SEC Filing | Icahn Enterprises

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to __________ Commission file number 1-9516 American Real Estate Partners, L.P. ----------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3398766 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 South Bedford Road, Mt. Kisco, NY 10549 - ----------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (914) 242-7700 ------------------- 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 |X| No|_|

American Real Estate Partners, L.P.-Form 10-Q-September 30, 1999 INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 ..............................1-2 Consolidated Statements of Earnings - Three Months Ended September 30, 1999 and 1998...........................3 Consolidated Statements of Earnings Nine Months Ended September 30, 1999 and 1998 ...........................4 Consolidated Statement of Changes In Partners' Equity and Other Comprehensive Income Nine Months Ended September 30, 1999.....................................5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998..........................6-7 Notes to Consolidated Financial Statements...............................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................30 Item 3. Quantitative and Qualitative Disclosure About Market Risks....................................................48 PART II. OTHER INFORMATION...................................................48

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The financial information contained herein is unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of such financial information have been included. All such adjustments are of a normal recurring nature. CONSOLIDATED BALANCE SHEETS (In $000's) September 30, December 31, 1999 1998 ------------ ------------ (unaudited) ASSETS Real estate leased to others: Accounted for under the financing method $ 230,577 $ 245,920 Accounted for under the operating method, net of accumulated depreciation 151,295 135,634 Investment in treasury bills 452,195 363,884 Marketable equity securities -- 190,775 Mortgages and notes receivable: Held for investment 43,344 45,173 Available for sale 31,252 22,440 Cash and cash equivalents 188,952 16,462 Equity interest in Stratosphere Corporation 50,336 48,969 Development properties 12,289 12,830 Investment in limited partnerships 4,299 5,569 Hotel and resort operating properties, net of accumulated depreciation 24,977 22,037 Receivables and other assets 15,629 18,994 Property held for sale 5,089 3,893 Debt placement costs, net of accumulated amortization 1,789 1,544 Construction in progress 2,745 1,791 ---------- ---------- Total $1,214,768 $1,135,915 ========== ========== Continued..... 1

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 CONSOLIDATED BALANCE SHEETS - Continued (In $000's) September 30, December 31, 1999 1998 ------------- ------------ (unaudited) LIABILITIES Mortgages payable $188,911 $173,559 Due to affiliate 64,249 60,750 Accounts payable, accrued expenses and other liabilities 10,384 10,004 Deferred income 2,785 2,788 Distributions payable 315 315 -------- -------- Total liabilities 266,644 247,416 ======== ======== Commitments and Contingencies (Notes 2 and 3) PARTNERS' EQUITY Limited partners: Preferred units, $10 liquidation preference, 5% cumulative pay- in-kind redeemable; 9,400,000 authorized; 8,060,437 and 7,676,607 issued and outstanding as of Sept.30, 1999 and Dec. 31, 1998 82,620 79,645 Depositary units; 47,850,000 authorized; 47,235,484 outstanding 858,319 802,856 General partner 19,106 17,919 Treasury units at cost: 1,137,200 depositary units (11,921) (11,921) ----------- ------------ Total partners' equity 948,124 888,499 ----------- ------------ Total $ 1,214,768 $ 1,135,915 =========== ============ See notes to consolidated financial statements 2

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (In $000's except per unit amounts) Three Months Ended September 30, -------------------------------- 1999 1998 ---------- ---------- Revenues: Interest income on financing leases $ 5,491 $ 5,959 Interest income on treasury bills and other investments 7,746 7,580 Rental income 5,391 4,671 Hotel and resort operating income 8,612 3,901 Dividend income 344 4,649 Other income 222 284 ---------- ---------- 27,806 27,044 ---------- ---------- Expenses: Interest expense 4,813 4,040 Depreciation and amortization 1,204 1,042 General and administrative expenses 1,044 663 Property expenses 650 486 Hotel and resort operating expenses 5,437 2,562 ---------- ---------- 13,148 8,793 ---------- ---------- Earnings before property and securities transactions and equity interest in affiliate 14,658 18,251 Provision for loss on real estate (1,137) -- Gain on sales and disposition of real estate 5,286 2,683 Equity in earnings of Stratosphere Corporation 129 -- ---------- ---------- NET EARNINGS $ 18,936 $ 20,934 ========== ========== Net earnings attributable to: Limited partners $ 18,559 20,517 General partner 377 417 ---------- ---------- $18,936 $ 20,934 ========== ========== Net earnings per limited partnership unit (Note 11): Basic earnings $ .38 $ .42 ========== ========== Weighted average limited partnership units outstanding 46,098,284 46,198,284 ========== ========== Diluted earnings $ .33 $ .38 ========== ========== Weighted average limited partnership units and equivalent partnership units outstanding 56,359,662 54,472,284 ========== ========== See notes to consolidated financial statements 3

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (In $000's except per unit amounts) Nine Months Ended September 30, ------------------------------- 1999 1998 ---------- ---------- Revenues: Interest income on financing leases $ 16,997 $ 18,370 Interest income on treasury bills and other investments 17,554 21,956 Rental income 15,395 13,685 Hotel and resort operating income 16,410 6,071 Dividend income 7,771 8,974 Other income 222 662 ---------- ---------- 74,349 69,718 ---------- ---------- Expenses: Interest expense 14,617 11,224 Depreciation and amortization 4,041 3,449 General and administrative expenses 3,159 2,313 Property expenses 2,172 2,051 Hotel and resort operating expenses 11,751 4,428 ---------- ---------- 35,740 23,465 ---------- ---------- Earnings before property and securities transactions and equity interest in affiliate 38,609 46,253 Provision for loss on real estate (1,364) (602) Gain on sales and disposition of real estate 8,948 9,760 Gain on sale of marketable equity securities 28,590 -- Equity in earnings of Stratosphere Corp. 1,375 -- ---------- ---------- NET EARNINGS $ 76,158 $ 55,411 ========== ========== Net earnings attributable to: Limited partners $ 74,642 $ 54,308 General partner 1,516 1,103 ---------- ---------- $ 76,158 $ 55,411 ========== ========== Net earnings per limited partnership unit (Note 11): Basic earnings $ 1.55 $ 1.11 ========== ========== Weighted average limited partnership units outstanding 46,098,284 46,198,284 ========== ========== Diluted earnings $ 1.34 $ 1.01 ========== ========== Weighted average limited partnership units and equivalent partnership units outstanding 55,831,750 53,918,593 ========== ========== See notes to consolidated financial statements 4

