e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-9516
AMERICAN REAL ESTATE PARTNERS,
L.P.
(Exact name of registrant as
specified in its charter)
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Delaware
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13-3398766
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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100 South Bedford Road, Mt.
Kisco, New York
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10549
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(Address of principal executive
offices)
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(Zip
Code)
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(914) 242-7700
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which
registered
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Depositary Units Representing
Limited Partner Interests
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New York Stock Exchange
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5% Cumulative
Pay-in-Kind
Redeemable Preferred Units Representing Limited Partner Interests
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act from their obligations under those
Securities. Yes o No þ
Note Checking the box above will not relieve
any registrant required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by a check mark whether the registrant is a large
accelerated filer, an accelerated file, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of depositary units held by
nonaffiliates of the registrant as of June 30, 2005, the
last business day of the registrants most recently
completed second fiscal quarter, based upon the closing price of
depositary units on the New York Stock Exchange Composite Tape
on such date was $180,152,064.
The number of depositary and preferred units outstanding as of
the close of business on March 10, 2006 was 61,856,830 and
10,800,397, respectively.
PART I
Introduction
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 engaged in a variety
of businesses including Oil & Gas exploration and
production, Gaming, Real Estate and Home Fashion. Our primary
business strategy is to continue to grow and enhance the value
of our businesses. We may also seek to acquire additional
businesses that are distressed or in
out-of-favor
industries and will consider divestiture of businesses from
which we do not foresee adequate future cash flow or
appreciation potential. In addition, we invest our available
liquidity in debt and equity securities with a view towards
enhancing returns as we continue to assess further acquisitions
of operating businesses.
Our general partner is American Property Investors, Inc., or
API, a Delaware corporation wholly-owned, through an
intermediate subsidiary, 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, and its subsidiaries. References to AREP
in this annual report on
Form 10-K
include AREH and its subsidiaries, unless the context otherwise
requires.
As of March 1, 2006, affiliates of Mr. Icahn
beneficially owned 55,655,382 depositary units representing AREP
limited partner interests, or the depositary units, representing
approximately 90.0% of the outstanding depositary units, and
9,346,044 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. See Item 12.
Security Ownership of Certain Beneficial Owners and Management.
Recent
Developments
In furtherance of our strategy to grow and enhance the value of
our businesses, since January 1, 2005, we acquired or
entered into agreements to acquire both new businesses and
add-on acquisitions to our gaming and oil and gas businesses:
Oil
& Gas
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In March 2005, we purchased an additional interest in our
Longfellow Ranch oil and gas property for $31.9 million.
The Longfellow Ranch is a highly productive, gas prone area
located in Pecos County, Texas and includes the Val Verde basin,
a gas producing area;
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In April 2005, we acquired, for $180.0 million in cash,
TransTexas Gas Corporation, now known as National Onshore LP, an
oil and gas exploration and production company with operations
and properties in South Texas;
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In June 2005, we acquired, for depositary units valued at
$125.0 million, Panaco, Inc., now known as National
Offshore LP, an oil and gas exploration and production company
with operations and properties in the Gulf Coast and the Gulf of
Mexico;
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In June 2005, we acquired, for depositary units valued at
$320.0 million, the managing membership interest in NEG
Holding LLC, which through its subsidiary NEG Operating LLC,
engages in the exploration and production of oil and gas in
Arkansas, Louisiana, Texas and Oklahoma; and
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In November 2005, we purchased oil and gas properties and
acreage in the Minden Field near our existing properties in East
Texas for $82.3 million, after purchase price adjustments.
The Minden Field property acquisition includes 3,500 net
acres with 17 producing properties and has reserves totaling
approximately 67.5 Bcfe as of December 31, 2005.
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1
Gaming
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In June 2005, we acquired, for our depositary units valued at
$12.0 million, shares of common stock of GB Holdings, Inc.,
or GBH, and shares of Atlantic Coast Entertainment Holdings Inc.
the indirect holding company of The Sands Hotel and Casino
located in Atlantic City, New Jersey; and
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In December 2005, we entered into an agreement with subsidiaries
of Harrahs Entertainment, Inc. to purchase, for
$170.0 million, both the Flamingo Laughlin Hotel and Casino
in Laughlin, Nevada and approximately 7.7 acres of
primarily undeveloped land that lies between the boardwalk and
The Sands.
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Home
Fashion
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In August 2005, we purchased, for $219.9 million in cash
and a portion of the debt of WestPoint Stevens Inc.,
approximately two-thirds of the outstanding equity of WestPoint
International, Inc., or WPI, the acquirer in a bankruptcy
proceeding of substantially all of the assets of WestPoint
Stevens Inc., a leading U.S. manufacturer of bed, bath and
other home fashion products. We also made available to WPI a
revolving credit facility. See Item 3. Legal Proceedings.
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Financing
Since January 1, 2005, we have taken the following steps to
fund our businesses and enhance our liquidity:
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In February 2005, we issued $480.0 million principal amount
of 7.125% senior notes due 2013. We used the net proceeds
of the offering to fund the acquisition of TransTexas in April
2005 and for general business purposes;
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In June 2005, we consolidated our oil and gas operations and
properties under our newly formed subsidiary, NEG Oil &
Gas LLC (formerly AREP Oil & Gas LLC). Based on reserve
reports prepared as of December 31, 2005 by independent
petroleum consultants, the proved reserves of NEG Oil &
Gas were 500.5 Bcfe. The total standardized measure of our
proved reserves was $1,772.1 million, of which 86% was
natural gas and 50% proved developed;
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In December 2005, NEG, Inc., our newly-formed subsidiary,
entered into an agreement and plan of merger pursuant to which
National Energy Group, Inc., of which we own 50.01% of the
common stock, will merge with and into NEG and the stockholders
of National Energy Group, including AREP, will receive shares of
common stock of NEG;
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In December 2005, NEG Oil & Gas entered into a new
$500.0 million revolving credit facility with an initial
borrowing base of $335.0 million, of which
$300.0 million was drawn at closing. The borrowings were
used to refinance an existing revolving credit facility, to
repay loans of $85.0 million from AREH to finance the
Minden Field acquisition and to pay a $78.0 million
distribution to AREH. This facility will mature in December 2010
and is secured by substantially all of the assets of NEG
Oil & Gas and its subsidiaries. The borrowing base will
be re-determined semi-annually based on, among other things, the
lenders review of the mid-year and year-end reserve
reports of NEG Oil & Gas;
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In February 2006, NEG filed a registration statement for an
initial public offering. The proceeds of the offering will be
used to purchase a managing membership interest in NEG
Oil & Gas. Following the offering, we expect to retain
a membership interest in NEG Oil & Gas and own more
than a majority of the voting power of NEG; and
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We are pursuing asset-backed financing at WestPoint Home, Inc.,
a subsidiary of WPI.
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2
Our
Businesses
Oil and
Gas
Background
During 2005, we acquired from entities affiliated with
Mr. Icahn three oil and gas exploration and production
companies: NEG Holding, Panaco (which was merged with and into
National Offshore), and TransTexas (which was merged with and
into National Onshore). On December 7, 2005, we entered
into an agreement and plan of merger, pursuant to which National
Energy Group will be merged with and into NEG, our wholly-owned
subsidiary.
We conduct our Oil and Gas activities through our wholly-owned
subsidiary, NEG Oil & Gas. NEG Oil & Gas is an
independent oil and gas exploration, development and production
company based in Dallas, Texas. Our core areas of operations are
the Val Verde and Permian Basins of West Texas, the Cotton
Valley Trend in East Texas, the Gulf Coast and the Gulf of
Mexico. NEG Oil & Gas also has oil and gas operations
in the Anadarko and Arkoma Basins of Oklahoma and Arkansas.
Based on reserve reports prepared as of December 31, 2005
by Netherland, Sewell & Associates, Inc. and DeGolyer
and MacNaughton, independent petroleum consultants, estimated
proved reserves were 500.5 Bcfe and were 86% natural gas
and 50% proved developed.
As of December 31, 2005, NEG Oil & Gas owned the
following assets and operations:
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a 50.01% ownership interest in National Energy Group, a
publicly traded oil and gas management company. National Energy
Group manages our oil and gas operations and its principal asset
consists of its non-managing membership interest in NEG Holding;
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a managing membership interest in NEG Holding;
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National Onshore; and
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National Offshore.
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Recent
Activity
During 2005, we expanded our Oil and Gas business through the
acquisition of two oil and gas companies, the managing
membership interest in NEG Holding, the purchase for
$114.2 million of oil and gas properties and successful
drilling activities.
In March 2005, we purchased an additional interest in Longfellow
Ranch for $31.9 million. The Longfellow Ranch is located in
Pecos County, Texas and includes the Val Verde basin, a gas
producing area. In November 2005, we purchased oil and gas
properties and acreage in the Minden Field near our existing
properties in East Texas for $82.3 million, after purchase
price adjustments. The Minden Field acquisition includes
3,500 net acres with 17 producing properties and has
reserves totaling approximately 67.5 Bcfe as of
December 31, 2005.
In April 2005, we acquired 100% of the equity of TransTexas (now
known as National Onshore) for a purchase price of
$180.0 million in cash from affiliates of Mr. Icahn.
In June 2005, we acquired 100% of the equity of Panaco (now know
as National Offshore) from affiliates of Mr. Icahn for 4,310,345
of our depositary units, valued at approximately
$125.0 million. In June 2005, we acquired the managing
membership interest in NEG Holding from an affiliate of
Mr. Icahn in consideration for 11,034,408 of our depositary
units, valued at approximately $320.0 million. The
membership interest acquired constitutes all of the membership
interests other than the membership interest already owned by
National Energy Group, our 50.01% owned subsidiary.
During 2005, we drilled or participated in drilling
98 gross wells (54.1 wells net to our interest). Our
successful drilling activity added approximately 84.0 Bcfe,
which is the equivalent of over two times our 2004 production.
In December 2005, NEG Oil & Gas signed a merger
agreement with National Energy Group that will allow us to
acquire the remaining shares of National Energy Group that we do
not own in exchange for an interest in a new, publicly traded
company. In accordance with the terms of the merger agreement,
National Energy Group will merge into NEG, a wholly-owned
subsidiary of AREP. NEG will be the surviving corporation and
will change its name to National Energy Group, Inc. The National
Energy Group stockholders, including AREP, will receive shares
in NEG representing approximately 7.99% (3.996% to us and 3.994%
to the public stockholders of National Energy Group)
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of the current economic interest of NEG Oil & Gas. The
merger agreement is contingent upon the completion of an initial
public offering of the shares of NEG by December 1, 2006.
On February 14, 2006, NEG filed a registration statement on
Form S-1
with the U.S. Securities and Exchange Commission for a
proposed initial public offering of its common stock. The number
of shares to be offered and the price range for the offering
have not yet been determined. All shares of common stock to be
sold in the offering will be offered by NEG. The offering is
contingent on the closing of the merger agreement with National
Energy Group described above.
Oil &
Gas Strategy
Our Oil & Gas segment has built its reserve base
through a combination of acquisitions and drilling activities.
We seek to acquire properties where there may be significant
undeveloped potential either on the existing acreage or in the
surrounding area, where future expansion is possible. We believe
this strategy will enable NEG Oil & Gas to continue to
build a substantial inventory of identified drilling locations,
achieve high drilling success rates, and grow production and
reserves efficiently. As of December 31, 2005, NEG
Oil & Gas has identified 1,828 potential drilling
locations on existing acreage, 570 of which are considered
proved undeveloped locations. As of that date, approximately 97%
of the identified potential drilling locations were located in
NEG Oil & Gas core operating areas of West Texas,
including the Longfellow Ranch property, East Texas and the Gulf
Coast.
Since NEG Oil & Gas typically drills in areas
relatively close to existing production, our oil and gas
operations have experienced comparatively high drilling success
rates. For the three years ended December 31, 2005, NEG
Oil & Gas has drilled or participated in a total of
279 gross wells, with 91% being completed as producing
wells. For those years, NEG Oil & Gas has added
estimated reserves from all sources equal to 506% of total
production during those years. For the period from 2002 to 2005,
NEG Oil & Gas increased net production from
11.6 Bcfe to 38.8 Bcfe per year, representing a 49.6%
compound annual growth rate.
NEG Oil & Gas enters into derivative contracts,
primarily no cost collars, to achieve more predictable cash
flows and to reduce its exposure to declines in market prices.
We generally hold all derivatives until the stated maturity or
settlement date. NEG Oil & Gas does not designate any
of its derivatives positions as accounting hedges and, as a
result, we recognize gains or losses for the change in the fair
value of our derivative contracts as an increase or reduction of
oil and gas revenues. This includes both realized gains and
losses from settlement of maturing derivatives and unrealized
gains or losses from our unsettled positions. Since
January 1, 2003, NEG Oil & Gas has experienced
significant volatility in its revenues as a result of including
realized and unrealized losses on our derivative positions in
oil and gas revenues.
Operating
Areas
NEG Oil & Gas primarily operates in four core areas:
West Texas, which includes Longfellow Ranch; East Texas; the
Gulf Coast and the Gulf of Mexico. In addition, NEG
Oil & Gas may seek to acquire properties outside our
core areas as opportunities present themselves. The historical
financial information and operating data of our oil and gas
operations includes the operations of entities acquired from
affiliates of Mr. Icahn since the date the entity was
originally acquired by an affiliate of Mr. Icahn, or the
date of common control.
4
The following tables and descriptions set forth summary
information attributable to the operating areas of NEG
Oil & Gas. The information contained in these tables is
presented as of December 31, 2005, except as otherwise
indicated:
Production
data
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Natural Gas
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Natural Gas
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Oil
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Gas
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Liquids
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Equivalent
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Areas
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(MBbls)
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(MMcf)
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(MBbls)
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(MMcfe)
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West Texas
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299
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7,132
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8,926
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East Texas
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39
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5,569
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5,803
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Gulf Coast
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547
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9,204
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350
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14,586
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Gulf of Mexico
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513
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3,396
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6,474
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Other
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42
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2,806
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3,058
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Total
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1,440
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28,107
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350
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38,847
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Drilling
inventory and areas of operation
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Identified
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Acreage(2)
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Drilling
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2005 Drilling
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Total
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Total
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Areas
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Locations(1)
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Success %
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Gross
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Net
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West Texas
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1,549
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92
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140,100
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42,300
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East Texas
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180
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100
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21,500
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19,400
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Gulf Coast
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43
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82
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53,600
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29,800
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Gulf of Mexico
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49
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67
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53,600
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28,900
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Other
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7
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91
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70,500
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36,900
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Total
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1,828
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92
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%
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339,300
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157,300
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(1) |
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Identified drilling locations represent total gross drilling
locations identified and scheduled by management of NEG
Oil & Gas as an estimate of multi-year drilling
activities on existing acreage. Of the total locations shown in
the table, 570 are classified as proved undeveloped. Actual
drilling activities may change depending on the availability of
capital, regulatory approvals, seasonal restrictions, oil and
natural gas prices, costs, drilling results and other factors. |
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(2) |
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Includes 13,260, 7,333 and 8,050 net acres with leases
expiring during 2006, 2007 and 2008, respectively. |
West Texas area. The West Texas area consists
of properties located on Longfellow Ranch and Goldsmith Adobe
Unit.
Longfellow Ranch. The Longfellow Ranch area
and associated fields cover over 300,000 surface acres in the
Val Verde Basin, a gas producing area. Longfellow Ranch is a
highly productive, gas prone, geologically complex, multi-pay
area. Drilling includes both infill and field expansion
development, as well as significant exploration activities.
Longfellow Ranch Field (Piñon Field) was discovered in 1983
by Fina Oil and Gas, but was not extensively developed due to a
lack of necessary pipeline and associated facilities. Riata
Energy Inc. acquired the field in 1996 and began an extensive
development program. The primary producing horizons in the field
are the Caballos Novaculites of Devonian age located at depths
ranging from 4,500 feet to 10,000 feet. Additional
producing horizons include the lower Pennsylvanian Dimple and
upper Mississippian Tesnus formations located at depths ranging
from 2,000 feet to 4,500 feet. Other objectives
include a normal stratigraphic section of Devonian, Silurian and
Ordovician. These horizons have produced north of the Marathon
thrust belt, where the structures can produce over a Tcf, or
trillion cubic feet, of gas. As of December 31, 2005, NEG
Oil & Gas has identified 1,488 drilling locations in
this area, 401 of which are classified as proved undeveloped. In
addition to the identified locations, approximately
105,500 gross acres are yet to be fully evaluated and no
drilling locations assigned to this acreage.
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Goldsmith Adobe Unit. Goldsmith Adobe Unit, or
GAU, and its surrounding areas are located in the Permian Basin
of West Texas. NEG Oil & Gas owns a 99.9% working
interest in GAU. Typically, wells drilled at GAU produce from
the Upper Clearfork formation at an average depth of
6,100 feet. This field consists of 10,440 gross acres
on which management has identified 61 drilling locations, 49 of
which are classified as proved undeveloped locations.
East Texas area. Our Texas area is part of the
Cotton Valley Trend which covers parts of East Texas and
Northern Louisiana and is largely gas prone. NEG Oil &
Gas is targeting the tight sand reservoirs of the Cotton Valley,
Pettit and Travis Peak formations at depths of 6,500 to
10,500 feet. These sands are typically distributed over a
large area, leading to high drilling success rates. Due to the
tight nature of the reservoirs, significant hydrolic fracture
stimulation is required to obtain commercial production rates
and efficiently drain the reservoir. Production in this area is
generally characterized as long-lived, with wells having a high
initial production and decline rates that stabilize at lower
levels after several years. Moreover, area operators continue to
focus on infill development drilling as many areas have been
down spaced to 80 acres per well, with some areas down
spaced to as little as 40 acres per well.
The East Texas operations are focused in Texas counties of
Harrison and Rusk with the primary fields of Blocker, Minden and
Oak Hill. These fields consists of 21,500 gross acres on
which management has identified 180 drilling locations, 86
of which are classified as proved undeveloped locations. NEG
Oil & Gas continues to seek acquisitions and
joint ventures in East Texas, such as the recent Minden Field
acquisition, to further grow the inventory of drilling locations.
Gulf Coast area. Our Gulf Coast area
encompasses the large coastal plain from the southernmost tip of
Texas through the Southern portion of Louisiana. This is a
predominantly gas prone, multi-pay, geologically complex area
where 3-D
seismic and other advanced exploration technologies are critical
to the companys efforts. This area is comprised of
sediments ranging from Cretaceous through Tertiary age and is
productive from very shallow depths of several thousand feet to
depths in excess of 18,000 feet. This is a geologically
complex area with significant faulting and compartmentalized
reservoirs. NEG Oil & Gas targets shallower formations
such as the Frio and the Miocene, as well as deeper horizons
such as Wilcox and Vicksburg. Operations in this area are
generally characterized as being comparatively higher risk and
higher potential than in our other core areas, with successful
wells typically having higher initial production rates with
steeper declines and shorter production lives. Drilling costs
per well also tend to be significantly higher than in our other
areas due to the increased depth and complexity of wellbore
conditions.
NEG Oil & Gas has an inventory of 18 identified
prospects in this area containing 43 identified drilling
locations, 14 of which are classified as proved undeveloped.
Gulf of Mexico area. In the Gulf of Mexico, we
focus on State and Federal waters off Texas and Louisiana. The
water depth ranges from 30 feet to 1,100 feet and
activity extends from the coast to more than 100 miles
offshore. The Gulf of Mexico is one of the premier producing
basins in the United States and is an area where NEG
Oil & Gas has achieved value-added growth through
exploitation and exploration. Production ranges in depth from
several thousand feet to in excess of 17,000 feet. The
reservoir rocks range in age from the Plio-Pleistocene through
the Oligocene. Typical Gulf of Mexico reservoirs have high
porosity and permeability and wells historically flow at
prolific rates. Overall, the Gulf of Mexico is known as an area
of high quality
3-D seismic
acquisition.
Major areas of activity include the blocks in East Breaks and
High Island areas that are located off the Texas coast, and the
East Cameron area located off the Louisiana coast. In most
cases, NEG Oil & Gas owns non-operating interests in
this area with larger companies such as Chevron, BP and Apache.
There are seven identified prospects in this area containing 49
identified drilling locations, 13 of which are classified as
proved undeveloped.
Other areas. Our other oil and gas properties
are located in the Mid-Continent area in Oklahoma and West
Arkansas. These areas are characterized by multiple producing
horizons and long-lived reserves and are primarily gas producing.
Anadarko Basin. The Anadarko Basin properties
are located throughout central and west Oklahoma. Anadarko Basin
is among the most historically petroliferous basins of the
continental United States. The Anadarko Basin is considered a
mature oil and natural gas province characterized by multiple
producing horizons and long-
6
lived and predictable reserves with low cost operations. Most
Anadarko Basin reserves are produced from formations at depths
ranging from approximately 5,000 to 15,000 feet.
Arkoma Basin. The Arkoma Basin properties are
located in southeast Oklahoma and northwest Arkansas. The Arkoma
Basin is considered a mature natural gas province characterized
by multiple producing horizons and long-lived and predictable
reserves with low cost operations. Most Arkoma Basin reserves
are produced from formations at depths ranging from
approximately 3,000 to 8,000 feet. The principal productive
formations are Atokan and, to a lesser extent, Morrowan
sandstones.
Oil &
Gas Reserves
Our Oil & Gas reserves are located in the continental
United States. Reserve reports were prepared using constant
prices and costs in accordance with the published guidelines of
the SEC. The net weighted average prices used in NEG
Oil & Gas reserve report as of December 31,
2005 were $57.28 per barrel of oil and $9.59 per Mcf
of gas. As of December 31, 2005, total proved reserves were
429.1 Bcf of natural gas and 11,904 MBbls of
condensate and oil. The estimation of reserves and future net
revenues can be materially affected by the oil and gas prices
used in preparing the reserve report.
The following table sets forth certain information for our total
proved reserves of oil and gas as of December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Net
|
|
|
|
|
|
|
Proved Reserves(1)
|
|
|
Daily Production
|
|
|
|
|
Areas
|
|
Bcfe(1)
|
|
|
% Gas
|
|
|
% Developed
|
|
|
(MMcfe/d)
|
|
|
Reserve Life(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
West Texas
|
|
|
222.2
|
|
|
|
90
|
%
|
|
|
37
|
%
|
|
|
26
|
|
|
|
25
|
|
East Texas
|
|
|
124.9
|
|
|
|
97
|
|
|
|
41
|
|
|
|
21
|
|
|
|
22
|
|
Gulf Coast
|
|
|
80.2
|
|
|
|
72
|
|
|
|
80
|
|
|
|
42
|
|
|
|
5
|
|
Gulf of Mexico
|
|
|
40.1
|
|
|
|
49
|
|
|
|
51
|
|
|
|
17
|
|
|
|
6
|
|
Other
|
|
|
33.1
|
|
|
|
92
|
|
|
|
97
|
|
|
|
7
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
500.5
|
|
|
|
86
|
%
|
|
|
50
|
%
|
|
|
113
|
%
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total proved reserves used in this table were derived from
reserve information prepared by Netherland, Sewell &
Associates, Inc. and DeGolyer and MacNaughton, independent
petroleum consultants. |
|
(2) |
|
Based on proved reserves and annual production volumes for 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
|
|
Oil
|
|
|
Natural Gas
|
|
|
Equivalent
|
|
|
|
(MBbls)
|
|
|
(MMcf)
|
|
|
(MMcfe)
|
|
|
Proved Developed Reserves
|
|
|
8,340
|
|
|
|
200,520
|
|
|
|
250,560
|
|
Proved Undeveloped Reserves
|
|
|
3,564
|
|
|
|
228,530
|
|
|
|
249,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Proved Reserves
|
|
|
11,904
|
|
|
|
429,050
|
|
|
|
500,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Oil
& Gas Production and Unit Economics
The following table shows the approximate net production
attributable to our oil and gas interests, the average sales
price per barrel of oil and Mcf of gas produced, and the average
unit economics per Mcfe, or thousand cubic feet gas equivalent,
related to our oil and gas production for the periods indicated.
Information relating to properties acquired or sold is reflected
in this table only since or up to the closing date of their
respective acquisition or sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Production data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
1,440
|
|
|
|
935
|
|
|
|
811
|
|
Natural gas (MMcf)
|
|
|
28,107
|
|
|
|
18,995
|
|
|
|
15,913
|
|
Natural gas liquids (MBbls)
|
|
|
350
|
|
|
|
549
|
|
|
|
166
|
|
Natural gas equivalents (MMcfe)
|
|
|
38,847
|
|
|
|
27,799
|
|
|
|
21,772
|
|
Average sales
price(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil average sales price (per Bbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
Price excluding realized gains or
losses on derivative contracts
|
|
$
|
55.72
|
|
|
$
|
39.55
|
|
|
$
|
30.26
|
|
Price including realized gains or
losses on derivative contracts
|
|
|
48.95
|
|
|
|
29.89
|
|
|
|
27.32
|
|
Natural gas average sales price
(per Mcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
Price excluding realized gains or
losses on derivative contracts
|
|
|
7.85
|
|
|
|
5.73
|
|
|
|
5.07
|
|
Price including realized gains or
losses on derivative contracts
|
|
|
6.38
|
|
|
|
5.39
|
|
|
|
4.70
|
|
Natural gas liquids (per Bbl)
|
|
|
33.46
|
|
|
|
26.72
|
|
|
|
23.24
|
|
Expense per Mcfe:
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
0.70
|
|
|
$
|
0.49
|
|
|
$
|
0.49
|
|
Transportation and gathering
|
|
|
0.13
|
|
|
|
0.11
|
|
|
|
0.07
|
|
Taxes, other than income
|
|
|
0.43
|
|
|
|
0.39
|
|
|
|
0.37
|
|
Depreciation, depletion and
amortization
|
|
|
2.35
|
|
|
|
2.17
|
|
|
|
1.81
|
|
General and administrative expenses
|
|
|
0.40
|
|
|
|
0.49
|
|
|
|
0.36
|
|
|
|
|
(1) |
|
Excludes the effect of unrealized gains and losses on derivative
contracts. |
Drilling
Activity
The following table sets forth exploration and development
drilling results for 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Gross
|
|
|
Net
|
|
|
Exploratory Wells(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive(2)
|
|
|
45
|
|
|
|
21.2
|
|
|
|
57
|
|
|
|
22.0
|
|
|
|
29
|
|
|
|
8.0
|
|
Non-productive
|
|
|
7
|
|
|
|
2.5
|
|
|
|
14
|
|
|
|
4.1
|
|
|
|
2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
52
|
|
|
|
23.7
|
|
|
|
71
|
|
|
|
26.1
|
|
|
|
31
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Development Wells(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productive(2)
|
|
|
45
|
|
|
|
30.2
|
|
|
|
40
|
|
|
|
20.0
|
|
|
|
38
|
|
|
|
27.4
|
|
Non-productive
|
|
|
1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
46
|
|
|
|
30.4
|
|
|
|
40
|
|
|
|
20.0
|
|
|
|
39
|
|
|
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Total
|
|
|
98
|
|
|
|
54.1
|
|
|
|
111
|
|
|
|
46.1
|
|
|
|
70
|
|
|
|
36.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of net wells is the sum of the fractional working
interests owned in gross wells. |
|
(2) |
|
Productive wells consist of wells that are completed or capable
of production. Wells that are completed in more than one
producing zone are counted as one well. |
8
Production
and Sales Prices
NEG Oil & Gas produces oil and gas solely in the
continental United States and currently sells a significant
portion of oil pursuant to a contract with Plains Marketing and
Transportation. We have no obligations to provide a fixed and
determinable quantity of oil
and/or gas
in the future under existing contracts or agreements. We do not
refine or process the oil and gas it produces, but sells the
production to unaffiliated oil and gas purchasing companies in
the area in which it is produced. We expect to sell crude oil on
a market price basis and to sell gas under contracts to both
interstate and intrastate natural gas pipeline companies.
Control
Over Production Activities
NEG Oil & Gas operated 527 of the 878 producing wells
in which we owned an interest as of December 31, 2005. The
non-operated properties are operated by unrelated third parties
pursuant to operating agreements which are generally standard in
the industry. Significant decisions about operations regarding
non-operated properties may be determined by the outside
operator rather than by NEG Oil & Gas. If NEG
Oil & Gas declines to participate in additional
activities proposed by the outside operator under certain
operating agreements, we will not receive revenues from,
and/or will
lose its interest in, the activity in which it declined to
participate.
Markets
and Customers
A large percentage of our oil and gas sales are made to a small
number of purchasers. Additionally, some of the oil and gas
production attributable to non-operated properties is sold to
other third party purchasers by the operator of such properties,
which then remits our proportionate share of the proceeds. Riata
is the largest single seller of oil and natural gas from our
non-operated properties pursuant to such an arrangement. For
2005, approximately 68% of NEG Oil & Gas oil and gas
revenues were generated from the following purchasers, including
Riata: Plains, All American, Duke Energy, Louis Dreyfus,
Crosstex Energy Services and Seminole Energy Services. NEG
Oil & Gas does not believe that the loss of any
purchaser would have a material adverse effect on our oil and
gas business because, under prevailing market conditions, other
purchasers are readily available.
The agreement with Plains, entered into in 1993, provides for
Plains to purchase NEG Oil & Gas oil pursuant to
West Texas Intermediate posted prices plus a premium. In
addition, a portion of our gas production is sold pursuant to
long-term netback contracts. Under netback contracts, gas
purchasers buy gas from a number of producers, process the gas
for natural gas liquids, and sell liquids and residue gas. Each
producer receives a fixed portion of the proceeds from the sale
of the liquids and residue gas. The gas purchasers pay for
transportation, processing and marketing of the gas and liquids,
and assume the risk of contracting pipelines and processing
plants in return for a portion of the proceeds of the sale of
the gas and liquids. Generally, because the purchasers are
marketing large volumes of hydrocarbons gathered from multiple
producers, higher prices may be obtained for the gas and
liquids. The remainder of NEG Oil & Gas natural
gas is sold on the spot market under short-term contracts.
