanying notes
are an integral part of these consolidated financial
statements.
F-90
LEAR CORPORATION
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of
Presentation
The
consolidated financial statements include the accounts of Lear Corporation
(“Lear” or the “Parent”), a Delaware corporation and the wholly owned and less
than wholly owned subsidiaries controlled by Lear (collectively, the “Company”).
In addition, Lear consolidates variable interest entities in which it bears
a
majority of the risk of the entities’ potential losses or stands to gain from a
majority of the entities’ expected returns. Investments in affiliates in which
Lear does not have control, but does have the ability to exercise significant
influence over operating and financial policies, are accounted for under the
equity method (Note 6, “Investments in Affiliates and Other Related Party
Transactions”).
The
Company and its affiliates design and manufacture complete automotive seat
systems, electrical distribution systems and various electronic products. The
Company also supplies automotive interior systems and components, including
instrument panels and cockpit systems, headliners and overhead systems, door
panels and flooring and acoustic systems. The Company’s main customers are
automotive original equipment manufacturers. The Company operates facilities
worldwide (Note 13, “Segment Reporting”).
(2) Summary of
Significant Accounting Policies
Assets and
Liabilities of Business Held for Sale
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company
classifies the assets and liabilities of a business as held for sale when
management approves and commits to a formal plan of sale and it is probable
that
the sale will be completed. The carrying value of the net assets of the business
held for sale are then recorded at the lower of their carrying value or fair
market value, less costs to sell. As of December 31, 2006, the assets and
liabilities of the Company’s North American interior business are classified as
held for sale and all prior period balance sheet information has been restated
(Note 3, “Divestiture of Interior Business”).
Cash and Cash
Equivalents
Cash
and
cash equivalents include all highly liquid investments with original maturities
of ninety days or less.
Accounts Receivable
The
Company records accounts receivable as its products are shipped to its
customers. The Company’s customers are the major automotive manufacturers in the
world. The Company records accounts receivable reserves for known collectibility
issues, as such issues relate to specific transactions or customer balances.
As
of December 31, 2006 and 2005, accounts receivable are reflected net of
reserves of $14.9 million and $20.4 million, respectively. The Company
writes off accounts receivable when it becomes apparent based upon age or
customer circumstances that such amounts will not be collected. Generally,
the
Company does not require collateral for its accounts receivable.
F-91
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. Finished goods and work-in-process inventories
include material, labor and manufacturing overhead costs. The Company records
inventory reserves for inventory in excess of production and/or forecasted
requirements and for obsolete inventory in production and service inventories.
As of December 31, 2006 and 2005, inventories are reflected net of reserves
of $87.1 million and $85.7 million, respectively. A summary of
inventories is shown below (in millions):
|
|
|
|
|
|
|
|
| |
|
December 31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
439.9
|
|
$
|
449.2
|
|
Work-in-process
|
|
|
35.6
|
|
|
36.7
|
|
Finished
goods
|
|
|
106.0
|
|
|
109.7
|
|
Inventories
|
|
$
|
581.5
|
|
$
|
595.6
|
Pre-Production
Costs Related to Long-Term Supply Arrangements
The
Company incurs pre-production engineering, research and development (“ER&D”)
and tooling costs related to the products produced for its customers under
long-term supply agreements. The Company expenses all pre-production ER&D
costs for which reimbursement is not contractually guaranteed by the customer.
In addition, the Company expenses all pre-production tooling costs related
to
customer-owned tools for which reimbursement is not contractually guaranteed
by
the customer or for which the customer has not provided a non-cancelable right
to use the tooling. During 2006 and 2005, the Company capitalized
$122.0 million and $227.2 million, respectively, of pre-production
ER&D costs for which reimbursement is contractually guaranteed by the
customer. During 2006 and 2005, the Company also capitalized $449.0 million
and $638.6 million, respectively, of pre-production tooling costs related
to customer-owned tools for which reimbursement is contractually guaranteed
by
the customer or for which the customer has provided a non-cancelable right
to
use the tooling. These amounts are included in other current and other long-term
assets in the consolidated balance sheets. During 2006 and 2005, the Company
collected $765.0 million and $715.8 million, respectively, of cash
related to ER&D and tooling costs.
During
2006 and 2005, the Company capitalized $17.4 million and
$44.4 million, respectively, of Company-owned tooling. These amounts are
included in property, plant and equipment, net, in the consolidated balance
sheets.
The
classification of capitalized pre-production ER&D and tooling costs related
to long-term supply agreements is shown below (in millions):
|
|
|
|
|
|
|
|
| |
|
December 31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Current
|
|
$
|
87.7
|
|
$
|
160.4
|
|
Long-term
|
|
|
116.2
|
|
|
146.9
|
|
Recoverable
customer engineering and
tooling
|
|
$
|
203.9
|
|
$
|
307.3
|
Gains
and
losses related to ER&D and tooling projects are reviewed on an aggregate
program basis. Net gains on projects are deferred and recognized over the life
of the related long-term supply agreement. Net losses on projects are recognized
as costs are incurred.
F-92
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
Property, Plant
and
Equipment
Property,
plant and equipment is stated at cost. Depreciable property is depreciated over
the estimated useful lives of the assets, using principally the straight-line
method as follows:
|
|
|
|
|
Buildings
and
improvements
|
|
20 to 40 years
|
|
Machinery
and equipment
|
|
5 to 15
years
|
A
summary of property, plant and equipment is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Land
|
|
$
|
131.0
|
|
$
|
131.5
|
|
|
Buildings
and improvements
|
|
|
516.7
|
|
|
572.8
|
|
|
Machinery
and equipment
|
|
|
2,077.5
|
|
|
2,116.0
|
|
|
Construction
in progress
|
|
|
60.7
|
|
|
56.1
|
|
|
Total
property, plant and equipment
|
|
|
2,785.9
|
|
|
2,876.4
|
|
|
Less —
accumulated depreciation
|
|
|
(1,314.2
|
)
|
|
(1,261.7
|
)
|
|
Net
property, plant and equipment
|
|
$
|
1,471.7
|
|
$
|
1,614.7
|
|
Depreciation
expense was $387.0 million, $388.5 million and $350.6 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
Costs
associated with the repair and maintenance of the Company’s property, plant and
equipment are expensed as incurred. Costs associated with improvements which
extend the life, increase the capacity or improve the efficiency or safety
of
the Company’s property, plant and equipment are capitalized and depreciated over
the remaining life of the related asset.
Impairment of
Goodwill
Goodwill
is not amortized but is tested for impairment on at least an annual basis.
Impairment testing is required more often than annually if an event or
circumstance indicates that an impairment, or decline in value, may have
occurred. In conducting its impairment testing, the Company compares the fair
value of each of its reporting units to the related net book value. If the
fair
value of a reporting unit exceeds its net book value, goodwill is considered
not
to be impaired. If the net book value of a reporting unit exceeds its fair
value, an impairment loss is measured and recognized. The Company conducts
its
annual impairment testing on the first day of the fourth quarter each year.
The
Company utilizes an income approach to estimate the fair value of each of its
reporting units. The income approach is based on projected debt-free cash flow
which is discounted to the present value using discount factors that consider
the timing and risk of cash flows. The Company believes that this approach
is
appropriate because it provides a fair value estimate based upon the reporting
unit’s expected long-term operating cash flow performance. This approach also
mitigates the impact of cyclical trends that occur in the industry. Fair value
is estimated using recent automotive industry and specific platform production
volume projections, which are based on both third-party and internally-developed
forecasts, as well as commercial, wage and benefit, inflation and discount
rate
assumptions. Other significant assumptions include terminal value growth rates,
terminal value margin rates, future capital expenditures and changes in future
working capital requirements. While there are inherent uncertainties related
to
the assumptions used and to management’s application of these assumptions to
this analysis, the Company believes that the income approach provides a
reasonable estimate of the fair value of its reporting units.
F-93
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
The
Company’s 2006 annual goodwill impairment analysis, completed as of
October 1, resulted in no impairment.
During
the third and fourth quarters of 2005, events occurred which indicated a
significant decline in the fair value of the Company’s interior segment, as well
as an impairment of the related goodwill. These events included unfavorable
operating results, primarily as a result of higher raw material costs, lower
production volumes on key platforms, industry overcapacity, insufficient
customer pricing and changes in certain customers’ sourcing strategies, as well
as the Company’s decision to evaluate strategic alternatives with respect to
this segment. The Company evaluated the net book value of goodwill within its
interior segment by comparing the fair value of the reporting unit to the
related net book value. As a result, the Company recorded total goodwill
impairment charges of $1.0 billion in 2005 related to the interior segment.
The Company also recognized a $2.9 million goodwill impairment charge
related to this segment during the second quarter of 2006. The goodwill resulted
from a $19.0 million purchase price adjustment for an indemnification claim
related to the Company’s acquisition of UT Automotive, Inc. (“UT Automotive”)
from United Technologies Corporation (“UTC”) in May 1999. The purchase
price adjustment was allocated to the Company’s electronic and electrical and
interior segments (Note 12, “Commitments and Contingencies”).
A
summary of the changes in the carrying amount of goodwill, by reportable
operating segment, for each of the two years in the period ended
December 31, 2006, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Interior
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1,
2005
|
|
$
|
1,075.7
|
|
$
|
945.9
|
|
$
|
1,017.8
|
|
$
|
3,039.4
|
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
—
|
|
|
(1,012.8
|
)
|
|
(1,012.8
|
)
|
|
Foreign
currency translation and other
|
|
|
(41.5
|
)
|
|
(40.3
|
)
|
|
(5.0
|
)
|
|
(86.8
|
)
|
|
Balance
as of December 31, 2005
|
|
$
|
1,034.2
|
|
$
|
905.6
|
|
$
|
—
|
|
$
|
1,939.8
|
|
|
Purchase
price adjustment
|
|
|
—
|
|
|
16.1
|
|
|
2.9
|
|
|
19.0
|
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
—
|
|
|
(2.9
|
)
|
|
(2.9
|
)
|
|
Foreign
currency translation and other
|
|
|
26.5
|
|
|
14.3
|
|
|
—
|
|
|
40.8
|
|
|
Balance
as of December 31, 2006
|
|
$
|
1,060.7
|
|
$
|
936.0
|
|
$
|
—
|
|
$
|
1,996.7
|
|
Intangible
Assets
The
Company’s intangible assets acquired through business acquisitions are valued
based on independent appraisals. A summary of intangible assets as of
December 31, 2006 and 2005, is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted
Average
Useful
Life
(Years)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
2.8
|
|
$
|
(0.8
|
)
|
$
|
2.4
|
|
10.0
|
|
Customer
contracts
|
|
|
23.0
|
|
|
(8.4
|
)
|
|
14.6
|
|
7.7
|
|
Customer
relationships
|
|
|
29.8
|
|
|
(4.5
|
)
|
|
25.3
|
|
19.0
|
|
Balance
as of December 31, 2006
|
|
$
|
55.6
|
|
$
|
(13.7
|
)
|
$
|
41.9
|
|
14.7
|
F-94
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Weighted
Average
Useful
Life
(Years)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
$
|
2.8
|
|
$
|
(0.4
|
)
|
$
|
2.4
|
|
10.0
|
|
Customer
contracts
|
|
|
20.8
|
|
|
(4.9
|
)
|
|
15.9
|
|
7.7
|
|
Customer
relationships
|
|
|
27.2
|
|
|
(2.4
|
)
|
|
24.8
|
|
18.8
|
|
Balance
as of December 31, 2005
|
|
$
|
50.8
|
|
$
|
(7.7
|
)
|
$
|
43.1
|
|
14.2
|
Excluding
the impact of any future acquisitions, the Company’s estimated annual
amortization expense is approximately $5.0 million in each of the three
succeeding years, decreasing to approximately $4.5 and $4.0 million in the
two years thereafter.
Impairment
of
Long-Lived Assets
The
Company monitors its long-lived assets for impairment indicators on an ongoing
basis in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” If impairment indicators exist, the Company
performs the required analysis and records impairment charges in accordance
with
SFAS No. 144. In conducting its analysis, the Company compares the undiscounted
cash flows expected to be generated from the long-lived assets to the related
net book values. If the undiscounted cash flows exceed the net book value,
the
long-lived assets are considered not to be impaired. If the net book value
exceeds the undiscounted cash flows, an impairment loss is measured and
recognized. An impairment loss is measured as the difference between the net
book value and the fair value of the long-lived assets. Fair value is estimated
based upon either discounted cash flow analyses or estimated salvage values.
Cash flows are estimated using internal budgets based on recent sales data,
independent automotive production volume estimates and customer commitments,
as
well as assumptions related to discount rates. Changes in economic or operating
conditions impacting these estimates and assumptions could result in the
impairment of long-lived assets.
The
Company recorded fixed asset impairment charges related to certain operating
locations within its interior segment of $10.0 million and
$82.3 million in the years ended December 31, 2006 and 2005,
respectively. The remaining fixed assets of the Company’s North American
interior business were written down to zero in the fourth quarter of 2006 as
a
result of entering into the agreement relating to the divestiture of the North
American interior business (Note 3, “Divestiture of Interior Business”).
In
the years ended December 31, 2006 and 2005, the Company also recognized
fixed asset impairment charges of $5.8 million and $15.1 million,
respectively, in conjunction with its restructuring actions. In the year ended
December 31, 2004, the Company recognized fixed asset impairment charges of
$3.0 million related to certain facility consolidations. See Note 5,
“Restructuring.” The Company has certain other facilities that have generated
operating losses in recent years. The results of the related impairment analyses
indicated that impairment of the fixed assets was not required. However, the
Company will continue to monitor the operating plans of these facilities for
potential impairment.
These
fixed asset impairment charges are recorded in cost of sales in the consolidated
statements of operations for the years ended December 31, 2006, 2005 and
2004.
Revenue
Recognition and Sales Commitments
The
Company enters into agreements with its customers to produce products at the
beginning of a vehicle’s life. Although such agreements do not provide for
minimum quantities, once the Company enters into such agreements, the Company
is
generally required to fulfill its customers’ purchasing requirements for the
entire production life of the vehicle. These agreements generally may be
terminated by the customer at any time. Historically, terminations of these
agreements have been minimal. In certain instances, the Company may be committed
under existing agreements to supply products to its customers at selling prices
which are not sufficient to cover the direct cost to produce such products.
In
such situations, the Company recognizes losses as they are incurred.
F-95
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
The
Company receives blanket purchase orders from its customers on an annual basis.
Generally, each purchase order provides the annual terms, including pricing,
related to a particular vehicle model. Purchase orders do not specify
quantities. The Company recognizes revenue based on the pricing terms included
in its annual purchase orders as its products are shipped to its customers.
The
Company is asked to provide its customers with annual cost reductions as part
of
certain agreements. The Company accrues for such amounts as a reduction of
revenue as its products are shipped to its customers. In addition, the Company
has ongoing adjustments to its pricing arrangements with its customers based
on
the related content, the cost of its products and other commercial factors.
Such
pricing accruals are adjusted as they are settled with the Company’s customers.
Amounts
billed to customers related to shipping and handling costs are included in
net
sales in the consolidated statements of operations. Shipping and handling costs
are included in cost of sales in the consolidated statements of operations.
Cost of Sales
and
Selling, General and Administrative Expenses
Cost
of sales includes material, labor and overhead costs associated with the
manufacture and distribution of the Company’s products. Distribution costs
include inbound freight costs, purchasing and receiving costs, inspection costs,
warehousing costs and other costs of the Company’s distribution network.
Selling, general and administrative expenses include selling, research and
development and administrative costs not directly associated with the
manufacture and distribution of the Company’s products.
Research and
Development
Costs
incurred in connection with the development of new products and manufacturing
methods, to the extent not recoverable from the Company’s customers, are charged
to selling, general and administrative expenses as incurred. These costs
amounted to $169.8 million, $174.0 million and $197.6 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
Other Expense,
Net
Other
expense includes state and local non-income related taxes, foreign exchange
gains and losses, discounts and expenses associated with the Company’s
asset-based securitization and factoring facilities, losses on the
extinguishment of debt (see Note 8, “Long-Term Debt”), gains and losses on the
sales of fixed assets and other miscellaneous income and expense. A summary
of
other expense is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
$
|
101.3
|
|
$
|
41.8
|
|
$
|
38.6
|
|
Other
income
|
|
|
(15.6
|
)
|
|
(3.8
|
)
|
|
—
|
|
Other
expense, net
|
|
$
|
85.7
|
|
$
|
38.0
|
|
$
|
38.6
|
Foreign Currency
Translation
With
the exception of foreign subsidiaries operating in highly inflationary
economies, which are measured in U.S. dollars, assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at the foreign exchange rates
in
effect at the end of the period. Revenues and expenses of foreign subsidiaries
are translated using an average of the foreign exchange rates in effect during
the period. Translation adjustments that arise from translating a foreign
subsidiary’s financial statements from the functional currency to U.S. dollars
are reflected in accumulated other comprehensive loss in the consolidated
balance sheets.
Transaction
gains and losses that arise from foreign exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of a foreign currency
investment position, are included in the statements of operations as incurred.
F-96
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
Stock-Based
Compensation
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment,” using the modified prospective transition method and
recognized income of $2.9 million as a cumulative effect of a change in
accounting principle related to a change in accounting for forfeitures. There
was no income tax effect resulting from this adoption (Note 9, “Income Taxes”).
SFAS No. 123(R) requires the estimation of expected forfeitures at the grant
date and the recognition of compensation cost only for those awards expected
to
vest. Previously, the Company accounted for forfeitures as they occurred. The
adoption of SFAS No. 123(R) did not result in the recognition of
additional compensation cost related to outstanding unvested awards, as the
Company recognized compensation cost using the fair value provisions of SFAS
No.
123, “Accounting for Stock-Based Compensation,” for all employee awards granted
after January 1, 2003. The pro forma effect on net income (loss) and net
income (loss) per share, as if the fair value recognition provisions had been
applied to all outstanding and unvested awards granted prior to January 1,
2003, is shown below (in millions, except per share data):
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
Net
income (loss), as
reported
|
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
|
Add:
Stock-based employee compensation expense included in reported
net
income (loss)
|
|
|
14.7
|
|
|
10.9
|
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards
|
|
|
(18.1
|
)
|
|
(21.6
|
)
|
|
Net
income (loss), pro forma
|
|
$
|
(1,384.9
|
)
|
$
|
411.5
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
– as reported
|
|
$
|
(20.57
|
)
|
$
|
6.18
|
|
|
Basic
– pro forma
|
|
$
|
(20.62
|
)
|
$
|
6.03
|
|
|
Diluted
– as reported
|
|
$
|
(20.57
|
)
|
$
|
5.77
|
|
|
Diluted
– pro forma
|
|
$
|
(20.62
|
)
|
$
|
5.63
|
|
For the
year ended December 31, 2006, total stock-based employee compensation
expense was $32.0 million.
For further information
related to the Company’s stock-based compensation programs, see Note 11,
“Stock-Based Compensation.”
Net Income (Loss)
Per Share
Basic
net income (loss) per share is computed using the weighted average common shares
outstanding during the period. Diluted net income (loss) per share includes
the
dilutive effect of common stock equivalents using the average share price during
the period. In addition, when the impact is dilutive, diluted net income per
share is calculated by increasing net income for the after-tax interest expense
on convertible debt and by increasing total shares outstanding by the number
of
shares that would be issuable upon conversion. Prior to the repurchase of
substantially all of the Company’s outstanding zero-coupon convertible notes
during 2006, there were 4,813,056 shares issuable upon conversion of the
Company’s convertible zero-coupon senior notes. Tables summarizing net income
(loss), for diluted net income (loss) per share (in millions) and shares
outstanding are shown below:
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
Net
income
(loss)
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
422.2
|
|
Add:
After-tax interest expense on convertible debt
|
|
|
—
|
|
|
—
|
|
|
9.3
|
|
Net
income (loss), for diluted net income (loss) per share
|
|
$
|
(707.5
|
)
|
$
|
(1,381.5
|
)
|
$
|
431.5
|
F-97
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of
Significant Accounting Policies – (continued)
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
|
|
68,607,262
|
|
67,166,668
|
|
68,278,858
|
|
Dilutive
effect of common stock equivalents
|
|
—
|
|
—
|
|
1,635,349
|
|
Shares
issuable upon conversion of convertible debt
|
|
—
|
|
—
|
|
4,813,056
|
|
Diluted
shares outstanding
|
|
68,607,262
|
|
67,166,668
|
|
74,727,263
|
For
further information related to the zero-coupon convertible senior notes, see
Note 8, “Long-Term Debt.”
The
shares issuable upon conversion of the Company’s outstanding zero-coupon
convertible debt and the effect of common stock equivalents, including options,
restricted stock units, performance units and stock appreciation rights were
excluded from the computation of diluted shares outstanding for the years ended
December 31, 2006 and 2005, as inclusion would have resulted in
antidilution. A summary of these options and their exercise prices, as well
as
these restricted stock units, performance units and stock appreciation rights,
is shown below:
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
Antidilutive
options
|
|
|
2,790,305
|
|
|
2,983,405
|
|
—
|
|
Exercise
prices
|
|
$
|
22.12 – $55.33
|
|
$
|
22.12 – $55.33
|
|
—
|
|
Restricted
stock units
|
|
|
1,964,571
|
|
|
2,234,122
|
|
—
|
|
Performance
units
|
|
|
169,909
|
|
|
123,672
|
|
—
|
|
Stock
appreciation rights
|
|
|
1,751,854
|
|
|
1,215,046
|
|
—
|
Use of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
During 2006, there were no material changes in the methods or policies used
to
establish estimates and assumptions. Generally, matters subject to estimation
and judgment include amounts related to accounts receivable realization,
inventory obsolescence, asset impairments, useful lives of intangible and fixed
assets and unsettled pricing discussions with customers and suppliers (Note
2,
“Summary of Significant Accounting Policies”); restructuring accruals (Note 5,
“Restructuring”); deferred tax asset valuation allowances and income taxes (Note
9, “Income Taxes”); pension and other postretirement benefit plan assumptions
(Note 10, “Pension and Other Postretirement Benefit Plans”); accruals related to
litigation, warranty and environmental remediation costs (Note 12, “Commitments
and Contingencies”); and self-insurance accruals. Actual results may differ from
estimates provided.
Reclassifications
Certain
amounts in prior years’ financial statements have been reclassified to conform
to the presentation used in the year ended December 31, 2006.
F-98
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Divestiture of
Interior Business
European Interior
Business
On
October 16, 2006, the Company completed the contribution of substantially
all of its European interior business to International Automotive Components
Group, LLC (“IAC Europe”), the Company’s joint venture with WL Ross & Co.
LLC (“WL Ross”) and Franklin Mutual Advisers, LLC (“Franklin”), in exchange for
a one-third equity interest. In connection with the transaction, the Company
entered into various ancillary agreements providing the Company with customary
minority shareholder rights and registration rights with respect to its equity
interest in IAC Europe. The Company’s European interior business included
substantially all of its interior components business in Europe (other than
Italy and one facility in France), consisting of nine manufacturing facilities
in five countries supplying door panels, overhead systems, instrument panels,
cockpits and interior trim to various original equipment manufacturers. IAC
Europe also owns the European interior business formerly held by Collins &
Aikman Corporation.
In
connection with this transaction, the Company recorded the fair market value
of
its initial investment in IAC Europe at $105.6 million and recognized a
pretax loss of approximately $29.1 million. This loss is recorded as part
of the Company’s loss on divestiture of interior business in the statement of
operations for the year ended December 31, 2006. The Company did not
account for the divestiture of its European interior business as a discontinued
operation due to its continuing involvement with IAC Europe. The Company’s
investment in IAC Europe is accounted for under the equity method of accounting
(Note 6, “Investments in Affiliates and Other Related Party Transactions”).
North American
Interior Business
On
November 30, 2006, the Company entered into an Asset Purchase Agreement
with International Automotive Components Group North America, Inc. and
International Automotive Components Group North America, LLC (together, “IAC
North America”), WL Ross and Franklin, under which the Company agreed to
transfer substantially all of the assets of the Company’s North American
interior business, as well as interests in two China joint ventures and
$25 million of cash, to IAC North America. Under the terms of the
agreement, the Company will receive a 25% equity interest in IAC North America
and warrants to purchase an additional 7% equity interest. In addition, under
the terms of the agreement, the Company will be obligated to fund up to an
additional $40 million to the IAC North America joint venture, in the event
that the joint venture does not meet certain financial targets in 2007. The
Asset Purchase Agreement also contains a closing date net working capital
adjustment provision and requires the Company to have a minimum level of
recoverable customer engineering and tooling as of the closing date. The closing
of the transaction contemplated by the agreement is subject to various
conditions, including the receipt of required third-party consents, as well
as
other closing conditions customary for transactions of this type. The
transaction is expected to close in the first quarter of 2007.
F-99
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Divestiture of
Interior Business – (continued)
The
Company accounted for the North American interior business as held for sale
as
of December 31, 2006, in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Accordingly, the Company recorded
an estimated pretax loss of $606.9 million to adjust the net carrying value
of the assets and liabilities of the North American interior business to their
recovery value under the terms of the agreement. The Company expects to incur
additional losses on the divestiture through the transaction closure date.
The
total pretax loss is expected to be in the range of $650 million to
$675 million. The Company will not account for the divestiture as a
discontinued operation due to its continuing involvement with IAC North America.
The Company will account for its investment in IAC North America under the
equity method of accounting effective upon the closing of the transaction.
The
major classes of the assets and liabilities of the Company’s North American
interior business that are classified as held for sale in the Company’s
consolidated balance sheets are shown below (in millions):
|
|
|
|
|
|
|
|
| |
|
December 31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$
|
19.2
|
|
$
|
10.3
|
|
Accounts
receivable
|
|
|
284.5
|
|
|
337.5
|
|
Inventories
|
|
|
69.2
|
|
|
92.7
|
|
Recoverable
customer engineering and tooling
|
|
|
52.7
|
|
|
157.2
|
|
Other
current assets
|
|
|
2.2
|
|
|
10.0
|
|
Current
assets of business held for sale
|
|
|
427.8
|
|
|
607.7
|
|
Property,
plant and equipment, net
|
|
|
—
|
|
|
404.5
|
|
Other
long-term assets
|
|
|
—
|
|
|
80.7
|
|
Long-term
assets of business held for sale
|
|
|
—
|
|
|
485.2
|
|
Total
assets of business held for sale
|
|
$
|
427.8
|
|
$
|
1,092.9
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Accounts
payable and
drafts
|
|
|
323.7
|
|
|
477.6
|
|
Accrued
liabilities
|
|
|
79.8
|
|
|
71.7
|
|
Current
portion of long-term debt
|
|
|
2.2
|
|
|
—
|
|
Current
liabilities of business held for sale
|
|
|
405.7
|
|
|
549.3
|
|
Long-term
debt
|
|
|
19.6
|
|
|
—
|
|
Other
long-term liabilities
|
|
|
28.9
|
|
|
27.6
|
|
Long-term
liabilities of business held for sale
|
|
|
48.5
|
|
|
27.6
|
|
Total
liabilities of business held for sale
|
|
$
|
454.2
|
|
$
|
576.9
|
The total
assets of business held for sale include recoverable customer engineering and
tooling contracts and other monetary assets amounting to $92.9 million for
which valuation allowances have been recorded in consolidation in order to
determine the loss on the transaction. The fair value of these monetary assets
approximates the carrying value indicated above before any valuation allowances.
For
further information on the operating results of the Company’s interior business,
see Note 13, “Segment Reporting.”
(4) Sale of Common
Stock
On
November 8, 2006, the Company completed the sale of 8,695,653 shares of
common stock for an aggregate purchase price of $23 per share to affiliates
of
and funds managed by Carl C. Icahn. The net proceeds from the sale of
$199.2 million will be used for general corporate purposes, including
strategic investments in the Company’s core businesses.
F-100
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(5)
Restructuring
2006 and
2005
In order
to address unfavorable industry conditions, the Company began to implement
consolidation and census actions in the second quarter of 2005. These actions
are part of a comprehensive restructuring strategy intended to (i) better
align the Company’s manufacturing capacity with the changing needs of its
customers, (ii) eliminate excess capacity and lower the operating costs of
the
Company and (iii) streamline the Company’s organizational structure and
reposition its business for improved long-term profitability.
In
connection with the restructuring actions, the Company currently expects to
incur pre-tax costs of approximately $300 million, although all aspects of
the restructuring actions have not been finalized. Such costs will include
employee termination benefits, asset impairment charges and contract termination
costs, as well as other incremental costs resulting from the restructuring
actions. These incremental costs will principally include equipment and
personnel relocation costs. The Company also expects to incur incremental
manufacturing inefficiency costs at the operating locations impacted by the
restructuring actions during the related restructuring implementation period.
Restructuring costs will be recognized in the Company’s consolidated financial
statements in accordance with accounting principles generally accepted in the
United States. Generally, charges will be recorded as elements of the
restructuring strategy are finalized. Actual costs recorded in the Company’s
consolidated financial statements may vary from current estimates.
In
connection with the Company’s restructuring actions, the Company recorded
charges of $93.2 million in 2006. This consists of $81.9 million
recorded as cost of sales and $17.2 million recorded as selling, general
and administrative expenses, offset by net gains on the sales of two facilities
and machinery and equipment, which are recorded as other expense, net. The
2006
charges consist of employee termination benefits of $79.3 million, asset
impairment charges of $5.8 million and contract termination costs of
$6.5 million, as well as other net costs of $1.6 million. Employee
termination benefits were recorded based on existing union and employee
contracts, statutory requirements and completed negotiations. Asset impairment
charges relate to the disposal of buildings, leasehold improvements and
machinery and equipment with carrying values of $5.8 million in excess of
related estimated fair values. Contract termination costs include lease
cancellation costs of $0.8 million, which was paid in 2006, the repayment
of various government-sponsored grants of $0.7 million, costs associated
with the termination of subcontractor and other relationships of
$4.1 million and pension benefit curtailment charges of $0.9 million.
A
summary of the 2006 restructuring charges, excluding the $0.9 million
pension and other postretirement benefit plan curtailments, is shown below
(in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual
as
of
December 31,
2005
|
|
Charges
|
|
Utilization
|
|
Accrual
as
of
December 31,
2006
|
| |
|
|
|
Cash
|
|
Non-cash
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination
benefits
|
|
$
|
15.1
|
|
$
|
79.3
|
|
$
|
(58.0
|
)
|
$
|
—
|
|
$
|
36.4
|
|
Asset
impairments
|
|
|
—
|
|
|
5.8
|
|
|
—
|
|
|
(5.8
|
)
|
|
—
|
|
Contract
termination costs
|
|
|
5.0
|
|
|
5.6
|
|
|
(7.2
|
)
|
|
—
|
|
|
3.4
|
|
Other
related costs
|
|
|
—
|
|
|
1.6
|
|
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
20.1
|
|
$
|
92.3
|
|
$
|
(66.8
|
)
|
$
|
(5.8
|
)
|
$
|
39.8
|
In
connection with the Company’s restructuring actions, the Company recorded
charges of $88.9 million in 2005, including $84.6 million recorded as
cost of sales and $6.2 million recorded as selling, general and
administrative expenses. The remaining amounts include a gain on the sale of
a
facility, which is recorded as other expense, net. The 2005 charges consist
of
employee termination benefits of $56.5 million, asset impairment charges of
$15.1 million and contract termination costs of $13.5 million, as well
as other net costs of $3.8 million. Employee termination benefits were
recorded based on existing union and employee contracts, statutory requirements
and completed negotiations. Asset impairment charges relate to the disposal
of
buildings, leasehold improvements and machinery and equipment with carrying
values of $15.1 million in excess of related estimated fair values.
Contract
F-101
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Restructuring
–
(continued)
termination costs include
lease cancellation costs of $3.4 million, which are expected to be paid
through 2006, the repayment of various government-sponsored grants of
$4.8 million, the termination of joint venture, subcontractor and other
relationships of $3.2 million and pension and other postretirement benefit
plan curtailments of $2.1 million.
A
summary of the 2005 restructuring charges, excluding the $2.1 million
pension and other postretirement benefit plan curtailments, is shown below
(in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Utilization
|
|
Accrual
as
of
December 31,
2005
|
| |
|
Charges
|
|
Cash
|
|
Non-cash
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination
benefits
|
|
$
|
56.5
|
|
$
|
(41.4
|
)
|
$
|
—
|
|
$
|
15.1
|
|
Asset
impairments
|
|
|
15.1
|
|
|
—
|
|
|
(15.1
|
)
|
|
—
|
|
Contract
termination costs
|
|
|
11.4
|
|
|
(6.4
|
)
|
|
—
|
|
|
5.0
|
|
Other
related costs
|
|
|
3.8
|
|
|
(3.8
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
86.8
|
|
$
|
(51.6
|
)
|
$
|
(15.1
|
)
|
$
|
20.1
|
2004
In 2004,
the Company recorded $7.8 million for employee termination benefits and
asset impairments at two U.S. seating facilities. In addition, the Company
also
incurred $39.9 million in estimated costs related to additional facility
consolidations and closures and census reductions.
F-102
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investments in
Affiliates and Other Related Party Transactions
The
Company’s beneficial ownership in affiliates accounted for under the equity
method is shown below:
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
Honduras
Electrical Distribution Systems S. de R.L. de C.V. (Honduras)
|
|
60
|
%
|
60
|
%
|
60
|
%
|
|
Lear-Kyungshin
Sales and Engineering LLC
|
|
60
|
|
60
|
|
60
|
|
|
Shanghai
Lear STEC Automotive Parts Co., Ltd. (China)
|
|
55
|
|
55
|
|
55
|
|
|
Lear
Shurlok Electronics (Proprietary) Limited (South Africa)
|
|
51
|
|
51
|
|
—
|
|
|
Industrias
Cousin Freres, S.L. (Spain)
|
|
50
|
|
50
|
|
50
|
|
|
Hanil
Lear India Private Limited (India)
|
|
50
|
|
50
|
|
50
|
|
|
Nanjing
Lear Xindi Automotive Interiors Systems Co., Ltd. (China)
|
|
50
|
|
50
|
|
50
|
|
|
Lear
Dongfeng Automotive Seating Co., Ltd. (China)
|
|
50
|
|
50
|
|
50
|
|
|
Dong
Kwang Lear Yuhan Hoesa (Korea)
|
|
50
|
|
50
|
|
50
|
|
|
Tacle
Seating USA, LLC
|
|
49
|
|
—
|
|
—
|
|
|
Jiangxi
Jiangling Lear Interior Systems Co. Ltd. (China)
|
|
41
|
|
41
|
|
41
|
|
|
Beijing
Lear Dymos Automotive Seating and Interior Co., Ltd. (China)
|
|
40
|
|
40
|
|
50
|
|
|
Total
Interior Systems — America, LLC
|
|
39
|
|
39
|
|
39
|
|
|
UPM
S.r.L. (Italy)
|
|
39
|
|
39
|
|
39
|
|
|
Markol
Otomotiv Yan Sanayi VE Ticaret A.S. (Turkey)
|
|
35
|
|
35
|
|
35
|
|
|
International
Automotive Components Group, LLC
|
|
33
|
|
—
|
|
—
|
|
|
Lear
Diamond Electro-Circuit Systems Co., Ltd. (Japan)
|
|
—
|
|
50
|
|
50
|
|
|
RecepTec
Holdings, L.L.C.
|
|
—
|
|
21
|
|
21
|
|
|
Shenyang
Lear Automotive Seating and Interior Systems Co., Ltd. (China)
|
|
—
|
|
—
|
|
60
|
|
|
Lear
Furukawa Corporation
|
|
—
|
|
—
|
|
51
|
|
|
Lear-NHK
Seating and Interior Co., Ltd. (Japan)
|
|
—
|
|
—
|
|
50
|
|
|
Bing
Assembly Systems, L.L.C.
|
|
—
|
|
—
|
|
49
|
|
|
JL
Automotive, LLC
|
|
—
|
|
—
|
|
49
|
|
|
Precision
Fabrics Group, Inc.
|
|
—
|
|
—
|
|
43
|
|
|
Klingel
Italiana S.R.L. (Italy)
|
|
—
|
|
—
|
|
40
|
|
Summarized
group financial information for affiliates accounted for under the equity method
as of December 31, 2006 and 2005, and for the years ended December 31,
2006, 2005 and 2004, is shown below (unaudited; in millions):
|
|
|
|
|
|
|
|
| |
|
December 31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
580.1
|
|
$
|
183.8
|
|
Non-current
assets
|
|
|
317.2
|
|
|
64.5
|
|
Current
liabilities
|
|
|
610.0
|
|
|
186.0
|
|
Non-current
liabilities
|
|
|
12.9
|
|
|
16.5
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Income
statement data:
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
956.8
|
|
$
|
1,248.4
|
|
$
|
1,127.1
|
|
Gross
profit
|
|
|
50.7
|
|
|
56.1
|
|
|
87.7
|
|
Income
before provision for income taxes
|
|
|
16.3
|
|
|
0.9
|
|
|
16.0
|
|
Net
income (loss)
|
|
|
11.5
|
|
|
(4.2
|
)
|
|
11.3
|
F-103
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investments in
Affiliates and Other Related Party Transactions – (continued)
As of
December 31, 2006 and 2005, the Company’s aggregate investment in
affiliates was $141.3 million and $28.5 million, respectively. In
addition, the Company had notes and advances due from affiliates of
$12.8 million and $2.8 million as of December 31, 2006 and 2005,
respectively.
