Item 1. Business.
Introduction
American Real Estate Partners, L.P. ("AREP") was formed in Delaware on February 17, 1987. Pursuant to an exchange offer (the "Exchange Offer") which was consummated on July 1, 1987, AREP acquired the real estate and other assets, subject to the liabilities, of thirteen limited partnerships (the "Predecessor Partnerships"). The Predecessor Partnerships acquired such assets between 1972 and 1985. A registration statement on Form S-4 relating to the Exchange Offer (Registration No. 33-13943) was filed with the Securities and Exchange Commission (the "SEC") and declared effective May 18, 1987.
AREP's general partner is American Property Investors, Inc. (the "General Partner"), a Delaware corporation which is wholly owned by Carl C. Icahn ("Icahn"). The General Partner's principal business address is 100 South Bedford Road, Mt. Kisco, New York 10549, and its telephone number is (914) 242-7700. AREP's business is conducted through a subsidiary limited partnership, American Real Estate Holdings Limited Partnership (the "Subsidiary"), in which AREP owns a 99% limited partnership interest. The General Partner also acts as the general partner for the Subsidiary. The General Partner has a 1% general partnership interest in each of AREP and the Subsidiary. References to AREP herein include the Subsidiary, unless the context otherwise requires.
On March 30, 1995, AREP completed a rights offering (the "Rights Offering"), pursuant to which it raised approximately $107,600,000, net of related expenses. In addition, in connection therewith the General Partner contributed $2,206,242 in accordance with the terms of the Partnership's Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). Pursuant to the terms of the Rights Offering, holders of depositary units representing limited partner interests (the "Depositary Units") on the record date received one transferable subscription right (each a "Right") for each seven Depositary Units held. Each Right was exercisable for a combination of securities consisting of six Depositary Units and one 5% cumulative pay-in-kind redeemable preferred unit representing a limited partner interest (the "Preferred Units"). High Coast Limited Partnership, a Delaware limited partnership which is controlled by Icahn, acted as guarantor of the offering (the "Guarantor"). The Guarantor exercised certain subscription rights and an over-subscription privilege pursuant to which it acquired a total of 10,324,128 additional Depositary Units and 1,720,688 Preferred Units; as a result, the Rights Offering was fully subscribed. 1,975,640 Rights were issued in the offering, of which 418,307 were exercised. 190,554 Depositary Units and 31,759 Preferred Units were subscribed for through the exercise of the Over-Subscription Privilege by Rights Holders other than the Guarantor. As of March 20, 1996, Icahn, through the Guarantor, beneficially owned approximately 50.6% of the Depositary Units then outstanding and approximately 88.2% of the Preferred Units then outstanding, giving effect to the Rights Offering. A registration statement on Form S-3 relating to the Rights Offering (Registration No. 33-54767) was filed with the SEC and declared effective February 23, 1995. See "Business -- Rights Offering" and Item 12 -- "Security Ownership of Certain Beneficial Owners and Management."
I-1 Description of Business
AREP is in the business of acquiring and managing real estate and activities related thereto. Such acquisitions may be accomplished by purchasing assets outright or by acquiring securities of entities which hold significant real estate related assets. Historically, the properties owned by AREP have been primarily office, retail, industrial, residential and hotel properties. Most of the real estate assets currently owned by AREP were acquired from the Predecessor Partnerships and such assets generally are net-leased to single, corporate tenants. As of March 7, 1996, AREP owned 238 separate real estate assets primarily consisting of fee and leasehold interests in 35 states. As discussed below, AREP is seeking to make new investments to take advantage of investment opportunities it believes exist in the real estate market to further diversify its portfolio and to mitigate against lease expirations.
For each of the years ended December 31, 1995, 1994 and 1993, no single real estate asset or series of assets leased to the same lessee accounted for more than 10% of the gross revenues of AREP. However, at December 31, 1995, 1994 and 1993, Portland General Electric Company ("PGEC") occupied a property (the "PGEC Property") which represented more than 10% of AREP's total real estate assets. See Item 2

Item 2. Properties.
As of March 7, 1996, AREP owned 238 separate real estate assets (primarily consisting of fee and leasehold interests and, to a limited extent, interests in real estate mortgages) in 35 states. These properties are generally net-leased to single corporate tenants. Approximately
I-14 97% of AREP's properties are currently net-leased. See Note 8 to the Financial Statements contained herein for information on mortgages payable.
The following table summarizes the type, number per type and average net effective rent per square foot of AREP's properties:
- -------------- (1) Based on net-lease rentals.
The following table summarizes the number of AREP's properties in each region specified below:
From January 1, 1995 through March 7, 1996, AREP sold or otherwise disposed of 15 properties. In connection with such sales and dispositions, AREP received an aggregate of approximately $21,000,000 in cash, net of amounts utilized to satisfy mortgage indebtedness which encumbered such properties. As of December 31, 1995, AREP owned seven properties that were being actively marketed for sale. The aggregate net realizable value of such properties is estimated to be approximately $1,983,000.
I-15 On February 1, 1995, the Penske Corp. exercised its purchase option on three properties leased from AREP, two located in New Jersey and one located in New York. The selling price was approximately $4,535,000 and a gain of approximately $1,003,000 was recognized in the year ended December 31, 1995. Each property was encumbered by first and second mortgages which totalled approximately $1,152,000 and which were paid from the sales proceeds.
On March 24, 1995, AREP sold a property located in Taylor, Michigan which is tenanted by Pace Membership Warehouse, Inc. The sales price was $9,300,000 and a gain of approximately $3,307,000 was recognized in the year ended December 31, 1995. The property was encumbered by a nonrecourse mortgage payable of approximately $4,346,000, which the purchaser assumed.
On May 18, 1995, AREP purchased approximately 248 acres of partially improved land located in Armonk, New York. The purchase price was approximately $3,044,000. AREP intends to construct approximately 45 to 50 single-family detached luxury homes subject to subdivision and other required approvals. No material development costs have yet been incurred.
On June 28, 1995, General Signal Technology Corporation, a tenant of a property located in Andover, Massachusetts, exercised its rights under the lease to purchase the property. The selling price was approximately $19,808,000, and a loss of approximately $125,000 was recognized in the year ended December 31, 1995. The property was encumbered by two nonrecourse mortgages payable, which totalled approximately $10,670,000 and were paid from the sales proceeds.
For each of the years ended December 31, 1995, 1994 and 1993, no single real estate asset or series of assets leased to the same lessee accounted for more than 10% of the gross revenues of AREP. However, at December 31, 1995, 1994 and 1993, PGEC occupied a property, which represented more than 10% of AREP's total real estate assets. PGEC is an electric utility engaged in the generation, purchase, transmission, distribution and sale of electricity, whose shares are traded on the NYSE.
The PGEC Property is an office complex consisting of three buildings containing an aggregate of approximately 803,000 square feet on an approximate 2.7 acre parcel of land located in Portland, Oregon. A Predecessor Partnership originally purchased the PGEC Property on September 11, 1978 for a price of approximately $57,143,000.
The PGEC Property is subject to two underlying mortgages, which in the aggregate as of December 31, 1995, had an outstanding principal balance of $35,534,172. The first mortgage bears interest at 8.5% per annum, provides for aggregate annual debt service of $2,856,960 and matures on October 1, 2002, at which time a balloon payment of $19,304,091 will be due and payable. By its terms, this mortgage is prepayable at any time subject to certain restrictions. The second mortgage bears interest at 10% per annum, provides for interest-only payments during its term (an aggregate of $1,000,000 per annum) and matures in October 1996, at which time a balloon payment of $10,000,000 will be due and payable. By its terms, this second
I-16 mortgage was not prepayable until September 1989, and then only with a 6% penalty, which penalty decreases by .5% each year thereafter.
The PGEC Property is net-leased to a wholly owned subsidiary of PGEC for forty years, with two ten-year and one five-year renewal options. The annual rental is $5,137,309 until 2003, $4,973,098 until 2018 and $2,486,549 during each renewal option. PGEC has guaranteed the performance of its subsidiary's obligations under the lease. The lessee has an option to purchase the PGEC Property in September of 2003, 2008, 2013 and 2018 at a price equal to the fair market value of the PGEC Property determined in accordance with the lease and is required to make a rejectable offer to purchase the PGEC Property in September 2018 for a price of $15,000,000. A rejection of such offer will have no effect on the lease obligations or the renewal and purchase options.
In June 1994, AREP entered into two joint ventures with unaffiliated co-venturers for the purpose of developing luxury garden apartment complexes. See Item 1 -- "Business -- Recent Acquisitions" above.
AREP's most significant acquisition in 1993 was the purchase of two non-performing mortgage loans for a combined price of $13,000,000. AREP foreclosed on these loans in 1993 and 1994, and now holds title to the underlying properties. On July 25, 1994, AREP obtained financing on these two properties. See Item 1 -- "Business -- Financing Activities."
AREP is continuing to seek opportunities to refinance upon favorable terms and sell certain of its properties to generate proceeds for future investments, in addition to the proceeds from the Rights Offering. In the current real estate environment, management continues to seek to improve the long-term value of AREP's portfolio by, among other means, using its available cash and reinvesting capital transaction proceeds to maximize capital appreciation and diversification of the portfolio. AREP believes that the continuing weakness in the real estate market presents opportunities to acquire significantly undervalued properties, including commercial properties, residential development projects, land parcels for the future development of residential and commercial properties, non-performing loans and securities of entities which own, manage or develop significant real estate assets, including limited partnership units and securities issued by real estate investment trusts, which will enhance AREP's portfolio and its return on investments. In selecting investments, AREP intends to focus on assets that it believes are undervalued in the current real estate market, such as development properties, non-performing loans and securities of companies with significant real estate assets, which the General Partner believes have the potential to diversify and enhance the long-term value of AREP's portfolio. AREP also may acquire real estate operating and development companies which may enhance its ability to develop and manage properties it acquires as well as its ability to reduce the operating expenses related to investments which require active management. The cash flow generated by an asset will be a consideration, but AREP may acquire assets that are not generating positive cash flow. While this may impact cash flow in the near term and there can be no assurance that any asset acquired by AREP will increase in value or generate positive cash flow, management intends to focus on assets that it believes may provide opportunities for long-term growth and diversification of its portfolio.
I-17 Item 3.

Item 3. Legal Proceedings.
Unitholder Litigation
In August 1994, three class action complaints against AREP were filed with the Delaware Court of Chancery, New Castle County, in connection with the Rights Offering, Allan Haymes, I.R.A. v. American Real Estate Partners, L.P., American Property Investors, Inc. and Carl C. Icahn and Steven Yavers v. American Real Estate Partners, L.P., American Property Investors, Inc. and Carl C. Icahn and Wilbert Schoomer v. American Real Estate Partners, L.P., American Property Investors, Inc. and Carl C. Icahn (the "Complaints"). The Complaints were consolidated. The Complaints claimed defendants breached fiduciary and common law duties owed to plaintiffs and plaintiffs' class by self dealing and failing to disclose all relevant facts regarding the Rights Offering, and sought declaratory and injunctive relief declaring the action was properly maintainable as a class action, declaring the defendants breached their fiduciary and other duties, enjoining the Rights Offering, ordering defendants to account for all damages suffered by the class for alleged acts and transactions and awarding further relief as the court deemed appropriate. On April 7, 1995, defendants moved to dismiss the consolidated complaint as moot. Only July 28, 1995, the parties submitted a stipulation of dismissal agreeing to dismiss the action as moot. The plaintiffs have reserved their right to make application to the Court for fees and expenses. On August 3, 1995, the Court signed an order dismissing the plaintiffs' claims with prejudice as moot. The Court retained jurisdiction with respect to any application filed by the plaintiffs for fees and expenses.
Defaulted Mortgage Receivable
As of December 31, 1995, AREP held a mortgage note receivable in the principal amount of approximately $97,000 which is in default. The mortgage encumbers one property together with a collateral assignment of ground lease and rent. The property is tenanted by Gino's. The mortgage had been taken back by a Predecessor Partnership in connection with the sale of this property. The tenant remained current in its lease obligations. See Note 14 to the Financial Statements contained herein.
Property Litigation
Simultaneously with the acquisition of property in East Syracuse, New York, AREP entered into a general construction contract (the "GC Agreement") pursuant to which the seller was required to construct the property for a guaranteed maximum amount of $2,327,802. However, the construction of the BJ's Warehouse Store was subject to delays and the seller did not meet all of its construction obligations under the GC Agreement and failed to cure such defaults. AREP sent a notice, dated February 19, 1993, terminating the GC Agreement. AREP contacted the surety of the GC Agreement to make a claim pursuant to the terms of the surety bond but was unsuccessful. AREP has determined at this point that it will not pursue any potential claims that it may have against the surety, because after due inquiry, it believes that such claims will not be able to be satisfied. Additionally, in connection with certain alleged
I-18 agreements between related entities and principals of the seller, and a brokerage company, the broker filed an action for a commission in the amount of $250,000 plus additional damages of $500,000. AREP served an answer denying any liability and served a cross-claim on the seller and its principals, based upon representations in the contract of sale that no commissions were due to this broker. AREP did not agree to assume the obligation to pay such commission and is defending such action; discovery is proceeding in the matter. Furthermore, another broker has instituted an action against AREP and certain other co-defendants regarding a $224,500 brokerage claim with respect to such property, as well as punitive damages of $1,000,000; this action was settled in January 1995 with dismissal of the action with prejudice and with a reservation of AREP's rights against its co-defendants.
Environmental Litigation
On September 16, 1991, AREP brought suit against Alco Standard Corporation and its affiliates, a former tenant of an industrial facility located in Rome, Georgia whose lease expired in October 1990. The action was brought against the defendants in the United States District Court for the Northern District of Georgia, Rome Division, for reimbursement of costs that could be incurred for clean-up of hazardous materials on the site and certain deferred maintenance. In July 1994, this litigation was settled and the property was sold for $525,000. A gain of approximately $100,000 was recognized in the year ended December 31, 1994. In addition, Alco reimbursed AREP for $150,000 of expenses incurred and indemnified AREP against any future liability in connection with any site contamination.
Lockheed, a tenant of AREP's leasehold property in Palo Alto, California, has entered into a consent decree with the California Department of Toxic Substances ("CDTS") to undertake certain environmental remediation at this property. Lockheed has estimated that the environmental remediation costs may be up to approximately $14,000,000. In a non-binding determination by CDTS, Lockheed was found responsible for approximately 75% of such costs and the balance was allocated to other parties. AREP was allocated no responsibility for any such costs.
Lockheed has served a notice that it may exercise its statutory right to have its liability reassessed in a binding arbitration proceeding. In this notice of arbitration, Lockheed stated that it will attempt to have allocated to AREP and to AREP's ground-lessor (which may claim a right of indemnity against AREP) approximately 9% and 17%, respectively, of the total remediation costs. AREP believes that it has no liability for any of such costs and, in any proceeding in which such liability is asserted against AREP, AREP intends to contest such liability vigorously. In the event any of such liability is allocated to AREP, AREP intends to seek indemnification for any such liability from Lockheed in accordance with its lease. In April 1995 Lockheed began ground water remediation at the leasehold property.