Regulatory
Environment
Oil and gas exploration, production and transportation
activities are subject to extensive regulation at the federal,
state and local levels. These regulations relate to, among other
things, environmental and land use matters, conservation,
safety, pipeline use, the drilling and spacing of wells, well
stimulation, transportation, and forced pooling and protection
of correlative rights among interest owners. The following is a
summary discussion of some key regulations that affect our oil
and gas operations.
Environmental and Land Use Laws and Regulation. A
variety of federal, state and local environmental and land use
laws and regulations apply to companies engaged in the
exploration, production and sale of petroleum hydrocarbons. Some
of these laws and regulations have been revised frequently in
the past, and in some cases these changes have imposed more
stringent requirements that increased operating costs
and/or
required capital expenditures to attain compliance with the
heightened level of regulation. NEG Oil & Gas believes
that our oil and gas operations are in substantial compliance
with current environmental laws and regulations. It understands
that failure to comply with these requirements could result in
civil and/or
criminal fines and penalties as well as potential loss of
permits or authorizations required for our oil and gas business.
It also understands that attaining and maintaining compliance at
an increased or heightened level could result in an increase in
expenditures.
9
Potential Material Costs Associated with Environmental
Regulation of Our Oil & Gas Operations. NEG
Oil & Gas will incur significant plugging, abandonment
and dismantlement costs in the future related to environmental
and land use regulations associated with existing properties and
operations and those that it may acquire in the future. As is
customary in the industry, we may also contractually assume
plugging, abandonment and dismantlement, clean up and other
obligations in connection with our acquisition of operating
interests in the fields. These costs can be significant.
As of December 31, 2005, NEG Oil & Gas had
approximately $24.3 million held in various escrow accounts
relating to the asset retirement obligations for certain
offshore properties located in federal waters. The total
estimated expected future costs to fulfill future plugging,
abandoning, dismantlement and structure removal obligations on
these properties is currently recorded at $41.2 million.
This obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future
cash flows underlying the obligation.
NEG Oil & Gas does not maintain monetary reserves
related to such asset retirement obligations for onshore
properties and those located in state waters. The cost to plug,
abandon, dismantle and remove wells and associated equipment on
these properties is proportionately shared with other working
interest owners and are typically incurred at the time the
assets are retired. It is NEG Oil & Gas
experience that wells may be sold to third parties prior to the
need to incur plugging and abandonment expenses, and when this
occurs, the costs for plugging and abandonment are typically
assumed by the third party. When they are not sold to third
parties, we have found that the plugging and abandonment
liability of onshore properties is substantially offset by the
value of the equipment salvaged.
Other potential material costs may be incurred for wells in
federal waters that exhibit a phenomenon known as sustained
casing pressure. The Department of Interior Minerals Management
Service, or MMS, has operational requirements regarding wells
with sustained casing pressure. These requirements include how
such wells are to be tested, reported and monitored. Future
regulations could require that such wells either be repaired or
plugged. Costs to effect repairs or to plug could be substantial
in wells with high pressure, or that are located in deep water
or both. We operate several wells on offshore federal leases
with sustained casing pressure that are subject to current
monitoring and operating requirements.
NEG Oil & Gas believes that its oil and gas operations
are in material compliance with all applicable oil and natural
gas, safety, environmental and land use laws and regulations,
and NEG Oil & Gas works diligently to ensure continuing
compliance. NEG Oil & Gas is not aware of, nor has it
received any notice of, any allegation that it is not in
material compliance with such requirements. However, on occasion
spills occur or NEG Oil & Gas receives notices of
non-compliance with certain requirements from federal, state, or
local regulatory agencies. These notices are typically
administrative in nature resulting in an infraction of operating
procedure and require resolving the matter in a prescribed
fashion and timeframe. Administrative fines are generally waived
or are minimal in degree, usually in payment of agency costs for
time and materials associated with inspections. However, NEG
Oil & Gas could face more serious enforcement depending
on the nature of the spill or non-compliance
and/or the
media impacted by the spill or non-compliance. NEG
Oil & Gas may incur significant costs for:
(1) clean-up
and damages due to spills or other releases; and (2) civil
penalties imposed for spills, releases or non-compliance with
applicable laws and regulations. If substantial liabilities to
third parties or governmental entities are incurred, the payment
of such claims may reduce or eliminate the funds available for
project investment or result in loss of properties. Although we
maintain insurance coverage considered to be customary in the
industry, NEG Oil & Gas is not fully insured against
all of these risks, either because insurance is not available or
because of high premiums. Accordingly, NEG Oil & Gas
may be subject to liability or may lose substantial portions of
properties due to hazards that cannot be insured against or have
not been insured against due to prohibitive premiums or for
other reasons.
NEG Oil & Gas does not anticipate that we will be
required in the near future to expend amounts that are material
in relation to our total capital expenditures program complying
with environmental laws and regulations, but inasmuch as these
laws and regulations are frequently changed and are subject to
interpretation, NEG Oil & Gas is unable to predict with
any certainty the ultimate cost of compliance or the extent of
liability risks. NEG Oil & Gas is also unable to assure
you that more stringent laws and regulations protecting the
environment will not be adopted and that material expenses will
not be incurred in complying with environmental laws and
regulations in the future.
10
At any time, NEG Oil & Gas may be forced to incur
significant costs to install controls or make operational
changes to comply with existing, new and evolving environmental
compliance requirements. The imposition of any of these
liabilities or compliance obligations on NEG Oil & Gas
may have a material adverse effect on its financial condition
and results of operations.
Other
Regulation
Federal Leases. As described above, certain of
our operations are located on federal oil and natural gas
leases, which are administered by the MMS pursuant to the Outer
Continental Shelf Lands Act, or OCSLA. These leases were issued
through competitive bidding and contain relatively standardized
terms. These leases require compliance with detailed MMS
regulations and orders that are subject to interpretation and
change by the MMS.
For offshore operations, lessees must obtain MMS approval for
exploration, development and production plans prior to the
commencement of such operations. Lessees must also obtain
permits from the MMS prior to the commencement of drilling. The
MMS has promulgated regulations requiring offshore production
facilities located on the Outer Continental Shelf, or OCS, to
meet stringent engineering and construction specifications. The
MMS also has regulations restricting the flaring or venting of
natural gas, and has proposed to amend such regulations to
prohibit the flaring of liquid hydrocarbons and oil without
prior authorization. Similarly, the MMS has promulgated other
regulations governing the plugging and abandonment of wells
located offshore and the installation and removal of all
production facilities.
To cover the various obligations of lessees on the OCS, the MMS
generally requires that lessees have substantial net worth or
post bonds or other acceptable assurances that such obligations
will be satisfied. The cost of these bonds or assurances can be
substantial, and there is no assurance that they can be obtained
in all cases. NEG Oil & Gas subsidiary, National
Offshore, is currently subject to supplemental bonding
requirements by the MMS. Material deviation from MMS regulations
could result in the MMS suspending or terminating an
operators or lessees offshore operations. Any such
suspension or termination could materially adversely affect the
financial condition and results of operations of NEG
Oil & Gas.
The MMS also administers the collection of royalties under the
terms of the OCSLA and the oil and gas leases issued thereunder.
The amount of royalties due is based upon the terms of the oil
and gas leases as well as the regulations promulgated by the
MMS. The MMS regulations governing the calculation of royalties
and the valuation of crude oil produced from federal leases
currently rely on arms-length sales prices and spot market
prices as indicators of value. On August 20, 2003, the MMS
issued a proposed rule that would change certain components of
its valuation procedures for the calculation of royalties owed
for crude oil sales. The proposal would change the valuation
basis for transactions not at arms-length from spot to the
New York Mercantile Exchange prices adjusted for locality and
quality differentials and would clarify the treatment of
transactions under a joint operating agreement. Final comments
on the proposed rule were due on November 10, 2003. NEG
Oil & Gas cannot predict whether this proposed rule
will take effect as written, nor can NEG Oil & Gas
predict whether the proposed rule, if it takes effect, will be
challenged in federal court and whether it will withstand such a
challenge. NEG Oil & Gas believes this rule, as
proposed, will not have a material impact on our financial
condition, liquidity or results of operations.
State
Regulation of Exploration and Production.
Each of the states in which NEG Oil & Gas operates
regulates the exploration, drilling, and development and
marketing of oil, natural gas, and natural gas condensate. Such
regulations have been developed to conserve minerals and for the
protection of correlative rights. These regulations include
requirements for obtaining drilling permits, for developing new
fields, for insuring proper well spacing and density and for
insuring sound well operation and proper plugging and
abandonment. The rate at which wells may be produced and may
also be regulated and the maximum daily production allowable
from both oil and gas wells may be established on a market
demand or conservation basis or both.
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Operating
Hazards and Insurance
The oil and natural gas business involves a variety of operating
risks. In accordance with industry practice, NEG Oil &
Gas maintains insurance against some, but not all, potential
risks and losses. For some risks, NEG Oil & Gas may not
obtain insurance if it is believed that the cost of available
insurance is excessive relative to the risks presented. In
addition, pollution and environmental risks generally are not
fully insurable. If a significant accident or other event occurs
and is not fully covered by insurance, it could adversely affect
our oil and gas operations.
Title
to Properties
NEG Oil & Gas believes that it has satisfactory title
to all of its material assets. Although title to oil and gas
properties is subject to encumbrances in some cases, such as
customary interests generally retained in connection with
acquisition of real property, customary royalty interests and
contract terms and restrictions, liens under operating
agreements, liens related to environmental liabilities
associated with historical operations, liens for current taxes
and other burdens, easements, restrictions and minor
encumbrances customary in the oil and natural gas industry, NEG
Oil & Gas believes that none of these liens,
restrictions, easements, burdens and encumbrances will
materially detract from the value of these properties or from
NEG Oil & Gas interest in these properties or
will materially interfere with our use of the properties in the
operation of NEG Oil & Gas business. In addition,
NEG Oil & Gas revolving credit facility is
secured by a first priority lien on substantially all of NEG
Oil & Gas oil and natural gas properties and
other assets. In addition, NEG Oil & Gas believes that
it has obtained sufficient
right-of-way
grants and permits from public authorities and private parties
for NEG Oil & Gas to operate its business in all
material respects as described in this annual report on
Form 10-K.
Competition
The oil and gas business is highly competitive in the search for
and acquisition of additional reserves and in the sale of oil
and gas. NEG Oil & Gas competitors include major
and intermediate sized integrated oil and gas companies,
independent oil and gas companies and individual producers and
operators. In particular, NEG Oil & Gas competes for
property acquisitions and for the equipment and labor required
to operate and develop its properties. These competitors may be
able to pay more for properties and may be able to define,
evaluate, bid for and purchase a greater number of properties
than NEG Oil & Gas can. Ultimately, NEG Oil &
Gas future success will depend on its ability to develop
or acquire additional reserves at costs that allow it to remain
competitive.
Employees
As of December 31, 2005, there were 95 people employed in
our Oil & Gas segment. None of these employees is
covered by a collective bargaining agreement.
Gaming
Business
We currently own and operate gaming properties in Las Vegas,
Nevada and Atlantic City, New Jersey. Our three gaming
properties in the Las Vegas metropolitan area are operated
through our wholly-owned subsidiary, American Casino &
Entertainment Properties LLC, or ACEP. Our Las Vegas properties
are the Stratosphere Casino Hotel & Tower, which is
located on the Las Vegas Strip and caters to visitors to Las
Vegas, and two off-Strip casinos, Arizona Charlies Decatur
and Arizona Charlies Boulder, which cater primarily to
residents of Las Vegas and the surrounding communities. The
Stratosphere is one of the most recognized landmarks in Las
Vegas and our two Arizona Charlies properties are
well-known casinos in their respective marketplaces.
Our Atlantic City property is The Sands, which we own and
operate through our 58.3% ownership of Atlantic Coast. The Sands
caters to middle and premium category patrons.
Las
Vegas Gaming Operations
Stratosphere Casino Hotel &
Tower. The Stratosphere owns approximately 34
acres of land located at the northern end of the Las Vegas Strip
of which approximately 17 acres is available for
development. The Stratosphere
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offers the tallest free-standing observation tower in the United
States and, at 1,149 feet, it is the tallest building west
of the Mississippi River. The tower includes an award-winning
332-seat revolving restaurant with unparalleled views of Las
Vegas, known as the Top of the World, and features the three
highest amusement rides in the world.
The Stratospheres casino contains approximately
80,000 square feet of gaming space, with approximately
1,400 slot machines, 48 table games an eight table poker room
and a race and sports book. Seven themed restaurants and four
lounges, two of which feature live entertainment, are all
located adjacent to the casino. For 2005, 2004 and 2003,
approximately 70.7%, 70.6% and 70.1%, respectively, of the
Stratospheres gaming revenue was generated by slot machine
play and 25.9%, 27.4% and 28.0%, respectively, by table games.
The Stratosphere derives its other gaming revenue from the poker
room and the race and sports book, which primarily are intended
to attract customers for slot machines and table games.
The hotel has 2,444 rooms, including 131 suites. The hotel
amenities include a 67,000 square foot pool and a
recreation area located on the eighth floor which includes a
café, cocktail bar, private cabanas and a fitness center.
The Beach Club 25, located on the
25th
floor, provides a secluded adult pool. The Stratosphere
refurbished approximately 1,400 of its guest rooms in 2004 and
2005.
The retail center, located on the second floor of the base
building, occupies approximately 110,000 square feet of
developed retail space. The retail center contains 43 shops, six
of which are food venues, and 13 merchant kiosks. Adjacent to
the retail center is the 640-seat showroom that currently offers
afternoon and evening shows designed to appeal to value-minded
visitors who come to Las Vegas.
Arizona Charlies Decatur. Arizona
Charlies Decatur, a full-service hotel and casino geared
toward residents of Las Vegas and surrounding communities, is
located on approximately 17 acres of land four miles west
of the Las Vegas Strip in the heavily populated west Las Vegas
area. The property is easily accessible from Route 95, a major
highway in Las Vegas.
Arizona Charlies Decatur contains approximately
52,000 square feet of gaming space with approximately 1,480
slot machines, 15 table games, a race and sports book, a
24-hour
bingo parlor, a Keno lounge and a poker room. Approximately
65.5% of the slot machines at Arizona Charlies Decatur are
video poker games. Arizona Charlies Decatur emphasizes
video poker because it is popular with local players and
therefore generates high volumes of play and casino revenue. For
2005, 2004 and 2003, approximately 89.3%, 90.0% and 90.8%,
respectively, of the propertys gaming revenue was
generated by slot machine play and 4.9%, 5.1% and 5.0%,
respectively, by table games. Arizona Charlies Decatur
derives its other gaming revenue from bingo, keno, poker and the
race and sports book, which are primarily intended to attract
customers for slot machines and table games.
Arizona Charlies Decatur currently has 258 rooms,
including nine suites. Hotel customers include local residents
and their
out-of-town
guests, as well as those business and leisure travelers who,
because of location and cost considerations, choose not to stay
on the Las Vegas Strip or at other hotels in Las Vegas.
Arizona Charlies Boulder. Arizona
Charlies Boulder operates a full-service casino, hotel and
RV park situated on approximately 24 acres of land located
on Boulder Highway, in an established retail and residential
neighborhood in the eastern metropolitan area of Las Vegas. The
property is easily accessible from I-515, the most heavily
traveled east/west highway in Las Vegas.
Arizona Charlies Boulder contains approximately
41,000 square feet of gaming space with approximately 830
slot machines, 14 table games, a race and sports book and a
24-hour
bingo parlor. Arizona Charlies Boulder is currently
expanding the casino to include an additional 7,300 square
feet of gaming space which will include approximately 250 new
slot machines and two table games and is expected to be
completed during 2006. Approximately 60.0% of the slot machines
at Arizona Charlies Boulder are video poker games. Arizona
Charlies Boulder emphasizes video poker because it is
popular with local players and, as a result, generates high
volumes of play and casino revenue. For 2005, 2004 and 2003,
approximately 88.1%, 89.1% and 86.9%, respectively, of gaming
revenue was generated by slot machine play and 7.1%, 7.0% and
9.3%, respectively, by table games. Arizona Charlies
Boulder derives its other gaming revenue from bingo and the race
and sports book, which are primarily intended to attract
customers for slot machines and table games.
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Arizona Charlies Boulder currently has 303 rooms,
including 221 suites. Hotel customers include local residents
and their
out-of-town
guests, as well as those business and leisure travelers who,
because of location and cost considerations, choose not to stay
on the Las Vegas Strip or at other hotels in Las Vegas.
Arizona Charlies Boulder also has an RV park. The RV park
is one of the largest short-term RV parks on the Boulder Strip
with 30- to 70-foot pull through stations and over 200 spaces.
Atlantic
City Gaming Operations
Our Atlantic City, New Jersey Gaming operations consist of The
Sands located on approximately six acres of land one-half block
from Atlantic Citys well-known Boardwalk. The Sands
contains approximately 80,000 square feet of gaming space
with approximately 2,150 slot machines, 79 table games, a poker
room and a simulcasting facility. For 2005, 2004 and 2003,
approximately 72.8%, 74.1% and 72.6%, respectively, of the
propertys gaming revenue was generated by slot machine
play and 26.3%, 25.0% and 21.0%, respectively, by table games.
The Sands derives its other gaming revenue from poker and the
simulcast facility, which primarily serve to attract customers
for slot machines and table games.
The Sands currently has two hotels with a total of 620 rooms,
including 187 suites; five restaurants; two cocktail lounges;
two private lounges for invited guests; a 720-seat cabaret
theater; retail space; an adjacent nine-story office building
with approximately 77,000 square feet of office space for
its executive, financial and administrative personnel; and the
People Mover, an elevated, enclosed, one-way moving
sidewalk connecting The Sands to the Boardwalk.
Pending
Acquisitions
On November 29, 2005, our subsidiary, AREP Gaming LLC,
through its subsidiaries, AREP Laughlin Corporation and AREP
Boardwalk LLC, entered into an agreement to purchase the
Flamingo Laughlin Hotel and Casino in Laughlin, Nevada and
7.7 acres of land in Atlantic City, New Jersey, known as
the Traymore site, from Harrahs Entertainment for
$170.0 million. Completion of the transaction is subject to
regulatory approval and is expected to close in mid-2006.
The Flamingo owns 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 Flamingo features the largest hotel in Laughlin with 1,907
hotel rooms, a 57,000 square foot casino, seven dining
rooms options, 2,420 parking spaces, over 35,000 square fee
of meeting space and a 3,000-seat outdoor amphitheater. The
right to acquire the Flamingo will be assigned to ACEP.
The Traymore site was once home to the historic Traymore Hotel.
The site is primarily undeveloped and is situated between The
Sands and the Atlantic City Boardwalk. The Atlantic City site
will be acquired by AREP Boardwalk.
An acquisition option is currently being discussed with Atlantic
Coast.
Strategy
In Las Vegas, we target primarily middle-market customers who
focus on obtaining value in their gaming, lodging, dining and
entertainment experiences. We emphasize the Stratosphere as a
destination property for visitors to Las Vegas by offering an
attractive experience for the value minded customer. We strive
to deliver value to our gaming customers at our Arizona
Charlies locations by offering payout ratios on our slot
and video poker machines that we believe are among the highest
payout ratios in Las Vegas. Our Las Vegas management team has
improved operating results by repositioning each of our
properties to better target their respective markets, expanding
and improving our existing facilities, focusing on customer
service and implementing a targeted cost reduction program.
The Sands seeks to attract both middle and premium slot and
table game players and is focused on acquiring new players and
recovering customers who played at The Sands in the past.
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Marketing
The Stratosphere utilizes the unique amenities of its tower to
attract visitors. Gaming products, hotel rooms, entertainment
and food and beverage products are priced to appeal to the
value-conscious middle-market Las Vegas visitor. The Top of the
World restaurant, however, caters to higher-end customers. The
Stratosphere participates in the Ultimate Rewards Club which
provides members with cash
and/or
complimentaries at the casino, which can be used at Arizona
Charlies Decatur or Arizona Charlies Boulder.
Advertising and promotional campaigns are designed to maximize
hotel room occupancy, visits to the tower and attract and retain
players on property.
Arizona Charlies Decatur and Arizona Charlies
Boulder market their hotels and casinos primarily to local
residents of Las Vegas and the surrounding communities. We
believe that the properties pricing and gaming odds make
them one of the best values in the gaming industry and that
their gaming products, hotel rooms, restaurants and other
amenities attract local customers in search of reasonable
prices, smaller casinos and more attentive service.
We focus our Las Vegas marketing efforts on attracting customers
with an affinity for playing slot and video poker machines.
Similarly, we have intentionally avoided competing for the
attention of high-stakes table game customers.
The Sands markets its hotel and casino in the highly competitive
Atlantic City market and the surrounding areas. The Sands seeks
premium category patrons by offering private, limited-access
facilities. Beginning in 2003, it began to leverage the heritage
of The Sands and promote the property as a boutique casino hotel
that provides outstanding value and service that exceeds
expectations. The Sands employs a variety of product offerings
for both the middle and premium category patron, including
incentives to visit The Sands facilities on a frequent
basis.
Competition
Investments in the gaming and entertainment industries involve
significant competitive pressures and political and regulatory
considerations. In recent years, there have been many new gaming
establishments opened as well as facility expansions, providing
an increased supply of competitive products and properties in
the industry, which may adversely affect our operating margins
and investment returns. The hotel and casino industry is highly
competitive.
Hotels located on or near the Las Vegas Strip compete primarily
with other Las Vegas strip hotels and with a few major hotels in
downtown Las Vegas. The Stratosphere also competes with a large
number of hotels and motels located in or near Las Vegas. The
Stratospheres tower competes with all other forms of
entertainment, recreational activities and other attractions in
and near Las Vegas. Arizona Charlies Boulder and Arizona
Charlies Decatur compete with other casinos and other
forms of entertainment, which cater to local residents.
The Sands faces intense competition from the other existing
Atlantic City casinos as well as legalized gaming on Native
American tribal lands. Legalized casino gambling in neighboring
states could have a material adverse effect on The Sands.
Regulation
Our gaming activities are subject to extensive regulation by
authorities in both Nevada and New Jersey. Gaming registrations,
licenses and approvals, once obtained, can be suspended or
revoked for a variety of reasons. To date, our casino properties
have obtained all gaming licenses necessary for the operation of
their existing gaming operations, however, we cannot assure you
that we will obtain any new gaming license or related approval
or renewal of an existing license on a timely basis or at all,
or that, once obtained, the registrations, findings of
suitability, licenses and approvals will not be suspended,
conditioned, limited or revoked.
Nevada
Gaming Law
The Nevada ownership and operation of casino gaming facilities
in the State of Nevada are subject to the Nevada Gaming Control
Act and the regulations made under such Act, as well as various
local ordinances. The gaming operations of our casinos are
subject to the licensing and regulatory control of the Nevada
Gaming
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Commission and the Nevada State Gaming Control Board. Our
casinos operations are also subject to regulation by the
Clark County Liquor and Gaming Licensing Board and the City of
Las Vegas. These agencies are referred to herein collectively as
the Nevada Gaming Authorities.
The laws, regulations and supervisory procedures of the Nevada
Gaming Authorities are based upon declarations of public policy.
These public policy concerns include, among other things:
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preventing unsavory or unsuitable persons from being directly or
indirectly involved with gaming at any time or in any capacity;
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establishing and maintaining responsible accounting practices
and procedures; and
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maintaining effective controls over the financial practices of
licensees, including establishing minimum procedures for
internal fiscal affairs, and safeguarding assets and revenue,
providing reliable recordkeeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities.
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preventing cheating and fraudulent practices; and
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providing a source of state and local revenue through taxation
and licensing fees.
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Changes in these laws, regulations and procedures could have
significant negative effects on our gaming operations and our
financial condition and results of operations.
Owner and Operator Licensing Requirements. Our
Nevada casinos are licensed by the Nevada Gaming Authorities as
corporate and limited liability company licensees, which we
refer to herein as company licensees. Under their gaming
licenses, our casinos are required to pay periodic fees and
taxes. The gaming licenses are not transferable.
To date, our casino properties have obtained all gaming licenses
necessary for the operation of their existing gaming operations;
however, gaming licenses and related approvals are privileges
under Nevada law, and we cannot assure you that any new gaming
license or related approvals that may be required in the future
will be granted, or that any existing gaming licenses or related
approvals will not be limited, conditioned, suspended or revoked
or will be renewed.
Our Registration Requirements. We have been
registered by the Nevada Gaming Commission as a publicly traded
corporation, which we refer to as a registered company for the
purposes of the Nevada Gaming Control Act. APIs parent
company, API, AREH, and AREHs direct and indirect
subsidiaries involved in Nevada gaming operations have been
registered by the Nevada Gaming Commission as holding companies
to the extent required by law.
Periodically, we will be required to submit detailed financial
and operating reports to the Nevada Gaming Commission and to
provide any other information that the Nevada Gaming Commission
may require. Substantially all of our material loans, leases,
sales of securities and similar financing transactions must be
reported to, or approved by, the Nevada Gaming Commission.
Individual Licensing Requirements. No person
may become a stockholder or member of, or receive any percentage
of the profits of, a non-publicly traded holding or intermediary
company or company licensee without first obtaining licenses and
approvals from the Nevada Gaming Authorities. The Nevada Gaming
Authorities may investigate any individual who has a material
relationship to or material involvement with us to determine
whether the individual is suitable or should be licensed as a
business associate of a gaming licensee. We and certain of our
officers, directors and key employees are required to file
applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an
application for licensing for any cause which they deem
reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial
information followed by a thorough investigation. An applicant
for licensing or an applicant for a finding of suitability must
pay or must cause to be paid all the costs of the investigation.
Changes in licensed positions must be reported to the Nevada
Gaming Authorities and, in addition to their authority to deny
an application for a finding of suitability or licensing, the
Nevada Gaming Authorities have the jurisdiction to disapprove a
change in a corporate position.
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If the Nevada Gaming Authorities were to find an officer,
director or key employee unsuitable for licensing or unsuitable
to continue having a relationship with us, we would have to
sever all relationships with that person. In addition, the
Nevada Gaming Commission may require us to terminate the
employment of any person who refuses to file appropriate
applications. Determinations of suitability or questions
pertaining to licensing are not subject to judicial review in
Nevada.
Consequences of Violating Gaming Laws. If the
Nevada Gaming Commission decides that we have violated the
Nevada Gaming Control Act or any of its regulations, it could
limit, condition, suspend or revoke our registrations and gaming
licenses. In addition, we and the persons involved could be
subject to substantial fines for each separate violation of the
Nevada Gaming Control Act, or of the regulations of the Nevada
Gaming Commission, at the discretion of the Nevada Gaming
Commission. Further, the Nevada Gaming Commission could appoint
a supervisor to conduct the operations of our casinos and, under
specified circumstances, earnings generated during the
supervisors appointment (except for the reasonable rental
value of the premises) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of any of our
gaming licenses and the appointment of a supervisor could, and
revocation of any gaming license would, have a significant
negative effect on our gaming operations.
Requirements for Beneficial Securities
Holders. Regardless of the number of shares held,
any beneficial holder of our voting securities may be required
to file an application, be investigated and have that
persons suitability as a beneficial holder of voting
securities determined if the Nevada Gaming Commission has reason
to believe that the ownership would otherwise be inconsistent
with the declared policies of the State of Nevada. If the
beneficial holder of the voting securities who must be found
suitable is a corporation, partnership, limited partnership,
limited liability company or trust, it must submit detailed
business and financial information including a list of its
beneficial owners. The applicant must pay all costs of the
investigation incurred by the Nevada Gaming Authorities in
conducting any investigation.
The Nevada Gaming Control Act requires any person who acquires
more than 5% of the voting securities of a registered company to
report the acquisition to the Nevada Gaming Commission. The
Nevada Gaming Control Act requires beneficial owners of more
than 10% of a registered companys voting securities to
apply to the Nevada Gaming Commission for a finding of
suitability within 30 days after the Chairman of the Nevada
State Gaming Control Board mails the written notice requiring
such filing. Under certain circumstances, an institutional
investor, as defined in the Nevada Gaming Control Act,
which acquires more than 10%, but not more than 15%, of the
registered companys voting securities may apply to the
Nevada Gaming Commission for a waiver of a finding of
suitability if the institutional investor holds the voting
securities for investment purposes only. In certain
circumstances, an institutional investor that has obtained a
waiver can hold up to 19% of a registered companys voting
securities for a limited period of time and maintain the waiver.
An institutional investor will not be deemed to hold voting
securities for investment purposes unless the voting securities
were acquired and are held in the ordinary course of business as
an institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the
members of the board at directors of the registered company, a
change in the corporate charter, bylaws, management, policies or
operations of the registered company, or any of its gaming
affiliates, or any other action which the Nevada Gaming
Commission finds to be inconsistent with holding the registered
companys voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding
voting securities for investment purposes only include:
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voting on all matters voted on by stockholders or interest
holders;
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making financial and other inquiries of management of the type
normally made by securities analysts for informational purposes
and not to cause a change in its management, policies or
operations; and
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other activities that the Nevada Gaming Commission may determine
to be consistent with such investment intent.
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Consequences of Being Found Unsuitable. Any
person who fails or refuses to apply for a finding of
suitability or a license within 30 days after being ordered
to do so by the Nevada Gaming Commission or by the Chairman of
the Nevada State Gaming Control Board, or who refuses or fails
to pay the investigative costs incurred by the Nevada Gaming
Authorities in connection with the investigation of its
application, may be found unsuitable.
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The same restrictions apply to a record owner if the record
owner, after request, fails to identify the beneficial owner.
Any person found unsuitable and who holds, directly or
indirectly, any beneficial ownership of any voting security or
debt security of a registered company beyond the period of time
as may be prescribed by the Nevada Gaming Commission may be
guilty of a criminal offense. We will be subject to disciplinary
action if, after we receive notice that a person is unsuitable
to hold an equity interest or to have any other relationship
with, we:
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pay that person any dividend or interest upon any voting
securities;
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allow that person to exercise, directly or indirectly, any
voting right held by that person;
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pay remuneration in any form to that person for services
rendered or otherwise; or
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fail to pursue all lawful efforts to require the unsuitable
person to relinquish such persons voting securities
including, if necessary, the immediate purchase of the voting
securities for cash at fair market value.