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' EQUITY AND OTHER COMPREHENSIVE INCOME Nine Months Ended September 30, 1999 (unaudited) (In $000's ) Limited Partners' Equity General ------------------------ Total Partner's Depositary Preferred Held in Partners' Equity Units Units Treasury Equity --------- --------- --------- --------- --------- Balance Dec. 31, 1998 $ 17,919 $ 802,856 $ 79,645 $ (11,921) $ 888,499 Comprehensive income: Net earnings 1,516 74,642 -- -- 76,158 Sale of marketable equity securities available for sale (320) (15,738) -- -- (16,058) Unrealized losses on securities available for sale (9) (466) -- -- (475) --------- --------- --------- --------- --------- Comprehensive income 1,187 58,438 -- -- 59,625 Pay-in-kind distribution -- (2,975) 2,975 -- -- --------- --------- --------- --------- --------- Balance September 30, 1999 $ 19,106 $ 858,319 $ 82,620 $ (11,921) $ 948,124 ========= ========= ========= ========= ========= Accumulated other comprehensive loss at September 30, 1999 was $7,260. See notes to consolidated financial statements. 5

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In $000's) Nine Months Ended September 30, ------------------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 76,158 $ 55,411 Adjustments to reconcile earnings to net cash provided by operating activities: Depreciation and amortization 4,041 3,449 Gain on sales and disposition of real estate (8,948) (9,760) Gain on sale of marketable equity securities (28,590) -- Equity in earnings of Stratosphere Corporation (1,375) -- Provision for loss on real estate 1,364 602 Changes in: Decrease in deferred income (3) (4) Decrease (increase) in receivables and other assets 1,196 (15,461) Increase in accounts payable, accrued expenses and other liabilities 320 8,941 --------- --------- Net cash provided by operating activities 44,163 43,178 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in mortgages and notes receivable (7,457) (45,899) Net proceeds from the sale and disposition of real estate 21,472 22,146 Principal payments received on leases accounted for under the financing method 5,958 5,884 Construction in progress (954) (451) Capitalized expenditures for real estate (2,227) (495) Investment in treasury bills (88,311) (50,435) Decrease (increase) in investment in limited partnerships 1,270 (28,263) Purchase of marketable equity securities -- (8,818) Disposition of marketable equity securities 203,917 -- Increase in due to affiliate 3,499 -- Property acquisitions (23,923) (42,289) --------- --------- Net cash provided by (used in) investing activities 113,244 (148,620) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Partners' equity: Distributions to partners -- (94) Debt: Increase in mortgages payable 22,400 47,682 Increase in notes payable -- 15,319 Periodic principal payments (7,048) (6,731) Balloon payments -- (1,369) Debt placement costs (269) (360) Senior debt principal payment -- (11,308) --------- --------- Net cash provided by financing activities 15,083 43,139 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 172,490 (62,303) CASH AND CASH EQUIVALENTS, beginning of period 16,462 129,147 --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 188,952 $ 66,844 ========= ========= Continued................ 6

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In $000's) Nine Months Ended September 30, ------------------------------- 1999 1998 -------- -------- SUPPLEMENTAL INFORMATION: Cash payments for interest $ 15,263 $ 11,346 ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Reclassifications: To property held for sale $ 1,333 $ 1,271 From financing lease (384) -- From mortgages and notes receivable -- (15,872) To operating lease -- 15,872 From operating lease (949) (1,271) From receivables and other assets (2,169) -- To hotel and resort operating properties 180 -- To due to affiliate 3,221 -- From accounts payable, accrued expenses and other liabilities (1,232) -- From hotel and resort operating property (763) -- To development property 763 -- -------- -------- $ -- $ -- ======== ======== See notes to consolidated financial statements 7

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. General The accompanying consolidated financial statements and related footnotes should be read in conjunction with the consolidated financial statements and related footnotes contained in the Company's annual report on Form 10-K for the year ended December 31, 1998. The results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Conflicts of Interest and Transactions with Related Parties a. The Company entered into a license agreement with an affiliate of the General Partner for a portion of office space at an annual rental of approximately $205,000, plus its share of certain additional rent. Such agreement was approved by the Audit Committee of the Board of Directors of the General Partner (the "Audit Committee"). For the three and nine months ended September 30, 1999, the Company paid rent of approximately $52,000 and $156,000, respectively, in accordance with the agreement. 8

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 b. The Company entered into a lease, expiring in 2001, for 7,920 square feet of office space, at an annual rental of approximately $153,000. The Company has sublet to certain affiliates 3,205 square feet at an annual rental of approximately $62,000, resulting in a net annual rental of approximately $91,000. During the three and nine months ended September 30, 1999, the affiliates paid the Company approximately $15,000 and $45,000, respectively, for rent of the sublet space. Such payments have been approved by the Audit Committee. c. As of November 4, 1999, affiliates of Carl C. Icahn ("Icahn"), the Chairman of the Board of the General Partner, own 6,974,167 Preferred Units and 38,962,136 Depositary Units. d. In the three and nine months ended September 30, 1999, the Company reimbursed Bayswater Realty & Capital Corp., an affiliate of the General Partner, approximately $240,000 and $552,000 respectively, for development and construction management services and related expenses. Such reimbursements have been approved by the Audit Committee. 3. Commitments and Contingencies On September 18, 1995, Caldor Corp., a tenant in a property owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The 9

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 annual rental for this property is approximately $248,000. In January 1999, Caldor announced it would liquidate its holdings and close its stores. The tenant has exercised its right to reject the lease effective July 31, 1999. At September 30, 1999, the property has a carrying value of approximately $1,751,000 and is unencumbered by any mortgage. 4. Hotel and Resort Operating Properties Since August 1992, the Company has operated a Holiday Inn located in Miami, Florida, subject to a ground lease. In April 1999, the Company acquired the underlying land for approximately $1.9 million. On August 1, 1998, the Company acquired the New Seabury resort located in Cape Cod, Massachusetts. Hotel and resort operations for the three and nine months ended September 30, 1999 have been included in "Hotel and resort operating income and expenses" in the Consolidated Statements of Earnings. Net hotel and resort operations ("hotel and resort operating income" less " hotel and resort operating expenses") resulted in income of approximately $3,175,000 and $4,659,000 for the three and nine months ended September 30, 1999, respectively. Hotel and resort operating expenses include all expenses except for approximately $333,000 and $999,000 of depreciation and amortization for the three and nine months ended September 30, 1999, respectively. 10