On December 11, 1995, Panos Sklavenitis commenced an action against the Subsidiary and others related to a shopping center that he purchased from a successor-in-interest to AREP. The action was brought in the United States District Court for the Central District of California, for reimbursement of the cost of remediating certain environmental contamination that appears
I-19 to have been caused by a dry cleaner that was a tenant at the property; the amount of damages sought have not yet been quantified. Mr. Sklavenitis is suing the parties who are in the chain of ownership, as well as the dry cleaner and its predecessor. AREP believes that it has no liability for any such costs and intends to vigorously contest the action. In the event any liability under the suit is allocated to AREP, AREP will seek indemnification for such monies from Federated Department Stores, Inc., Ralph's Grocery Company and Los Coyotes Associates and the other owners in the chain of title.
Bankruptcies
AREP is aware that 14 of its present and former tenants have been or are currently involved in some type of bankruptcy or reorganization. Of AREP's 14 present and former tenants involved in bankruptcy proceedings or reorganization, nine have rejected their leases, affecting 28 properties, all of which have been vacated. See also Notes 7, 14 and 18 to the Financial Statements contained herein and "Business - Bankruptcies and Defaults" which describe various tenant and mortgagor bankruptcies for which AREP has filed claims.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
None.
I-20 PART II
Item 5.

Item 5. Market for AREP's Common Equity and Related Security Holder Matters.
Market Information
AREP's Depositary Units are traded on the NYSE under the symbol "ACP." Trading on the NYSE commenced July 23, 1987, and the range of high and low market prices for the Depositary Units on the New York Stock Exchange Composite Tape (as reported by The Wall Street Journal) from January 1, 1994 through December 31, 1995 is as follows:
On March 20, 1996, the last sales price of the Depositary Units, as reported by the New York Stock Exchange Composite Tape (as reported by The Wall Street Journal) was $8.875.
As of March 20, 1996, there were approximately 22,000 record holders of the Depositary Units.
Since January 1, 1994, AREP has made no cash distributions with respect to the Depositary Units.
Distributions
After evaluating the contingencies facing AREP, its anticipated cash flows, liquidity needs, maturing debt obligations and capital expenditure requirements, the Board of Directors of the General Partner reduced the quarterly distributions in 1993 from $.25 to $.125 per quarter. This reduction permitted management to continue to establish reserves for AREP's maturing debt obligations and other contingencies. In 1994 the General Partner determined that it was necessary for AREP to conserve cash and increase reserves from time to time in order to meet capital expenditures and maturing debt obligations and no distributions were made to Unitholders in 1994 or 1995.
On December 4, 1995, the Board of Directors of the General Partner announced that no distribution for the fiscal quarter ended December 31, 1995 would be made and that no
II-1 distributions are expected to be made in 1996. In making its announcement, AREP noted it plans to continue to apply available Partnership operating cash flow toward its operations, repayment of maturing indebtedness, tenant requirements and other capital expenditures and creation of cash reserves for Partnership contingencies, including environmental matters and scheduled lease expirations. As previously reported, by the end of the year 2000, net leases representing approximately 26% of AREP's net annual rentals from its portfolio will be due for renewal, and by the end of the year 2002, 40% of such rentals will be due for renewal. Another factor that AREP took into consideration was that net leases representing approximately 30% of AREP's net annual rentals from its portfolio are with tenants in the retail sector, some of which are currently experiencing cash flow difficulties and restructurings. In addition, AREP noted that net operating cash flow in 1995 was break-even, after payment of approximately $23,900,000 of periodic principal payments and maturing debt obligations, including an $11.3 million principal payment made in May 1995 on its Senior Unsecured Debt, capital expenditures and the creation of cash reserves for its obligations. In making its announcement, AREP stated that it expects to reconsider distribution issues for 1997. See Item 7 -- "Management's Discussion and Analysis of the Financial Condition and Results of Operations -- Capital Resources and Liquidity." A substantial portion of the proceeds from the Rights Offering and its available cash will be used to fund the acquisition of additional properties by AREP, which the General Partner believes have the potential to diversify and enhance the long-term value of AREP's investment portfolio.
Pursuant to the terms of the Preferred Units, on April 1, 1996, AREP will distribute to holders of record of Preferred Units as of March 15, 1996, additional Preferred Units at the rate of $.50 per Preferred Unit (which is equal to a rate of 5% of the liquidation preference thereof). The total number of additional Preferred Units anticipated to be distributed by AREP on April 1, 1996 is approximately 98,782.
Each Depositary Unitholder will be taxed on the Unitholder's allocable share of AREP's taxable income and gains and, with respect to Preferred Unitholders, accrued guaranteed payments, whether or not any cash is distributed to the Unitholder.
Repurchase of Depositary Units
AREP announced in 1987 its intention to purchase up to 1,000,000 Depositary Units. On June 16, 1993, AREP increased the amount of shares authorized to be repurchased to 1,250,000 Depositary Units. As of March 8, 1996, AREP had purchased 1,037,200 Depositary Units at an aggregate cost of approximately $11,184,000. Management has not been acquiring Depositary Units for AREP, although AREP may from time to time acquire additional Depositary Units. Under the terms of the Note Agreements for the Senior Unsecured Debt, distributions and the amounts used to repurchase Depositary Units cannot exceed net cash flow, as defined therein, plus $15,000,000. See Item 7 -- "Management's Discussion and Analysis of the Financial Condition and Results of Operations -- Capital Resources and Liquidity." To date this restriction has not impaired the ability of AREP to make distributions.
II-2
Item 6.

Item 6. Selected Financial Data.
* To the extent financial information pertaining to AREP is reflected, such information is consolidated for AREP and its Subsidiary.
II-3 Item 7.

Item 7. Management's Discussion and Analysis of the Financial Condition and Results of Operations.
General
Historically, substantially all of AREP's real estate assets have been net-leased to single corporate tenants under long-term leases. With certain exceptions, these tenants are required to pay all expenses relating to the leased property and therefore AREP is not typically responsible for payment of expenses, such as maintenance, utilities, taxes and insurance associated with such properties. AREP has experienced an increase in its property expenses in recent years, due principally to tenant bankruptcies and defaults as well as the acquisition of operating properties, although such expenses decreased in 1995 in comparison to 1994 as discussed below under "-Results of Operations".
Economic conditions in recent years led the General Partner to reexamine from time to time AREP's cash needs and investment opportunities. Tenant defaults and lease expirations caused rental revenues to decrease and property management and certain operating expenses to increase and led to expenditures to re-let. In addition, the availability of acceptable financing to refinance maturing debt obligations including AREP's Senior Unsecured Debt became increasingly scarce. Consequently, the General Partner determined it was necessary to conserve cash and establish reserves from time to time. As a result, there was insufficient cash flow from operations to pay distributions to unitholders and such distributions were reduced and finally suspended. As discussed below, AREP's investment strategy is to apply its capital transaction proceeds and Rights Offering proceeds, including interest earned thereon, toward its investment purposes.
By the end of the year 2000, net leases representing approximately 26% of AREP's net annual rentals from its portfolio will be due for renewal, and by the end of the year 2002, net leases representing approximately 40% of AREP's net annual rentals will be due for renewal. Since most of AREP's properties are net-leased to single, corporate tenants, it is expected that it may be difficult and time-consuming to re-lease or sell those properties that existing tenants decline to re-let or purchase and AREP may be required to incur expenditures to renovate such properties for new tenants. In addition, AREP may become responsible for the payment of certain operating expenses, including maintenance, utilities, taxes, insurance and environmental compliance costs associated with such properties, which are presently the responsibility of the tenant. As a result, AREP could experience an adverse impact on net cash flow from such properties.
As a consequence of the foregoing, AREP decided to raise funds through the Rights Offering to increase its assets available for investment, take advantage of real estate investment opportunities, further diversify its portfolio and mitigate against the impact of potential lease expirations. The Rights Offering was successfully completed during April 1995 and net proceeds of approximately $107.6 million were raised for investment purposes. In order to enhance AREP's investment portfolio (and ultimately its asset values and cash flow prospects), AREP is seeking to acquire investments in undervalued properties, including commercial properties, residential development projects, land parcels for the future development of
II-4 residential and commercial properties, non-performing loans and securities of entities which own, manage or develop significant real estate assets, including limited partnership units and securities issued by real estate investment trusts. Such assets may not be generating positive cash flow in the near term; however, the General Partner believes that the acquisition of properties requiring some degree of management or development activity have the greatest potential for growth, both in terms of capital appreciation and the generation of cash flow. These types of investments may involve debt restructuring, capital improvements and active asset management and by their nature as under-performing assets may not be readily financeable. As such, they require AREP to maintain a strong capital base.
Expenses relating to environmental clean-up have not had a material effect on the earnings, capital expenditures, or competitive position of AREP. Management believes that substantially all such costs would be the responsibility of the tenants pursuant to lease terms. While most tenants have assumed responsibility for the environmental conditions existing on their leased property, there can be no assurance that AREP will not be deemed to be a responsible party or that the tenant will bear the costs of remediation. Also, as AREP acquires more operating properties, its exposure to environmental clean-up costs may increase. AREP completed Phase I Environmental Site Assessments of certain of its properties by third-party consultants. Based on the results of these Phase I Environmental Site Assessments, the environmental consultant has recommended that limited Phase II Environmental Site Investigations be conducted. AREP has notified each of the tenants of the respective sites of the environmental consultant's findings. If such tenants do not arrange for further investigations, or remediations, if required, AREP 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 AREP's exposure could amount to $3-4 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, AREP is planning Phase I Environmental Site Assessments for approximately 100 more net leased properties during 1996 and 1997. Phase I Environmental Site Assessments will also be performed in connection with new acquisitions and with such property refinancings as AREP may deem necessary and appropriate.
Results of Operations
Calendar Year 1995 Compared to Calendar Year 1994. Gross revenues increased by approximately $8,370,000, or 13.6%, during calendar year 1995 as compared to calendar year 1994. This increase reflects approximate increases of $6,715,000, or 466.8%, in other interest income, $2,655,000 in other income, $980,000, or 11.1%, in hotel operating income, and $558,000, or 2.9%, in rental income, partially offset by a decrease of approximately $2,538,000, or 7.9%, in financing lease income. The increase in other interest income is primarily due to an increase in AREP's short-term cash investments as a result of the Rights Offering proceeds and the investment in the Facility Agreement. The increase in other income is primarily due to the settlement of the Chipwich and Be-Mac bankruptcy claims. The hotel operating revenues were generated by two hotels formerly leased to Integra. AREP has been
II-5 operating these hotel properties through a third-party management company since August 7, 1992. The increase in rental income is primarily due to increased rents at the two apartment complexes in Lexington, Kentucky and the new apartment complex in Alabama, partially offset by the loss of rents due to property sales. The decrease in financing lease income is primarily attributable to normal lease amortization and property sales.
Expenses decreased by approximately $2,886,000, or 6.9%, during calendar year 1995 compared to calendar year 1994. This decrease reflects decreases of approximately $3,122,000, or 13.7%, in interest expense, $586,000, or 13.3%, in property expenses and $185,000, or 6.7%, in general and administrative expenses, partially offset by increases of approximately $630,000, or 8.9%, in hotel operating expenses and $377,000, or 7.6%, in depreciation and amortization expense.
The decrease in interest expense is primarily attributable to normal loan amortization and reductions due to repayments of maturing balloon debt obligations, including the Senior Unsecured Debt, certain loan refinancings, as well as the sale of encumbered properties. The decrease in property expenses is primarily attributable to decreases in certain operating property expenses and environmental review expenses. The hotel expenses were generated from the hotels mentioned previously.
Earnings before property transactions increased during the calendar year 1995 by approximately $11,256,000, or 57.5%, from calendar year 1994 primarily due to increased interest income earned on the Rights Offering proceeds, other income from the settlement of bankruptcy claims and decreased interest expense due to refinancings and repayments of maturing debt obligations, partially offset by a decrease in financing lease income.
Gain on property transactions increased by approximately $918,000 during the calendar year 1995 as compared to calendar year 1994, due to differences in the size and number of transactions.
During calendar year 1995, AREP recorded a provision for loss on real estate of approximately $769,000 as compared to $582,000 in 1994.
Net earnings for the calendar year 1995 increased by approximately $11,987,000, or 51.7%, as compared to net earnings for the calendar year 1994. This increase was primarily attributable to the increase in other interest income, other income from the settlement of bankruptcy claims and decreased interest expense, partially offset by a decrease in financing lease income.
Calendar Year 1994 Compared to Calendar Year 1993. Gross revenues increased by approximately $1,394,000, or 2.3%, during calendar year 1994 as compared to calendar year 1993. This increase reflects approximate increases of $3,393,000, or 21.6%, in rental income and $405,000, or 4.8%, in hotel operating income, partially offset by decreases of approximately $861,000, or 2.6%, in financing lease income, $571,000, or 28.4%, in other interest income, and $972,000, or 84.1%, in other income. The increase in rental income is primarily attributable to the two apartment complexes in Lexington, Kentucky acquired in 1993, increases
II-6 in rents from a property formerly occupied by Amdura and rents received from BJ's Warehouse Store. The hotel operating revenues were generated by two hotels formerly leased to Integra. AREP has been operating these hotel properties through a third-party management company since August 7, 1992. The decrease in financing lease income is primarily attributable to normal amortization of financing leases partially offset by increased income from the Toy's "R" Us properties reacquired as a result of foreclosure on defaulted purchase money mortgages. The decrease in other interest income is primarily attributable to less interest received on defaulted purchase money mortgages and payments of balloon balances due. The decrease in other income related primarily to the settlement of the Days Inn bankruptcy claim, most of which was recognized in 1993.
Expenses increased by approximately $196,000, or .5%, during calendar year 1994 compared to calendar year 1993. This increase reflects increases of approximately $1,833,000, or 71.1%, in property expenses, $600,000, or 13.8%, in depreciation and amortization and $336,000, or 13.7%, in general and administrative expenses, offset by decreases of approximately $2,392,000, or 9.5%, in interest expense and $181,000, or 2.5%, in hotel operating expenses. The increase in property expenses is primarily attributable to costs associated with the newly acquired operating properties mentioned previously, as well as the former Days Inn and Amdura properties now operated by the Company. The decrease in interest expense is primarily attributable to normal loan amortization and reductions due to certain loan refinancings and the repayments of maturing balloon debt obligations, including the Senior Unsecured Debt.
Earnings before property transactions increased during the calendar year 1994 by approximately $1,198,000, or 6.5%, from calendar year 1993.
Gain on property transactions decreased by approximately $586,000 during the calendar year 1994 as compared to calendar year 1993, due to differences in the size and number of transactions.
During calendar year 1994, AREP recorded a provision for loss on real estate of $582,000 as compared to $462,000 in 1993.
Net earnings for the calendar year 1994 increased by approximately $492,000, or 2.2%, as compared to net earnings for the calendar year 1993. This increase is attributable to the approximate $1,198,000 increase in earnings before property transactions, offset by the decrease in gain on sales of real estate and the increase in provision for loss on real estate.
Capital Resources and Liquidity
Generally, the cash needs of AREP for day-to-day operations have been satisfied from cash flow generated from current operations. In recent years, AREP has applied a larger portion of its cash flow to the repayment of maturing debt obligations. Cash flow from day-to-day operations represents net cash provided by operating activities (excluding working capital changes and non-recurring other income) plus principal payments received on financing leases
II-7 as well as principal receipts on mortgages receivable reduced by periodic principal payments on mortgage debt.