A
summary of transactions with affiliates and other related parties is shown
below
(in millions):
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Sales
to
affiliates
|
|
$
|
35.8
|
|
$
|
144.9
|
|
$
|
140.3
|
|
Purchases
from affiliates
|
|
|
51.1
|
|
|
224.9
|
|
|
120.9
|
|
Purchases
from other related parties(1)
|
|
|
12.5
|
|
|
13.6
|
|
|
12.5
|
|
Management
and other fees for services provided to affiliates
|
|
|
—
|
|
|
0.6
|
|
|
3.3
|
|
Dividends
received from affiliates
|
|
|
1.6
|
|
|
5.3
|
|
|
3.2
|
——————
(1)
Includes
$4.0 million, $4.3 million and $3.5 million in 2006, 2005 and
2004, respectively, paid to CB Richard Ellis (formerly Trammell Crow Company
in
2005 and 2004) for real estate brokerage, as well as property and project
management services; includes $6.6 million, $7.0 million and
$7.3 million in 2006, 2005 and 2004, respectively, paid to Analysts
International, Sequoia Services Group for the purchase of computer equipment
and
for computer-related services; includes $0.5 million, $0.4 million and
$0.4 million in 2006, 2005 and 2004, respectively, paid to Elite Support
Management Group, L.L.C. for the provision of information technology temporary
support personnel; includes $1.4 million, $1.9 million and
$1.3 million in 2006, 2005 and 2004, respectively, paid to Creative Seating
Innovations, Inc. for prototype tooling and parts; and includes
$0.7 million and $2.4 million in 2006 and 2005, respectively, paid to
the Materials Group for plastic resins. Each entity employed a relative of
the
Company’s Chairman and Chief Executive Officer in 2006. In addition, Elite
Support Management and Creative Seating Innovations were each partially owned
by
relatives of the Company’s Chairman and Chief Executive Officer in 2006. As a
result, such entities may be deemed to be related parties. These purchases
were
made in the ordinary course of the Company’s business and in accordance with the
Company’s normal procedures for engaging service providers or normal sourcing
procedures for suppliers, as applicable.
The
Company’s investments in Honduras Electrical Distribution Systems S. de R.L. de
C.V., Lear-Kyungshin Sales and Engineering LLC and Shanghai Lear STEC Automotive
Parts Co., Ltd. are accounted for under the equity method as the result of
certain approval rights granted to the minority shareholder.
The
Company guarantees 60% of certain of the debt of Honduras Electrical
Distribution Systems S. de R.L. de C.V., 40% of certain of the debt of Beijing
Lear Dymos Automotive Seating and Interior Co., Ltd. and 39% of certain of
the
debt of Total Interior Systems — America, LLC. As of December 31, 2006, the
amount of debt guaranteed by the Company was $17.9 million.
2006
In
October 2006, the Company completed the contribution of substantially all
of its European interior business to International Automotive Components Group,
LLC, a joint venture the Company formed with WL Ross and Franklin (Note 3,
“Divestiture of Interior Business”). In February 2006, the Company formed
Tacle Seating USA, LLC, a joint venture with Tachi-S Engineering U.S.A., Inc.,
to manufacture and supply seat systems.
Also
in
2006, the Company divested its ownership interest in RecepTec Holdings, L.L.C,
recognizing a gain of $13.4 million, which is reflected in equity in net
(income) loss in affiliates in the consolidated statement of operations for
the
year ended December 31, 2006. In addition, the Company and its joint
venture partner dissolved Lear Diamond Electro-Circuit Systems Co., Ltd.
F-104
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investments in
Affiliates and Other Related Party Transactions – (continued)
2005
In
December 2005, the Company engaged in the restructuring of two of its
previously unconsolidated affiliates, Bing Assembly Systems, L.L.C. (“BAS”) and
JL Automotive, LLC (“JLA”), which involved capital restructurings, changes in
the investors and amendments to the related operating agreements. Each venture
assembles, sequences and manufactures automotive interior components. These
restructurings resulted in the recognition of a $29.8 million loss, which
is reflected in equity in net (income) loss of affiliates in the accompanying
statement of operations for the year ended December 31, 2005. In addition,
as part of the restructurings, a new joint venture partner, Comer Holdings,
LLC,
acquired a 51% ownership interest in Integrated Manufacturing and Assembly,
LLC
(formerly BAS) and CL Automotive, LLC (formerly JLA) with Lear retaining a
49%
ownership interest in both of these ventures. Upon the completion of these
restructurings, which were effective December 31, 2005, it was determined
that both of these ventures are variable interest entities and that the Company
is the primary beneficiary due to its financing of the ventures through member
loans and through various amendments to the respective operating agreements.
Accordingly, the assets and liabilities of these ventures are reflected in
the
Company’s consolidated financial statements. The equity interests of the
ventures not owned by the Company are reflected as minority interests in the
Company’s consolidated financial statements as of December 31, 2005. The
operating results of these ventures are included in the consolidated statements
of operations from the date of consolidation, December 31, 2005.
In
January 2005, the Company acquired an additional 29% of Lear Furukawa
Corporation (“Lear Furukawa”) for $2.3 million, increasing its ownership
interest to 80%. The acquisition was accounted for as a purchase, and
accordingly, the assets purchased and liabilities assumed are reflected in
the
Company’s consolidated financial statements. The operating results of Lear
Furukawa are included in the consolidated statement of operations from the
date
of acquisition. The operating results of the Company, after giving pro forma
effect to this acquisition, are not materially different from reported results.
Previously, Lear Furukawa was accounted for under the equity method as
shareholder resolutions required a two-thirds majority vote for approval of
corporate actions.
In
July 2005, the Company began reflecting the financial position and results
of operations of Shenyang Lear Automotive Seating and Interior Systems Co.,
Ltd.
(“Shenyang”) in its consolidated financial statements, due to a change in the
approval rights granted to the minority shareholder. Previously, Shenyang was
accounted for under the equity method as certain shareholder resolutions
required unanimous shareholder approval.
Also
in
2005, the Company divested its ownership interest in Precision Fabrics Group,
Inc. (“Precision Fabrics”) and recognized a charge of $16.9 million. This
charge is reflected in equity in net (income) loss of affiliates in the
consolidated statement of operations for the year ended December 31, 2005.
In addition, in 2005, the Company sold its ownership interests in Klingel
Italiana S.R.L and dissolved Lear-NHK Seating and Interior Co., Ltd.
2004
In
December 2004, the Company formed Dong Kwang Lear Yuhan Hoesa, a joint
venture with Dong Kwang Tech Co., Ltd., to manufacture and supply seat systems
in Korea. In October 2004, the Company formed Beijing Lear Dymos Automotive
Seating and Interior Co., Ltd., a joint venture with Dymos Incorporated, to
manufacture and supply seat systems in China. In February 2004, the Company
formed two joint ventures, Lear-Kyungshin Sales and Engineering LLC and Honduras
Electrical Distribution Systems S. de R.L. de C.V. (collectively, the “Kyungshin
affiliates”), with Kyungshin Industrial Co., Ltd. to manufacture and supply wire
harnesses.
Also
in
2004, the Company sold its ownership interests in Corporate Eagle Two, L.L.C.,
Saturn Electronics Texas, L.L.C. and Nawon Ind. Co., Ltd. (“Nawon”).
In
conjunction with the acquisition of GHW Grote & Hartmann GmbH in
July 2004, the Company assumed a 40% ownership interest in Klingel Italiana
S.R.L.
F-105
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Short-Term
Borrowings
The
Company utilizes other uncommitted lines of credit as needed for its short-term
working capital fluctuations. As of December 31, 2006, the Company had
unused unsecured lines of credit available from banks of $165.0 million,
subject to certain restrictions imposed by the New Credit Agreement (Note 8,
“Long-Term Debt”). As of December 31, 2006 and 2005, the weighted average
interest rate on outstanding borrowings was 4.0% and 5.0%, respectively.
(8) Long-Term
Debt
A
summary of long-term debt and the related weighted average interest rates,
including the effect of hedging activities described in Note 14, “Financial
Instruments,” is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
|
Debt
Instrument
|
|
Long-Term
Debt
|
|
Weighted
Average
Interest
Rate
|
|
Long-Term
Debt
|
|
Weighted
Average
Interest
Rate
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Primary Credit
Facility
|
|
$
|
997.0
|
|
7.49
|
%
|
$
|
400.0
|
|
5.67
|
%
|
|
8.50% Senior
Notes, due 2013
|
|
|
300.0
|
|
8.50
|
%
|
|
—
|
|
—
|
|
|
8.75% Senior
Notes, due 2016
|
|
|
600.0
|
|
8.75
|
%
|
|
—
|
|
—
|
|
|
5.75% Senior
Notes, due 2014
|
|
|
399.3
|
|
5.635
|
%
|
|
399.3
|
|
5.635
|
%
|
|
Zero-Coupon
Convertible Senior Notes, due 2022
|
|
|
3.6
|
|
4.75
|
%
|
|
300.1
|
|
4.75
|
%
|
|
8.125% Senior
Notes, due 2008
|
|
|
73.3
|
|
8.125
|
%
|
|
295.6
|
|
8.125
|
%
|
|
8.11% Senior
Notes, due 2009
|
|
|
41.4
|
|
8.11
|
%
|
|
800.0
|
|
8.35
|
%
|
|
Other
|
|
|
45.5
|
|
7.06
|
%
|
|
57.5
|
|
6.34
|
%
|
| |
|
|
2,460.1
|
|
|
|
|
2,252.5
|
|
|
|
|
Less
— current portion
|
|
|
(25.6
|
)
|
|
|
|
(9.4
|
)
|
|
|
|
Long-term
debt
|
|
$
|
2,434.5
|
|
|
|
$
|
2,243.1
|
|
|
|
Primary Credit
Facility
On
April 25, 2006, the Company entered into a $2.7 billion Amended and
Restated Credit and Guarantee Agreement (the “New Credit Agreement”), which
provides for maximum revolving borrowing commitments of $1.7 billion and a
term loan facility of $1.0 billion. The New Credit Agreement replaced the
Company’s prior primary credit facility. The $1.7 billion revolving credit
facility matures on March 23, 2010, and the $1.0 billion term loan
facility matures on April 25, 2012. The New Credit Agreement provides for
multicurrency borrowings in a maximum aggregate amount of $750 million,
Canadian borrowings in a maximum aggregate amount of $200 million and
swing-line borrowings in a maximum aggregate amount of $300 million, the
commitments for which are part of the aggregate revolving credit facility
commitment.
Of the
$1.0 billion proceeds under the term loan facility, $400.0 million was
used to repay the term loan facility under the Company’s prior primary credit
facility and $521.1 million was used to repurchase outstanding zero-coupon
convertible senior notes with an accreted value of $303.2 million, Euro
13.0 million aggregate principal amount of the Company’s senior notes due
2008 and $206.6 million aggregate principal amount of the Company’s senior
notes due 2009. In connection with these transactions, the Company recognized
a
net gain of $0.6 million on the extinguishment of debt, which is included
in other expense, net in the consolidated statement of operations for the year
ended December 31, 2006.
F-106
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
–
(continued)
As
of
December 31, 2006, the Company had $997.0 million in borrowings
outstanding under the New Credit Agreement, all of which were outstanding under
the term loan facility. There were no revolving borrowings outstanding. As
of
December 31, 2006, the commitment fee on the $1.7 billion revolving
credit facility was 0.50% per annum. Borrowings and repayments under the
Company’s New Credit Agreement (as well as predecessor facilities) are shown
below (in millions):
|
|
|
|
|
|
|
|
|
Year
|
|
Borrowings
|
|
Repayments
|
| |
|
|
|
|
|
|
|
2006
|
|
$
|
11,978.2
|
|
$
|
11,381.2
|
|
2005
|
|
|
8,942.4
|
|
|
8,542.4
|
|
2004
|
|
|
4,153.1
|
|
|
4,153.1
|
Zero-Coupon
Convertible Senior Notes
In
February 2002, the Company issued $640.0 million aggregate principal
amount at maturity of zero-coupon convertible senior notes due 2022 (the
“Convertible Notes”), yielding gross proceeds of $250.3 million. The
Convertible Notes are unsecured and rank equally with the Company’s other
unsecured senior indebtedness, including the Company’s other senior notes. Each
Convertible Note of $1,000 principal amount at maturity was issued at a price
of
$391.06, representing a yield to maturity of 4.75%. Holders of the Convertible
Notes may convert their notes at any time on or before the maturity date at
a
conversion rate, subject to adjustment, of 7.5204 shares of the Company’s common
stock per note, provided that the average per share price of the Company’s
common stock for the 20 trading days immediately prior to the conversion date
is
at least a specified percentage, beginning at 120% upon issuance and declining
1/2% each year thereafter to 110% at maturity, of the accreted value of the
Convertible Note, divided by the conversion rate (the “Contingent Conversion
Trigger”). The Convertible Notes are also convertible (1) if the long-term
credit rating assigned to the Convertible Notes by either Moody’s Investors
Service or Standard & Poor’s Ratings Services is reduced below Ba3 or BB-,
respectively (which is currently the case), or either ratings agency withdraws
its long-term credit rating assigned to the notes, (2) if the Company calls
the
Convertible Notes for redemption or (3) upon the occurrence of specified other
events.
As
discussed above, during the second quarter of 2006, the Company repurchased
substantially all of the Convertible Notes with borrowings under its New Credit
Agreement. As of December 31, 2006, notes with an accreted value of
$3.6 million were outstanding.
Other Senior
Notes
In
November 2006, the Company issued $300 million aggregate principal
amount of unsecured 8.50% senior notes due 2013 (the “2013 Notes”) and
$600 million aggregate principal amount of unsecured 8.75% senior notes due
2016 (the “2016 Notes”). The notes are unsecured and rank equally with the
Company’s other unsecured senior indebtedness, including the Company’s other
senior notes. The proceeds from these notes were used to repurchase the
Company’s senior notes due 2008 (the “2008 Notes”) and senior notes due 2009
(the “2009 Notes”). The Company repurchased 2008 Notes and 2009 Notes with an
aggregate principal amount of Euro 181.4 million and $552.0 million,
respectively, for an aggregate purchase price of $835.8 million, including
related fees. In connection with these transactions, the Company recognized
a
loss of $48.5 million on the extinguishment of debt, which is included in
other expense, net in the consolidated statement of operations for the year
ended December 31, 2006. In January 2007, the Company completed an
exchange offer of the 2013 Notes and the 2016 Notes for substantially identical
notes registered under the Securities Act of 1933, as amended. Interest on
both
the 2013 Notes and 2016 Notes is payable on June 1 and December 1 of
each year.
F-107
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
–
(continued)
The
Company may redeem all or part of the 2013 Notes and the 2016 Notes, at its
option, at any time subsequent to December 1, 2010, in the case of the 2013
Notes, and December 1, 2011, in the case of the 2016 Notes, at the
redemption prices set forth below, together with any interest accrued but not
yet paid to the date of redemption. These redemption prices, expressed as a
percentage of the principal amount due, are set forth below:
|
|
|
|
|
|
|
|
| |
|
Twelve-Month
Period
Commencing
December 1,
|
|
| |
|
2013
Notes
|
|
|
2016
Notes
|
|
| |
|
|
|
|
|
|
|
2010
|
|
104.250
|
%
|
|
N/A
|
|
|
2011
|
|
102.125
|
%
|
|
104.375
|
%
|
|
2012
|
|
100.0
|
%
|
|
102.917
|
%
|
|
2013
|
|
100.0
|
%
|
|
101.458
|
%
|
|
2014
and thereafter
|
|
100.0
|
%
|
|
100.0
|
%
|
The
Company may redeem all or part of the 2013 Notes and the 2016 Notes, at its
option, at any time prior to December 1, 2010, in the case of the 2013
Notes, and December 1, 2011, in the case of the 2016 Notes, at the greater
of (a) 100% of the principal amount of the notes to be redeemed or (b) the
sum
of the present values of the redemption price set forth above and the remaining
scheduled interest payments from the redemption date through December 1,
2010, in the case of the 2013 Notes, or December 1, 2011, in the case of
the 2016 Notes, discounted to the redemption date on a semiannual basis at
the
applicable treasury rate plus 50 basis points, together with any interest
accrued but not yet paid to the date of redemption.
In
addition to the senior notes discussed above, the Company has outstanding
$399.3 million aggregate principal amount of senior notes due 2014 (the
“2014 Notes”). Interest on the 2014 Notes is payable on February 1 and
August 1 of each year. The Company also has outstanding Euro
55.6 million ($73.3 million based on the exchange rate in effect as of
December 31, 2006) aggregate principal amount of 2008 Notes. Interest on
the 2008 Notes is payable on April 1 and October 1 of each year.
During 2006, the Company repurchased an aggregate principal amount of Euro
194.4 million ($257.0 million based on the exchange rates in effect as
of the transaction dates) of the 2008 Notes using proceeds from the issuance
of
the 2013 Notes and 2016 Notes and borrowings under the New Credit Agreement.
In
addition, the Company has outstanding $41.4 million aggregate principal
amount of 2009 Notes. Interest on the 2009 Notes is payable on May 15 and
November 15 of each year. During 2006, the Company repurchased an aggregate
principal amount of $758.6 million of the 2009 Notes using proceeds from
the issuance of the 2013 Notes and 2016 Notes and borrowings under the New
Credit Agreement.
The
Company may redeem all or part of the 2014 Notes, the 2008 Notes and the 2009
Notes, at its option, at any time, at the greater of (a) 100% of the principal
amount of the notes to be redeemed or (b) the sum of the present values of
the
remaining scheduled payments of principal and interest thereon from the
redemption date to the maturity date, discounted to the redemption date on
a
semiannual basis at the applicable treasury rate plus 20 basis points in the
case of the 2014 Notes, at the Bund rate plus 50 basis points in the case of
the
2008 Notes and at the applicable treasury rate plus 50 basis points in the
case
of the 2009 Notes, together with any interest accrued but not yet paid to the
date of the redemption.
Guarantees
The
senior notes of the Company are senior unsecured obligations and rank pari
passu
in right of payment with all of the Company’s existing and future unsubordinated
unsecured indebtedness. The Company’s obligations under the senior notes are
guaranteed, on a joint and several basis, by certain of its subsidiaries, which
are primarily domestic subsidiaries and all of which are directly or indirectly
wholly owned by the Company (Note 18, “Supplemental Guarantor Condensed
Consolidating Financial Statements”). The Company’s obligations under the New
Credit Agreement are secured by a pledge of all or a portion of the capital
stock of certain of its subsidiaries, including substantially all of its
first-tier subsidiaries, and are partially secured by a security interest in
the
Company’s assets and the assets of certain of its domestic subsidiaries. In
addition, the Company’s obligations under the New Credit Agreement are
guaranteed by the same subsidiaries that guarantee the Company’s obligations
under the senior notes.
F-108
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term Debt
–
(continued)
Covenants
The New
Credit Agreement contains certain affirmative and negative covenants, including
(i) limitations on fundamental changes involving the Company or its
subsidiaries, asset sales and restricted payments, (ii) a limitation on
indebtedness with a maturity shorter than the term loan facility, (iii) a
limitation on aggregate subsidiary indebtedness to an amount which is no more
than 4% of consolidated total assets, (iv) a limitation on aggregate secured
indebtedness to an amount which is no more than $100 million and (v)
requirements that the Company maintain an initial leverage ratio of not more
than 4.0 to 1, as of December 31, 2006, with decreases over time and an
initial interest coverage ratio of not less than 2.50 to 1 with increases over
time.
The
leverage and interest coverage ratios, as well as the related components of
their computation, are defined in the New Credit Agreement. The leverage ratio
is calculated as the ratio of consolidated indebtedness to consolidated
operating profit. For the purpose of the covenant calculation, (i) consolidated
indebtedness is generally defined as reported debt, net of cash and excludes
transactions related to the Company’s asset-backed securitization and factoring
facilities and (ii) consolidated operating profit is generally defined as net
income excluding income taxes, interest expense, depreciation and amortization
expense, other income and expense, minority interests in income of subsidiaries
in excess of net equity earnings in affiliates, certain restructuring and other
non-recurring charges, extraordinary gains and losses and other specified
non-cash items. Consolidated operating profit is a non-GAAP financial measure
that is presented not as a measure of operating results, but rather as a measure
used to determine covenant compliance under the Company’s primary credit
facility. The interest coverage ratio is calculated as the ratio of consolidated
operating profit to consolidated interest expense. For the purpose of the
covenant calculation, consolidated interest expense is generally defined as
interest expense plus any discounts or expenses related to the Company’s
asset-backed securitization facility less amortization of deferred finance
fees
and interest income. As of December 31, 2006, the Company was in compliance
with all covenants set forth in the New Credit Agreement. The Company’s leverage
and interest coverage ratios were 2.4 to 1 and 4.2 to 1, respectively.
Reconciliations
of (i) consolidated indebtedness to reported debt, (ii) consolidated operating
profit to income before provision for income taxes and cumulative effect of
a
change in accounting principle and (iii) consolidated interest expense to
reported interest expense are shown below (in millions):
|
|
|
|
|
| |
|
December 31,
2006
|
| |
|
|
|
|
Consolidated
indebtedness
|
|
$
|
1,996.7
|
|
Cash
and cash equivalents
|
|
|
502.7
|
|
Reported
debt
|
|
$
|
2,499.4
|
F-109
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term
Debt
– (continued)
|
|
|
|
|
|
| |
|
Year
Ended
December 31,
2006
|
|
| |
|
|
|
|
|
Consolidated
operating profit
|
|
$
|
835.9
|
|
|
Depreciation
and amortization
|
|
|
(392.2
|
)
|
|
Consolidated
interest expense
|
|
|
(200.4
|
)
|
|
Loss
on divestiture of interior business
|
|
|
(636.0
|
)
|
|
Other
expense, net (excluding certain costs related to asset-backed
securitization facility)
|
|
|
(77.7
|
)
|
|
Restructuring
charges
|
|
|
(105.5
|
)
|
|
Impairment
charges
|
|
|
(12.9
|
)
|
|
Other
non-cash items
|
|
|
(64.6
|
)
|
|
Loss
before provision for income taxes, minority interests in consolidated
subsidiaries, equity
in net income of affiliates and cumulative effect
of a change in accounting principle
|
|
$
|
(653.4
|
)
|
|
Consolidated
interest expense
|
|
$
|
200.4
|
|
|
Certain
costs related to asset-backed securitization facility
|
|
|
(8.0
|
)
|
|
Amortization
of deferred financing fees
|
|
|
8.7
|
|
|
Bank
facility and other fees
|
|
|
8.7
|
|
|
Reported
interest expense
|
|
$
|
209.8
|
|
The New
Credit Agreement also contains customary events of default, including an event
of default triggered by a change of control of the Company. The senior notes
due
2013 and 2016 (having an aggregate principal amount outstanding of
$900 million as of December 31, 2006) provide holders of the notes the
right to require the Company to repurchase all or any part of their notes at
a
purchase price equal to 101% of their principal amount, plus accrued and unpaid
interest, upon a “change of control” (as defined in the indenture governing the
notes). The transaction contemplated by the Agreement and Plan of Merger with
affiliates of American Real Estate Partners, L.P. would not constitute a change
of control for these purposes (Note 17, “Subsequent Event”). The indentures
governing the Company’s other senior notes do not contain a change in control
repurchase obligation.
With
the
exception of the Convertible Notes, the senior notes also contain covenants
restricting the ability of the Company and its subsidiaries to incur liens
and
to enter into sale and leaseback transactions. With respect to the indenture
governing the Company’s Convertible Notes, the Company received consents from a
majority of the holders of the Convertible Notes allowing the Company to execute
a supplemental indenture which eliminated the covenants and related provisions
in the indenture that restricted the Company’s ability to incur liens and to
enter into sale and leaseback transactions. As of December 31, 2006, the
Company was in compliance with all covenants and other requirements set forth
in
its senior notes.
Other
As of
December 31, 2006, other long-term debt was principally made up of amounts
outstanding under term loans and capital leases.
F-110
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Long-Term
Debt
– (continued)
Scheduled
Maturities
As
of
December 31, 2006, the scheduled maturities of long-term debt for the five
succeeding years are shown below (in millions):
|
|
|
|
|
|
Year
|
|
Maturities
|
| |
|
|
|
|
2007
|
|
$
|
25.6
|
|
2008
|
|
|
85.9
|
|
2009
|
|
|
53.1
|
|
2010
|
|
|
10.7
|
|
2011
|
|
|
8.6
|
(9) Income
Taxes
A
summary of income (loss) before provision for income taxes, minority interests
in consolidated subsidiaries and equity in net (income) loss of affiliates
and
the components of provision for income taxes is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries, equity in net (income) loss of affiliates
and
cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(785.3
|
)
|
$
|
(1,520.8
|
)
|
$
|
47.7
|
|
|
Foreign
|
|
|
131.9
|
|
|
392.2
|
|
|
516.6
|
|
| |
|
$
|
(653.4
|
)
|
$
|
(1,128.6
|
)
|
$
|
564.3
|
|
|
Domestic
provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision (benefit)
|
|
$
|
30.6
|
|
$
|
(12.9
|
)
|
$
|
7.2
|
|
|
Deferred
provision (benefit)
|
|
|
(1.6
|
)
|
|
65.3
|
|
|
(4.0
|
)
|
|
Total
domestic provision
|
|
|
29.0
|
|
|
52.4
|
|
|
3.2
|
|
|
Foreign
provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Current
provision
|
|
|
79.3
|
|
|
162.5
|
|
|
112.1
|
|
|
Deferred
provision (benefit)
|
|
|
(53.4
|
)
|
|
(20.6
|
)
|
|
12.7
|
|
|
Total
foreign provision
|
|
|
25.9
|
|
|
141.9
|
|
|
124.8
|
|
|
Provision
for income taxes
|
|
$
|
54.9
|
|
$
|
194.3
|
|
$
|
128.0
|
|
The
domestic provision includes withholding taxes related to dividends and royalties
paid by the Company’s foreign subsidiaries. The foreign deferred provision
(benefit) includes the benefit of prior unrecognized net operating loss
carryforwards of $14.1 million, $1.8 million and $5.7 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
F-111
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Income Taxes
–
(continued)
A
summary of the differences between the provision (benefit) for income taxes
calculated at the United States federal statutory income tax rate of 35% and
the
consolidated provision for income taxes is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries, equity in net (income) loss of affiliates
and
cumulative effect of a change in accounting principle multiplied
by
the
United States federal statutory rate
|
|
$
|
(228.7
|
)
|
$
|
(395.0
|
)
|
$
|
197.5
|
|
|
Differences
in income taxes on foreign earnings, losses and remittances
|
|
|
10.2
|
|
|
(34.0
|
)
|
|
(46.5
|
)
|
|
Valuation
allowance adjustments
|
|
|
259.4
|
|
|
275.2
|
|
|
13.3
|
|
|
Research
and development credits
|
|
|
(11.4
|
)
|
|
(22.6
|
)
|
|
(16.6
|
)
|
|
Goodwill
impairment
|
|
|
1.0
|
|
|
354.4
|
|
|
—
|
|
|
Investment
credit / grants
|
|
|
(6.7
|
)
|
|
(22.8
|
)
|
|
(7.4
|
)
|
|
Other
|
|
|
31.1
|
|
|
39.1
|
|
|
(12.3
|
)
|
|
Provision
for income taxes
|
|
$
|
54.9
|
|
$
|
194.3
|
|
$
|
128.0
|
|
For the
years ended December 31, 2006, 2005 and 2004, income in foreign
jurisdictions with tax holidays was $109.2 million, $54.7 million and
$143.4 million, respectively. Such tax holidays generally expire from 2007
through 2018.
Deferred
income taxes represent temporary differences in the recognition of certain
items
for income tax and financial reporting purposes. A summary of the components
of
the net deferred income tax asset (liability) is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
Tax
loss
carryforwards
|
|
$
|
451.1
|
|
$
|
259.0
|
|
|
Tax
credit carryforwards
|
|
|
140.1
|
|
|
85.7
|
|
|
Retirement
benefit plans
|
|
|
113.5
|
|
|
90.1
|
|
|
Accrued
liabilities
|
|
|
66.7
|
|
|
71.7
|
|
|
Reserves
related to current assets
|
|
|
41.1
|
|
|
29.7
|
|
|
Self-insurance
reserves
|
|
|
19.6
|
|
|
20.6
|
|
|
Defined
benefit plan liability adjustments
|
|
|
84.0
|
|
|
39.5
|
|
|
Deferred
compensation
|
|
|
15.3
|
|
|
20.2
|
|
|
Recoverable
customer engineering and tooling
|
|
|
—
|
|
|
57.5
|
|
|
Long-term
asset basis differences
|
|
|
102.2
|
|
|
—
|
|
|
Derivative
instruments and hedging
|
|
|
8.2
|
|
|
22.0
|
|
|
Other
|
|
|
0.2
|
|
|
—
|
|
| |
|
|
1,042.0
|
|
|
696.0
|
|
|
Valuation
allowance
|
|
|
(843.9
|
)
|
|
(478.3
|
)
|
| |
|
$
|
198.1
|
|
$
|
217.7
|
|
F-112
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Income Taxes
–
(continued)
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Long-term
asset basis
differences
|
|
$
|
—
|
|
$
|
(137.4
|
)
|
|
Recoverable
customer engineering and tooling
|
|
|
(14.7
|
)
|
|
—
|
|
|
Undistributed
earnings of foreign subsidiaries
|
|
|
(106.4
|
)
|
|
(86.8
|
)
|
|
Other
|
|
|
—
|
|
|
(4.3
|
)
|
| |
|
$
|
(121.1
|
)
|
$
|
(228.5
|
)
|
|
Net
deferred income tax asset (liability)
|
|
$
|
77.0
|
|
$
|
(10.8
|
)
|
During
2005, the Company concluded that it was no longer more likely than not that
it
would realize its U.S. deferred tax assets. As a result, in the fourth quarter
of 2005, the Company recorded a tax charge of $300.3 million comprised of
(i) a full valuation allowance in the amount of $255.0 million with respect
to its net U.S. deferred tax assets and (ii) an increase in related tax reserves
of $45.3 million. During 2006, the Company continued to incur losses in the
United States for which no tax benefit was recorded and the related U.S.
valuation allowance increased to $545.0 million. In addition, deferred tax
assets have been fully offset by a valuation allowance in certain foreign
jurisdictions due to a history of operating losses. The Company intends to
maintain these valuation allowances until it is more likely than not that the
deferred taxes within these countries will be realized. The classification
of
the net deferred income tax liability is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
83.3
|
|
$
|
138.6
|
|
|
Long-term
|
|
|
110.5
|
|
|
76.0
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Current
|
|
|
(20.8
|
)
|
|
(33.3
|
)
|
|
Long-term
|
|
|
(96.0
|
)
|
|
(192.1
|
)
|
|
Net
deferred income tax asset (liability)
|
|
$
|
77.0
|
|
$
|
(10.8
|
)
|
Deferred
income taxes have not been provided on $975.6 million of certain
undistributed earnings of the Company’s foreign subsidiaries as such amounts are
considered to be permanently reinvested. It is not practicable to determine
the
unrecognized deferred income tax liability on these earnings because the actual
tax liability on these earnings, if any, is dependent on circumstances existing
when remittance occurs.
The
Company operates in multiple jurisdictions throughout the world, and its tax
returns are periodically audited or subject to review by both domestic and
foreign tax authorities. The Company reviews its income tax positions on a
continuous basis and records a tax reserve when it believes a liability is
probable and can be reasonably estimated in accordance with SFAS No. 5,
“Accounting for Contingencies.” The tax issues which resulted in reserves will
be resolved on an item by item basis upon the occurrence of certain events,
which may include the resolution of tax audits and the expiration of the statute
of limitations for the relevant taxing authority to examine the Company’s tax
position. In addition, the reserves may be affected by changes in tax laws,
the
issuance of new or proposed regulations or the availability of new information
that impacts a tax exposure item. Reserves associated with income tax
uncertainties are included in either accrued liabilities or other long-term
liabilities and are not included as a component of deferred tax assets or
liabilities. Interest and penalties, where applicable, are included in the
tax
reserves.
As of
December 31, 2006, the Company had tax loss carryforwards of
$1.5 billion. Of the total loss carryforwards, $872.0 million has no
expiration date and $600.9 million expires from 2007 through 2026. In
addition, the Company had tax credit carryforwards of $140.1 million
comprised principally of U.S. foreign tax credits, research and development
credits and investment tax credits that generally expire between 2015 and 2026.
F-113
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other
Postretirement Benefit Plans
The
Company has noncontributory defined benefit pension plans covering certain
domestic employees and certain employees in foreign countries, principally
Canada. The Company’s salaried pension plans provide benefits based on final
average earnings formulas. The Company’s hourly pension plans provide benefits
under flat benefit and cash balance formulas. The Company also has contractual
arrangements with certain employees which provide for supplemental retirement
benefits. In general, the Company’s policy is to fund its pension benefit
obligation based on legal requirements, tax considerations and local practices.
The
Company has postretirement benefit plans covering a portion of the Company’s
domestic and Canadian employees. The Company’s postretirement benefit plans
generally provide for the continuation of medical benefits for all eligible
employees who complete ten years of service after age 45 and retire from the
Company at age 55 or older. The Company does not fund its postretirement benefit
obligation. Rather, payments are made as costs are incurred by covered retirees.