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Hotel and resort operations are highly seasonal in nature and are not necessarily indicative of results expected for the full year. 5. Mortgages and Notes Receivable a. In 1998, the Company acquired an interest in the Sands Hotel and Casino (the "Sands") located in Atlantic City, New Jersey by purchasing the principal amount of $18.7 million of First Mortgage Notes ("Notes") issued by GB Property Funding Corp. ("GB Property"). GB Property was organized as a special purpose entity for the borrowing of funds by Greate Bay Hotel and Casino, Inc. ("Greate Bay"). The purchase price for such notes was approximately $15.1 million. In the nine months ended September 30, 1999, the Company purchased additional Notes in the principal amount of $11.6 million with a purchase price of $9.3 million. Subsequent to September 30, 1999 the Company purchased additional Notes in the principal amount of $1,120,000 with a purchase price of $900,000. An affiliate of the General Partner also has an investment in Notes of GB Property. A total of $185 million of such Notes were issued, which bear interest at 10.875% per annum and are due on January 15, 2004. Greate Bay owns and operates the Sands, a destination resort complex located in Atlantic City, New Jersey. On January 5, 1998, GB Property and Greate Bay filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code to restructure Greate Bay's long term debt. 11

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 The Company, the General Partner, and the directors and officers of the General Partner are in the process of pursuing gaming applications to obtain licenses from the New Jersey Casino Control Commission. The Company understands that the application process may take a number of months. The Company has no reason to believe that it will not obtain its necessary license; however, the licensing application of the affiliate of the General Partner may be reviewed and approved by the authorities earlier than the Company's application. In an effort to facilitate the consummation of the Greate Bay reorganization process, the Company may enter into an agreement (the "Transfer/Repurchase Agreement") to transfer its interests in Greate Bay to an affiliate of the General Partner at a price equal to the Company's cost for such Notes. However, the affiliate of the General Partner would be obligated to sell back to the Company, and the Company would be obligated to repurchase such interest in Greate Bay at the same price (together with a commercially reasonable interest factor), when the appropriate licenses are obtained by the Company, as was done in the case of Stratosphere in Nevada. The Company would also acquire its proportionate share of all sale proceeds, stock rights, acquired shares and other benefits, if any, that may have accreted to or been obtained in connection with such Greate Bay interests while held by the affiliate of the General Partner under the Transfer/Repurchase Agreement. The Company has classified the GB Property Notes as available for sale for accounting purposes. This investment is carried at fair market value on the Balance Sheet. At September 30, 1999 unrealized holding 12

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 losses of $1,672,000 have been recorded in Partners' Equity. At September 30, 1999 the carrying value was $22,722,000. b. In 1998, the Company acquired an interest in the Claridge Hotel and Casino (the "Claridge Hotel") located in Atlantic City, New Jersey by purchasing the principal amount of $15 million of First Mortgage Notes of the Claridge Hotel and Casino Corporation (the "Claridge Corporation"). The purchase price of such notes was approximately $14.1 million. In the nine months ended September 30, 1999, the Company purchased additional Notes in the principal amount of $30,000 with a purchase price of $17,000. Subsequent to September 30, 1999, the Company purchased additional Notes in the principal amount of $1,461,000 with a purchase price of $870,000. A total of $85 million of such notes were issued, which bear interest at 11.75% payable semi-annually and are due February 1, 2002. An affiliate of the General Partner also has an investment in the Notes of the Claridge Corporation. In March 1999, the Company received the previously postponed semi-annual interest payment due February 1, 1999. In August 1999, the Claridge Corporation announced that it would not pay the interest due August 1, 1999 and that it had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code to facilitate a financial restructuring. The Claridge Corporation through its wholly-owned subsidiary, the Claridge at Park Place, Incorporated, operates the Claridge Hotel, a destination resort complex located in Atlantic City, New Jersey. 13

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 As mentioned above regarding the Company's interest in the Sands, the Company is pursuing gaming licenses in New Jersey. As in the case of the Sands, the Company and an affiliate of the General Partner may enter into a Transfer/Repurchase Agreement to facilitate the approval process with respect to the Claridge Hotel. The Company has classified the Claridge Corporation Notes as available for sale for accounting purposes. This investment is carried at fair market value on the Balance Sheet. At September 30, 1999 unrealized holding losses of $5,588,000 have been recorded in Partners' Equity. At September 30, 1999, the carrying value was $8,530,000. c. In 1998, the Company purchased approximately $76.1 million of senior debt of Philip Services Corp. and Philip Services (Delaware), Inc. (collectively, "Philips") for approximately $35.2 million. In 1999, the Company purchased an additional $9.4 million of Philips debt for approximately $4.4 million. In addition, the Company received a repayment from asset sales of approximately $5.6 million. In addition, an affiliate of Mr. Icahn purchased approximately $200 million of senior debt of Philips and also owns common shares of Philips. Philips, which is Canadian-based, is an integrated metals recovery and industrial services company. In June 1999, Philips filed a voluntary application to reorganize under the Companies' Creditors Arrangement Act with the Ontario Superior Court of Justice in Toronto, Canada and voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. Philips is operating as a debtor-in-possession and expects to complete the reorganization process by year end. In 14

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 connection with the reorganization, the Company currently intends to act as a subparticipant and provide approximately $8.5 million of the $33.5 million debtor-in-possession financing obtained by Philips. The Company has classified the Philips debt as held for investment. At September 30, 1999, the carrying value totalled approximately $34.1 million. 6. Equity Interest in Stratosphere Corporation The Stratosphere Corporation ("Stratosphere") owns and operates the Stratosphere Tower Casino & Hotel, a destination resort complex located in Las Vegas, Nevada. In October 1998, an affiliate of the General Partner obtained its licenses from the Nevada Gaming Authority and in accordance with a prior agreement paid the Company approximately $60.7 million for its Stratosphere interest. However, the affiliate of the General Partner was obligated to sell back to the Company and the Company was obligated to repurchase such interest in Stratosphere at the same price (together with a commercially reasonable interest factor) when the appropriate licenses were obtained by the Company. 15