AREP may not be able to re-let certain of its properties at current rentals. As previously discussed, net leases representing approximately 40% of AREP's net annual rentals will be due for renewal by the end of the year 2002. In 1995, seventeen leases covering twenty-six properties and representing approximately $996,000 in annual rentals expired. Sixteen of these twenty-six properties originally representing approximately $653,000 in annual rental income have been or will be re-let or renewed for approximately $662,000 in annual rentals. Three properties, with an approximate annual rental income of $137,000, are currently being marketed for sale or lease. Seven properties with annual rentals of approximately $206,000 were sold in 1995.
In 1996, 22 leases covering 22 properties and representing approximately $2,413,000 in annual rentals are scheduled to expire. Seven of these 22 leases originally representing approximately $1,102,000 in annual rental income have been or will be re-let or renewed for approximately $1,109,000 in annual rentals. Such renewals are generally for a term of five years. Six leases, with an approximate annual rental income of $822,000, will be marketed for sale or lease when the current lease terms expire. Tenants occupying two of the properties with approximate annual rental income of $358,000 have elected to exercise their purchase options and the renewal status of the remaining seven properties representing approximately $131,000 in annual rental income is uncertain as of the date hereof.
After evaluating the contingencies facing AREP, its anticipated cash flows, liquidity needs, maturing debt obligations and capital expenditure requirements, the Board of Directors of the General Partner reduced the quarterly distributions in 1993 from $.25 to $.125 per quarter. This reduction permitted management to continue to establish reserves for AREP's maturing debt obligations and other contingencies. In 1994 the General Partner determined that it was necessary for AREP to conserve cash and increase reserves from time to time in order to meet capital expenditures and maturing debt obligations and no distributions were made to Unitholders in 1994 or 1995.
On December 4, 1995, the Board of Directors of the General Partner announced that no distribution for the fiscal quarter ended December 31, 1995 would be made and that no distributions on its Depositary Units are expected to be made in 1996. In making its announcement, AREP noted it plans to continue to apply available Partnership operating cash flow toward its operations, repayment of maturing indebtedness, tenant requirements and other capital expenditures and creation of cash reserves for Partnership contingencies including environmental matters and scheduled lease expirations. As previously reported, by the end of the year 2000, net leases representing approximately 26% of AREP's net annual rentals will be due for renewal, and by the end of the year 2002, 40% of such rentals will be due for renewal. Another factor that AREP took into consideration was that net leases representing approximately 30% of AREP's annual rentals from its portfolio are with tenants in the retail sector, some of which are currently experiencing cash flow difficulties and restructurings. In addition, AREP noted that net operating cash flow in 1995 was break-even, after payment of approximately $23,900,000 of periodic principal payments and maturing debt obligations, including an $11.3
II-8 million principal payment made in May 1995 on its Senior Unsecured Debt, capital expenditures and the creation of cash reserves for its obligations. In making its announcement, AREP stated that it expects to reconsider distribution issues for 1997.
There were no distributions due to Unitholders for the year ended December 31, 1995. Distributions paid during December 31, 1995 totalled approximately $105,000, representing distributions due to Unitholders who exchanged their limited partner interests during 1995. There were no distributions due to Unitholders for the year ended December 31, 1994. Distributions paid during 1994 totalled approximately $1.9 million, representing distributions due to Unitholders for the fourth quarter of 1993 and to Unitholders who exchanged their limited partner interests during 1994. Distributions due to Unitholders for the year ended December 31, 1993 were approximately $7,100,000. Distributions paid during 1993 totalled approximately $9,300,000, representing distributions due to Unitholders for the fourth quarter of 1992, the first three quarters of 1993 and to Unitholders who exchanged their limited partner interests during 1993.
During the year ended December 31, 1995, AREP generated approximately $26,900,000 in cash flow from day-to-day operations which excludes approximately $4.6 million in interest earned on the Rights Offering proceeds which will be retained for future acquisitions. In addition, approximately $2.8 million of non-recurring income, including approximately $2 million from the Chipwich bankruptcy settlement, was recorded. During 1994, AREP generated approximately $22,000,000 in cash flow from day-to-day operations and approximately $200,000 from the Days Inn bankruptcy settlement.
Capital expenditures for real estate, excluding new acquisitions, were approximately $2,100,000 during 1995. During 1994, such expenditures totalled approximately $2,300,000. During 1993, such expenditures totalled approximately $2,500,000.
During 1995, approximately $14.9 million of balloon mortgages were repaid out of AREP's cash flow, including the scheduled payment due on AREP's Senior Unsecured Debt. During 1994, approximately $16.7 million of balloon mortgages were repaid out of the AREP's cash flow, including the scheduled payment due on the AREP's Senior Unsecured Debt. In addition to payments due under AREP's Senior Unsecured Debt, approximately $19,000,000 and $5,500,000 of maturing balloon mortgages are due in 1996 and 1997, respectively, and during the period 1998 through 1999 approximately $12,000,000 in maturing mortgages come due. AREP will seek to refinance a portion of these maturing mortgages, although it does not expect to be able to refinance all of them and may be required to repay them from cash flow and increase reserves from time to time, thereby reducing cash flow otherwise available for other uses.
During 1995, net cash flow after payment of maturing debt obligations and capital expenditures but before creation of cash reserves was approximately $10 million, excluding non-recurring income and interest earned on the Rights Offering proceeds which will be retained for acquisitions. After the creation of such reserves net cash flow for 1995 was approximately break-even. AREP's operating cash reserves are approximately $23 million at December 31, 1995 which are being retained to meet maturing debt obligations, capitalized expenditures for
II-9 real estate and certain contingencies facing AREP. AREP from time to time may increase its cash reserves to meet its maturing debt obligations, tenant requirements and other capital expenditures and to guard against scheduled lease expirations and other contingencies including environmental matters. Rights Offering proceeds and related interest income are being retained for investment in undervalued assets including commercial properties, residential development projects, land parcels for the development of residential and commercial properties, non-performing loans and securities of entities which own, manage or develop significant real estate assets, including limited partnership units and securities issued by real estate investment trusts. In addition to using its available cash to make these types of investments, AREP intends to sell some of its existing portfolio properties and use such proceeds to reinvest in such undervalued assets. These types of investments may involve debt restructuring, capital improvements and active asset management and by their nature as underperforming assets may not be readily financeable and may not generate immediate positive cash flow. As such, they require AREP to maintain a strong capital base both to react quickly to these market opportunities as well as to allow AREP to rework the assets to enhance their turnaround performance.
AREP also has significant maturing debt requirements under the Note Agreements. As of December 31, 1995, AREP has $33,923,329 of Senior Unsecured Debt outstanding. Pursuant to the Note Agreements, AREP is required to make semi-annual interest payments and annual principal payments. The interest rate charged on the Senior Unsecured Debt is 9.6% per annum. Under the terms of the Note Agreements, AREP deferred and capitalized 2% annually of its interest payment through May 1993. In May 1994 and 1995, AREP repaid $10 million and $11.3 million, respectively, of its outstanding Senior Unsecured Debt under the Note Agreements and principal payments of approximately $11,308,000 are due annually from 1996 through the final payment date of May 27, 1998. As of December 31, 1995, AREP was in compliance with the terms of the Note Agreements.
The Note Agreements contain certain covenants restricting the activities of AREP. Under the Note Agreements, AREP must maintain a specified level of net annual rentals from unencumbered properties (as defined in the Note Agreements) and is restricted, in certain respects, in its ability to create liens and incur debts. Investment by AREP in certain types of assets that may be regarded as non-income producing, such as land or non-performing loans, is restricted under the Note Agreements. The holders of the Senior Unsecured Debt have agreed, however, to waive this restriction with respect to any capital raised by AREP in the Rights Offering.
The Note Agreements contain certain prepayment penalties which AREP would be required to pay if it extinguishes any portion of the outstanding principal prior to its annual due date. The Note Agreements require that such prepayment consist of 100% of the principal amount to be prepaid plus a premium based on a formula described therein. As of March 8, 1996, the premium required in order to prepay the Note Agreement in full would have been approximately $2,745,000. Subject to negotiating favorable terms AREP may prepay in full the Senior Unsecured Debt. Prepayment would release the Company from certain covenants which restrict its operating and investment activities, including, among others, covenants relating to the level of net annual rentals from unencumbered properties and the ability to create liens and
II-10 incur additional debt. To date, the Partnership has been unable to negotiate favorable terms for such prepayment.
Sales proceeds from the sale or disposal of portfolio properties totalled approximately $21 million in 1995. During 1994, sales proceeds totalled approximately $12.6 million, including $1.4 million of net proceeds from a balloon payment of a mortgage receivable. During 1995, AREP received $9.8 million of mortgage proceeds from the financing of its two apartment complexes located in Lexington, Kentucky. In addition, approximately $8.8 million of mortgage financing was obtained by the Alabama joint venture. AREP intends to use property sales, financing and refinancing proceeds for new investments. In addition, AREP successfully completed its Rights Offering in April 1995 and net proceeds of approximately $107.6 million were raised for investment purposes.
AREP entered into two joint ventures with unaffiliated co-venturers in June 1994 for the purpose of developing luxury garden apartment complexes in Hoover, Alabama, and Cary, North Carolina. In the year ended December 31, 1994, AREP invested approximately $5,500,000 in these joint ventures. During 1995, AREP invested approximately an additional $400,000. In May 1995, AREP acquired approximately 248 acres of land for approximately $3,044,000. AREP intends to develop and construct 45 to 50 single-family detached luxury homes on this land. In August 1995, AREP invested approximately $7.1 million by purchasing a portion of an unsecured Senior Term Facility Agreement. The borrower is Queens Moat Houses P.L.C., which is a United Kingdom based hotel operator with properties located in various countries in Europe.
AREP's cash and cash equivalents increased by approximately $147.6 million during 1995, primarily due to Rights Offering proceeds, and the interest earned thereon, of $115.4 million, sales proceeds, net of property acquisitions and investments, of approximately $11 million and financing proceeds of approximately $10 million. These funds are being retained for investment in undervalued assets including commercial properties, residential development projects, land parcels, non-performing loans and securities of companies which own significant real estate assets. In addition, approximately $10 million of additional cash reserves were created.
II-11
Item 8.

Item 8. Financial Statements
INDEPENDENT AUDITORS' REPORT
The Partners American Real Estate Partners, L.P:
We have audited the accompanying consolidated balance sheets of American Real Estate Partners, L.P. and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of earnings, changes in partners' equity and cash flows for each of the years in the three-year period ended December 31, 1995. In connection with our audits of the consolidated financial statements, we also have audited the 1995 financial statement schedule as listed in the Index at Item 14 (a) 2. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Real Estate Partners, L.P. and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
New York, New York March 7, 1996
II-12
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 and 1994 - --------------------------------------------------------------------------------
(Continued)
II-13 AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 and 1994 (Continued) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
II-14 AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
II-15 AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
II-16 AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - --------------------------------------------------------------------------------
(Continued)
II-17 AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
II-18 AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 - --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
On July 1, 1987, American Real Estate Holdings Limited Partnership (the "Subsidiary"), in connection with an exchange offer (the "Exchange"), entered into merger agreements with American Real Estate Partners, L.P. (the "Company") and each of American Property Investors, L.P., American Property Investors II, L.P., American Property Investors III, L.P., American Property Investors IV, L.P., American Property Investors V, L.P., American Property Investors VI, L.P., American Property Investors VII, L.P., American Property Investors VIII, L.P., American Property Investors IX, L.P., American Property Investors X, L.P., American Property Investors XI, L.P., American Property Investors 82, L.P. and American Property Investors 83, L.P. (collectively, the "Predecessor Partnerships"), pursuant to which the Subsidiary acquired all the assets, subject to the liabilities (known and unknown) of the Predecessor Partnerships.
The limited partners of the Predecessor Partnerships received limited partner interests in the Subsidiary. The number of such limited partner interests received by a limited partner was determined based upon his percentage ownership interest in the Predecessor Partnerships, the value of the Predecessor Partnerships' net assets and the number of limited partner interests allocable to the Predecessor Partnerships' general partners and their affiliates. The limited partner interests in the Subsidiary were contributed to the Company in exchange for limited partner interests therein. Limited partnership interests were allocable to the Predecessor Partnerships' general partners and their affiliates as a result of their rights: (i) to receive a portion of the cash flow of the Predecessor Partnerships by virtue of their ownership of interests in such partnerships and their entitlement to receive management fees and nonaccountable expense reimbursements and (ii) to share in the proceeds from the sale or liquidation of the assets of the Predecessor Partnerships and to receive real estate commissions with respect to the sale of properties by the Predecessor Partnerships. These rights of the Predecessor Partnerships' general partners and their affiliates were valued in connection with the Exchange. As a result of such valuation, and the assignment of the interests receivable by the corporate affiliates to American Property Investors, Inc. (the "General Partner"), an aggregate of 1,254,280 units and a 1% general partner interest in the Company were issued to the General Partner and 5,679 units were issued to noncorporate affiliates of the Predecessor Partnerships' general partners. In addition, the General Partner also received a 1% general partner interest in the Subsidiary.
By virtue of the Exchange, the Subsidiary owns the assets, subject to the liabilities, of the Predecessor Partnerships. The Company owns a 99% limited partner interest in the Subsidiary. The General Partner owns a 1% general partner interest in both the Subsidiary and the Company representing an aggregate 1.99% general partner interest in the Company and the Subsidiary.
The participation in the transaction by a Predecessor Partnership was conditioned upon obtaining the approval of a majority-in-interest of the limited partners in such Predecessor Partnership. Such approvals were obtained with respect to each of the Predecessor Partnerships prior to July 1, 1987.
II-19 During 1989, Integrated Resources, Inc. ("Integrated"), the former parent of the General Partner, experienced serious financial difficulties and, on February 13, 1990, it filed in the Bankruptcy Court for the Southern District of New York a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code (the "Filing"). The General Partner was a separate entity and neither the General Partner nor any other subsidiary of Integrated was included in the Filing.
On September 13, 1990, in connection with its voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code, Integrated entered into an agreement whereby it agreed to sell all of its stock in the General Partner to Meadowstar Holding Company, Inc. ("Meadowstar"). Neither the Company nor the General Partner was a party to such agreement. The sale of the stock of the General Partner to Meadowstar was approved by the Bankruptcy Court on October 22, 1990. On November 15, 1990, pursuant to the terms of the Acquisition Agreement, Meadowstar purchased all of the outstanding shares of Common Stock of the General Partner. In May 1993, Carl C. Icahn acquired all of Meadowstar's interest in the General Partner. See Note 10 pertaining to the Rights Offering consummated in March 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Financial Statements and Principles of Consolidation - The consolidated financial statements are prepared on the accrual basis of accounting and include only those assets, liabilities and results of operations which relate to the Company and the Subsidiary. All material intercompany accounts and transactions have been eliminated in consolidation.
Registration Costs, Expenses of the Exchange and Rights Offering Expenses - Registration costs of the Predecessor Partnerships were charged against partners' equity upon the closing of the public offerings in accordance with prevalent industry practice. Expenses of the Exchange were charged against partners' equity upon consummation of the Exchange. Rights Offering Expenses were charged against partners' equity upon consummation of the Right's Offering.