Obligations and
Funded Status
A
reconciliation of the change in benefit obligation, the change in plan assets
and the net amount recognized in the consolidated balance sheets is shown below
(based on a September 30 measurement date, in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of
year
|
|
$
|
788.3
|
|
$
|
630.8
|
|
$
|
265.5
|
|
$
|
222.1
|
|
|
Service
cost
|
|
|
50.3
|
|
|
41.0
|
|
|
12.7
|
|
|
11.7
|
|
|
Interest
cost
|
|
|
44.2
|
|
|
37.6
|
|
|
15.0
|
|
|
13.5
|
|
|
Amendments
|
|
|
3.5
|
|
|
5.6
|
|
|
—
|
|
|
(1.0
|
)
|
|
Actuarial
(gain) loss
|
|
|
(30.5
|
)
|
|
96.0
|
|
|
(16.3
|
)
|
|
22.4
|
|
|
Benefits
paid
|
|
|
(24.9
|
)
|
|
(21.6
|
)
|
|
(9.1
|
)
|
|
(7.8
|
)
|
|
Curtailment
(gain) loss
|
|
|
(4.6
|
)
|
|
(1.7
|
)
|
|
—
|
|
|
0.1
|
|
|
Special
termination benefits
|
|
|
1.7
|
|
|
0.1
|
|
|
0.4
|
|
|
0.3
|
|
|
Settlements
|
|
|
—
|
|
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
Acquisitions,
new plans and other
|
|
|
22.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
Translation
adjustment
|
|
|
10.4
|
|
|
1.5
|
|
|
(0.3
|
)
|
|
4.2
|
|
|
Benefit
obligation at end of year
|
|
$
|
860.9
|
|
$
|
788.3
|
|
$
|
267.9
|
|
$
|
265.5
|
|
F-114
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of
year
|
|
$
|
474.2
|
|
$
|
394.5
|
|
$
|
—
|
|
$
|
—
|
|
|
Actual
return on plan assets
|
|
|
42.7
|
|
|
45.6
|
|
|
—
|
|
|
—
|
|
|
Employer
contributions
|
|
|
69.5
|
|
|
48.7
|
|
|
9.1
|
|
|
7.8
|
|
|
Benefits
paid
|
|
|
(24.9
|
)
|
|
(21.6
|
)
|
|
(9.1
|
)
|
|
(7.8
|
)
|
|
Settlements
|
|
|
—
|
|
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
Acquisitions,
new plans and other
|
|
|
11.5
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
Translation
adjustment
|
|
|
0.6
|
|
|
8.3
|
|
|
—
|
|
|
—
|
|
|
Fair
value of plan assets at end of year
|
|
$
|
573.6
|
|
$
|
474.2
|
|
$
|
—
|
|
$
|
—
|
|
|
Funded
status
|
|
$
|
(287.3
|
)
|
$
|
(314.1
|
)
|
$
|
(267.9
|
)
|
$
|
(265.5
|
)
|
|
Contributions
between September 30 and December 31
|
|
|
11.9
|
|
|
15.8
|
|
|
2.1
|
|
|
1.8
|
|
| |
|
|
(275.4
|
)
|
|
(298.3
|
)
|
|
(265.8
|
)
|
|
(263.7
|
)
|
|
Unrecognized
net actuarial loss
|
|
|
|
|
|
182.9
|
|
|
|
|
|
111.3
|
|
|
Unrecognized
net transition (asset) obligation
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
8.9
|
|
|
Unrecognized
prior service cost (credit)
|
|
|
|
|
|
50.5
|
|
|
|
|
|
(37.1
|
)
|
|
Net
amount recognized
|
|
$
|
(275.4
|
)
|
$
|
(65.1
|
)
|
$
|
(265.8
|
)
|
$
|
(180.6
|
)
|
|
Amounts
recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
(4.9
|
)
|
$
|
(19.8
|
)
|
$
|
(10.0
|
)
|
$
|
(7.6
|
)
|
|
Other
long-term liabilities
|
|
|
(270.5
|
)
|
|
(208.8
|
)
|
|
(255.8
|
)
|
|
(173.0
|
)
|
|
Other
long-term assets (intangible asset)
|
|
|
|
|
|
48.5
|
|
|
|
|
|
—
|
|
|
Accumulated
other comprehensive loss
|
|
|
|
|
|
115.0
|
|
|
|
|
|
—
|
|
|
Net
amount recognized
|
|
$
|
(275.4
|
)
|
$
|
(65.1
|
)
|
$
|
(265.8
|
)
|
$
|
(180.6
|
)
|
As of
December 31, 2006 and 2005, the accumulated benefit obligation for all of
the Company’s pension plans was $766.2 million and $697.2 million,
respectively. As of December 31, 2006, the majority of the Company’s
pension plans had accumulated benefit obligations in excess of plan assets.
As
of December 31, 2005, all of the Company’s pension plans had accumulated
benefit obligations in excess of plan assets. The projected benefit obligation,
the accumulated benefit obligation and the fair value of plan assets of pension
plans with accumulated benefit obligations in excess of plan assets were
$860.4 million, $765.9 million and $573.3 million, respectively,
as of December 31, 2006, and $788.3 million, $697.2 million and
$474.2 million, respectively, as of December 31, 2005.
F-115
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
New Accounting
Pronouncement
The
Financial Accounting Standards Board (“FASB”) issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106, and 132(R).” This statement
requires recognition of the funded status of a company’s defined benefit pension
and postretirement benefit plans as an asset or liability on the balance sheet.
Previously, under the provisions of SFAS No. 87, “Employers’ Accounting for
Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions,” the asset or liability recorded on the balance sheet
reflected the funded status of the plan, net of certain unrecognized items
that
qualified for delayed income statement recognition. Under SFAS
No. 158,
these previously unrecognized items are to be recorded in accumulated other
comprehensive loss when the recognition provisions are adopted. The Company
adopted the recognition provisions as of December 31, 2006, and the funded
status of its defined benefit plans is reflected in its consolidated balance
sheet as of December 31, 2006. In accordance with the transition provisions
of SFAS No. 158, prior periods have not been restated. The incremental effect
of
applying the recognition provisions of SFAS No. 158 on the Company’s
consolidated balance sheet as of December 31, 2006, is shown below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Before
Adoption
of
SFAS No.
158
|
|
Adjustments
|
|
After
Adoption
of
SFAS No.
158
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets (other long-term
assets)
|
|
$
|
45.7
|
|
$
|
(45.7
|
)
|
$
|
—
|
|
|
Liability
for defined benefit plan obligations (current and
long-term
liabilities)
|
|
|
(420.3
|
)
|
|
(120.9
|
)
|
|
(541.2
|
)
|
|
Accumulated
other comprehensive loss — (stockholders’ equity)
|
|
|
97.6
|
|
|
166.6
|
|
|
264.2
|
|
See Note
16, “Accounting Pronouncements,” for a discussion of other provisions of SFAS
No. 158 that have not yet been adopted by the Company.
Accumulated Other
Comprehensive Loss
Amounts
recorded in accumulated other comprehensive loss not yet recognized in net
periodic benefit cost as of December 31, 2006, are shown below:
|
|
|
|
|
|
|
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
|
|
|
|
|
|
|
Net
actuarial
loss
|
|
$
|
150.1
|
|
$
|
91.8
|
|
|
Net
transition (asset) obligation
|
|
|
(0.1
|
)
|
|
7.8
|
|
|
Prior
service cost (credit)
|
|
|
47.9
|
|
|
(33.3
|
)
|
| |
|
$
|
197.9
|
|
$
|
66.3
|
|
Amounts
recorded in accumulated other comprehensive loss that are expected to be
recognized as components of net periodic benefit cost in the year ended
December 31, 2007, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other
Postretirement
|
|
| |
|
|
|
|
|
|
|
|
Amortization
of actuarial
loss
|
|
$
|
3.1
|
|
$
|
4.5
|
|
|
Amortization
of net transition (asset) obligation
|
|
|
(0.1
|
)
|
|
1.0
|
|
|
Amortization
of prior service cost (credit)
|
|
|
4.7
|
|
|
(3.5
|
)
|
| |
|
$
|
7.7
|
|
$
|
2.0
|
|
F-116
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
Net Periodic
Benefit Cost
The
components of the Company’s net periodic benefit cost are shown below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
50.3
|
|
$
|
41.0
|
|
$
|
36.7
|
|
$
|
12.7
|
|
$
|
11.7
|
|
$
|
13.1
|
|
|
Interest
cost
|
|
|
44.2
|
|
|
37.6
|
|
|
32.2
|
|
|
15.0
|
|
|
13.5
|
|
|
12.3
|
|
|
Expected
return on plan assets
|
|
|
(39.4
|
)
|
|
(30.2
|
)
|
|
(24.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization
of actuarial loss
|
|
|
7.1
|
|
|
3.0
|
|
|
2.8
|
|
|
5.8
|
|
|
3.6
|
|
|
3.9
|
|
|
Amortization
of transition (asset) obligation
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
1.0
|
|
|
1.1
|
|
|
1.2
|
|
|
Amortization
of prior service cost (credit)
|
|
|
5.4
|
|
|
5.4
|
|
|
4.3
|
|
|
(3.7
|
)
|
|
(3.1
|
)
|
|
(2.8
|
)
|
|
Special
termination benefits
|
|
|
1.7
|
|
|
—
|
|
|
0.1
|
|
|
0.4
|
|
|
0.3
|
|
|
0.2
|
|
|
Settlement
loss
|
|
|
—
|
|
|
1.0
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Curtailment
(gain) loss
|
|
|
0.9
|
|
|
0.5
|
|
|
1.9
|
|
|
—
|
|
|
1.4
|
|
|
(7.7
|
)
|
|
Net
periodic benefit cost
|
|
$
|
70.1
|
|
$
|
58.1
|
|
$
|
53.9
|
|
$
|
31.2
|
|
$
|
28.5
|
|
$
|
20.2
|
|
Assumptions
The
weighted-average actuarial assumptions used in determining the benefit
obligation are shown below:
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
Discount
rate:
|
|
|
|
|
|
|
|
|
|
|
Domestic
plans
|
|
6.00
|
%
|
5.75
|
%
|
5.90
|
%
|
5.70
|
%
|
|
Foreign
plans
|
|
5.00
|
%
|
5.00
|
%
|
5.30
|
%
|
5.30
|
%
|
|
Rate
of compensation increase:
|
|
|
|
|
|
|
|
|
|
|
Domestic
plans
|
|
3.75
|
%
|
3.75
|
%
|
N/A
|
|
N/A
|
|
|
Foreign
plans
|
|
4.00
|
%
|
3.25
|
%
|
N/A
|
|
N/A
|
|
The
weighted-average actuarial assumptions used in determining net periodic benefit
cost are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
plans
|
|
5.75
|
%
|
6.00
|
%
|
6.25
|
%
|
5.70
|
%
|
6.00
|
%
|
6.25
|
%
|
|
Foreign
plans
|
|
5.00
|
%
|
6.00
|
%
|
6.25
|
%
|
5.30
|
%
|
6.50
|
%
|
6.50
|
%
|
|
Expected
return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
plans
|
|
8.25
|
%
|
7.75
|
%
|
7.75
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Foreign
plans
|
|
6.90
|
%
|
7.00
|
%
|
7.00
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Rate
of compensation increase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
plans
|
|
3.75
|
%
|
3.00
|
%
|
3.00
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
|
Foreign
plans
|
|
3.90
|
%
|
3.25
|
%
|
3.25
|
%
|
N/A
|
|
N/A
|
|
N/A
|
|
F-117
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
The
expected return on plan assets is determined based on several factors, including
adjusted historical returns, historical risk premiums for various asset classes
and target asset allocations within the portfolio. Adjustments made to the
historical returns are based on recent return experience in the equity and
fixed
income markets and the belief that deviations from historical returns are likely
over the relevant investment horizon.
For
measurement purposes, domestic healthcare costs were assumed to increase 9%
in
2007, grading down over time to 5% in seven years. Foreign healthcare costs
were
assumed to increase 7% in 2007, grading down over time to 4% in eleven years
on
a weighted average basis.
Assumed
healthcare cost trend rates have a significant effect on the amounts reported
for the postretirement benefit plans. A 1% increase in the assumed rate of
healthcare cost increases each year would increase the postretirement benefit
obligation as of December 31, 2006, by $59.1 million and increase the
postretirement net periodic benefit cost by $7.0 million for the year then
ended. A 1% decrease in the assumed rate of healthcare cost increases each
year
would decrease the postretirement benefit obligation as of December 31,
2006, by $46.2 million and decrease the postretirement net periodic benefit
cost by $5.4 million for the year then ended.
Plan
Assets
The
Company’s pension plan asset allocations by asset category are shown below
(based on a September 30 measurement date). Pension plan asset allocations
for the foreign plans relate to the Company’s Canadian pension plans.
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
Domestic
plans
|
|
69
|
%
|
71
|
%
|
|
Foreign
plans
|
|
58
|
%
|
59
|
%
|
|
Debt
securities:
|
|
|
|
|
|
|
Domestic
plans
|
|
28
|
%
|
27
|
%
|
|
Foreign
plans
|
|
36
|
%
|
38
|
%
|
|
Cash
and other:
|
|
|
|
|
|
|
Domestic
plans
|
|
3
|
%
|
2
|
%
|
|
Foreign
plans
|
|
6
|
%
|
3
|
%
|
The
Company’s investment policies incorporate an asset allocation strategy that
emphasizes the long-term growth of capital. The Company believes this strategy
is consistent with the long-term nature of plan liabilities and ultimate cash
needs of the plans. For the domestic portfolio, the Company targets an equity
allocation of 60% – 80% of plan assets, a fixed income allocation of 15% – 40%
and cash allocation of 0% – 15%. For the foreign portfolio, the Company targets
an equity allocation of 50% – 70% of plan assets, a fixed income allocation of
30% – 50% and a cash allocation of 0% – 10%. Differences in the target
allocations of the domestic and foreign portfolios are reflective of differences
in the underlying plan liabilities. Diversification within the investment
portfolios is pursued by asset class and investment management style. The
investment portfolios are reviewed on a quarterly basis to maintain the desired
asset allocations, given the market performance of the asset classes and
investment management styles.
The
Company utilizes investment management firms to manage these assets in
accordance with the Company’s investment policies. Retained investment managers
are provided investment guidelines that indicate prohibited assets, which
include commodities contracts, futures contracts, options, venture capital,
real
estate and interest-only or principal-only strips. Derivative instruments are
also prohibited without the specific approval of the Company. Investment
managers are limited in the maximum size of individual security holdings and
the
maximum exposure to any one industry relative to the total portfolio. Fixed
income managers are provided further investment guidelines that indicate minimum
credit ratings for debt securities and limitations on weighted average maturity
and portfolio duration.
F-118
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other Postretirement Benefit Plans – (continued)
The
Company evaluates investment manager performance against market indices which
the Company believes are appropriate to the investment management style for
which the investment manager has been retained. The Company’s investment
policies incorporate an investment goal of aggregate portfolio returns which
exceed the returns of the appropriate market indices by a reasonable spread
over
the relevant investment horizon.
Contributions
The
Company expects to contribute approximately $60 million to its domestic and
foreign pension plan asset portfolios in 2007. Contributions to the pension
plans are consistent with minimum funding requirements of the relevant
governmental authorities. The Company may make contributions in excess of these
minimums when the Company believes it is financially advantageous to do so
and
based on its other capital requirements. In addition, the Company’s future
funding obligations may be affected by changes in applicable legal requirements.
Benefit
Payments
As
of
December 31, 2006, the Company’s estimate of expected benefit payments in
each of the five succeeding years and in the aggregate for the five years
thereafter are shown below (in millions):
|
|
|
|
|
|
|
|
| |
|
Pension
|
|
Other
Postretirement
|
| |
|
|
|
|
|
|
|
2007
|
|
$
|
27.1
|
|
$
|
10.0
|
|
2008
|
|
|
29.0
|
|
|
10.7
|
|
2009
|
|
|
31.1
|
|
|
11.5
|
|
2010
|
|
|
34.8
|
|
|
12.2
|
|
2011
|
|
|
37.6
|
|
|
12.6
|
|
Five
years thereafter
|
|
|
241.9
|
|
|
73.5
|
Defined
Contribution and Multi-employer Pension Plans
The
Company also sponsors defined contribution plans and participates in
government-sponsored programs in certain foreign countries. Contributions are
determined as a percentage of each covered employee’s salary. The Company also
participates in multi-employer pension plans for certain of its hourly
employees. Contributions are based on collective bargaining agreements. For
the
years ended December 31, 2006, 2005 and 2004, the aggregate cost of the
defined contribution and multi-employer pension plans was $22.7 million,
$25.8 million and $25.1 million, respectively.
Subsequent
Events
In 2006,
the Company elected to freeze its U.S. salaried defined benefit pension plan
effective December 31, 2006. In conjunction with this, the Company
established a new defined contribution retirement plan for its salaried
employees effective January 1, 2007. Contributions to this plan will be
determined as a percentage of each covered employee’s salary and are expected to
be in the range of $18 million to $25 million in 2007. Subsequent to
the measurement date of September 30, 2006, the Company incurred
curtailment gains of approximately $36.5 million and $14.7 million
with respect to pension and other postretirement benefit plans, respectively.
The pension plan curtailment gain resulted from the suspension of the accrual
of
defined benefits related to the Company’s U.S. salaried defined benefit pension
plan. The other postretirement benefit plan curtailment gain resulted from
employee terminations associated with a facility closure in the fourth quarter
of 2006. The Company uses a September 30 measurement date for its U.S.
pension and other postretirement benefit plans, and as these curtailments
occurred after the measurement date, the related curtailment gains will be
recognized by the Company in the first quarter of 2007.
F-119
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stock-Based
Compensation
The
Company has three plans under which it has issued stock options: the 1994 Stock
Option Plan, the 1996 Stock Option Plan and the Long-Term Stock Incentive Plan.
Options issued to date under these plans generally vest three years following
the grant date and expire ten years from the issuance date.
A
summary of option transactions during each of the three years in the period
ended December 31, 2006, is shown below:
|
|
|
|
|
|
| |
|
Stock
Options
|
|
Price
Range
|
| |
|
|
|
|
|
Outstanding
as of January 1,
2004
|
|
4,002,625
|
|
$15.50 – $55.33
|
|
Expired
or cancelled
|
|
(14,450
|
)
|
$15.50 – $54.22
|
|
Exercised
|
|
(693,495
|
)
|
$15.50 – $54.22
|
|
Outstanding
as of December 31, 2004
|
|
3,294,680
|
|
$22.12 – $55.33
|
|
Expired
or cancelled
|
|
(176,800
|
)
|
$22.12 – $54.22
|
|
Exercised
|
|
(134,475
|
)
|
$22.12 – $54.22
|
|
Outstanding
as of December 31, 2005
|
|
2,983,405
|
|
$22.12 – $55.33
|
|
Expired
or cancelled
|
|
(186,100
|
)
|
$22.12 – $54.22
|
|
Exercised
|
|
(7,000
|
)
|
$22.12
|
|
Outstanding
as of December 31, 2006
|
|
2,790,305
|
|
$22.12 –
$55.33
|
A
summary of options outstanding as of December 31, 2006, is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
of exercise
prices
|
|
$
|
22.12 – 27.25
|
|
$
|
33.00 – 39.83
|
|
$
|
41.83 – 42.32
|
|
$
|
54.22 – 55.33
|
|
Options
outstanding and exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
outstanding and exercisable
|
|
|
215,475
|
|
|
795,080
|
|
|
1,389,300
|
|
|
390,450
|
|
Weighted
average remaining contractual
life (years)
|
|
|
3.16
|
|
|
3.56
|
|
|
5.42
|
|
|
1.56
|
|
Weighted
average exercise price
|
|
$
|
22.58
|
|
$
|
36.98
|
|
$
|
41.83
|
|
$
|
54.27
|
As of
December 31, 2005, 2,967,405 options were exercisable. During 2006, an
additional 16,000 options became exercisable. As of December 31, 2006, all
outstanding options were exercisable.
The
Long-Term Stock Incentive Plan also permits the grants of stock appreciation
rights, restricted stock, restricted stock units, performance shares and
performance units (collectively, “Incentive Units”) to officers and other key
employees of the Company. As of December 31, 2006, the Company had
outstanding stock-settled stock appreciation rights covering 1,751,854 shares
with a weighted average exercise price of $28.99 per right and outstanding
restricted stock and performance shares convertible into a maximum of 2,134,480
shares of common stock of the Company. Restricted stock and performance shares
include 1,285,387 restricted stock units at no cost to the employee, 679,184
restricted stock units at a weighted average cost to the employee of $40.86
per
unit and 169,909 performance shares at no cost to the employee. As of
December 31, 2006, the Company also had outstanding 463,748 cash-settled
stock appreciation rights with a weighted average exercise price of $28.74
per
right.
Stock
appreciation rights granted prior to 2006 vest on a graded basis over one to
three years following the grant date and expire seven years from the grant
date.
Stock appreciation rights granted in 2006 vest three years following the grant
date and expire seven years from the grant date. Restricted stock units granted
prior to 2006 vest on a graded basis over two to five years following the grant
date. Restricted stock units granted in 2006 vest on a graded basis over two
to
four years following the grant date. Performance shares vest three years
following the grant date.
F-120
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Stock-Based
Compensation – (continued)
A
summary of Incentive Unit transactions during each of the three years in the
period ended December 31, 2006, is shown below:
|
|
|
|
|
|
|
|
|
| |
|
Stock
Appreciation
Rights(1)
|
|
Restricted
Stock
Units
|
|
Performance
Shares(2)
|
|
| |
|
|
|
|
|
|
|
|
Outstanding
as of January 1,
2004
|
|
—
|
|
1,394,716
|
|
256,158
|
|
|
Granted
|
|
—
|
|
954,637
|
|
53,193
|
|
|
Expired
or cancelled
|
|
—
|
|
(39,332
|
)
|
(6,664
|
)
|
|
Distributed
|
|
—
|
|
(476,337
|
)
|
(93,660
|
)
|
|
Outstanding
as of December 31, 2004
|
|
—
|
|
1,833,684
|
|
209,027
|
|
|
Granted
|
|
1,215,046
|
|
605,811
|
|
56,733
|
|
|
Expired
or cancelled
|
|
—
|
|
(74,528
|
)
|
(67,452
|
)
|
|
Distributed
|
|
—
|
|
(130,845
|
)
|
(74,636
|
)
|
|
Outstanding
as of December 31, 2005
|
|
1,215,046
|
|
2,234,122
|
|
123,672
|
|
|
Granted
|
|
642,285
|
|
406,086
|
|
130,655
|
|
|
Expired
or cancelled
|
|
(91,002
|
)
|
(146,045
|
)
|
(84,418
|
)
|
|
Distributed
or exercised
|
|
(14,475
|
)
|
(529,592
|
)
|
—
|
|
|
Outstanding
as of December 31, 2006
|
|
1,751,854
|
|
1,964,571
|
|
169,909
|
|
——————
(1)
Does
not
include cash-settled stock appreciation rights.
(2)
Performance
shares reflected as “granted” are notional shares granted at the beginning of a
three-year performance period whose eventual payout is subject to satisfaction
of performance criteria. Performance shares reflected as “distributed” are those
that are paid out in shares of common stock upon satisfaction of the performance
criteria at the end of the three-year performance period.
As of
December 31, 2005, all outstanding stock appreciation rights were
nonvested. During 2006, 375,331 stock appreciation rights vested and 360,856
of
these remain outstanding as of December 31, 2006. All outstanding
restricted stock units and performance shares are nonvested. Restricted stock
units and performance shares are distributed when vested. As of
December 31, 2006, unrecognized compensation cost related to nonvested
Incentive Units was $41.9 million. This amount is expected to be recognized
over the next 1.6 years on a weighted average basis.
The fair
values of the stock-settled stock appreciation right grants, which have a
seven-year term, were estimated as of the grant dates using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
dividend yields of 0.00% in 2006 and 1.91% in 2005; expected life of 5 years
in
2006 and 41/2 years in 2005; risk-free interest rate of 4.58% in 2006 and 4.40%
in 2005; and expected volatility of 40.00% in 2006 and 2005. The weighted
average fair value of the stock-settled stock appreciation right grants were
$13.21 per right in 2006 and $9.30 per right in 2005.
(12) Commitments
and
Contingencies
Legal and Other
Contingencies
As of
December 31, 2006 and December 31, 2005, the Company had recorded
reserves for pending legal disputes, including commercial disputes and other
matters, of $18.0 million and $49.2 million, respectively. Such
reserves reflect amounts recognized in accordance with accounting principles
generally accepted in the United States and typically exclude the cost of legal
representation. Product warranty liabilities are recorded separately from legal
liabilities, as described below.
F-121
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
Commercial
Disputes
The
Company is involved from time to time in legal proceedings and claims,
including, without limitation, commercial or contractual disputes with its
suppliers, competitors and customers. These disputes vary in nature and are
usually resolved by negotiations between the parties.
On
January 29, 2002, Seton Company (“Seton”), one of the Company’s leather
suppliers, filed a suit alleging that the Company had breached a purported
agreement to purchase leather from Seton for seats for the life of the General
Motors GMT 800 program. Seton filed the lawsuit in the U.S. District Court
for
the Eastern District of Michigan seeking compensatory and exemplary damages
totaling approximately $96.5 million, plus interest, on breach of contract
and promissory estoppel claims. In May 2005, this case proceeded to trial,
and the jury returned a $30.0 million verdict against the Company. On
September 27, 2005, the Court denied the Company’s post-trial motions
challenging the judgment and granted Seton’s motion to award prejudgment
interest in the amount of approximately $4.7 million. On October 4,
2006, the Sixth Circuit Court of Appeals affirmed the judgment of the trial
court. On October 18, 2006, the Company filed a Petition for Rehearing with
the court which was denied on November 16, 2006. On December 7, 2006,
the Court of Appeals issued a mandate indicating that the order affirming the
judgment was final. In December 2006, the Company paid the principal and
all remaining interest on the judgment.
On
January 26, 2004, the Company filed a patent infringement lawsuit against
Johnson Controls Inc. and Johnson Controls Interiors LLC (together, “JCI”) in
the U.S. District Court for the Eastern District of Michigan alleging that
JCI’s
garage door opener products infringed certain of the Company’s radio frequency
transmitter patents. JCI counterclaimed seeking a declaratory judgment that
the
subject patents are invalid and unenforceable, and that JCI is not infringing
these patents. JCI also has filed motions for summary judgment asserting that
its garage door opener products do not infringe the Company’s patents and that
one of the Company’s patents is invalid and unenforceable. The Company is
vigorously pursuing its claims against JCI. A trial date has not been scheduled.
After
the
Company filed its patent infringement action against JCI, affiliates of JCI
sued
one of the Company’s vendors and certain of the vendor’s employees in Ottawa
County, Michigan Circuit Court on July 8, 2004, alleging misappropriation
of trade secrets and disclosure of confidential information. The suit alleges
that the defendants misappropriated and shared with the Company trade secrets
involving JCI’s universal garage door opener product. JCI seeks to enjoin the
defendants from selling or attempting to sell a competing product, as well
as
compensatory damages and attorney fees. The Company is not a defendant in this
lawsuit; however, the agreements between the Company and the defendants contain
customary indemnification provisions. The Company does not believe that its
garage door opener product benefited from any allegedly misappropriated trade
secrets or technology. However, JCI has sought discovery of certain information
which the Company believes is confidential and proprietary, and the Company
has
intervened in the case as a non-party for the limited purpose of protecting
its
rights with respect to JCI’s discovery efforts. The trial has been rescheduled
to October 2007.
On
June 13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit
against the Company and Ford Motor Company (“Ford”) in the Northern District of
Illinois alleging patent infringement. Two counts were asserted against the
Company and Ford based upon two Chamberlain rolling-code garage door opener
system patents. Two additional counts were asserted against Ford only (not
the
Company) based upon different Chamberlain patents. The Chamberlain lawsuit
was
filed in connection with the marketing of the Company’s universal garage door
opener system, which competes with a product offered by JCI. JCI obtained
technology from Chamberlain to operate its product. In October 2005, JCI
joined the lawsuit as a plaintiff along with Chamberlain. In October 2006,
Ford was dismissed from the suit. JCI and Chamberlain have filed a motion for
a
preliminary injunction, and the Company is vigorously defending the claims
asserted in this lawsuit. A trial date has not yet been scheduled.
F-122
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
Product Liability Matters
In the
event that use of the Company’s products results in, or is alleged to result in,
bodily injury and/or property damage or other losses, the Company may be subject
to product liability lawsuits and other claims. In addition, the Company is
a
party to warranty-sharing and other agreements with its customers relating
to
its products. These customers may pursue claims against the Company for
contribution of all or a portion of the amounts sought in connection with
product liability and warranty claims. The Company can provide no assurances
that it will not experience material claims in the future or that it will not
incur significant costs to defend such claims. In addition, if any of the
Company’s products are, or are alleged to be, defective, the Company may be
required or requested by its customers to participate in a recall or other
corrective action involving such products. Certain of the Company’s customers
have asserted claims against the Company for costs related to recalls or other
corrective actions involving its products. In certain instances, the allegedly
defective products were supplied by
tier II suppliers against whom the
Company has sought or will seek contribution. In this regard, in the first
quarter of 2007, the Company received notice of a potential warranty claim
concerning a component produced by a tier II supplier and incorporated into
a
product supplied by the Company. The alleged non-conformity is not
safety-related. The Company is continuing to work with the customer and the
tier
II supplier to evaluate the matter and determine the appropriate corrective
action, if any. The Company has also placed its tier II supplier on notice
of
the potential claim and of the Company’s intention to seek full contribution and
reimbursement for any loss. The Company carries insurance for certain legal
matters, including product liability claims, but such coverage may be limited.
The Company does not maintain insurance for product warranty or recall matters.
The
Company records product warranty liabilities based on its individual customer
agreements. Product warranty liabilities are recorded for known warranty issues
when amounts related to such issues are probable and reasonably estimable.
In
certain product liability and warranty matters, the Company may seek recovery
from its suppliers that supply materials or services included within the
Company’s products that are associated with the related claims.
A
summary of the changes in product warranty liabilities for each of the two
years
in the period ended December 31, 2006, is shown below (in millions):
|
|
|
|
|
|
|
Balance
as of January 1,
2005
|
|
$
|
43.4
|
|
|
Expense,
net
|
|
|
16.7
|
|
|
Settlements
|
|
|
(26.0
|
)
|
|
Foreign
currency translation and other
|
|
|
(1.7
|
)
|
|
Balance
as of December 31, 2005
|
|
|
32.4
|
|
|
Expense,
net
|
|
|
17.5
|
|
|
Settlements
|
|
|
(12.4
|
)
|
|
Foreign
currency translation and other
|
|
|
3.4
|
|
|
Balance
as of December 31, 2006
|
|
$
|
40.9
|
|
Environmental
Matters
The
Company is subject to local, state, federal and foreign laws, regulations and
ordinances which govern activities or operations that may have adverse
environmental effects and which impose liability for clean-up costs resulting
from past spills, disposals or other releases of hazardous wastes and
environmental compliance. The Company’s policy is to comply with all applicable
environmental laws and to maintain an environmental management program based
on
ISO 14001 to ensure compliance. However, the Company currently is, has been
and
in the future may become the subject of formal or informal enforcement actions
or procedures.
F-123
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
The
Company has been named as a potentially responsible party at several third-party
landfill sites and is engaged in the cleanup of hazardous waste at certain
sites
owned, leased or operated by the Company, including several properties acquired
in its 1999 acquisition of UT Automotive. Certain present and former properties
of
UT Automotive are subject to environmental liabilities which may be
significant. The Company obtained agreements and indemnities with respect to
certain environmental liabilities from UTC in connection with its acquisition
of
UT Automotive. UTC manages and directly funds these environmental liabilities
pursuant to its agreements and indemnities with the Company.
As of
December 31, 2006 and December 31, 2005, the Company had recorded
reserves for environmental matters of $3.6 million and $3.2 million,
respectively. While the Company does not believe that the environmental
liabilities associated with its current and former properties will have a
material adverse effect on its business, consolidated financial position,
results of operations or cash flows no assurances can be given in this regard.
One of
the Company’s subsidiaries and certain predecessor companies were named as
defendants in an action filed by three plaintiffs in August 2001 in the
Circuit Court of Lowndes County, Mississippi, asserting claims stemming from
alleged environmental contamination caused by an automobile parts manufacturing
plant located in Columbus, Mississippi. The plant was acquired by the Company
as
part of its acquisition of UT Automotive in May 1999 and sold almost
immediately thereafter, in June 1999, to Johnson Electric Holdings Limited
(“Johnson Electric”). In December 2002, 61 additional cases were filed by
approximately 1,000 plaintiffs in the same court against the Company and other
defendants relating to similar claims. In September 2003, the Company was
dismissed as a party to these cases. In the first half of 2004, the Company
was
named again as a defendant in these same 61 additional cases and was also named
in five new actions filed by approximately 150 individual plaintiffs related
to
alleged environmental contamination from the same facility. The plaintiffs
in
these actions are persons who allegedly were either residents and/or owned
property near the facility or worked at the facility. In November 2004, two
additional lawsuits were filed by 28 plaintiffs (individuals and organizations),
alleging property damage as a result of the alleged contamination. Each of
these
complaints seeks compensatory and punitive damages.
All of
the plaintiffs subsequently dismissed their claims for health effects and
personal injury damages and the cases proceeded with approximately 280
plaintiffs alleging property damage claims only. In March 2005, the venue
for these lawsuits was transferred from Lowndes County, Mississippi, to
Lafayette County, Mississippi. In April 2005, certain plaintiffs filed an
amended complaint alleging negligence, nuisance, intentional tort and conspiracy
claims and seeking compensatory and punitive damages.
In the
first quarter of 2006, co-defendant UTC entered into a settlement agreement
with
the plaintiffs. During the third quarter of 2006, the Company and co-defendant
Johnson Electric entered into a settlement memorandum with the plaintiffs’
counsel outlining the terms of a global settlement, including establishing
the
requisite percentage of executed settlement agreements and releases that were
required to be obtained from the individual plaintiffs for a final settlement
to
proceed. Since November 2006, the Company has reached a final settlement
with respect to approximately 85% of the plaintiffs involving an aggregate
payment of $875,000 and is in the process of attempting to resolve the remaining
claims.
UTC,
the
former owner of UT Automotive, and Johnson Electric have each sought
indemnification for losses associated with the Mississippi claims from the
Company under the respective acquisition agreements, and the Company has claimed
indemnification from them under the same agreements. In the first quarter of
2006, UTC filed a lawsuit against the Company in the State of Connecticut
Superior Court, District of Hartford, seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses UTC paid in settling and defending the Columbus, Mississippi
lawsuits. In the second quarter of 2006, the Company filed a motion to dismiss
this matter and filed a separate action against UTC and Johnson Electric in
the
State of Michigan, Circuit Court for the County of Oakland, seeking declaratory
relief and indemnification from UTC or Johnson Electric for the settlement
amount, attorney fees, costs and expenses the Company has paid, or will pay,
in
settling and defending the Columbus, Mississippi lawsuits. During the fourth
quarter of 2006, UTC agreed to dismiss the
F-124
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
lawsuit filed in the State
of Connecticut Superior Court, District of Hartford and agreed to proceed with
the lawsuit filed in the State of Michigan, Circuit Court for the County of
Oakland. During the first quarter of 2007, Johnson Electric and UTC each filed
counter-claims against the Company seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses each has paid or will pay in settling and defending the Columbus,
Mississippi lawsuits. To date, no company admits to, or has been found to have,
an obligation to fully defend and indemnify any other. The Company intends
to
vigorously pursue its claims against UTC and Johnson Electric and believes
that
it is entitled to indemnification from either UTC or Johnson Electric for its
losses. However, the ultimate outcome of these matters is unknown.
Other Matters
In
January 2004, the Securities and Exchange Commission (the “SEC”) commenced
an informal inquiry into the Company’s September 2002 amendment of its 2001
Form 10-K. The amendment was filed to report the Company’s employment of
relatives of certain of its directors and officers and certain related party
transactions. The SEC’s inquiry does not relate to the Company’s consolidated
financial statements. In February 2005, the staff of the SEC informed the
Company that it proposed to recommend to the SEC that it issue an administrative
“cease and desist” order as a result of the Company’s failure to disclose the
related party transactions in question prior to the amendment of its 2001 Form
10-K. The Company expects to consent to the entry of the order as part of a
settlement of this matter.
In
April 2006, a former employee of the Company filed a purported class action
lawsuit in the U.S. District Court for the Eastern District of Michigan against
the Company, members of its Board of Directors, members of its Employee Benefits
Committee (the “EBC”) and certain members of its human resources personnel
alleging violations of the Employment Retirement Income Security Act (“ERISA”)
with respect to the Company’s retirement savings plans for salaried and hourly
employees. In the second quarter of 2006, the Company was served with three
additional purported class action ERISA lawsuits, each of which contained
similar allegations against the Company, members of its Board of Directors,
members of its EBC and certain members of its senior management and its human
resources personnel. At the end of the second quarter of 2006, the court entered
an order consolidating these four lawsuits. During the third quarter of 2006,
plaintiffs filed their consolidated complaint, which alleges breaches of
fiduciary duties substantially similar to those alleged in the four individually
filed lawsuits. The consolidated complaint continues to name certain current
and
former members of the Board of Directors and the EBC and certain members of
senior management and adds certain other current and former members of the
EBC.