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 In October 1999 the Company obtained its Nevada Gaming Authority approvals and repurchased its Stratosphere interests for approximately $64.3 million representing the original purchase price plus accrued interest less a Stratosphere bankruptcy distribution. For accounting purposes, the Company reflects its interest in Stratosphere under the equity method and has recorded its corresponding liability to repurchase from the affiliate of the General Partner in accordance with the Transfer/Repurchase Agreement. The difference between the Company's carrying value and its share of Stratosphere's net equity at date of reorganization is being accreted over a 40 year period. For the three and nine months ended September 30, 1999, approximately $79,000 and $238,000 of accretion and $49,000 and $1,137,000 of income have been included in "Equity in earnings of Stratosphere Corporation", respectively. At September 30, 1999, the Company has an equity interest of approximately $50,336,000 and a corresponding liability of approximately $64,249,000 to reflect the Company's obligation to repurchase its Stratosphere interest. Approximately $1,470,000 and $4,257,000 of interest expense due to the affiliate of the General Partner has been recorded in the three and nine months ended September 30, 1999. 16

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Condensed financial information for this investment at September 30, 1999 and for the three and nine months then ended is shown below (in $000's). Total -------- Current assets $ 32,780 Noncurrent assets 127,970 Current liabilities 24,847 Noncurrent liabilities 6,667 Net equity 129,236 The Company's share 62,726 Three months ended 9/30/99: Revenues $ 30,712 Costs and other deductions 30,611 Net income 101 The Company's share 49 Nine months ended 9/30/99: Revenues $ 94,398 Costs and other deductions 92,056 17

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Net income 2,342 The Company's share 1,137 7. Marketable Equity Securities The Company owned 6,448,200 common shares of RJR Nabisco Holdings Corp. ("RJR") purchased for approximately $175.3 million. On June 14, 1999, the Company sold its entire interest in RJR for net proceeds of approximately $203.9 million realizing a gain of approximately $28.6 million. The Company had classified RJR as available for sale for accounting purposes. This investment was carried at fair market value on the Balance Sheet with unrealized holding gains and losses reflected in Partners' Equity. Unrealized holding gains of $16,058,000 had previously been recorded in Partners' Equity. The Company recorded dividend income of approximately $6.6 million in the nine months ended September 30, 1999. 8. Property Held For Sale 18

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 At September 30, 1999, the Company owned 14 properties that were being actively marketed for sale. At September 30, 1999, these properties have been stated at the lower of their carrying value or net realizable value. The aggregate value of these properties at September 30, 1999 is estimated to be approximately $5,089,000. 9. Significant Property Transactions a. In February 1999, the Company sold two properties located in Augusta, GA and Richmond, VA, to its tenant, Haverty Furniture Companies, Inc., pursuant to its exercise of a purchase option, for a selling price of approximately $2,734,000. As a result, the Company recognized a gain of approximately $1.6 million in the nine months ended September 30, 1999. b. In July 1999, the Company sold a property located in Burbank, California to its tenant, Lockheed Missile and Space Company, Inc., for a selling price of $9.8 million. A gain of approximately $3.4 million was recorded in the three and nine months ended September 30, 1999. c. In July 1999, the Company purchased an office and industrial facility located in Madison, Wisconsin. The property is net leased to Rayovac Corporation. The purchase price was $22,000,000 (see Note 10b). The lease term, which commenced December 15, 1985, is for twenty-eight years with rent currently at 19

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 approximately $1,641,000 per year until December 31, 1999 when a scheduled cumulative consumer price index ("CPI") rent adjustment will occur with the new rent anticipated to be approximately $2 million per year. There are several additional CPI adjustments over the initial term of the lease which are based on the increase in the CPI since base year 1987. There is one ten year renewal period with rent based on additional CPI adjustments. d. In September 1999, the Company sold a property located in Ocala, Florida, formerly tenanted by K-Mart, for a selling price of $3.2 million. As a result, the Company recognized a gain of approximately $1 million in the three and nine months ended September 30, 1999. e. Entergy Louisiana, Inc., a tenant in fifteen properties owned by the Company, with leases expiring in the year 2000, has notified the Company that it will renew leases covering thirteen of the fifteen properties. The thirteen properties which were leased for a total of approximately $2,400,000 per annum have been renewed for approximately $2,595,000 per annum. Leases covering two properties with annual rents of approximately $902,000 will not be renewed. One of the properties not being renewed, with an annual rent of approximately $857,000, has an estimated fair market value of $3,500,000 and a carrying value of $4,547,000 resulting in the Company recording a 20

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 provision for loss on real estate in the amount of approximately $1,047,000 in the three and nine months ended September 30, 1999. 10. Mortgages Payable a. On June 30, 1999, the Company executed a mortgage loan and obtained funding in the principal amount of approximately $6.3 million, which is secured by a mortgage on an industrial building tenanted by Stone Container Corporation, located in Germantown, Wisconsin. The loan bears interest at 7.25% per annum and matures July 1, 2009, at which time the remaining principal balance of approximately $5 million will be due. Annual debt service is approximately $546,000. b. On September 15, 1999, the Company executed a mortgage loan and obtained funding in the principal amount of $16.1 million, which is secured by a mortgage on an office and industrial facility tenanted by Rayovac Corporation, located in Madison, Wisconsin. The loan bears interest at 7.99% per annum and matures September 2014, at which time the remaining principal balance of approximately $6.3 million will be due. Annual debt service is approximately $1,416,000 through December 2003 and approximately $1,772,000 thereafter. 11. Distributions Payable 21

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Distributions payable represent amounts accrued and unpaid due to non-consenting investors ("Non- consents"). Non-consents are those investors who have not yet exchanged their limited partnership interests in the various Predecessor Partnerships for limited partnership units of American Real Estate Partners, L.P. 12. Preferred Units Pursuant to the terms of the Preferred Units, on February 23, 1999, the Company declared its scheduled annual preferred unit distribution payable in additional Preferred Units at the rate of 5% of the liquidation preference of $10. The distribution was payable March 31, 1999 to holders of record as of March 15, 1999. A total of 383,830 additional Preferred Units were issued. As of September 30, 1999, 8,060,437 Preferred Units are issued and outstanding. 13. Earnings Per Share For the three and nine months ended September 30, 1999 and 1998, basic and diluted earnings per weighted average limited partnership unit are detailed as follows: 22