Net Earnings and Distributions Per Limited Partnership Unit - For financial reporting purposes, the weighted average number of depositary units and equivalent units outstanding and subscribed for assumed outstanding for the year ended December 31, 1995 was 27,467,194. For the years ended December 31, 1994 and 1993 the weighted average number of depositary units assumed outstanding was 13,812,800 and 13,889,667, respectively. There were no distributions in 1995 or 1994. Distributions were $.50 per unit in 1993.
Unit Option Plan - The Company adopted a Nonqualified Unit Option Plan (the "Plan") in 1987, which was further amended in 1989, under which options to purchase an aggregate of 1,416,910 depositary Units may be granted to officers and key employees of the General Partner and the Company who provide services to the Company. To date, no options have been granted under the Plan.
Cash and Cash Equivalents - The Company considers short-term investments, which are highly liquid with original maturities of three months or less from date of issuance, to be cash equivalents.
Included in cash and cash equivalents at December 31, 1995 and 1994 are investments in government backed securities of approximately $164,130,000 and $17,155,000, respectively.
Income Taxes - No provision has been made for Federal, state or local income taxes since the Company is a partnership and, accordingly, such taxes are the responsibility of the partners.
II-20 Leases - The Company leases to others substantially all its real property under long-term net leases and accounts for these leases in accordance with the provisions of Financial Accounting Standards Board Statement No. 13, "Accounting for Leases," as amended. This Statement sets forth specific criteria for determining whether a lease is to be accounted for as a financing lease or operating lease.
a. Financing Method - Under this method, minimum lease payments to be received plus the estimated value of the property at the end of the lease are considered the gross investment in the lease. Unearned income, representing the difference between gross investment and actual cost of the leased property, is amortized to income over the lease term so as to produce a constant periodic rate of return on the net investment in the lease.
b. Operating Method - Under this method, revenue is recognized as rentals become due and expenses (including depreciation) are charged to operations as incurred.
Properties - Properties, other than those accounted for under the financing method, are carried at cost less accumulated depreciation unless declines in the values of the properties are considered other than temporary.
For each of the years ended December 31, 1995, 1994 and 1993 no individual real estate or series of assets leased to the same lessee accounted for more than 10% of the gross revenues of the Company. At December 31, 1994 and 1993, Portland General Electric Company occupied a property, consisting of corporate offices, which represented more than 10% of the Company's total assets.
Depreciation - Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years. When properties are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the property account and the accumulated depreciation account, and any gain or loss on such sale or disposal is generally credited or charged to income (see Note 7).
Debt Placement Costs - Debt placement costs are amortized on a straight-line basis over the term of the respective indebtedness.
Use of Estimates - Management of the Partnership has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
Assets Held for Sale - Assets held for sale are carried at the lower of cost or net realizable value.
Accounting by Creditors for Impairment of a Loan - On January 1, 1995, SFAS No. 114, Accounting by Creditors for Impairment of a Loan ("Statement 114"), as amended by SFAS 118, Accounting by Creditors for Impairment of a Loan - Income Recognition Disclosures, was adopted by the Company. In accordance with these standards, if it is probable that based upon current information that a creditor will be unable to collect all amounts due according to the contractual terms of a loan agreement, the asset is considered "impaired". Reserves are established against impaired loans in amounts equal to the difference between the recorded investment in the asset and either the present value of the cash flows expected to be received, or the fair value of the underlying collateral if foreclosure is deemed probable or if the loan is considered collateral dependent. The adoption of Statement 114 and 118 had no impact on net income.
II-21 Impact of New Accounting Standards Issued, But Not Yet Adopted Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("Statement 121")
Statement 121, which was issued in March 1995 , and requires that long-lived assets and certain identifiable intangibles, and goodwill related to those assets to be held and used and long-lived assets and certain identifiable intangibles to be disposed of, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Statement 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the entity should 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 that carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss in not recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset.
This Statement generally requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell.
Statement 121 is effective for fiscal years beginning after December 15, 1995, applied prospectively. Statement 121 is not expected to have a material effect on the Company's financial condition or results of operations.
3. CONFLICTS OF INTEREST AND TRANSACTIONS WITH RELATED PARTIES
a. The General Partner and its affiliates may realize substantial fees, commissions and other income from transactions involving the purchase, operation, management, financing and sale of the Partnership's properties, subject to certain limitations relating to properties acquired from the Predecessor Partnerships in the Exchange. Some of such amounts may be paid regardless of the overall profitability of the Partnership and whether any distributions have been made to Unitholders. As new properties are acquired, developed, constructed, operated, leased, financed and sold, the General Partner or its affiliates may perform acquisition functions, development and construction oversight and other land development services, property management and leasing services, either on a day-to-day basis or on an asset management basis, and other services and be entitled to fees and reimbursement of expenses relating thereto, including the Reinvestment Incentive Fee, property management fees, real estate brokerage and leasing commissions, fees for financing either provided or arranged by the General Partner and its affiliates, development fees, general contracting fees and construction management fees. The terms of any transactions between the Company and the General Partner or its affiliates must be fair and reasonable to the Company and customary to the industry.
Reinvestment incentive fees as payment for services rendered in connection with the acquisition of properties from July 1, 1987 through July 1, 1997 were 1% of the purchase price for the first five years and are 1/2% for the second five years.
Reinvestment incentive fees are only payable on an annual basis if the sum of (x), the sales price of all Predecessor Partnerships' properties (net of associated debt which encumbered such properties at the consummation of the Exchange) sold through the end of such year, and (y), the appraised value of all Predecessor Partnerships' properties which have been financed or refinanced (and not subsequently sold), net of the amount of
II-22 any refinanced debt, through the end of such year determined at the time of such financings or refinancings, exceeds the aggregate values assigned to such Predecessor Partnerships' properties for purposes of the Exchange. If the subordination provisions are not satisfied in any year, payment of reinvestment incentive fees for such year will be deferred. At the end of each year, a new determination will be made with respect to subordination requirements (reflecting all sales, financings and refinancings from the consummation of the Exchange through the end of such year) in order to ascertain whether reinvestment incentive fees for that year and for any prior year, which have been deferred, may be paid.
From the commencement of the Exchange through December 31, 1995 the Company (i) sold or disposed of an aggregate of 140 properties of the Predecessor Partnerships for an aggregate of approximately $69,123,000, net of associated indebtedness which encumbered such properties at the consummation of the Exchange and (ii) refinanced 25 Predecessor Partnership properties with an aggregate appraised value, net of the amount of the refinanced debt, of approximately $44,431,000 for a sum total of approximately $113,554,000. Aggregate appraised values attributable to such properties for purposes of the Exchange were approximately $105,039,000. Sixteen properties have been acquired since the commencement of the exchange, including two joint ventures entered into in 1994, for aggregate purchase prices of approximately $58,000,000. Reinvestment incentive fees of approximately $354,000 have previously been paid to the General Partner, and approximately $113,000 and $15,000 are payable to the General Partner for the 1994 and 1995 acquisitions, respectively.
b. The Company and certain affiliates of its General Partner entered into an agreement with the third-party landlord of its leased executive office space. The agreement provided for the Company and these affiliates to relocate their offices to an adjacent building also owned by the landlord which relocation occurred in September 1995. In accordance with the agreement, 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. The prior lease, which was terminated, provided for approximately 6,900 square feet at an annual rental of $155,000. During the year ended December 31, 1995, the affiliates reimbursed the Company approximately $15,000 for rent in connection with the new lease.
In addition, the Company and an affiliate received a lease termination fee of $350,000 which has been allocated $175,000 to the Company and $175,000 to the affiliates. Such allocations and terms of the sublease were approved by the Audit Committee of the Board of Directors of the General Partner.
c. The Company was reimbursed by an affiliate of the General Partner for payroll and certain overhead expenses related to certain employees of the Company who provided services on a part-time basis in the amount of approximately $86,000 for the year ended December 31, 1995. Such reimbursements were approved by the Audit Committee of the Board of Directors of the General Partner.
4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE FINANCING METHOD
Real estate leased to others accounted for under the financing method is summarized as follows:
II-23
II-24 The following is a summary of the anticipated future receipts of the minimum lease payments receivable at December 31, 1995:
At December 31, 1995, approximately $213,771,000 of the net investment in financing leases was pledged to collateralize the payment of nonrecourse mortgages payable.
5. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING METHOD
Real estate leased to others accounted for under the operating method is summarized as follows:
As of December 31, 1995 and 1994, accumulated depreciation on the hotel operating properties (not included above) amounted to approximately $2,321,000 and $1,499,000, respectively (see Note 7).
The following is a summary of the anticipated future receipts of minimum lease payments under noncancelable leases at December 31, 1995:
At December 31, 1995, approximately $95,147,000 of real estate leased to others was pledged to collateralize the payment of nonrecourse mortgages payable.
II-25 6. MORTGAGES AND NOTE RECEIVABLE (See Note 2)
(a) See Note 14a.
(b) 5.75% is paid currently and 3.25% is deferred. The principal and deferred interest is payable in monthly installments from March 1999 until November 2005.
(c) 4.5% is paid currently and 4.5% is deferred until maturity.
(d) Payments are $46,931 through November 1, 1996 and $54,276 through September 1, 2001.
(e) Interest only will accrue until December 1, 2010; commencing January 1, 2011, monthly payments of $39,035 will be due, which will self-amortize the outstanding principal and current and deferred interest, with the final payment due December 1, 2019. Increased rentals on the property, if any, during the renewal term of the underlying lease will be applied against accrued interest and then the outstanding principal.
(f) On January 16, 1992, the purchase money mortgage was amended. The maturity date was extended to November 1994 and the monthly payments decreased to $27,800 commencing February 1, 1992. Under the terms of the amendment, the maturity date has been further extended to February 1997 to coincide with Easco's renewal of its lease for an additional ten years.
(g) On August 15, 1995, the Company invested approximately $7.1 million in a note receivable by purchasing a portion (approximately 1.85%) of an unsecured Senior Term Facility Agreement ("Facility Agreement"). The borrower is Queens Moat Houses P.L.C. ("Queens Moat") and certain subsidiaries. Queens Moat is a United Kingdom based hotel operator with properties in the U.K., Germany, Netherlands, France and Belgium. The Company purchased its participation portion from Lazard Freres & Co. LLC, defined as a Priority Lender in the Facility Agreement, at 71.75% of the face amount of the Company's pro rata portion of the Facility Agreement's outstanding senior advances on the acquisition date. The Facility Agreement's advances are denominated in Pounds Sterling, Deutsche Marks, Dutch Guilders, Belgian Francs and French Francs. The discount at acquisition date, based on the then existing spot rate, was approximately $2.8 million. The Facility Agreement matures December 31, 2000 and bears interest at LIBOR (London Interbank Offered Rate) plus 1.75% per annum for the relevant currencies. Interest will accrue from July 1, 1995 to June 30, 1996 which will then be
II-26 due and payable to the Company. Subsequent to June 30, 1996 interest periods and payments can vary from one month to two, three or six months at the discretion of the borrower. There are scheduled payments of the advances over the term of the loan. In addition, repayments are required when certain underlying assets are sold. During the year ended December 31, 1995, these repayments totalled approximately $102,000.
The discount at acquisition date will be amortized on a straight-line basis over the term of the Facility Agreement. For the year ended December 31, 1995, approximately $225,000 of discount was amortized. In accordance with accounting policy, foreign exchange gains and losses will be recorded each quarter based on the prevailing exchange rates at each balance sheet data. Foreign exchange gains of approximately $158,000 have been recognized and are included in "Other Income" for the year ended December 31, 1995.
The Company has generally not recognized any profit in connection with the property sales in which the above purchase money mortgages receivable were taken back. Such profits are being deferred and will be recognized when the principal balances on the purchase money mortgages are received since profit recognition was not allowed under generally accepted accounting principles at the time of sale.
7. SIGNIFICANT PROPERTY TRANSACTIONS
Information on significant property transactions during the three-year period ended December 31, 1995 is as follows:
a. On March 27, 1991, The Public Building Commission of Chicago ("Public Building Commission") commenced a condemnation proceeding against a property leased by The TJX Companies, Inc. The condemnation proceeding was settled on March 12, 1993 when the Company received approximately $4,305,000 from the tenant who purchased the property in accordance with their lease obligations. A net gain of approximately $1,575,000 was recognized on this transaction in the year ended December 31, 1993.
b. On September 16, 1991, the Company brought suit against Alco Standard Corporation and its affiliates, a former tenant of an industrial facility locate in Rome, Georgia whose lease expired in October 1990. The action was brought against the defendants in the United States District Court Northern District of Georgia, Rome Division for reimbursement of costs that could be incurred for clean-up of hazardous materials on the site and certain deferred maintenance. In July 1994, this litigation was settled and the property was sold for $525,000. A gain of approximately $100,000 was recognized in the year ended December 31, 1994. In addition, Alco reimbursed the Company for $150,000 of expenses incurred and indemnified the Company against any future liability in connection with any site contamination. The expense reimbursement has been included in "Property expenses" in the financial statements for the year ended December 31, 1994.
c. On September 27, 1991, Days Inn of America, Inc. ("Days Inn") a tenant of a property owned by the Company, located in Atlanta, Georgia, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The tenant, by order of the Bankruptcy Court, rejected the lease effective July 31, 1992. The Company submitted a claim to the Bankruptcy Court and in August 1993, it reached a settlement of this claim against Days Inn, now known as Buckhead America Corporation ("Buckhead"). As a result, the Company has received cash in the amounts of approximately $104,000, $184,000 and $730,000 in the years ended December 31, 1995, 1994 and 1993, respectively. In addition, stock in Buckhead valued at approximately $28,000 and $305,000 was received in the years ended December 31, 1995 and 1993, respectively. The total of the above amounts of approximately $132,000, $184,000 and
II-27 $1,035,000 have been included in "Other income" for the years ended December 31, 1995, 1994 and 1993, respectively. The Buckhead stock received in 1993 was disposed of in 1994 with a nominal gain.
Effective August 1, 1992, the Company engaged a management company to perform on-site and supervisory and management services. The lease rejection has adversely impacted operating cash flow by approximately $110,000 per month. In addition, the Company expects to incur costs of approximately $2,600,000, as leases are executed to renovate, build-out and re-lease the property.
d. On July 14, 1992, Integra, a Hotel and Restaurant Company ("Integra"), which leased two hotel properties located in Miami, Florida and Phoenix, Arizona filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Bankruptcy Code. The tenant's petition, previously filed with the Bankruptcy Court, to reject the aforementioned leases, was approved on August 7, 1992, and the Company assumed operation of the properties on that date. The Company has submitted a claim to the Bankruptcy Court.
At December 31, 1995, the property located in Miami Florida has a carrying value of approximately $5,475,000 and is unencumbered by any mortgages. This property is subject to a ground lease. Based on current conditions, management believes the carrying value of the Miami property is reasonably stated.
At December 31, 1995, the property located in Phoenix, Arizona has a carrying value of approximately $7,888,000 and is encumbered by a nonrecourse mortgage payable of approximately $3,255,000. This mortgage was refinanced during the year ended December 31, 1994 (see Note 8e). Based on current conditions, the management believes the carrying value of the Phoenix property is reasonably stated.