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Gaming Laws Relating to Securities
Ownership. The Nevada Gaming Commission may, in
its discretion, require the holder of any debt or similar
securities of a registered company to file applications, be
investigated and be found suitable to own the debt or other
security of the registered company if the Nevada Gaming
Commission; has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the
State of Nevada. If the Nevada Gaming Commission decides that a
person is unsuitable to own the security, then under the Nevada
Gaming Control Act, the registered company can be sanctioned,
including the loss of its approvals if, without the prior
approval of the Nevada Gaming Commission, it:
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pays to the unsuitable person any dividend, interest or any
distribution whatsoever;
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recognizes any voting right by the unsuitable person in
connection with the securities;
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pays the unsuitable person remuneration in any form; or
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makes any payment to the unsuitable person by way of principal,
redemption, conversion, exchange, liquidation or similar
transaction.
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We are required to maintain a current stock ledger in Nevada
which may be examined by the Nevada Gaming Authorities at any
time. If any securities are held in trust by an agent or by a
nominee, the record holder may be required to disclose the
identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make the disclosure may be grounds for
finding the record holder unsuitable. We will be required to
render maximum assistance in determining the identity of the
beneficial owner of any of our voting securities. The Nevada
Gaming Commission has the power to require the stock
certificates of any registered company to bear a legend
indicating that the securities are subject to the Nevada Gaming
Control Act and certain subject to restrictions imposed by
applicable gaming laws. To date, this requirement has not been
imposed on us.
Approval of Public Offerings. Neither we nor
any of our affiliates may make a public offering of securities
without the prior approval of the Nevada Gaming Commission if
the proceeds from the offering are intended to be used to
construct, acquire or finance gaming facilities in Nevada, or to
retire or extend obligations incurred for those purposes or for
similar transactions. The Nevada Commission has granted AREP
prior approval to make public offerings for a period of two
years expiring in May 2006, subject to certain conditions. This
approval, the shelf approval, may be rescinded for good cause
without prior notice upon the issuance of an interlocutory stop
order by the Chairman of the Nevada Board and must be renewed at
the end of the two-year approval period. The shelf approval
applies to any affiliated company wholly owned by us, or an
affiliate, which is a publicly traded corporation or would
thereby become a publicly traded corporation pursuant to a
public offering. The shelf approval includes approval for
Stratosphere Gaming Corp. to guarantee any security issued by,
or to hypothecate its assets to secure the payment or
performance of any obligations evidenced by a security issued by
us or an affiliate in a public offering under the shelf
approval. The shelf approval also includes approval for us to
place restrictions upon the transfer of, and to enter into
agreements not to encumber the equity securities of our
subsidiaries licensed or registered in Nevada, as applicable, in
conjunction with public offerings made under the shelf approval.
The shelf approval does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the
contrary is unlawful.
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Approval of Changes in Control. As a
registered company, we must obtain prior approval of the Nevada
Gaming Commission with respect to a change in control through:
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mergers;
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consolidation;
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stock or asset acquisitions;
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management or consulting agreements; or
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any act or conduct by a person by which the person obtains
control of us.
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Entities seeking to acquire control of a registered company must
satisfy the Nevada State Gaming Control Board and Nevada Gaming
Commission with respect to a variety of stringent standards
before assuming control of the registered company. The Nevada
Gaming Commission may also require controlling stockholders,
officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire
control to be investigated and licensed as part of the approval
process relating to the transaction.
Approval of Defensive Tactics. The Nevada
legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and
corporate defense tactics affecting Nevada gaming licenses or
affecting registered companies that are affiliated with the
operations permitted by Nevada gaming licenses may be harmful to
stable and productive corporate gaming. The Nevada Gaming
Commission has established a regulatory scheme to reduce the
potentially adverse effects of these business practices upon
Nevadas gaming industry and to further Nevadas
policy to:
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assure the financial stability of corporate gaming operators and
their affiliates;
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preserve the beneficial aspects of conducting business in the
corporate form; and
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promote a neutral environment for the orderly governance of
corporate affairs.
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As a registered company, we may need to obtain approvals from
the Nevada Gaming Commission before we can make exceptional
repurchases of voting securities above our current market price
and before a corporate acquisition opposed by management can be
consummated. The Nevada Gaming Control Act also requires prior
approval of a plan of recapitalization proposed by a registered
companys board of directors in response to a tender offer
made directly to its stockholders for the purpose of acquiring
control.
Fees and Taxes. License fees and taxes,
computed in various ways depending on the type of gaming or
activity involved, are payable to the State of Nevada and to the
counties and cities in which the licensed subsidiaries
respective operations are conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable
either monthly, quarterly or annually and are based upon:
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a percentage of gross revenues received;
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the number of gaming devices operated; or
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the number of table games operated.
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Our casinos are also subject to a state payroll tax based on the
wages paid to their employees.
Foreign Gaming Investigations. Any person who
is licensed, required to be licensed, registered, required to be
registered, or is under common control with those persons, or
licensees, and who proposes to become involved in a gaming
venture outside of Nevada, is required to deposit with the
Nevada State Gaming Control Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of
investigation of the Nevada State Gaming Control Board of the
licensees or registrants participation in such
foreign gaming. The revolving fund is subject to increase or
decrease in the discretion of the Nevada Gaming Commission.
Licensees and registrants are required to comply with the
reporting requirements imposed by the Nevada Gaming Control Act.
A licensee or registrant is also subject to disciplinary action
by the Nevada Gaming Commission if it:
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knowingly violates any laws of the foreign jurisdiction
pertaining to the foreign gaming operation;
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fails to conduct the foreign gaming operation in accordance with
the standards of honesty and integrity required of Nevada gaming
operations;
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engages in any activity or enters into any association that is
unsuitable because it poses an unreasonable threat to the
control of gaming in Nevada, reflects, or tends to reflect,
discredit or disrepute upon the State of Nevada or gaming in
Nevada, or is contrary to the gaming policies of Nevada;
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engages in activities or enters into associations that are
harmful to the State of Nevada or its ability to collect gaming
taxes and fees; or
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employs, contracts with or associates with a person in the
foreign operation who has been denied a license or finding of
suitability in Nevada on the ground of unsuitability.
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License for Conduct of Gaming and Sale of Alcoholic
Beverage. The conduct of our Gaming activities
and the service and sale of alcoholic beverages by our casinos
are subject to licensing, control and regulation by the Clark
County Liquor and Gaming Licensing Board and the City of Las
Vegas. In addition to approving our casinos, the Clark County
Liquor and Gaming License Board and the City of Las Vegas have
the authority to approve all persons owning or controlling the
stock of any corporation controlling a gaming license. All
licenses are revocable and are not transferable. The county and
city agencies have full power to limit, condition, suspend or
revoke any license. Any disciplinary action could, and
revocation would, have a substantial negative impact upon our
operations.
New
Jersey Gaming Law
Casino gaming in Atlantic City, New Jersey is strictly regulated
under the New Jersey Casino Control Act, or NJCCA, and its
attendant regulations by the New Jersey Casino Control
Commission, or New Jersey Commission. The NJCCA and the
regulations concern primarily the financial stability, integrity
and character of casino operators, their employees, their debt
and equity security holders and others financially interested in
casino operations; the nature of hotel and casino facilities;
the operation methods (including rules of games and credit and
collection procedures); and financial and accounting practices
used in connection with casino operations. A number of these
regulations result in casino operating costs greater than those
in comparable facilities in Nevada and elsewhere. The following
is only a summary of the applicable provisions of the NJCCA and
the regulations; it is qualified in its entirety by reference to
the NJCCA and such other applicable laws and regulations.
The NJCCA and the regulations promulgated thereunder contain
detailed provisions concerning, among other things:
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the granting and renewal of casino licenses;
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the suitability of the approved hotel facility, and the amount
of authorized casino space and gaming units permitted therein;
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the qualification of natural persons and entities related to the
casino licensee;
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the licensing of certain employees and all gaming-related
vendors and certain non-gaming related vendors of casino
licensees;
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the types of games offered to the public and the rules under
which the games are played;
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the selling and redeeming of gaming chips;
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the granting and duration of credit and the enforceability of
gaming debts;
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management control procedures, accounting and cash control
methods and reports to gaming agencies;
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the security standards;
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the manufacture and distribution of gaming equipment; and
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the simulcasting of horse races by casino licensees,
advertising, entertainment and alcoholic beverages.
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Casino Control Commission. The New Jersey
Commission has broad, plenary power to regulate a wide spectrum
of gaming and non-gaming-related activities and to approve the
form of ownership and financial structure of casino licensees
and their affiliated and related companies such as holding
companies and financial sources.
Casino License. The qualification criteria for
casino licensees include: good character, honesty and integrity;
financial stability, integrity and responsibility; and business
ability and casino experience. Casino licensees must also
establish the qualifications of its financial sources. A casino
license issued by the New Jersey Commission permits the licensee
to offer authorized casino games to the public. Having satisfied
all the requisite criteria, ACE Gaming LLC has been issued a
plenary casino license, which was most recently renewed on
September 29, 2004 for four years through September
2008. To be considered financially stable, a licensee must
establish and maintain that it can pay winning wagers when due;
achieve annual gross operating profit; pay all local, state and
federal taxes when due; make necessary capital and maintenance
expenditures to ensure that it has a superior first-class
facility; and pay, exchange, refinance or extend debts which
will mature or become due and payable during the license term.
In the event a licensee fails to demonstrate or maintain
financial stability, the New Jersey Commission may take such
action as it deems necessary, including: impose license
conditions; establish a cure period; impose reporting
requirements; restrict cash transfers; require additional
reserves or trust accounts; or revoke the license and appoint a
conservator.
Under New Jersey gaming law no entity may hold a casino license
unless each officer, director, principal employee, person who
directly or indirectly holds any beneficial interest or
ownership in the licensee, each person who in the opinion of the
New Jersey Commission has the ability to control or elect a
majority of the board of directors of the licensee (other than a
banking or other licensed lending institution acting in the
ordinary course of business) and any lender, underwriter, agent
or employee of the licensee or other person whom the New Jersey
Commission may consider appropriate, obtains and maintains
either a license or qualification approval. Qualification
approval means that such person must, but for residence,
individually meet the qualification requirements as a casino key
employee.
Control Persons. Any entity qualifier or
intermediary or holding company, such as AREP, is required to
meet the same basic standards for approval as a casino licensee.
However, the New Jersey Commission, with the concurrence of the
Director of the Division of Gaming Enforcement, may waive the
requirement that an officer, director, lender, underwriter,
agent or employee of a publicly traded holding company, or
person directly or indirectly holding a beneficial interest or
ownership of the securities thereof, individually qualify for
approval under casino key employee standards so long as the New
Jersey Commission and the Director of the Division of Gaming
Enforcement remain satisfied that such officer, director,
lender, underwriter, agent or employee is not significantly
involved in the activities of the casino licensee, or that such
security holder does not have the ability to control the
publicly-traded corporate holding company or elect one or more
of its directors. Persons holding 5.0% or more of the equity
securities of such holding company are presumed to have the
ability to control the company or elect one or more of its
directors and will, unless this presumption is rebutted, be
required to individually qualify. Equity securities are defined
as any voting stock or any security similar to or convertible
into or carrying a right to acquire any security having a direct
or indirect participation in the profits of the issuer.
Financial Sources. The New Jersey Commission
may require all financial backers, investors, mortgagees, bond
holders and holders of notes or other evidence of indebtedness,
either in effect or proposed, which bear any relation to any
casino project, including holders of publicly-traded securities
of an entity which holds a casino license or is an entity
qualifier, subsidiary or holding company of a casino licensee,
to qualify as financial sources. However, the New Jersey
Commission may, in its discretion, waive the qualification
requirement for holders of less than 15.0% of debt securities
such as publicly-traded mortgage bonds so long as the securities
remain widely distributed and freely traded in the public market
and the holder has no ability to control the casino licensee.
Institutional Investors. An institutional
investor is defined by the NJCCA as any retirement fund
administered by a public agency for the exclusive benefit of
federal, state or local public employees; any investment company
registered under the Investment Company Act of 1940, as amended;
any collective investment trust organized by banks under
Part Nine of the Rules of the Comptroller of the Currency;
any closed end investment trust; any chartered or licensed life
insurance company or property and casualty insurance company;
any banking and other chartered or licensed lending institution;
any investment advisor registered under the Investment Advisers
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Act of 1940, as amended; and such other persons as the New
Jersey Commission may determine for reasons consistent with the
policies of the NJCCA.
An institutional investor may be granted a waiver by the New
Jersey Commission from financial source or other qualification
requirements applicable to a holder of publicly-traded
securities, in the absence of a prima facie showing by the
Division of Gaming Enforcement that there is any cause to
believe that the holder may be found unqualified, on the basis
of New Jersey Commission findings that: (1) its holdings
were purchased for investment purposes only and, upon request by
the New Jersey Commission, it files a certified statement to the
effect that it has no intention of influencing or affecting the
affairs of the issuer, the casino licensee or its holding or
intermediary companies; provided, however, that the
institutional investor will be permitted to vote on matters put
to the vote of the outstanding security holders; and (2) if
the securities are debt securities of a casino licensees
holding or intermediary companies or another subsidiary company
of the casino licensees holding or intermediary companies
which is related in any way to the financing of the casino
licensee and represent either (A) 20.0% or less of the
total outstanding debt of the company or (B) 50.0% or less
of any issue of outstanding debt of the company, the securities
are equity securities and represent less than 10.0% of the
equity securities of a casino licensees holding or
intermediary companies or the securities so held exceed such
percentages, upon a showing of good cause. There can be no
assurance, however, that the New Jersey Commission will make
such findings or grant such waiver and, in any event, an
institutional investor may be required to produce for the New
Jersey Commission or the Antitrust Division of the Department of
Justice upon request, any document or information which bears
any relation to such debt or equity securities.
Ownership and Transfer of Securities. The
NJCCA imposes certain restrictions upon the issuance, ownership
and transfer of securities of a regulated company and defines
the term security to include instruments which
evidence a direct or indirect beneficial ownership or creditor
interest in a regulated company including, but not limited to
mortgages, debentures, security agreements, notes and warrants.
AREP is deemed to be a regulated company, and instruments
evidencing a beneficial ownership or creditor interest therein,
including the notes or a partnership interest, are deemed to be
the securities of a regulated company.
If the New Jersey Commission finds that a holder of such
securities is not qualified under the NJCCA, it has the right to
take any remedial action it may deem appropriate, including the
right to force divestiture by such disqualified holder of such
securities. In the event that certain disqualified holders fail
to divest themselves of such securities, the New Jersey
Commission has the power to revoke or suspend the casino license
affiliated with the regulated company that issued the
securities. If a holder is found unqualified, it is unlawful for
the holder (1) to exercise, directly or through any trustee
or nominee, any right conferred by such securities, or
(2) to receive any dividends or interest upon such
securities or any remuneration, in any form, from its affiliated
casino licensee for services rendered or otherwise.
With respect to non-publicly-traded securities, the NJCCA and
regulations of the New Jersey Commission require that the
corporate charter or partnership agreement of a regulated
company establish a right in the New Jersey Commission of prior
approval with regard to transfers of securities, shares and
other interests and an absolute right in the regulated company
to repurchase at the market price or the purchase price,
whichever is the lesser, any such security, share or other
interest in the event that the New Jersey Commission disapproves
a transfer. With respect to publicly-traded securities, such
corporate charter or partnership agreement is required to
establish that any such securities of the entity are held
subject to the condition that if a holder thereof is found to be
disqualified by the New Jersey Commission, such holder shall
dispose of such securities.
Under the terms of the indenture governing the notes, if a
holder of the notes does not qualify under the NJCCA when
required to do so, such holder must dispose of its interest in
such securities, and the issuer of such securities may redeem
the securities at the lesser of the outstanding amount or fair
market value.
Regulatory Violations and Conservatorship. If
the New Jersey Commission were to determine that a casino
licensee or any of its individual or entity qualifiers has
violated the NJCCA, or cannot meet the qualification
requirements of the NJCCA, such person or entity could be
subject to fines or the suspension or revocation of its license
or qualification. If a casino license is suspended for a period
in excess of 120 days or is revoked or not renewed, the New
Jersey Commission could appoint a conservator to operate and
dispose of the casino hotel facilities. A conservator would be
vested with title to all property of such licensee relating to
the casino and the
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approved hotel, subject to valid liens
and/or
encumbrances. Acting under the direct supervision of the New
Jersey Commission, the conservator would be charged with the
duty of conserving, preserving and, if permitted, continuing the
operation of the casino hotel. During the period of the
conservatorship, a former or suspended casino licensee is
entitled to a fair rate of return out of net earnings, if any,
on the property retained by the conservator. The New Jersey
Commission may also discontinue any conservatorship action and
direct the conservator to take such steps as are necessary to
affect an orderly transfer of the property of a former or
suspended casino licensee. Such events could result in an event
of default under the terms of the indenture governing our senior
notes.
Seasonality
Generally, our Las Vegas gaming and entertainment properties are
not affected by seasonal trends. However, we tend to have
increased customer flow from mid-January through Easter, from
October through Thanksgiving, the week between Christmas and New
Years Day and during periods of large events, conventions
or trade shows and decreased customer flow from the Thanksgiving
holiday through Christmas Day and from New Years Day
through the middle of January. Our Atlantic City property is
highly seasonal in nature, with peak activity occurring from May
to September. Consequently, operating results for our Atlantic
City property tend to be better for the first and fourth
quarters of the fiscal year. Such seasonality and fluctuations
may materially affect our revenues and profitability.
Employees
At December 31, 2005, our gaming segment had approximately
6,060 employees, of whom approximately 2,045 were covered by
various collective bargaining agreements providing, generally,
for basic pay rates, working hours, other conditions of
employment, and orderly settlement of labor disputes. Our Gaming
segment historically has had good relationships with the unions
representing its employees and believes that its employee
relations are good.
Corporate
Structure and Financing
We own our interest in our Las Vegas gaming operations through
ACEP which files annual, quarterly and current reports. Each of
these reports is separately filed with the Securities and
Exchange Commission. ACEP has outstanding $215.0 million
principal amount of 7.85% senior secured notes due 2012.
Pursuant to the terms of such notes, ACEP is subject to
restrictions on its ability to make distributions to, or engage
in transactions with, us and our affiliates.
We own our interest in our Atlantic City gaming operations
through our 58.3% interest in Atlantic Coast. Atlantic Coast has
outstanding approximately $37.5 million principal amount of
3% senior exchangeable notes due 2008 of which we own
approximately $35.1 million. Each such note may, at the
option of the holder, be converted into shares of Atlantic Coast
common stock, or Atlantic Coast shares. After giving effect to
the conversion of all such notes and the exercise of all
outstanding warrants to purchase Atlantic Coast shares, we would
own 63.4% of Atlantic Coast, on a fully diluted basis.
We also own 77.5% of the outstanding common stock of GBH which
in turn currently owns 41.7% of Atlantic Coast. On
September 29, 2005, GBH filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code. We understand, that as part of its reorganization, GBH is
contemplating a sale of the Atlantic Coast common stock that it
owns. See Item 3. Legal Proceedings.
Real
Estate
Rental
Real Estate
Our rental real estate operations consist primarily of retail,
office and industrial properties leased to single corporate
tenants. Historically, substantially all of our real estate
assets leased to others have been net-leased under long-term
leases. With certain exceptions, these tenants are required to
pay all expenses relating to the leased
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property and, therefore, we are not typically responsible for
payment of expenses, including maintenance, utilities, taxes,
insurance or any capital items associated with such properties.
To capitalize on favorable real estate market conditions and the
mature nature of our commercial real estate portfolio, beginning
in early 2004 we determined to offer for sale our rental real
estate portfolio. During 2005, we sold 14 rental real
estate properties for approximately $52.5 million. These
properties were encumbered by mortgage debt of approximately
$10.7 million that we repaid from the sale proceeds. As of
December 31, 2005, we owned 55 rental real estate
properties with a book value of approximately
$154.3 million, individually encumbered by mortgage debt
which aggregated approximately $81.5 million.
We continue to seek opportunities to acquire additional rental
real estate properties. While we believe opportunities in real
estate related acquisitions continue to remain available, there
is increasing competition for these opportunities and the
increased competition affects price and the ability to find
quality assets that provide attractive returns.
Real
Estate Development
Our residential home development operations focus primarily on
the construction and sale of single-family homes, custom-built
homes, multi-family homes and residential lots in subdivisions
and in planned communities. Our home building business is
managed by Bayswater Development L.L.C., our wholly-owned
subsidiary. Our long-term investment horizon and operational
expertise allow us to acquire properties with limited current
income and complex entitlement and development issues.
We are currently developing seven residential subdivisions in
New York, Florida and Massachusetts. In New York, we are
developing two high-end residential subdivisions in Westchester
County: Penwood, located in Bedford, and Hammond Ridge, located
in Armonk and New Castle. We are also seeking approval to
develop Pondview Estates which is located in Patterson and Kent
in Putnam County, New York. In Cape Cod, Massachusetts, we are
developing our New Seabury property, a luxury second-home
waterfront community. In Vero Beach, Florida, we are building
out our Grand Harbor and Oak Harbor properties, two residential
waterfront communities. In Naples, Florida, we are building,
developing and selling Falling Waters, a condominium community.
We continue to explore opportunities to sell or finance our
development portfolio.
New Seabury Development. Located in Cape Cod,
Massachusetts, New Seabury is a 2,000 acre resort community
overlooking Nantucket Sound and Marthas Vineyard. There
are approximately 178 acres of land remaining for future
development. We have begun the first phase of our planned
450 unit residential development. As of December 31,
2005 approximately 29 of these new units were under contract.
The average sale price was $961,000 with a range of sales prices
between $660,000 and $2.3 million.
Grand Harbor and Oak Harbor. Grand Harbor and
Oak Harbor are two waterfront communities located in Vero Beach,
Florida. As of December 31, 2005, approximately 900 homes
had been built and sold in the communities. Grand Harbor and Oak
Harbor include properties in various stages of development,
including 364 improved lots and 13 substantially finished homes
ready for sale. In addition, there are approximately
400 acres of land to the north of Grand Harbor available
for development. As of December 31, 2005, 21 homes had been
sold and 9 were under contract. The average sales price was
$775,000 with a range of sales prices between $425,000 and
$1.4 million.
Penwood. Located in Bedford, New York, Penwood
consists of 44 lots situated on 297 acres. The development
is approximately one hour from Manhattan. Homes are situated on
lots that range from 2.1 acres to 14.5 acres. Homes
range in size from 5,400 square feet to 9,600 square
feet. The average selling price of a Penwood home is
$2.4 million, with a range of sales prices between
$2.0 million and $3.4 million. As of December 31,
2005, we have sold 40 of the 44 units and three units were
under contract.
Hammond Ridge. Located in Armonk and New
Castle, New York, Hammond Ridge consists of 37 single-family
lots situated on 220 acres. The development is
approximately 40 minutes from Manhattan. Purchasers of Hammond
Ridge units may select one of many home designs and many options
and upgrades that we offer or
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customize designs. The average sales price of a Hammond Ridge
home is $2.1 million, with a range of prices between
$1.6 million and $2.8 million. From January 2005, when
sales commenced, through December 31, 2005, we sold eight
units and executed sale contracts for 11 homes.
Pondview Estates. Located in Patterson and
Kent, New York, Pondview Estates is a townhouse condominium
development on a
91-acre
wooded hillside overlooking an
on-site
pond. We expect to build a 50-townhouse condominium once final
approvals are granted. Pre-sales are expected to begin in 2006.
Falling Waters. Located in Naples, Florida,
Falling Waters is a
793-unit
condominium development on 158 acres located approximately
ten minutes from downtown Naples, Florida. It is a gated
community with
24-hour
security. The average selling price is $200,000. As of
December 31, 2005, there were 109 units remaining to
be constructed, 104 of which have been pre-sold and five of
which remain to be sold.
Additional Developments. We have invested and
expect to continue to invest in undeveloped land and development
properties. We are highly selective in making investments in
residential home development. Currently we are reviewing a wide
variety of potential developments in New York and Florida.
Hotel
and Resort Operations
New Seabury Resort. New Seabury is a resort
community overlooking Nantucket Sound and Marthas Vineyard
in Cape Cod, Massachusetts. In addition to our residential
development at New Seabury, we operate a full-service resort.
The property currently includes a golf club with two 18 hole
championship golf courses, the Popponesset Inn, which is a
casual waterfront dining and wedding facility, a private beach
club, a fitness center and a 16 court tennis facility.
Grand Harbor and Oak Harbor. In addition to
the residential development at Grand Harbor and Oak Harbor, we
acquired three golf courses, a tennis complex, fitness center,
beach club and clubhouses and an assisted living facility
located adjacent to the Intracoastal Waterway in Vero Beach,
Florida.
Seasonality
Resort operations are highly seasonal with peak activity in Cape
Cod from June to September and in Florida from November to
February. Sales activity for our real estate developments in
Cape Cod and New York typically peak in late winter and early
spring while in Florida our peak selling season is during the
winter months.
Employees
Our real estate-related activities, including rental real
estate, real estate development and hotel and resort operations,
have approximately 440 full and part-time employees, which
number fluctuates due to the seasonal nature of certain of our
businesses. No such employees are covered by collective
bargaining agreements.
Home
Fashion
Background
We conduct our Home Fashion operations through WPI, a
manufacturer and distributor of home fashion consumer products
based in West Point, Georgia. On August 8, 2005, WPI and
its subsidiaries completed the purchase of substantially all the
assets of WestPoint Stevens and certain of its subsidiaries
pursuant to an asset purchase agreement approved by The United
States Bankruptcy Court for the Southern District of New York in
connection with Chapter 11 proceedings of WestPoint
Stevens. WestPoint Stevens was a premier manufacturer and
marketer of bed and bath home fashions supplying leading
U.S. retailers and institutional customers. Before the
asset purchase transaction, WPI did not have any operations.
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. Pursuant to the asset purchase
agreement, 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
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approving the sale, we would receive rights to subscribe for at
least 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. 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 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 appealed portions of the bankruptcy
courts ruling. In connection with that appeal, the
subscription rights distributed to the second lien lenders at
closing were placed in escrow. We are vigorously contesting any
changes to the sale order. Depending on the implementation of
any changes to the bankruptcy court order, then ownership in WPI
may be distributed in a different manner than described above
and we may own less than a majority of WPIs shares of
common stock. Our loss of control of WPI could adversely affect
WPIs business and the value of our investment.
In addition, we consolidated the results and balance sheet of
WPI as of December 31, 2005 and for the period from the
date of acquisition through December 31, 2005. 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 as
presented as of December 31, 2005 and for the year then
ended. See Item 1A. Risk Factors and Item 3. Legal
Proceedings.
Business
WPIs business consists of manufacturing, sourcing,
distributing, marketing and selling home fashion consumer
products. 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, drapes and valances, bedskirts, bed pillows,
flocked blankets, woven blankets and throws, and heated blankets
and mattress pads. WPI continues to serve substantially all the
former customers of WestPoint Stevens using facilities acquired
from WestPoint Stevens and through sourcing activities.
WPI manufactures and sources its products in a wide assortment
of colors and patterns from a variety of fabrics, including
chambray, twill, sateen, flannel and linen, and from a variety
of fibers, including cotton, synthetics and cotton blends. WPI
seeks to position its business as a single-source supplier to
retailers of bed and bath products, offering a broad assortment
of products across multiple price points. WPI believes that
product and price point breadth will allow it to provide a
comprehensive product offering for each major distribution
channel.
WPI operates its business through showroom space in New York
City, office space in Georgia, Alabama and New York, 13
manufacturing facilities in Alabama, Florida, Maine, North
Carolina and South Carolina, a chemical plant in Alabama, a
printing facility in Georgia, 10 distribution centers and
warehouses and 33 retail stores.
Strategy
WPI intends to lower its cost of goods sold and improve its
long-term profitability by lessening its dependence upon
high-cost U.S. sources of manufactured products through
establishing offshore sourcing arrangements. WPIs offshore
sourcing arrangements may employ a combination of owned and
operated facilities, joint ventures and long term supply
contracts. In addition, WPI will seek to lower its general and
administrative expense by consolidating its locations, reducing
headcount and applying more stringent oversight of expense areas
where potential savings may be realized. WPI also will seek to
increase its revenues by selling more licensed, differentiated
and proprietary products to WPIs existing customers. WPI
believes that it can improve margins over time through upgraded
marketing, selective product development, enhanced design and
improved customer service capabilities.
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Brands,
Trademarks and Licenses
WPI markets its products under trademarks, brand names and
private labels. WPI uses trademarks, brand names and private
labels as merchandising tools to assist its customers in
coordinating their product offerings and differentiating their
products from those of their competitors.
WPI manufactures and sells its own branded line of home fashion
products consisting of merchandise bearing trademarks that
include ATELIER
MARTEX®,
GRAND
PATRICIAN®,
MARTEX®,
PATRICIAN®,
LADY
PEPPERELL®,
LUXOR®,
SEDUCTION®,
UTICA®
and
VELLUX®.
In addition, some of WPIs home fashion products are
manufactured and sold pursuant to licensing agreements under
designer and brand names that include, among others,
Lauren/Ralph Lauren and Charisma, which expire on
December 31, 2008 and March 31, 2010, respectively.
Private label brands, also known as store brands,
are controlled by individual retail customers through use of
their own brands or through an exclusive license or other
arrangement with brand owners. Private label brands provide
retail customers with a way to promote consumer loyalty. As the
brand is owned and controlled by WPIs retail customers and
not by WPI, WPI tends to earn smaller margins and has limited
ability to prevent retail customers from discontinuing doing
business with it. As WPIs customer base has experienced
consolidation, there has been an increasing focus on proprietary
branding strategies.
The percentage of WPI net sales, including net sales by
WestPoint Stevens, derived from the sale of private label
branded products for 2005 was approximately 43%. For 2005, the
percentage of WPI, net sales, including net sales by WestPoint
Stevens, derived from sales under brands it owns and controls
was 25%, and the percentage of WPI, net sales derived from
sales, including net sales by WestPoint Stevens, under brands
owned by third parties pursuant to licensing arrangements with
WPI was 19%.