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Three Months Ended Nine Months Ended ------------------ ------------------ 9/30/99 9/30/98 9/30/99 9/30/98 ------- ------- ------- ------- Basic: Earnings before property and securities transactions and equity interest in affiliate $ .29 $ .37 $ .76 $ .92 Net gain from property and securities transactions and equity in earnings of Stratosphere Corporation .09 .05 .79 .19 -------- ------- -------- ------ Net earnings $ .38 $ .42 $ 1.55 $ 1.11 ======== ======= ======== ====== Diluted: Earnings before property and securities transactions and equity interest in affiliate $ .26 $ .33 $ .68 $ .84 Net gain from property and securities transactions and equity in earnings of Stratosphere Corporation .07 .05 .66 .17 -------- ------- -------- ------ Net earnings $ .33 $ .38 $ 1.34 $.1.01 ======== ======= ======== ====== 23

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 14. Comprehensive Income The Company adopted SFAS No. 130 "Reporting Comprehensive Income" effective January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. The components of comprehensive income include net income and certain amounts previously reported directly in equity. Comprehensive income for the three months ended September 30, 1999 and 1998 is as follows (in $000's): 1999 1998 -------- -------- Net income $ 18,936 $ 20,934 Unrealized gains on securities available for sale 1,558 (2,553) -------- -------- Comprehensive income $ 20,494 $ 18,381 ======== ======== Comprehensive income for the nine months ended September 30, 1999 and 1998 are as follows 24

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 (in $000's): 1999 1998 -------- -------- Net income $ 76,158 $ 55,411 Realized gains previously reported in partner's equity (16,058) -- Unrealized losses on securities available for sale (475) (2,553) -------- -------- Comprehensive income $ 59,625 $ 52,858 ======== ======== 15. Segment Reporting The Company is engaged in four operating segments consisting of the ownership and operation of (i) rental real estate, (ii) hotel and resort operating properties, (iii) property development, and (iv) investment in securities including investment in other limited partnerships and marketable equity securities. The Company's reportable segments offer different services and require different operating strategies and management expertise. 25

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Non-segment revenue to reconcile to total revenue consists primarily of interest income on treasury bills and other investments. There have been no material changes in segment and non-segment assets since December 31, 1998. The Company assesses and measures segment operating results based on segment earnings from operations as disclosed below. Segment earnings from operations are not necessarily indicative of cash available to fund cash requirements nor synonymous with cash flow from operations. The revenues and net earnings for each of the reportable segments are summarized as follows for the three and nine months ended September 30, 1999 and 1998 (in $000's). Three Months Ended ------------------ 9/30/99 9/30/98 ------- ------- Revenues: Rental real estate $10,882 $10,630 Hotel & resort operating properties 8,612 3,901 Other investments 451 6,403 ------- ------- Sub-total 19,945 20,934 26

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Reconciling items 7,861(1) 6,110(1) ------- ------- Total revenues $27,806 $27,044 ======= ======= (1) Primarily interest income on T-bills and other short-term investments and other income. Three Months Ended ------------------ Net earnings: 9/30/99 9/30/98 -------- -------- Segment earnings: Rental real estate $ 10,232 $ 10,144 Hotel and resort operating properties 3,175 1,339 Other investments 451 6,403 -------- -------- Total segment earnings 13,858 17,886 Interest income 7,639 5,826 Interest expense (4,813) (4,040) 27

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Other income 222 284 General and administrative expenses (1,044) (663) Depreciation and amortization (1,204) (1,042) -------- -------- Earnings before property and securities transactions and equity interest in affiliate 14,658 18,251 Gain on property transactions and equity in earnings of Stratosphere Corporation 4,278 2,683 General partner's share (377) (417) -------- -------- Net earnings-limited partner unitholders $ 18,559 $ 20,517 ======== ======== Nine Months Ended ----------------- 9/30/99 9/30/98 -------- -------- Revenues: Rental real estate $32,392 $32,055 Hotel & resort operating properties 16,410 6,071 Other investments 8,730 11,341 -------- -------- 28

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Sub-total 57,532 49,467 Reconciling items 16,817(1) 20,251(1) ------- ------- Total revenues $74,349 $69,718 ======= ======= (1) Primarily interest income on T-bills and other short-term investments and other income. Nine Months Ended ----------------- Net earnings: 9/30/99 9/30/98 -------- -------- Segment earnings: Rental real estate $ 30,220 $ 30,004 Hotel and resort operating properties 4,659 1,643 Other investments 8,730 11,341 -------- -------- Total segment earnings 43,609 42,988 Interest income 16,595 19,589 Interest expense (14,617) (11,224) 29

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Other income 222 662 General and administrative expenses (3,159) (2,313) Depreciation and amortization (4,041) (3,449) -------- -------- Earnings before property and securities transactions and equity interest in affiliate 38,609 46,253 Gain on sale of marketable equity securities 28,590 -- Gain on property transactions and equity in earnings of Stratosphere Corporation 8,959 9,158 General partner's share (1,516) (1,103) -------- -------- Net earnings-limited partner unitholders $ 74,642 $ 54,308 ======== ======== Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements included in Management's 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 30

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 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 management's 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 to the date hereof. General The Company believes that it will benefit from the acquisition of assets undervalued in the market and diversification of its portfolio of assets. To further its investment objectives, the Company may consider the acquisition or seek effective control of land development companies and other real estate operating companies which may have a significant inventory of quality assets under development, as well as experienced personnel. From time to time the Company has discussed and in the future may discuss and may make such acquisitions from Mr. Icahn, the General Partner or their affiliates, provided the terms thereof are fair and reasonable to the Company. Additionally, in selecting future real estate investments, the Company intends to focus on assets that it believes are undervalued in the real estate market, which 31