During the year ended December 31, 1993, the Company completed major renovations at the Miami and Phoenix Holiday Inns with capital expenditures totaling approximately $1,700,000 and $400,000, respectively. In connection with these renovations, approximately $250,000 of nonrecurring maintenance expenses were incurred at the Miami location. These expenses were included in hotel operating expenses for the year ended December 31, 1993. During the year ended December 31, 1995, additional capital expenditures of approximately $162,000 and $368,000 were incurred at the Miami and Phoenix Holiday Inn's, respectively. During the year ended December 31, 1994 approximately $190,000 and $240,000 were incurred at the Miami and Phoenix properties, respectively.
The Company entered into a management agreement for the operation of the hotels with a national management organization. Since August 7, 1992, the hotels have been classified as Hotel Operating Properties and their revenues and expenses separately disclosed in the Consolidated Statements of Earnings. Net hotel operations (hotel operating revenues less hotel operating expenses) totalled approximately $2,131,000, $1,781,000 and $1,195,000 for the years ended December 31, 1995, 1994 and 1993, respectively. This was approximately $29,000, $379,000 and $965,000 less than the rent would have been from the rejected leases for the years then ended, respectively. Hotel operating expenses include all expenses except for approximately $822,000, $776,000 and $509,000 of depreciation and $339,000, $456,000 and $742,000 of interest expense for the years ended December 31, 1995, 1994 and 1993, respectively. These amounts are included in their respective captions in the Consolidated Statements of Earnings. The results for the year ended December 31, 1995 are not necessarily indicative of future operating results.
e. On July 31, 1992, Chipwich, Inc. ("Chipwich"), parent of Peltz Food Corporation, a tenant in a property owned by the Company filed a voluntary petition for reorganization
II-28 pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. Chipwich then filed a motion for rejection of the lease and, pursuant to an order of the Bankruptcy Court, the lease was rejected on September 29, 1992. There was a guarantor of the lease and the Company settled its claim against the guarantor.
In 1995, the guarantor paid the company $2,200,000 in full satisfaction of its leasehold obligation which, net of related costs, resulted in approximately $2,034,000 of "Other income" in the year ended December 31, 1995. The company reclassified this property to "Property held for sale" and reduced its carrying value to net realizable value by recording a provision for loss on real estate of $611,552 in the year ended December 31, 1995.
f. During 1992, leases on two properties formerly tenanted by Petrolane, Inc. located in Belle Chasse, LA and Nisku, Alberta, Canada, expired and were re-let at rents substantially less than the previous leases. As a result, the Company previously recorded provisions for loss on real estate in the year ended December 31, 1992. In addition, after further evaluation and review, the Company believed the Belle Chasse property's carrying value at June 30, 1994 to exceed the recoverable value in the amount of $237,000. As a result, the Company recorded a provision for loss on real estate in the amount of $237,000 for the year ended December 31, 1994.
In September 1995, the Company sold the property located in Belle Chasse, LA to the current tenant pursuant to a purchase option for $575,000. A gain of approximately $116,000 was recorded in the year ended December 31, 1995. In December 1995, the properly located in Nisku, Alberta, Canada was sold to the current tenant for a sale price of approximately $730,000. A gain of approximately $6,000 was recorded in the year ended December 31, 1995.
g. On December 9, 1991, Stop N Go Markets of Texas, Inc. (National Convenience Stores, Inc.) filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Bankruptcy Code. The tenant, who previously leased twenty-three locations, filed a motion with the Bankruptcy Court to assume four leases and reject the remaining leases. Pursuant to a stipulation by the Bankruptcy Court on February 4, 1993, the tenant's motion was approved effective as of August 31, 1992. On March 19, 1993, the Company filed a proof of claim with the Bankruptcy Court. In November 1993, the Company received stock of the debtor valued at approximately $123,000 in partial settlement of its claim. This total has been included in "Other income" for the year ended December 31, 1993. In April of 1995 and May of 1994 additional stock of the debtor was received. The total value of the stock at December 31, 1995 of $120,000 is based on the lower of cost or market. In January 1996, the entire NCS stock was sold pursuant to a tender offer for proceeds totaling $364,500. A gain of approximately $245,000 will be recognized in the three months ending March 31, 1996.
In 1994, all four of the leased locations were sold. The remaining nineteen properties, whose rents totaled approximately $217,000 per year, were actively marketed for sale by the Company. During the years ended December 31, 1994 and 1993, the Company sold ten and nine of these locations, respectively. A nominal gain was recognized on the disposal of all twenty-three properties.
h. On November 2, 1992, the Company purchased approximately fifteen acres of land in East Syracuse, New York for approximately $3,500,000 and contracted to build a 116,000 square foot BJ's Warehouse Store ("BJ's") upon the site. The Company has entered into a twenty year lease with Waban, Inc. ("Waban"), the parent company of BJ's Warehouse Club. Construction was substantially completed on May 22, 1993 and Waban took possession of the premises, which is situated on approximately ten acres of land, and
II-29 commenced rental payments on that date. The lease provides for an initial annual net rental of $659,262 with CPI increases every five years, not to exceed 8.77%. Under the lease, Waban is responsible for any required structural repairs. Of the remaining five acres of adjacent land approximately 3.6 acres is available for future development by the Company.
Simultaneously with the acquisition of the property, the Company entered into a general construction contract with the seller (the "GC Agreement") pursuant to which the seller (the "Seller") was required to construct BJ's in accordance with the terms and conditions of the lease for a guaranteed maximum amount of $2,327,802. However, the construction of BJ's was subject to delays and the Seller did not meet all of its construction obligations under the GC Agreement and failed to cure such defaults. The Company sent a notice, dated February 19, 1993, terminating the GC Agreement and assumed the construction obligations. The Company contacted the surety of the GC Agreement pertaining to the site work. The surety was not responsive to the Company. The Company has determined at this point to not pursue any potential claims it may have because after further investigation, it believes such claims will not be able to be satisfied.
At December 31, 1995, the BJ's land, including related improvements, cost a total of approximately $4,877,000 and the building cost a total of approximately $3,421,000. The carrying value of this property at December 31, 1995 is approximately $8,016,000 and is encumbered by a nonrecourse mortgage payable of approximately $3,813,000. The adjacent land available for future development, including related improvements, cost a total of approximately $1,244,000. Approximately $210,000 of interest was capitalized during the year ended December 31, 1993.
A reinvestment incentive fee was paid in 1994 to the General Partner of approximately $45,000 pertaining to this acquisition and development.
The Company received permanent financing of $4,000,000 on the BJ's parcel and improvements in October 1993. (see Note 8a).
II-30 i. At December 31, 1992, the Company owned fifteen properties tenanted by Nationsbank, formerly NCNB National Bank of South Carolina. The leases on fourteen of these properties expired in December 1992 and one expired in March 1993; however, nine leases were extended to March 1993 in connection with an executed agreement (the "Agreement") entered into between the Company and the tenant to purchase and/or lease any one or more of ten locations, including the property whose lease expired in March 1993. The tenant elected to purchase four and lease six properties in accordance with the Agreement. The four properties which were sold on March 26, 1993 had a carrying value of approximately $4,357,000 and were unencumbered by any mortgage at December 31, 1992. Since the contracted selling price of approximately $5,300,000 exceeded the carrying value, the Company believed the assets were fairly stated. The six leased locations were re-let at an annual rental of approximately $214,000, a reduction of approximately $196,000 from the previous rent. As a result, the Company wrote the properties down by incurring a provision for loss on real estate for the year ended December 31, 1992. At December 31, 1995, these properties have a carrying value of approximately $2,031,000 and are unencumbered by any mortgage.
Of the remaining five properties whose leases were not extended, one was sold on January 20, 1993. Another property, whose carrying value at December 31, 1992 was $357,000 was written down by incurring a provision for loss on real estate in the amount of $182,000 in the three months ended March 31, 1993 and subsequently sold on April 15, 1993. The other three properties were sold during the year ended December 31, 1994.
j. On January 26, 1993, Be-Mac Transport Company, Inc. ("Be-Mac"), a tenant in a property owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. Be-Mac then filed a motion for rejection of the lease and, pursuant to an order of the Bankruptcy Court, the lease was rejected on February 24, 1993. There was a guarantor of the lease and the Company settled its unsecured proof of claim filed by the Company for $377,000 in May 1995. As a result, approximately $331,000, net of related costs, of "Other income" was recognized in the year ended December 31, 1995. Based on the purchase option price contained in the rejected lease, the Company wrote the property down by incurring a provision for loss on real estate in the amount of $196,000 in the year ended December 31, 1993. At December 31, 1995, the property has a carrying value of $927,000 and is unencumbered by any mortgage. The Company re-let the property effective March 1, 1994 at an annual rental of $120,000.
k. On July 31, 1993, the Company held a nonrecourse mortgage in the amount of approximately $3,456,000 secured by four properties tenanted by Toys "R" Us, Inc. The mortgage had been taken back by a Predecessor Partnership in connection with the sale of such properties. The tenant remained current in its obligations under the lease. The terms of the mortgage called for a balloon payment of approximately $3,456,000 on January 1, 1993 which was not received. The Company reacquired these properties in satisfaction of such mortgage and as of August 1, 1993 real estate with a carrying value of approximately $5,883,000 and a nonrecourse mortgage payable with a balance of approximately $2,904,000 were recorded. No gain or loss resulted upon foreclosure because the estimated fair value of the properties exceeded their carrying value. These properties have a carrying value of approximately $5,734,000 and are encumbered by a nonrecourse mortgage payable of approximately $3,235,000 at December 31, 1995. See Note 8d concerning the mortgage refinancing in 1994.
II-31 l. On December 31, 1992, the Company held four nonrecourse wrap-around mortgages in the amount of approximately $7,689,000 secured by four properties tenanted by The Wickes Corp. The mortgages had been taken back by a Predecessor Partnership in connection with the sale of such properties. The tenant remained current in its obligations under the lease. However, the Company did not receive monthly debt service payments on these mortgages from the purchaser. Additionally, the terms of mortgages called for balloon payments of approximately $7,689,000 on January 1, 1993 which were not received. However, the tenant had previously purchased one property from the debtor and in January 1993, the tenant paid the balloon mortgage due on the property net of the underlying first mortgage, which it assumed. A gain of approximately $1,371,000 was recognized on this transaction in the year ended December 31, 1993.
In addition, the debtor paid the balloon mortgage due on one property, net of the underlying first mortgage in August of 1993. A gain of approximately $784,000 was recognized in the year ended December 31, 1993.
In January 1994, the debtor paid the balloon mortgage due, net of the underlying first mortgage, on one Wickes property and a gain of approximately $1,238,000 was recognized in the year ended December 31, 1994. In addition, the Company foreclosed on the remaining Wickes property in January 1994 and real estate with a carrying value of approximately $643,000 was recorded in the year ended December 31, 1994. No gain or loss was incurred upon foreclosure because the estimated fair value of the property is equal to its carrying value. The mortgage balance on this remaining property is approximately $538,000 at December 31, 1995.
m. On June 17, 1993, the Company purchased two non-performing mortgage loans for a combined price of $13,000,000. Each loan was collateralized by a residential apartment complex located in Lexington, Kentucky. The face value of the non-performing loans was approximately $21,188,000.
The first non-performing loan, purchased for $6,990,000, was collateralized by a 396 unit multi-family complex. The Company foreclosed on this property ("Stoney Falls"), and received the deed on October 11, 1993. The Company has entered into a management agreement for the operation of this property with a national management organization which began operating the property effective September 1, 1993. Subsequent to the acquisition, the Company received distributions from the receiver and cash flow from the property pertaining to the period prior to formal foreclosure, net of expenditures incurred by the Company, which have been applied as a reduction to the initial cost of the loan. This net cash flow, subsequent to the acquisition, totalled approximately $94,000. During the year ended December 31, 1994, the Company completed major renovations which totalled approximately $1,360,000. In connection with these renovations, approximately $350,000 of non recurring maintenance expenses where incurred. These expenses are included in "Property expenses" for the year ended December 31, 1994. During the year ended December 31, 1995, approximately $267,000 of capital expenditures were incurred. This asset has a carrying value of approximately $8,132,000 and is encumbered by a nonrecourse mortgage payable of approximately $5,438,000 at December 31, 1995.
The second non-performing loan, purchased for $6,010,000, is collateralized by a 232 unit apartment complex. Foreclosure proceedings were initiated in April 1993 resulting in the debtor filing for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The Company executed an agreement with the borrower, which was approved by the Bankruptcy Court, and foreclosed on this property ("Stoney Brooke") and received the deed on February 11, 1994. Subsequent to the acquisition, the Company received distributions from the seller of the note and began to receive cash flow
II-32 from the property pertaining to the period prior to formal foreclosure, net of expenditures incurred by the Company, which have been applied as a reduction to the initial cost of the loan. This cash flow, net of expenditures incurred by the Company, totalled approximately $735,000. This property at December 31, 1995 has a carrying value of approximately $5,130,000 and is encumbered by a nonrecourse mortgage payable of approximately $4,449,000.
A reinvestment incentive fee of approximately $65,000 was paid to the General Partner in 1994. (See Note 3).
See Note 8f in connection with the mortgage financing of these two properties in 1994.
n. In March 1994, the Company foreclosed on the property tenanted by Webcraft Technologies and KSS Transportation. As a result, real estate with a carrying value of approximately $626,000 was recorded in the year ended December 31, 1994. No gain or loss was incurred upon foreclosure because the estimated fair value of the property is believed to exceed its carrying value.
II-33 o. In June 1994, the Company sold a property to the tenant, Lockheed Sanders, Inc. The property, which was located in Plainfield, N.J., was subject to a purchase option which was exercised. The selling price was $5,625,000 and a gain of approximately $1,961,000 was recognized in the year ended December 31, 1994. The property was unencumbered by any mortgage.
p. The Company entered into two joint ventures in June 1994 with unaffiliated co-venturers for the purpose of developing luxury garden apartment complexes. Both of these joint ventures have been consolidated in the accompanying financial statements.
1. The first joint venture, formed as an Alabama Limited Liability Company, developed a 240 unit multi-family project situated on approximately twenty acres, currently owned by the joint venture, located in Hoover, Alabama, a suburb of Birmingham. The Company, which owns a seventy percent (70%) majority interest in the joint venture, contributed $1,750,000 in June 1994 and the co-venturer contributed $250,000. As of December 31, 1995 and 1994 approximately $220,000 and $250,000, respectively, representing the minority interest of the co-venturer has been included in "Accounts payable, accrued expenses, and other liabilities" in the accompanying financial statements. Distributions will be made in proportion to ownership interests. The co-venturer will be credited with $500,000 of additional capital in lieu of receiving a general contractor's fee. Permanent financing has been obtained by the joint venture in the amount of $8,860,000 of which $360,000 is guaranteed by the co-venturer and personally by its principals. The Company funded approximately $140,000 of $200,000 of approved additional improvements with the co-venturer funding the balance. The complex was completed in September 1995, and all rental units were available for occupancy. As of February 1996, approximately 83% of the units are leased. The development totalled approximately $10,889,000, including the acquisition of land valued at approximately $1,138,000. An affiliate of the Company's co-venturer is managing the property.
For the year ended December 31, 1995, net rental operations resulted in a loss of approximately $301,000, including approximately $289,000 of depreciation and amortization, before consideration of the co-venturer's minority interest in such loss of approximately $90,000.