The consolidated complaint generally alleges that the defendants breached their
fiduciary duties to plan participants in connection with the administration
of
the Company’s retirement savings plans for salaried and hourly employees. The
fiduciary duty claims are largely based on allegations of breaches of the
fiduciary duties of prudence and loyalty and of over-concentration of plan
assets in the Company’s common stock. The plaintiffs purport to bring these
claims on behalf of the plans and all persons who were participants in or
beneficiaries of the plans from October 21, 2004, to the present and seek
to recover losses allegedly suffered by the plans. The complaints do not specify
the amount of damages sought. During the fourth quarter of 2006, the defendants
filed a motion to dismiss all defendants and all counts in the consolidated
complaint. No determination has been made that a class action can be maintained,
and there have been no decisions on the merits of the cases. The Company intends
to vigorously defend the consolidated lawsuit.
Between
February 9, 2007 and February 21, 2007, certain stockholders filed six
purported class action lawsuits against the Company, certain members of the
Company’s Board of Directors and American Real Estate Partners, L.P. and
certain of its affiliates (collectively, “AREP”). Three of the lawsuits were
filed in the Delaware Court of Chancery and have since been consolidated into
a
single action. Three of the lawsuits were filed in Michigan Circuit Court.
The
class action complaints, which are substantially similar, generally allege
that
the Agreement and Plan of Merger (“Merger Agreement”) unfairly limits the
process of selling the Company and that certain members of the Company’s Board
of Directors have breached their fiduciary duties in connection with the Merger
Agreement and have acted with conflicts of interest in approving the Merger
Agreement. The lawsuits seek to enjoin the merger, to invalidate the Merger
Agreement and to enjoin the operation of certain provisions of the
F-125
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
Merger Agreement, a
declaration that certain members of the Company’s Board of Directors breached
their fiduciary duties in approving the Merger Agreement and an award of
unspecified damages or rescission in the event that the proposed merger with
AREP is completed. On February 23, 2007, the plaintiffs in the consolidated
Delaware action filed a consolidated amended complaint, a motion for expedited
proceedings and a motion to preliminarily enjoin the merger contemplated by
the
Merger Agreement. The Company believes that the lawsuits are without merit
and
intends to defend against them vigorously.
Prior
to
the acquisition of UT Automotive from UTC in May 1999, one of the Company’s
subsidiaries purchased the stock of a UT Automotive subsidiary. In connection
with the acquisition, the Company agreed to indemnify UTC for certain matters,
including tax consequences if the Internal Revenue Service (the “IRS”)
overturned UTC’s tax treatment of the transaction. On June 28, 2006, this
matter was settled with the Appeals Office of the IRS. As a result of the IRS
settlement in the second quarter of 2006, the Company was required to make
an
indemnity payment to UTC of $20.5 million. The payment has been recorded as
an adjustment to the original purchase price and allocated to goodwill in a
manner consistent with the original purchase price allocation. The amount
allocated to the Interiors — Americas unit of $2.9 million was immediately
written off as this unit’s goodwill is fully impaired. On September 1,
2006, the Company entered into a Payment Agreement and Limited Release with
UTC
in order to settle its indemnity obligation related to this issue. In connection
with this agreement, the Company made a payment to UTC in the amount of
$20.6 million, including interest up to the date of the agreement.
Although
the Company records reserves for legal, product warranty and environmental
matters in accordance with SFAS No. 5, “Accounting for Contingencies,” the
outcomes of these matters are inherently uncertain. Actual results may differ
significantly from current estimates.
The
Company is involved in certain other legal actions and claims arising in the
ordinary course of business, including, without limitation, commercial disputes,
intellectual property matters, personal injury claims, tax claims and employment
matters. Although the outcome of any legal matter cannot be predicted with
certainty, the Company does not believe that any of these other legal
proceedings or matters in which the Company is currently involved, either
individually or in the aggregate, will have a material adverse effect on its
business, consolidated financial position, results of operations or cash flows.
Employees
Approximately
78% of the Company’s employees are members of industrial trade unions and are
employed under the terms of collective bargaining agreements. Collective
bargaining agreements covering approximately 58% of the Company’s unionized
workforce of approximately 81,500 employees, including 20% of the Company’s
unionized workforce in the United States and Canada, are scheduled to expire
in
2007. Management does not anticipate any significant difficulties with respect
to the agreements as they are renewed.
Lease
Commitments
A
summary of lease commitments as of December 31, 2006, under non-cancelable
operating leases with terms exceeding one year is shown below (in millions):
|
|
|
|
|
|
2007
|
|
$
|
93.7
|
|
2008
|
|
|
75.6
|
|
2009
|
|
|
65.3
|
|
2010
|
|
|
52.9
|
|
2011
|
|
|
43.5
|
|
2012
and thereafter
|
|
|
71.3
|
|
Total
|
|
$
|
402.3
|
F-126
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments
and
Contingencies – (continued)
The
Company previously guaranteed the residual value of certain of its leased
assets. In October 2006, the residual value guarantees were released in
conjunction with the expiration of the related leases. The Company was not
required to make any payments related to these residual value guarantees.
The
Company’s operating leases cover principally buildings and transportation
equipment. Rent expense was $133.8 million, $136.1 million and
$125.0 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
(13) Segment
Reporting
Historically,
the Company has had three reportable operating segments: seating, electronic
and
electrical and interior. The seating segment includes seat systems and
components thereof. The electronic and electrical segment includes electronic
products and electrical distribution systems, primarily wire harnesses and
junction boxes; interior control and entertainment systems; and wireless
systems. The interior segment includes instrument panels and cockpit systems,
headliners and overhead systems, door panels, flooring and acoustic systems
and
other interior products. See Note 3, “Divestiture of Interior Business.”
Each
of
the Company’s operating segments reports its results from operations and makes
its requests for capital expenditures directly to the chief operating
decision-making group. The economic performance of each operating segment is
driven primarily by automobile production volumes in the geographic regions
in
which it operates, as well as by the success of the vehicle platforms for which
it supplies products. Also, each operating segment operates in the competitive
tier I automotive supplier environment and is continually working with its
customers to manage costs and improve quality. The Company’s manufacturing
facilities generally use just-in-time manufacturing techniques to produce and
distribute their automotive interior products. The Company’s production
processes generally make use of unskilled labor, dedicated facilities,
sequential manufacturing processes and commodity raw materials. The Other
category includes the corporate headquarters, geographic headquarters and the
elimination of intercompany activities, none of which meets the requirements
of
being classified as an operating segment.
The
accounting policies of the Company’s operating segments are the same as those
described in Note 2, “Summary of Significant Accounting Policies.” The Company
evaluates the performance of its operating segments based primarily on (i)
revenues from external customers, (ii) income (loss) before goodwill impairment
charges, loss on divestiture of interior business, interest, other expense,
provision for income taxes, minority interests in consolidated subsidiaries,
equity in net (income) loss of affiliates and cumulative effect of a change
in
accounting principle (“segment earnings”) and (iii) cash flows, being defined as
segment earnings less capital expenditures plus depreciation and amortization.
A
summary of revenues from external customers and other financial information
by
reportable operating segment is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Interior
|
|
Other
|
|
Consolidated
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
11,624.8
|
|
$
|
2,996.9
|
|
$
|
3,217.2
|
|
$
|
—
|
|
$
|
17,838.9
|
|
Segment
earnings(1)
|
|
|
604.0
|
|
|
102.5
|
|
|
(183.8
|
)
|
|
(241.7
|
)
|
|
281.0
|
|
Depreciation
and amortization
|
|
|
167.3
|
|
|
110.1
|
|
|
93.8
|
|
|
21.0
|
|
|
392.2
|
|
Capital
expenditures
|
|
|
161.1
|
|
|
77.0
|
|
|
98.7
|
|
|
10.8
|
|
|
347.6
|
|
Total
assets
|
|
|
4,386.4
|
|
|
2,374.5
|
|
|
528.3
|
|
|
561.3
|
|
|
7,850.5
|
F-127
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment
Reporting – (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005
|
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Interior
|
|
Other
|
|
Consolidated
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
11,035.0
|
|
$
|
2,956.6
|
|
$
|
3,097.6
|
|
$
|
—
|
|
$
|
17,089.2
|
|
|
Segment
earnings(1)
|
|
|
323.3
|
|
|
180.0
|
|
|
(191.1
|
)
|
|
(206.8
|
)
|
|
105.4
|
|
|
Depreciation
and amortization
|
|
|
150.7
|
|
|
106.0
|
|
|
116.6
|
|
|
20.1
|
|
|
393.4
|
|
|
Capital
expenditures
|
|
|
229.2
|
|
|
102.9
|
|
|
190.9
|
|
|
45.4
|
|
|
568.4
|
|
|
Total
assets
|
|
|
3,985.2
|
|
|
2,122.4
|
|
|
1,506.8
|
|
|
674.0
|
|
|
8,288.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005
|
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Interior
|
|
Other
|
|
Consolidated
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
11,314.6
|
|
$
|
2,680.4
|
|
$
|
2,965.0
|
|
$
|
—
|
|
$
|
16,960.0
|
|
|
Segment
earnings(1)
|
|
|
682.1
|
|
|
210.9
|
|
|
85.1
|
|
|
(209.7
|
)
|
|
768.4
|
|
|
Depreciation
and amortization
|
|
|
133.4
|
|
|
89.9
|
|
|
108.9
|
|
|
22.9
|
|
|
355.1
|
|
|
Capital
expenditures
|
|
|
208.6
|
|
|
116.4
|
|
|
86.9
|
|
|
17.1
|
|
|
429.0
|
|
|
Total
assets
|
|
|
4,172.7
|
|
|
2,122.4
|
|
|
2,403.6
|
|
|
1,070.8
|
|
|
9,944.4
|
|
——————
(1)
See
definition above.
In 2005,
the Company changed its allocation of cash and cash equivalents. Cash and cash
equivalents, previously reflected in the reportable operating segments, has
been
reflected in total in “Other.” Total assets by reportable operating segment as
of December 31, 2004, reflect this change. In addition, prior years’
reportable operating segment information has been reclassified to reflect the
current organizational structure of the Company.
For the
year ended December 31, 2006, segment earnings include restructuring
charges of $39.9 million, $42.6 million, $10.1 million and
$6.5 million in the seating, electronic and electrical and interior
segments and in the other category, respectively (Note 5, “Restructuring”). In
addition, 2006 segment earnings include additional fixed asset impairment
charges of $10.0 million in the interior segment (Note 2, “Summary of
Significant Accounting Policies”).
For the
year ended December 31, 2005, segment earnings includes restructuring
charges of $30.9 million, $30.0 million, $27.9 million and
$2.0 million in the seating, electronic and electrical and interior
segments and in the other category, respectively. In addition, 2005 segment
earnings include additional fixed asset impairment charges of $82.3 million
in the interior segment.
For the
year ended December 31, 2004, segment earnings include restructuring
charges of $7.8 million in the seating segment.
F-128
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment
Reporting – (continued)
A
reconciliation of consolidated income before goodwill impairment charges, loss
on divestiture of interior business, interest, other expense, provision for
income taxes, minority interests in consolidated subsidiaries, equity in net
(income) loss of affiliates and cumulative effect of a change in accounting
principal to income (loss) before provision for income taxes, minority interests
in consolidated subsidiaries, equity in net (income) loss of affiliates and
effect of a change in accounting principle is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
522.7
|
|
$
|
312.2
|
|
$
|
978.1
|
|
|
Corporate
and geographic headquarters and elimination of intercompany
activity
(“Other”)
|
|
|
(241.7
|
)
|
|
(206.8
|
)
|
|
(209.7
|
)
|
|
Income
before goodwill impairment charges, loss on divestiture of
Interior
business, interest, other expense, provision for income taxes,
minority
interests in consolidated subsidiaries, equity in net (income)
loss of affiliates
and cumulative effect of a change in accounting
principle
|
|
|
281.0
|
|
|
105.4
|
|
|
768.4
|
|
|
Goodwill
impairment charges
|
|
|
2.9
|
|
|
1,012.8
|
|
|
—
|
|
|
Loss
on divestiture of Interior business
|
|
|
636.0
|
|
|
—
|
|
|
—
|
|
|
Interest
expense
|
|
|
209.8
|
|
|
183.2
|
|
|
165.5
|
|
|
Other
expense, net
|
|
|
85.7
|
|
|
38.0
|
|
|
38.6
|
|
|
Income
(loss) before provision for income taxes, minority interests
in
consolidated subsidiaries and equity in net (income) loss of
affiliates and
cumulative effect of a change in accounting principle
|
|
$
|
(653.4
|
)
|
$
|
(1,128.6
|
)
|
$
|
564.3
|
|
Revenues
from external customers and tangible long-lived assets for each of the
geographic areas in which the Company operates is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
| |
|
2006
|
|
2005
|
|
2004
|
| |
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
6,624.3
|
|
$
|
6,252.2
|
|
$
|
6,200.7
|
|
Canada
|
|
|
1,375.3
|
|
|
1,374.1
|
|
|
1,317.8
|
|
Germany
|
|
|
2,034.3
|
|
|
2,123.4
|
|
|
2,026.0
|
|
Mexico
|
|
|
1,789.5
|
|
|
1,595.6
|
|
|
1,475.7
|
|
Other
countries
|
|
|
6,015.5
|
|
|
5,743.9
|
|
|
5,939.8
|
|
Total
|
|
$
|
17,838.9
|
|
$
|
17,089.2
|
|
$
|
16,960.0
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
| |
|
2006
|
|
2005
|
| |
|
|
|
|
|
|
|
Tangible
long-lived assets:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
472.6
|
|
$
|
563.3
|
|
Canada
|
|
|
51.5
|
|
|
50.6
|
|
Germany
|
|
|
161.3
|
|
|
185.1
|
|
Mexico
|
|
|
168.2
|
|
|
153.9
|
|
Other
countries
|
|
|
618.1
|
|
|
661.8
|
|
Total
|
|
$
|
1,471.7
|
|
$
|
1,614.7
|
F-129
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Segment
Reporting – (continued)
A
substantial majority of the Company’s consolidated and reportable operating
segment revenues are from four automotive manufacturing companies, with General
Motors and Ford and their respective affiliates accounting for 55%, 53% and
56%
of the Company’s net sales in 2006, 2005 and 2004, respectively. Excluding net
sales to Saab, Volvo, Jaguar and Land Rover, which are affiliates of General
Motors or Ford, General Motors and Ford accounted for approximately 47%, 44%
and
46% of the Company’s net sales in 2006, 2005 and 2004, respectively. The
following is a summary of the percentage of revenues from major customers:
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
General
Motors
Corporation
|
|
31.9
|
%
|
28.3
|
%
|
31.4
|
%
|
|
Ford
Motor Company
|
|
22.6
|
|
24.7
|
|
24.1
|
|
|
DaimlerChrysler
|
|
10.3
|
|
11.4
|
|
11.8
|
|
|
BMW
|
|
7.4
|
|
7.6
|
|
7.5
|
|
In
addition, a portion of the Company’s remaining revenues are from the above
automotive manufacturing companies through various other automotive suppliers.
(14) Financial
Instruments
The
carrying values of the Company’s senior notes vary from their fair values. The
fair values were determined by reference to quoted market prices of these
securities. As of December 31, 2006 and 2005, the aggregate carrying value
of the Company’s senior notes was $1.4 billion and $1.8 billion,
respectively, as compared to an estimated fair value of $1.3 billion and
$1.6 billion, respectively. As of December 31, 2006 and 2005, the
carrying values of the Company’s other senior indebtedness and other financial
instruments approximated their fair values, which were determined based on
related instruments currently available to the Company for similar borrowings
with like maturities.
Certain
of the Company’s European and Asian subsidiaries periodically factor their
accounts receivable with financial institutions. Such receivables are factored
without recourse to the Company and are excluded from accounts receivable in
the
consolidated balance sheets. As of December 31, 2006 and December 31,
2005, the amount of factored receivables was $256.3 million and
$256.2 million, respectively. The Company cannot provide any assurances
that these factoring facilities will be available or utilized in the future.
Asset-Backed
Securitization Facility
The
Company and several of its U.S. subsidiaries sell certain accounts receivable
to
a wholly owned, consolidated, bankruptcy-remote special purpose corporation
(Lear ASC Corporation) under an asset-backed securitization facility (the “ABS
facility”). In turn, Lear ASC Corporation transfers undivided interests in up to
$150 million of the receivables to bank-sponsored commercial paper
conduits. The level of funding utilized under this facility is based on the
credit ratings of the Company’s major customers, the level of aggregate accounts
receivable in a specific month and the Company’s funding requirements. Should
the Company’s major customers experience further reductions in their credit
ratings, the Company may be unable or choose not to utilize the ABS facility
in
the future. Should this occur, the Company would utilize its New Credit
Agreement to replace the funding currently provided by the ABS facility. In
addition, the ABS facility providers can elect to discontinue the program in
the
event the Company’s senior secured debt credit rating declines to below B- or B3
by Standard & Poor’s Ratings Services or Moody’s Investors Service,
respectively. In October 2006, the ABS facility was amended to extend the
termination date from October 2006 to October 2007. No assurances can
be given that the ABS facility will be extended upon its maturity.
The
Company retains a subordinated ownership interest in the pool of receivables
sold to Lear ASC Corporation. This retained interest is recorded at fair value,
which is generally based on a discounted cash flow analysis. As of
December 31, 2006, accounts receivable totaling $568.6 million had
been transferred to Lear ASC
F-130
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Financial
Instruments – (continued)
Corporation, but no
undivided interests in the receivables were transferred to the conduits. As
such, this retained interest is included in accounts receivable in the
consolidated balance sheet as of December 31, 2006. As of December 31,
2005, accounts receivable totaling $673.4 million had been transferred to
Lear ASC Corporation, including $523.4 million of retained interests, which
serves as credit enhancement for the facility and is included in accounts
receivable in the consolidated balance sheet as of December 31, 2005, and
$150.0 million of undivided interests, which was transferred to the
conduits and is excluded from accounts receivable in the consolidated balance
sheet as of December 31, 2005.
During
the years ended December 31, 2006, 2005 and 2004, the Company and its
subsidiaries sold to Lear ASC Corporation adjusted accounts receivable totaling
$4.4 billion, $4.2 billion and $4.7 billion, respectively, under
the ABS facility and recognized discounts of $8.0 million,
$4.7 million and $1.4 million, respectively. These discounts are
included in other expense, net, in the consolidated statements of operations
for
the years ended December 31, 2006, 2005 and 2004. The Company continues to
service the transferred receivables and receives an annual servicing fee of
1.0%
of the sold accounts receivable. The conduit investors and Lear ASC Corporation
have no recourse to the other assets of the Company or its subsidiaries for
the
failure of the accounts receivable obligors to pay timely on the accounts
receivable.
Certain
cash flows received from and paid to Lear ASC Corporation are shown below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended
December 31,
|
|
| |
|
2006
|
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from (repayments of)
securitizations
|
|
$
|
(150.0
|
)
|
$
|
150.0
|
|
$
|
—
|
|
|
Proceeds
from collections reinvested in securitizations
|
|
|
4,476.2
|
|
|
4,288.1
|
|
|
4,664.4
|
|
|
Servicing
fees received
|
|
|
6.1
|
|
|
5.3
|
|
|
5.5
|
|
Under
the
provisions of FASB Interpretation (“FIN”) No. 46R, “Consolidation of Variable
Interest Entities,” Lear ASC Corporation is a variable interest entity. The
accounts of this entity have historically been included in the consolidated
financial statements of the Company, as this entity is a wholly owned subsidiary
of Lear. In addition, the bank conduits, which purchase undivided interests
in
the Company’s sold accounts receivable, are variable interest entities. Under
the current ABS facility, the provisions of FIN No. 46R do not require the
Company to consolidate any of the bank conduits’ assets or liabilities.
Derivative
Instruments and Hedging Activities
The
Company uses derivative financial instruments, including forward foreign
exchange, futures, option and swap contracts, to manage its exposures to
fluctuations in foreign exchange rates and interest rates. The use of these
financial instruments mitigates the Company’s exposure to these risks with the
intent of reducing the variability of the Company’s operating results. The
Company is not a party to leveraged derivatives. On the date a derivative
contract is entered into, the Company designates the derivative as either (1)
a
hedge of a recognized asset or liability or of an unrecognized firm commitment
(a fair value hedge), (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability (a cash flow hedge) or (3) a hedge of a net investment in a foreign
operation (a net investment hedge).
For a
fair value hedge, both the effective and ineffective portions of the change
in
the fair value of the derivative are recorded in earnings and reflected in
the
consolidated statement of operations on the same line as the gain or loss on
the
hedged item attributable to the hedged risk. For a cash flow hedge, the
effective portion of the change in the fair value of the derivative is recorded
in accumulated other comprehensive income (loss) in the consolidated balance
sheet. When the underlying hedged transaction is realized, the gain or loss
included in accumulated other comprehensive income (loss) is recorded in
earnings and reflected in the consolidated statement of operations on the same
line as the gain or loss on the hedged item attributable to the hedged risk.
For
a net investment hedge of a foreign operation, the effective portion of the
change in the fair value of the derivative is recorded in cumulative translation
adjustment, which is a component of accumulated other comprehensive income
F-131
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Financial
Instruments – (continued)
(loss) in the
consolidated balance sheet. In addition, for both cash flow and net investment
hedges, changes in the fair value excluded from the Company’s effectiveness
assessments and the ineffective portion of changes in the fair value are
recorded in earnings and reflected in the consolidated statement of operations
as other expense, net.
The
Company formally documents its hedge relationships, including the identification
of the hedging instruments and the hedged items, as well as its risk management
objectives and strategies for undertaking the hedge transaction. Derivatives
are
recorded at fair value in other current and long-term assets and other current
and long-term liabilities in the consolidated balance sheet. This process
includes linking derivatives that are designated as hedges of specific assets,
liabilities, firm commitments or forecasted transactions. The Company also
formally assesses, both at inception and at least quarterly thereafter, whether
a derivative used in a hedging transaction is highly effective in offsetting
changes in either the fair value or cash flows of the hedged item. When it
is
determined that a derivative ceases to be a highly effective hedge, the Company
discontinues hedge accounting.
Forward
foreign exchange, futures and option contracts — The Company uses forward
foreign exchange, futures and option contracts to reduce the effect of
fluctuations in foreign exchange rates on short-term, foreign currency
denominated intercompany transactions and other known foreign currency
exposures. Gains and losses on the derivative instruments are intended to offset
gains and losses on the hedged transaction in an effort to reduce the earnings
volatility resulting from fluctuations in foreign exchange rates. The principal
currencies hedged by the Company include the Mexican peso and the Canadian
dollar, as well as the Euro and other European currencies. Forward foreign
exchange, futures and option contracts are accounted for as cash flow hedges
when the hedged item is a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability. As
of
December 31, 2006, contracts designated as cash flow hedges with
$464.9 million of notional amount were outstanding with maturities of less
than twelve months. As of December 31, 2006, the fair market value of these
contracts was approximately $15.0 million. As of December 31, 2006,
other foreign currency derivative contracts that did not qualify for hedge
accounting had a total notional amount outstanding of $346.7 million. These
foreign currency derivative contracts consist principally of cash transactions
between three and thirty days, hedges of intercompany loans and hedges of
certain other balance sheet exposures. As of December 31, 2006, the fair
market value of these contracts was approximately $1.6 million.
Interest
rate swap contracts — The Company uses interest rate swap contracts to manage
its exposure to fluctuations in interest rates. Interest rate swap contracts
which fix the interest payments of certain variable rate debt instruments or
fix
the market rate component of anticipated fixed rate debt instruments are
accounted for as cash flow hedges. Interest rate swap contracts which hedge
the
change in fair market value of certain fixed rate debt instruments are accounted
for as fair value hedges. As of December 31, 2006, contracts representing
$800.0 million of notional amount were outstanding with maturity dates of
August 2007 through September 2011. All of these contracts modify the
variable rate characteristics of the Company’s variable rate debt instruments,
which are generally set at three-month LIBOR rates. These contracts convert
variable rate obligations into fixed rate obligations with a weighted average
interest rate of 4.902%. The fair market value of all outstanding interest
rate
swap contracts is subject to changes in value due to changes in interest rates.
As of December 31, 2006, the fair market value of these contracts was
approximately negative $2.7 million.
As of
December 31, 2006 and 2005, net gains of approximately $14.7 million
and $9.0 million, respectively, related to derivative instruments and
hedging activities were recorded in accumulated other comprehensive loss. During
the years ended December 31, 2006, 2005 and 2004, net gains (losses) of
approximately $(2.2) million, $33.5 million and $(7.4) million,
respectively, related to the Company’s hedging activities were reclassified from
accumulated other comprehensive loss into earnings. During the year ending
December 31, 2007, the Company expects to reclassify into earnings net
gains of approximately $16.0 million recorded in accumulated other
comprehensive loss. Such gains will be reclassified at the time the underlying
hedged transactions are realized. During the years ended December 31, 2006,
2005 and 2004, amounts recognized in the consolidated statements of operations
related to changes in the fair value of cash flow and fair value hedges excluded
from the effectiveness assessments and the ineffective portion of changes in
the
fair value of cash flow and fair value hedges were not material.
F-132
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Financial
Instruments – (continued)
Non-U.S.
dollar financing transactions — The Company has designated its Euro-denominated
senior notes (Note 8, “Long-Term Debt”) as a net investment hedge of long-term
investments in its Euro-functional subsidiaries. As of December 31, 2006,
the amount recorded in accumulated other comprehensive loss related to the
effective portion of the net investment hedge of foreign operations was
approximately negative $147.2 million. Such amount will be included in
accumulated other comprehensive loss until the Company liquidates its related
net investment in its designated foreign operations.
(15) Quarterly
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen
Weeks Ended
|
|
| |
|
April 1,
2006
|
|
July 1,
2006
|
|
September 30,
2006
|
|
December 31,
2006
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
4,678.5
|
|
$
|
4,810.2
|
|
$
|
4,069.7
|
|
$
|
4,280.5
|
|
|
Gross
profit
|
|
|
219.2
|
|
|
284.1
|
|
|
186.8
|
|
|
237.6
|
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
|
Loss
on divestiture of Interior business
|
|
|
—
|
|
|
—
|
|
|
28.7
|
|
|
607.3
|
|
|
Income
(loss) before cumulative effect of a change in
accounting
principle
|
|
|
15.0
|
|
|
(6.4
|
)
|
|
(74.0
|
)
|
|
(645.0
|
)
|
|
Net
income (loss)
|
|
|
17.9
|
|
|
(6.4
|
)
|
|
(74.0
|
)
|
|
(645.0
|
)
|
|
Basic
net income (loss) per share before cumulative effect
of a change in
accounting accounting principle
|
|
|
0.22
|
|
|
(0.10
|
)
|
|
(1.10
|
)
|
|
(8.90
|
)
|
|
Basic
net income (loss) per share
|
|
|
0.27
|
|
|
(0.10
|
)
|
|
(1.10
|
)
|
|
(8.90
|
)
|
|
Diluted
net income (loss) per share before cumulative effect
of a change in
accounting accounting principle
|
|
|
0.22
|
|
|
(0.10
|
)
|
|
(1.10
|
)
|
|
(8.90
|
)
|
|
Diluted
net income (loss) per share
|
|
|
0.26
|
|
|
(0.10
|
)
|
|
(1.10
|
)
|
|
(8.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Thirteen
Weeks Ended
|
|
| |
|
April 2,
2005
|
|
July 2,
2005
|
|
October 1,
2005
|
|
December 31,
2005
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
4,286.0
|
|
$
|
4,419.3
|
|
$
|
3,986.6
|
|
$
|
4,397.3
|
|
|
Gross
profit
|
|
|
199.9
|
|
|
220.8
|
|
|
86.4
|
|
|
228.9
|
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
—
|
|
|
670.0
|
|
|
342.8
|
|
|
Net
income (loss)
|
|
|
15.6
|
|
|
(44.4
|
)
|
|
(750.1
|
)
|
|
(602.6
|
)
|
|
Basic
net income (loss) per share
|
|
|
0.23
|
|
|
(0.66
|
)
|
|
(11.17
|
)
|
|
(8.97
|
)
|
|
Diluted
net income (loss) per share
|
|
|
0.23
|
|
|
(0.66
|
)
|
|
(11.17
|
)
|
|
(8.97
|
)
|
(16) Accounting
Pronouncements
Inventory
Costs — The FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No.
43, Chapter 4.” This statement clarifies the requirement that abnormal
inventory-related costs be recognized as current-period charges and requires
that the allocation of fixed production overheads to inventory conversion costs
be based on the normal capacity of the production facilities. The provisions
of
this statement are to be applied prospectively to inventory costs incurred
during fiscal years beginning after June 15, 2005. The effects of adoption
were not significant.
Nonmonetary
Assets — The FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an
amendment of APB Opinion No. 29.” APB Opinion No. 29, in general, requires the
use of fair value as the measurement basis for exchanges of nonmonetary assets.
This statement eliminates the exception to the fair value measurement principle
for nonmonetary exchanges of similar productive assets and replaces it with
a
general exception for nonmonetary asset exchanges that lack commercial
substance. The provisions of this statement are to be applied prospectively
to
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The effects of adoption were not significant.
F-133
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Accounting
Pronouncements – (continued)
Financial
Instruments — The FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments — an amendment of FASB Statements No. 133 and 140.” This
statement resolves issues related to the application of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” to beneficial
interests in securitized assets. The provisions of this statement are to be
applied prospectively to all financial instruments acquired or issued during
fiscal years beginning after September 15, 2006. The Company is currently
evaluating the provisions of this statement but does not expect the effects
of
adoption to be significant.
The FASB
issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an
amendment of FASB Statement No. 140.” This statement requires that all servicing
assets and liabilities be initially measured at fair value. The provisions
of
this statement are to be applied prospectively to all servicing transactions
beginning after September 15, 2006. The effects of adoption were not
significant.
Fair
Value Measurements — The FASB issued SFAS No. 157, “Fair Value Measurements.”
This statement defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. The provisions
of
this statement are to generally be applied prospectively in fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
impact of this statement on its financial statements.
Pension
and Other Postretirement Benefits — The FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statements No. 87, 88, 106 and 132(R).” The Company adopted
the funded status recognition provisions of SFAS No. 158 as of December 31,
2006. For a discussion of the effects of adopting the recognition provisions
of
SFAS No. 158, see Note 10, “Pension and Other Postretirement Benefit Plans.”
This
statement also requires the measurement of defined benefit plan asset and
liabilities as of the annual balance sheet date. Currently, the Company measures
its plan assets and liabilities using an early measurement date of
September 30, as allowed by the original provisions of SFAS No. 87,
“Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting
for Postretirement Benefits Other Than Pensions.” The measurement date
provisions of SFAS No. 158 are effective for fiscal years ending after
December 15, 2008. The Company is currently evaluating the measurement date
provisions of this statement.
Income
Taxes — The FASB issued Interpretation (“FIN”) No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN
48 clarifies the accounting for uncertainty in income taxes by establishing
minimum standards for the recognition and measurement of tax positions taken
or
expected to be taken in a tax return. Under the requirements of FIN 48, the
Company must review all of its uncertain tax positions and make a determination
as to whether its position is more-likely-than-not to be sustained upon
examination by regulatory authorities. If a position meets the
more-likely-than-not criterion, then the related tax benefit is measured based
on the cumulative probability analysis of the amount that is
more-likely-than-not to be realized upon ultimate settlement. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
cumulative impact of the initial adoption of FIN 48 will be reported as an
adjustment to the Company’s beginning retained deficit balance in 2007. The
Company is currently evaluating the impact of this interpretation on its
financial statements.
Financial
Statement Reporting — The SEC issued Staff Accounting Bulletin (“SAB”) No. 108.
SAB 108 provides interpretive guidance on how the effects of the carryover
or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The interpretive guidance is effective for financial
statements covering fiscal years ending after November 15, 2006. The effect
of adoption was not significant.
F-134
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(17) Subsequent
Event
On
February 9, 2007, the Company entered into an Agreement and Plan of Merger
(the “Merger Agreement”) with AREP Car Holdings Corp., a Delaware corporation
(“Parent”), and AREP Car Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent (“Merger Sub”). Under the terms of the Merger
Agreement, Merger Sub would be merged with and into the Company, and as a
result, the Company would continue as the surviving corporation and a wholly
owned subsidiary of Parent. Parent and Merger Sub are affiliates of Carl C.
Icahn.
Pursuant
to the Merger Agreement, as of the effective time of the merger, each issued
and
outstanding share of common stock of the Company, other than shares (i) owned
by
Parent, Merger Sub or any subsidiary of Parent and (ii) owned by any
shareholders who are entitled to and who properly exercise appraisal rights
under Delaware law, will be canceled and automatically converted into the right
to receive $36.00 in cash, without interest.
The
Merger Agreement contains provisions pursuant to which the Company may solicit
alternative acquisition proposals for forty-five days after the date of the
Merger Agreement (the “Solicitation Period”) and receive unsolicited proposals
thereafter. The Company may terminate the Merger Agreement under certain
circumstances, including if its board of directors determines in good faith
that
it has received a Superior Proposal (as defined in the Merger Agreement) and
otherwise complies with certain terms of the Merger Agreement. In connection
with such termination, and in certain other limited circumstances, the Company
would be required to pay a fee of $85.2 million to Parent plus up to
$15.0 million of Parent’s out-of-pocket expenses (including fees and
expenses of financing sources, counsel, accountants, investment bankers, experts
and consultants) relating to the Merger Agreement. If such termination is to
accept a Superior Proposal prior to the end of the Solicitation Period, the
Company would be required to pay a fee of $73.5 million to Parent plus up
to $6.0 million of Parent’s out-of-pocket expenses.
Parent
has obtained debt financing commitments for the transaction contemplated by
the
Merger Agreement. Consummation of the merger is not subject to a financing
condition, but is subject to other conditions, including receipt of the
affirmative vote of the holders of a majority of the outstanding shares of
the
Company’s common stock, antitrust approvals and other customary closing
conditions.
In
connection with the execution of the Merger Agreement, the Company entered
into
a voting agreement with Icahn Partners LP, Icahn Partners Master Fund LP, Koala
Holding LLC and High River Limited Partnership. In the aggregate, such holders
beneficially own approximately 15% of the Company’s outstanding common stock.
Pursuant to the voting agreement, such holders agreed to vote in favor of the
merger and, subject to certain exceptions, not to dispose of any shares of
common stock prior to consummation of the merger. Such holders have also agreed
to vote in favor of a Superior Proposal under certain circumstances. In
addition, American Real Estate Partners, L.P. has provided a limited guaranty
in
favor of the Company with respect to the performance by Parent and Merger Sub
of
certain payment obligations under the Merger Agreement.
For
further information regarding the Merger Agreement, please refer to the Merger
Agreement and certain related documents which are incorporated by reference
as
exhibits to this Report.