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 investments may require substantial liquidity to maintain a competitive advantage. Despite the substantial capital pursuing real estate opportunities, the Company believes that there are still opportunities available to acquire investments that are undervalued. These may include commercial properties, residential and commercial development projects, land, non-performing loans, the securities of entities which own, manage or develop significant real estate assets, including limited partnership units and securities issued by real estate investment trusts and the acquisition of debt or equity securities of companies which may be undergoing restructuring and sub-performing properties that may require active asset management and significant capital improvements. The Company notes that while there are still opportunities available to acquire investments that are undervalued, acquisition opportunities in the real estate market for value-added investors have become more competitive to source and the increased competition may have some impact on the spreads and the ability to find quality assets that provide returns that are sought. These investments may not be readily financeable and may not generate immediate positive cash flow for the Company. As such, they require the Company to maintain a strong capital base in order to react quickly to these market opportunities as well as to allow the Company the financial strength to develop or reposition these assets. While this may impact cash flow in the near term and there can be no assurance that any asset acquired by the Company will increase in value or generate positive cash flow, the Company intends to focus on assets that it believes may provide opportunities for long-term growth and further its objective to diversify its portfolio. Historically, substantially all of the Company's real estate assets have been net leased to single corporate tenants under long-term leases. With certain exceptions, these tenants are required to pay all 32

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 expenses relating to the leased property and therefore the Company is not typically responsible for payment of expenses, such as maintenance, utilities, taxes and insurance associated with such properties. By the end of the year 2002, net leases representing approximately 24.0% of the Company's net annual rentals from its portfolio will be due for renewal, and by the end of the year 2004, net leases representing approximately 35.1% of the Company's net annual rentals will be due for renewal. Since most of the Company's properties are net-leased to single, corporate tenants, it may be difficult and time-consuming to re-lease or sell those properties that existing tenants decline to re-let or purchase and the Company may be required to incur expenditures to renovate such properties for new tenants. In addition, the Company may become responsible for the payment of certain operating expenses, including maintenance, utilities, taxes, insurance and environmental compliance costs associated with such properties, which are presently the responsibility of the tenant. As a result, the Company could experience an adverse impact on net cash flow in the future from such properties. An amendment to the Partnership Agreement (the "Amendment" ) became effective in August, 1996 which permits the Company to invest in securities issued by companies that are not necessarily engaged as one of their primary activities in the ownership, development or management of real estate while remaining in the real estate business and continuing to pursue suitable investments for the Company in the real estate market. An example of these investments is the Company's recent investment in RJR referred to elsewhere herein. 33

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 As with real estate related investments, among these types of investments that the Company will consider are opportunistic investments undervalued in the market, in companies that, for example, may be undergoing restructuring and may require significant capital expenditures. In September 1997, the Company completed its Rights Offering (the "1997 Offering") to holders of its Depositary Units to increase its assets available for investment, take advantage of investment opportunities, further diversify its portfolio of assets and mitigate against the impact of potential lease expirations. Net proceeds of approximately $267 million were raised for investment purposes. Expenses relating to environmental clean-up have not had a material effect on the earnings, capital expenditures, or competitive position of the Company. Management believes that substantially all such costs would be the responsibility of the tenants pursuant to lease terms. While most tenants have assumed responsibility for the environmental conditions existing on their leased property, there can be no assurance that the Company will not be deemed to be a responsible party or that the tenant will bear the costs of remediation. Also, as the Company acquires more operating properties, its exposure to environmental clean-up costs may increase. The Company completed Phase I Environmental Site Assessments on most of its properties by third-party consultants. Based on the results of these Phase I Environmental Site Assessments, the environmental consultant has recommended that certain sites may have environmental conditions that should be further reviewed. 34

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 The Company has notified each of the responsible tenants to attempt to ensure that they cause any required investigation and/or remediation to be performed. If such tenants do not arrange for further investigations, or remediations, if required, the Company may determine to undertake the same at its own cost. If the tenants fail to perform responsibilities under their leases referred to above, based solely upon the consultant's estimates resulting from its Phase I Environmental Site Assessments referred to above, it is presently estimated that the Company's exposure could amount to $2-3 million, however, as no Phase II Environmental Site Assessments have been conducted by the consultants, there can be no accurate estimation of the need for or extent of any required remediation, or the costs thereof. In addition, the Company has notified all tenants of the Resource Conservation and Recovery Act's ("RCRA") December 22, 1998 requirements for regulated underground storage tanks. The Company may, at its own cost, have to cause compliance with RCRA's requirements in connection with vacated properties, bankrupt tenants and new acquisitions. Phase I Environmental Site Assessments will also be performed in connection with new acquisitions and with such property refinancings as the Company may deem necessary and appropriate. The Company is in the process of updating its Phase I Site Assessments for certain of its environmentally sensitive properties including properties with open RCRA requirements. Approximately forty updates are expected to be completed in 1999 with another fifty scheduled for the year 2000. The Company is investigating the potential impact of the year 2000 in the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of 35

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Company believes it has identified and is addressing the year 2000 operating issues under its control. Based on current information, costs of addressing and solving potential problems have not had and are not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. It should be noted that most of the Company's real estate assets have been net leased to single corporate tenants who, with certain exceptions, are required to pay all expenses and building maintenance related to the leased property, including any property related expenses from year 2000 problems. However, the likelihood and effects of year 2000 failures on tenants, infrastructure systems and suppliers and vendors of the Company cannot be estimated. Failures of third parties such as banks and significant tenants to comply with year 2000 problems could have an adverse impact on the Company's business, including the inability to receive or process payments from tenants for significant periods of time. If the Company, its tenants or vendors are unable to resolve such processing issues in a timely manner, it could result in material financial risk. Accordingly, the Company will devote the necessary resources to resolve all 36

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 significant year 2000 issues in a timely manner, but believes that these issues will not be material to the Company's business aside from a catastrophic third-party failure that would affect most businesses. Results of Operations Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Gross revenues increased by $762,000, or 2.8%, during the three months ended September 30, 1999 as compared to the same period in 1998. This increase reflects increases of $4,711,000 in hotel and resort operating income, $720,000 in rental income and $166,000 in interest income on treasury bills and other investments partially offset by decreases of $4,305,000 in dividend income, $468,000 in financing lease income and $62,000 in other income. The increase in hotel and resort operating income is primarily attributable to the acquisition of New Seabury which has been included in operations since August 1, 1998. The increase in rental income is primarily due to property acquisitions. The decrease in dividend income is primarily attributable to the 1998 disposition of one of the Company's limited partnership investments. Expenses increased by $4,355,000, or 49.5%, during the three months ended September 30, 1999 compared to the same period in 1998. This increase reflects increases of $2,875,000 in hotel and resort operating expenses, $773,000 in interest expense, $381,000 in general and administrative expenses, $164,000 in property expenses and $162,000 in depreciation and amortization. The increase in hotel and 37