A reinvestment incentive fee of approximately $38,000 is due the general partner upon completion of the project (see Note 3).
2. The second joint venture, a Delaware limited partnership, is developing a 288 unit multi-family project situated on approximately thirty-three acres in Cary, North Carolina (Raleigh-Durham area). The Company, which owns a ninety percent (90%) majority interest in the partnership, has contributed approximately $4,022,000 as of December 31, 1995 and is a limited partner. The Company has fulfilled its contribution obligation. The co-venturer is the general partner and has a limited partner interest. The Company is entitled to a cumulative annual preferred return of 12% on its investment before cash distributions are made in proportion to ownership interests. Construction financing has been obtained by the joint venture in the amount of $12,205,000 and is guaranteed by the joint venture general partner and personally by its principals. The development costs are expected to total approximately $16,100,000. As of December 31, 1995, approximately $12,216,000 of development costs have been incurred of which approximately $6,988,000 represents completed rental units, including the acquisition of land valued at $1,600,000. Construction loan funding at December 31, 1995 was
II-34 approximately $7,834,000. The first units were available for occupancy in October 1995 and project completion is scheduled for July 1996. As of March 1996, approximately 29% of the rental units are leased. An affiliate of the Company's co-venturer is managing the property.
For the year ended December 31, 1995, net rental operations resulted in a loss of approximately $115,000, including approximately $87,000 of depreciation and amortization.
A reinvestment incentive fee of approximately $70,000 will be due the Company's general partner upon completion of the project (see Note 3).
q. On February 1, 1995, the Penske Corp. exercised its purchase option on three properties leased from the Company (two in New Jersey and one in New York). The selling price was approximately $4,535,000 and a gain of approximately $1,003,000 was recognized in the year ended December 31, 1995. Each property was encumbered by first and second mortgages which totalled approximately $1,152,000 and which were paid from the sales proceeds.
r. On March 24, 1995, the Company sold the property tenanted by Pace Membership Warehouse, Inc. in Taylor, Michigan. The selling price was $9,300,000 and a gain of approximately $3,307,000 was recognized in the year ended December 31, 1995. The property was encumbered by a nonrecourse mortgage payable of approximately $4,346,000 which the purchaser assumed.
s. On May 18, 1995, the Company purchased approximately 248 acres of partially improved land located in Armonk, New York. The purchase price was approximately $3,044,000. The Company intends to construct approximately 45 to 50 single-family detached luxury homes subject to subdivision and other required approvals. No material development costs have yet been incurred.
A reinvestment incentive fee of approximately $15,000 is payable to the Company's general partner (see Note 3).
t. On June 28, 1995, General Signal Technology Corporation, a tenant of a property located in Andover, Massachusetts exercised its rights under the lease to purchase the property. The selling price was approximately $19,808,000 and a loss of approximately $125,000 was recognized in the year ended December 31, 1995. The property was encumbered by two nonrecourse mortgages payable which totalled approximately $10,670,000 and were paid from the sales proceeds.
II-35 8. MORTGAGES PAYABLE
At December 31, 1995, mortgages payable, all of which are nonrecourse to the Company, are summarized as follows:
The following is a summary of the anticipated future principal payments of the mortgages:
a. On October 18, 1993, the Company obtained permanent financing on the BJ's property in East Syracuse, New York. The nonrecourse loan is in the principal amount of $4,000,000, bears interest at 8.25% per annum, and matures October 31, 1998 at which time the Company has the option to extend the loan for one to five years, providing certain conditions are met. The monthly debt service is approximately $34,000. Debt placement costs of approximately $156,000 have been incurred.
b. On December 13, 1993, the Company prepaid a mortgage with an outstanding balance of $3,038,346 that encumbered a property tenanted by the Lockheed Corporation, located in Burbank, CA. This mortgage was scheduled to mature on February 1, 1996 and bore interest at 16%. Prepayment penalties of approximately $91,000 were incurred.
c. On December 22, 1993, the Company refinanced a nonrecourse mortgage loan which had an outstanding principal balance of approximately $7,613,000. This mortgage encumbered a property tenanted by Super Foods Services, Inc. It was scheduled to mature on October 1, 2010 and bore interest at 11.076%. The new mortgage loan which is self-liquidating is in the principal amount of $7,650,000, bears interest at 8.25% per annum, and matures August 1, 2010. Debt placement costs of approximately $333,000 and prepayment penalties of approximately $76,000 were incurred. The new annual debt service of approximately $846,000 reflects a decrease of $156,000 and initial interest savings of approximately $215,000 in 1994.
II-36 d. On March 4, 1994, the Company paid off one nonrecourse mortgage loan and refinanced two nonrecourse mortgage loans that encumbered a total of seven properties tenanted by Toys "R" Us. The loan paid off, which encumbered one property, had an outstanding principal balance of approximately $616,000, bore interest at 10.375%, and was callable at the lender's option in 1994. The two loans refinanced had outstanding principal balances of approximately $1,550,000 and $2,863,000, bore interest at 9.25% and 9.55%, were self-liquidating, and were callable at the lender's option in 1995 and 1996, respectively. The two new mortgage loans, in the principal amounts of approximately $1,464,000 and $3,636,000, bear interest at 7.08%, are self-liquidating and mature January 15, 2012. Debt placement costs of approximately $226,000 have been incurred. The new annual debt service of approximately $532,000 reflects a decrease of approximately $89,000.
e. A balloon payment of approximately $6,266,000 was originally due June 1, 1994 on a nonrecourse mortgage which encumbered the Holiday Inn in Phoenix, Arizona; however, the Company paid off approximately $2,966,000 on that date and was granted an extension on the remaining balance. The interest rate was 10.75%. On June 27, 1994 the Company refinanced the remaining balance with a nonrecourse mortgage loan in the amount of $3,300,000. The new mortgage loan matures July 27, 1999, bears interest at 10.35% and has a balloon payment due at maturity of approximately $3,120,000. Debt placement costs of approximately $143,000 were incurred. The new annual debt service is approximately $370,000.
f. On July 25, 1994 the Company obtained financing on the two apartment complexes located in Lexington, Kentucky. The two nonrecourse mortgage loans in the amount of $5,500,000 and $4,500,000 for Stoney Falls and Stoney Brooke Apartments, respectively, bear interest at 8.375% and mature in ten years when balloon payments totaling approximately $8,150,000 will be due. Under the terms of the loans, $100,000 was initially funded on each loan with the balance funded in January 1995. Debt placement costs of approximately $250,000 have been incurred. Annual debt service on the two loans is approximately $956,000.
g. On December 9 and 23, 1994, the Company prepaid the first and second mortgages, respectively, with aggregate outstanding balances of approximately $3,364,000 which encumbered a property tenanted by Chomerics, Inc. located in Woburn, Massachusetts. The first and second mortgages were scheduled to mature August 1, 2011 and February 1, 2005, respectively, and both bore interest at 13.875%. The first mortgage was callable August 1, 1996.
9. SENIOR INDEBTEDNESS
On May 27, 1988, the Company closed a $50,000,000, 10-year senior unsecured debt financing. The notes bear interest at 9.6%, payable semiannually, 2% of which may be deferred and added to the principal at the Company's option during the first five years. During 1993 $546,842 was added to the principal of the note. In May 1994 and 1995, the Company repaid $10,000,000 and approximately $11,308,000 of the outstanding principal balance of the notes, respectively. The Company is required to make principal repayments of approximately $11,308,000 in each of the years 1996 through 1998.
The note agreements also place limitations on the Company with respect to, among other things, additional debt and the use of proceeds from property sales. In addition, distributions and the amounts used to purchase partnership interests cannot exceed cash flow, as defined in the agreements, plus $15,000,000. The Company is also required to maintain, among other things, specified levels of (i) net annual rentals, as defined in the agreements, on properties
II-37 unencumbered by mortgage financing and (ii) net cash flow.
10. RIGHTS OFFERING
A registration statement relating to the Rights Offering was filed with the Securities and Exchange Commission and declared effective February 23, 1995.
On March 1, 1995, the Company issued to record holders of its Depositary Units one transferable subscription right (a "Right"), for each seven Depositary Units of the Company held on February 24, 1995, the record date. The Rights entitled the holders thereof (the "Rights Holders") to acquire during the subscription period at a subscription price of $55, six Depositary Units and one 5% cumulative pay-in-kind redeemable preferred unit representing a limited partner interest ("Preferred Units"). The subscription period commenced on March 1, 1995 and expired at the close of business on March 30, 1995.
The Preferred Units have certain rights and designations, generally as follows. Each Preferred Unit will have a liquidation preference of $10.00 and will entitle the holder thereof to receive distributions thereon, payable solely in additional Preferred Units, at the rate of $.50 per Preferred Unit per annum (which is equal to a rate of 5% of the liquidation preference thereof), payable annually on March 31 of each year (each, a "Payment Date"), commencing March 31, 1996. On any Payment Date commencing with the Payment Date on March 31, 2000, the Company with the approval of the Audit Committee of the Board of Directors of the General Partner may opt to redeem all, but not less than all, of the Preferred Units for a price, payable either in all cash or by issuance of additional Depositary Units, equal to the liquidation preference of the Preferred Units, plus any accrued but unpaid distributions thereon. On March 31, 2010, the Company must redeem all, but not less than all, of the Preferred Units on the same terms as any optional redemption.
1,975,640 Rights were issued in the Rights Offering of which 418,307 were exercised. 190,554 Depositary Units and 31, 759 Preferred Units were subscribed for through the exercise of the Over-Subscription Privilege by Rights Holders other than High Coast Limited Partnership ("High Coast"), a Delaware limited partnership.
High Coast acted as guarantor for the Rights Offering and is an affiliate of Carl C. Icahn, ("Icahn"), the Chairman of American Property Investors, Inc., ("API"), the general partner of the Company. API is also the general partner of the guarantor and the two limited partners are affiliates of and are controlled by Icahn. Pursuant to its subscription guaranty, High Coast oversubscribed for a total of 9,343,998 Depositary Units and 1,557,333 Preferred Units. As a result, the Rights Offering was fully subscribed. The proceeds received by the Company, after deduction of expenses of approximately $1.1 million incurred by the Company in connection with the Rights Offering, were approximately $107.6 million.
In addition, in accordance with the terms of the Company's and its subsidiary's partnership agreements, API was required to contribute $2,206,242 in order to maintain its aggregate 1.99% general partnership interest.
On April 12, 1995, the Company received $108,660,200, the gross proceeds of the Rights Offering, from its subscription agent and $2,206,242 from API. The Company issued 1,975,640 Preferred Units and an additional 11,853,840 Depositary Units. Trading in the Preferred Units commenced March 31, 1995 on the New York Stock Exchange ("NYSE") under the symbol "ACP PR". The Depositary Units trade on the NYSE under the symbol "ACP".
As of March 6, 1996, High Coast owns 1,741,688 Preferred Units and 12,991,312 Depositary
II-38 Units.
11. EARNINGS PER SHARE
Net earnings per limited partnership unit and equivalent partnership units are computed using the weighted average number of units and equivalent units outstanding during the period. The earnings per share calculation for the year ended December 31, 1995 assumes the Depositary and Preferred Units subscribed for in the Rights Offering were outstanding at the beginning of the year. Also, with respect to the year ended December 31, 1995 calculation, net income has been increased by approximately $2,100,000 in accordance with the modified treasury stock method. The dilutive effect of preferred units and the pro rata quarterly portion of the annual pay-in-kind distribution to preferred Unitholders have been included in the earnings per share calculation, as calculated under the effective yield method, as equivalent depositary units (see Note 10).
12. RECONCILIATION OF NET EARNINGS PER FINANCIAL STATEMENTS TO TAX REPORTING
II-39
13. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT DATA)
Net earnings per unit is computed separately for each period and, therefore, the sum of such quarterly per unit amounts may differ from the total for the year.
(1) Includes the issuance of additional Partnership units and equivalent units in 1995.
14. COMMITMENTS AND CONTINGENCIES
a. On December 31, 1995, the Company held a mortgage note receivable in the principal amount of $96,938. The mortgage encumbers one property together with a collateral assignment of the ground lease and rent. The property is tenanted by Gino's. The mortgage had been taken back by a Predecessor Partnership in connection with the sale of this property and seven other properties. The tenant has remained current in its lease obligations.
The terms of the mortgage called for a balloon payment of $1,100,000 on January 1, 1992 which was not received. On January 9, 1992, the Company gave written notice of default to Sheldon Lowe and Joseph T. Comras, the mortgagors and the current owners at that date of the eight properties. As of December 31, 1995, the Company has commenced
II-40 foreclosure action on the Gino's property which is located in Pennsylvania. The Company foreclosed on the property in Michigan on October 7, 1993 and real estate with carrying value of approximately $70,000 was recorded in the year ended December 31, 1993. On February 25, 1994 the Company foreclosed on the previously encumbered property formerly tenanted by Lionel Leisure located in Pennsylvania. In September 1994, this property was sold and no gain or loss was incurred upon disposition. In October 1994, the Company foreclosed on two properties located in Massachusetts and real estate with a carrying value of approximately $102,000 was recorded in the year ended December 31, 1994. During the year ended December 31, 1995, the Company completed foreclosure actions on three properties (one in Pennsylvania and two in New Jersey), tenanted by Gino's and Foodarama. As a result, real estate with a carrying value of approximately $256,000 was recorded. No gain or loss was incurred or is anticipated upon foreclosure because the estimated fair value of the properties exceeds their carrying value.
b. Lockheed Missile and Space Company, Inc. ("Lockheed"), a tenant of the Company's leasehold property in Palo Alto, California, has entered into a consent decree with the California Department of Toxic Substances Control ("CDTS") to undertake certain environmental remediation at this property. Lockheed has estimated that the environmental remediation costs may be up to approximately $14,000,000. In a non-binding determination by the CDTS, Lockheed was found responsible for approximately 75% of such costs and the balance was allocated to other parties. The Company was allocated no responsibility for any such costs.
Lockheed has served a notice that it may exercise its statutory right to have its liability reassessed in a binding arbitration proceeding. In connection with this notice, Lockheed has stated that it will attempt to have allocated to the Company and to the Company's ground-lessor (which may claim a right of indemnity against the Company) approximately 9% and 17%, respectively, of the total remediation costs. The Company believes that it has no liability for any of such costs, and in any proceeding in which such liability is asserted against it, the Company will vigorously contest such liability. In the event any of such liability is allocated to the Company, it will seek indemnification from Lockheed in accordance with its lease.
c. On January 25, 1995, the Grand Union Company, a tenant leasing eight properties owned by the Company, filed a prepackaged voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. These eight properties' annual rentals total approximately $1,450,000 (including two properties which are sublet, representing approximately $58,000 in annual rentals). The tenant is current in its obligations under the lease. The tenant rejected the lease on one property located in Waterford, NY effective July 31, 1995 by order of the Bankruptcy Court on June 6, 1995. The annual rent for this property was approximately $103,000. The Company is now actively marketing this property for sale and believes the property's carrying value of $1,057,149 at December 31, 1995 to exceed its estimated net realizable value by $157,149, for which a provision for loss on real estate was recorded in the year then ended.