F-135
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
2006
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
| |
|
(in
millions)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
195.8
|
|
$
|
4.0
|
|
$
|
302.9
|
|
$
|
—
|
|
$
|
502.7
|
|
Accounts
receivable
|
|
|
12.7
|
|
|
243.5
|
|
|
1,750.7
|
|
|
—
|
|
|
2,006.9
|
|
Inventories
|
|
|
15.2
|
|
|
136.9
|
|
|
429.4
|
|
|
—
|
|
|
581.5
|
|
Current
assets of business held for sale
|
|
|
77.1
|
|
|
217.1
|
|
|
133.6
|
|
|
—
|
|
|
427.8
|
|
Other
|
|
|
45.9
|
|
|
29.9
|
|
|
295.6
|
|
|
—
|
|
|
371.4
|
|
Total
current assets
|
|
|
346.7
|
|
|
631.4
|
|
|
2,912.2
|
|
|
—
|
|
|
3,890.3
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
230.9
|
|
|
284.1
|
|
|
956.7
|
|
|
—
|
|
|
1,471.7
|
|
Goodwill,
net
|
|
|
454.5
|
|
|
551.1
|
|
|
991.1
|
|
|
—
|
|
|
1,996.7
|
|
Investments
in subsidiaries
|
|
|
3,691.2
|
|
|
3,257.4
|
|
|
—
|
|
|
(6,948.6
|
)
|
|
—
|
|
Other
|
|
|
233.7
|
|
|
24.1
|
|
|
234.0
|
|
|
—
|
|
|
491.8
|
|
Total
long-term assets
|
|
|
4,610.3
|
|
|
4,116.7
|
|
|
2,181.8
|
|
|
(6,948.6
|
)
|
|
3,960.2
|
| |
|
$
|
4,957.0
|
|
$
|
4,748.1
|
|
$
|
5,094.0
|
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
—
|
|
$
|
—
|
|
$
|
39.3
|
|
$
|
—
|
|
$
|
39.3
|
|
Accounts
payable and drafts
|
|
|
157.0
|
|
|
395.7
|
|
|
1,764.7
|
|
|
—
|
|
|
2,317.4
|
|
Other
accrued liabilities
|
|
|
322.3
|
|
|
145.8
|
|
|
631.2
|
|
|
—
|
|
|
1,099.3
|
|
Current
liabilities of business held for sale
|
|
|
60.4
|
|
|
226.1
|
|
|
119.2
|
|
|
—
|
|
|
405.7
|
|
Current
portion of long-term debt
|
|
|
6.0
|
|
|
—
|
|
|
19.6
|
|
|
—
|
|
|
25.6
|
|
Total
current liabilities
|
|
|
545.7
|
|
|
767.6
|
|
|
2,574.0
|
|
|
—
|
|
|
3,887.3
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,413.2
|
|
|
—
|
|
|
21.3
|
|
|
—
|
|
|
2,434.5
|
|
Long-term
liabilities of business held for sale
|
|
|
—
|
|
|
0.1
|
|
|
48.4
|
|
|
—
|
|
|
48.5
|
|
Intercompany
accounts, net
|
|
|
1,193.7
|
|
|
503.1
|
|
|
(1,696.8
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
|
202.4
|
|
|
176.5
|
|
|
499.3
|
|
|
—
|
|
|
878.2
|
|
Total
long-term liabilities
|
|
|
3,809.3
|
|
|
679.7
|
|
|
(1,127.8
|
)
|
|
—
|
|
|
3,361.2
|
|
Stockholders’
Equity
|
|
|
602.0
|
|
|
3,300.8
|
|
|
3,647.8
|
|
|
(6,948.6
|
)
|
|
602.0
|
| |
|
$
|
4,957.0
|
|
$
|
4,748.1
|
|
$
|
5,094.0
|
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
F-136
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31,
2005
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
| |
|
(in
millions)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
38.6
|
|
$
|
4.8
|
|
$
|
153.9
|
|
$
|
—
|
|
$
|
197.3
|
|
Accounts
receivable
|
|
|
46.1
|
|
|
208.7
|
|
|
1,745.3
|
|
|
—
|
|
|
2,000.1
|
|
Inventories
|
|
|
24.6
|
|
|
176.9
|
|
|
394.1
|
|
|
—
|
|
|
595.6
|
|
Current
assets of business held for sale
|
|
|
228.7
|
|
|
264.3
|
|
|
114.7
|
|
|
—
|
|
|
607.7
|
|
Other
|
|
|
151.4
|
|
|
68.5
|
|
|
225.8
|
|
|
—
|
|
|
445.7
|
|
Total
current assets
|
|
|
489.4
|
|
|
723.2
|
|
|
2,633.8
|
|
|
—
|
|
|
3,846.4
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
216.7
|
|
|
479.8
|
|
|
918.2
|
|
|
—
|
|
|
1,614.7
|
|
Goodwill,
net
|
|
|
454.5
|
|
|
536.5
|
|
|
948.8
|
|
|
—
|
|
|
1,939.8
|
|
Long-term
assets of business held for sale
|
|
|
108.5
|
|
|
267.3
|
|
|
109.4
|
|
|
—
|
|
|
485.2
|
|
Investments
in subsidiaries
|
|
|
3,274.0
|
|
|
2,895.0
|
|
|
—
|
|
|
(6,169.0
|
)
|
|
—
|
|
Other
|
|
|
104.9
|
|
|
26.9
|
|
|
270.5
|
|
|
—
|
|
|
402.3
|
|
Total
long-term assets
|
|
|
4,158.6
|
|
|
4,205.5
|
|
|
2,246.9
|
|
|
(6,169.0
|
)
|
|
4,442.0
|
| |
|
$
|
4,648.0
|
|
$
|
4,928.7
|
|
$
|
4,880.7
|
|
$
|
(6,169.0
|
)
|
$
|
8,288.4
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
—
|
|
$
|
—
|
|
$
|
23.4
|
|
$
|
—
|
|
$
|
23.4
|
|
Accounts
payable and drafts
|
|
|
223.0
|
|
|
560.2
|
|
|
1,732.8
|
|
|
—
|
|
|
2,516.0
|
|
Other
accrued liabilities
|
|
|
238.8
|
|
|
161.2
|
|
|
608.6
|
|
|
—
|
|
|
1,008.6
|
|
Current
liabilities of business held for sale
|
|
|
169.6
|
|
|
275.7
|
|
|
104.0
|
|
|
—
|
|
|
549.3
|
|
Current
portion of long-term debt
|
|
|
2.1
|
|
|
2.1
|
|
|
5.2
|
|
|
—
|
|
|
9.4
|
|
Total
current liabilities
|
|
|
633.5
|
|
|
999.2
|
|
|
2,474.0
|
|
|
—
|
|
|
4,106.7
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,194.7
|
|
|
8.4
|
|
|
40.0
|
|
|
—
|
|
|
2,243.1
|
|
Long-term
liabilities of business held for sale
|
|
|
—
|
|
|
0.3
|
|
|
27.3
|
|
|
—
|
|
|
27.6
|
|
Intercompany
accounts, net
|
|
|
410.0
|
|
|
1,012.5
|
|
|
(1,422.5
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
|
298.8
|
|
|
157.7
|
|
|
343.5
|
|
|
—
|
|
|
800.0
|
|
Total
long-term liabilities
|
|
|
2,903.5
|
|
|
1,178.9
|
|
|
(1,011.7
|
)
|
|
—
|
|
|
3,070.7
|
|
Stockholders’
Equity
|
|
|
1,111.0
|
|
|
2,750.6
|
|
|
3,418.4
|
|
|
(6,169.0
|
)
|
|
1,111.0
|
| |
|
$
|
4,648.0
|
|
$
|
4,928.7
|
|
$
|
4,880.7
|
|
$
|
(6,169.0
|
)
|
$
|
8,288.4
|
F-137
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
2006
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(in
millions)
|
|
|
Net
sales
|
|
$
|
1,580.3
|
|
$
|
6,889.8
|
|
$
|
12,729.4
|
|
$
|
(3,360.6
|
)
|
$
|
17,838.9
|
|
|
Cost
of sales
|
|
|
1,691.5
|
|
|
6,755.6
|
|
|
11,824.7
|
|
|
(3,360.6
|
)
|
|
16,911.2
|
|
|
Selling,
general and administrative expenses
|
|
|
240.5
|
|
|
75.0
|
|
|
331.2
|
|
|
—
|
|
|
646.7
|
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
Loss
on divestiture of Interior business
|
|
|
240.4
|
|
|
259.6
|
|
|
136.0
|
|
|
—
|
|
|
636.0
|
|
|
Interest
(income) expense
|
|
|
(114.4
|
)
|
|
126.1
|
|
|
198.1
|
|
|
—
|
|
|
209.8
|
|
|
Intercompany
(income) expense, net
|
|
|
(281.2
|
)
|
|
77.4
|
|
|
203.8
|
|
|
—
|
|
|
—
|
|
|
Other
expense, net
|
|
|
27.6
|
|
|
48.8
|
|
|
9.3
|
|
|
—
|
|
|
85.7
|
|
|
Income
(loss) before provision (benefit) for
income taxes, minority interests
in
consolidated subsidiaries and equity in net
(income) loss of
affiliates and subsidiaries
|
|
|
(224.1
|
)
|
|
(455.6
|
)
|
|
26.3
|
|
|
—
|
|
|
(653.4
|
)
|
|
Provision
(benefit) for income taxes
|
|
|
5.4
|
|
|
(67.4
|
)
|
|
116.9
|
|
|
—
|
|
|
54.9
|
|
|
Minority
interests in consolidated subsidiaries
|
|
|
—
|
|
|
—
|
|
|
18.3
|
|
|
—
|
|
|
18.3
|
|
|
Equity
in net (income) loss of affiliates
|
|
|
(12.7
|
)
|
|
(5.2
|
)
|
|
1.7
|
|
|
—
|
|
|
(16.2
|
)
|
|
Equity
in net (income) loss of subsidiaries
|
|
|
493.6
|
|
|
(80.1
|
)
|
|
—
|
|
|
(413.5
|
)
|
|
—
|
|
|
Loss
before cumulative effect of a change in
accounting principle
|
|
|
(710.4
|
)
|
|
(302.9
|
)
|
|
(110.6
|
)
|
|
413.5
|
|
|
(710.4
|
)
|
|
Cumulative
effect of a change in accounting
principle
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
Net
loss
|
|
$
|
(707.5
|
)
|
$
|
(302.9
|
)
|
$
|
(110.6
|
)
|
$
|
413.5
|
|
$
|
(707.5
|
)
|
F-138
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
2005
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(in
millions)
|
|
|
Net
sales
|
|
$
|
1,657.2
|
|
$
|
6,599.0
|
|
$
|
11,350.1
|
|
$
|
(2,517.1
|
)
|
$
|
17,089.2
|
|
|
Cost
of sales
|
|
|
1,727.4
|
|
|
6,568.4
|
|
|
10,574.5
|
|
|
(2,517.1
|
)
|
|
16,353.2
|
|
|
Selling,
general and administrative expenses
|
|
|
309.6
|
|
|
2.8
|
|
|
318.2
|
|
|
—
|
|
|
630.6
|
|
|
Goodwill
impairment charges
|
|
|
—
|
|
|
1,012.8
|
|
|
—
|
|
|
—
|
|
|
1.012.8
|
|
|
Interest
expense
|
|
|
45.9
|
|
|
94.2
|
|
|
43.1
|
|
|
—
|
|
|
183.2
|
|
|
Intercompany
(income) expense, net
|
|
|
(373.7
|
)
|
|
308.2
|
|
|
65.5
|
|
|
—
|
|
|
—
|
|
|
Other
expense, net
|
|
|
6.4
|
|
|
19.4
|
|
|
12.2
|
|
|
—
|
|
|
38.0
|
|
|
Income
(loss) before provision (benefit) for
income taxes, minority interests
in consolidated
subsidiaries and equity in net (income) loss
of
affiliates and subsidiaries
|
|
|
(58.4
|
)
|
|
(1,406.8
|
)
|
|
336.6
|
|
|
—
|
|
|
(1,128.6
|
)
|
|
Provision
(benefit) for income taxes
|
|
|
270.2
|
|
|
(140.6
|
)
|
|
64.7
|
|
|
—
|
|
|
194.3
|
|
|
Minority
interests in consolidated subsidiaries
|
|
|
—
|
|
|
—
|
|
|
7.2
|
|
|
—
|
|
|
7.2
|
|
|
Equity
in net (income) loss of affiliates
|
|
|
40.6
|
|
|
(3.5
|
)
|
|
14.3
|
|
|
—
|
|
|
51.4
|
|
|
Equity
in net (income) loss of subsidiaries
|
|
|
1,012.3
|
|
|
(193.9
|
)
|
|
—
|
|
|
(818.4
|
)
|
|
—
|
|
|
Net
income (loss)
|
|
$
|
(1,381.5
|
)
|
$
|
(1,068.8
|
)
|
$
|
250.4
|
|
$
|
818.4
|
|
$
|
(1,381.5
|
)
|
F-139
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
2004
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(in
millions)
|
|
|
Net
sales
|
|
$
|
1,652.1
|
|
$
|
6,937.7
|
|
$
|
10,990.3
|
|
$
|
(2,620.1
|
)
|
$
|
16,960.0
|
|
|
Cost
of sales
|
|
|
1,739.9
|
|
|
6,270.1
|
|
|
10,168.0
|
|
|
(2,620.1
|
)
|
|
15,557.9
|
|
|
Selling,
general and administrative expenses
|
|
|
205.3
|
|
|
129.5
|
|
|
298.9
|
|
|
—
|
|
|
633.7
|
|
|
Interest
expense
|
|
|
30.2
|
|
|
100.5
|
|
|
34.8
|
|
|
—
|
|
|
165.5
|
|
|
Intercompany
(income) expense, net
|
|
|
(317.2
|
)
|
|
339.4
|
|
|
(22.2
|
)
|
|
—
|
|
|
—
|
|
|
Other
(income) expense, net
|
|
|
(17.8
|
)
|
|
29.5
|
|
|
26.9
|
|
|
—
|
|
|
38.6
|
|
|
Income
before provision (benefit) for income
taxes, minority interests in
consolidated
subsidiaries and equity in net (income) loss
of
affiliates and subsidiaries
|
|
|
11.7
|
|
|
68.7
|
|
|
483.9
|
|
|
—
|
|
|
564.3
|
|
|
Provision
(benefit) for income taxes
|
|
|
(17.9
|
)
|
|
25.1
|
|
|
120.8
|
|
|
—
|
|
|
128.0
|
|
|
Minority
interests in consolidated subsidiaries
|
|
|
—
|
|
|
—
|
|
|
16.7
|
|
|
—
|
|
|
16.7
|
|
|
Equity
in net (income) loss of affiliates
|
|
|
0.3
|
|
|
(3.3
|
)
|
|
0.4
|
|
|
—
|
|
|
(2.6
|
)
|
|
Equity
in net income of subsidiaries
|
|
|
(392.9
|
)
|
|
(305.8
|
)
|
|
—
|
|
|
698.7
|
|
|
—
|
|
|
Net
income
|
|
$
|
422.2
|
|
$
|
352.7
|
|
$
|
346.0
|
|
$
|
(698.7
|
)
|
$
|
422.2
|
|
F-140
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
2006
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(in
millions)
|
|
|
Net
Cash Provided by Operating Activities
|
|
$
|
28.9
|
|
$
|
(102.0
|
)
|
$
|
358.4
|
|
$
|
—
|
|
$
|
285.3
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(47.8
|
)
|
|
(94.8
|
)
|
|
(205.0
|
)
|
|
—
|
|
|
(347.6
|
)
|
|
Cost
of acquisitions, net of cash acquired
|
|
|
—
|
|
|
(24.9
|
)
|
|
(5.6
|
)
|
|
—
|
|
|
(30.5
|
)
|
|
Net
proceeds from disposition of businesses and other assets
|
|
|
(1.4
|
)
|
|
22.5
|
|
|
44.8
|
|
|
—
|
|
|
65.9
|
|
|
Net
cash used in investing activities
|
|
|
(49.2
|
)
|
|
(97.2
|
)
|
|
(165.8
|
)
|
|
—
|
|
|
(312.2
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of senior notes
|
|
|
900.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
900.0
|
|
|
Repayment
of senior notes
|
|
|
(1,356.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,356.9
|
)
|
|
Primary
credit facility borrowings, net
|
|
|
597.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
597.0
|
|
|
Other
long-term debt repayments, net
|
|
|
(44.8
|
)
|
|
(10.5
|
)
|
|
18.8
|
|
|
—
|
|
|
(36.5
|
)
|
|
Short-term
debt repayments, net
|
|
|
—
|
|
|
—
|
|
|
(11.8
|
)
|
|
—
|
|
|
(11.8
|
)
|
|
Change
in intercompany accounts
|
|
|
(102.0
|
)
|
|
192.6
|
|
|
(90.6
|
)
|
|
—
|
|
|
—
|
|
|
Net
proceeds from the sale of common stock
|
|
|
199.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
199.2
|
|
|
Dividends
paid
|
|
|
(16.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.8
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
Increase
in drafts
|
|
|
1.6
|
|
|
(2.3
|
)
|
|
3.7
|
|
|
—
|
|
|
3.0
|
|
|
Net
cash provided by financing activities
|
|
|
177.5
|
|
|
179.8
|
|
|
(79.9
|
)
|
|
—
|
|
|
277.4
|
|
|
Effect
of foreign currency translation
|
|
|
—
|
|
|
18.6
|
|
|
36.3
|
|
|
—
|
|
|
54.9
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
157.2
|
|
|
(0.8
|
)
|
|
149.0
|
|
|
—
|
|
|
305.4
|
|
|
Cash
and Cash Equivalents at Beginning of Year
|
|
|
38.6
|
|
|
4.8
|
|
|
153.9
|
|
|
—
|
|
|
197.3
|
|
|
Cash
and Cash Equivalents at End of Year
|
|
$
|
195.8
|
|
$
|
4.0
|
|
$
|
302.9
|
|
$
|
—
|
|
$
|
502.7
|
|
F-141
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
2005
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(in
millions)
|
|
|
Net
Cash Provided by Operating Activities
|
|
$
|
(260.7
|
)
|
$
|
(15.8
|
)
|
$
|
837.3
|
|
$
|
—
|
|
$
|
560.8
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(123.0
|
)
|
|
(235.9
|
)
|
|
(209.5
|
)
|
|
—
|
|
|
(568.4
|
)
|
|
Cost
of acquisitions, net of cash acquired
|
|
|
—
|
|
|
—
|
|
|
(11.8
|
)
|
|
—
|
|
|
(11.8
|
)
|
|
Net
proceeds from disposition of businesses
and other assets
|
|
|
7.8
|
|
|
16.1
|
|
|
9.4
|
|
|
—
|
|
|
33.3
|
|
|
Other,
net
|
|
|
1.9
|
|
|
0.6
|
|
|
2.8
|
|
|
—
|
|
|
5.3
|
|
|
Net
cash used in investing activities
|
|
|
(113.3
|
)
|
|
(219.2
|
)
|
|
(209.1
|
)
|
|
—
|
|
|
(541.6
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of senior notes
|
|
|
(600.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(600.0
|
)
|
|
Primary
credit facility borrowings, net
|
|
|
400.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
400.0
|
|
|
Other
long-term debt repayments, net
|
|
|
(17.7
|
)
|
|
(2.2
|
)
|
|
(12.8
|
)
|
|
—
|
|
|
(32.7
|
)
|
|
Short-term
debt repayments, net
|
|
|
—
|
|
|
—
|
|
|
(23.8
|
)
|
|
—
|
|
|
(23.8
|
)
|
|
Change
in intercompany accounts
|
|
|
601.1
|
|
|
234.5
|
|
|
(835.6
|
)
|
|
—
|
|
|
—
|
|
|
Dividends
paid
|
|
|
(67.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(67.2
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
4.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4.7
|
|
|
Repurchase
of common stock
|
|
|
(25.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25.4
|
)
|
|
Decrease
in drafts
|
|
|
(7.1
|
)
|
|
1.5
|
|
|
2.3
|
|
|
—
|
|
|
(3.3
|
)
|
|
Other,
net
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
Net
cash used in financing activities
|
|
|
289.1
|
|
|
233.8
|
|
|
(869.9
|
)
|
|
—
|
|
|
(347.0
|
)
|
|
Effect
of foreign currency translation
|
|
|
—
|
|
|
2.2
|
|
|
(62.0
|
)
|
|
—
|
|
|
(59.8
|
)
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(84.9
|
)
|
|
1.0
|
|
|
(303.7
|
)
|
|
—
|
|
|
(387.6
|
)
|
|
Cash
and Cash Equivalents at Beginning
of Year
|
|
|
123.5
|
|
|
3.8
|
|
|
457.6
|
|
|
—
|
|
|
584.9
|
|
|
Cash
and Cash Equivalents at End of Year
|
|
$
|
38.6
|
|
$
|
4.8
|
|
$
|
153.9
|
|
$
|
—
|
|
$
|
197.3
|
|
F-142
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Year Ended December 31,
2004
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(in
millions)
|
|
|
Net
Cash Provided by Operating Activities
|
|
$
|
100.6
|
|
$
|
64.6
|
|
$
|
510.7
|
|
$
|
—
|
|
$
|
675.9
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(71.6
|
)
|
|
(146.2
|
)
|
|
(211.2
|
)
|
|
—
|
|
|
(429.0
|
)
|
|
Cost
of acquisitions, net of cash acquired
|
|
|
(14.1
|
)
|
|
(3.3
|
)
|
|
(85.6
|
)
|
|
—
|
|
|
(103.0
|
)
|
|
Net
proceeds from disposition of businesses and
other assets
|
|
|
15.3
|
|
|
13.2
|
|
|
27.8
|
|
|
—
|
|
|
56.3
|
|
|
Other,
net
|
|
|
0.8
|
|
|
0.1
|
|
|
2.3
|
|
|
—
|
|
|
3.2
|
|
|
Net
cash used in investing activities
|
|
|
(69.6
|
)
|
|
(136.2
|
)
|
|
(266.7
|
)
|
|
—
|
|
|
(472.5
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of senior notes
|
|
|
399.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
399.2
|
|
|
Other
long-term debt repayments, net
|
|
|
(11.4
|
)
|
|
1.0
|
|
|
(39.0
|
)
|
|
—
|
|
|
(49.4
|
)
|
|
Short-term
debt repayments, net
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
(29.4
|
)
|
|
—
|
|
|
(29.8
|
)
|
|
Change
in intercompany accounts
|
|
|
(189.1
|
)
|
|
66.2
|
|
|
122.9
|
|
|
—
|
|
|
—
|
|
|
Dividends
paid
|
|
|
(68.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(68.0
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
24.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24.4
|
|
|
Repurchase
of common stock
|
|
|
(97.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(97.7
|
)
|
|
Decrease
in drafts
|
|
|
(6.1
|
)
|
|
(5.3
|
)
|
|
(1.2
|
)
|
|
—
|
|
|
(12.6
|
)
|
|
Net
cash provided by financing activities
|
|
|
51.0
|
|
|
61.8
|
|
|
53.3
|
|
|
—
|
|
|
166.1
|
|
|
Effect
of foreign currency translation
|
|
|
—
|
|
|
4.5
|
|
|
41.6
|
|
|
—
|
|
|
46.1
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
82.0
|
|
|
(5.3
|
)
|
|
338.9
|
|
|
—
|
|
|
415.6
|
|
|
Cash
and Cash Equivalents at Beginning
of Year
|
|
|
41.5
|
|
|
9.1
|
|
|
118.7
|
|
|
—
|
|
|
169.3
|
|
|
Cash
and Cash Equivalents at End of Year
|
|
$
|
123.5
|
|
$
|
3.8
|
|
$
|
457.6
|
|
$
|
—
|
|
$
|
584.9
|
|
Basis
of
Presentation — Certain of the Company’s wholly owned subsidiaries (the
“Guarantors”) have unconditionally fully guaranteed, on a joint and several
basis, the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all of the Company’s obligations under the New
Credit Agreement and the indentures governing the Company’s senior notes,
including the Company’s obligations to pay principal, premium, if any, and
interest with respect to the senior notes. The senior notes consist of
$300 million aggregate principal amount of 8.50% senior notes due 2013,
$600 million aggregate principal amount of 8.75% senior notes due 2016,
$399 million aggregate principal amount of 5.75% senior notes due 2014,
$4 million aggregate principal amount of zero-coupon convertible senior
notes due 2022, Euro 56 million aggregate principal amount of 8.125% senior
notes due 2008 and $41 million aggregate principal amount of 8.11% senior
notes due 2009. The Guarantors under the indentures are currently Lear
Automotive Dearborn, Inc., Lear Automotive (EEDS) Spain S.L., Lear Corporation
EEDS and Interiors, Lear Corporation (Germany) Ltd., Lear Corporation Mexico,
S.
de R.L. de C.V., Lear Operations Corporation and Lear Seating Holdings Corp.
#50. Lear Automotive Dearborn, Inc. became a Guarantor under the indentures
effective April 25, 2006. In lieu of providing separate audited financial
statements for the Guarantors, the Company has included the audited supplemental
guarantor condensed consolidating financial statements above. These financial
statements reflect the guarantors listed above for all periods presented.
Management does not believe that separate financial statements of the Guarantors
are material to investors. Therefore, separate financial statements and other
disclosures concerning the Guarantors are not presented.
As of
and
for the years ended December 31, 2005 and 2004, the supplemental guarantor
condensed consolidating financial statements have been restated to reflect
certain changes to the equity investments of the guarantor subsidiaries.
Distributions
— There are no significant restrictions on the ability of the Guarantors to make
distributions to the Company.
F-143
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
Selling,
General and Administrative Expenses — During 2006, 2005 and 2004, the Parent
allocated $50.0 million, $62.3 million and $63.3 million,
respectively, of corporate selling, general and administrative expenses to
its
operating subsidiaries. The allocations were based on various factors, which
estimate usage of particular corporate functions, and in certain instances,
other relevant factors, such as the revenues or the number of employees of
the
Company’s subsidiaries.
Long-Term
Debt of the Parent and the Guarantors — A summary of long-term debt of the
Parent and the Guarantors on a combined basis is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
December 31,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
Amended
and restated primary credit
facility
|
|
$
|
997.0
|
|
$
|
400.0
|
|
|
Senior
notes
|
|
|
1,417.6
|
|
|
1,795.0
|
|
|
Other
long-term debt
|
|
|
4.6
|
|
|
12.3
|
|
| |
|
|
2,419.2
|
|
|
2,207.3
|
|
|
Less
— current portion
|
|
|
(6.0
|
)
|
|
(4.2
|
)
|
| |
|
$
|
2,413.2
|
|
$
|
2,203.1
|
|
The
obligations of foreign subsidiary borrowers under the New Credit Agreement
are
guaranteed by the Parent.
For a
more detailed description of the above indebtedness, see Note 8, “Long-Term
Debt.”
The
aggregate minimum principal payment requirements on long-term debt of the Parent
and the Guarantors, including capital lease obligations, in each of the five
years subsequent to December 31, 2006, are shown below (in millions):
|
|
|
|
|
|
Year
|
|
Maturities
|
| |
|
|
|
|
2007
|
|
$
|
6.0
|
|
2008
|
|
|
79.3
|
|
2009
|
|
|
47.2
|
|
2010
|
|
|
6.0
|
|
2011
|
|
|
6.0
|
F-144
LEAR CORPORATION
AND SUBSIDIARIES
SCHEDULE
II — VALUATION AND QUALIFYING
ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance
as
of
Beginning
of
Year
|
|
Additions
|
|
Retirements
|
|
Other
Changes
|
|
Balance
as
of End
of Year
|
| |
|
(in
millions)
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
of accounts deducted from related assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
20.4
|
|
$
|
7.7
|
|
$
|
(12.2
|
)
|
$
|
(1.0
|
)
|
$
|
14.9
|
|
Reserve
for unmerchantable inventories
|
|
|
85.7
|
|
|
28.4
|
|
|
(23.3
|
)
|
|
(3.7
|
)
|
|
87.1
|
|
Restructuring
reserves
|
|
|
25.5
|
|
|
92.3
|
|
|
(75.9
|
)
|
|
—
|
|
|
41.9
|
|
Allowance
for deferred tax assets
|
|
|
478.3
|
|
|
364.6
|
|
|
(28.4
|
)
|
|
29.4
|
|
|
843.9
|
| |
|
$
|
609.9
|
|
$
|
493.0
|
|
$
|
(139.8
|
)
|
$
|
24.7
|
|
$
|
987.8
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
of accounts deducted from related assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
26.7
|
|
$
|
12.5
|
|
$
|
(15.8
|
)
|
$
|
(3.0
|
)
|
$
|
20.4
|
|
Reserve
for unmerchantable inventories
|
|
|
86.4
|
|
|
33.8
|
|
|
(23.3
|
)
|
|
(11.2
|
)
|
|
85.7
|
|
Restructuring
reserves
|
|
|
20.9
|
|
|
86.8
|
|
|
(80.3
|
)
|
|
(1.9
|
)
|
|
25.5
|
|
Allowance
for deferred tax assets
|
|
|
277.7
|
|
|
276.3
|
|
|
(44.5
|
)
|
|
(31.2
|
)
|
|
478.3
|
| |
|
$
|
411.7
|
|
$
|
409.4
|
|
$
|
(163.9
|
)
|
$
|
(47.3
|
)
|
$
|
609.9
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
THE YEAR ENDED DECEMBER 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
of accounts deducted from related assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
30.6
|
|
$
|
11.7
|
|
$
|
(16.0
|
)
|
$
|
0.4
|
|
$
|
26.7
|
|
Reserve
for unmerchantable inventories
|
|
|
55.8
|
|
|
45.5
|
|
|
(16.0
|
)
|
|
1.1
|
|
|
86.4
|
|
Restructuring
reserves
|
|
|
8.1
|
|
|
18.8
|
|
|
(6.0
|
)
|
|
—
|
|
|
20.9
|
|
Allowance
for deferred tax assets
|
|
|
220.8
|
|
|
84.4
|
|
|
(27.5
|
)
|
|
—
|
|
|
277.7
|
| |
|
$
|
315.3
|
|
$
|
160.4
|
|
$
|
(65.5
|
)
|
$
|
1.5
|
|
$
|
411.7
|
F-145
LEAR CORPORATION
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
December
31,
2006
|
|
| |
|
(unaudited)
|
|
|
|
| |
|
(in
millions, except share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
330.4
|
|
$
|
502.7
|
|
|
Accounts
receivable
|
|
|
2,412.7
|
|
|
2,006.9
|
|
|
Inventories
|
|
|
599.0
|
|
|
581.5
|
|
|
Current
assets of business held for sale
|
|
|
38.3
|
|
|
427.8
|
|
|
Other
|
|
|
317.6
|
|
|
371.4
|
|
|
Total
current assets
|
|
|
3,698.0
|
|
|
3,890.3
|
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,425.9
|
|
|
1,471.7
|
|
|
Goodwill,
net
|
|
|
2,006.6
|
|
|
1,996.7
|
|
|
Other
|
|
|
530.5
|
|
|
491.8
|
|
|
Total
long-term assets
|
|
|
3,963.0
|
|
|
3,960.2
|
|
|
|
|
$
|
7,661.0
|
|
$
|
7,850.5
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
11.5
|
|
$
|
39.3
|
|
|
Accounts
payable and drafts
|
|
|
2,480.3
|
|
|
2,317.4
|
|
|
Accrued
liabilities
|
|
|
1,152.8
|
|
|
1,099.3
|
|
|
Current
liabilities of business held for
sale
|
|
|
16.7
|
|
|
405.7
|
|
|
Current
portion of long-term debt
|
|
|
26.4
|
|
|
25.6
|
|
|
Total
current liabilities
|
|
|
3,687.7
|
|
|
3,887.3
|
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,431.8
|
|
|
2,434.5
|
|
|
Long-term
liabilities of business held for sale
|
|
|
21.6
|
|
|
48.5
|
|
|
Other
|
|
|
827.4
|
|
|
878.2
|
|
|
Total
long-term liabilities
|
|
|
3,280.8
|
|
|
3,361.2
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value, 150,000,000 shares authorized;
82,166,506
shares and 81,984,306 shares issued as of March 31, 2007
and December
31, 2006, respectively
|
|
|
0.7
|
|
|
0.7
|
|
|
Additional
paid-in capital
|
|
|
1,357.3
|
|
|
1,338.1
|
|
|
Common
stock held in treasury, 5,508,097 shares as of March 31, 2007,
and
5,732,316 shares as of December 31, 2006, at cost
|
|
|
(201.9
|
)
|
|
(210.2
|
)
|
|
Retained
deficit
|
|
|
(308.0
|
)
|
|
(362.5
|
)
|
|
Accumulated
other comprehensive loss
|
|
|
(155.6
|
)
|
|
(164.1
|
)
|
|
Total
stockholders’ equity
|
|
|
692.5
|
|
|
602.0
|
|
|
|
|
$
|
7,661.0
|
|
$
|
7,850.5
|
|
The accompanying notes are an integral
part of these condensed consolidated balance sheets.
F-146
LEAR CORPORATION
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
|
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
|
| |
|
(unaudited;
in millions,
except per share data)
|
|
|
Net
sales
|
|
$
|
4,406.1
|
|
$
|
4,678.5
|
|
|
Cost
of sales
|
|
|
4,095.2
|
|
|
4,459.3
|
|
|
Selling,
general and administrative expenses
|
|
|
126.5
|
|
|
165.0
|
|
|
Loss
on divestiture of Interior business
|
|
|
25.6
|
|
|
—
|
|
|
Interest
expense
|
|
|
51.5
|
|
|
47.7
|
|
|
Other
(income) expense, net
|
|
|
25.0
|
|
|
(8.3
|
)
|
|
Income
before provision (benefit) for income taxes and cumulative effect
of
a
change in accounting principle
|
|
|
82.3
|
|
|
14.8
|
|
|
Provision
(benefit) for income taxes
|
|
|
32.4
|
|
|
(0.2
|
)
|
|
Income
before cumulative effect of a change in accounting
principle
|
|
|
49.9
|
|
|
15.0
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
2.9
|
|
|
Net
income
|
|
$
|
49.9
|
|
$
|
17.9
|
|
|
Basic
net income per share:
|
|
|
|
|
|
|
|
|
Income
before cumulative effect of a change in accounting principle
|
|
$
|
0.65
|
|
$
|
0.22
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
0.05
|
|
|
Basic
net income per share
|
|
$
|
0.65
|
|
$
|
0.27
|
|
|
Diluted
net
income per share:
|
|
|
|
|
|
|
|
|
Income
before cumulative effect of a change in accounting principle
|
|
$
|
0.64
|
|
$
|
0.22
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
0.04
|
|
|
Diluted
net income per share
|
|
$
|
0.64
|
|
$
|
0.26
|
|
The accompanying notes are an integral
part of these condensed consolidated statements.
F-147
LEAR
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
|
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
|
| |
|
(unaudited;
in millions)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
49.9
|
|
$
|
17.9
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
Cumulative
effect of a change in accounting principle
|
|
|
—
|
|
|
(2.9
|
)
|
|
Loss
on divestiture of Interior business
|
|
|
25.6
|
|
|
—
|
|
|
Depreciation
and amortization
|
|
|
74.5
|
|
|
97.8
|
|
|
Net
change in recoverable customer engineering and tooling
|
|
|
23.8
|
|
|
128.6
|
|
|
Net
change in working capital items
|
|
|
(150.4
|
)
|
|
(235.8
|
)
|
|
Net
change in sold accounts receivable
|
|
|
(38.9
|
)
|
|
38.1
|
|
|
Other,
net
|
|
|
(26.3
|
)
|
|
(4.3
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
(41.8
|
)
|
|
39.4
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(29.2
|
)
|
|
(92.6
|
)
|
|
Divestiture of Interior business
|
|
|
(57.3
|
)
|
|
—
|
|
|
Other, net
|
|
|
(28.6
|
)
|
|
27.9
|
|
|
Net cash used in investing
activities
|
|
|
(115.1
|
)
|
|
(64.7
|
)
|
|
Cash
Flows
from Financing Activities:
|
|
|
|
|
|
|
|
|
Long-term debt repayments, net
|
|
|
(3.6
|
)
|
|
(6.1
|
)
|
|
Short-term debt repayments, net
|
|
|
(11.0
|
)
|
|
—
|
|
|
Dividends paid
|
|
|
—
|
|
|
(16.8
|
)
|
|
Proceeds from exercise of stock options
|
|
|
5.7
|
|
|
—
|
|
|
Increase (decrease) in drafts
|
|
|
(13.5
|
)
|
|
1.1
|
|
|
Net cash used in financing
activities
|
|
|
(22.4
|
)
|
|
(21.8
|
)
|
|
Effect of foreign currency translation
|
|
|
7.0
|
|
|
10.7
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(172.3
|
)
|
|
(36.4
|
)
|
|
Cash and Cash Equivalents as of
Beginning
of Period
|
|
|
502.7
|
|
|
207.6
|
|
|
Cash
and Cash Equivalents as of End of Period
|
|
$
|
330.4
|
|
$
|
171.2
|
|
|
Changes
in Working Capital Items:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(434.2
|
)
|
$
|
(428.2
|
)
|
|
Inventories
|
|
|
(20.6
|
)
|
|
14.0
|
|
|
Accounts payable
|
|
|
224.5
|
|
|
103.9
|
|
|
Accrued liabilities and other
|
|
|
79.9
|
|
|
74.5
|
|
|
Net
change in working capital items
|
|
$
|
(150.4
|
)
|
$
|
(235.8
|
)
|
|
Supplementary
Disclosure:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
36.9
|
|
$
|
26.6
|
|
|
Cash paid for income taxes
|
|
$
|
45.7
|
|
$
|
42.9
|
|
The accompanying notes are an integral
part of these condensed consolidated statements.