Marketing
WPI markets its products through leading department stores, mass
merchants, specialty stores, institutional channels and retail
stores owned and operated by WPI. Through marketing efforts
directed towards retailers and institutional clients, WPI seeks
to create products and services in direct response to recognized
consumer trends by focusing on elements such as product design,
product innovation, packaging, store displays and other
marketing support.
WPI works closely with its major customers to assist them in
merchandising and promoting WPIs products to consumers. In
addition, WPI periodically meets with its customers in an effort
to maximize product exposure and sales and to jointly develop
merchandise assortments and plan promotional events specifically
tailored to the customer. WPI provides merchandising assistance
with store layouts, fixture designs, advertising and
point-of-sale
displays. A national consumer and trade advertising campaign and
comprehensive internet website have served to enhance brand
recognition. WPI also provides its customers with suggested
customized advertising materials designed to increase product
sales. A heightened focus on consumer research provides needed
products on a continual basis. WPI distributes finished products
directly to retailers. The majority of WPIs remaining
sales of home fashion products are through the institutional
channel, which includes hospitality and healthcare
establishments, as well as laundry supply businesses. In
addition to domestic sales, WPI distributes its home fashion
products for eventual sale to several foreign markets.
International operations accounted for approximately 3% of total
revenues in 2005.
WPI also sells its and other manufacturers products
through its retail stores division, which currently consists of
33 geographically dispersed, value-priced retail outlets
throughout the United States, most of which are located in
factory outlet shopping centers. WestPoint Home retail stores
sell first quality products, overstocks, seconds, discontinued
items and other products.
Competition
The home fashion industry is highly competitive. WPIs
future success will, to a large extent, depend on its ability to
remain a competitive low-cost producer. WPI competes with both
foreign and domestic companies on,
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among other factors, the basis of price, quality and customer
service. WPI also faces competition from its principal customers
as retailers and major institutional clients themselves become
importers sourcing directly from overseas mills. In the home
fashion markets, WPI competes with many companies, one of the
largest of which is Springs Global US, Inc., a company formed by
the merger of Springs Industries, Inc. and Coteminas S.A., a
major Brazilian textile producer. WPIs 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.
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 WPIs market share.
Seasonality
The Home Fashion industry is seasonal, with a peak sales season
in the fall. In response to this seasonality, WPI increases its
inventory levels during the first six months of the year to meet
customer demands for the peak fall season.
Employees
WPI and its subsidiaries employed approximately 9,000 employees
as of December 31, 2005. Currently, less than 4% of
WPIs employees are unionized.
Investments
We seek to invest our available cash and cash equivalents in
debt and equity securities with a view to enhancing returns as
we continue to assess further acquisitions of operating
businesses. During 2005, we had a net loss on investment
activity of approximately $21.0 million comprised of
approximately $26.9 million in realized losses and
$5.9 million in unrealized gains.
As of December 31, 2005, 53.6% of our total investments, or
$448.8 million, were managed by an unaffiliated third-party
investment manager. These investments are predominantly fixed
income securities that have an average duration of less than one
month, and, in total, are managed to have an average S&P
credit quality of above A-. We make these investments to
maintain liquidity while achieving better risk-adjusted returns
than could be attained by investing in cash or cash equivalents.
We also invest in undervalued debt and equity and equity and
debt derivative securities that we believe have the potential
for achieving returns significantly in excess of overall market
performance or with the prospect of the issuers of the
securities becoming operating businesses we control. We believe
that these securities may have greater inherent value than
indicated by their market price and may present the opportunity
for activist bondholders or shareholders to be
catalysts to realize value. 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 and equity derivatives. The debt
securities and obligations in which we may invest may include
bonds, debentures, notes, mortgage-related securities and
municipal obligations as well as debt derivatives. Certain of
these securities may include lower-rated securities which may
provide the potential for higher yields and therefore may entail
higher risks. In addition, we may engage in various investment
techniques, including options, futures, foreign currency
transactions and leveraging for hedging or other purposes, which
typically we hold for only short periods, depending on market
conditions. During 2005, we had gains on debt, equity and equity
derivatives activity of approximately $20.0 million
comprised of approximately $9.0 million in realized gains
and $11.0 million in unrealized gains.
These investments are generally based upon long-term strategic
objectives and tend to be held for an extended period,
independent of market conditions or liquidity considerations. As
of December 31, 2005, such investments represented
$371.5 million, or 44.4% of our total investments, and
included investments in:
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fixed income securities with an aggregate value of
$11.1 million;
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equity securities and equity derivatives in publicly traded
companies with an aggregate value of
$350.4 million; and
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equity securities in companies that are not publicly traded with
limited liquidity with an aggregate value of $10.0 million.
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Included in the above are shares of Time Warner Inc. common
stock. On December 19, 2005, we reported in a
Schedule 14A filed with the SEC that we owned
11,000,000 shares of such stock. The Schedule 14A
identified us as one of the participants in the solicitation of
proxies for common stock of Time Warner. Other participants
included affiliates of Mr. Icahn and certain unrelated
parties. In a subsequent Schedule 14A, filed on
February 17, 2006, we reported that our ownership of common
stock of Time Warner had increased to 12,302,790 shares.
We also take short positions and make investments in
equity derivatives predicated upon our belief that the price of
an underlying equity security would decline. Such investments
inherently are risky as they may expose us to unlimited losses
as the price of the underlying equity security increases. During
2005, we had losses on a single short position of approximately
$41.3 million comprised of approximately $37.1 million
in realized losses and $4.2 million in unrealized losses.
From January 1, 2006 through March 15, 2006, we had
additional losses on our short position of approximately
$29.3 million, which includes approximately
$5.1 million in realized losses and approximately
$24.2 million in unrealized losses.
We conduct our activities in a manner so as not to be deemed an
investment company under the Investment Company Act of 1940, as
amended. Generally, this means that we do not intend to invest
in securities as our primary business and that no more than 40%
of our total assets will be invested in investment securities as
such term is defined in the Investment Company Act. In addition,
we intend to structure our investments so as 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 of 1986, as amended.
Available
Information
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports are available, without charge,
on our website, http://www.areplp.com/investor.shtml as
soon as reasonably practicable after they are filed
electronically with the SEC. Copies are also available, without
charge, by writing American Real Estate Partners, L.P., 100
South Bedford Road, Mt. Kisco, NY 10549, Attention: Investor
Relations.
Each of ACEP, Atlantic Coast and National Energy Group
separately files with the Securities and Exchange Commission
annual, quarterly and current reports that are available to the
public free of charge either from each respective company or at
the SEC website at http://www.sec.gov. NEG filed with the
SEC a registration statement on
form S-1
with respect to its planned initial public offering, which is
available at the SEC website at http://www.sec.gov.
Item 1A. Risk
Factors.
Risks
Relating to Our Structure
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 90.0% 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.
We have invested and may in the future invest in entities in
which Mr. Icahn also invests or purchase 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 which we compete and there is no
requirement that any additional business opportunities be
presented to us.
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 unit holder 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. Icahns interests
might conflict with your interests as a unit holder.
29
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, and our principal executive officer and vice
chairman of the board of directors, Keith A. Meister, are, and
will in the future 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 between our interests and the
other entities or business activities in which such individuals
are involved. Conflicts of interest may arise in the future as
such affiliates and we may compete for the same assets,
purchasers and sellers of assets or financings.
To
service our indebtedness and pay distributions with respect to
our units, 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, to pay distributions with respect to our units 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. 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 or
to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness on or before maturity. We
cannot assure you that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
We are a
holding company and will depend on the businesses of our
subsidiaries to satisfy our obligations.
We are a holding company. 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 that we will reduce the liquid assets
at AREP and AREH in order to fund those investments and ongoing
operations. Consequently, our cash flow and our ability to meet
our debt service obligations and make distributions with respect
to depositary units and preferred units likely will depend on
the cash flow of our subsidiaries and the payment of funds to us
by our subsidiaries in the form of loans, dividends,
distributions 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, 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. Our subsidiary, NEG Oil &
Gas has a credit facility which restricts dividends,
distributions and other transactions with us. These agreements
preclude our receiving payments from the operations of our
Gaming and our Oil & Gas properties which account for a
significant portion of our revenues and cash flows. We are
negotiating similar facilities for WPI, Atlantic Coast and our
real estate development properties which may 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 our debt will be
limited.
We or our
subsidiaries may be able to incur substantially more
debt.
We or our subsidiaries may be able to incur substantial
additional indebtedness in the future. The terms of our
8.125% senior notes due 2012 and our 7.125% senior
notes due 2013 do not prohibit us or our subsidiaries from doing
so. We may incur additional indebtedness if we comply with
certain financial tests contained in the indentures that govern
these notes. As of December 31, 2005, based upon these
tests, we could have incurred up to
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approximately $1.4 billion of additional indebtedness. Our
subsidiaries, other than AREH, are not subject to any of the
covenants contained in the indentures with respect to our debt,
including the covenant restricting debt incurrence. If new debt
is added to our and our subsidiaries current debt levels,
the related risks that we, and they now face could intensify.
Our
failure to comply with the covenants contained under any of our
debt instruments, including the indentures governing our
outstanding 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. 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.
The
market for our securities may be volatile.
The market for our equity securities may be subject to
disruptions that could cause substantial volatility in their
prices. Any such disruptions may adversely affect the value of
your securities.
We have
only recently made cash distributions to our unitholders and
future distributions, if any, can be affected by numerous
factors.
We made cash distributions with respect to each of the third and
fourth quarters of 2005 in the amount of $.10 per
depositary unit. The payment of future distributions will be
determined by the board of directors of our general partner
quarterly, based on a review of a number of factors, including
those described below and other factors that it deems relevant
at the time that declaration of a distribution is considered.
Our ability to pay distributions will depend on numerous
factors, including the availability of adequate cash flow from
operations; the proceeds, if any, from divestitures; our capital
requirements and other obligations; restrictions contained in
our financing arrangements, and our issuances of additional
equity and debt securities. The availability of cash flow in the
future depends as well upon events and circumstances outside our
control, including prevailing economic and industry conditions
and financial, business and similar factors. No assurance can be
given that we will be able to make distributions or as to the
timing of any distribution. If distributions are made, there can
be no assurance that holders of depositary units may not be
required to recognize taxable income in excess of cash
distributions made in respect of the period in which a
distribution is made.
Holders
of our depositary units have limited voting rights, rights to
participate in our management and control of us.
Our general partner manages and operates AREP. Unlike the
holders of common stock in a corporation, holders of outstanding
units have only limited voting rights on matters affecting our
business. Holders of depositary units have no right to elect the
general partner on an annual or other continuing basis, and our
general partner generally may not be removed except pursuant to
the vote of the holders of not less than 75% of the outstanding
depositary units. In addition, removal of the general partner
may result in a default under our debt securities. As a result,
holders of depositary units have limited say in matters
affecting our operations and others may find it difficult to
attempt to gain control or influence our activities.
Holders
of depositary units may not have limited liability in certain
circumstances and may be liable for the return of distributions
that cause our liabilities to exceed our assets.
We conduct our businesses through AREH in several states.
Maintenance of limited liability will require compliance with
legal requirements of those states. We are the sole limited
partner of AREH. Limitations on the liability of a limited
partner for the obligations of a limited partnership have not
clearly been established in several states. If it were
determined that AREH has been conducting business in any state
without compliance with the
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applicable limited partnership statute or the possession or
exercise of the right by the partnership, as limited partner of
AREH, to remove its general partner, to approve certain
amendments to the AREH partnership agreement or to take other
action pursuant to the AREH partnership agreement, constituted
control of AREHs business for the purposes of
the statutes of any relevant state, AREP
and/or
unitholders, under certain circumstances, might be held
personally liable for AREHs obligations to the same extent
as our general partner. Further, under the laws of certain
states, AREP might be liable for the amount of distributions
made to AREP by AREH.
Holders of our depositary units may also have to repay AREP
amounts wrongfully distributed to them. Under Delaware law, we
may not make a distribution to holders of common units if the
distribution causes our liabilities to exceed the fair value of
our assets. Liabilities to partners on account of their
partnership interests and nonrecourse liabilities are not
counted for purposes of determining whether a distribution is
permitted. Delaware law provides that a limited partner who
receives such a distribution and knew at the time of the
distribution that the distribution violated Delaware law will be
liable to the limited partnership for the distribution amount
for three years from the distribution date.
Additionally, under Delaware law an assignee who becomes a
substituted limited partner of a limited partnership is liable
for the obligations, if any, of the assignor to make
contributions to the partnership. However, such an assignee is
not obligated for liabilities unknown to him or her at the time
he or she became a limited partner if the liabilities could not
be determined from the partnership agreement.
We may be
subject to the pension liabilities of our affiliates.
Mr. Icahn, through certain affiliates, currently owns 100%
of API and approximately 86.5% of our outstanding depositary
units and 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. Icahns 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, is the sponsor
of several pension plans which are underfunded by a total of
approximately $21.8 million on an ongoing actuarial basis
and $135.2 million 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.
Starfire Holding Corporation, which is 100% owned by
Mr. Icahn, has undertaken to indemnify us and our
subsidiaries from losses resulting from any imposition of
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
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.
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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. 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. See Note 25 of notes to
consolidated financial statements and Item 3. Legal
Proceedings.
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 operate as a partnership for federal income tax purposes.
This allows us to pass through our income and deductions to our
partners. We believe that we have been and are properly treated
as a partnership for federal income tax purposes. 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. 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 regular corporate
tax rates. 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 of
1940, it is likely that we would be treated as a corporation for
U.S. federal income tax purposes and subject to corporate
tax on our net income at regular corporate tax rates. The cost
of paying federal and possibly state income tax, either for past
years or going forward, would be a significant liability and
would reduce our funds available to make interest and principal
payments on the notes. To meet the qualifying income test we may
structure transactions in a less advantageous manner or avoid
otherwise economically desirable transactions.
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During
2004 and 2005, we identified three significant deficiencies in
our internal control over financial reporting. If we were to
discover other significant deficiencies in the future, including
at any recently acquired entity, it may affect adversely our
ability to provide timely and reliable financial information and
satisfy our reporting obligations under federal securities laws,
which also could affect our ability to remain listed with the
New York Stock Exchange or the market price of our depositary
units.
Effective internal and disclosure controls are necessary for us
to provide reliable financial reports and effectively prevent
fraud and to operate successfully as a public company. If we
cannot provide reliable financial reports or prevent fraud, our
reputation and operating results would be harmed. We have
discovered two significant deficiencies in internal controls at
the Holding Company and one of a subsidiary as defined under
interim standards adopted by the Public Company Accounting
Oversight Board, or PCAOB, that require remediation. A
significant deficiency is a control deficiency, or
combination of control deficiencies, that adversely affect a
companys ability to initiate, authorize, record, process,
or report external financial data reliably in accordance with
generally accepted accounting principles such that there is a
more than remote likelihood that a misstatement of a
companys annual or interim financial statements that is
more than inconsequential will not be prevented or detected.
Throughout 2005, we implemented processes to address a
significant deficiency in our consolidation process reported by
management in 2004 during its evaluation of the effectiveness of
the design and operation of our disclosure controls and
procedures and our internal controls over financial reporting.
During the third quarter of 2005, we identified a significant
deficiency related to our periodic reconciliation, review and
analysis of investment accounts. This significant deficiency
arose from a lack of monitoring and review controls. We have
engaged additional resources and enhanced our treasury function
to provide what we believe is the appropriate level of control.
During the fourth quarter of 2005, National Energy Groups
management identified a significant deficiency related to the
lack of a detailed review of the assumptions utilized in the
determination of its deferred tax asset valuation allowance.
National Energy Group has implemented procedures to verify the
detailed review of the tax provision by its third party tax
advisor including verification of the review and validation of
all assumptions used in the determination of the deferred tax
asset valuation allowance. Neither WPI nor Atlantic Coast has
completed its review of internal control over financial
reporting.
To the extent that any material weakness or significant
deficiency exists in our or our consolidated subsidiaries
internal control over financial reporting, such deficiencies may
adversely affect our ability to provide timely and reliable
financial information necessary for the conduct of our business
and satisfaction of our reporting obligations under federal
securities laws, which could affect our ability to remain listed
with the New York Stock Exchange. Ineffective internal and
disclosure controls could also cause investors to lose
confidence in our reported financial information, which could
have a negative effect on the trading price of our depositary
units or the rating of our debt.
Risks
Related to our Businesses
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:
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the continued threat of terrorism;
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economic downturn;
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loss of any of our or our subsidiaries key personnel;
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the availability, as needed, of additional financing; and
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the continued availability of insurance at acceptable rates.
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34
Oil &
Gas
Oil and
gas prices are volatile. A decrease in oil and natural gas
prices could have a material adverse effect on our business,
financial condition, cash flows or results of
operations.
A substantial decline in the prices NEG Oil & Gas
receives for our oil and gas production would have a material
adverse effect on NEG Oil & Gas, as our future
financial condition, revenues, results of operations, cash
flows, rate of growth and the carrying value of our oil and gas
properties depend primarily upon those prices. For example,
changes in the prices we receive for oil and gas could affect
our ability to finance capital expenditures, make acquisitions,
pay dividends, borrow money and satisfy our financial
obligations. In addition, declines in prices could reduce the
amount of oil and natural gas that we can produce economically
and, as a result, could have a material adverse effect on our
reserves. Oil and natural gas are commodities and their prices
are subject to wide fluctuations in response to relatively minor
changes in supply and demand. Historically, prices have been
volatile and are likely to continue to be volatile in the
future, especially given current world geopolitical conditions.
The prices of oil and gas are affected by a variety of other
factors that are beyond our control, including:
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changes in global supply and demand for oil and natural gas;
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commodity processing, gathering and transportation availability;
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actions of the Organization of Petroleum Exporting Countries;
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domestic and foreign governmental regulations and taxes;
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domestic and foreign political conditions, including embargoes,
affecting oil-producing activity;
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the level of global oil and natural gas exploration activity and
inventories;
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the price and availability of domestic and imported oil and
natural gas;
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the price, availability and consumer acceptance of alternative
fuel sources;
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the availability of refining capacity;
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technological advances affecting energy consumption;
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weather conditions;
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financial and commercial market uncertainty;
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worldwide economic conditions; and
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disruptions as a result of natural calamities.
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These factors and the volatility of the energy markets generally
make it extremely difficult to predict future oil and gas price
movements. Our production is weighted toward natural gas, making
earnings and cash flow more sensitive to natural gas price
fluctuations.
Estimating
our reserves, production and future net cash flow is difficult
to do with any certainty.
The reserve data included in this annual report on
Form 10-K
represent estimates only. Estimating quantities of proved oil
and gas reserves is a complex process that requires
interpretations of available technical data and various
estimates, including estimates based upon assumptions relating
to economic factors, including future commodity prices,
production costs, production and ad valorem taxes and
availability of capital, estimates of required capital
expenditures and workover and remedial costs, and the assumed
effect of governmental regulation. In addition, there are
numerous uncertainties about when reserves may be classified as
proved as opposed to possible or probable. Furthermore, actual
results will vary from our estimates and such variances may be
significant.
At December 31, 2005, 50% of the estimated proved reserves
for NEG Oil & Gas were proved undeveloped and 8% were
proved developed non-producing. Estimates of proved undeveloped
reserves and proved developed non-producing reserves are almost
always based on analogy to existing wells instead of the
performance data used to estimate producing reserves. Recovery
of proved undeveloped reserves requires significant capital
expenditures
35
and successful drilling operations. Revenues from estimated
proved developed non-producing reserves will not be realized
until some time in the future, if at all. The reserve data
assumes that we will be required to make significant capital
expenditures to develop its reserves. Although we have prepared
estimates of our reserves and the costs associated with these
reserves in accordance with industry standards, these estimates
may not be accurate, development may not occur as scheduled and
actual results may not be as estimated.
Prospects
that we decide to drill may not yield gas or oil in commercially
viable quantities.
We describe some of our current prospects and plans to explore
those prospects in this annual report on
Form 10-K.
A prospect is a property on which NEG Oil & Gas has
identified what our geoscientists believe, based on available
seismic and geological information, to be indications of gas or
oil. NEG Oil & Gas prospects are in various
stages of evaluation, ranging from a prospect that is ready to
drill to a prospect that will require substantial additional
seismic data processing and interpretation. However, the use of
seismic data and other technologies and the study of producing
fields in the same area will not enable NEG Oil & Gas
to know conclusively prior to drilling and testing whether gas
or oil will be present or, if present, whether gas or oil will
be present in sufficient quantities to recover drilling or
completion costs or to be economically viable. From
January 1, 2003 through December 31, 2005, NEG
Oil & Gas participated in drilling a total of
279 gross wells, of which 25 have been identified as dry
holes. If we drill additional wells that we identify as dry
holes in our current and future prospects, our drilling success
rate may decline and materially harm our business.
Our
Oil & Gas business involves significant operating
risks.
Our operations are subject to all the risks normally incident to
the operation and development of oil and natural gas properties
and the drilling of oil and gas wells, including:
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well blowouts;
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craterings and explosions;
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pipe failures and ruptures;
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pipeline accidents and failures;
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casing collapses;
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unexpected formations or pressures;
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fires;
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mechanical and operational problems that affect production;
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formations with abnormal pressures;
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uncontrollable flows of oil, natural gas, brine or well
fluids; and
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releases of contaminants into the environment, including
groundwater contamination.
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In addition to lost production and increased costs, these
hazards could cause serious injuries, fatalities, contamination
or property damage for which NEG Oil & Gas could be
held responsible. The potential consequences of these hazards
are particularly severe for NEG Oil & Gas because a
significant portion of our operations are conducted offshore and
in other environmentally sensitive areas. While NEG
Oil & Gas maintains insurance against many of these
risks, we do not maintain insurance in amounts that cover all of
the losses to which we may be subject, and the insurance we have
may not continue to be available on acceptable terms. The
occurrence of an uninsured or underinsured loss could result in
significant costs that could have a material adverse effect on
our financial condition and operations.
36
The
marketability of our production is dependent upon gathering
systems, transportation facilities and processing facilities
that we do not control.
Market conditions and the unavailability of satisfactory oil and
natural gas transportation arrangements may hinder our access to
oil and natural gas markets or delay our production. The
marketability of our oil and natural gas production depends in
part upon the availability, proximity and capacity of pipelines,
gas gathering systems, transportation barges and processing
facilities owned by third parties. We do not control these
facilities and they may not be available to us in the future.
Alternative delivery methods could be either prohibitively
expensive or available only after a period of delay, if at all.
Any significant change in relationships with third party
operators or market factors affecting operator of any
third-party transportation and processing facilities NEG
Oil & Gas uses could adversely impact its ability to
deliver to market the oil and natural gas we produce and thereby
cause a significant interruption in our operations. These are
risks for which NEG Oil & Gas generally does not
maintain insurance. Accordingly, our financial condition and
results of operations would be adversely affected if one or more
transportation, gathering or processing facility, became
unavailable or otherwise unable to provide services.
Commodity
price risk management activities may limit future revenues from
price increases and result in financial losses or reduce its
income.
To reduce exposure to fluctuations in the prices of oil and gas,
NEG Oil & Gas enters into derivative contracts with
respect to a substantial portion of its oil and gas production.
Its revolving credit facility currently permits us to use
derivatives for up to 80% of the expected volumes associated
with proved developed producing reserves. Derivative contracts
expose us to risk of financial loss in some circumstances,
including when:
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production is less than expected;
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a counterparty to a derivative contract fails to perform under
the contract;
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there is a change in the expected differential between the
underlying price in the derivative contract and actual prices
received; or
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there is a sudden, unexpected event that materially impacts oil
or natural gas prices.
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Total net realized losses on derivative instruments included in
the oil and gas revenues for NEG Oil & Gas were
$51.3 million in 2005 and $16.6 million in 2004. In
addition, rising oil and gas prices caused us to incur
unrealized commodity derivative losses of $69.3 million in
2005. These unrealized losses resulted because we do not elect
hedge accounting treatment for our derivative positions. Changes
in the fair market value of the derivative positions were
therefore required to be recognized in our statement of
operations.
NEG Oil & Gas may incur realized and unrealized losses
of this type in the future. Derivative contracts may also limit
the benefit we would otherwise receive from increases in the
prices for oil and gas. Oil and gas revenues may continue to
experience significant volatility in the future due to changes
in the fair value of the derivative contracts. The prices NEG
Oil & Gas receives for our oil and gas production
affect its:
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cash flow available for capital expenditures:
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ability to borrow and raise additional capital;
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quantity of oil and natural gas it can produce;
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quantity of oil and gas reserves; and
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operating results for oil and natural gas activities.
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NEG Oil & Gas generally enters into derivative
contracts for a substantial portion of our expected future oil
and gas production to reduce our exposure to commodity price
decreases. Changes in the fair value of our derivatives
contracts have a direct effect on our revenue.
NEG Oil & Gas has used cost-free collars and options to
put products to a purchaser at a specified price, or floor. In
these transactions, NEG Oil & Gas will usually have the
option to receive from the counterparty to the
37
derivative contracts a specified price or the excess of a
specified price over a floating marketing price. If the floating
price exceeds the fixed price, the party to the derivative
contract is required to pay the counterparty all or a portion of
these differences multiplied by the quantity subject to the
derivative contract.
As of December 31, 2005, NEG Oil & Gas was not a
party to any derivative contracts that require an initial
deposit of cash collateral. However, its working capital could
be impacted in the future if it enters into derivative
arrangements that require cash collateral and commodity prices
subsequently change in a manner adverse to us. Further, the
obligation to post cash or other collateral could, if imposed,
adversely affect our liquidity.
We may
experience difficulty finding and acquiring additional reserves
and may be unable to compensate for the depletion of proved
reserves.
The future success and growth of our operations depend upon the
ability of NEG Oil & Gas to find or acquire additional
economically recoverable oil and gas reserves. Except to the
extent that it conducts successful exploration or development
activities or acquires properties containing proved reserves,
our proved reserves will generally decline as they are produced.
The decline rate varies depending upon reservoir characteristics
and other factors. Future oil and gas reserves and production,
and, therefore, cash flow and income will be highly dependent
upon the level of success in exploiting current reserves and
acquiring or finding additional reserves. The business of
exploring for, developing or acquiring reserves is capital
intensive. To the extent cash flow from operations is not
sufficient and external sources of capital become limited or
unavailable, the ability to make the necessary capital
investments to maintain or expand our asset base of oil and gas
reserves could be impaired. Development projects and acquisition
activities may not result in additional reserves. NEG
Oil & Gas may not have success drilling productive
wells at economic returns sufficient to replace our current and
future production and reserves which we acquire may contain
undetected problems or issues that did not initially appear to
be significant to us.
Shortages
of oil field equipment, services and qualified personnel could
reduce our cash flow and adversely affect the results of
operations of NEG Oil & Gas.
The demand for qualified and experienced field personnel to
drill wells and conduct field operations, geologists,
geophysicists, engineers and other professionals in the oil and
natural gas industry can fluctuate significantly, often in
correlation with oil and natural gas prices, causing periodic
shortages. Historically, there have been shortages of drilling
rigs and other oil field equipment as demand for rigs and
equipment has increased along with the number of wells being
drilled. These factors also cause significant increases in costs
for equipment, services and personnel. Higher oil and natural
gas prices generally stimulate demand and result in increased
prices for drilling rigs, crews and associated supplies,
equipment and service. It is beyond the control and ability of
NEG Oil & Gas to predict whether these conditions will
exist in the future and, if so, what their timing and duration
will be. These types of shortages or price increases could
significantly decrease the profit margin, cash flow and
operating results, or restrict our ability to drill the wells
and conduct the operations which we currently have planned and
budgeted.
Oil and
gas exploration, exploitation and development activities may not
be successful.
Exploration, exploitation and development activities are subject
to many risks. For example, we cannot assure you that new wells
drilled by NEG Oil & Gas will be productive or that NEG
Oil & Gas will recover all or any portion of its
investment in such wells. Drilling for oil and gas often
involves unprofitable efforts, not only from dry wells but also
from wells that are productive but do not produce sufficient oil
or gas to return a profit at then-realized prices after
deducting drilling, operating and other costs. The seismic data
and other technologies that are used do not allow NEG
Oil & Gas to know conclusively prior to drilling a well
that oil or gas is present or that it can be produced
economically. The cost of exploration, exploitation and
development activities is subject to numerous uncertainties
beyond our control, and cost factors can adversely affect the
economics of a project. Further, our development activities may
be curtailed, delayed or canceled as a result of numerous
factors, including:
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title problems;
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problems in delivery of our oil and natural gas to market;
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pressure or irregularities in geological formations;
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equipment failures or accidents;
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shortages of, or delays in obtaining, equipment or qualified
personnel;
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adverse weather conditions;
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reductions in oil and natural gas prices;
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compliance with environmental and other governmental
requirements; and
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costs of, or shortages or delays in the availability of,
drilling rigs, equipment and services.
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Our
acquisition activities may not be successful.
NEG Oil & Gas intends to acquire additional oil and gas
properties, or businesses that own or operate such properties,
when attractive opportunities arise. NEG Oil & Gas may
not be able to identify suitable acquisition opportunities. If
NEG Oil & Gas does identify an appropriate acquisition
candidate, it may be unable to negotiate mutually acceptable
terms with the seller or finance the acquisition. As a result of
recent increases in oil and gas prices, acquisition prices also
have increased, potentially making it more difficult for us to
identify and complete acquisitions suitable for us. If NEG
Oil & Gas is unable to complete suitable acquisitions,
it will be more difficult to replace reserves. In addition,
successfully completed acquisitions involve a number of risks,
including:
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unexpected losses of key employees, customers and suppliers of
an acquired business;
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difficulties in conforming the financial, technical and
management standards, processes, procedures and controls of the
acquired business with those of our existing operations; and
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diversion of management and other resources.
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Moreover, the success of any acquisition will depend on a
variety of factors, including the ability of NEG Oil &
Gas to accurately assess the reserves associated with the
property, future oil and gas prices and operating costs,
potential environmental and other liabilities and other factors.
These assessments are necessarily inexact. As a result, it may
not recover the purchase price of a property from the sale of
production from the property or recognize an acceptable return
from such sales. The risks normally associated with acquisitions
are heightened in the current environment, as market prices of
oil and gas properties are generally high compared to historical
norms and could continue to rise. In addition, NEG
Oil & Gas may face greater risks if we acquire
properties in areas where we may be less familiar with
operating, regulatory and other issues specific to those areas.