In June 1995, the tenant emerged from Bankruptcy. The tenant affirmed five of the seven remaining leases and allowed the two sub-let property's leases to remain in effect. At December 31, 1995, the carrying value of these seven properties is approximately $11,203,000. One of these properties is encumbered by a nonrecourse mortgage payable of approximately $4,672,000. The Company has filed a proof of claim with the Bankruptcy Court for the rejected lease.
II-41 d. On June 23, 1995, Bradlees Stores, Inc., a tenant leasing four properties owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The annual rentals for these four properties is approximately $1,320,000. The tenant is current in its obligations under the leases. The tenant has not yet determined whether it will exercise its right to reject or affirm the leases which will require an order of the Bankruptcy Court. There are existing assignors who are still obligated to fulfill all of the terms and conditions of the leases.
At December 31, 1995, the carrying value of these four properties is approximately $7,537,000. Two of the properties are encumbered by nonrecourse mortgages payable of approximately $2,031,000.
e. 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 annual rental for this property is approximately $248,000. The tenant is current in its obligations under the lease with the exception of approximately $12,000 of prepetition rent. The tenant has not yet determined whether it will exercise its right to reject or affirm the leases which will require an order of the Bankruptcy Court. At December 31, 1995, the property has a carrying value of approximately $2,005,000 and is unencumbered by any mortgage.
15. PROPERTY HELD FOR SALE
At December 31, 1995, the Company owned seven properties that were being actively marketed for sale. At December 31, 1995, these properties have been stated at the lower of their carrying value or net realizable value. The aggregate value of the properties is estimated to be approximately $1,983,000, after incurring a provision for loss on real estate in the amount of $157,149 in the year ended December 31, 1995 (see Note 14c). At December 31, 1994, the aggregate value of the properties was estimated to be approximately $413,000 after incurring a provision for loss on real estate in the amount of approximately $85,000 in the year then ended.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable, Construction Loans Payable, Mortgages Payable and Accounts Payable and Accrued Expenses
The carrying amount of cash and cash equivalents, accounts receivable, construction loans payable, mortgages payable and accounts payable and accrued expenses are carried at cost, which approximates their fair value.
Mortgages Receivable
The fair values of the mortgages receivable past due, in process of foreclosure, or for which foreclosure proceedings are pending, are based on the discounted cash flows of the underlying lease. The fair values of the mortgages receivable satisfied subsequent to year end are based on the amount of the net proceeds received.
The fair values of the mortgages receivable which are current are based on the discounted cash flows of their respective payment streams.
The approximate estimated fair values of the mortgages receivable held as of December 31, 1995 are summarized as follows:
II-42
The net investment at December 31, 1995 is equal to the carrying amount of the mortgage receivable less any deferred income recorded.
Senior Indebtedness
The approximate fair value and carrying value of the Company's senior indebtedness at December 31, 1995 is $34,106,000 and $33,923,000, respectively. The estimated fair value is based on the amount of future cash flows associated with the instrument discounted using the rate at which the Company believes it could currently replace the senior indebtedness.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
17. DISTRIBUTIONS PAYABLE
Distributions payable represent amounts accrued and unpaid due to non-consenting investors ("Non-consents"). Non-consents are those investors who have not yet exchanged their limited partnership interest in the various Predecessor Partnerships for limited partnership units of American Real Estate Partners, L.P.
18. SUBSEQUENT EVENTS
a. On January 10, 1996, Rickel Home Centers, Inc., a tenant leasing a property owned by the Company, filed a voluntary petition for reorganization pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. This property's annual rental totals approximately $90,000. The tenant has not yet determined whether it will exercise its right to reject or affirm the lease which will require an order of the Bankruptcy Court. The tenant is current in its obligations under the lease.
b. On January 11, 1996, Forte Hotels, Inc. ("Forte") a/k/a Travelodge, a tenant in a property owned by the Company entered into a Lease Termination and Mutual Release Agreement ("Agreement"). This Agreement terminated the lease, which was due to expire on June 30, 1996, effective January 17, 1996 and required Forte to pay the Company $2,800,000 in consideration of the early lease termination and certain deferred maintenance items. In addition, this property was encumbered by two mortgages. The first mortgage with a principal balance of approximately $84,000 was paid off on January 18, 1996. The
II-43 second mortgage with a principal balance of approximately $231,000 was paid off March 1, 1996.
As a result of the above settlement and mortgage payoffs, the Company will recognize "Other income" of approximately $2,700,000, net of related costs, in the quarter ended March 31, 1996. The carrying value of this property at December 31, 1995 is approximately $762,000. The Company believes that the carrying value of the asset is fairly stated at December 31, 1995.
II-44 Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
II-45 PART III
Item 10.

Item 10. Directors and Executive Officers of AREP.
The names, offices held and the ages of the directors and executive officers of the General Partner are as follows:
Carl C. Icahn has been Chairman of the Board of the General Partner since November 15, 1990. He is also President and a Director of Starfire Holding Corporation (formerly Icahn Holding Corporation), a Delaware corporation ("SHC") and Chairman of the Board and a Director of various of SHC's subsidiaries, including ACF Industries, Inc., a New Jersey corporation ("ACF"). SHC is primarily engaged in the business of holding, either directly or through subsidiaries, a majority of the common stock of ACF and its address is 100 South Bedford Road, Mount Kisco, New York 10549. Mr. Icahn has also been Chairman of the Board of Directors of ACF since October 29, 1984 and a Director of ACF since June 29, 1984. ACF is a railroad freight and tank car leasing, sales and manufacturing company. He has also been Chairman of the Board of Directors and President of Icahn & Co., Inc. since 1968. Icahn & Co., Inc. is a registered broker-dealer and a member of the National Association of Securities Dealers. In 1979, Mr. Icahn acquired control and presently serves as Chairman of the Board of Directors of Bayswater Realty & Capital Corp., which is a real estate investment and development company. ACF, Icahn & Co., Inc. and Bayswater Realty & Capital Corp. are deemed to be directly or indirectly owned and controlled by Carl C. Icahn. Mr. Icahn was Chief Executive Officer and Member of the Office of the Chairman of Trans World Airlines, Inc. ("TWA") from November 8, 1988 to January 8, 1993; Chairman of the Board of Directors of TWA from January 3, 1986 to January 8, 1993 and Director of TWA from September 27, 1985 to January 8, 1993. Mr. Icahn also has substantial equity interests in and controls various partnerships and corporations which invest in publicly traded securities.
Alfred D. Kingsley has served as Director of the General Partner since November 15, 1990. He was also Vice Chairman of the Board of Directors of TWA from February 1, 1989
III-1 to January 8, 1993 and a Member of the Office of the Chairman from November 8, 1988 to January 8, 1993. Mr. Kingsley was a Director of TWA from September 27, 1985 to January 8, 1993. He also was a Director and Executive Officer and Director of Research at Icahn & Co., Inc. and related entities from 1968 until December 1994. He also has been Vice Chairman of the Board of Directors of ACF since October 29, 1984 and a Director of ACF since June 29, 1984. Mr. Kingsley has also been a Senior Managing Director of Greenway Partners, L.P. since May 1993, which invests in publicly traded securities.
Mark H. Rachesky, M.D. has served as Director of the General Partner since November 15, 1990 and as Vice President since November 29, 1990. Beginning February 1990, Dr. Rachesky acted as a senior investment advisor to Carl C. Icahn and his affiliated companies and shortly thereafter, he became their chief investment officer. Dr. Rachesky is also the sole Managing Director of Starfire Holding Corporation, which is responsible for substantially all of Mr. Icahn's investment activities. Dr. Rachesky has been a director of Samsonite Corporation since June 1993, and is also a director of Culligan Water Technologies, Inc. since its spin-off from Samsonite in August 1995. From August 1993, Dr. Rachesky has served as a director of Cadus Pharmaceutical Corporation. From June 1987 to February 1990, Dr. Rachesky was employed by an affiliate of the Robert M. Bass Group, Inc. where he was involved in financing and investment activity. Dr. Rachesky is a graduate of the Stanford University School of Medicine and School of Business.
William A. Leidesdorf has served as Director of the General Partner since March 26, 1991. Since April 1995, Mr. Leidesdorf has acted as an independent real estate investment banker. From January 1, 1994 through April 1995, Mr. Leidesdorf was Managing Director of RFG Financial, Inc., a commercial mortgage company. From September 30, 1991 to December 31, 1993, Mr. Leidesdorf was Senior Vice President of Palmieri Asset Management Group. From May 1, 1990 to September 30, 1991, Mr. Leidesdorf was Senior Vice President of Lowe Associates, Inc., a real estate development company, where he was involved in the acquisition of real estate and the asset management workout and disposition of business areas. He also acted as the Northeast Regional Director for Lowe Associates, Inc. From June 1985 to January 30, 1990, Mr. Leidesdorf was Senior Vice President and stockholder of Eastdil Realty, Inc., a real estate company, where he was involved in the asset management workout, disposition of business and financing areas. During the interim period from January 30, 1990 through May 1, 1990, Mr. Leidesdorf was an independent contractor for Eastdil Realty, Inc. on real estate matters.
Jack G. Wasserman has served as a Director of the General Partner since December 3, 1993. Mr. Wasserman is an attorney and a member of the New York State Bar and has been with the New York based law firm of Wasserman, Schneider & Babb since 1966, where he is currently a senior partner.
John P. Saldarelli has served as Vice President, Secretary and Treasurer of the General Partner since March 18, 1991. Mr. Saldarelli was also President of Bayswater Realty Brokerage Corp. from June 1987 until November 19, 1993 and Vice President of Bayswater Realty & Capital Corp. from September 1979 until April 15, 1993, both of which are deemed to be directly or indirectly owned and controlled by Carl C. Icahn.
III-2 William Leidesdorf and Jack G. Wasserman are on the Audit Committee of the Board of Directors of the General Partner.
Each of Messrs. Icahn and Kingsley served on the Board of Directors of TWA. On January 31, 1992, TWA filed a petition for bankruptcy in the U.S. Bankruptcy Court in Delaware, seeking reorganization under Chapter 11 of the Bankruptcy Code. In connection therewith, the Pension Benefit Guaranty Corporation asserted that there existed in the TWA defined benefit plans an underfunding deficiency, and that if the Plans were terminated, TWA and all members of the controlled group of which TWA was a member, including the General Partner, would be liable, jointly and severally, for approximately $1.2 billion. On January 8, 1993, TWA, the Pension Benefit Guaranty Corporation, Mr. Icahn and the members of the controlled group, among others, settled all claims and potential claims which they had against each other.
Each executive officer and director will hold office until the next annual meeting of the General Partner and until his or her successor is elected and qualified. Effective June 15, 1993, directors who are not employed by AREP or certain affiliates, receive fees of $3,000 for attendance at each quarterly meeting of the Board of Directors. Mr. Kingsley, Mr. Leidesdorf and Mr. Wasserman each received $12,000 for attendance at meetings in 1995.
Each of the executive officers of the General Partner performs services for other affiliates of the General Partner.
There are no family relationships between or among any of the directors and/or executive officers of the General Partner.
If distributions (which are payable in kind) are not made to the holders of Preferred Units on any two Payment Dates (which need not be consecutive), the holders of more than 50% of all outstanding Preferred Units, including the General Partner and its affiliates, voting as a class, will be entitled to appoint two nominees for the Board of Directors of the General Partner. Holders of Preferred Units owning at least 10% of all outstanding Preferred Units, including the General Partner and its affiliates to the extent that they are holders of Preferred Units, may call a meeting of the holders of Preferred Units to elect such nominees. Once elected, the nominees will be appointed to the Board of Directors of the General Partner by Icahn. As directors, the nominees will, in addition to their other duties as directors, be specifically charged with reviewing all future distributions to the holders of the Preferred Units. Such additional directors shall serve until the full distributions accumulated on all outstanding Preferred Units have been declared and paid or set apart for payment. If and when all accumulated distributions on the Preferred Units have been declared and paid or set aside for payment in full, the holders of Preferred Units shall be divested of the special voting rights provided by the failure to pay such distributions, subject to revesting in the event of each and every subsequent default. Upon termination of such special voting rights attributable to all holders of Preferred Units with respect to payment of distributions, the term of office of each director nominated by the holders of Preferred Units (the "Preferred Unit Directors") pursuant to such special voting rights shall terminate and the number of directors constituting the entire Board of Directors shall be reduced by the number of Preferred Unit Directors. The holders of the Preferred Units have no other
III-3 rights to participate in the management of AREP and are not entitled to vote on any matters submitted to a vote of the holders of Depositary Units.
Filing of Reports
To the best of AREP's knowledge, no director, executive officer or beneficial owner of more than 10% of AREP's Depositary Units failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended, during the year ended December 31, 1995.
Item 11.

Item 11. Executive Compensation. (1)
The following table sets forth information in respect of the compensation of the Chief Executive Officer and each of the other four most highly compensated executive officers of AREP for services in all capacities to AREP for the fiscal years ended December 31, 1995, 1994 and 1993. (2)
SUMMARY COMPENSATION TABLE Annual Compensation
- --------------------
(1) Pursuant to applicable regulations, certain columns of the Summary Compensation Table and each of the remaining tables have been omitted, as there has been no compensation awarded to, earned by or paid to any of the named executive officers by AREP or by the General Partner, which was subsequently reimbursed by AREP, required to be reported in those columns or tables.
(2) Carl C. Icahn, the Chief Executive Officer, received no compensation as such for the periods indicated. In addition, other than John P. Saldarelli, no other executive officer received compensation in excess of $100,000 from AREP for the applicable period.
(3) On March 18, 1991, Mr. Saldarelli was elected Vice President, Secretary and Treasurer of the General Partner. Mr. Saldarelli devotes substantially all of his time to the performance of services for AREP and the General Partner. The other executive officers and directors of the General Partner devote only a portion of their time to performance of services for AREP.
III-4 AREP has adopted a Nonqualified Unit Option Plan (the "Plan") pursuant to which options to purchase an aggregate of 1,416,910 Depositary Units at an option price equal to the market price on the date of grant may be granted to officers and key employees of the General Partner and AREP who provide services to AREP. To date, no options have been granted under the Plan.
In February 1993, AREP adopted a 401K plan pursuant to which AREP will make a matching contribution to an employee's individual plan account in the amount of one-third (1/3) of the first six (6%) percent of gross salary contributed by the employee.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
As discussed below, effective February 22, 1995 the General Partner and its affiliates contributed all of their Depositary Units to the Guarantor in exchange for a general partner interest in the Guarantor. As a result, as of February 22, 1995, the Guarantor owned 1,365,768 Depositary Units, or approximately 9.89% of the Depositary Units then outstanding, prior to giving effect to the Rights Offering. There were no outstanding Preferred Units on that date. After giving effect to the Rights Offering, the Guarantor owned 11,689,896 Depositary Units, or approximately 45.6% of the Depositary Units then outstanding, and 1,720,688 Preferred Units, or 87.1% of the Preferred Units then outstanding. The foregoing is exclusive of a 1.99% ownership interest in AREP which the General Partner held by virtue of its 1% General Partner interest in each of AREP and the Subsidiary. In addition, the Guarantor received certain registration rights with respect to its Depositary Units and Preferred Units for providing the subscription guaranty but was not otherwise compensated. Prior to May 1993, Icahn's ownership of the General Partner was through his affiliate, Meadowstar Holding Company, Inc. ("Meadowstar"). Meadowstar had originally purchased all of the outstanding shares of common stock of (i) the General Partner and (ii) API Nominee Corp., a Delaware corporation ("Nominee"), pursuant to an Acquisition Agreement, dated as of September 13, 1990 (the "Acquisition Agreement") between Meadowstar and Integrated Resources, Inc. In May 1993, Icahn purchased all of the outstanding shares of the General Partner from Meadowstar. As a result, Icahn became the beneficial owner of the 1,254,280 Depositary Units owned by the General Partner. Icahn may also be deemed to be the beneficial owner of the 148,962 Depositary Units owned of record by Nominee (the Units owned by Nominee are Depositary Units of holders who have not yet exchanged their limited partner interests) which, in accordance with state law are in the process of being turned over to the relevant state authorities as unclaimed property; however, Icahn disclaims such beneficial ownership. During the fiscal year ended December 31, 1995, the Guarantor acquired 810,416 Depositary Units in open market purchases. As a result of these purchases and subsequent purchases in 1996 to date and after giving effect to the Rights Offering, as of March 20, 1996, the Guarantor owns 12,991,312 Depositary Units, or approximately 50.6% of the outstanding Depositary Units and 1,741,688 Preferred Units or approximately 88.2% of the outstanding Preferred Units.