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 resort operating expenses is primarily attributable to the acquisition of New Seabury as mentioned above. The increase in interest expense is primarily attributable to the interest expense due to an affiliate of the General Partner in connection with the Stratosphere repurchase obligation. Earnings before property and securities transactions and equity interest in affiliate decreased during the three months ended September 30, 1999 by $3,593,000 as compared to the same period in 1998, primarily due to decreased dividend income and increased interest expense partially offset by an increase in net hotel and resort operations. Gain on property transactions increased by $2,603,000 during the three months ended September 30, 1999 as compared to the same period in 1998, due to differences in the size and number of transactions. During the three months ended September 30, 1999, the Company recorded a provision for loss on real estate of $1,137,000. No such provision was recorded in the same period in 1998. In the three months ended September 30, 1999, the Company recorded $129,000 of income related to its equity in earnings of Stratosphere Corporation. There was no such income in 1998. 38

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Net earnings for the three months ended September 30, 1999 decreased by $1,998,000 as compared to the three months ended September 30, 1998 primarily due to decreased earnings before property and securities transactions and equity interest in affiliate as mentioned above and increased provision for loss on real estate partially offset by increased gain on property transactions. Diluted earnings per weighted average limited partnership unit outstanding before property and securities transactions and equity interest in affiliate were $.26 in the three months ended September 30, 1999 compared to $.33 in the comparable period of 1998, and net gain from property and securities transactions and equity in earnings of affiliate was $.07 in the three months ended September 30, 1999 compared to $.05 in the comparable period of 1998. Diluted net earnings per weighted average limited partnership unit outstanding totalled $.33 in the three months ended September 30, 1999 compared to $.38 in the comparable period of 1998. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Gross revenues increased by $4,631,000, or 6.6%, during the nine months ended September 30, 1999 as compared to the same period in 1998. This increase reflects increases of $10,339,000 in hotel and resort operating income, and $1,710,000 in rental income partially offset by decreases of $4,402,000 in interest income on treasury bills and other investments, $1,373,000 in financing lease income, $1,203,000 in dividend income and $440,000 in other income. The increase in hotel and resort operating income is 39

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 primarily attributable to the acquisition of New Seabury which has been included in operations since August 1, 1998. The increase in rental income is primarily due to property acquisitions. The decrease in interest income on treasury bills and other investments is primarily due to a decrease in short-term investments. Expenses increased by $12,275,000, or 52.3%, during the nine months ended September 30, 1999 compared to the same period in 1998. This increase reflects increases of $7,323,000 in hotel and resort operating expenses, $3,394,000 in interest expense, $846,000 in general and administrative expenses $592,000 in depreciation and amortization and $121,000 in property expenses. The increase in hotel and resort operating expenses is primarily attributable to the acquisition of New Seabury as mentioned above. The increase in interest expense is primarily attributable to the interest expense due to an affiliate of the General Partner in connection with the Stratosphere repurchase obligation. Earnings before property and securities transactions and equity interest in affiliate decreased during the nine months ended September 30, 1999 by $7,644,000 as compared to the same period in 1998, primarily due to decreased interest income on treasury bills and other investments, financing lease income and dividend income and increased interest expense partially offset by increases in net hotel and resort operations. Gain on property transactions decreased by $812,000 during the nine months ended September 30, 1999, 1999 as compared to the same period in 1998, due to differences in the size and number of transactions. 40

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 During the nine months ended September 30, 1999, the Company recorded a provision for loss on real estate of $1,364,000 as compared to $602,000 in the same period in 1998. In the nine months ended September 30, 1999, the Company recorded $1,375,000 of income related to its equity in earnings of Stratosphere Corporation. There was no such income in 1998. In the nine months ended September 30, 1999, the Company recorded a non-recurring gain on sale of marketable equity securities of $28,590,000 related to the sale of its RJR common stock. There was no such income in 1998. Net earnings for the nine months ended September 30, 1999 increased by $20,747,000 as compared to the nine months ended September 30, 1998 primarily due to the non-recurring gain on the sale of the Company's RJR common stock partially offset by decreased earnings before property and securities transactions and equity interest in affiliate as mentioned above. Diluted earnings per weighted average limited partnership unit outstanding before property and securities transactions and equity interest in affiliate were $.68 in the nine months ended September 30, 1999 compared to $.84 in the comparable period of 1998, and net gain from property and securities transactions and equity in earnings of affiliate was $.66 in the nine months ended September 30, 1999 compared to $.17 41

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 in the comparable period of 1998. Diluted net earnings per weighted average limited partnership unit outstanding totalled $1.34 in the nine months ended September 30, 1999 compared to $1.01 in the comparable period of 1998. Capital Resources and Liquidity Generally, the cash needs of the Company for day-to-day operations have been satisfied from cash flow generated from current operations. In recent years, the Company has applied a significant portion of its operating cash flow to the repayment of maturing debt obligations. Cash flow from day-to-day operations represents net cash provided by operating activities (excluding working capital changes and non-recurring other income) plus principal payments received on financing leases as well as principal receipts on certain mortgages receivable reduced by periodic principal payments on mortgage debt. In 1999, 23 leases covering 23 properties and representing approximately $1,785,000 in annual rentals are scheduled to expire. Seven of these leases originally representing approximately $958,000 in annual rental income have been or will be re-let or renewed for approximately $963,000 in annual rentals. Such renewals are generally for a term of five years. Eleven properties, with an approximate annual rental income of $552,000, will be marketed for sale or lease when the current lease terms expire. Four properties with annual rental income of $255,000 have been purchased by their tenants pursuant to the exercise of purchase 42