F-148
LEAR CORPORATION
AND SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of
Presentation
The
condensed consolidated financial statements include the accounts of Lear
Corporation (“Lear” or the “Parent”), a Delaware corporation and the wholly
owned and less than wholly owned subsidiaries controlled by Lear (collectively,
the “Company”). In addition, Lear consolidates variable interest entities in
which it bears a majority of the risk of the entities’ potential losses or
stands to gain from a majority of the entities’ expected returns. Investments in
affiliates in which Lear does not have control, but does have the ability to
exercise significant influence over operating and financial policies, are
accounted for under the equity method.
The
Company and its affiliates design and manufacture complete automotive seat
systems, electrical distribution systems and select electronic products. Through
the first quarter of 2007, the Company also supplied automotive interior systems
and components, including instrument panels and cockpit systems, headliners
and
overhead systems, door panels and flooring and acoustic systems (Note 3,
“Divestiture of Interior Business”). The Company’s main customers are automotive
original equipment manufacturers. The Company operates facilities
worldwide.
Certain
amounts in the prior period’s financial statements have been reclassified to
conform to the presentation used in the quarter ended March 31, 2007.
(2) Merger
Agreement
On
February 9, 2007, the Company entered into an Agreement and Plan of Merger
(the
“Merger Agreement”) with AREP Car Holdings Corp., a Delaware corporation
(“Parent”), and AREP Car Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Parent (“Merger Sub”). Under the terms of the Merger
Agreement, Merger Sub would be merged with and into the Company, and as a
result, the Company would continue as the surviving corporation and a wholly
owned subsidiary of Parent. Parent and Merger Sub are affiliates of Carl C.
Icahn.
Pursuant
to the Merger Agreement, as of the effective time of the merger, each issued
and
outstanding share of common stock of the Company, other than shares (i) owned
by
Parent, Merger Sub or any subsidiary of Parent and (ii) owned by any
shareholders who are entitled to and who have properly exercised appraisal
rights under Delaware law, will be canceled and automatically converted into
the
right to receive $36.00 in cash, without interest.
The
Merger Agreement contains provisions pursuant to which the Company was permitted
to solicit alternative acquisition proposals for forty-five days after the
date
of the Merger Agreement (the “Solicitation Period”) and continue ongoing
discussions or negotiations thereafter. The Solicitation Period ended on March
26, 2007, and no alternative acquisition proposals have been received as of
the
date of this Report. The Company may terminate the Merger Agreement under
certain circumstances, including if its board of directors determines in good
faith that it has received a Superior Proposal (as defined in the Merger
Agreement) and otherwise complies with certain terms of the Merger Agreement.
In
connection with such termination, and in certain other limited circumstances,
the Company would be required to pay a fee of $85.2 million to Parent plus
up to
$15.0 million of Parent’s out-of-pocket expenses (including fees and expenses of
financing sources, counsel, accountants, investment bankers, experts and
consultants) relating to the Merger Agreement.
Parent
has obtained debt financing commitments for the transaction contemplated by
the
Merger Agreement. Consummation of the merger is not subject to a financing
condition, but is subject to other conditions, including receipt of the
affirmative vote of the holders of a majority of the outstanding shares of
the
Company’s common stock, antitrust approvals and other customary closing
conditions.
In
connection with the execution of the Merger Agreement, the Company entered
into
a voting agreement with Icahn Partners LP, Icahn Partners Master Fund LP, Koala
Holding Limited Partnership and High River Limited Partnership. In the
aggregate, such holders beneficially own approximately 16% of the Company’s
outstanding common stock. Pursuant to the voting agreement, such holders agreed
to vote in favor of the merger and, subject to certain exceptions, not to
dispose of any shares of common stock prior to consummation of the merger.
Such
holders have also agreed to vote in favor of a Superior Proposal under certain
circumstances. In addition, American Real
F-149
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(2) Merger Agreement
–
(continued)
Estate Partners, L.P. has
provided a limited guaranty in favor of the Company with respect to the
performance by Parent and Merger Sub of certain payment obligations under the
Merger Agreement.
If
presented, the transaction contemplated by the Merger Agreement will be voted
on
by shareholders of record as of May 14, 2007, at the Company’s annual
stockholders’ meeting, which has been scheduled for June 27, 2007.
For
further information regarding the Merger Agreement, please refer to the Merger
Agreement and certain related documents, which are incorporated by reference
as
exhibits to this Report.
(3) Divestiture of
Interior Business
On
March 31, 2007, the Company completed the transfer of substantially all of
the
assets of the Company’s North American interior business (as well as its
interests in two China joint ventures and $27.4 million of cash) to
International Automotive Components Group North America, Inc. and International
Automotive Components Group North America, LLC (together, “IAC North America”),
in exchange for a 25% equity interest in IAC North America and warrants for
an
additional 7% of the current outstanding equity of IAC North America. In
addition, under the terms of the divestiture agreement, the Company has agreed
to fund up to an additional $40 million to IAC North America, in the event
that
IAC North America does not meet certain financial targets in 2007. The legal
transfer of certain assets included in this transaction is subject to the
satisfaction of certain post-closing conditions. In connection with this
transaction, IAC North America assumed the ordinary course liabilities of the
Company’s North American interior business, and the Company retained certain
pre-closing liabilities, including pension and postretirement healthcare
liabilities incurred through the closing date of the transaction.
The
Company recorded a loss on divestiture of interior business of $606.9 million
in
the fourth quarter of 2006 and an additional charge of $29.4 million in the
first quarter of 2007, including $6.2 million recorded as cost of sales, $2.0
million recorded as selling, general and administrative expenses and $21.2
million recorded as loss on divestiture of interior business. Approximately
$22.5 million of the first quarter 2007 charge represented cash costs. As of
March 31, 2007, the beneficial ownership interests of certain less than wholly
owned subsidiaries were transferred to IAC North America, however, as described
above, the transfer of legal ownership is subject to the satisfaction of certain
post-closing conditions. Accordingly, these assets and liabilities remain
classified as held for sale on the Company’s condensed consolidated balance
sheet as of March 31, 2007. A summary of the major classes of the assets and
liabilities of the Company’s North American interior business that are
classified as held for sale in the Company’s condensed consolidated balance
sheets are shown below (in millions):
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
December
31,
2006
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12.8
|
|
$
|
19.2
|
|
Accounts receivable
|
|
|
17.3
|
|
|
284.5
|
|
Inventories
|
|
|
3.9
|
|
|
69.2
|
|
Other current
assets
|
|
|
4.3
|
|
|
54.9
|
|
Current
assets of business held for sale
|
|
$
|
38.3
|
|
$
|
427.8
|
|
Accounts payable
and
drafts
|
|
$
|
8.4
|
|
$
|
323.7
|
|
Accrued liabilities
|
|
|
5.4
|
|
|
79.8
|
|
Current portion of long-term debt
|
|
|
2.9
|
|
|
2.2
|
|
Current
liabilities of business held for sale
|
|
|
16.7
|
|
|
405.7
|
|
Long-term
debt
|
|
|
18.2
|
|
|
19.6
|
|
Other long-term liabilities
|
|
|
3.4
|
|
|
28.9
|
|
Long-term
liabilities of business held for sale
|
|
|
21.6
|
|
|
48.5
|
|
Total
liabilities of business held for sale
|
|
$
|
38.3
|
|
$
|
454.2
|
F-150
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(3) Divestiture of
Interior Business – (continued)
The
Company did not account for the divestiture of its North American interior
business as a discontinued operation due to its continuing involvement with
IAC
North America. The Company’s investment in IAC North America is accounted for
under the equity method of accounting.
The
divestiture of the Company’s North American interior business substantially
completes the disposition of the Company’s interior business. On October 16,
2006, the Company completed the contribution of substantially all of its
European interior business to International Automotive Components Group, LLC
(“IAC Europe”), in exchange for a one-third equity interest in IAC Europe. In
connection with this transaction, the Company recorded a loss on divestiture
of
interior business of $33.5 million, of which $4.4 million was recorded in the
first quarter of 2007 and $29.1 million was recorded in 2006.
(4) Stock-Based
Compensation
On
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” using the
modified prospective transition method and recognized income of $2.9 million
as
a cumulative effect of a change in accounting principle related to a change
in
accounting for forfeitures. There was no income tax effect resulting from this
adoption. SFAS No. 123(R) requires the estimation of expected forfeitures at
the
grant date and the recognition of compensation cost only for those awards
expected to vest. Previously, the Company accounted for forfeitures as they
occurred. In the first quarters of 2007 and 2006, there were no outstanding
unvested awards for which no compensation cost was recognized as the Company
adopted the fair value recognition provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation,” for all employee awards granted after January 1,
2003.
(5)
Restructuring
In order
to address unfavorable industry conditions, the Company began to implement
consolidation and census actions in the second quarter of 2005. These actions
are part of a comprehensive restructuring strategy intended to (i) better
align the Company’s manufacturing capacity with the changing needs of its
customers, (ii) eliminate excess capacity and lower the operating costs of
the
Company and (iii) streamline the Company’s organizational structure and
reposition its business for improved long-term profitability.
The
Company currently expects to incur pretax costs of approximately $300 million,
in connection with the restructuring actions, although all aspects of the
restructuring actions have not been finalized. Such costs include employee
termination benefits, asset impairment charges and contract termination costs,
as well as other incremental costs resulting from the restructuring actions.
These incremental costs principally include equipment and personnel relocation
costs. The Company also expects to incur incremental manufacturing inefficiency
costs at the operating locations impacted by the restructuring actions during
the related restructuring implementation period. Restructuring costs are
recognized in the Company’s consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Generally,
charges are recorded as elements of the restructuring strategy are finalized.
Actual costs recorded in the Company’s consolidated financial statements may
vary from current estimates.
In
connection with the Company’s restructuring actions, the Company recorded net
charges of $13.6 million in the first quarter of 2007, including $11.1 million
recorded as cost of sales and $2.5 million recorded as selling, general and
administrative expenses. The first quarter 2007 charges consist of employee
termination benefits of $24.1 million, fixed asset impairment charges of $0.4
million, net contract termination costs of $(12.7) million and other costs
of
$1.8 million. Employee termination benefits were recorded based on existing
union and employee contracts, statutory requirements and completed negotiations.
Asset impairment charges relate to the disposal of machinery and equipment
with
carrying values of $0.4 million in excess of related estimated fair values.
Contract termination costs include lease cancellation costs, the repayment
of
various government-sponsored grants and a net pension and other postretirement
benefit plan curtailment gain of $13.9 million.
F-151
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(5) Restructuring
–
(continued)
A
summary of the first quarter 2007 restructuring charges, excluding the net
pension and other postretirement benefit plan curtailment gain of $13.9 million
is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrual
as of
December 31, 2006
|
|
2007
Charges
|
|
2007
Utilization
|
|
Accrual
as of
March 31, 2007
|
|
Cash
|
|
Non-cash
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination
benefits
|
|
$
|
36.4
|
|
$
|
24.1
|
|
$
|
(36.9
|
)
|
$
|
—
|
|
$
|
23.6
|
|
Asset
impairments
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Contract
termination costs
|
|
|
3.4
|
|
|
1.2
|
|
|
(1.4
|
)
|
|
—
|
|
|
3.2
|
|
Other
related costs
|
|
|
—
|
|
|
1.8
|
|
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
39.8
|
|
$
|
27.5
|
|
$
|
(40.1
|
)
|
$
|
(0.4
|
)
|
$
|
26.8
|
(6)
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out method. Finished goods and work-in-process inventories
include material, labor and manufacturing overhead costs. A summary of
inventories is shown below (in millions):
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
December
31,
2006
|
| |
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
439.9
|
|
$
|
439.9
|
|
Work-in-process
|
|
|
36.2
|
|
|
35.6
|
|
Finished
goods
|
|
|
122.9
|
|
|
106.0
|
|
Inventories
|
|
$
|
599.0
|
|
$
|
581.5
|
(7) Property, Plant
and Equipment
Property,
plant and equipment is stated at cost. Depreciable property is depreciated
over
the estimated useful lives of the assets, principally using the straight-line
method. A summary of property, plant and equipment is shown below (in
millions):
|
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
December
31,
2006
|
|
| |
|
|
|
|
|
|
|
|
Land
|
|
$
|
132.6
|
|
$
|
133.5
|
|
|
Buildings
and
improvements
|
|
|
607.5
|
|
|
559.1
|
|
|
Machinery
and equipment
|
|
|
2,024.1
|
|
|
2,081.3
|
|
|
Construction
in progress
|
|
|
22.0
|
|
|
12.0
|
|
|
Total
property, plant and equipment
|
|
|
2,786.2
|
|
|
2,785.9
|
|
|
Less
– accumulated depreciation
|
|
|
(1,360.3
|
)
|
|
(1,314.2
|
)
|
|
Net
property, plant and equipment
|
|
$
|
1,425.9
|
|
$
|
1,471.7
|
|
Depreciation
expense was $73.2 million and $96.6 million in the three months ended March
31,
2007 and April 1, 2006, respectively.
Costs
associated with the repair and maintenance of the Company’s property, plant and
equipment are expensed as incurred. Costs associated with improvements which
extend the life, increase the capacity or improve the efficiency or safety
of
the Company’s property, plant and equipment are capitalized and depreciated over
the remaining life of the related asset.
F-152
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(8)
Goodwill
A
summary of the changes in the carrying amount of goodwill, by reportable
operating segment, for the three months ended March 31, 2007, is shown below
(in
millions):
|
|
|
|
|
|
|
|
|
|
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Total
|
| |
|
|
|
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
$
|
1,060.7
|
|
$
|
936.0
|
|
$
|
1,996.7
|
|
Foreign
currency translation and
other
|
|
|
7.6
|
|
|
2.3
|
|
|
9.9
|
|
Balance
as of March 31, 2007
|
|
$
|
1,068.3
|
|
$
|
938.3
|
|
$
|
2,006.6
|
(9) Long-Term
Debt
A
summary of long-term debt and the related weighted average interest rates,
including the effect of hedging activities described in Note 19, “Financial
Instruments,” is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March
31, 2007
|
|
December
31, 2006
|
|
Long-Term
Debt
|
|
Weighted
Average
Interest
Rate
|
Long-Term
Debt
|
|
Weighted
Average
Interest
Rate
|
| |
|
|
|
|
|
|
|
|
|
Primary
Credit Facility
|
|
$
|
997.0
|
|
7.49
|
%
|
|
$
|
997.0
|
|
7.49
|
%
|
|
8.50%
Senior Notes, due 2013
|
|
|
300.0
|
|
8.50
|
%
|
|
|
300.0
|
|
8.50
|
%
|
|
8.75%
Senior Notes, due 2016
|
|
|
600.0
|
|
8.75
|
%
|
|
|
600.0
|
|
8.75
|
%
|
|
5.75%
Senior Notes, due 2014
|
|
|
399.4
|
|
5.635
|
%
|
|
|
399.3
|
|
5.635
|
%
|
|
8.125%
Euro-denominated Senior Notes, due 2008
|
|
|
74.2
|
|
8.125
|
%
|
|
|
73.3
|
|
8.125
|
%
|
|
8.11%
Senior Notes, due 2009
|
|
|
41.4
|
|
8.11
|
%
|
|
|
41.4
|
|
8.11
|
%
|
|
Zero-coupon
Convertible Senior Notes, due
2022
|
|
|
0.7
|
|
4.75
|
%
|
|
|
3.6
|
|
4.75
|
%
|
|
Other
|
|
|
45.5
|
|
7.03
|
%
|
|
|
45.5
|
|
7.06
|
%
|
| |
|
|
2,458.2
|
|
|
|
|
|
2,460.1
|
|
|
|
|
Current
portion
|
|
|
(26.4
|
)
|
|
|
|
|
(25.6
|
)
|
|
|
|
Long-term
debt
|
|
$
|
2,431.8
|
|
|
|
|
$
|
2,434.5
|
|
|
|
Primary Credit
Facility
The
Company’s Primary Credit Facility consists of an Amended and Restated Credit and
Guarantee Agreement, which provides for maximum revolving borrowing commitments
of $1.7 billion and a term loan facility of $1.0 billion. As of March 31, 2007
and December 31, 2006, the Company had $997.0 million in borrowings outstanding
under the Primary Credit Facility, all of which were outstanding under the
term
loan facility. There were no revolving borrowings outstanding.
The
Company’s obligations under the Primary Credit Facility are secured by a pledge
of all or a portion of the capital stock of certain of its subsidiaries,
including substantially all of its first-tier subsidiaries, and are partially
secured by a security interest in the Company’s assets and the assets of certain
of its domestic subsidiaries. In addition, the Company’s obligations under the
Primary Credit Facility are guaranteed, on a joint and several basis, by certain
of its subsidiaries, which are primarily domestic subsidiaries and all of which
are directly or indirectly 100% owned by the Company.
The
Primary Credit Facility contains certain affirmative and negative covenants,
including (i) limitations on fundamental changes involving the Company or its
subsidiaries, asset sales and restricted payments, (ii) a limitation on
indebtedness with a maturity shorter than the term loan facility, (iii) a
limitation on aggregate subsidiary indebtedness to an amount which is no more
than 4% of consolidated total assets, (iv) a limitation on aggregate secured
indebtedness to an amount which is no more than $100 million and (v)
requirements that the Company
F-153
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Long-Term Debt
–
(continued)
maintain a leverage ratio
of
not more than 4.0 to 1, as of March 31, 2007, with decreases over time and
an
interest coverage ratio of not less than 2.50 to 1 with increases over time.
The
leverage and interest coverage ratios, as well as the related components of
their computation, are defined in the Primary Credit Facility. The leverage
ratio is calculated as the ratio of consolidated indebtedness to consolidated
operating profit. For the purpose of the covenant calculation, (i) consolidated
indebtedness is generally defined as reported debt, net of cash and excludes
transactions related to the Company’s asset-backed securitization and factoring
facilities and (ii) consolidated operating profit is generally defined as net
income excluding income taxes, interest expense, depreciation and amortization
expense, other income and expense, minority interests in income of subsidiaries
in excess of net equity earnings in affiliates, certain restructuring and other
non-recurring charges, extraordinary gains and losses and other specified
non-cash items. Consolidated operating profit is a non-GAAP financial measure
that is presented not as a measure of operating results, but rather as a measure
used to determine covenant compliance under the Company’s Primary Credit
Facility. The interest coverage ratio is calculated as the ratio of consolidated
operating profit to consolidated interest expense. For the purpose of the
covenant calculation, consolidated interest expense is generally defined as
interest expense plus any discounts or expenses related to the Company’s
asset-backed securitization facility less amortization of deferred finance
fees
and interest income. As of March 31, 2007, the Company was in compliance with
all covenants set forth in the Primary Credit Facility. The Company’s leverage
and interest coverage ratios were 2.3 to 1 and 4.6 to 1, respectively.
Reconciliations
of (i) consolidated indebtedness to reported debt, (ii) consolidated operating
profit to income before provision for income taxes and (iii) consolidated
interest expense to reported interest expense are shown below (in
millions):
|
|
|
|
|
| |
|
March
31,
2007
|
| |
|
|
|
|
Consolidated
indebtedness
|
|
$
|
2,139.3
|
|
Cash
and cash equivalents
|
|
|
330.4
|
|
Reported
debt
|
|
$
|
2,469.7
|
|
|
|
|
|
|
| |
|
Three
Months Ended
March 31,
2007
|
|
| |
|
|
|
|
|
Consolidated
operating profit
|
|
$
|
266.6
|
|
|
Depreciation
and amortization
|
|
|
(74.5
|
)
|
|
Consolidated
interest expense
|
|
|
(45.3
|
)
|
|
Costs
related to divestiture of interior business
|
|
|
(33.8
|
)
|
|
Other
expense, net (excluding certain amounts related to
asset-backed
securitization facility)
|
|
|
(26.3
|
)
|
|
Restructuring
charges
|
|
|
(15.8
|
)
|
|
Other
excluded items
|
|
|
27.0
|
|
|
Other
non-cash items
|
|
|
(15.6
|
)
|
|
Income
before provision for income taxes
|
|
$
|
82.3
|
|
|
Consolidated
interest expense
|
|
$
|
45.3
|
|
|
Certain
amounts related to asset-backed securitization
facility
|
|
|
1.3
|
|
|
Amortization
of deferred financing fees
|
|
|
2.3
|
|
|
Bank
facility and other fees
|
|
|
2.6
|
|
|
Reported
interest expense
|
|
$
|
51.5
|
|
F-154
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Long-Term Debt
–
(continued)
The
Primary Credit Facility also contains customary events of default, including
an
event of default triggered by a change of control of the Company. The senior
notes due 2013 and 2016 (having an aggregate principal amount outstanding of
$900 million as of March 31, 2007) provide holders of the notes the right to
require the Company to repurchase all or any part of their notes at a purchase
price equal to 101% of the principal amount, plus accrued and unpaid interest,
upon a “change of control” (as defined in the indenture governing the notes).
The transaction contemplated by the Merger Agreement with affiliates of American
Real Estate Partners, L.P. would not constitute a change of control for these
purposes (Note 2, “Merger Agreement”). The indentures governing the Company’s
other senior notes do not contain a change of control repurchase
obligation.
The
Company’s senior notes also contain covenants restricting the ability of the
Company and its subsidiaries to incur liens and to enter into sale and leaseback
transactions. As of March 31, 2007, the Company was in compliance with all
covenants and other requirements set forth in its senior notes.
All of
the Company’s senior notes are guaranteed by the same subsidiaries that
guarantee the Primary Credit Facility. In the event that any such subsidiary
ceases to be a guarantor under the Primary Credit Facility, such subsidiary
will
be released as a guarantor of the senior notes. The Company’s obligations under
the senior notes are not secured by the pledge of the assets or capital stock
of
any of its subsidiaries.
(10) Pension and
Other
Postretirement Benefit Plans
Net Periodic
Benefit Cost
The
components of the Company’s net periodic benefit cost are shown below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Pension
|
|
Other
Postretirement
|
|
| |
|
Three
Months Ended
|
|
Three
Months Ended
|
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
|
March
31,
2007
|
|
April
1,
2006
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
8.0
|
|
$
|
12.6
|
|
$
|
2.9
|
|
$
|
3.2
|
|
|
Interest
cost
|
|
|
10.4
|
|
|
10.8
|
|
|
3.7
|
|
|
3.7
|
|
|
Expected
return on plan assets
|
|
|
(10.2
|
)
|
|
(9.7
|
)
|
|
—
|
|
|
—
|
|
|
Amortization
of actuarial loss
|
|
|
0.8
|
|
|
1.8
|
|
|
1.1
|
|
|
1.4
|
|
|
Amortization
of transition
obligation
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Amortization
of prior service cost
|
|
|
1.1
|
|
|
1.3
|
|
|
(0.9
|
)
|
|
(0.9
|
)
|
|
Curtailment
gain, net
|
|
|
(36.9
|
)
|
|
—
|
|
|
(13.4
|
)
|
|
—
|
|
|
Special
termination benefits
|
|
|
5.7
|
|
|
0.1
|
|
|
0.8
|
|
|
0.1
|
|
|
Net
periodic benefit cost (gain)
|
|
$
|
(21.1
|
)
|
$
|
16.9
|
|
$
|
(5.6
|
)
|
$
|
7.7
|
|
In the
first quarter of 2007, the Company recorded a pension plan curtailment gain
of
$36.4 million and an other postretirement benefit plan curtailment gain of
$14.7
million. The pension plan curtailment gain resulted from the suspension of
the
accrual of defined benefits related to the Company’s U.S. salaried defined
benefit pension plan as the Company elected to freeze its U.S. salaried defined
benefit plan effective December 31, 2006. The other postretirement benefit
plan
curtailment gain resulted from employee terminations associated with a facility
closure in 2006. As both curtailment gains were incurred subsequent to the
Company’s defined benefit plan measurement date of September 30, 2006, they were
recorded in the first quarter of 2007. The Company recognized additional net
pension and other postretirement benefit costs of $5.2 million and $1.3 million,
respectively, related to other restructuring actions and the divestiture of
the
Company’s North American interior business.
F-155
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(10) Pension and
Other
Postretirement Benefit Plans – (continued)
Contributions
Employer
contributions to the Company’s domestic and foreign pension plans for the three
months ended March 31, 2007, were approximately $9.5 million, in aggregate.
The
Company expects to contribute an additional $45 million to $50 million, in
aggregate, to its domestic and foreign pension portfolios in 2007.
(11) Cost of Sales
and
Selling, General and Administrative Expenses
Cost
of
sales includes material, labor and overhead costs associated with the
manufacture and distribution of the Company’s products. Distribution costs
include inbound freight costs, purchasing and receiving costs, inspection costs,
warehousing costs and other costs of the Company’s distribution network.
Selling, general and administrative expenses include selling, research and
development and administrative costs not directly associated with the
manufacture and distribution of the Company’s products.
(12) Other (Income)
Expense, Net
Other
(income) expense includes state and local non-income taxes, foreign exchange
gains and losses, fees associated with the Company’s asset-backed securitization
and factoring facilities, minority interests in consolidated subsidiaries,
equity in net income of affiliates, gains and losses on the sales of assets
and
other miscellaneous income and expense. A summary of other (income) expense,
net
is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
|
| |
|
|
|
|
|
|
|
|
Other
expense
|
|
$
|
28.6
|
|
$
|
18.4
|
|
|
Other
income
|
|
|
(3.6
|
)
|
|
(26.7
|
)
|
|
Other
(income) expense,
net
|
|
$
|
25.0
|
|
$
|
(8.3
|
)
|
For the
first quarter of 2007, other expense includes a loss of $3.9 million related
to
the acquisition of the minority interest in an affiliate. For the first quarter
of 2006, other income includes gains of $25.9 million related to the sales
of
the Company’s interests in two affiliates.
(13) Income
Taxes
The
provision for income taxes was $32.4 million in the first quarter of 2007,
representing an effective tax rate of 39.4%, as compared to a benefit for income
taxes of $0.2 million, representing an effective tax rate of negative 1.4%,
in
the first quarter of 2006. The provision for income taxes in the first quarter
of 2007 was impacted by costs of $33.8 million related to the divestiture of
the
Company’s interior business, for a significant portion of which no tax benefit
was provided as it was incurred in the United States. This was offset by the
impact of the U.S. salaried pension plan curtailment gain of $36.4 million,
for
which no tax expense was provided. The provision for income taxes in the first
quarter of 2007 was also impacted by a portion of the Company’s restructuring
charges and costs related to the Merger Agreement, for which no tax benefit
was
provided as the charges were incurred in certain countries for which no tax
benefit is likely to be realized due to a history of operating losses in those
countries. Excluding these items, the effective tax rate in the first quarter
of
2007 approximated the U.S. federal statutory income tax rate of 35% adjusted
for
income taxes on foreign earnings, losses and remittances, foreign valuation
allowances, the U.S. valuation allowance, tax credits, income tax incentives
and
other permanent items. Further, the Company’s current and future provision for
income taxes is significantly impacted by the recognition of valuation
allowances in certain countries, particularly the United States. The Company
intends to maintain these allowances until it is more likely than not that
the
deferred tax assets will be realized. The Company’s future income tax expense
will include no tax benefit with respect to U.S. losses and no tax expense
with
respect to U.S. income until the allowance is eliminated. Accordingly, income
taxes are impacted by the U.S. valuation allowance and the mix of earnings
among
jurisdictions. The benefit for income taxes in the first quarter of 2006
includes a one-time tax
F-156
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(13) Income Taxes
–
(continued)
benefit of $8.6 million
resulting from a tax audit resolution and court rulings in certain
jurisdictions. The benefit for income taxes in the first quarter of 2006 was
also impacted by gains on the sales of the Company’s interests in two U.S.
affiliates, for which no tax expense was recognized, and a portion of the
Company’s restructuring charges, for which no tax benefit was provided as the
charges were incurred in certain countries for which no tax benefit is likely
to
be realized due to a history of operating losses in those countries.
On
January 1, 2007 the Company adopted the provisions of Interpretation (“FIN”) No.
48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB
Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income
taxes by establishing minimum standards for the recognition and measurement
of
tax positions taken or expected to be taken in a tax return. Under the
requirements of FIN 48, the Company must review all of its tax positions and
make a determination as to whether its position is more-likely-than-not to
be
sustained upon examination by regulatory authorities. If a tax position meets
the more-likely-than-not standard, then the related tax benefit is measured
based on the cumulative probability analysis of the amount that is
more-likely-than-not to be realized upon ultimate settlement or disposition
of
the underlying issue.
The
Company recognized the cumulative impact of adopting FIN 48 as a $4.5 million
decrease to its liability for unrecognized tax benefits with a corresponding
decrease to the Company’s retained deficit balance as of January 1, 2007.
As of January 1, 2007, the Company’s gross unrecognized tax benefits were $148.6
million (including interest and penalties), of which $114.9 million, if
recognized, would affect the Company’s effective tax rate. The gross
unrecognized tax benefits differ from the amount that would affect the effective
tax rate due primarily to the impact of the valuation allowance.
The
Company continues to recognize both interest and penalties accrued with respect
to unrecognized tax benefits as income tax expense. As of January 1, 2007 the
Company had recorded reserves for the payment of interest and penalties in
the
amount of $28.6 million. During the three months ended March 31, 2007, the
Company recognized an increase in liability for gross interest and penalties
of
approximately $4.4 million.
The
Company operates in multiple jurisdictions throughout the world, and its tax
returns are periodically audited or subject to review by both domestic and
foreign tax authorities. The Company considers its significant tax jurisdictions
to include Canada, Germany, Hungary, Mexico, Poland, Spain and the United
States. The Company or its subsidiaries remain subject to income tax examination
in certain U.S. state and local jurisdictions for years after 1998, in Germany,
Mexico and Poland for years after 2000, in Spain for years after 2001 and in
the
U.S. federal jurisdiction, Canada and Hungary for years after 2002.
(14) Net Income Per
Share
Basic
net income per share is computed using the weighted average common shares
outstanding during the period. Diluted net income per share includes the
dilutive effect of common stock equivalents using the average share price during
the period, as well as shares issuable upon conversion of the Company’s
outstanding zero-coupon convertible senior notes. A summary of shares
outstanding is shown below:
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
| |
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
|
|
|
76,410,482
|
|
|
67,216,992
|
|
Dilutive
effect of common stock equivalents
|
|
|
1,579,369
|
|
|
724,075
|
|
Diluted
shares outstanding
|
|
|
77,989,851
|
|
|
67,941,067
|
|
Diluted
net income per share
|
|
$
|
0.64
|
|
$
|
0.26
|
Shares
issuable upon conversion of the Company’s outstanding zero-coupon convertible
debt and the effect of certain common stock equivalents, including options,
restricted stock units, performance units and stock appreciation rights, were
excluded from the computation of diluted shares outstanding for the three months
ended
F-157
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(14) Net Income Per
Share – (continued)
March 31, 2007 and April
1, 2006, as inclusion would have resulted in antidilution. A summary of these
options and their exercise prices, as well as these restricted stock units
and
stock appreciation rights, is shown below:
|
|
|
|
|
|
| |
|
Three
Months Ended
|
| |
|
March
31, 2007
|
|
April
1, 2006
|
| |
|
|
|
|
|
Options
|
|
|
|
|
|
Antidilutive
options
|
|
2,236,780
|
|
2,907,005
|
|
Exercise
price
|
|
$35.93 – $55.33
|
|
$22.12 – $55.33
|
|
Restricted
stock units
|
|
—
|
|
821,237
|
|
Performance
units
|
|
—
|
|
48,563
|
|
Stock
appreciation
rights
|
|
642,285
|
|
1,138,114
|
(15) Comprehensive
Income
Comprehensive
income is defined as all changes in a Company’s net assets except changes
resulting from transactions with stockholders. It differs from net income in
that certain items currently recorded in equity are included in comprehensive
income. A summary of comprehensive income is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
|
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
|
| |
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
49.9
|
|
$
|
17.9
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Derivative
instruments and hedging
activities
|
|
|
(5.0
|
)
|
|
(5.8
|
)
|
|
Foreign
currency translation adjustment
|
|
|
13.5
|
|
|
15.6
|
|
|
Other
comprehensive income
|
|
|
8.5
|
|
|
9.8
|
|
|
Comprehensive
income
|
|
$
|
58.4
|
|
$
|
27.7
|
|
(16) Pre-Production
Costs Related to Long-Term Supply Agreements
The
Company incurs pre-production engineering, research and development (“ER&D”)
and tooling costs related to the products produced for its customers under
long-term supply agreements. The Company expenses all pre-production ER&D
costs for which reimbursement is not contractually guaranteed by the customer.
In addition, the Company expenses all pre-production tooling costs related
to
customer-owned tools for which reimbursement is not contractually guaranteed
by
the customer or for which the customer has not provided a non-cancelable right
to use the tooling. During the first quarters of 2007 and 2006, the Company
capitalized $22.4 million and $38.8 million, respectively, of pre-production
ER&D costs for which reimbursement is contractually guaranteed by the
customer. In addition, during the first quarters of 2007 and 2006, the Company
capitalized $42.5 million and $173.9 million, respectively, of pre-production
tooling costs related to customer-owned tools for which reimbursement is
contractually guaranteed by the customer or for which the customer has provided
a non-cancelable right to use the tooling. These amounts are included in other
current and long-term assets in the condensed consolidated balance sheets.
During the first quarters of 2007 and 2006, the Company collected $91.6 million
and $298.5 million, respectively, of cash related to ER&D and tooling costs.
During
the first quarter of 2007, the Company did not capitalize any Company-owned
tooling. During the first quarter of 2006, the Company capitalized $1.4 million
of Company-owned tooling. Amounts capitalized as Company-owned tooling are
included in property, plant and equipment, net in the condensed consolidated
balance sheets.
F-158
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(16) Pre-Production
Costs Related to Long-Term Supply Agreements – (continued)
The
classification of recoverable customer engineering and tooling is shown below
(in millions):
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
December
31,
2006
|
| |
|
|
|
|
|
|
|
Current
|
|
$
|
61.4
|
|
$
|
87.7
|
|
Long-term
|
|
|
112.8
|
|
|
116.2
|
|
Recoverable
customer engineering and
tooling
|
|
$
|
174.2
|
|
$
|
203.9
|
Gains
and
losses related to ER&D and tooling projects are reviewed on an aggregated
program basis. Net gains on projects are deferred and recognized over the life
of the long-term supply agreement. Net losses on projects are recognized as
costs are incurred.
(17) Legal and Other
Contingencies
As of
March 31, 2007 and December 31, 2006, the Company had recorded reserves for
pending legal disputes, including commercial disputes and other matters, of
$21.3 million and $18.0 million, respectively. Such reserves reflect amounts
recognized in accordance with accounting principles generally accepted in the
United States and typically exclude the cost of legal representation. Product
warranty liabilities are recorded separately from legal liabilities, as
described below.
Commercial
Disputes
The
Company is involved from time to time in legal proceedings and claims,
including, without limitation, commercial or contractual disputes with its
suppliers, competitors and customers. These disputes vary in nature and are
usually resolved by negotiations between the parties.