We may
not be able to compete successfully in the future with respect
to acquiring prospective reserves, developing reserves,
marketing its production, attracting and retaining quality
personnel, implementing new technologies and raising additional
capital.
NEG Oil & Gas operates in a competitive environment for
acquiring properties, marketing oil and gas, integrating new
technologies and employing skilled personnel. Many of its
competitors possess and employ substantially greater financial,
technical and personnel resources. Those companies may be
willing and able to pay more for producing oil and natural gas
properties and prospects than the financial resources of NEG
Oil & Gas permits, and may be able to define, evaluate,
bid for and purchase a greater number of properties and
prospects. Competitors may also enjoy technological advantages
over us and may be able to implement new technologies more
rapidly. Additionally, there is substantial competition for
capital available for investment in the oil and natural gas
industry.
We cannot
control activities on properties we do not operate. If NEG
Oil & Gas is not able to fund required capital
expenditures with respect to non-operated properties, it may
result in a reduction or forfeiture of the interests of NEG
Oil & Gas in those properties.
Other companies operated approximately 41% of the value of our
proved reserves as of December 31, 2005. NEG Oil &
Gas has limited ability to exercise influence over operations
for these properties or their associated
39
costs. Our dependence on the operator and other working interest
owners for these projects and our limited ability to influence
operations and associated costs could prevent the realization of
our targeted returns on capital with respect to exploration,
exploitation, development or acquisition activities. The success
and timing of exploration, exploitation and development
activities on properties operated by others depend upon a number
of factors that may be outside our control including:
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the timing and amount of capital expenditures;
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the operators expertise and financial resources;
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approval of other participants in drilling wells; and
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selection of technology.
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Where we are not the majority owner or operator of a particular
oil and natural gas project, we may have no control over the
timing or amount of capital expenditures associated with the
project. If we are not willing and able to fund required capital
expenditures relating to a project when required by the majority
owner or operator, our interests in the project may be reduced
or forfeited.
Our
activities are subject to complex laws and regulations,
including environmental laws and regulations, that can adversely
affect the cost, manner and feasibility of doing
business.
Operations and facilities of NEG Oil & Gas are subject
to extensive federal, state and local laws and regulations
relating to exploration for, and the exploitation, development,
production and transportation of, oil and gas, including
environmental and safety matters. In addition, certain laws
impose strict liability for the costs of remediating
contamination at properties that NEG Oil & Gas owns or
operates or where wastes generated by our operations have been
disposed, regardless of whether such disposal was lawful at the
time that it occurred. Applicable laws and regulations include
those relating to:
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land use restrictions where many of our operations are located;
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drilling bonds and other financial responsibility requirements;
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spacing of wells;
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emissions into the air;
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unitization and pooling of properties;
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habitat and endangered species protection, reclamation and
remediation;
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the containment and disposal of hazardous substances, oil field
waste and other waste materials;
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the use of underground storage tanks;
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the use of underground injection wells, which affects the
disposal of water and other produced liquids from our wells;
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safety precautions;
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the prevention of oil spills;
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releases of contaminants into the environment;
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wetlands protection;
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the closure of exploration and production facilities; and
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operational reporting requirements.
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Under these laws and regulations, NEG Oil & Gas could
be liable for:
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governmental sanctions, such as fines, penalties, and injunctive
relief;
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property and natural resource damages;
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releases or discharges of hazardous materials;
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well reclamation costs;
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oil spill
clean-up
costs;
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other remediation and
clean-up
costs;
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plugging and abandonment costs, which may be particularly high
in the case of offshore facilities;
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personal injuries; and
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other environmental damages.
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Although NEG Oil & Gas believes it is in substantial
compliance with all applicable environmental laws and
regulations and that its liabilities are not material, we cannot
be certain that existing environmental laws or regulations
applicable to our operations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, will
not harm our business, results of operations and financial
condition.
Some environmental laws and regulations impose strict liability.
Strict liability means that in some situations NEG
Oil & Gas could be exposed to liability for
clean-up
costs and other damages as a result of conduct that was lawful
at the time it occurred or for the conduct of prior operators or
other third parties. In addition, we may be required to make
large and unanticipated capital expenditures to comply with
applicable laws and regulations, for example by installing and
maintaining pollution control devices. Similarly, plugging and
abandonment obligations will be substantial and may be more than
NEG Oil & Gas has estimated. It is not possible for us
to estimate reliably the amount and timing of all future
expenditures related to environmental matters, but they may be
material. In addition, our operations could be adversely
affected by federal and state laws that require environmental
impact studies to be conducted before governmental authorities
can take certain actions, including, in some cases, the issuance
of permits to us. Environmental risks generally are not fully
insurable.
We may be
required to write down the carrying value of our
properties.
Under full cost accounting rules, NEG Oil & Gas may be
required to write down the carrying value of properties when oil
and gas prices decrease or when there are substantial downward
adjustments of estimated proved reserves, increases in our
estimates of development costs or deterioration in our
exploration results. NEG Oil & Gas uses the full cost
method of accounting for oil and gas exploitation, development
and exploration activities. Under full cost accounting rules,
NEG Oil & Gas performs a ceiling test. This
test is an impairment test and generally establishes a maximum,
or ceiling, of the book value of oil and gas
properties that is equal to the expected after-tax present value
of the future net cash flows from proved reserves, including the
effect of cash flow hedges, calculated using prevailing prices
on the last day of the relevant period. If the net book value of
properties, reduced by any related net deferred income tax
liability, exceeds the ceiling, NEG Oil & Gas writes
down the book value of the properties. Depending on the
magnitude of any future impairments, a ceiling test write down
could significantly reduce NEG Oil & Gas income
or produce a loss. Ceiling test computations use commodity
prices prevailing on the last day of the relevant period, making
it impossible to predict the timing and magnitude of any future
write downs. To the extent finding and development costs
increase, NEG Oil & Gas will become more susceptible to
ceiling test write downs in low price environments.
Changes
in the financial condition of any of our large oil and gas
purchasers could make it difficult to collect amounts due from
those purchasers.
For 2005, 68% of our oil and natural gas revenues were generated
from sales to six purchasers. A material adverse change in the
financial conditions of any these purchasers could adversely
impact future revenues and our ability to collect current
accounts receivable from such purchasers. Additionally, the loss
of any of these purchasers could have an adverse impact on our
revenues.
41
Gaming
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 and New Jersey. Various regulatory authorities, including
the Nevada State Gaming Control Board, Nevada Gaming Commission
and the New Jersey Casino Control 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 the licensed gaming operations conducted in
Nevada and New Jersey, 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 or New Jersey, we
may 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 any such
license, and any disciplinary action may, and revocation 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:
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our properties use significant amounts of electricity, natural
gas and other forms of energy, and energy price increases may
reduce our profitability;
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our Nevada properties use significant amounts of water and a
water shortage may adversely affect our operations;
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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
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our reliance on slot machine revenues and the concentration of
manufacturing of slot machines in certain companies could impose
additional costs on us.
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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:
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we compete with many world class destination resorts with
greater name recognition, different attractions, amenities and
entertainment options;
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we compete with the continued growth of gaming on Native
American tribal lands;
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the existence of legalized gambling in other jurisdictions may
reduce the number of visitors to our properties;
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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
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our properties also compete and will in the future compete with
all forms of legalized gambling.
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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.
42
Our
acquisition of the Flamingo in Laughlin, Nevada and the Traymore
site in Atlantic City, New Jersey may not be
successful.
Our subsidiary, AREP Gaming LLC, through its subsidiaries, AREP
Laughlin Corporation and AREP Boardwalk LLC, has entered into an
agreement to purchase the Flamingo Hotel & Casino in
Laughlin, Nevada and 7.7 acres of land in Atlantic City,
New Jersey, formerly known as the Traymore site, from
Harrahs Entertainment for an aggregate purchase price of
$170.0 million. AREP Gaming intends to assign the rights to
acquire the Flamingo to ACEP. The acquisition of the Flamingo is
subject to the satisfaction of several conditions, including
obtaining approval of Nevada gaming authorities and we cannot be
certain that the condition will be satisfied. We anticipate that
payment of the acquisition price will be made from a combination
of ACEPs available cash and borrowing under its senior
secured revolving facility. This will reduce cash that otherwise
would be available for other purposes and will require
additional borrowing by ACEP. It may be some time before we
recover our investment in the Flamingo, if we succeed in doing
so at all.
In addition, ACEP currently plans to spend approximately
$40.0 million through 2008 to refurbish rooms, upgrade
amenities and acquire new gaming equipment for the Flamingo.
Acquisitions generally involve significant risks, including
difficulties in the assimilation of the operations, services and
corporate culture of the acquired company. We may not
successfully manage and integrate the Flamingos operations
with ours. The benefits from the acquisition of the Flamingo are
based on projections and assumptions related to our program to
upgrade and refurbish the facilities, as well as recent results.
As a result, we cannot be certain that we will realize the
anticipated benefits.
We will acquire the Atlantic City property through AREP
Gamings direct subsidiary, AREP Boardwalk. We are seeking
financing for the acquisition but cannot guarantee that
financing will be available, or that it will be on favorable
terms and we may be required to fund the purchase from available
cash. The property is largely undeveloped and produces little
income. During the development process we will incur substantial
costs which will not be recouped unless and until the property
becomes income-producing. Development is subject to a variety of
governmental approvals, including NJCAA and New Jersey
Commission approval should we elect to locate a casino on the
site. We cannot be certain that the property will be developed
successfully.
The Sands
has recently incurred operating losses which could result in our
determining that, for financial reporting purposes, our
investment has been impaired.
During 2005, The Sands incurred an operating loss relating to
its operations. Although The Sands continues to generate
positive cash flow, if The Sands continues to incur losses we
may conclude that, for financial reporting purposes, our
investment is impaired. If, as a result, we were to write-off
our investment, it could adversely affect our results.
Creditors
of GBH have indicated that they intend to challenge the
transactions consummated in July 2004, which, among other things
resulted in the transfer of The Sands to ACE Gaming, and intend
to attempt to subordinate our claims against GBH Holdings to
those of other creditors.
We own approximately 77.5% of GBHs outstanding common
stock. GBHs principal asset is 41.7% of the common stock
of Atlantic Coast. On September 29, 2005, GBH filed for
protection under Chapter 11 of the U.S. Bankruptcy Code. As
a result, we determined that we no longer control GBH under
applicable accounting rules and have deconsolidated our
investment for financial reporting purposes. Creditors of GBH
have indicated that they intend to challenge the transactions in
July 2004 that, among other things, resulted in the transfer of
The Sands to ACE Gaming, the exchange certain of GBHs
notes for 3% senior secured convertible notes of Atlantic
Coast, and, ultimately, our owning 58.3% of the Atlantic Coast
shares. The creditors also have indicated that, if they succeed
in challenging these transactions, they intend to seek to
rescind the July 2004 transactions and attempt to equitably
subordinate, in bankruptcy, AREPs claims against GBH to
the claims of such creditors. If such a suit is brought we
intend to vigorously defend AREP and its subsidiaries against
such claims, however we cannot predict the outcome of the
litigation.
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
43
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.
Home
Fashion
A recent
court order may result in our ownership of WPI being reduced to
less than 50%. Uncertainties arising from this decision may
adversely affect WPIs operations and prospects and the
value of our investment in it.
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 pursuant to which we acquired our
ownership of a majority of the common stock of a newly formed
company, WPI. WPI acquired substantially all of the assets of
West Point Stevens. We filed a petition for a writ of mandamus
requesting that the U.S. Court of Appeals review the District
Courts decision which was denied. Proceedings will
continue in the bankruptcy court. See Item 3. Legal
Proceedings.
Depending on the implementation of any changes to the bankruptcy
courts order, our percentage of the outstanding shares of
common stock of WPI could be reduced to less than 50%, which
could result in our losing control of WPI. In addition, 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 results and balance sheet of
WPI as of December 31, 2005 and for the period from the
date of acquisition through December 31, 2005. If we were
to own less than 50% of the outstanding common stock and lose
control of WPI, we would no longer consolidate it and our
financial statements could be materially different than as
presented as of December 31, 2005 and for the year then
ended.
WPI
recently 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 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 WPIs
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. In the first two months
of 2006, the Home Fashion segment experienced an increased rate
of negative cash flow from
44
operations. Such negative cash flow was principally due to
restructuring actions that had been delayed and which took place
in the first two months of 2006. We expect that WPI will
continue to operate at a loss during 2006 and 2007, and we
cannot assure you that it will be able to operate profitably in
the future.
WPI may
not be able to secure additional financing to meet its future
needs.
Other than the credit facility provided by AREH which matures on
August 7, 2006, WPI has not yet obtained any additional
credit facilities and we cannot assure you that it will be able
to do so on terms that are acceptable to it. Moreover, the
pending litigation relating to the ownership of WPI has hindered
the consummation of the rights offering pursuant to which WPI
was to raise $92 million in incremental equity and there
can be no assurance as to when or if such offering will occur
and whether AREP will remain obligated to purchase any
additional shares pursuant thereto. In addition, we have not yet
ascertained the full extent to which additional capital will be
required to retain WPIs customers and make investments
required to attain a competitive cost structure. As a result, we
cannot assure you that WPI will be able to obtain the capital
that will be required to continue operations or to repay amounts
due under the AREH credit facility.
From time to time, WPI may explore additional financing methods
and other means to make needed investments. Such financing
methods could include stock issuance or debt financing. If
WPIs business does not improve, it is likely that this
financing would be available, if at all, only on terms that are
not advantageous and potentially highly dilutive to existing
stockholders of WPI.
The loss
of any of WPIs large customers could have an adverse
effect on WPIs business.
During 2005 and 2004, WPIs six largest customers accounted
for approximately 51% of its net sales (including net sales by
WestPoint Stevens). WPI has experienced a significant decline in
net sales to one of its largest customers. Sales to this
customer have declined from $202.4 million for 2004 to
$51.5 million for 2005 (including net sales by WestPoint
Stevens). In addition, many 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
WPIs 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 WPIs sales are derived from licensed designer brands.
The loss of a significant license could have an adverse effect
on WPIs business.
A portion of WPIs sales is derived from licensed designer
brands. The license agreements for WPIs 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 WPIs business, which effect could
be material. Under certain circumstances, these licenses can be
terminated without WPIs consent due to circumstances
beyond WPIs control.
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 WPIs 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
45
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
WPIs operations.
The home
fashion industry is highly competitive and WPIs success
depends on WPIs ability to compete effectively in the
market.
The home fashion industry is highly competitive. WPIs
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,
the largest of which is Springs Global US, Inc., a company
formed by the merger of Coteminas S.A., a major Brazilian
textile producer, with Springs Industries, Inc. WPIs
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 WPIs ability to
compete effectively in any of these areas. Any failure to
compete effectively could adversely affect WPIs 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
WPIs 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:
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challenges caused by distance;
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language and cultural differences;
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legal and regulatory restrictions;
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the difficulty of enforcing agreements with overseas suppliers;
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currency exchange rate fluctuations;
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political and economic instability;
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potential adverse tax consequences; and
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higher costs associated with doing business internationally.
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There has
been consolidation of retailers of WPIs 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 WPIs 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
46
regulations. WPIs 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 stocks, preferred stocks and
securities convertible into common stocks, 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 a 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.
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Our investments may not be successful for many reasons
including, but not limited to:
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fluctuation of interest rates;
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lack of control in minority investments;
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worsening of general economic and market conditions;
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lack of diversification;
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fluctuation of U.S. dollar exchange rates; and
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adverse legal and regulatory developments that may affect
particular businesses.
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We also have engaged in a short sale which has, to
date, and in the future could result in significant unrealized
and realized losses.
Item 1B. Unresolved
Staff Comments.
There are no unresolved SEC staff comments.
47
Oil &
Gas
Productive
Wells
The following table sets forth our interests in productive
wells, by principal area of operation, as of December 31,
2005.
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Oil
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Natural Gas
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Total
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Gross
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Net
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Gross
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|
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Net
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Gross
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|
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Net
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Area:
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West Texas
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|
|
164
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|
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159.6
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|
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174
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67.1
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|
|
338
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|
|
226.7
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East Texas
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3
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2.7
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|
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104
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100.3
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107
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103.0
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Gulf Coast
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31
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20.2
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98
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68.7
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129
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88.9
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Gulf of Mexico
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28
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15.7
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27
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8.7
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55
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24.4
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Other
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|
39
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12.5
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|
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210
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|
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97.2
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|
249
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109.7
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Total
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265
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210.7
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613
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342.0
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878
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|
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552.7
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Leasehold
Acreage
The following table shows the approximate gross and net acres in
which we had a leasehold interest, by principal area of
operation, as of December 31, 2005.
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Developed Acreage
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Undeveloped Acreage
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Gross
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Net
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Gross
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Net(1)
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Area:
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West Texas
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31,200
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15,900
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108,900
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26,400
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East Texas
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14,500
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13,800
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7,000
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5,600
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Gulf Coast
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32,300
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17,600
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|
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21,300
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|
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12,200
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Gulf of Mexico
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53,600
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28,900
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Other
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70,500
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36,900
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Total
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202,100
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|
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113,100
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137,200
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44,200
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(1) |
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Includes 13,260, 7,333 and 8,050 net acres with leases
expiring during 2006, 2007 and 2008, respectively. |
NEG Oil & Gas acquires a leasehold interest in the
properties explored. The leases grant the lessee the right to
explore for and extract oil and gas from a specified area. Lease
rentals usually consist of a fixed annual charge made prior to
obtaining production. Once production has been established, a
royalty is paid to the lessor based upon the gross proceeds from
the sale of oil and gas. Once wells are drilled, a lease
generally continues as long as production of oil and gas
continues. In some cases, leases may be acquired in exchange for
a commitment to drill or finance the drilling of a specified
number of wells to predetermined depths.
Substantially all of NEG Oil & Gas producing oil
and gas properties are located on leases held for an
indeterminate number of years as long as production is
maintained. All non-producing acreage is held under leases from
mineral owners or a government entity which expire at varying
dates. NEG Oil & Gas is obligated to pay annual delay
rentals to the lessors of certain properties in order to prevent
the leases from terminating.
Gaming
Las
Vegas
We own and operate the Stratosphere Casino Hotel &
Tower, located in Las Vegas, Nevada, which is centered around
the Stratosphere Tower, the tallest free-standing observation
tower in the United States. The hotel and entertainment facility
has 2,444 rooms and suites, an 80,000 square foot casino
and related amenities.
We own Arizona Charlies Decatur and Arizona Charlies
Boulder. Arizona Charlies Decatur has 258 hotel rooms and
a 52,000 square foot casino and related amenities. Arizona
Charlies Boulder has 303 hotel rooms and a
41,000 square foot casino and related amenities.
48
Atlantic
City
The Sands, located in Atlantic City, New Jersey, contains 620
rooms and suites, an 80,000 square foot casino and related
amenities.
Real
Estate
Rental
Real Estate
As of December 31, 2005, we owned 55 separate real estate
assets, excluding our real estate development, hotel and resort
operations, hotel and casino operations and real estate assets
related to our oil and gas operations. These primarily consist
of fee and leasehold interests in 25 states. Most of these
properties are net-leased to single corporate tenants.
Approximately 84% of these properties are currently net-leased,
6% are operating properties and 10% are vacant.
Real
Estate Development
We own, primarily through our subsidiary, Bayswater Development
LLC, 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 Resort in Cape Cod, Massachusetts, includes land
for future residential and commercial development. We have begun
construction and sales on the first phase of our approximately
450-unit
residential development.
We own the waterfront communities of Grand Harbor and Oak Harbor
in Vero Beach, Florida. These communities include properties in
various stages of development and we also own 400 acres of
developable land to the north of Grand Harbor.
We also own and are developing residential communities in
Westchester County, New York and Naples, Florida.
Hotel
and Resort Operations
We own the New Seabury resort in Cape Cod, Massachusetts. The
resort is comprised of a golf club, with two championship golf
courses, the Popponesset Inn, a private beach club, a fitness
center and a tennis facility.
We also own three golf courses, a tennis complex, fitness
center, beach club and clubhouses and an assisted living
facility located adjacent to the Intercoastal Waterway in Vero
Beach, Florida.
Home
Fashion
WPIs properties are indirectly owned or leased through its
subsidiaries, including owned office space in West Point,
Georgia, and Valley, Alabama, and leased office space, including
approximately 104,000 square feet in New York City. WPI
intends to replace the New York City lease with a lease for
reduced space when the New York City lease expires in December
2006. WPI also leases approximately 37,000 square feet
elsewhere for other administrative, storage and office space.
WPI owns and utilizes 13 manufacturing facilities located in
Alabama, Florida, Maine, North Carolina, and South Carolina
which contain in the aggregate approximately
6,100,000 square feet of floor space and leases and
utilizes four manufacturing facilities in Alabama, Florida and
North Carolina which contain in the aggregate approximately
450,000 square feet of floor space. WPI closed its Fairview
towel manufacturing facility in Valley, Alabama on
December 31, 2005. This closure brought the number of owned
manufacturing facilities to 13. As a result of our increased
sourcing efforts, we expect to continue to reduce our domestic
capacity.
WPI also owns a chemical plant in Opelika, Alabama containing
approximately 43,000 square feet of floor space and
operates a fleet of tractors and trailers from a company-owned
transportation center in Valley, Alabama
49
containing approximately 40,000 square feet of floor space.
In addition, WPI owns a printing facility in West Point, Georgia
consisting of approximately 38,000 square feet at which
product packaging and labeling are printed.
WPI owns and operates nine distribution centers and warehouses
for its operations which contain approximately
3,440,000 square feet of floor space and leases and
operates three distribution outlets and warehouses containing
approximately 500,000 square feet of floor space. In
addition, WPI owns two retail outlet stores and leases 31 other
retail stores which range in size from approximately
9,000 square feet to approximately 38,000 square feet.
|
|
Item 3.
|
Legal
Proceedings.
|
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.
WestPoint
Stevens, Inc.
On August 8, 2005, WPI and its subsidiaries completed the
purchase of substantially all the assets of WestPoint Stevens
and certain of its subsidiaries pursuant to an asset purchase
agreement approved by the United States Bankruptcy Court for the
Southern District of New York in connection with Chapter 11
proceedings of West Point Stevens. WestPoint Stevens was a
premier manufacturer and marketer of bed and bath home fashions
supplying leading U.S. retailers and institutional
customers. Before the asset purchase transaction, WPI did not
have any operations.
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. Pursuant to the asset purchase
agreement, rights to subscribe for an additional
10.5 million shares of common stock of WPI at a price of
$8.772 per share, or the rights offering are to be
allocated among former creditors of WestPoint Stevens. Under the
asset purchase agreement and the bankruptcy court order
approving the sale, we would receive rights to subscribe for at
least 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. Accordingly, upon
completion of the rights offering and depending upon the extent
to which the other holders exercise their 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 be outstanding.
Certain first lien creditors, or the objecting creditors, filed
an appeal of the bankruptcy court order approving the sale with
the United States District Court for the Southern District
of New York. In connection with that appeal certain subscription
rights distributed to the second lien creditors at the closing
were placed in escrow. On November 16, 2005, the District
Court rendered a decision and order in Contrarian Funds
Inc. v. WestPoint Stevens, Inc. et. al. which it
amended on December 7, 2005.
The District Court concluded, among other things, that
provisions of the sale order providing for the satisfaction of
the objecting creditors claims and the elimination of the
liens in their favor by the distribution to them of shares of
common stock of WPI were not authorized by applicable law or by
the contracts among the parties. The District Court remanded the
matter to the Bankruptcy Court for further proceedings
consistent with its opinion. The District Courts decision
did not disturb the sale of assets by WestPoint Stevens to WPI.
On February 3, 2006, we filed a request for a stay of the
implementation of the District Courts order with the
U.S. Court of Appeals for the Second Circuit and filed a
petition for a writ of mandamus requesting that the Court of
Appeals review the District Courts decision and order. The
hearing on our petition was held on March 14, 2006 and on
March 16, 2006 the Court of Appeals denied the petition.
Proceedings will continue in the bankruptcy court.
We currently own approximately 67.7% of the outstanding shares
of common stock of WPI. As a result of the decision and order,
our percentage of the outstanding shares of common stock of WPI
could, in certain circumstances, be reduced to less than 50%.
50
We are vigorously contesting any changes to the bankruptcy court
sale order, however, we cannot predict the outcome of these
proceedings or the ultimate impact on WPIs business
operations or prospects or on our investment in WPI.
GBH
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 have
determined that we no longer control GBH and have deconsolidated
our investment effective September 29, 2005. Creditors of
GBH have indicated that they intend to challenge the
transactions in July 2004 that, among other things, resulted in
the transfer of The Sands to ACE Gaming, the exchange of certain
of GBHs notes for 3% senior secured convertible notes of
Atlantic Coast, and, ultimately, our owing 58.3% of the Atlantic
Coast shares. The creditors also have indicated that, if they
succeed in challenging these transactions, they intend to seek
to rescind the July 2004 transactions and attempt to equitably
subordinate, in bankruptcy, AREPs claims against GBH to
the claims of such creditors. If the creditors bring suit, ACE
Gaming and AREP will vigorously defend such action.
Additionally, on September 2, 2005, Robino Stortini
Holdings, LLC, or RSH, which claims 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 the six members of its Board of Directors. Three of the GBH
directors include a director and two officers of our general
partner. RSH alleges five counts against the defendants and
seeks as relief the appointment of a custodian and receiver for
GBH and, among other things, a declaration that the director
defendants breached their fiduciary duties and an award of
unspecified compensatory damages as well as attorneys fees
and costs. All defendants have moved to dismiss the RSH
litigation. While we are not a party to the RSH litigation
lawsuit, claims under the RSH litigation may be subject to
indemnification by us.
The GBH bankruptcy and the RSH litigation are in their
preliminary stages and we cannot predict the outcome of either
case or the potential impact on us.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to our security holders during the
fourth quarter of 2005.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Security Holder
Matter and Issuer Purchases of Equity Securities.
|
Our depositary units are traded on the New York Stock Exchange,
or NYSE, under the symbol ACP. The range of high and
low sales prices for the depositary units on the New York Stock
Exchange Composite Tape (as reported by The Wall Street Journal)
for each quarter from January 1, 2004 through
December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
per
|
|
Quarter Ended:
|
|
High
|
|
|
Low
|
|
|
Depositary Unit
|
|
|
March 31, 2004
|
|
$
|
17.19
|
|
|
$
|
14.46
|
|
|
$
|
|
|
June 30, 2004
|
|
|
21.80
|
|
|
|
15.25
|
|
|
|
|
|
September 30, 2004
|
|
|
22.93
|
|
|
|
18.41
|
|
|
|
|
|
December 31, 2004
|
|
|
29.23
|
|
|
|
20.00
|
|
|
|
|
|
March 31, 2005
|
|
|
30.78
|
|
|
|
25.40
|
|
|
|
|
|
June 30, 2005
|
|
|
29.35
|
|
|
|
26.60
|
|
|
|
|
|
September 30, 2005
|
|
|
39.74
|
|
|
|
28.20
|
|
|
|
.10
|
|
December 31, 2005
|
|
|
39.30
|
|
|
|
28.70
|
|
|
|
.10
|
|
As of December 31, 2005, there were approximately 9,200
record holders of the depositary units.
There were no repurchases of our depositary units during 2004 or
2005.
51
Distributions
Distribution
Policy and Quarterly Distribution
During 2005, we paid two quarterly distributions, in the third
and fourth quarter, to holders of our depositary units. Each
distribution was $.10 per depositary unit.
On March 15, 2006, the Board of Directors approved payment
of a quarterly cash distribution of $0.10 per unit on its
depositary units for the first quarter of 2006 consistent with
the distribution policy adopted in 2005. The distribution is
payable on April 7, 2006, to depositary unitholders of
record at the close of business on March 27, 2006.
The declaration and payment of distributions is reviewed
quarterly by our Board of Directors based upon a review of our
balance sheet and cash flow, the ratio of current assets to
current liabilities, our expected capital and liquidity
requirements, the provisions of our partnership agreement and
provisions in our financing arrangements governing
distributions, and keeping in mind that limited partners subject
to U.S. federal income tax have recognized income on our
earnings without receiving distributions that could be used to
satisfy any resulting tax obligations. The payment of future
distributions will be determined by the Board of Directors
quarterly, based upon the factors described above and other
factors that it deems relevant at the time that declaration of a
distribution is considered. There can be no assurance as to
whether or in what amounts any future distributions might be
paid.
As of March 10, 2006 there were 61,856,830 depositary units
and 10,800,397 preferred units outstanding. Trading in the
preferred units commenced March 31, 1995 on the NYSE under
the symbol ACP-P. The preferred units represent
limited partner interests in AREP and have certain rights and
designations, generally as follows. Each preferred unit has a
liquidation preference of $10.00 and entitles the holder to
receive distributions payable solely in additional preferred
units, at a rate of $.50 per preferred unit per annum
(which is equal to a rate of 5% of the liquidation preference of
the unit) payable annually on March 31 of each year, each
referred to as a payment date.
On any payment date, with the approval of our audit committee,
we may opt to redeem all, but not less than all, of the
preferred units for a price, payable either in all cash or by
issuance of additional depositary units, equal to the
liquidation preference of the preferred units, plus any accrued
but unpaid distributions thereon. On March 31, 2010, we
must redeem all, but not less than all, of the preferred units
on the same terms as any optional redemption.
On March 31, 2005, we distributed to holders of record of
our preferred units as of March 15, 2005, 514,133
additional preferred units. Pursuant to the terms of the
preferred units, on February 28, 2006, we declared our
scheduled annual preferred unit distribution payable in
additional preferred units at the rate of 5% of the liquidation
preference of $10.00. The distribution is payable on
March 31, 2006 to holders of record as of March 15,
2006. In March 2006, the number of authorized preferred units
was increased to 11,400,000.
Each depositary unitholder will be taxed on the
unitholders allocable share of our taxable income and
gains and, with respect to preferred unitholders, accrued
guaranteed payments, whether or not any cash is distributed to
the unitholder.