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 options. One property with an approximate annual rental income of $20,000 is expected to be renewed at fair market value which is approximately $165,000. The Board of Directors of the General Partner announced that no distributions on its Depositary Units are expected to be made in 1999. The Company believes that it should continue to hold and invest rather than distribute cash. In making its announcement, the Company noted it plans to continue to apply available operating cash flow toward its operations, repayment of maturing indebtedness, tenant requirements and other capital expenditures and creation of cash reserves for contingencies including environmental matters and scheduled lease expirations. During the nine months ended September 30, 1999, the Company generated approximately $34 million in cash flow from day-to-day operations which excludes approximately $6 million in interest earned on the 1997 Offering proceeds which is being retained for future acquisitions. Capital expenditures for real estate were approximately $2.2 million during the nine months ended September 30, 1999. In 1999, the Company has approximately $5.4 million of maturing debt obligations. The Company may seek to refinance a portion of these maturing mortgages, although it does not expect to refinance all of them, 43

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 and may repay them from cash flow and increase reserves from time to time, thereby reducing cash flow otherwise available for other uses. During the nine months ended September 30, 1999, net cash flow after payment of maturing debt obligations and capital expenditures was approximately $31.8 million which was added to the Company's operating cash reserves. The Company's operating cash reserves are approximately $105.1 million at September 30, 1999 (not including the cash from capital transactions or from the 1997 Offering which is being retained for investment), which are being retained to meet maturing debt obligations, capitalized expenditures for real estate and certain contingencies facing the Company. The Company from time to time may increase its cash reserves to meet its maturing debt obligations, tenant requirements and other capital expenditures and to provide for scheduled lease expirations and other contingencies including environmental matters. Sales proceeds from the sale or disposal of portfolio properties totalled approximately $21.5 million in the nine months ended September 30, 1999. Financing net proceeds totalled approximately $22.2 million in the nine months ended September 30, 1999. The Company intends to use asset sales, financing and refinancing proceeds for new investments. 44

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 In 1998 and 1999, the Company invested approximately $175.3 million in the common stock of RJR. In June 1999, the Company sold its entire RJR position for net proceeds of approximately $203.9 million realizing a non-recurring gain of approximately $28.6 million. There can be no assurance that the Company will be able to realize any such investment gains in the future. In the nine months ended September 30, 1999, the Company purchased an office and industrial facility for approximately $22 million. In addition the Company purchased $11.6 million face amount of Sands Notes for approximately $9.3 million. The Company, the General Partner and the officers and directors of the General Partner obtained their Nevada Gaming approvals and subsequently, in October 1999, the Company repurchased its Stratosphere interest for approximately $64.3 million. Also, the Company understands that Stratosphere may seek approximately $80 million for expansion of its hotel and casino facility, a substantial portion of which may be provided by the Company. The Company is investigating possible tender offers for real estate operating companies and real estate limited partnership units. The Company may also consider indirect investments in real estate by making loans secured by the indirect ownership interests of certain real properties. 45

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 The Company's cash and cash equivalents and investment in treasury bills increased by approximately $260.8 million during the first nine months of 1999, primarily due to the sale of RJR stock ($203.9 million), net cash flow from operations ($31.8 million ), mortgage loan net proceeds ($22.2 million), property sales ($21.5 million), interest earned on the 1997 Rights Offering ($6 million) less property acquisitions ($23.9 million). To further its investment objectives, the Company may consider the acquisition or seek effective control of land development companies and other real estate operating companies which may have a significant inventory of quality assets under development as well as experienced personnel. This may enhance its ability to further diversify its portfolio of properties and gain access to additional operating and development capabilities. Pursuant to the 1997 Offering, which closed in September 1997, the Company raised approximately $267 million to increase its available liquidity so that it will be in a better position to take advantage of investment opportunities and to further diversity its portfolio. The United States Securities and Exchange Commission requires that registrants include information about primary market risk exposures relating to financial instruments. Through its operating and investment activities, the Company is exposed to market, credit and related risks, including those described elsewhere 46

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 herein. As the Company may invest in debt or equity securities of companies undergoing restructuring or undervalued by the market, these securities are subject to inherent risks due to price fluctuations, and risks relating to the issuer and its industry, and the market for these securities may be less liquid and more volatile than that of higher rated or more widely followed securities. Other related risks include liquidity risks, which arise in the course of the Company's general funding activities and the management of its balance sheet. This includes both risks relating to the raising of funding with appropriate maturity and interest rate characteristics and the risk of being unable to liquidate an asset in a timely manner at an acceptable price. Real estate investments by their nature are often difficult or time-consuming to liquidate. Also, buyers of minority interests may be difficult to secure, while transfers of large block positions may be subject to legal, contractual or market restrictions. Other operating risks for the Company include lease terminations, whether scheduled terminations or due to tenant defaults or bankruptcies, development risks, and environmental and capital expenditure matters, as described elsewhere herein. Whenever practical, the Company employs internal strategies to mitigate exposure to these and other risks. The Company, on a case by case basis with respect to new investments, performs internal analyses of risk identification, assessment and control. The Company reviews credit exposures, and seeks to mitigate counter party credit exposure through various techniques, including obtaining and maintaining collateral, 47

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 and assessing the creditworthiness of counterparties and issuers. Where appropriate, an analysis is made of political, economic and financial conditions, including those of foreign countries. Operating risk is managed through the use of experienced personnel. The Company seeks to achieve adequate returns commensurate with the risk it assumes. The Company utilizes qualitative as well as quantitative information in managing risk. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Response to this item is included in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" above. Part II. Other information Item 6. Exhibits and Reports on Form 8-K (a) Financial Data Schedule is attached hereto as Exhibit EX-27 EXHIBIT INDEX 48

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 Exhibit Description ------- ----------- EX-27 Financial Data Schedule 49

American Real Estate Partners, L.P. Form-10-Q September 30, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. American Real Estate Partners, L.P. By: American Property Investors, Inc. General Partner /s/ John P. Saldarelli ---------------------------- John P. Saldarelli Treasurer (Principal Financial Officer and Principal Accounting Officer) Date: November 12, 1999 50

5 1,000 9-MOS DEC-31-1999 SEP-30-1999 188,952 452,195 0 0 0 0 463,899 44,761 1,214,768 0 188,911 0 0 0 948,124 1,214,768 0 74,349 0 17,964 3,159 0 14,617 76,158 0 76,158 0 0 0 76,158 1.55 1.34