On
January 29, 2002, Seton Company (“Seton”), one of the Company’s leather
suppliers, filed a suit alleging that the Company had breached a purported
agreement to purchase leather from Seton for seats for the life of the General
Motors GMT 800 program. Seton filed the lawsuit in the U.S. District Court
for
the Eastern District of Michigan seeking compensatory and exemplary damages
totaling approximately $96.5 million, plus interest, on breach of contract
and
promissory estoppel claims. In May 2005, this case proceeded to trial, and
the
jury returned a $30.0 million verdict against the Company. On September 27,
2005, the Court denied the Company’s post-trial motions challenging the judgment
and granted Seton’s motion to award prejudgment interest in the amount of
approximately $4.7 million. On October 4, 2006, the Sixth Circuit Court of
Appeals affirmed the judgment of the trial court. On October 18, 2006, the
Company filed a Petition for Rehearing with the court which was denied on
November 16, 2006. On December 7, 2006, the Court of Appeals issued a mandate
indicating that the order affirming the judgment was final. In December 2006,
the Company paid the principal and all remaining interest on the judgment.
On
January 26, 2004, the Company filed a patent infringement lawsuit against
Johnson Controls Inc. and Johnson Controls Interiors LLC (together, “JCI”) in
the U.S. District Court for the Eastern District of Michigan alleging that
JCI’s
garage door opener products infringed certain of the Company’s radio frequency
transmitter patents. JCI counterclaimed seeking a declaratory judgment that
the
subject patents are invalid and unenforceable, and that JCI is not infringing
these patents. JCI also has filed motions for summary judgment asserting that
its garage door opener products do not infringe the Company’s patents and that
one of the Company’s patents is invalid and unenforceable. The Company is
vigorously pursuing its claims against JCI. A trial date has not been
scheduled.
After
the
Company filed its patent infringement action against JCI, affiliates of JCI
sued
one of the Company’s vendors and certain of the vendor’s employees in Ottawa
County, Michigan Circuit Court on July 8, 2004, alleging misappropriation of
trade secrets and disclosure of confidential information. The suit alleges
that
the defendants misappropriated and shared with the Company trade secrets
involving JCI’s universal garage door opener product. JCI seeks to enjoin the
defendants from selling or attempting to sell a competing product, as well
as
compensatory
F-159
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
damages and attorney fees.
The Company is not a defendant in this lawsuit; however, the agreements between
the Company and the defendants contain customary indemnification provisions.
The
Company does not believe that its garage door opener product benefited from
any
allegedly misappropriated trade secrets or technology. However, JCI has sought
discovery of certain information which the Company believes is confidential
and
proprietary, and the Company has intervened in the case as a non-party for
the
limited purpose of protecting its rights with respect to JCI’s discovery
efforts. The trial has been rescheduled to October 2007.
On June
13, 2005, The Chamberlain Group (“Chamberlain”) filed a lawsuit against the
Company and Ford Motor Company (“Ford”) in the Northern District of Illinois
alleging patent infringement. Two counts were asserted against the Company
and
Ford based upon two Chamberlain rolling-code garage door opener system patents.
Two additional counts were asserted against Ford only (not the Company) based
upon different Chamberlain patents. The Chamberlain lawsuit was filed in
connection with the marketing of the Company’s universal garage door opener
system, which competes with a product offered by JCI. JCI obtained technology
from Chamberlain to operate its product. In October 2005, JCI joined the lawsuit
as a plaintiff along with Chamberlain. In October 2006, Ford was dismissed
from
the suit. JCI and Chamberlain have filed a motion for a preliminary injunction,
and on March 30, 2007, the Court issued a decision granting plaintiffs’ motion
for a preliminary injunction but did not enter an injunction at that time.
In
response, the Company filed a motion seeking to stay the effectiveness of any
injunction that may be entered and General Motors Corporation (“GM”) moved to
intervene. On April 25, 2007, the court granted GM’s motion to intervene,
entered a preliminary injunction order that exempts the Company’s existing GM
programs and denied the Company’s motion to stay the effectiveness of the
preliminary injunction order pending appeal. On April 27, 2007, the Company
filed its notice of appeal from the granting of the preliminary injunction
and
the denial of its motion to stay its effectiveness. No trial date has been
set
by the district court.
Product Liability
Matters
In the
event that use of the Company’s products results in, or is alleged to result in,
bodily injury and/or property damage or other losses, the Company may be subject
to product liability lawsuits and other claims. In addition, the Company is
a
party to warranty-sharing and other agreements with its customers relating
to
its products. These customers may pursue claims against the Company for
contribution of all or a portion of the amounts sought in connection with
product liability and warranty claims. The Company can provide no assurances
that it will not experience material claims in the future or that it will not
incur significant costs to defend such claims. In addition, if any of the
Company’s products are, or are alleged to be, defective, the Company may be
required or requested by its customers to participate in a recall or other
corrective action involving such products. Certain of the Company’s customers
have asserted claims against the Company for costs related to recalls or other
corrective actions involving its products. In certain instances, the allegedly
defective products were supplied by tier II suppliers against whom the Company
has sought or will seek contribution. The Company carries insurance for certain
legal matters, including product liability claims, but such coverage may be
limited. The Company does not maintain insurance for product warranty or recall
matters.
The
Company records product warranty liabilities based on its individual customer
agreements. Product warranty liabilities are recorded for known warranty issues
when amounts related to such issues are probable and reasonably estimable.
In
certain product liability and warranty matters, the Company may seek recovery
from its suppliers that supply materials or services included within the
Company’s products that are associated with the related claims.
F-160
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
A
summary of the changes in product warranty liabilities for the three months
ended March 31, 2007, is shown below (in millions):
|
|
|
|
|
|
|
Balance
as of January 1, 2007
|
|
$
|
40.9
|
|
|
Expense
|
|
|
1.4
|
|
|
Income
related to favorable
settlements
|
|
|
(2.7
|
)
|
|
Settlements
|
|
|
(5.8
|
)
|
|
Foreign
currency translation and other
|
|
|
(1.2
|
)
|
|
Balance
as of March 31, 2007
|
|
$
|
32.6
|
|
Environmental
Matters
The
Company is subject to local, state, federal and foreign laws, regulations and
ordinances which govern activities or operations that may have adverse
environmental effects and which impose liability for clean-up costs resulting
from past spills, disposals or other releases of hazardous wastes and
environmental compliance. The Company’s policy is to comply with all applicable
environmental laws and to maintain an environmental management program based
on
ISO 14001 to ensure compliance. However, the Company currently is, has been
and
in the future may become the subject of formal or informal enforcement actions
or procedures.
The
Company has been named as a potentially responsible party at several third-party
landfill sites and is engaged in the cleanup of hazardous waste at certain
sites
owned, leased or operated by the Company, including several properties acquired
in its 1999 acquisition of UT Automotive, Inc. (“UT Automotive”). Certain
present and former properties of UT Automotive are subject to environmental
liabilities which may be significant. The Company obtained agreements and
indemnities with respect to certain environmental liabilities from United
Technologies Corporation (“UTC”) in connection with its acquisition of UT
Automotive. UTC manages and directly funds these environmental liabilities
pursuant to its agreements and indemnities with the Company.
As of
March 31, 2007 and December 31, 2006, the Company had recorded reserves for
environmental matters of $2.8 million and $3.2 million, respectively. While
the
Company does not believe that the environmental liabilities associated with
its
current and former properties will have a material adverse effect on its
business, consolidated financial position, results of operations or cash flows,
no assurances can be given in this regard.
One of
the Company’s subsidiaries and certain predecessor companies were named as
defendants in an action filed by three plaintiffs in August 2001 in the Circuit
Court of Lowndes County, Mississippi, asserting claims stemming from alleged
environmental contamination caused by an automobile parts manufacturing plant
located in Columbus, Mississippi. The plant was acquired by the Company as
part
of its acquisition of UT Automotive in May 1999 and sold almost immediately
thereafter, in June 1999, to Johnson Electric Holdings Limited (“Johnson
Electric”). In December 2002, 61 additional cases were filed by approximately
1,000 plaintiffs in the same court against the Company and other defendants
relating to similar claims. In September 2003, the Company was dismissed as
a
party to these cases. In the first half of 2004, the Company was named again
as
a defendant in these same 61 additional cases and was also named in five new
actions filed by approximately 150 individual plaintiffs related to alleged
environmental contamination from the same facility. The plaintiffs in these
actions are persons who allegedly were either residents and/or owned property
near the facility or worked at the facility. In November 2004, two additional
lawsuits were filed by 28 plaintiffs (individuals and organizations), alleging
property damage as a result of the alleged contamination. Each of these
complaints seeks compensatory and punitive damages.
All of
the plaintiffs subsequently dismissed their claims for health effects and
personal injury damages and the cases proceeded with approximately 280
plaintiffs alleging property damage claims only. In March 2005, the venue for
these lawsuits was transferred from Lowndes County, Mississippi, to Lafayette
County, Mississippi. In April 2005, certain plaintiffs filed an amended
complaint alleging negligence, nuisance, intentional tort and conspiracy claims
and seeking compensatory and punitive damages.
F-161
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
In the
first quarter of 2006, co-defendant UTC entered into a settlement agreement
with
the plaintiffs. During the third quarter of 2006, the Company and co-defendant
Johnson Electric entered into a settlement memorandum with the plaintiffs’
counsel outlining the terms of a global settlement, including establishing
the
requisite percentage of executed settlement agreements and releases that were
required to be obtained from the individual plaintiffs for a final settlement
to
proceed. Since November 2006, the Company has reached a final settlement with
respect to approximately 85% of the plaintiffs involving aggregate payments
of
$875,000 and is in the process of attempting to resolve the remaining
claims.
UTC,
the
former owner of UT Automotive, and Johnson Electric have each sought
indemnification for losses associated with the Mississippi claims from the
Company under the respective acquisition agreements, and the Company has claimed
indemnification from them under the same agreements. In the first quarter of
2006, UTC filed a lawsuit against the Company in the State of Connecticut
Superior Court, District of Hartford, seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses UTC paid in settling and defending the Columbus, Mississippi
lawsuits. In the second quarter of 2006, the Company filed a motion to dismiss
this matter and filed a separate action against UTC and Johnson Electric in
the
State of Michigan, Circuit Court for the County of Oakland, seeking declaratory
relief and indemnification from UTC or Johnson Electric for the settlement
amount, attorney fees, costs and expenses the Company has paid, or will pay,
in
settling and defending the Columbus, Mississippi lawsuits. During the fourth
quarter of 2006, UTC agreed to dismiss the lawsuit filed in the State of
Connecticut Superior Court, District of Hartford and agreed to proceed with
the
lawsuit filed in the State of Michigan, Circuit Court for the County of Oakland.
During the first quarter of 2007, Johnson Electric and UTC each filed
counter-claims against the Company seeking declaratory relief and
indemnification from the Company for the settlement amount, attorney fees,
costs
and expenses each has paid or will pay in settling and defending the Columbus,
Mississippi lawsuits. To date, no company admits to, or has been found to have,
an obligation to fully defend and indemnify any other. The Company intends
to
vigorously pursue its claims against UTC and Johnson Electric and believes
that
it is entitled to indemnification from either UTC or Johnson Electric for its
losses. However, the ultimate outcome of these matters is unknown.
Other
Matters
In
January 2004, the Securities and Exchange Commission (the “SEC”) commenced an
informal inquiry into the Company’s September 2002 amendment of its 2001 Form
10-K. The amendment was filed to report the Company’s employment of relatives of
certain of its directors and officers and certain related party transactions.
The SEC’s inquiry does not relate to the Company’s consolidated financial
statements. In February 2005, the staff of the SEC informed the Company that
it
proposed to recommend to the SEC that it issue an administrative “cease and
desist” order as a result of the Company’s failure to disclose the related party
transactions in question prior to the amendment of its 2001 Form 10-K. The
Company expects to consent to the entry of the order as part of a settlement
of
this matter.
In April
2006, a former employee of the Company filed a purported class action lawsuit
in
the U.S. District Court for the Eastern District of Michigan against the
Company, members of its Board of Directors, members of its Employee Benefits
Committee (the “EBC”) and certain members of its human resources personnel
alleging violations of the Employment Retirement Income Security Act (“ERISA”)
with respect to the Company’s retirement savings plans for salaried and hourly
employees. In the second quarter of 2006, the Company was served with three
additional purported class action ERISA lawsuits, each of which contained
similar allegations against the Company, members of its Board of Directors,
members of its EBC and certain members of its senior management and its human
resources personnel. At the end of the second quarter of 2006, the court entered
an order consolidating these four lawsuits as In re: Lear Corp. ERISA
Litigation. During the third quarter of 2006, plaintiffs filed their
consolidated complaint, which alleges breaches of fiduciary duties substantially
similar to those alleged in the four individually filed lawsuits. The
consolidated complaint continues to name certain current and former members
of
the Board of Directors and the EBC and certain members of senior management
and
adds certain other current and former members of the EBC. The consolidated
complaint generally alleges that the defendants breached their
F-162
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
fiduciary duties to plan
participants in connection with the administration of the Company’s retirement
savings plans for salaried and hourly employees. The fiduciary duty claims
are
largely based on allegations of breaches of the fiduciary duties of prudence
and
loyalty and of over-concentration of plan assets in the Company’s common stock.
The plaintiffs purport to bring these claims on behalf of the plans and all
persons who were participants in or beneficiaries of the plans from October
21,
2004, to the present and seek to recover losses allegedly suffered by the plans.
The complaints do not specify the amount of damages sought. During the fourth
quarter of 2006, the defendants filed a motion to dismiss all defendants and
all
counts in the consolidated complaint. The filings related to the motion to
dismiss have been made, but the Court has not yet ruled on the motion. No
determination has been made that a class action can be maintained, and there
have been no decisions on the merits of the cases. The Company intends to
vigorously defend the consolidated lawsuit.
On March
1, 2007, a purported class action ERISA lawsuit was filed on behalf of
participants in the Company’s 401(k) plans. The lawsuit was filed in the United
States District Court for the Eastern District of Michigan and alleges that
the
Company, members of its Board of Directors, and members of the Employee Benefits
Committee (collectively, the “Lear Defendants”) breached their fiduciary duties
to the participants in the 401(k) plans by approving the Agreement and Plan
of
Merger (the “Merger Agreement”) with AREP Car Holdings Corp. and AREP Car
Acquisition Corp. (collectively the “AREP Entities”). On March 8, 2007, the
plaintiff filed a motion for expedited discovery to support a potential motion
for preliminary injunction to enjoin the Merger Agreement. The Lear Defendants
filed an opposition to the motion for expedited discovery on March 22, 2007.
Plaintiff filed a reply on April 11, 2007. On April 18, 2007, the Judge denied
plaintiff’s motion for expedited discovery. On March 15, 2007, the plaintiff
requested that the case be reassigned to the Judge overseeing In re: Lear
Corp. ERISA Litigation (described above). The Lear Defendants have opposed
the reassignment. On March 22, 2007, the Lear Defendants filed a motion to
dismiss all counts of the complaint against the Lear Defendants. Plaintiff
also
filed a motion for preliminary injunction and expedited briefing schedule on
April 10, 2007. The Lear Defendants’ opposition brief is due May 10, 2007. The
Court has not set a hearing date on either of these motions.
Between
February 9, 2007 and February 21, 2007, certain stockholders filed six purported
class action lawsuits against the Company, certain members of the Company’s
Board of Directors and American Real Estate Partners, L.P. and certain of its
affiliates (collectively, “AREP”). Three of the lawsuits were filed in the
Delaware Court of Chancery and have since been consolidated into a single
action. Three of the lawsuits were filed in Michigan Circuit Court; those too
have since been consolidated into a single action. The class action complaints,
which are substantially similar, generally allege that the Merger Agreement
unfairly limits the process of selling the Company and that certain members
of
the Company’s Board of Directors have breached their fiduciary duties in
connection with the Merger Agreement and have acted with conflicts of interest
in approving the Merger Agreement. The lawsuits seek to enjoin the merger,
to
invalidate the Merger Agreement and to enjoin the operation of certain
provisions of the Merger Agreement, a declaration that certain members of the
Company’s Board of Directors breached their fiduciary duties in approving the
Merger Agreement and an award of unspecified damages or rescission in the event
that the proposed merger with AREP is completed. On February 23, 2007, the
plaintiffs in the consolidated Delaware action filed a consolidated amended
complaint, a motion for expedited proceedings and a motion to preliminarily
enjoin the transactions contemplated by the Merger Agreement. On March 27,
2007,
the plaintiffs in the consolidated Delaware action filed a consolidated second
amended complaint. On May 9, 2007, the court overseeing the consolidated
Michigan action will hear the Company’s motion to dismiss that action. A hearing
on the plaintiffs’ motion for preliminary injunction in the consolidated
Delaware action is scheduled for June 6, 2007, and a trial is scheduled for
the
fourth quarter of 2007. The Company believes that the lawsuits are without
merit
and intends to defend against them vigorously.
Although
the Company records reserves for legal, product warranty and environmental
matters in accordance with SFAS No. 5, “Accounting for Contingencies,” the
outcomes of these matters are inherently uncertain. Actual results may differ
significantly from current estimates.
The
Company is involved in certain other legal actions and claims arising in the
ordinary course of business, including, without limitation, commercial disputes,
intellectual property matters, personal injury claims, tax claims
F-163
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(17) Legal and Other
Contingencies – (continued)
and employment matters.
Although the outcome of any legal matter cannot be predicted with certainty,
the
Company does not believe that any of these other legal proceedings or matters
in
which the Company is currently involved, either individually or in the
aggregate, will have a material adverse effect on its business, consolidated
financial position, results of operations or cash flows.
(18) Segment
Reporting
Historically,
the Company has had three reportable operating segments: seating, electronic
and
electrical and interior. The seating segment includes seat systems and
components thereof. The electronic and electrical segment includes electronic
products and electrical distribution systems, primarily wire harnesses and
junction boxes, interior control and entertainment systems and wireless systems.
The interior segment includes instrument panels and cockpit systems, headliners
and overhead systems, door panels, flooring and acoustic systems and other
interior products (Note 3, “Divestiture of Interior Business”). The Other
category includes unallocated costs related to corporate headquarters,
geographic headquarters and the elimination of intercompany activities, none
of
which meets the requirements of being classified as an operating segment.
The
Company evaluates the performance of its operating segments based primarily
on
(i) revenues from external customers, (ii) income (loss) before loss on
divestiture of interior business, interest expense, other (income) expense,
provision (benefit) for income taxes and cumulative effect of a change in
accounting principle (“segment earnings”) and (iii) cash flows, being defined as
segment earnings less capital expenditures plus depreciation and amortization.
A
summary of revenues from external customers and other financial information
by
reportable operating segment is shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended March 31,
2007
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Interior
|
|
Other
|
|
Consolidated
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
2,994.2
|
|
$
|
788.7
|
|
$
|
623.2
|
|
$
|
—
|
|
$
|
4,406.1
|
|
Segment
earnings
|
|
|
197.1
|
|
|
17.5
|
|
|
8.8
|
|
|
(39.0
|
)
|
|
184.4
|
|
Depreciation
and amortization
|
|
|
40.8
|
|
|
28.3
|
|
|
1.3
|
|
|
4.1
|
|
|
74.5
|
|
Capital
expenditures
|
|
|
20.2
|
|
|
8.6
|
|
|
0.1
|
|
|
0.3
|
|
|
29.2
|
|
Total
assets
|
|
|
4,371.0
|
|
|
2,277.7
|
|
|
134.7
|
|
|
877.6
|
|
|
7,661.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended April 1, 2006
|
| |
|
Seating
|
|
Electronic
and
Electrical
|
|
Interior
|
|
Other
|
|
Consolidated
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
2,992.5
|
|
$
|
787.3
|
|
$
|
898.7
|
|
$
|
—
|
|
$
|
4,678.5
|
|
Segment
earnings
|
|
|
125.9
|
|
|
53.1
|
|
|
(59.5
|
)
|
|
(65.3
|
)
|
|
54.2
|
|
Depreciation
and amortization
|
|
|
40.4
|
|
|
26.8
|
|
|
24.8
|
|
|
5.8
|
|
|
97.8
|
|
Capital
expenditures
|
|
|
36.8
|
|
|
15.7
|
|
|
33.1
|
|
|
7.0
|
|
|
92.6
|
|
Total
assets
|
|
|
4,170.6
|
|
|
2,178.1
|
|
|
1,511.1
|
|
|
621.5
|
|
|
8,481.3
|
For the
three months ended March 31, 2007, segment earnings include restructuring
charges of ($4.7) million, $17.9 million and $0.4 million in the seating and
electronic and electrical segments and in the other category, respectively.
For
the three months ended April 1, 2006, segment earnings include restructuring
charges of $15.1 million, $2.0 million and $5.8 million in the seating,
electronic and electrical and interior segments, respectively (Note 5,
“Restructuring”).
F-164
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(18) Segment Reporting
– (continued)
A
reconciliation of consolidated segment earnings to consolidated income before
provision (benefit) for income taxes and cumulative effect of a change in
accounting principle is shown below (in millions):
|
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
|
|
| |
|
March 31,
2007
|
|
April 1,
2006
|
|
| |
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
184.4
|
|
$
|
54.2
|
|
|
Loss
on divestiture of Interior
business
|
|
|
25.6
|
|
|
—
|
|
|
Interest
expense
|
|
|
51.5
|
|
|
47.7
|
|
|
Other
(income) expense, net
|
|
|
25.0
|
|
|
(8.3
|
)
|
|
Income
before provision (benefit) for income taxes and cumulative
effect of a
change in accounting principle
|
|
$
|
82.3
|
|
$
|
14.8
|
|
(19) Financial
Instruments
Certain
of the Company’s European and Asian subsidiaries periodically factor their
accounts receivable with financial institutions. Such receivables are factored
without recourse to the Company and are excluded from accounts receivable in
the
condensed consolidated balance sheets. As of March 31, 2007 and December 31,
2006, the amount of factored receivables was $219.9 million and $256.3 million,
respectively. The Company cannot provide any assurances that these factoring
facilities will be available or utilized in the future.
Asset-Backed
Securitization Facility
The
Company and several of its U.S. subsidiaries sell certain accounts receivable
to
a wholly-owned, consolidated, bankruptcy-remote special purpose corporation
(Lear ASC Corporation) under an asset-backed securitization facility (the “ABS
facility”). In turn, Lear ASC Corporation transfers undivided interests in up to
$150 million of the receivables to bank-sponsored commercial-paper conduits.
As
of March 31, 2007 and December 31, 2006, accounts receivable totaling $445.4
million and $568.6 million, respectively, had been transferred to Lear ASC
Corporation, but no undivided interests in the receivables were transferred
to
the conduits. As such, these retained interests are included in accounts
receivable in the condensed consolidated balance sheets as of March 31, 2007
and
December 31, 2006. In the first quarter of 2006, a discount on the sale of
receivables of $1.6 million was recognized and is reflected in other (income)
expense, net in the condensed consolidated statement of income.
The
Company retains a subordinated ownership interest in the pool of receivables
sold to Lear ASC Corporation. This retained interest is recorded at fair value,
which is generally based on a discounted cash flow analysis. The Company
continues to service the transferred receivables for an annual servicing fee.
The conduit investors and Lear ASC Corporation have no recourse to the Company
or its subsidiaries for the failure of the accounts receivable obligors to
pay
timely on the accounts receivable.
F-165
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(19) Financial
Instruments – (continued)
The
following table summarizes certain cash flows received from and paid to Lear
ASC
Corporation (in millions):
|
|
|
|
|
|
|
|
| |
|
Three
Months Ended
|
| |
|
March
31,
2007
|
|
April
1,
2006
|
| |
|
|
|
|
|
|
|
Proceeds
from collections reinvested in
securitizations
|
|
$
|
932.7
|
|
$
|
1,071.6
|
|
Servicing
fees received
|
|
|
1.2
|
|
|
1.5
|
Derivative
Instruments and Hedging Activities
Forward
foreign exchange, futures and option contracts — The Company uses forward
foreign exchange, futures and option contracts to reduce the effect of
fluctuations in foreign exchange rates on short-term, foreign currency
denominated intercompany transactions and other known foreign currency
exposures. Gains and losses on the derivative instruments are intended to offset
gains and losses on the hedged transaction in an effort to reduce the earnings
volatility resulting from fluctuations in foreign exchange rates. The principal
currencies hedged by the Company include the Mexican peso and the Hungarian
forint, as well as the Euro and other European currencies. Forward foreign
exchange, futures and option contracts are accounted for as cash flow hedges
when the hedged item is a forecasted transaction or the variability of cash
flows to be received or paid related to a recognized asset or liability. As
of
March 31, 2007, contracts designated as cash flow hedges with $380.4 million
of
notional amount were outstanding with maturities of less than nine months.
As of
March 31, 2007, the fair market value of these contracts was approximately
$9.4
million. As of March 31, 2007, other foreign currency derivative contracts
that
did not qualify for hedge accounting with $439.8 million of notional amount
were
outstanding. These foreign currency derivative contracts consist principally
of
cash transactions between three and thirty days, hedges of intercompany loans
and hedges of certain other balance sheet exposures. As of March 31, 2007,
the
fair market value of these contracts was approximately $1.6 million.
Interest
rate swap contracts — The Company uses interest rate swap contracts to manage
its exposure to fluctuations in interest rates. Interest rate swap contracts
which fix the interest payments of certain variable rate debt instruments or
fix
the market rate component of anticipated fixed rate debt instruments are
accounted for as cash flow hedges. Interest rate swap contracts which hedge
the
change in fair market value of certain fixed rate debt instruments are accounted
for as fair value hedges. As of March 31, 2007, contracts representing $800.0
million of notional amount were outstanding with maturity dates of August 2007
through September 2011. All of these contracts modify the variable rate
characteristics of the Company’s variable rate debt instruments, which are
generally set at three-month LIBOR rates. These contracts convert variable
rate
obligations into fixed rate obligations with a weighted average interest rate
of
4.902%. The fair market value of all outstanding interest rate swap contracts
is
subject to changes in value due to changes in interest rates. As of March 31,
2007, the fair market value of these contracts was approximately negative $5.0
million.
Commodity
swap contracts — The Company uses derivative instruments including financially
settled forward, swap and option contracts to manage its exposure to
fluctuations in certain commodity prices. All derivative instruments are
currently designated as cash flow hedges, as the hedged item is a forecasted
transaction. Gains and losses on the derivative instruments are intended to
offset gains and losses on the hedged transaction in an effort to reduce the
earnings volatility resulting from fluctuations in commodity prices. As of
March
31, 2007, the fair market value of these commodity instruments was $1.1 million
with maturity dates through December 2008.
As of
March 31, 2007 and December 31, 2006, net gains of approximately $9.8 million
and $14.7 million, respectively, related to derivative instruments and hedging
activities were recorded in accumulated other comprehensive loss. In the three
months ended March 31, 2007 and April 1, 2006, net gains of $3.6 million and
$1.6 million, respectively, related to the Company’s hedging activities were
reclassified from accumulated other comprehensive loss into earnings. During
the
twelve month period ending March 29, 2008, the Company expects to reclassify
into earnings net gains of approximately $11.5 million recorded in accumulated
other comprehensive loss.
F-166
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(19) Financial
Instruments – (continued)
Such gains will be
reclassified at the time the underlying hedged transactions are realized. During
the three months ended March 31, 2007 and April 1, 2006, amounts recognized
in
the condensed consolidated statements of income related to changes in the fair
value of cash flow and fair value hedges excluded from the effectiveness
assessments and the ineffective portion of changes in the fair value of cash
flow and fair value hedges were not material.
Non-U.S.
dollar financing transactions — The Company designated its previously
outstanding Euro-denominated senior notes (Note 9, “Long-Term Debt”) as a net
investment hedge of long-term investments in its Euro-functional subsidiaries.
As of March 31, 2007, the amount recorded in accumulated other comprehensive
loss related to the effective portion of the net investment hedge of foreign
operations was approximately negative $148.0 million. Such amount will be
included in accumulated other comprehensive loss until the Company liquidates
its related net investment in its designated foreign operations.
(20) Accounting
Pronouncements
Financial
Instruments
The FASB
issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an
amendment of FASB Statements No. 133 and 140.” This statement resolves issues
related to the application of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” to beneficial interests in securitized
assets. The provisions of this statement are to be applied prospectively to
all
financial instruments acquired or issued during fiscal years beginning after
September 15, 2006. The effects of adoption were not significant.
The FASB
issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an
amendment of FASB Statement No. 140.” This statement requires that all servicing
assets and liabilities be initially measured at fair value. The provisions
of
this statement are to be applied prospectively to all servicing transactions
beginning after September 15, 2006. The effects of adoption were not
significant.
Fair Value
Measurements
The FASB
issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The provisions of this statement are to generally
be applied prospectively in fiscal years beginning after November 15, 2007.
The
Company is currently evaluating the impact of this statement on its financial
statements.
Pension and Other
Postretirement Benefits
The FASB
issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and
132(R).” The Company adopted the funded status recognition provisions of SFAS
No. 158 as of December 31, 2006.
This
statement also requires the measurement of defined benefit plan asset and
liabilities as of the annual balance sheet date. Currently, the Company measures
its plan assets and liabilities using an early measurement date of September
30,
as allowed by the original provisions of SFAS No. 87, “Employers’ Accounting for
Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions.” The measurement date provisions of SFAS No. 158 are
effective for fiscal years ending after December 15, 2008. The Company is
currently evaluating the measurement date provisions of this statement.
Fair Value
Option
The FASB
issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities – including an amendment of FASB Statement No. 115.” This statement
allows entities to measure eligible financial instruments and certain other
items at fair value that are not currently required to be measured at fair
value. The
F-167
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(20) Accounting
Pronouncements – (continued)
provisions of this statement
are effective as of the beginning of an entity’s first fiscal year beginning
after November 15, 2007. The Company is currently evaluating the impact of
this statement on its financial statements.