52
|
|
Item 6.
|
Selected
Historical Consolidated Financial Data.
|
The following table summarizes certain of our selected
historical consolidated financial data, which you should read in
conjunction with our consolidated financial statements and the
related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
contained in this annual report on
Form 10-K.
The selected historical consolidated financial data as of
December 31, 2005 and 2004, and for the years ended
December 31, 2005, 2004, and 2003, have each been derived
from our audited consolidated financial statements at those
dates and for those periods, contained elsewhere in this annual
report
Form 10-K.
The selected historical consolidated financial data as of
December 31, 2003, 2002 and 2001 and for the years ended
December 31, 2002 and 2001 has each been derived from our
audited consolidated financial statements at that date and for
that period, not contained in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In $000s except unit and per
unit)
|
|
|
Total revenues
|
|
$
|
1,262,493
|
|
|
$
|
670,276
|
|
|
$
|
576,845
|
|
|
$
|
588,061
|
|
|
$
|
589,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
(50,306
|
)
|
|
$
|
72,425
|
|
|
$
|
58,458
|
|
|
$
|
42,688
|
|
|
$
|
86,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from discontinued
operations
|
|
$
|
23,262
|
|
|
$
|
81,329
|
|
|
$
|
9,962
|
|
|
$
|
6,038
|
|
|
$
|
7,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before cumulative
effect of accounting change
|
|
$
|
(27,044
|
)
|
|
$
|
153,754
|
|
|
$
|
68,420
|
|
|
$
|
48,726
|
|
|
$
|
94,216
|
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(27,044
|
)
|
|
$
|
153,754
|
|
|
$
|
70,332
|
|
|
$
|
48,726
|
|
|
$
|
94,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partners
|
|
$
|
(21,640
|
)
|
|
$
|
130,850
|
|
|
$
|
51,074
|
|
|
$
|
63,168
|
|
|
$
|
66,668
|
|
General partner
|
|
|
(5,404
|
)
|
|
|
22,904
|
|
|
|
19,258
|
|
|
|
(14,442
|
)
|
|
|
27,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(27,044
|
)
|
|
$
|
153,754
|
|
|
$
|
70,332
|
|
|
$
|
48,726
|
|
|
$
|
94,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
(0.82
|
)
|
|
$
|
1.11
|
|
|
$
|
0.84
|
|
|
$
|
1.14
|
|
|
$
|
1.19
|
|
Income from discontinued operations
|
|
|
0.42
|
|
|
|
1.73
|
|
|
|
0.21
|
|
|
|
0.13
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per LP Unit
|
|
$
|
(0.40
|
)
|
|
$
|
2.84
|
|
|
$
|
1.05
|
|
|
$
|
1.27
|
|
|
$
|
1.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited
partnership units outstanding
|
|
|
54,085,492
|
|
|
|
46,098,284
|
|
|
|
46,098,284
|
|
|
|
46,098,284
|
|
|
|
46,098,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
(0.82
|
)
|
|
$
|
1.09
|
|
|
$
|
0.80
|
|
|
$
|
1.01
|
|
|
$
|
1.07
|
|
Income from discontinued operations
|
|
|
0.42
|
|
|
|
1.55
|
|
|
|
0.18
|
|
|
|
0.11
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per LP Unit
|
|
$
|
(0.40
|
)
|
|
$
|
2.64
|
|
|
$
|
0.98
|
|
|
$
|
1.12
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average limited
partnership units and equivalent partnership units outstanding
|
|
|
54,085,492
|
|
|
|
51,542,312
|
|
|
|
54,489,943
|
|
|
|
56,466,698
|
|
|
|
55,599,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(2)
|
|
$
|
256,893
|
|
|
$
|
340,034
|
|
|
$
|
171,806
|
|
|
$
|
149,499
|
|
|
$
|
155,518
|
|
Adjusted EBITDA(2)
|
|
$
|
326,147
|
|
|
$
|
349,213
|
|
|
$
|
174,420
|
|
|
$
|
153,107
|
|
|
$
|
160,882
|
|
Cash dividends declared (per unit)
|
|
$
|
.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002(1)
|
|
|
2001(1)
|
|
|
|
(in $000s)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
576,123
|
|
|
$
|
806,309
|
|
|
$
|
553,224
|
|
|
$
|
145,195
|
|
|
$
|
219,644
|
|
Investments
|
|
|
836,663
|
|
|
|
350,527
|
|
|
|
167,727
|
|
|
|
395,495
|
|
|
|
319,882
|
|
Property, plant and equipment, net
|
|
|
1,635,238
|
|
|
|
1,263,852
|
|
|
|
1,115,983
|
|
|
|
1,074,515
|
|
|
|
1,001,387
|
|
Total assets
|
|
|
3,966,462
|
|
|
|
2,861,153
|
|
|
|
2,156,892
|
|
|
|
2,002,493
|
|
|
|
2,032,297
|
|
Long term debt (including current
portion)
|
|
|
1,435,821
|
|
|
|
759,807
|
|
|
|
374,421
|
|
|
|
435,675
|
|
|
|
530,745
|
|
Liability for preferred limited
partnership units(1)
|
|
|
112,067
|
|
|
|
106,731
|
|
|
|
101,649
|
|
|
|
|
|
|
|
|
|
Partners equity
|
|
|
1,498,449
|
|
|
|
1,641,755
|
|
|
|
1,527,396
|
|
|
|
1,387,253
|
|
|
|
1,301,810
|
|
|
|
|
(1) |
|
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. |
|
(2) |
|
EBITDA represents earnings before interest expense, income tax
(benefit) expense and depreciation, depletion and amortization.
We define Adjusted EBITDA as EBITDA excluding the effect of
unrealized losses or gains on derivative contracts. We present
EBITDA and Adjusted EBITDA because we consider them important
supplemental measures of our performance and believe they are
frequently used by securities analysts, investors and other
interested parties in the evaluation of companies issuing debt,
many of which present EBITDA and Adjusted EBITDA when reporting
their results. We present EBITDA and Adjusted EBITDA on a
consolidated basis. However, we conduct substantially all of our
operations through subsidiaries. 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 of our senior 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 currently may be subject or into which
they may 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. |
EBITDA and Adjusted EBITDA have limitations as analytical tools,
and you should not consider them in isolation, or as substitutes
for analysis of our results as reported under generally accepted
accounting principles, or GAAP. For example, EBITDA and Adjusted
EBITDA:
|
|
|
|
|
do not reflect our cash expenditures, or future requirements for
capital expenditures, or contractual commitments;
|
|
|
|
do not reflect changes in, or cash requirements for, our working
capital needs; and
|
|
|
|
do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal
payments, on our debts.
|
Although depreciation, depletion and amortization are non-cash
charges, the assets being depreciated, depleted or amortized
often will have to be replaced in the future, and EBITDA and
Adjusted EBITDA do not reflect any cash requirements for such
replacements. Other companies in the industries in which we
operate may calculate EBITDA and Adjusted EBITDA differently
than we do, limiting their usefulness as comparative measures.
In addition, EBITDA and Adjusted EBITDA do not reflect the
impact of earnings or charges resulting from matters we consider
not to be indicative of our ongoing operations.
EBITDA and Adjusted EBITDA are not measurements of our financial
performance under GAAP and should not be considered as an
alternative to net earnings, operating income or any other
performance measures derived in accordance with GAAP or as an
alternative to cash flow from operating activities as a measure
of our
54
liquidity. We compensate for these limitations by relying
primarily on our GAAP results and using EBITDA only
supplementally.
The following table reconciles net earnings (loss) to EBITDA and
EBITDA to Adjusted EBITDA for the periods indicated (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Net (loss) earnings
|
|
$
|
(27,044
|
)
|
|
$
|
153,754
|
|
|
$
|
70,332
|
|
|
$
|
48,726
|
|
|
$
|
94,216
|
|
Interest expense
|
|
|
104,014
|
|
|
|
62,183
|
|
|
|
38,865
|
|
|
|
37,204
|
|
|
|
44,336
|
|
Income tax expense (benefit)
|
|
|
21,092
|
|
|
|
18,312
|
|
|
|
(15,792
|
)
|
|
|
10,880
|
|
|
|
(25,609
|
)
|
Depreciation, depletion and
amortization
|
|
|
158,581
|
|
|
|
105,785
|
|
|
|
78,401
|
|
|
|
52,689
|
|
|
|
42,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
256,643
|
|
|
|
340,034
|
|
|
|
171,806
|
|
|
|
149,499
|
|
|
|
155,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on derivative
contracts
|
|
|
69,254
|
|
|
|
9,179
|
|
|
|
2,614
|
|
|
|
3,608
|
|
|
|
5,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
325,897
|
|
|
$
|
349,213
|
|
|
$
|
174,420
|
|
|
$
|
153,107
|
|
|
$
|
160,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Managements discussion and analysis of financial condition
and results of operations, or MD&A, is comprised of the
following sections:
1. Overview
2. Results of Operations
|
|
|
|
|
Consolidated Financial Results
|
|
|
|
Oil & Gas
|
|
|
|
Gaming
|
|
|
|
Real Estate
|
|
|
|
Home Fashion
|
|
|
|
Holding Company and Investments
|
3. Liquidity and Capital Resources
|
|
|
|
|
Consolidated Financial Results
|
|
|
|
Oil & Gas
|
|
|
|
Gaming
|
|
|
|
Real Estate
|
|
|
|
Home Fashion
|
4. Critical Accounting Policies & Estimates
5. Certain Trends and Uncertainties
American Real Estate Partners, L.P. (the Company or
AREP or we) is a master limited
partnership formed in Delaware on February 17, 1987. AREP
is a diversified holding company owning subsidiaries engaged in
the following operating businesses: (1) Oil &
Gas; (2) Gaming: (3) Real Estate and (4) Home
Fashion. Our primary business strategy is to continue to grow
and enhance the value of our businesses. We may also seek to
acquire
55
additional businesses that are distressed or in
out-of-favor
industries and will consider the divestiture of businesses from
which we do not foresee adequate future cash flow or
appreciation potential. 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.
We own a 99% limited partner interest in American Real Estate
Holdings Limited Partnership. AREH, the operating partnership,
holds our investments and conducts our business operations.
Substantially all of our assets and liabilities are owned by
AREH and substantially all of our operations are conducted
through AREH and its subsidiaries. American Property Investors,
Inc., or API, owns a 1% general partner interest in both us and
AREH, representing an aggregate 1.99% general partner interest
in us and AREH. API is owned and controlled by Mr. Carl C.
Icahn.
As of March 1, 2006, affiliates of Mr. Icahn
beneficially owned approximately 90% of our outstanding
depositary units and approximately 86.5% of our outstanding
preferred units.
In addition to our Oil & Gas, Gaming, Real Estate and
Home Fashion segments, we discuss the Holding Company. The
Holding Company includes the unconsolidated results of AREH and
AREP and, principally, includes investment activity and expenses
associated with the activities of a holding company. Certain
real estate expenses are included in the Holding Company to the
extent they relate to administration of our various real estate
holdings.
A summary of the significant events that occurred in 2005 is as
follows:
|
|
|
|
|
We acquired additional Oil & Gas and Gaming assets from
affiliates of Mr. Icahn for aggregate consideration of
$180.0 million in cash and depositary units valued at
$457.0 million;
|
|
|
|
Our subsidiary, GB Holdings, Inc., or GBH, filed for bankruptcy
on September 29, 2005;
|
|
|
|
We continued to sell properties in our net lease portfolio;
|
|
|
|
In February 2005, we issued $480 million principal amount
of
71/8% senior
unsecured notes due 2013;
|
|
|
|
We incurred losses of $41.3 million on a short position
that we had initiated in 2004;
|
|
|
|
Oil & Gas activities: production volumes and the market
prices for oil and gas rose in 2005 over the prior year but the
positive impact was offset by the negative impact of derivative
losses;
|
|
|
|
On August 8, 2005, we acquired approximately two thirds of
the outstanding equity of WPI, the acquirer in a bankruptcy
proceeding of substantially all of the assets of WestPoint
Stevens Inc. See Item 3. Legal Proceedings.
|
Our historical financial statements herein have been restated to
reflect the five entities acquired in the second quarter of 2005
as discussed in notes 1, 4 and 5 of the notes to the
consolidated financial statements.
The key factors affecting the financial results for the years
ended December 31, 2005 versus 2004 were:
|
|
|
|
|
Decreased operating income, principally due to the operating
loss of $22.4 million in the Home Fashion segment and an
increase of $12.7 million in Holding Company costs.
Oil & Gas operating income was reduced by
$69.3 million due to unrealized derivative losses;
|
|
|
|
Net losses on securities of $21.3 million in 2005 versus
gains of $16.5 million in 2004;
|
|
|
|
Impairment charges of $52.4 million in connection with the
bankruptcy of GBH;
|
|
|
|
Interest expense increased $41.8 million due to higher debt
levels; and
|
|
|
|
Reduced gains on sales of properties: income from discontinued
operations fell $58.1 million.
|
The key factors affecting the financial results for the year
ended December 31, 2004 versus 2003 were:
|
|
|
|
|
Increased operating income principally due to a
$28.4 million increase in operating income from gaming
activities;
|
56
|
|
|
|
|
Interest expense increased $23.3 million due to higher debt
levels;
|
|
|
|
Interest income increased $21.4 million due to increased
levels of investments;
|
|
|
|
Net gains on securities were $16.5 million in 2004 versus
$1.7 million in the prior year;
|
|
|
|
Increased gains on sales of properties: income from gains on
discontinued operations rose $71.8 million;
|
|
|
|
An impairment charge of $15.6 million in 2004 related to
our interest in GBH.
|
Results
of Operations
Consolidated
Financial Results
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Revenues increased by $592.2 million, or 88.4%, as compared
to the prior year. This increase reflects the inclusion of WPI
($472.7 million for five months), and increases of
$19.5 million for Gaming, $60.9 million for
Oil & Gas and $39.2 million for Real Estate.
Operating income decreased by $15.1 million, or 16.3%, as
compared to the prior year. This decrease reflects the inclusion
of losses on WPI of $22.4 million and an increase in
Holding Company costs of $12.7 million, of which
$4.3 million related to acquisitions. These items were
offset by increases of $8.9 million from Gaming,
$4.5 million from Oil & Gas, and $6.5 million
from Real Estate activities. Oil & Gas operating income
was reduced by $69.3 million in unrealized derivative
losses.
As a result of the bankruptcy of GBH, 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 Entertainment Holdings Inc., 32.3%
of which had been owned through our ownership of GBH
($45.7 million).
Interest expense increased by $41.8 million, or 67.3%, as
compared to the prior year. This increase reflects the increased
amount of borrowings, principally attributable to the issuance
in February 2005 of $480.0 million principal amount of
7.125% senior notes due in 2013. Interest income increased
slightly by $0.6 million, or 1.4%, as compared to the prior
year.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Revenues increased by $93.4 million, or 16.2%, as compared
to the prior year. This increase reflects increases of
$40.5 million in Gaming revenues, $38.1 million in
Oil & Gas revenues, and $14.9 million from Real
Estate activities.
Operating income increased by $26.5 million, or 40.1%, as
compared to the prior year. This increase reflects increases of
$28.4 million from Gaming, $2.7 million from
Oil & Gas, offset by a $2.9 million reduction from
Real Estate activities and an increase in Holding Company costs
of $1.3 million and acquisition costs of $0.4 million.
Interest expense increased by $23.3 million, or 60.0%, as
compared to the prior year. This increase reflects the increased
amount of borrowings. Interest income increased by
$21.4 million, or 90.0%, during 2004, as compared to the
prior year. The increase is due to interest on two mezzanine
loans, and increased interest income on other investments.
Oil &
Gas
We conduct our oil and gas activities through our wholly-owned
subsidiary, NEG Oil & Gas (formerly AREP Oil &
Gas). NEG Oil & Gas is an independent oil and gas
exploration, development and production company based in Dallas,
Texas. NEG Oil & Gas core areas of operations are
the Val Verde and Permian Basins of West Texas, the Cotton
Valley Trend in East Texas, the Gulf Coast and the Gulf of
Mexico. NEG Oil & Gas also has oil and gas operations
in the Anadarko and Arkoma Basins of Oklahoma and Arkansas.
Based on reserve reports prepared as of December 31, 2005
by Netherland, Sewell & Associates, Inc. and DeGolyer
and MacNaughton, independent
57
petroleum consultants, estimated proved reserves were
500.5 Bcfe and were 86% natural gas and 50% proved
developed.
As of December 31, 2005, NEG Oil & Gas owned the
following assets and operations:
|
|
|
|
|
A 50.01% ownership interest in National Energy Group, or NEG, a
publicly traded oil and gas management company. National Energy
Group manages the oil and gas operations and its principal asset
consists of its non-managing membership interest in NEG Holding
LLC;
|
|
|
|
A managing membership interest in NEG Holding;
|
|
|
|
National Onshore LP; and
|
|
|
|
National Offshore LP.
|
The subsidiaries of NEG Oil & Gas were acquired in
transactions with affiliates of Mr. Icahn and subsequently
acquired by us in various purchase transactions. In accordance
with generally accepted accounting principles, assets
transferred between entities under common control are accounted
for at historical cost similar to the pooling of interest method
and the financial statements are combined from the date of
acquisition by an entity under common control. The financial
statements include the consolidated results of operations,
financial position and cash flows of National Energy Group, NEG
Holding, National Onshore and National Offshore from the date
Mr. Icahn obtained control, or the date of common control.
The following table summarizes key operating data for the
Oil & Gas segment (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Gross oil and gas revenues
|
|
$
|
312,661
|
|
|
$
|
161,055
|
|
|
$
|
108,713
|
|
Realized derivatives losses
|
|
|
(51,263
|
)
|
|
|
(16,625
|
)
|
|
|
(8,309
|
)
|
Unrealized derivatives losses
|
|
|
(69,254
|
)
|
|
|
(9,179
|
)
|
|
|
(2,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas revenues
|
|
|
192,144
|
|
|
|
135,251
|
|
|
|
97,790
|
|
Plant revenues
|
|
|
6,710
|
|
|
|
2,737
|
|
|
|
2,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
198,854
|
|
|
|
137,988
|
|
|
|
99,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and gas operating
expenses
|
|
|
54,800
|
|
|
|
31,075
|
|
|
|
22,345
|
|
Depreciation, depletion and
amortization
|
|
|
91,100
|
|
|
|
60,123
|
|
|
|
39,455
|
|
General and administrative expenses
|
|
|
15,433
|
|
|
|
13,737
|
|
|
|
7,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,333
|
|
|
|
104,935
|
|
|
|
69,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
37,521
|
|
|
$
|
33,053
|
|
|
$
|
30,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004 and 2003,
natural gas comprised 72%, 70%, and 74% of gross oil and gas
revenues, respectively.
58
Other data related to Oil & Gas operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Production data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil (MBbls)
|
|
|
1,440
|
|
|
|
935
|
|
|
|
811
|
|
Natural gas (MMcf)
|
|
|
28,107
|
|
|
|
18,895
|
|
|
|
15,913
|
|
Natural gas liquids (MBbls)
|
|
|
350
|
|
|
|
549
|
|
|
|
166
|
|
Natural gas equivalents (MMcfe)
|
|
|
38,847
|
|
|
|
27,799
|
|
|
|
21,772
|
|
Average Sales
Price(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil average sales price (per Bbl)
|
|
|
|
|
|
|
|
|
|
|
|
|
Price excluding realized gains or
losses on derivative contracts
|
|
$
|
55.72
|
|
|
$
|
39.55
|
|
|
$
|
30.26
|
|
Price including realized gains or
losses on derivative contracts
|
|
|
48.95
|
|
|
|
29.89
|
|
|
|
27.32
|
|
Natural gas average sales price
(per Mcf)
|
|
|
|
|
|
|
|
|
|
|
|
|
Price excluding realized gains or
losses on derivative contracts
|
|
|
7.85
|
|
|
|
5.73
|
|
|
|
5.07
|
|
Price including realized gains or
losses on derivative contracts
|
|
|
6.38
|
|
|
|
5.39
|
|
|
|
4.70
|
|
Natural gas liquids (per Bbl)
|
|
|
33.46
|
|
|
|
26.72
|
|
|
|
23.24
|
|
Expense per Mcfe:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total oil and gas operating
expenses
|
|
$
|
1.41
|
|
|
$
|
1.12
|
|
|
$
|
1.03
|
|
Depreciation, depletion and
amortization
|
|
|
2.35
|
|
|
|
2.14
|
|
|
|
1.80
|
|
General and administrative expenses
|
|
|
0.40
|
|
|
|
0.49
|
|
|
|
0.36
|
|
|
|
|
(1) |
|
Excludes the effect of unrealized gains and losses on derivative
contracts. |
For the year ended December 31, 2005, the Oil &
Gas segment includes operations of NEG, National Onshore,
National Offshore and NEG Holding. The date of common control
for National Offshore was effective December 31, 2004. A
significant portion of the fluctuations between 2005 and 2004 is
due to the addition of National Offshore as well as the impact
of derivative losses. For the year ended December 31, 2003,
the operations of National Onshore are included from
August 28, 2003, the date of common control. A significant
portion of the fluctuations between 2004 and 2003 is due to the
addition of the National Onshore operations in 2003.
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Gross oil and gas revenues for 2005, before realized and
unrealized derivative losses, increased by 94.1% to
$312.7 million compared to $161.1 million in the prior
year. The increase is primarily attributable to (a) the
acquisition of National Offshore effective December 31,
2004 ($62.2 million), (b) the increase in average
sales prices ($58.9 million), and (c) the increase in
volume, excluding revenues for National Offshore in 2005
($30.5 million). Including the effects of realized and
unrealized derivative losses, oil and gas revenues increased by
42.1% to $192.1 million. Unrealized derivative losses in
2005 were $69.3 million compared to $9.2 million in
the prior year, an increase of 654.5%. Unrealized derivative
losses resulted from
mark-to-market
adjustments on our unsettled derivative positions at
December 31, 2005.
During 2005, our average realized price of natural gas,
including the effects of realized derivative losses, increased
by 18.3% to $6.38 per Mcf from $5.39 per Mcf in the
prior year. Our natural gas volume increased by 9.2 Bcf, or
48.8%, to 28.1 Bcf compared to 18.9 Bcf in the prior
year. Approximately 3.4 Bcf of the increase is attributable
to the addition of National Offshore. Excluding the effects of
National Offshore, our gas production increased by 31% primarily
due to our successful drilling activity.
Our average realized price of oil in 2005, including the effects
of realized derivative losses, increased by 63.8%, to $48.95
compared to $29.89 in the prior year. Our average oil volume
increased by 54% to 1,440 MBbls compared to 935 MBbls
in 2004. All of the oil volume increase is attributable to the
addition of National Offshore, without which our oil volume
would have decreased by 9.6% due mainly to the sale of an oil
producing property in 2004.
59
Total oil and gas operating expenses increased
$23.7 million, or 76.3% to $54.8 million during 2005
as compared to $31.1 million in the prior year. Total oil
and gas operating expenses per Mcfe increased $0.29, or 25.9%,
compared to 2004. $12.5 million of the increase was
attributable to the acquisition of National Offshore. The
remainder of the increase was attributable to increased
production, an increase in the number of producing wells and
overall rising operating expenses in the oil and gas industry.
The increase in operating expenses on a per Mcfe basis is
attributable to the National Offshore acquisition. Typically
offshore production is more expensive to produce and transport
than onshore production.
Depletion, depreciation and amortization for the oil and gas
segment, or DD&A, increased $31.0 million (51.5%) to
$91.1 million during 2005 as compared to $60.1 million
during 2004. DD&A per Mcfe increased $0.21, or 9.8%, to
$2.35 per Mcfe as compared to $2.14 per Mcfe in 2004.
$21.4 million of the increase was attributable to the
acquisition of National Offshore. Absent the acquisition of
National Offshore, DD&A expense increased $9.0 million,
or 15%, due to 31% higher natural gas production in 2005. On a
per Mcfe basis our DD&A rate increased due to the addition
of the production of National Offshore.
General and administrative expenses for the oil and gas segment,
or G&A, increased $1.7 million (12.3%) to
$15.4 million in 2005 as compared to $13.7 million
during 2004. G&A per Mcfe decreased $0.09, or 18.4%,
compared to 2004. The increase in expenses was primarily
attributable to the acquisition of National Offshore as we added
five new staff positions as result of the acquisition. The
balance of the increase was attributable to an overall increase
in staff levels and higher corporate governance costs. On a per
Mcfe basis, our oil and gas segment G&A decreased due to
higher overall production.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Gross oil and gas revenues for 2004, before realized and
unrealized derivative losses, increased $52.3 million or
48.1% to $161.1 million compared to $108.7 million in
2003. The increase is primarily attributable to the acquisition
of National Onshore effective August 28, 2003
($40.4 million) and an increase in average price
($12.3 million). The increase in revenues was offset by a
slight decline in production volumes, excluding the effect of
the National Onshore acquisition.
Including the effects of realized and unrealized derivative
losses, oil and gas revenues increased $37.5 million or
38.3% as compared to the prior year 2003. Unrealized derivative
losses in 2004 were $9.2 million compared to
$2.6 million in 2003, an increase of 251.1%. Unrealized
derivatives losses resulted from
mark-to-market
adjustments on our unsettled derivative positions at
December 31, 2004.
Our average natural gas price, including the effect of realized
derivatives losses, increased by 14.7% and our average crude oil
price increased by 9.4% in 2004 as compared to 2003. Our average
natural gas production in 2004 increased to 18.9 Bcf or
18.7% when compared to 2003. The increase in natural gas
production was primarily attributable to the acquisition of
National Onshore effective August 28, 2003. Absent the
acquisition of National Onshore, gas production decreased 2.5%.
Our oil production in 2004 increased by 15.3% to 935 Mbbls
compared to 2003. The increase in oil production was primarily
attributable to the acquisition of National Onshore. Absent the
acquisition of National Onshore, oil production decreased 10.2%
due to the sale of properties in June 2004.
Total oil and gas operating expenses increased
$8.7 million, or 39.1%, to $31.1 million during 2004
as compared to $22.3 million in 2003. Total oil and gas
operating expenses per Mcfe increased $0.09, or 8.7%, compared
to 2003. The increase was primarily attributable to the
acquisition of National Onshore effective August 28, 2003.
Absent the acquisition of National Onshore, total oil and gas
operating expenses increased $2.0 million, or 10.5%, due to
rising operating expenses.
Depletion, depreciation and amortization for the oil and gas
segment, or DD&A, increased $20.7 million (52.4%) to
$60.1 million during 2004 as compared to $39.4 million
during 2003. DD&A per Mcfe increased $0.34, or 18.9%, to
$2.14 per Mcfe as compared to $1.80 in 2003. The increase was
attributable to the acquisition of National Onshore effective
August 28, 2003. Absent the acquisition of National
Onshore, DD&A expense decreased $2.1 million, or 8.8%,
due to lower production in 2004 and a lower average depletion
rate.
60
General and administrative expenses for the Oil & Gas
segment, or G&A, increased $6.0 million (76.8%) to
$13.7 million in 2004 as compared to $7.8 million
during 2003. General and administrative expenses per Mcfe
increased $0.13 or 36.1%, compared to 2003. The increase was
primarily attributable to the acquisition of National Onshore.
Excluding the National Onshore acquisition, general and
administrative expense would have been relatively unchanged.
Gaming
We conduct our gaming operations in both Las Vegas and Atlantic
City. Our Las Vegas properties include the Stratosphere Casino
Hotel and Tower, Arizona Charlies Decatur and Arizona
Charlies Boulder. Our Atlantic City operations consist of
The Sands Hotel and Casino in Atlantic City, New Jersey.
Substantially all of our properties were acquired in
transactions with affiliates of Mr. Icahn. In accordance
with generally accepted accounting principles, assets
transferred between entities under common control are accounted
for at historical cost similar to the pooling of interest method
and the financial statements are combined from the date of
acquisition by an entity under common control, from the date of
common control. The financial statements include the
consolidated results of operations, financial position and cash
flows of our properties from the date Mr. Icahn obtained
control, or the date of common control.
On September 29, 2005, GBH, through which we owned an
indirect 32.3% equity interest in The Sands, 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 effective September 29, 2005.
Accordingly, we report results for The Sands from that date
based only on our direct 58.3% ownership of Atlantic Coast.
On November 29, 2005, we entered into an agreement to
purchase the Flamingo Laughlin Hotel and Casino in Laughlin,
Nevada and 7.7 acres of land in Atlantic City, New Jersey,
for $170.0 million. See Discussion of Segment
Liquidity and Capital Resources for additional information
regarding this agreement.
Summarized income statement information for the years ended
December 31, 2005, 2004 and 2003 is as follows (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
329,789
|
|
|
$
|
325,615
|
|
|
$
|
302,701
|
|
Hotel
|
|
|
73,924
|
|
|
|
65,561
|
|
|
|
58,253
|
|
Food and beverage
|
|
|
92,006
|
|
|
|
88,851
|
|
|
|
81,545
|
|
Tower, retail and other income
|
|
|
38,668
|
|
|
|
37,330
|
|
|
|
34,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenues
|
|
|
534,387
|
|
|
|
517,357
|
|
|
|
476,558
|
|
Less promotional allowances
|
|
|
44,066
|
|
|
|
46,521
|
|
|
|
46,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
490,321
|
|
|
|
470,836
|
|
|
|
430,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino
|
|
|
110,821
|
|
|
|
112,452
|
|
|
|
113,941
|
|
Hotel
|
|
|
31,734
|
|
|
|
27,669
|
|
|
|
24,751
|
|
Food and beverage
|
|
|
60,284
|
|
|
|
56,425
|
|
|
|
53,471
|
|
Other operating expenses
|
|
|
16,715
|
|
|
|
14,905
|
|
|
|
15,305
|
|
Selling, general and administrative
|
|
|
172,947
|
|
|
|
169,736
|
|
|
|
165,754
|
|
Depreciation and amortization
|
|
|
37,641
|
|
|
|
38,414
|
|
|
|
34,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,142
|
|
|
|
419,601
|
|
|
|
407,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
60,179
|
|
|
$
|
51,235
|
|
|
$
|
22,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Gross revenues increased 3.3% to $534.4 million for 2005
from $517.4 million for the prior year. This increase was
primarily due to an increase in business volume, as discussed
below. Las Vegas gross revenues increased 8.3% and Atlantic City
gross revenues decreased 5.3%.
Casino revenues increased 1.3% to $329.8 million for 2005
from $325.6 million for the prior year. Combined slot
machine revenues increased to $256.1 million, or 77.6% of
combined casino revenues, for 2005 from $253.9 million for
the prior year, primarily due to an increase in slot hold
percentage. Combined table game revenues decreased to
$63.8 million, or 16.2% of combined casino revenues, for
2005 compared to $64.5 million for the prior year,
primarily due to a decrease in hold percentage. Las Vegas casino
revenues increased 8.9% while Atlantic City casino revenues
decreased 6.8%.
Hotel revenues increased 12.8% to $73.9 million for 2005
from $65.6 million for the prior year. This increase was
primarily due to a 10.4% increase in the average daily room rate
as a result of increased direct bookings and decreased rooms
sold through wholesalers. Las Vegas hotel revenues increased
13.2% and Atlantic City hotel revenues increased 10.6%.
Food and beverage revenues increased 3.6% to $92.0 million
for 2005 from $88.9 million for the prior year. This
increase was primarily due to an increase in food and beverage
covers and an increase in the average revenue per guest check.
Las Vegas food and beverage revenues increased 4.6% and Atlantic
City food and beverage revenues were unchanged.
Promotional allowances are comprised of the estimated retail
value of goods and services provided to casino customers under
various marketing programs. As a percentage of casino revenues,
promotional allowances decreased to 13.4% for 2005 from 14.3%
for the prior year. This decrease was primarily attributable to
a reduction in benefits from promotional activities related to
slots. Promotional allowances as a percentage of casino revenues
for Las Vegas operations decreased by 1.7% and for Atlantic City
operations increased by 0.1%.
Casino operating expenses decreased by 1.5% to
$110.8 million for 2005 from $112.5 million for the
prior year. The decrease in casino expenses was primarily due to
reduced labor costs and a reduction in gaming taxes related to
lower gaming revenues in Atlantic City partially offset by
increased utilization of participation games in Las Vegas.
Hotel operating expenses increased 14.7% to $31.7 million
for 2005 from $27.7 million for the prior year. This
increase was primarily due to an increase in labor costs and
costs associated with an increase in occupancy.
Food and beverage operating expenses increased 6.8% to
$60.3 million for 2005 from $56.4 million for the
prior year. This increase was primarily due to an increase in
food and labor costs associated with an increase in Las Vegas
business volume.
Other operating expenses increased 12.1% to $16.7 million
for 2005 from $14.9 million for the prior year. This
increase was primarily due to an increase in costs related to
headliner entertainment at The Sands and increased labor costs
related to the opening of the Insanity ride at the Stratosphere
Casino Hotel & Tower in Las Vegas.
Selling, general and administrative expenses primarily consist
of payroll, marketing, advertising, repair and maintenance,
utilities and other administrative expenses. These expenses
increased 1.9% to $172.9 million for 2005 from
$169.7 million for the prior year. This increase was
primarily due to an increase in payroll expenses, utility costs
and professional fees, partially offset by decreased property
taxes.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Gross revenues increased 8.6% to $517.4 million for 2004
from $476.6 million for the prior year. This increase was
primarily due to an increase in all revenues, primarily
attributable to an increase in business volume, as discussed
below. Las Vegas gross revenues increased 13.4% while Atlantic
City gross revenues increased 1.4%.
Casino revenues increased 7.6% to $325.6 million for 2004
from $302.7 million for the prior year. Combined slot
machine revenues increased to $253.9 million, or 78.0% of
combined casino revenues, for 2005 from $240.8 million for
the prior year, primarily due to an increase in slot hold
percentage. Combined table game
62
revenues increased to $64.5 million, or 17.2% of combined
casino revenues, for 2004 compared to $56.0 million for the
prior year, primarily due to an increase in the hold percentage
and an increase in the number of table games in Atlantic City.
Las Vegas casino revenues increased 13.6% while Atlantic City
casino revenues increased 1.8%.
Hotel revenues increased 12.5% to $65.6 million for 2004
from $58.3 million for the prior year. This increase was
primarily due to an 8.1% increase in the average daily room
rate, primarily attributable to an increase in tourism in the
Las Vegas market. Las Vegas hotel revenues increased 15.6% and
Atlantic City hotel revenues decreased 0.8%.
Food and beverage revenues increased 9.0% to $88.9 million
for 2004 from $81.5 million for the prior year. This
increase was primarily due to an increase in food and beverage
covers and an increase in the average revenue per guest check.
Las Vegas food and beverage revenues increased 12.4% and
Atlantic City food and beverage revenues decreased 0.3%.
Promotional allowances are comprised of the estimated retail
value of goods and services provided to casino customers under
various marketing programs. As a percentage of casino revenues,
promotional allowances decreased to 14.3% for 2004 from 15.3%
for the prior year. This decrease was primarily attributable to
a reduction in benefits from promotional activities related to
slots. Promotional allowances as a percentage of casino revenues
for Las Vegas operations decreased by 1.1% and for Atlantic City
operations decreased by 0.8%.
Casino operating expenses decreased by 1.3% to
$112.5 million for 2004 from $113.9 million for the
prior year. The decrease in casino expenses was primarily due to
reduced labor costs as a result of the increased utilization of
ticket-in/ticket-out slot technology.
Hotel operating expenses increased 11.8% to $27.7 million
for 2004 from $24.8 million for the prior year. This
increase was primarily due to an increase in labor costs and
costs associated with an increase in business volume.
Food and beverage operating expenses increased 5.5% to
$56.4 million for 2004 from $53.5 million for the
prior year. This increase was primarily due to an increase in
labor costs and costs associated with an increase in business
volume.
Other operating expenses decreased 2.6% to $14.9 million
for 2004 from $15.3 million for the prior year. This
decrease was primarily due to a decrease in costs related to
headliner entertainment at The Sands.
Selling, general and administrative expenses primarily consist
of marketing, advertising, repair and maintenance, utilities and
other administrative expenses. These expenses increased 2.4% to
$169.7 million for 2004 from $165.8 million for the
prior year. This increase was primarily due to an increase in
payroll expenses, legal fees, costs associated with
Sarbanes-Oxley and insurance costs.
Results
by Location
The following is an analysis of revenue and operating income
(loss), by geographical location for our Gaming Segment (in
$000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Las Vegas
|
|
$
|
327,985
|
|
|
$
|
299,981
|
|
|
$
|
262,811
|
|
Atlantic City
|
|
|
162,336
|
|
|
|
170,855
|
|
|
|
167,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gaming
|
|
$
|
490,321
|
|
|
$
|
470,836
|
|
|
$
|
430,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Las Vegas
|
|
$
|
67,052
|
|
|
$
|
48,862
|
|
|
$
|
23,847
|
|
Atlantic City
|
|
|
(6,873
|
)
|
|
|
2,373
|
|
|
|
(1,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gaming
|
|
$
|
60,179
|
|
|
$
|
51,235
|
|
|
$
|
22,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
During 2005, we began to incur operating losses relating to the
operation of The Sands. However, The Sands continues to generate
positive cash flow. We believe that our efforts to improve
profitability will lead to a reversal of these operating losses.
However, there is no guarantee that our efforts will be
successful and we continue to evaluate whether there is an
impairment under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. In the event
that a change in operations results in a future reduction of
cash flows, we may determine that an impairment under
SFAS No. 144 has occurred at The Sands, and an
impairment charge may be required. The carrying value of
property, plant and equipment of The Sands at December 31,
2005 was $155.5 million.
Real
Estate
Our real estate operations consist of rental real estate,
property development and associated resort activities. The
operating performance of the three segments was as follows (in
$000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on financing leases
|
|
$
|
7,299
|
|
|
$
|
9,880
|
|
|
$
|
13,115
|
|
Rental income
|
|
|
9,157
|
|
|
|
8,771
|
|
|
|
7,809
|
|
Property development
|
|
|
58,270
|
|
|
|
26,591
|
|
|
|
13,266
|
|
Resort operations
|
|
|
25,911
|
|
|
|
16,210
|
|
|
|
12,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100,637
|
|
|
|
61,452
|
|
|
|
46,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental real estate
|
|
|
4,198
|
|
|
|
7,739
|
|
|
|
5,315
|
|
Property development
|
|
|
47,130
|
|
|
|
22,313
|
|
|
|
12,187
|
|
Resort operations
|
|
|
27,963
|
|
|
|
16,592
|
|
|
|
11,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,291
|
|
|
|
46,644
|
|
|
|
28,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
21,346
|
|
|
$
|
14,808
|
|
|
$
|
17,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
Real Estate
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Revenues decreased by 11.8% to $16.5 million in 2005 from
$18.7 million in the prior year. The decrease was primarily
attributable to the sale of ten financing lease properties.
Operating expenses decreased 45.8% to $4.2 million in 2005
from $7.7 million in the prior year. The decrease was
primarily due to hurricane related losses in 2004.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Revenues decreased 10.9% to $18.7 million in 2004 from
$20.9 million in the prior year. The decrease was primarily
attributable to the sale of thirteen financing lease properties
partially offset by the acquisition of an operating property in
2004. Operating expenses increased 45.6%, to $7.7 million
in 2004 from $5.3 million in the prior year. The increase
was primarily due to hurricane related losses in 2004.
64
We market portions of our commercial real estate portfolio for
sale. Sale activity was as follows (in $000s, except unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Properties sold
|
|
|
14
|
|
|
|
57
|
|
|
|
9
|
|
Proceeds received
|
|
$
|
52,525
|
|
|
$
|
245,424
|
|
|
$
|
21,164
|
|
Mortgage debt repaid
|
|
$
|
10,702
|
|
|
$
|
93,845
|
|
|
$
|
4,375
|
|
Total gain recorded
|
|
$
|
16,315
|
|
|
$
|
80,459
|
|
|
$
|
10,474
|
|
Gain recorded in continuing
operations
|
|
$
|
176
|
|
|
$
|
5,262
|
|
|
$
|
7,121
|
|
Gain recorded in discontinued
operations(i)
|
|
$
|
16,139
|
|
|
$
|
75,197
|
|
|
$
|
3,353
|
|
|
|
|
(i) |
|
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. |
Property
Development
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Revenues increased 119.1% to $58.3 million in 2005 from
$26.6 million in the prior year. Operating expenses
increased 111.2% to $47.1 million in 2005 from
$22.3 million in the prior year. In 2005, we sold
104 units with an average profit margin of 19.1%. In 2004,
we sold 38 units with an average profit margin of 16.1%.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Revenues increased 100.4% to $26.6 million in 2004 from
$13.3 million in the prior year. Operating expenses
increased 83.1% to $22.3 million in 2004, from
$12.2 million in the prior year. In 2004, we sold
38 units with an average profit margin of 16.1%. In 2003,
we sold 36 units with an average profit margin of 8.1%.
Existing land inventory in New Seabury, Massachusetts and Vero
Beach, Florida may provide for future sales increases to
mitigate the decline in units available for sale in our
Westchester, New York and Naples, Florida subdivisions.
Resort
Operations
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Revenues increased 59.8% to $25.9 million in 2005, from
$16.2 million in the prior year. This increase is primarily
due to the acquisition of Grand Harbor in July, 2004. Grand
Harbor revenues were $14.3 million and $5.6 million in
2005 and 2004, respectively.
Operating expenses increased 68.5% to $28.0 million in 2005
from $16.6 million in the prior year. This increase is
primarily due to the acquisition of Grand Harbor. Grand Harbor
expenses were $16.9 million and $6.2 million in 2005
and 2004, respectively.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Revenues increased 31% to $16.2 million in 2004 from
$12.4 million in the prior year. This increase is primarily
due to the acquisition of Grand Harbor in July, 2004. Grand
Harbor revenues were $5.6 million in 2004.
Operating expenses increased 46.1% to $16.6 million in 2004
from $11.4 million in the prior year. This increase is
primarily due to the acquisition of Grand Harbor. Grand Harbor
expenses were $6.2 million in 2004.
Home
Fashion
On August 8, 2005, WestPoint International, Inc., or WPI,
our indirect subsidiary, completed the acquisition of
substantially all of the assets of WestPoint Stevens. The
acquisition was completed pursuant to an agreement dated
65
June 23, 2005, which was subsequently approved by the
U.S. Bankruptcy Court. WPI is engaged in the business of
manufacturing, sourcing, marketing and distributing bed and bath
home fashion products.
We invested in WPI in keeping with our strategy to acquire
undervalued assets and companies that are in distressed or in
out of favor industries. Although we have experience operating
distressed businesses in troubled industries, we cannot predict
whether we will be successful in our efforts to bring WPI to
profitability.
A recent court order may result in our ownership of WPI being
reduced to less than 50%. If we were to own less than 50% of the
outstanding common stock and lose control of WPI, we would no
longer consolidate WPI and our financial statements could be
materially different as of December 31, 2005 and for the
year then ended.
Results
of Operations for period from August 8, 2005 to
December 31, 2005
Historically, WPI has been adversely affected by a variety of
negative conditions, including the following items that continue
to have an impact on its operating results:
|
|
|
|
|
adverse competitive conditions for U.S. mills compared to
mills located overseas;
|
|
|
|
growth of low priced imports from Asia and Latin America
resulting from lifting of import quotas;
|
|
|
|
retailers of consumer goods have become fewer and more powerful
over time; and
|
|
|
|
long term increases in pricing and decreases in availability of
raw materials.
|
The following table summarizes the key operating data for our
Home Fashion segment for the period from August 8, 2005
(acquisition date) to December 31, 2005 (in $000s):
|
|
|
|
|
Revenues
|
|
$
|
472,681
|
|
Expenses:
|
|
|
|
|
Cost of sales
|
|
|
421,408
|
|
Selling, general and administrative
|
|
|
73,702
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(22,429
|
)
|
|
|
|
|
|
Total depreciation for the period was $19.4 million, of
which $16.0 million was included in cost of sales and
$3.4 million was included in selling, general and
administrative expenses. For the period from August 8, 2005
to December 31, 2005, bed products revenues were
$294.9 million and bath products revenues were
$144.0 million. Other sales, consisting primarily of sales
from WPIs retail outlet stores, were $33.8 million.
Gross earnings for the period from August 8, 2005 to
December 31, 2005 were $51.3 million and reflect a
gross margin of 10.8%. Selling, general and administrative
expenses were $73.7 million for the period from
August 8, 2005 to December 31, 2005 and as a
percentage of net sales represent 15.6%. The operating loss
includes $1.7 million in costs related to ongoing
restructuring initiatives, consisting primarily of continuing
costs related to closed plants. We expect to continue our
restructuring efforts and, accordingly, expect that
restructuring charges and operating losses will continue to be
incurred during 2006.
Other
On October 13, 2005, WPI and Ralph Lauren Home, Inc., a
division of Polo Ralph Lauren Corporation, entered into a
license agreement whereby WPI exclusively produces sheets,
bedding accessories, towels, bed pillows, mattress pads, feather
beds, down comforters and blankets under the Ralph Lauren brand.
A similar license agreement had been in effect with WestPoint
Stevens although the royalties and minimums were changed as of
January 1, 2006 under the new agreement with WPI.
66
Seasonality
The results of operations for Gaming, Resort operations,
Property Development operations and Home Fashion are seasonal in
nature. Results for Oil & Gas and Rental Real Estate
are generally not seasonal. Generally, our Las Vegas gaming and
entertainment properties are not affected by seasonal trends.
However, we tend to have increased customer flow in the fourth
quarter of the year. Our Atlantic City property is highly
seasonal in nature, with peak activity occurring from May to
September. Resort operations are highly seasonal with peak
activity in Cape Cod from June to September and in Florida from
November to February. Sales activity for our Property
Development operations in Cape Cod and New York typically peak
in late winter and early spring while in Florida our peak
selling season is during the winter months. The Home Fashion
segment experiences its peak sales season in the fall.
Holding
Company
Investment
Activities
The Holding Company engages in certain investment activities.
The activities include those associated with investing its
available liquidity, as well as activities that are designed to
earn returns from increases or decreases in the market price of
securities.
As noted below, we have significant realized and unrealized
gains and losses in 2005 and 2004 from several positions,
including a short position that was initiated in 2004, and
several long positions, many of which were liquidated in 2005.
We may, on occasion, invest in securities in which entities
affiliated with Mr. Icahn are also investing, for example,
as reported on our Schedule 14A filing of December 19,
2005, we owned 11,000,000 shares of Time Warner, Inc. In a
subsequent Schedule 14A, filed on February 17, 2006,
we reported that our ownership of common stock of Time Warner
had increased to 12,302,790 shares.
General
and Administrative Expenses
General and administrative expenses related to the Holding
Company and principally related to payroll and professional fees
expenses of the Holding Company including costs related to
administration of various real estate holdings. The amount
attributable to real estate holdings was approximately
$3.4 million and $2.6 million for 2005 and 2004,
respectively.
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
General and administrative costs increased 196% to
$19.1 million, as compared to $6.4 million in the
prior year due largely to direct acquisition costs
($4.2 million), other legal and professional fees
($3.6 million), and higher compensation costs
($1.8 million).
The direct acquisition costs related to legal and professional
fees associated with the five acquisitions that were made in the
first two quarters of 2005. Direct acquisition costs associated
with the WPI acquisition have been capitalized. Legal and
professional expenses rose due to ongoing legal proceedings
relating to WPI, as well as increased expense associated with
the preparation and review of our financial results and other
compliance related activities including those required under the
Sarbanes-Oxley Act of 2002. Higher compensation costs reflect
increased headcount levels (average of 22 employees in 2005
compared to 15 in the prior year) as well as costs associated
with the new CEO option plan.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
General and administrative costs increased 36.3% to
$6.4 million, as compared to $4.7 million in the prior
year, due largely to higher compensation costs (increase of
$0.6 million) and professional fees (increase of
$0.7 million).
67
Interest
Income and Expense
Year
ended December 31, 2005 compared to the year ended
December 31, 2004
Interest expense increased 67.3% to $104.0 million, during
2005 as compared to $62.2 million in the prior year. This
increase reflects increased borrowings in 2005 as a result of
the issuance of the $480.0 million senior notes in February
2005 and a full year of interest on the $353.0 million
senior notes issued in May 2004. Interest income was consistent
with the prior year due to reduced amounts of interest on two
mezzanine loans ($18.0 million) offset by higher interest
earned on cash balances.
Year
ended December 31, 2004 compared to the year ended
December 31, 2003
Interest expense increased 60.0% to $12.2 million, during
2004 as compared to $38.9 million in the prior year. This
increase reflects the increased amount of borrowings arising
from the $353.0 million of senior notes issued in May 2004.
Interest income increased by $21.4 million, or 90.0%,
during 2004 as compared to the prior year. The increase is due
to the repayment of two mezzanine loans, on which interest was
not recognized until received, and increased interest income on
other investments.
Impairment
Charges from GB Holdings, Inc.
On September 29, 2005, GB Holdings 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 GBHs 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 had been 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 our agreement to purchase
additional shares 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.
Other
Income (Expense), net
Other income (expense), net for the years ended
December 31, 2005, 2004 and 2003 is as follows (in $000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net realized gains (losses) on
sales of marketable securities
|
|
$
|
(26,938
|
)
|
|
$
|
40,159
|
|
|
$
|
1,653
|
|
Unrealized losses on securities
sold short
|
|
|
(4,178
|
)
|
|
|
(18,807
|
)
|
|
|
|
|
Unrealized gains (losses) on
marketable securities
|
|
|
9,856
|
|
|
|
(4,812
|
)
|
|
|
|
|
Write-down of marketable equity
and debt securities
|
|
|
|
|
|
|
|
|
|
|
(19,759
|
)
|
Minority interest
|
|
|
13,822
|
|
|
|
2,074
|
|
|
|
2,721
|
|
Gain on sale or disposition of
real estate
|
|
|
176
|
|
|
|
5,262
|
|
|
|
7,121
|
|
Other
|
|
|
11,022
|
|
|
|
6,740
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,760
|
|
|
$
|
30,616
|
|
|
$
|
(8,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net realized losses of $26.9 million in 2005 included,
principally, $42.9 million in losses related to short
position covering and option trades offset by $14.6 million
in gains on three energy stocks that were sold during the year.
The net gains in 2004 arose, principally, from the sale of a
corporate bond position acquired in 2003.
The net unrealized gains on investments of $5.7 million in
2005 relate primarily to gains on equities and options in the
trading portfolio net of the unrealized loss on a short
position. The net unrealized loss in 2004 was due, principally,
to the unrealized losses on the short position.
68
Minority interest increased in 2005 due, principally, to the
inclusion of the minoritys share of the losses of WPI.
Effective
Income Tax Rate
For the year ended December 31, 2005, we recorded an income
tax provision of $21.1 million on a pre-tax loss of
$29.2 million. A tax expense was recorded even though we
reported an overall loss, because some of the corporate
tax-paying entities reported income, but the non-corporate
entities reported significant losses. For the year ended
December 31, 2004, we recorded an income tax provision of
$18.3 million on pre-tax income of $90.7 million. Our
effective income tax rate was (72.2%) and 20.2% for the
respective periods. The difference between the effective tax
rate and statutory federal rate of 35% is principally due to
losses incurred for which a benefit was not provided, changes in
the valuation allowance and partnership income not subject to
taxation, as such taxes are the responsibility of the partners.
We recorded an income tax provision of $18.3 million and an
income tax benefit of $15.8 million on pre-tax income of
$90.7 million and $42.7 million for the years ended
December 31, 2004 and 2003, respectively. For the year
ended December 31, 2003, an income tax benefit was
recorded, even though we reported overall income, primarily due
to a reduction in the valuation allowances on the deferred tax
assets of several corporate entities. Our effective income tax
rate was 20.2% and (37.0%) for the respective periods. The
difference between the effective tax rate and statutory federal
rate of 35% is due principally to a change in the valuation
allowance and partnership income not subject to taxation.
Liquidity
and Capital Resources
Consolidated
Financial Results
We are a holding company. 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 that we will reduce the liquid assets
at AREP and AREH in order to fund those investments and ongoing
operations. Consequently, our cash flow and our ability to meet
our debt service obligations and make distributions with respect
to depositary units and preferred units likely will depend on
the cash flow of our subsidiaries and the payment of funds to us
by our subsidiaries in the form of loans, dividends,
distributions 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, 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. Our subsidiary, NEG Oil &
Gas has a credit facility which restricts dividends,
distributions and other transactions with us. These agreements
preclude our receiving payments from the operations of our
Gaming and our Oil & Gas properties which account for a
significant portion of our revenues and cash flows. We are
negotiating similar facilities for WPI, Atlantic Coast
69
and our real estate development properties which may 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 our debt will be
limited.
As of December 31, 2005, the Holding Company had a cash and cash
equivalents balance of $576.1 million, short-term
investments of $820.7 million (of which $448.8 million
was invested in highly liquid
fixed-income
securities) and total debt of $912.5 million (of which
$831.0 million relates to the senior unsecured notes).
At December 31, 2005, the restricted net assets of our
consolidated subsidiaries approximated $842 million.
We actively pursue various means to raise cash from our
subsidiaries. To date, such means include payment of dividends
from subsidiaries, obtaining loans or other financings based on
the asset values of subsidiaries or selling debt or equity
securities of subsidiaries through capital market transactions.
As a result of financing transactions at our subsidiaries, we
will face significant limitations on the amounts of cash that we
can receive from subsidiaries. Our ability to make future
interest payments, therefore, will be based on receiving cash
from those subsidiaries that do not have restrictions and from
other financing and liquidity sources available to AREP and AREH.
In February 2005, we issued $480.0 million principal amount
of 7.125% senior notes due 2013. In May 2004, we issued
$353.0 million principal amount of 8.125% senior notes
due 2012. In January 2004, ACEP issued $215.0 million
principal amount of 7.85% senior secured notes due 2012.
Additionally, in December 2005, NEG Oil & Gas entered
into a revolving credit facility which allows for borrowings of
up to $500.0 million based upon a borrowing base
determination. The initial borrowing base was
$335.0 million, of which $300.0 million was borrowed
at closing.
Cash
Flows
Net cash provided by continuing operating activities was
$245.7 million for the year ended December 31, 2005 as
compared to $89.5 million in the prior year. Our cash and
cash equivalents and investments in marketable equity and debt
securities increased by $491.4 million during the year
ended December 31, 2005 primarily due to proceeds from
senior notes payable of $480.0 million, cash flow from
continuing operations of $245.7 million, net proceeds from
credit facilities of $252.0 million, partially offset by
acquisitions of $293.6 million, and capital expenditures of
$362.7 million.
Net cash provided by continuing operations activities was
$89.5 million for the year ended December 31, 2004 as
compared to $71.7 million in the prior year. Our cash and
cash equivalents and investments in marketable equity and debt
securities increased by $243.8 million during the year
ended December 31, 2005 primarily due to proceeds from
senior notes payable of $565.4 million, cash flow from
continuing operations of $89.5 million, partially offset by
acquisitions of $125.9 million and capital expenditures of
$241.8 million.
We are continuing to pursue the purchase of assets, including
assets that may not generate positive cash flow, are difficult
to finance or may require additional capital, such as properties
for development, non-performing loans, securities of companies
that are undergoing or that may undergo restructuring, and
companies that are in need of capital. All of these activities
require us to maintain a strong capital base and liquidity.
70
Borrowings
Borrowings comprised the following (in $000s):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Senior unsecured 7.125% notes
due 2013 AREP
|
|
$
|
480,000
|
|
|
$
|
|
|
Senior unsecured 8.125% notes
due 2012 AREP, net of discount
|
|
|
350,922
|
|
|
|
350,598
|
|
Senior secured 7.85% notes
due 2012 ACEP
|
|
|
215,000
|
|
|
|
215,000
|
|
Borrowings under credit
facilities NEG Oil & Gas
|
|
|
300,000
|
|
|
|
51,834
|
|
Mortgages payable
|
|
|
81,512
|
|
|
|
91,896
|
|
GBH Notes (see Note 16)
|
|
|
|
|
|
|
43,741
|
|
Other
|
|
|
8,387
|
|
|
|
6,738
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,435,821
|
|
|
|
759,807
|
|
Less: current portion, including
debt related to real estate held for sale
|
|
|
24,155
|
|
|
|
76,679
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,411,666
|
|
|
$
|
683,128
|
|
|
|
|
|
|
|
|
|
|
Senior
unsecured notes AREP
Senior
unsecured 7.125% notes due 2013
On February 7, 2005, AREP and American Real Estate Finance
Corp. , or AREF, closed on 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
71/8%,
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 of 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 stock; 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 $353.0 million, were priced at 99.266% of
principal amount. The notes have a fixed annual interest rate of
81/8%,
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 stock; create liens; and enter into transactions with
affiliates.
Senior
unsecured notes restrictions and
covenants AREP
Both of our senior unsecured notes issuances 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 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, 2005, such ratio was less than 1.75 to 1.0,
and accordingly, we and AREH could have incurred up to
approximately $1.4 billion of additional indebtedness.
71
In addition, both issues 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, for the four
consecutive fiscal quarters most recently completed prior to
such quarterly determination date. The applicable terms of the
indentures, for purposes of calculating this ratio, exclude from
cash flow of AREP and guarantors the net income (loss) of our
non-guarantor subsidiaries (and other amounts including interest
expense, depreciation, and other non-cash items deducted in
calculating a subsidiarys net income), but include cash
and cash equivalents received from investments or subsidiaries.
For the four quarters ended December 31, 2005, the ratio of
cash flow to fixed charges was in excess of 1.5 to 1.0. If the
ratio were less than 1.5 to 1.0, we would be deemed to have
satisfied this test if there were deposited cash, which together
with cash previously deposited for such purpose and not
released, equal to the amount of interest payable on the notes
for one year (approximately $63 million). We believe that
our existing liquidity would enable us to escrow any required
amounts to remain in compliance with the relevant covenant. If
at any subsequent quarterly determination date, the ratio is at
least 1.5 to 1.0, such deposited funds would be released to us.
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, 2005, 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, 2005, 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, 2005.
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.
ACEPs 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 ACEPs
notes and investments as restricted payments.
ACEPs 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, 2005, 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 our 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.
The restrictions imposed by ACEPs senior secured notes and
the credit facility likely will preclude our receiving payments
from the operations of our principal hotel and gaming properties.
Additionally, ACEPs senior secured revolving credit
facility allows for borrowings of up to $20.0 million,
including the issuance of letters of credit of up to
$10.0 million. Loans made under the senior secured
revolving facility will mature and the commitments under them
will terminate in January 2008. At December 31, 2005, there
were no borrowings or letters of credit outstanding under the
facility. The facility contains restrictive covenants
72
similar to those contained in the 7.85% senior secured
notes due 2012. In addition, the facility requires that, as of
the last date of each fiscal quarter, ACEPs ratio of net
property, plant and equipment for key properties, as defined, to
consolidated first lien debt be not less than 5.0 to 1.0 and
ACEPs ratio of consolidated first lien debt to
consolidated cash flow not be more than 1.0 to 1.0. At
December 31, 2005, we were in compliance with the relevant
covenants. ACEP has obtained proposals to increase its facility
to $60.0 million.
Borrowings
under credit facilities- Mizuho
In December, 2003 NEG Operating LLC, a subsidiary of NEG Oil
& Gas, entered into a credit agreement with certain
commercial lending institutions, including Mizuho Corporate
Bank, Ltd. as Administrative Agent and Bank of Texas, N.A. and
Bank of Nova Scotia as Co-Agents.
The credit agreement provided for a loan commitment amount of up
to $145.0 million and a letter of credit commitment of up
to $15.0 million (provided, the outstanding aggregate
amount of the unpaid borrowings, plus the aggregate undrawn face
amount of all outstanding letters of credit shall not exceed the
borrowing base under the credit agreement). Borrowings under the
credit agreement were purchased by us in December, 2005
coincident with the entrance into the senior secured revolving
credit facility described below.
As of December 31, 2004, the outstanding balance under the
credit facility was $51.8 million.