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March
31, 2007
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
guarantors
|
|
Eliminations
|
|
Consolidated
|
| |
|
(unaudited;
in millions)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
100.0
|
|
$
|
6.2
|
|
$
|
224.2
|
|
$
|
—
|
|
$
|
330.4
|
|
Accounts
receivable
|
|
|
26.5
|
|
|
333.9
|
|
|
2,052.3
|
|
|
—
|
|
|
2,412.7
|
|
Inventories
|
|
|
14.5
|
|
|
128.7
|
|
|
455.8
|
|
|
—
|
|
|
599.0
|
|
Current
assets of business held for sale
|
|
|
—
|
|
|
—
|
|
|
38.3
|
|
|
—
|
|
|
38.3
|
|
Other
|
|
|
33.8
|
|
|
19.8
|
|
|
264.0
|
|
|
—
|
|
|
317.6
|
|
Total
current assets
|
|
|
174.8
|
|
|
488.6
|
|
|
3,034.6
|
|
|
—
|
|
|
3,698.0
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
199.4
|
|
|
284.9
|
|
|
941.6
|
|
|
—
|
|
|
1,425.9
|
|
Goodwill,
net
|
|
|
454.5
|
|
|
551.1
|
|
|
1,001.0
|
|
|
—
|
|
|
2,006.6
|
|
Investments
in subsidiaries
|
|
|
3,890.6
|
|
|
2,343.1
|
|
|
—
|
|
|
(6,233.7
|
)
|
|
—
|
|
Other
|
|
|
237.8
|
|
|
24.4
|
|
|
268.3
|
|
|
—
|
|
|
530.5
|
|
Total
long-term assets
|
|
|
4,782.3
|
|
|
3,203.5
|
|
|
2,210.9
|
|
|
(6,233.7
|
)
|
|
3,963.0
|
| |
|
$
|
4,957.1
|
|
$
|
3,692.1
|
|
$
|
5,245.5
|
|
$
|
(6,233.7
|
)
|
$
|
7,661.0
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11.5
|
|
$
|
—
|
|
$
|
11.5
|
|
Accounts
payable and drafts
|
|
|
148.0
|
|
|
399.5
|
|
|
1,932.8
|
|
|
—
|
|
|
2,480.3
|
|
Accrued
liabilities
|
|
|
310.7
|
|
|
193.9
|
|
|
648.2
|
|
|
—
|
|
|
1,152.8
|
|
Current
liabilities of business held for sale
|
|
|
—
|
|
|
—
|
|
|
16.7
|
|
|
—
|
|
|
16.7
|
|
Current
portion of long-term debt
|
|
|
6.0
|
|
|
—
|
|
|
20.4
|
|
|
—
|
|
|
26.4
|
|
Total
current liabilities
|
|
|
464.7
|
|
|
593.4
|
|
|
2,629.6
|
|
|
—
|
|
|
3,687.7
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,411.2
|
|
|
—
|
|
|
20.6
|
|
|
—
|
|
|
2,431.8
|
|
Long-term
liabilities of business held for sale
|
|
|
—
|
|
|
—
|
|
|
21.6
|
|
|
—
|
|
|
21.6
|
|
Intercompany
accounts, net
|
|
|
1,219.6
|
|
|
604.0
|
|
|
(1,823.6
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
|
169.1
|
|
|
170.6
|
|
|
487.7
|
|
|
—
|
|
|
827.4
|
|
Total
long-term liabilities
|
|
|
3,799.9
|
|
|
774.6
|
|
|
(1,293.7
|
)
|
|
—
|
|
|
3,280.8
|
|
Stockholders’
Equity
|
|
|
692.5
|
|
|
2,324.1
|
|
|
3,909.6
|
|
|
(6,233.7
|
)
|
|
692.5
|
| |
|
$
|
4,957.1
|
|
$
|
3,692.1
|
|
$
|
5,245.5
|
|
$
|
(6,233.7
|
)
|
$
|
7,661.0
|
F-168
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December
31, 2006
|
| |
|
Parent
|
|
Guarantors
|
|
Non-guarantors
|
|
Eliminations
|
|
Consolidated
|
| |
|
(in
millions)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
195.8
|
|
$
|
4.0
|
|
$
|
302.9
|
|
$
|
—
|
|
$
|
502.7
|
|
Accounts
receivable
|
|
|
12.7
|
|
|
243.5
|
|
|
1,750.7
|
|
|
—
|
|
|
2,006.9
|
|
Inventories
|
|
|
15.2
|
|
|
136.9
|
|
|
429.4
|
|
|
—
|
|
|
581.5
|
|
Current
assets of business held for sale
|
|
|
77.1
|
|
|
217.1
|
|
|
133.6
|
|
|
—
|
|
|
427.8
|
|
Other
|
|
|
45.9
|
|
|
29.9
|
|
|
295.6
|
|
|
—
|
|
|
371.4
|
|
Total
current assets
|
|
|
346.7
|
|
|
631.4
|
|
|
2,912.2
|
|
|
—
|
|
|
3,890.3
|
|
Long-Term
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
230.9
|
|
|
284.1
|
|
|
956.7
|
|
|
—
|
|
|
1,471.7
|
|
Goodwill,
net
|
|
|
454.5
|
|
|
551.1
|
|
|
991.1
|
|
|
—
|
|
|
1,996.7
|
|
Investments
in subsidiaries
|
|
|
3,691.2
|
|
|
3,257.4
|
|
|
—
|
|
|
(6,948.6
|
)
|
|
—
|
|
Other
|
|
|
233.7
|
|
|
24.1
|
|
|
234.0
|
|
|
—
|
|
|
491.8
|
|
Total
long-term assets
|
|
|
4,610.3
|
|
|
4,116.7
|
|
|
2,181.8
|
|
|
(6,948.6
|
)
|
|
3,960.2
|
| |
|
$
|
4,957.0
|
|
$
|
4,748.1
|
|
$
|
5,094.0
|
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
|
LIABILITIES
AND
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
—
|
|
$
|
—
|
|
$
|
39.3
|
|
$
|
—
|
|
$
|
39.3
|
|
Accounts
payable and drafts
|
|
|
157.0
|
|
|
395.7
|
|
|
1,764.7
|
|
|
—
|
|
|
2,317.4
|
|
Accrued
liabilities
|
|
|
322.3
|
|
|
145.8
|
|
|
631.2
|
|
|
—
|
|
|
1,099.3
|
|
Current
liabilities of business held for sale
|
|
|
60.4
|
|
|
226.1
|
|
|
119.2
|
|
|
—
|
|
|
405.7
|
|
Current
portion of long-term debt
|
|
|
6.0
|
|
|
—
|
|
|
19.6
|
|
|
—
|
|
|
25.6
|
|
Total
current liabilities
|
|
|
545.7
|
|
|
767.6
|
|
|
2,574.0
|
|
|
—
|
|
|
3,887.3
|
|
Long-Term
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,413.2
|
|
|
—
|
|
|
21.3
|
|
|
—
|
|
|
2,434.5
|
|
Long-term
liabilities of business held for sale
|
|
|
—
|
|
|
0.1
|
|
|
48.4
|
|
|
—
|
|
|
48.5
|
|
Intercompany
accounts, net
|
|
|
1,193.7
|
|
|
503.1
|
|
|
(1,696.8
|
)
|
|
—
|
|
|
—
|
|
Other
|
|
|
202.4
|
|
|
176.5
|
|
|
499.3
|
|
|
—
|
|
|
878.2
|
|
Total
long-term liabilities
|
|
|
3,809.3
|
|
|
679.7
|
|
|
(1,127.8
|
)
|
|
—
|
|
|
3,361.2
|
|
Stockholders’
Equity
|
|
|
602.0
|
|
|
3,300.8
|
|
|
3,647.8
|
|
|
(6,948.6
|
)
|
|
602.0
|
| |
|
$
|
4,957.0
|
|
$
|
4,748.1
|
|
$
|
5,094.0
|
|
$
|
(6,948.6
|
)
|
$
|
7,850.5
|
F-169
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Three Months Ended March 31,
2007
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
guarantors
|
|
Eliminations
|
|
Consolidated
|
| |
|
(unaudited;
in millions)
|
|
Net
sales
|
|
$
|
288.3
|
|
$
|
1,525.5
|
|
$
|
3,614.7
|
|
$
|
(1,022.4
|
)
|
$
|
4,406.1
|
|
Cost
of sales
|
|
|
298.9
|
|
|
1,499.1
|
|
|
3,319.6
|
|
|
(1,022.4
|
)
|
|
4,095.2
|
|
Selling,
general and administrative
expenses
|
|
|
34.1
|
|
|
14.0
|
|
|
78.4
|
|
|
—
|
|
|
126.5
|
|
Loss
on divestiture of Interior business
|
|
|
(17.2
|
)
|
|
28.2
|
|
|
14.6
|
|
|
—
|
|
|
25.6
|
|
Interest
expense
|
|
|
21.8
|
|
|
28.3
|
|
|
1.4
|
|
|
—
|
|
|
51.5
|
|
Intercompany
(income) expense, net
|
|
|
(79.6
|
)
|
|
16.8
|
|
|
62.8
|
|
|
—
|
|
|
—
|
|
Other
expense, net
|
|
|
2.0
|
|
|
10.0
|
|
|
13.0
|
|
|
—
|
|
|
25.0
|
|
Income
(loss) before income taxes and
equity in net income of
subsidiaries
|
|
|
28.3
|
|
|
(70.9
|
)
|
|
124.9
|
|
|
—
|
|
|
82.3
|
|
Provision
(benefit) for income taxes
|
|
|
—
|
|
|
(9.8
|
)
|
|
42.2
|
|
|
—
|
|
|
32.4
|
|
Equity
in net income of subsidiaries
|
|
|
(21.6
|
)
|
|
(5.9
|
)
|
|
—
|
|
|
27.5
|
|
|
—
|
|
Net
income (loss)
|
|
$
|
49.9
|
|
$
|
(55.2
|
)
|
$
|
82.7
|
|
$
|
(27.5
|
)
|
$
|
49.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Three Months Ended April 1,
2006
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(unaudited;
in millions)
|
|
|
Net
sales
|
|
$
|
475.6
|
|
$
|
1,889.0
|
|
$
|
3,152.5
|
|
$
|
(838.6
|
)
|
$
|
4,678.5
|
|
|
Cost
of sales
|
|
|
500.6
|
|
|
1,850.8
|
|
|
2,946.5
|
|
|
(838.6
|
)
|
|
4,459.3
|
|
|
Selling,
general and administrative
expenses
|
|
|
59.4
|
|
|
27.3
|
|
|
78.3
|
|
|
—
|
|
|
165.0
|
|
|
Interest
expense
|
|
|
15.1
|
|
|
23.5
|
|
|
9.1
|
|
|
—
|
|
|
47.7
|
|
|
Intercompany
(income) expense, net
|
|
|
(131.8
|
)
|
|
87.5
|
|
|
44.3
|
|
|
—
|
|
|
—
|
|
|
Other
(income) expense, net
|
|
|
(31.3
|
)
|
|
12.0
|
|
|
11.0
|
|
|
—
|
|
|
(8.3
|
)
|
|
Income
(loss) before income taxes, equity
in net (income) loss of subsidiaries
and
cumulative effect of a change in
accounting principle
|
|
|
63.6
|
|
|
(112.1
|
)
|
|
63.3
|
|
|
—
|
|
|
14.8
|
|
|
Provision
(benefit) for income taxes
|
|
|
(2.9
|
)
|
|
1.7
|
|
|
1.0
|
|
|
—
|
|
|
(0.2
|
)
|
|
Equity
in net (income) loss of subsidiaries
|
|
|
51.5
|
|
|
(41.2
|
)
|
|
—
|
|
|
(10.3
|
)
|
|
—
|
|
|
Income
(loss) before cumulative effect
of a change in accounting
principle
|
|
|
15.0
|
|
|
(72.6
|
)
|
|
62.3
|
|
|
10.3
|
|
|
15.0
|
|
|
Cumulative
effect of a change in accounting
principle
|
|
|
2.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
Net
income
|
|
$
|
17.9
|
|
$
|
(72.6
|
)
|
$
|
62.3
|
|
$
|
10.3
|
|
$
|
17.9
|
|
F-170
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Three Months Ended March 31,
2007
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(unaudited;
in millions)
|
|
|
Net
cash used in operating activities
|
|
$
|
15.2
|
|
$
|
(54.2
|
)
|
$
|
(2.8
|
)
|
$
|
—
|
|
$
|
(41.8
|
)
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and
equipment
|
|
|
(2.8
|
)
|
|
(17.7
|
)
|
|
(8.7
|
)
|
|
—
|
|
|
(29.2
|
)
|
|
Divestiture
of Interior business
|
|
|
(6.5
|
)
|
|
(12.9
|
)
|
|
(37.9
|
)
|
|
—
|
|
|
(57.3
|
)
|
|
Other,
net
|
|
|
0.6
|
|
|
0.3
|
|
|
(29.5
|
)
|
|
—
|
|
|
(28.6
|
)
|
|
Net
cash used in investing activities
|
|
|
(8.7
|
)
|
|
(30.3
|
)
|
|
(76.1
|
)
|
|
—
|
|
|
(115.1
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt repayments, net
|
|
|
(2.9
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
(3.6
|
)
|
|
Short-term
debt repayments, net
|
|
|
—
|
|
|
—
|
|
|
(11.0
|
)
|
|
—
|
|
|
(11.0
|
)
|
|
Proceeds
from exercise of stock options
|
|
|
5.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.7
|
|
|
Decrease
in drafts
|
|
|
(1.0
|
)
|
|
(2.5
|
)
|
|
(10.0
|
)
|
|
—
|
|
|
(13.5
|
)
|
|
Change
in intercompany accounts
|
|
|
(104.1
|
)
|
|
86.5
|
|
|
17.6
|
|
|
—
|
|
|
—
|
|
|
Net
cash used in financing activities
|
|
|
(102.3
|
)
|
|
84.0
|
|
|
(4.1
|
)
|
|
—
|
|
|
(22.4
|
)
|
|
Effect
of foreign currency
translation
|
|
|
—
|
|
|
2.7
|
|
|
4.3
|
|
|
—
|
|
|
7.0
|
|
|
Net
Change in Cash and Cash
Equivalents
|
|
|
(95.8
|
)
|
|
2.2
|
|
|
(78.7
|
)
|
|
|
|
|
(172.3
|
)
|
|
Cash
and Cash Equivalents as of
Beginning of Period
|
|
|
195.8
|
|
|
4.0
|
|
|
302.9
|
|
|
—
|
|
|
502.7
|
|
|
Cash
and Cash Equivalents as of
End of Period
|
|
$
|
100.0
|
|
$
|
6.2
|
|
$
|
224.2
|
|
$
|
—
|
|
$
|
330.4
|
|
F-171
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For
the Three Months Ended April 1,
2006
|
|
| |
|
Parent
|
|
Guarantors
|
|
Non-
guarantors
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
(unaudited;
in millions)
|
|
|
Net
cash provided by operating activities
|
|
$
|
154.7
|
|
$
|
(41.3
|
)
|
$
|
(74.0
|
)
|
$
|
—
|
|
$
|
39.4
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(14.4
|
)
|
|
(30.6
|
)
|
|
(47.6
|
)
|
|
|
|
|
(92.6
|
)
|
|
Other,
net
|
|
|
31.2
|
|
|
(3.0
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
27.9
|
|
|
Net
cash used in investing activities
|
|
|
16.8
|
|
|
(33.6
|
)
|
|
(47.9
|
)
|
|
—
|
|
|
(64.7
|
)
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt repayments, net
|
|
|
(2.1
|
)
|
|
(0.1
|
)
|
|
(3.9
|
)
|
|
—
|
|
|
(6.1
|
)
|
|
Dividends
paid
|
|
|
(16.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16.8
|
)
|
|
Increase
in drafts
|
|
|
7.6
|
|
|
(0.6
|
)
|
|
(5.9
|
)
|
|
—
|
|
|
1.1
|
|
|
Change
in intercompany accounts
|
|
|
(152.5
|
)
|
|
78.3
|
|
|
74.2
|
|
|
—
|
|
|
—
|
|
|
Net
cash used in financing activities
|
|
|
(163.8
|
)
|
|
77.6
|
|
|
64.4
|
|
|
—
|
|
|
(21.8
|
)
|
|
Effect
of foreign currency translation
|
|
|
—
|
|
|
3.7
|
|
|
7.0
|
|
|
—
|
|
|
10.7
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
7.7
|
|
|
6.4
|
|
|
(50.5
|
)
|
|
|
|
|
(36.4
|
)
|
|
Cash
and Cash Equivalents as of Beginning of Period
|
|
|
38.6
|
|
|
4.8
|
|
|
164.2
|
|
|
—
|
|
|
207.6
|
|
|
Cash
and Cash Equivalents as of End of Period
|
|
$
|
46.3
|
|
$
|
11.2
|
|
$
|
113.7
|
|
$
|
—
|
|
$
|
171.2
|
|
Basis
of
Presentation — Certain of the Company’s wholly-owned subsidiaries (the
“Guarantors”) have unconditionally fully guaranteed, on a joint and several
basis, the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all of the Company’s obligations under the Primary
Credit Facility and the indentures governing the Company’s senior notes,
including the Company’s obligations to pay principal, premium, if any, and
interest with respect to the senior notes. The senior notes consist of $300
million aggregate principal amount of 8.50% senior notes due 2013, $600 million
aggregate principal amount of 8.75% senior notes due 2016, $399 million
aggregate principal amount of 5.75% senior notes due 2014, Euro 56 million
aggregate principal amount of 8.125% senior notes due 2008, $41 million
aggregate principal amount of 8.11% senior notes due 2009 and $1 million
aggregate principal amount of zero-coupon convertible senior notes due 2022.
The
Guarantors under the indentures are currently Lear Automotive Dearborn, Inc.,
Lear Automotive (EEDS) Spain S.L., Lear Corporation EEDS and Interiors, Lear
Corporation (Germany) Ltd., Lear Corporation Mexico, S. de R.L. de C.V., Lear
Operations Corporation and Lear Seating Holdings Corp. #50. Lear Automotive
Dearborn, Inc. became a Guarantor under the indentures effective April 25,
2006.
In lieu of providing separate audited financial statements for the Guarantors,
the Company has included the audited supplemental guarantor condensed
consolidating financial statements above. These financial statements reflect
the
guarantors listed above for all periods presented. Management does not believe
that separate financial statements of the Guarantors are material to investors.
Therefore, separate financial statements and other disclosures concerning the
Guarantors are not presented.
As of
December 31, 2006 and for the three months ended April 1, 2006, the supplemental
guarantor condensed consolidating financial statements have been restated to
reflect certain changes to the equity investments of guarantor
subsidiaries.
Distributions
— There are no significant restrictions on the ability of the Guarantors to make
distributions to the Company.
Selling,
General and Administrative Expenses — During the three months ended March 31,
2007 and April 1, 2006, the Parent allocated $2.5 million and $12.9 million,
respectively, of corporate selling, general and administrative expenses to
its
operating subsidiaries. The allocations were based on various factors, which
estimate
F-172
LEAR CORPORATION AND
SUBSIDIARIES
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(21) Supplemental
Guarantor Condensed Consolidating Financial Statements –
(continued)
usage of particular
corporate functions, and in certain instances, other relevant factors, such
as
the revenues or the number of employees of the Company’s subsidiaries.
Long-term
debt of the Parent and the Guarantors — A summary of long-term debt of the
Parent and the Guarantors on a combined basis is shown below (in
millions):
|
|
|
|
|
|
|
|
|
| |
|
March
31,
2007
|
|
December
31,
2006
|
|
| |
|
|
|
|
|
|
|
|
Amended
and restated primary credit
facility
|
|
$
|
997.0
|
|
$
|
997.0
|
|
|
Senior
notes
|
|
|
1,415.7
|
|
|
1,417.6
|
|
|
Other
long-term debt
|
|
|
4.5
|
|
|
4.6
|
|
| |
|
|
2,417.2
|
|
|
2,419.2
|
|
|
Less
— current portion
|
|
|
(6.0
|
)
|
|
(6.0
|
)
|
| |
|
$
|
2,411.2
|
|
$
|
2,413.2
|
|
The
obligations of foreign subsidiary borrowers under the Primary Credit Facility
are guaranteed by the Parent.
For more
information on the above indebtedness, see Note 9, “Long-Term Debt.”
F-173
Until
,
200_, all dealers that effect transactions in these securities, whether or
not
participating in this exchange offer, may be required to deliver a prospectus.
Each broker-dealer that receives new notes for its own account pursuant to
the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes.
___________________
PROSPECTUS
___________________
AMERICAN
REAL ESTATE PARTNERS, L.P.
(Exact name
of co-registrant as
specified in its charter)
AMERICAN
REAL ESTATE FINANCE CORP.
(Exact name
of co-registrant as
specified in its charter)
AMERICAN
REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP
(Exact name of registrant of guarantee as
specified in its charter)
Offer
to
exchange our 7⅛% Senior Notes due 2013, which have been registered
under the
Securities Act of 1933, for any and all of our outstanding
7⅛% Senior Notes
due 2013.
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 20.
Indemnification of Directors and Officers.
Indemnification
Under the Delaware Limited Partnership Act and the American Real Estate Partners
L.P. Limited Partnership Agreement
AREP
is
organized under the laws of Delaware. Section 17-108 of the Delaware Act,
provides that a limited partnership may, and shall have the power to, indemnify
and hold harmless any partners or other persons from and against any and all
claims and demands whatsoever, subject to such standards and restrictions set
forth in the partnership agreement.
Section
6.15 of the AREP partnership agreement, dated as of May 12, 1987, as
amended, provides that the general partner, its affiliates, and all officers,
directors, employees and agents of the general partner and its affiliates
(individually, an “Indemnitee”), to the fullest extent permitted by law, will be
indemnified and held harmless from and against any and all losses, claims,
demands, costs, damages, liabilities, joint and several, expenses of any nature
(including attorneys’ fees and disbursements), judgments, fines, settlements,
and other amounts arising from any and all claims, demands, actions, suits
or
proceedings, whether civil, criminal, administrative or investigative, in which
the Indemnitee may be involved, or threatened to be involved, as a party or
otherwise by reason of its status as (x) the general partner or an
affiliate thereof or (y) a partner, shareholder, director, officer, employee
or
agent of the general partner or an affiliate thereof or (z) a person serving
at
the request of the partnership in another entity in a similar capacity, which
relate to, arise out of or are incidental to the partnership, its property,
business or affairs, including, without limitation, liabilities under the
federal and state securities laws, regardless of whether the Indemnitee
continues to be a general partner, an affiliate, or an officer, director,
employee or agent of the general partner or of an affiliate thereof at the
time
any such liability or expense is paid or incurred, if (i) the Indemnitee acted
in good faith and in a manner it believed to be in, or not opposed to, the
best
interests of the partnership, and, with respect to any criminal proceeding,
had
no reasonable cause to believe its conduct was unlawful and (ii) the
Indemnitee’s conduct did not constitute willful misconduct. The partnership
agreement further provides that an Indemnitee shall not be denied
indemnification in whole or in part under Section 6.15 by reason of the fact
that the Indemnitee had an interest in the transaction with respect to which
the
indemnification applies if the transaction was otherwise permitted by the terms
of the partnership agreement. Any indemnification under Section 6.15 shall
be
satisfied solely out of the assets of the partnership.
Indemnification
Under the Delaware General Corporation Law and the Certificate of Incorporation
and Bylaws of AREP Finance
AREP
Finance, the co-issuer of the notes, is a corporation incorporated under the
laws of the State of Delaware. Section 145 of the Delaware General Corporation
Law provides that a corporation may indemnify directors and officers as well
as
other employees and individuals against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with any threatened, pending or completed actions,
suits or proceedings in which such person is made a party by reason of such
person being or having been a director, officer, employee of or agent to the
Registrants. The statute provides that it is not exclusive of other rights
to
which those seeking indemnification may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise.
II-1
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
4.1
|
|
|
Indenture, dated
as of
February 7, 2005, among American Real Estate Partners, L.P., American
Real Estate Finance Corp., AREH, as guarantor and Wilmington Trust
Company, as Trustee (incorporated by reference to Exhibit 4.9 to
AREP’s Form 8-K (SEC File No. 1-9516), filed on February 10,
2005).
|
|
4.2
|
|
|
Form of 7
1/8% Senior Note due 2013 (incorporated by reference to
Exhibit 4.9 to AREP’s Form 8-K (SEC File No. 1-9516), filed on
February 10, 2005).
|
|
4.3
|
|
|
Registration Rights
Agreement, dated as of January 17, 2007, among American Real Estate
Partners, L.P., American Real Estate Finance Corp., AREH and Jefferies
& Company (incorporated by reference to Exhibit 4.3 to AREP’s
Form 8-K (SEC File No. 1-9516), filed on January 19,
2007).
|
|
5.1
|
|
|
Opinion of Proskauer
Rose LLP.(1)
|
|
12.1
|
|
|
Ratio of earnings
to
fixed charges.
|
|
23.1
|
|
|
Consent of Grant
Thornton LLP.
|
|
23.2
|
|
|
Consent of Grant
Thornton LLP.
|
|
23.3
|
|
|
Consent of Grant
Thornton LLP.
|
|
23.4
|
|
|
Consent of KPMG
LLP.
|
|
23.5
|
|
|
Consent of KPMG
LLP.
|
|
23.6
|
|
|
Consent of KPMG
LLP.
|
|
23.7
|
|
|
Consent of Ernst
&
Young LLP.
|
|
23.8
|
|
|
Consent of Proskauer
Rose LLP (included in Exhibit 5.1).(1)
|
|
24.1
|
|
|
Power of Attorney
(included on the signature pages to this S-4).
|
|
25.1
|
|
|
Statement of
Eligibility of Trustee.(1)
|
|
99.1
|
|
|
Letter of
Transmittal.(1)
|
|
99.2
|
|
|
Notice of Guaranteed
Delivery.(1)
|
|
99.3
|
|
|
Letter to
Clients.(1)
|
|
99.4
|
|
|
Letter to
Brokers.(1)
|
|
99.5
|
|
|
Form of Exchange
Agent
Agreement by and between AREP and Wilmington Trust
Company.(1)
|
——————
(1)
To be
filed by amendment.
Item 22.
Undertakings
The
undersigned registrants hereby undertake:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
(i)
To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
To reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
Registration Statement; and
II-2
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to Table of Contents
(iii)
To include any material information with respect to the plan of distribution
not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement; provided, however, that
paragraphs (1)(i), (1)(ii) and (1)(iii) do not apply if the information required
to be included in a post-effective amendment by those paragraphs is contained
in
periodic reports filed with or furnished to the SEC by the registrants pursuant
to Section 13 or 15(d) of the Exchange Act that are incorporated by reference
in
the registration statement, or is contained in a form of prospectus filed
pursuant to Rule 424(b) that is a part of the Registration Statement.
(2)
That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To remove from registration by means of a post-effective amendment any of the
securities being registered that remain unsold at the termination of the
offering.
(4)
That, for the purpose of determining liability under the Securities Act to
any
purchaser:
(a)
If the registrant is relying on Rule 430B:
(i)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the Registration Statement;
and
(ii)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B relating
to
an offering made pursuant to Rule 415(a)(l)(i), (vii) or (x) for the purpose
of
providing the information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the Registration Statement as of the
earlier of the date such form of prospectus is first used after effectiveness
or
the date of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall
be
deemed to be a new effective date of the Registration Statement relating to
the
securities in the Registration Statement to which that prospectus relates,
and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the Registration Statement
or made in a document incorporated or deemed incorporated by reference into
the
Registration Statement or prospectus that is part of the Registration Statement
will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the Registration
Statement or prospectus that was part of the Registration Statement or made
in
any such document immediately prior to such effective date; or
(b)
If the registrant is subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a Registration Statement relating to an offering, other
than Registration Statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part of and included
in
the Registration Statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a Registration Statement or
prospectus that is part of the Registration Statement or made in a document
incorporated or deemed incorporated by reference into the Registration Statement
or prospectus that is part of the Registration Statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify
any
statement that was made in the Registration Statement or prospectus that was
part of the Registration Statement or made in any such document immediately
prior to such date of first use.
(5)
That, for the purpose of determining liability of the registrant under the
Securities Act to any purchaser in the initial distribution of the securities,
in a primary offering of securities of the undersigned registrants pursuant
to
the Registration Statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
registrants will be a seller to the purchaser and will be considered to offer
or
sell such securities to such purchaser:
II-3
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to Table of Contents
(a)
Any preliminary prospectus or prospectus of the undersigned registrant relating
to the offering required to be filed pursuant to Rule 424;
(b)
Any free writing prospectus relating to the offering prepared by or on behalf
of
the undersigned registrants or used or referred to by the undersigned
registrant;
(c)
The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(d)
Any other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(6)
That, for purposes of determining any liability under the Securities Act, each
filing of the registrant’s annual report pursuant to Section 13(a) or 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to
be a
new registration statement relating to the securities offered therein, and
the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
(7)
Insofar as indemnification for liabilities arising under the Securities Act
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other
than
the payment by the registrant of expenses incurred or paid by a director,
officer of controlling person of the registrant in the successful defense of
any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants
will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(8)
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under
the
Securities Act shall be deemed to be part of the Registration Statement as
of
the time it was declared effective.
(9)
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to
be a new registration statement relating to the securities offered therein,
and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
Pursuant
to
the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York on June 21, 2007.
|
|
|
|
|
|
AMERICAN REAL ESTATE PARTNERS, L.P.
|
| |
|
|
| |
By:
|
American Property Investors, Inc., its general
partner
|
| |
|
|
| |
By:
|
/s/ Keith A. Meister
|
| |
|
Keith A. Meister
Principal Executive Officer
and Vice Chairman of the Board
|
KNOW
BY
ALL MEN BY THESE PRESENTS that each person whose signature appears below hereby
constitutes and appoints Keith A. Meister as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to act for him and in his name, place and stead, in any and all capacities,
to
sign any or all amendments (including pre-effective and post-effective
amendments) to this Registration Statement, including any subsequent
registration statement for the same offering that may be filed under Rule 462(b)
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorney-in-fact and agent full power and authority to do and perform
each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent
or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant
to
the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Keith
A. Meister
|
|
Principal Executive Officer
|
|
June 21, 2007
|
|
Keith A. Meister
|
|
and Vice Chairman of the Board
(Principal
Executive Officer)
|
|
|
| |
|
|
|
|
|
/s/
Andrew Skobe
|
|
Chief Financial Officer
|
|
June 21, 2007
|
|
Andrew
Skobe
|
|
(Principal Financial Officer) and
Chief
Accounting Officer
(Principal Accounting Officer)
|
|
|
| |
|
|
|
|
|
/s/
Jack G. Wasserman
|
|
Director
|
|
June 21, 2007
|
|
Jack
G.
Wasserman
|
|
|
|
|
| |
|
|
|
|
|
/s/
William A. Leidesdorf
|
|
Director
|
|
June 21, 2007
|
|
William
A.
Leidesdorf
|
|
|
|
|
| |
|
|
|
|
|
/s/
James L. Nelson
|
|
Director
|
|
June 21, 2007
|
|
James
L.
Nelson
|
|
|
|
|
| |
|
|
|
|
|
/s/
Vincent J. Intrieri
|
|
Director
|
|
June 21, 2007
|
|
Vincent
J.
Intrieri
|
|
|
|
|
| |
|
|
|
|
|
|
|
Chairman of the Board
|
|
|
|
Carl
C.
Icahn
|
|
|
|
|
Pursuant
to
the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York on June 21, 2007.
|
|
|
|
|
|
AMERICAN REAL ESTATE FINANCE CORP.
|
| |
|
|
| |
By:
|
/s/ Keith A. Meister
|
| |
|
Keith A. Meister
Principal Executive Officer
and Vice Chairman of the Board
|
KNOW
BY
ALL MEN BY THESE PRESENTS that each person whose signature appears below hereby
constitutes and appoints Keith A. Meister as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to act for him and in his name, place and stead, in any and all capacities,
to
sign any or all amendments (including pre-effective and post-effective
amendments) to this Registration Statement, including any subsequent
registration statement for the same offering that may be filed under Rule 462(b)
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorney-in-fact and agent full power and authority to do and perform
each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent
or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant
to
the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Keith
A. Meister
|
|
Principal Executive Officer
|
|
June 21, 2007
|
|
Keith A. Meister
|
|
and Vice Chairman of the Board
(Principal
Executive Officer)
|
|
|
| |
|
|
|
|
|
/s/
Andrew Skobe
|
|
Chief Financial Officer
|
|
June 21, 2007
|
|
Andrew
Skobe
|
|
(Principal Financial Officer) and
Chief
Accounting Officer
(Principal Accounting Officer)
|
|
|
| |
|
|
|
|
|
/s/
Jack G. Wasserman
|
|
Director
|
|
June 21, 2007
|
|
Jack
G.
Wasserman
|
|
|
|
|
| |
|
|
|
|
|
/s/
William A. Leidesdorf
|
|
Director
|
|
June 21, 2007
|
|
William
A.
Leidesdorf
|
|
|
|
|
| |
|
|
|
|
|
/s/
James L. Nelson
|
|
Director
|
|
June 21, 2007
|
|
James
L.
Nelson
|
|
|
|
|
| |
|
|
|
|
|
/s/
Vincent J. Intrieri
|
|
Director
|
|
June 21, 2007
|
|
Vincent
J.
Intrieri
|
|
|
|
|
| |
|
|
|
|
|
|
|
Chairman of the Board
|
|
|
|
Carl
C.
Icahn
|
|
|
|
|
Pursuant
to
the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York on June 21, 2007.
|
|
|
|
|
|
AMERICAN REAL ESTATE HOLDINGS LIMITED
PARTNERSHIP
|
| |
|
|
| |
By:
|
/s/ Keith A. Meister
|
| |
|
Keith A. Meister
Principal Executive Officer
and Vice Chairman of the Board
|
KNOW
BY
ALL MEN BY THESE PRESENTS that each person whose signature appears below hereby
constitutes and appoints Keith A. Meister as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
to act for him and in his name, place and stead, in any and all capacities,
to
sign any or all amendments (including pre-effective and post-effective
amendments) to this Registration Statement, including any subsequent
registration statement for the same offering that may be filed under Rule 462(b)
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto
said attorney-in-fact and agent full power and authority to do and perform
each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent
or his substitute may lawfully do or cause to be done by virtue hereof.
Pursuant
to
the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Keith
A. Meister
|
|
Principal Executive Officer
|
|
June 21, 2007
|
|
Keith A. Meister
|
|
and Vice Chairman of the Board
(Principal
Executive Officer)
|
|
|
| |
|
|
|
|
|
/s/
Andrew Skobe
|
|
Chief Financial Officer
|
|
June 21, 2007
|
|
Andrew
Skobe
|
|
(Principal Financial Officer) and
Chief
Accounting Officer
(Principal Accounting Officer)
|
|
|
| |
|
|
|
|
|
/s/
Jack G. Wasserman
|
|
Director
|
|
June 21, 2007
|
|
Jack
G.
Wasserman
|
|
|
|
|
| |
|
|
|
|
|
/s/
William A. Leidesdorf
|
|
Director
|
|
June 21, 2007
|
|
William
A.
Leidesdorf
|
|
|
|
|
| |
|
|
|
|
|
/s/
James L. Nelson
|
|
Director
|
|
June 21, 2007
|
|
James
L.
Nelson
|
|
|
|
|
| |
|
|
|
|
|
/s/
Vincent J. Intrieri
|
|
Director
|
|
June 21, 2007
|
|
Vincent
J.
Intrieri
|
|
|
|
|
| |
|
|
|
|
|
|
|
Chairman of the Board
|
|
|
|
Carl
C.
Icahn
|
|
|
|
|
EXHIBIT
12.1
AMERICAN
REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
RATIO
OF EARNINGS TO FIXED CHARGES
(AMOUNTS
IN THOUSANDS)
| |
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
| |
|
|
|
Three
Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes, income or
loss from
equity investees and minority interest
|
|
|
|
|
$
|
64,076
|
|
$
|
(19,298 |
) |
$
|
(44,453
|
)
|
$
|
(16,001
|
)
|
$
|
75,275
|
|
$
|
22,036
|
|
$
|
34,407
|
|
|
Fixed
Charges
|
|
|
|
|
|
34,775 |
|
|
27,213 |
|
|
115,307
|
|
|
94,795
|
|
|
47,671
|
|
|
21,520
|
|
|
27,747
|
|
|
Amortization
of capitalized interest
|
|
|
|
|
|
15 |
|
|
15 |
|
|
60
|
|
|
59
|
|
|
206
|
|
|
256
|
|
|
257
|
|
|
Total
Earnings
|
|
|
|
|
$
|
98,866 |
|
$
|
7,930 |
|
$
|
70,914
|
|
$
|
78,853
|
|
$
|
123,152
|
|
$
|
43,812
|
|
$
|
62,411
|
|
|
Fixed
Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
$
|
32,977 |
|
$
|
25,155 |
|
$
|
106,612
|
|
$
|
91,174
|
|
$
|
47,320
|
|
$
|
21,103
|
|
$
|
27,297
|
|
|
Interest
capitalized
|
|
|
|
|
|
21 |
|
|
6 |
|
|
110
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Estimated
interest within rental expense
|
|
|
|
|
|
1,777 |
|
|
2,052 |
|
|
8,585
|
|
|
3,621
|
|
|
351
|
|
|
417
|
|
|
450
|
|
|
Total
Fixed Charges
|
|
|
|
|
$
|
34,775 |
|
$
|
27,213 |
|
$
|
115,307
|
|
$
|
94,795
|
|
$
|
47,671
|
|
$
|
21,520
|
|
$
|
27,747
|
|
|
Ratio
of earnings to fixed charges
|
|
|
|
|
|
2.8 |
|
|
—
|
(1) |
|
—
|
(2) |
|
—
|
(3) |
|
2.6
|
|
|
2.0
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
——————
|
(1)
|
Fixed
charges exceeded earnings by $19.3 million for the first quarter
of
2006.
|
|
(2)
|
Fixed
charges exceeded earnings by $44.4 million in
2006.
|
| (3) |
Fixed charges
exceeded
earnings by $15.9 million in 2005. |
Unassociated Document
Exhibit
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
issued our reports dated March 2, 2007, accompanying the consolidated financial
statements and management's assessment of the effectiveness of internal control
over financial reporting included in the Annual Report of American Real Estate
Partners, L.P. on Form 10-K for the year ended December 31, 2006 which are
incorporated by reference in this Registration Statement and Prospectus.
We
hereby consent to the incorporation by reference of said reports in this
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption “Experts.” Our audit report on the consolidated financial
statements expressed an unqualified opinion and contains an explanatory
paragraph relating to the change in accounting for the Partnership's investment
in ImClone Systems Incorporated and Subsidiary from an available for sale
security to the equity method.
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| /s/
Grant Thornton
LLP |
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New York, New York
June 15, 2007
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Unassociated Document
Exhibit
23.2
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
issued our report dated March 2, 2007, accompanying the consolidated
financial
statements of American Real Estate Holdings Limited Partnership as of
December 31, 2006, which is included in this Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as
it appears
under the caption “Experts.” Our
audit
report on the consolidated financial statements expressed an unqualified
opinion
and contains an explanatory paragraph relating to the change in accounting
for
the Partnership’s investment in ImClone Systems Incorporated and Subsidiary from
an available for sale security to the equity
method.
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| GRANT
THORNTON LLP |
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New York, New York
June 15,
2007 |
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Exhibit
23.3
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
issued our report dated June 15, 2007, accompanying the balance sheet of
American Property Investors, Inc. as of December 31, 2006, which is included
in
this Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and
to the
use of our name as it appears under the caption “Experts.”
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| /s/
Grant Thornton
LLP |
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New York, New York
June 15,
2007 |
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Exhibit
23.4
CONSENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the use of our report dated March 1, 2007, with respect to the
consolidated balance sheets of ImClone Systems Incorporated and subsidiary
as of
December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders’ equity (deficit) and comprehensive income, for the
years then ended, included in this registration statement and incorporated
herein by reference and to the reference to our firm under the heading “Experts”
in the prospectus. Our report on the consolidated financial statements refers
to
the Company’s adoption of the provisions of Statement of Financial Accounting
Standards No. 123R, “Share-Based Payment.”
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| /s/
KPMG LLP |
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Princeton, New Jersey
June 15,
2007 |
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CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the use of our report dated March 1, 2007, with respect to the
consolidated balance sheets of ImClone Systems Incorporated and subsidiary
as of
December 31, 2006 and 2005, and the related consolidated statements of
operations, stockholders’ equity (deficit) and comprehensive income and cash
flows for each of the years in the three year period ended December 31, 2006,
incorporated herein by reference
and
to the reference to our firm under the heading “Experts” in the prospectus. Our
report on the consolidated financial statements refers to the Company’s adoption
of the provisions of Statement of Financial Accounting Standards No. 123R,
“Share-Based Payment.”
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| /s/ KPMG LLP |
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Princeton, New Jersey
June 15,
2007 |
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Exhibit
23.6
CONSENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the use of our report dated March 11, 2005, with respect to
the
consolidated statements of operations, changes in shareholders’ equity, and cash
flows for the year ended December 31, 2004 for GB Holdings, Inc. and
subsidiaries, included herein and incorporated herein by reference and
to the
reference to our firm under the heading “Experts” in the Registration Statement.
Our report dated March 11, 2005 contains an explanatory paragraph that
states
that GB Holdings Inc. has suffered recurring net losses, has a net working
capital deficiency and has significant debt obligations which are due
within one
year that raise substantial doubt about its ability to continue as a
going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of that uncertainty.
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| /s/ KPMG LLP |
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Short Hills, New Jersey
June 15,
2007 |
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Exhibit
23.7
CONSENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the reference to our firm under the caption “Experts” and to the use
of our report dated February 20, 2007, with respect to the consolidated
financial statements and schedule of Lear Corporation included in the
Registration Statement (Form S-4) and related Prospectus of American
Real Estate
Partners, L.P. for the registration of $500,000,000 of its 7 1/8 %
Senior Notes
Due 2013.
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| /s/ Ernst & Young LLP |
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Detroit, Michigan
June 18,
2007 |
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