NEG
Oil & Gas LLC Senior Secured Revolving Credit
Facility
In December, 2005, NEG Oil & Gas entered into a credit
facility with Citicorp USA, Inc. as administrative agent, Bear
Stearns Corporate Lending Inc., as syndication agent, and
certain other lender parties. Upon the completion of this
offering, NEG, Inc. will be a guarantor of the obligations under
the credit facility.
Under the credit facility, NEG Oil & Gas is permitted
to borrow up to $500.0 million. Borrowings under the
revolving credit facility are 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. The initial borrowing
base is set at $335.0 million and is subject to semi-annual
redeterminations, based on engineering reports to be provided by
NEG Oil & Gas by March 31 and September 30 of
each year, beginning March 31, 2006. Obligations under the
credit facility are secured by liens on all of the assets of NEG
Oil & Gas and its wholly-owned subsidiaries. The credit
facility has a term of five years and all amounts will be 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 Operatings credit facility with Mizuho
Corporate Bank, Ltd., as administrative agent, (2) to repay
a National Onshore loan, borrowed from AREP, of
$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.
The credit facility contains covenants that, among other things,
restrict the incurrence of indebtedness by NEG Oil &
Gas and its subsidiaries, the creation of liens by them, hedging
contracts, mergers and issuances of securities by them, and
distributions and investments by NEG Oil & Gas and its
subsidiaries. The covenant restricting indebtedness allows,
among other things, for the incurrence of up to
$200.0 million principal amount of second lien borrowings
or high yield debt that satisfy certain conditions specified in
the credit facility. The restriction on distributions and
investments allows, among other things, for distributions to
AREP from the proceeds from the issuance or borrowing of second
lien or high yield debt and distributions in connection with an
initial equity offering, as defined, quarterly tax distributions
to NEG Oil & Gas equity holders, repayment of
currently outstanding advances by AREP to subsidiaries of NEG
Oil & Gas aggregating approximately $40.0 million
and other cash distributions to NEG Oil & Gass
equity holders not to exceed $8.0 million in any fiscal
year.
The credit facility also requires NEG Oil & Gas to
maintain: (1) a ratio of consolidated total debt to
consolidated EBITDA (for the four fiscal quarter period ending
on the date of the consolidated balance sheet used to determine
consolidated total debt), as defined, of not more than 3.5 to
1.0; (2) consolidated tangible net worth, as
73
defined, of not less than $240.0 million, plus 50% of
consolidated net income for each fiscal quarter ending after
December 31, 2005 for which consolidated net income is
positive; and (3) a ratio of consolidated current assets to
consolidated current liabilities of not less than 1.0 to 1.0.
These covenants may have the effect of limiting distributions by
NEG Oil & Gas.
Obligations under the credit facility are immediately due and
payable upon the occurrence of certain events of default in the
credit facility, including failure to pay any principal
components of any obligations when due and payable, failure to
comply with any covenant or condition of any loan document or
hedging contract, as defined in the credit facility, within
30 days of receiving notice of such failure, any change of
control or any event of default as defined in the restated NEG
Operating credit facility.
Mortgages
payable
Mortgages payable, all of which are nonrecourse to us, are
summarized below. The mortgages bear interest at rates between
4.97-7.99% and have maturities between September 1, 2008
and July 1, 2016. The following is a summary of mortgages
payable (in $000s):
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|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Total mortgages
|
|
$
|
81,512
|
|
|
$
|
91,896
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|
Less current portion and mortgages
on properties held for sale
|
|
|
(18,104
|
)
|
|
|
(31,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,408
|
|
|
$
|
60,719
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|
|
|
|
|
|
|
|
|
|
Contractual
Commitments
The following table reflects, at December 31, 2005, our
contractual cash obligations, subject to certain conditions, due
over the indicated periods and when they come due ($ in
millions):
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|
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|
|
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Less
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|
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Than
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1-3
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3-5
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After
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|
|
|
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1 Year
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|
|
Years
|
|
|
Years
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|
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5 Years
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|
|
Total
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|
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Senior unsecured 7.125% notes
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|
$
|
|
|
|
$
|
|
|
|
$
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|
|
|
$
|
480.0
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|
|
$
|
480.0
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|
Senior unsecured 8.125% notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353.0
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|
|
|
353.0
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|
Senior secured 7.85% notes
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
215.0
|
|
|
|
215.0
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|
Senior debt interest
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|
|
53.7
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|
|
|
110.3
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|
|
|
101.9
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|
|
|
112.4
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|
|
|
378.3
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|
Oil & Gas Credit facility
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|
|
|
|
|
|
|
|
|
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300.0
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|
|
|
|
|
|
|
300.0
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|
Derivative obligations
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|
|
68.0
|
|
|
|
17.9
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|
|
|
|
|
|
|
|
|
|
|
85.9
|
|
Mortgages payable
|
|
|
4.5
|
|
|
|
28.9
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|
|
|
8.7
|
|
|
|
39.4
|
|
|
|
81.5
|
|
Lease obligations
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|
|
15.7
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|
|
|
23.0
|
|
|
|
12.7
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|
|
|
13.8
|
|
|
|
65.2
|
|
Construction and development
obligations
|
|
|
29.3
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
32.7
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|
Other
|
|
|
43.8
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|
|
|
11.4
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|
|
|
6.4
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|
|
|
|
|
|
|
61.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
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|
$
|
215.0
|
|
|
$
|
194.9
|
|
|
$
|
429.7
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|
|
$
|
1,213.6
|
|
|
$
|
2,053.2
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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Derivative
Obligations
Our Oil & Gas operations have liabilities related to
derivative contracts of $85.9 million at December 31,
2005. The fair value of the derivative contracts that mature in
less than a year is $68.0 million. The amount, if any, that
we will be required to pay with respect to any contract will be
determined at the maturity date and may vary from the fair value
as reported at this time depending on market prices for oil and
gas and the stated contract terms.
Textile
purchase orders
Purchase orders or contracts for the purchase of certain
inventory and other goods and services are not included in the
table above. We are not able to determine the aggregate amount
of such purchase orders that represent
74
contractual obligations, as purchase orders may represent
authorizations to purchase rather than binding agreements.
Purchase orders are based on our current needs and are fulfilled
by vendors within short time horizons. We do not have
significant agreements for the purchase of inventory or other
goods specifying minimum quantities or set prices that exceed
expected requirements.
Obligations
Related to Securities
As discussed in Note 8 of the consolidated financial
statements, we have contractual liabilities of
$75.9 million and $131.1 million related to securities
sold not yet purchased and a margin liability on marketable
securities, respectively. These amounts have not been included
in the table above as their maturity is not subject to a
contract and cannot properly be estimated.
Off
Balance Sheet Arrangements
We do not maintain any off-balance sheet transactions,
arrangements, obligations or other relationships with
unconsolidated entities or others.
Discussion
of Segment Liquidity and Capital Resources
Oil &
Gas
NEG Oil & Gas derives its cash primarily from the sale
of natural gas and oil and borrowings. During the year ended
December 31, 2005, cash flows from operations provided by
our oil and gas segment was $154.7 million compared to
$91.6 million in 2004. The increase was primarily
attributable to higher revenues due to the acquisition of
National Offshore and higher price realizations.
During the year ended December 31, 2005, our oil and gas
capital expenditures aggregated $315.9 million. NEG
Oil & Gas capital expenditures for 2006 are forecasted
to be approximately $200.0 million. The planned capital
expenditures do not include any major acquisitions that we may
consider from time to time and for which NEG Oil & Gas
may need to obtain additional financing.
On March 10, 2005, NEG Oil & Gas sold its rights
and interests in West Delta 52, 54 and 58 to an unrelated third
party in exchange for the assumption of existing future asset
retirement obligations on the properties and a cash payment of
$0.5 million. The estimated fair value of the asset
retirement obligations assumed by the purchaser was
$16.8 million. In addition, NEG Oil & Gas
transferred to the purchaser $4.7 million in an escrow
account that had been funded relating to the asset retirement
obligations on the properties. The full cost pool was reduced by
$11.6 million and no gain or loss was recognized on the
transaction.
Historically, we have funded our Oil & Gas capital
expenditures from Oil & Gas operating cash flows and
bank borrowings. Our Oil & Gas operating cash flows may
fluctuate significantly due to changes in oil and gas commodity
prices, production interruptions and other factors. The timing
of most of our oil and gas capital expenditures is discretionary
because we have no long-term capital expenditure commitments. We
may vary our capital expenditures as circumstances warrant in
the future.
NEG
Oil & Gas Credit Facility
On December 22, 2005, NEG Oil & Gas completed a
new $500.0 million senior secured revolving credit
facility, or the revolving credit facility. The initial
borrowing base is $335.0 million, of which
$300.0 million was drawn at closing. This facility will
mature in December 2010 and is secured by substantially all of
the assets of NEG Oil & Gas and its subsidiaries. The
borrowing base will be redetermined semi-annually based on,
among other things, the lenders review of NEG
Oil & Gas mid-year and year-end reserve reports.
Gaming
Our Gaming segment derives cash primarily from casino, hotel and
related activities. Cash from operations was $68.5 million,
$58.7 million and $45.5 million for the years ended
December 31, 2005, 2004 and 2003, respectively. The
increase from 2004 to 2005 and from 2003 to 2004 was due to
increased revenues. In addition to
75
cash from operations, cash is available to us, if necessary,
under our separate senior secured revolving credit facilities
for our Atlantic City and Las Vegas subsidiaries. Our Las Vegas
and Atlantic City operations maintain credit facilities. Both
facilities are subject to us complying with financial and other
covenants. At December 31, 2005, we had availability under
our credit facilities of $20.0 million and
$3.5 million for Las Vegas and Atlantic City, respectively,
at December 31, 2005, subject to continuing compliance with
existing covenant restrictions. Our Las Vegas facility expires
January 29, 2008 and our Atlantic City facility expires on
November 17, 2007. The cash generated from operations and
credit facilities of our Las Vegas and Atlantic City are not
available to fund one another.
Under terms of the senior secured notes of ACEP, the ability to
pay dividends and engage in other transactions with AREP are
limited.
Capital spending for the Las Vegas operations was
$28.2 million, $14.0 million and $30.4 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. Capital spending for the Atlantic City operation
was $4.0 million, $16.6 million and $12.8 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. We have estimated our combined capital
expenditures for 2006 to be $29.6 million.
On November 29, 2005, AREPs wholly-owned subsidiary,
AREP Gaming LLC, through its subsidiaries, AREP Laughlin
Corporation and AREP Boardwalk LLC, entered into an agreement to
purchase the Flamingo Laughlin Hotel and Casino in Laughlin,
Nevada and 7.7 acres of land in Atlantic City, New Jersey
from Harrahs Entertainment, for $170.0 million.
Completion of the transaction is subject to regulatory approval
and is expected to close in mid-2006. We intend to assign the
right to purchase the Flamingo to ACEP. The allocation of the
purchase price is subject to agreement by Harrahs.
AREHs direct subsidiaries will own and operate the
Flamingo as part of ACEP and the Atlantic City property will be
owned by AREP Gaming LLC. ACEP has obtained proposals to
increase its senior secured revolving credit facility to
$60.0 million, which they plan to utilize, together with
their excess cash to purchase the Flamingo and fund the
additional capital spending estimated to be approximately
$40.0 million through 2008.
The Flamingo owns 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 Flamingo features the largest hotel in Laughlin with 1,907
hotel rooms, a 57,000 square foot casino, seven dining
options, 2,420 parking spaces, over 35,000 square feet of
meeting space and a 3,000-seat outdoor amphitheater.
The Atlantic City acquisition includes 7.7 acres of largely
underdeveloped land between The Sands and the Atlantic City
Boardwalk. AREP Boardwalk LLC will acquire the site and is
seeking financing for the acquisition. If such financing is not
available, AREP expects to fund the purchase price from
available cash.
An acquisition option is currently being discussed with Atlantic
Coast.
Real
Estate
Our real estate operations generate cash through rentals and
leases and asset sales (principally sales of rental properties)
and the operation of resorts. All of these operations generate
cash flows from operations.
Real estate development activities are currently a significant
user of funds. With our renewed development activity at New
Seabury and Grand Harbor, it is expected that cash expenditures
over the next year will approximate $100.0 million. Such
amounts will be funded, principally, from unit sales and, to the
extent such proceeds are insufficient, by AREP from available
cash.
Asset
Sales and Purchases
During the year ended December 31, 2005, we sold
14 rental real estate properties for $52.5 million,
which were encumbered by mortgage debt of $10.7 million
which was repaid from the sales proceeds.
Net proceeds from the sale or disposal of portfolio properties
totaled $41.8 million in the year ended December 31,
2005. During 2004, net sales proceeds totaled
$151.6 million.
76
Home
Fashion
Our Home Fashion segment did not generate cash flow from
operations in 2005. At December 31, 2005, the segment had
approximately $90.0 million of cash and cash equivalents.
WPI may receive an additional $92 million in connection
with the rights offering to which we may be obligated to
subscribe depending upon whether certain former creditors of
WestPoint Stevens choose to do so and the outcome of the pending
litigation. The rights offering has been delayed and our right
to participate in it has been challenged by certain creditors of
WestPoint Stevens. Until the earlier of August 8, 2006, or
the date on which such rights are exercised, AREH has made
available to WPI a line of credit. The proceeds from the sale
under the rights offering must be used by WPI to repay the AREH
line of credit. See Item 3. Legal Proceedings.
For the period from August 8, 2005 to December 31,
2005, the Home Fashion segment had a negative cash flow from
operations of $9.6 million. In the first two months of
2006, the Home Fashion segment experienced an increased rate of
negative cash flow from operations. Such negative cash flow was
principally due to restructuring actions that had been delayed
and which took place in the first two months of 2006.
Capital spending by WPI was $5.7 million for the period
from August 8, 2005 to December 31, 2005. Capital
expenditures for 2006 are expected to total approximately
$15.0 million. We believe WPIs current liquidity
levels are sufficient to fund its operations for the foreseeable
future.
Our Home Fashion segment is negotiating to obtain a
$250.0 million senior secured revolving credit facility
from a third party which, upon the entering into the credit
facility, is expected to impose various operating and financial
restrictions on WPI and its subsidiaries. These restrictions
include limitations on indebtedness, liens, asset sales,
transactions with affiliates, acquisitions, mergers, capital
expenditures, dividends and investments. Net proceeds from the
offering would be used for general business purposes including
restructurings and international expansion.
Distributions
During 2005, we began to pay distributions to our unit holders.
Total distributions of $0.20 were declared and paid during the
year in an aggregate amount of $12.6 million.
On March 31, 2005, we distributed to holders of record of
our preferred units as of March 15, 2005, 514,313
additional preferred units. Pursuant to the terms of the
preferred units, on February 8, 2006, we declared our
scheduled annual preferred unit distribution payable in
additional preferred units at the rate of 5% of the liquidation
preference of $10.00. The distribution is payable on
March 31, 2006 to holders of record as of March 15,
2006. In March 2006, the number of authorized preferred units
was increased to 11,400,000.
Our preferred units are subject to redemption at our option on
any payment date, and the preferred units must be redeemed by us
on or before March 31, 2010. The redemption price is
payable, at our option, subject to the indenture, either all in
cash or by the issuance of depositary units, in either case, in
an amount equal to the liquidation preference of the preferred
units plus any accrued but unpaid distributions thereon.
Critical
Accounting Policies and Estimates
Our significant accounting policies are described in Note 1
of our consolidated financial statements. Our consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles, or GAAP. The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and
liabilities. Among others, estimates are used when accounting
for valuation of investments, recognition of casino revenues and
promotional allowances and estimated costs to complete its land,
house and condominium developments. Estimates and assumptions
are evaluated on an ongoing basis and are based on historical
and other factors believed to be reasonable under the
circumstances. The results of these estimates may form the basis
of the carrying value of certain assets and liabilities and may
not be readily apparent from other sources. Actual results,
under conditions and circumstances different from those assumed,
may differ from estimates.
77
We believe the following accounting policies are critical to our
business operations and the understanding of results of
operations and affect the more significant judgments and
estimates used in the preparation of our consolidated financial
statements.
Accounting
for the Impairment of Long-Lived Assets
Long-lived assets held and used by us and long-lived assets to
be disposed of, are reviewed for impairment whenever events or
changes in circumstances, such as vacancies and rejected leases,
indicate that the carrying amount of an asset may not be
recoverable.
In performing the review for recoverability, we estimate the
future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future
cash flows, undiscounted and without interest charges, is less
than the carrying amount of the asset an impairment loss is
recognized. Measurement of an impairment loss for long-lived
assets that we expect to hold and use is based on the fair value
of the asset. Long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less cost to sell.
During 2005, we began to incur operating losses relating to
operation of The Sands. However, The Sands continues to generate
positive cash flow. We believe that our efforts to improve
profitability will lead to a reversal of these operating losses.
However, as there is no guarantee that our efforts will be
successful, we continue to evaluate whether there is impairment
under SFAS No. 144 Accounting for the Impairment or
Disposal of Long-lived Assets. In the event that a change in
operations results in a future reduction of cash flows, we may
determine that an impairment under SFAS 144 has occurred at
The Sands, and an impairment charge may be required. The
carrying value of property, plant and equipment of The Sands at
December 31, 2005 was approximately $155.5 million.
Commitments
and Contingencies Litigation
On an ongoing basis, we assess the potential liabilities related
to any lawsuits or claims brought against us. While it is
typically very difficult to determine the timing and ultimate
outcome of such actions, we use our best judgment to determine
if it is probable that we will incur an expense related to the
settlement or final adjudication of such matters and whether a
reasonable estimation of such probable loss, if any, can be
made. In assessing probable losses, we make estimates of the
amount of insurance recoveries, if any. We accrue a liability
when we believe a loss is probable and the amount of loss can be
reasonably estimated. Due to the inherent uncertainties related
to the eventual outcome of litigation and potential insurance
recovery, it is possible that certain matters may be resolved
for amounts materially different from any provisions or
disclosures that we have previously made.
Oil and
Natural Gas Properties
We utilize the full cost method of accounting for our crude oil
and 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 abandonments of properties, are
treated as adjustments to the cost of crude oil and natural gas
properties, with no gain or loss recognized.
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 is compared to the ceiling
limitation on a quarterly basis.
78
Accounting
for Asset Retirement Obligations
We account for our asset retirement obligation under Statement
of Financial Accounting Standards No. 143 (SFAS 143),
Accounting for Asset Retirement Obligations.
SFAS 143 provides accounting requirements for costs
associated with legal obligations to retire tangible, long-lived
assets. Under SFAS 143, an asset retirement obligation is
needed at fair value in the period in which it is incurred by
increasing the carrying amount for the related long-lived asset.
In each subsequent period, the liability is accreted to its
present value and the capitalized cost is depreciated over the
useful life of the related asset.
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.
Our corporate subsidiaries, account for their income taxes under
the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry
forwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.
Management periodically evaluates all evidence, both positive
and negative, in determining whether a valuation allowance to
reduce the carrying value of deferred tax assets is still
needed. In 2005 and 2004, we concluded, based on the projected
allocations of taxable income, that our corporate subsidiaries
more likely than not will realize a partial benefit from their
deferred tax assets and loss carry forwards. Ultimate
realization of the deferred tax asset is dependent upon, among
other factors, our corporate subsidiaries ability to
generate sufficient taxable income within the carry forward
periods and is subject to change depending on the tax laws in
effect in the years in which the carry forwards are used.
Forward
Looking Statements
Statements included in Managements Discussion and
Analysis of Financial Condition and Results of Operations
which are not historical in nature are intended to be, and are
hereby identified as, forward looking statements for
purposes of the safe harbor provided by Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended by Public Law 104-67.
Forward looking statements regarding managements present
plans or expectations involve risks and uncertainties and
changing economic or competitive conditions, as well as the
negotiation of agreements with third parties, which could cause
actual results to differ from present plans or expectations, and
such differences could be material. Readers should consider that
such statements speak only as of the date hereof.
Certain
Trends and Uncertainties
We have in the past and may in the future make forward looking
statements. Certain of the statements contained in this document
involve risks and uncertainties. Our future results could differ
materially from those statements. Factors that could cause or
contribute to such differences include, but are not limited to
those discussed in this document. These statements are subject
to risks and uncertainties that could cause actual results to
differ materially from those predicted. Also, please see
Item 1A., Risk Factors of this
Form 10-K.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
Market risk is the risk of loss arising from adverse changes in
market rates and prices, such as interest rates, foreign
currency exchange rates and commodity prices. Our significant
market risks are primarily associated with interest rates,
equity prices and derivatives. The following sections address
the significant market risks associated with our business
activities.
79
Interest
Rate Risk
The fair values of our long term debt and other borrowings will
fluctuate in response to changes in market interest rates.
Increases and decreases in prevailing interest rates generally
translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate
sensitive instruments may be affected by the creditworthiness of
the issuer, relative values of alternative investments, the
liquidity of the instrument and other general market conditions.
We do not invest in derivative financial instruments, interest
rate swaps or other investments that alter interest rate
exposure.
We have predominately long-term fixed interest rate debt.
Generally, the fair market value of debt securities with a fixed
interest rate will increase as interest rates fall, and the fair
market value will decrease as interest rates rise. At
December 31, 2005, the impact of a 100 basis point
increase in interest rates on fixed rate debt would result in a
decrease in market value of approximately $30 million. A
100 basis point decrease would result in an increase in
market value of approximately $30 million.
Equity
Price Risk
The carrying values of investments subject to equity price risks
are based on quoted market prices or managements estimates
of fair value as of the balance sheet dates. Market prices are
subject to fluctuation and, consequently, the amount realized in
the subsequent sale of an investment may significantly differ
from the reported market value. Fluctuation in the market price
of a security may result from perceived changes in the
underlying economic characteristics of the investee, the
relative price of alternative investments and general market
conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of
the security being sold.
Based on a sensitivity analysis for our equity price risks as of
December 31, 2005 and 2004 the effects of a hypothetical
20% increase or decrease in market prices as of those dates
would result in a gain or loss that would be approximately
$170 million and $19 million, respectively. The
selected hypothetical change does not reflect what could be
considered the best or worst case scenarios. Indeed, results
could be far worse due to the nature of equity markets.
Commodity
Price Risk
Our Home Fashion and Oil & Gas operating units
selectively use commodity futures contracts, forward purchase
commodity contracts, option contracts and price
collars primarily to reduce the risk of changes to
cotton and oil and gas prices. We do not hold or issue
derivative instruments for trading purposes.
At December 31, 2005, WPI, in its normal course of
business, had entered into various commodity futures contracts,
forward purchase commodity contracts and option contracts. Based
on December 31, 2005 forward cotton prices, WPIs
forward purchase commodity contracts (which covered a portion of
its 2006 needs) had a net deferred gain of $0.2 million.
Based on a sensitivity analysis for commodities that assumes a
decrease of 10% in such commodity prices, the hypothetical net
deferred loss for the forward purchase commodity contracts of
WPI at December 31, 2005 is estimated to be
$0.1 million. Actual commodity price volatility is
dependent on many varied factors impacting supply and demand
that are impossible to forecast. Therefore, actual changes in
fair value over time could differ substantially from the
hypothetical change disclosed above.
The Oil & Gas segments revenues are derived from
the sale of its crude oil and natural gas production. The prices
for oil and gas remain extremely volatile and sometimes
experience large fluctuations as a result of relatively small
changes in supply, weather conditions, economic conditions and
government actions. If energy prices decline significantly,
revenues and cash flow would significantly decline. In addition,
a noncash write-down of our oil and gas properties could be
required under full cost accounting rules if prices declined
significantly, even if it is only for a short period of time.
See Revenue Recognition Oil and Natural Gas
Properties under Item 7 of this annual
80
report on
Form 10-K.
From time to time, we enter into derivative financial
instruments to manage oil and gas price risk related to revenue.
We use price collars to reduce the risk of changes
in oil and gas prices. Under these arrangements, no payments are
due by either party so long as the market price is above the
floor price set in the collar below the ceiling. If the price
falls below the floor, the counter-party to the collar pays the
difference to us and if the price is above the ceiling, the
counter-party receives the difference from us.
The following is a summary of our commodity price collar
agreements as of December 31, 2005:
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|
|
|
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|
|
|
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Type of Contract
|
|
Production Month
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|
|
Volume per Month
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|
|
Floor
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|
|
Ceiling
|
|
|
No cost collars
|
|
|
Jan Dec 2006
|
|
|
|
31,000 Bbls
|
|
|
|
41.65
|
|
|
|
45.25
|
|
No cost collars
|
|
|
Jan Dec 2006
|
|
|
|
16,000 Bbls
|
|
|
|
41.75
|
|
|
|
45.40
|
|
No cost collars
|
|
|
Jan Dec 2006
|
|
|
|
540,000 MMBTU
|
|
|
|
6.00
|
|
|
|
7.25
|
|
No cost collars
|
|
|
Jan Dec 2006
|
|
|
|
120,000 MMBTU
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|
|
|
6.00
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|
|
|
7.28
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|
No cost collars
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|
|
Jan Dec 2006
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|
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500,000 MMBTU
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|
|
|
4.50
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|
|
|
5.00
|
|
No cost collars
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|
|
Jan Dec 2006
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|
|
|
500,000 MMBTU
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|
|
|
4.50
|
|
|
|
5.00
|
|
No cost collars
|
|
|
Jan Dec 2006
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|
|
|
46,000 Bbls
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|
|
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60.00
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|
|
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68.50
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(We participate in a second
ceiling at $84.50 on the 46,000 Bbls)
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|
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No cost collars
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|
|
Jan Dec 2007
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|
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30,000 Bbls
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|
|
|
57.00
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|
|
|
70.50
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|
No cost collars
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|
|
Jan Dec 2007
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|
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30,000 Bbls
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|
|
|
57.50
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|
|
|
72.00
|
|
No cost collars
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|
|
Jan Dec 2007
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|
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930,000 MMBTU
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|
|
|
8.00
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|
|
|
10.23
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|
No cost collars
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|
|
Jan Dec 2008
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|
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46,000 Bbls
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|
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55.00
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|
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69.00
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|
No cost collars
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|
|
Jan Dec 2008
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750,000 MMBTU
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|
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7.00
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10.35
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We record derivative contracts as assets or liabilities in the
balance sheet at fair value. As of December 31, 2005 and
2004, these derivatives were recorded as a liability of
$85.9 million (including a current liability of
$68.0 million) and $16.7 million (including a current
liability of $8.9 million), respectively. The long-term
portion is included in other non-current liabilities. 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 oil and gas
revenues. Our realized and unrealized losses on our derivative
contracts for the periods indicated were as follows (in $000s):
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Years ended
December 31,
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2005
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2004
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2003
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Realized loss (net cash payments)
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$
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(51,263
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)
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$
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(16,625
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)
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$
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(8,309
|
)
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Unrealized loss
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|
(69,254
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)
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(9,179
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)
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(2,614
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)
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|
|
|
|
|
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|
|
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$
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(120,517
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)
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$
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(25,804
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)
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|
$
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(10,923
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)
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81
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Item 8.
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Financial
Statements and Supplementary Data.
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Report of
Independent Registered Public Accounting Firm
Board of Directors and Partners of
American Real Estate Partners, L.P.
We have audited the accompanying consolidated balance sheets of
American Real Estate Partners, L.P. and Subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in partners equity and
comprehensive income (loss), and cash flows for each of the two
years in the period ended December 31, 2005. These
consolidated financial statements are the responsibility of the
Partnerships 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 as of and for the year ended December 31,
2004, which statements reflect total assets of 4% percent and
total revenue of 25% of the related consolidated totals as of
December 31, 2004. Those statements were audited by other
auditors, whose report thereon have 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.
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, based on our audits and the report 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 Partners, L.P. and
Subsidiaries as of December 31, 2005 and 2004, and the
consolidated results of their operations and their consolidated
cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of American Real Estate Partners, L.P. and
Subsidiaries internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated
March 10, 2006 expressed an unqualified opinion thereon.
New York, New York
March 10, 2006
82
Report of
Independent Registered Public Accounting Firm
To the Shareholders of GB Holdings, Inc.:
We have audited accompanying the consolidated balance sheet of
GB Holdings, Inc. and subsidiaries as of December 31, 2004
(not presented herein) and the related consolidated statements
of operations, changes in shareholders equity and cash
flows for each of the years in the two-year period ended
December 31, 2004. These consolidated financial statements
are the responsibility of the companys 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
consolidated financial position of GB Holdings, Inc. and
subsidiaries as of December 31, 2004 and the results of
their operations and their cash flows for each of the years in
the two-year period 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. Managements 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
83
Report of
Independent Registered Public Accounting Firm
The Partners
American Real Estate Partners, L.P.:
We have audited the accompanying consolidated statements of
operations, changes in partners equity and comprehensive
income, and cash flows of American Real Estate Partners, L.P.
and subsidiaries for the year ended December 31, 2003.
These consolidated financial statements are the responsibility
of the Partnerships 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, changes in partners equity and
comprehensive income, and cash flows of American Real Estate
Partners, L.P. and subsidiaries as of December 31, 2003, in
conformity with U.S. generally accepted accounting
principles.
As discussed in note 2 to the consolidated financial statements,
effective January 1, 2003, the Partnership changed its
method of accounting for asset retirement obligations.
New York, New York
November 29, 2005
84
AMERICAN
REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In $000s except per
|
|
|
|
Unit amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
576,123
|
|
|
$
|
806,309
|
|
Investments
|
|
|
820,699
|
|
|
|
99,088
|
|
Inventories, net
|
|
|
244,239
|
|
|
|
|
|
Trade, notes and other receivables,
net
|
|
|
255,014
|
|
|
|
105,486
|
|
Other current assets
|
|
|
287,985
|
|
|
|
209,418
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,184,060
|
|
|
|
1,220,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
Oil & Gas
|
|
|
742,459
|
|
|
|
527,384
|
|
Gaming
|
|
|
441,059
|
|
|
|
445,400
|
|
Real Estate
|
|
|
285,694
|
|
|
|
291,068
|
|
Home Fashion
|
|
|
166,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and
equipment, net
|
|
|
1,635,238
|
|
|
|
1,263,852
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
15,964
|
|
|
|
251,439
|
|
Intangible assets
|
|
|
23,402
|
|
|
|
|