The affirmative vote of Unitholders holding more than 75% of the total number of all Units then outstanding, including Depositary Units held by the General Partner and its
III-5 affiliates, is required to remove the General Partner. Thus, since Icahn, through the Guarantor, holds approximately 50.6% of the Depositary Units outstanding after giving effect to the Rights Offering and subsequent purchases to date, the General Partner will not be able to be removed pursuant to the terms of the Partnership Agreement without Icahn's consent. Moreover, under the Partnership Agreement, the affirmative vote of the General Partner and Unitholders owning more than 50% of the total number of all outstanding Depositary Units then held by Unitholders, including the Guarantor, is required to approve, among other things, selling or otherwise disposing of all or substantially all of AREP's assets in a single sale or in a related series of multiple sales, dissolving AREP or electing to continue AREP in certain instances, electing a successor general partner, making certain amendments to the Partnership Agreement or causing AREP, in its capacity as sole limited partner of the Subsidiary, to consent to certain proposals submitted for the approval of the limited partners of the Subsidiary. Accordingly, as the Guarantor holds in excess of 50% of the Depositary Units outstanding, Icahn, through the Guarantor, will have effective control over such approval rights.
As of March 20, 1996, to the best knowledge of AREP, Wellington Management Company, a Massachusetts corporation, who filed a Schedule 13-G on January 26, 1996, owns 1,526,546 Depositary Units, or approximately 5.95% of the outstanding Depositary Units.
The following table provides information, as of March 20, 1996, as to the beneficial ownership of the Depositary Units and Preferred Units of AREP for each director of the General Partner, and all directors and executive officers of the General Partner as a group.
- --------------- (1) Carl C. Icahn, through the Guarantor, is the beneficial owner of the 12,991,312 Depositary Units set forth above and may also be deemed to be the beneficial owner of the 148,962 Depositary Units owned of record by API Nominee Corp., which in accordance with state law are in the process of being turned over to the relevant state authorities as unclaimed property; however, Mr. Icahn disclaims such beneficial ownership. The foregoing is exclusive of a 1.99% ownership interest in AREP which the General Partner holds by virtue of its 1% General Partner interest in each of AREP and the Subsidiary, but inclusive of the Depositary Units the Guarantor acquired through the Rights Offering. Furthermore, pursuant to a registration rights agreement entered into by the Guarantor in connection with the Rights Offering, AREP has agreed to pay any expenses incurred in connection with two demand and unlimited piggy-back registrations requested by the Guarantor.
III-6 Item 13.

Item 13. Certain Relationships and Related Transactions.
Related Transactions with the General Partner and its Affiliates
For the year ended December 31, 1995, AREP made no payments with respect to the Depositary Units owned by the General Partner. However, in 1995 the General Partner was allocated $699,597 of the income of AREP as a result of its 1.99% general partner interest in AREP.
In May 1995, AREP and an affiliate of the General Partner ("Affiliate") entered into an agreement with the third-party landlord of its leased executive office space. The agreement provided for AREP and the Affiliate to relocate their offices to an adjacent building also owned by the landlord which relocation occurred in September 1995. In accordance with the agreement, AREP entered into a lease, expiring in 2001, for 7,920 square feet of office space, at an annual rental of approximately $153,000. AREP has sublet to certain affiliates of the General Partner 3,205 square feet at an annual rental of approximately $62,000, resulting in a net annual rental of approximately $91,000. Affiliates of the General Partner reimbursed AREP for approximately $15,000 in rent paid by AREP on its behalf during 1995 in connection with the new lease. The prior lease, which was terminated, provided for approximately 6,900 square feet at an annual rental of $155,000 to AREP. In addition, AREP and the Affiliate received a lease termination fee of $350,000 allocated $175,000 to AREP and $175,000 to the Lessor. Such allocations and the terms of the sublease were reviewed and approved by the Audit Committee of the Board of Directors of the General Partner.
Property Management and Other Related Transactions
The General Partner and its affiliates benefited from the Rights Offering because, in their capacity as Exercising Rights Holders, they were entitled to the same right to increase their investment in AREP as other Unitholders, including acquiring additional Depositary Units. The Guarantor also received certain registration rights with respect to its Depositary Units and Preferred Units for providing the Subscription Guaranty.
The General Partner and its affiliates may receive fees in connection with the acquisition, sale, financing, development and management of new properties acquired by AREP. As development and other new properties are acquired, developed, constructed, operated, leased and financed, the General Partner or its affiliates may perform acquisition functions, including the review, verification and analysis of data and documentation with respect to potential acquisitions, and perform development and construction oversight and other land development services, property management and leasing services, either on a day-to-day basis or on an asset management basis, and may perform other services and be entitled to fees and reimbursement of expenses relating thereto, provided the terms of such transactions are fair and reasonable to AREP in accordance with AREP Agreement and customary to the industry. It is not possible to state precisely what role, if any, the General Partner or any of its affiliates may have in the acquisition, development or management of any new investments. Consequently, it is not
III-7 possible to state the amount of the income, fees or commissions the General Partner or its affiliates might be paid in connection with the investment of the Rights Offering proceeds since the amount thereof is dependent upon the specific circumstances of each investment, including the nature of the services provided, the location of the investment and the amount customarily paid in such locality for such services. However, Unitholders may expect that, subject to the specific circumstances surrounding each transaction and the overall fairness and reasonableness thereof to AREP, the fees charged by the General Partner and its affiliates for the services described below generally will be within the ranges set forth below:
- Property Management and Asset Management Services. To the extent that AREP acquires any properties requiring active management (e.g., operating properties that are not net leased) or asset management services, including on site services, it may enter into management or other arrangements with the General Partner or its affiliates. Generally, it is contemplated that under property management arrangements, the entity managing the property would receive a property management fee (generally 3% to 6% of gross rentals for direct management, depending upon the location) and under asset management arrangements, the entity managing the asset would receive an asset management fee (generally .5% to 1% of the appraised value of the asset for asset management services, depending upon the location) in payment for its services and reimbursement for costs incurred.
- Brokerage and Leasing Commissions. AREP also may pay affiliates of the General Partner real estate brokerage and leasing commissions (which generally may range from 2% to 6% of the purchase price or rentals depending on location; this range may be somewhat higher for problem properties or lesser-valued properties).
- Lending Arrangements. The General Partner or its affiliates may lend money to, or arrange loans for, AREP. Fees payable to the General Partner or its affiliates in connection with such activities include mortgage brokerage fees (generally .5% to 3% of the loan amount), mortgage origination fees (generally .5% to 1.5% of the loan amount) and loan servicing fees (generally .10% to .12% of the loan amount), as well as interest on any amounts loaned by the General Partner or its affiliates to AREP.
- Development and Construction Services. The General Partner or its affiliates may also receive fees for development services, generally 1% to 4% of development costs, and general contracting services or construction management services, generally 4% to 6% of construction costs.
- Reinvestment Incentive Fees. Subject to the limitations described below, the General Partner is entitled to receive a reinvestment incentive fee (a "Reinvestment Incentive Fee") for performing acquisition services equal to a percentage of the purchase price (whether paid in cash, Depositary Units, other securities and/or with mortgage financing) of properties (other than Predecessor Properties) acquired from July 1, 1987 through July 1, 1997. This percentage is 1% for the first five years and 1/2% for the second five years. Although a Reinvestment Incentive Fee accrues each time a property is acquired, Reinvestment Incentive Fees are only payable on an annual basis, within 45 days after the end of each calendar year, if the following subordination provisions are satisfied. Reinvestment Incentive Fees accrued in any year will
III-8 only be payable if the sum of (x) the sales price of all Predecessor Properties (net of associated debt which encumbered these Properties at the consummation of the Exchange) sold through the end of that year and (y) the appraised value of all Predecessor Properties which have been financed or refinanced (and not subsequently sold), net of the amount of any refinanced debt through the end of that year determined at the time of such financings or refinancings, exceeds the aggregate values assigned to those Predecessor Properties for purposes of the Exchange. If the subordination provisions are not satisfied in any year, payment of Reinvestment Incentive Fees for that year will be deferred. At the end of each year a new determination will be made with respect to subordination requirements (reflecting all sales, financings and refinancings from the consummation of the Exchange through the end of that year) in order to ascertain whether Reinvestment Incentive Fees may be payable irrespective of whether distributions have been made or are projected to be made to Unitholders. Through December 31, 1995, an aggregate of (i) 140 Predecessor Properties were sold or disposed of for an aggregate amount of approximately $69,123,000 net of associated indebtedness which encumbered these Properties at the consummation of the Exchange, and (ii) 25 Predecessor Properties were refinanced at an aggregate appraised value, net of the amount of the refinanced debt, of approximately $44,431,000 for a sum total of approximately $113,554,000. Aggregate appraised values attributable to these Predecessor Properties for purposes of the Exchange were approximately $105,039,000. Accordingly, through December 31, 1995, AREP satisfied the subordination requirements detailed above.
AREP may also enter into other transactions with the General Partner and its affiliates, including, without limitation, buying and selling properties and borrowing and lending funds from or to the General Partner or its affiliates, joint venture developments and issuing securities to the General Partner or its affiliates in exchange for, among other things, assets that they now own or may acquire in the future, provided the terms of such transactions are fair and reasonable to AREP. The General Partner is also entitled to reimbursement by AREP for all allocable direct and indirect overhead expenses (including, but not limited to, salaries and rent) incurred in connection with the conduct of AREP's business.
In addition, employees of AREP may, from time to time, provide services to affiliates of the General Partner, with AREP being reimbursed therefor. Reimbursement to AREP by such affiliates in respect of such services is subject to review and approval by the Audit Committee of the Board of Directors of the General Partner. In 1995 such amounts were approximately $86,000, which reimbursement was approved by the Audit Committee of the General Partner.
The Audit Committee of the Board of Directors of the General Partner meets on an annual basis, or more often if necessary, to review any conflicts of interest which may arise, including the payment by AREP of any fees to the General Partner or any of its affiliates. The General Partner and its affiliates may not receive duplicative fees.
III-9 Nonqualified Unit Option Plan
AREP has adopted the Plan, under which options to purchase an aggregate of 1,416,910 Depositary Units may be granted to officers and key employees of the General Partner and AREP who provides services to AREP. To date, no options have been granted under the Plan. See Item 11 - "Executive Compensation."
III-10 Part IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements:
The following financial statements of American Real Estate Partners, L.P. are included in Part II, Item 8:
All other Financial Statement schedules have been omitted because the required financial information is not applicable or the information is shown in the Financial Statements or Notes thereto.
(a)(3) Exhibits:
IV-1
IV-2
IV-3
(b) Reports on Form 8-K:
(1) AREP filed a Current Report on Form 8-K (the "Form 8-K") with the Securities and Exchange Commission on March 16, 1995. Pursuant to Item 5 of the Form 8-K, AREP released its earnings for the fourth quarter and fiscal year ended December 31, 1995 and also announced that no distribution would be made for the fiscal quarter ending March 31, 1996.
(2) AREP filed a Current Report on Form 8-K (the "Form 8-K") with the Securities and Exchange Commission on December 4, 1995. Pursuant to Item 5 of the Form 8-K, AREP announced that no distribution would be made for the fourth quarter of 1995 and that no distributions are expected to be made in 1996.
IV-4
AMERICAN REAL ESTATE PARTNERS, LP a limited partnership Schedule III ------------
REAL ESTATE OWNED AND REVENUES EARNED ------------- -------------- --------------
IV-5 AMERICAN REAL ESTATE PARTNERS, LP a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED ------------- -------------- --------------
IV-6 AMERICAN REAL ESTATE PARTNERS, LP a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED ------------- -------------- --------------
IV-7 AMERICAN REAL ESTATE PARTNERS, LP a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED ------------ -------------- ---------
IV-8 AMERICAN REAL ESTATE PARTNER, LP a limited partnership Schedule III ------------ REAL ESTATE OWNED REVENUES EARNED ------------- ------------ -----------
IV-9 AMERICAN REAL ESTATE PARTNERS, LP a limited partnership Schedule III ------------ REAL ESTATE OWNED AND REVENUES EARNED --------------- -------------- ----------
(1) Amount shown includes hotel operating properties.
(2) The Company owns a 70% interest in the joint venture which owns this property.
(3) The Company owns a 90% interest in the joint venture which owns this property.
IV-10
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1995
1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel operating properties, was carried at the beginning of the period, with the total at the close of the period, is shown below:
b. A reconciliation of the total amount of accumulated depreciation at the beginning of the period, with the total at the close of the period, is shown below:
Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years.
2. A reconciliation of the total amount at which real estate owned, accounted for under the financing method, was carried at the beginning of the period, with the total at the close of the period, is shown below:
3. The aggregate cost of real estate owned for Federal income tax purposes is $376,471,538.
(Continued)
IV-11
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1995
4. Net income applicable to the period in Schedule III is reconciled with net earnings as follows:
(Continued)
IV-12
Schedule III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1994
1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel operating properties, was carried at the beginning of the period, with the total at the close of the period, is shown below:
b. A reconciliation of the total amount of accumulated depreciation at the beginning of the period, with the total at the close of the period, is shown below:
Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years.
2. A reconciliation of the total amount at which real estate owned, accounted for under the financing method, was carried at the beginning of the period, with the total at the close of the period, is shown below:
3. The aggregate cost of real estate owned for Federal income tax purposes is $402,624,341.
(Continued)
IV-13
Schedule III Page 8.1
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1994
4. Net income applicable to the period in Schedule III is reconciled with net earnings as follows:
(Continued)
IV-14
SCHEDULE III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1993
1a. A reconciliation of the total amount at which real estate owned, accounted for under the operating method and hotel operating properties, was carried at the beginning of the period, with the total at the close of the period, is shown below:
b. A reconciliation of the total amount of accumulated depreciation at the beginning of the period, with the total at the close of the period, is shown below:
Depreciation on properties accounted for under the operating method is computed using the straight-line method over the estimated useful life of the particular property or property components, which range from 5 to 45 years.
2. A reconciliation of the total amount at which real estate owned, accounted for under the financing method, was carried at the beginning of the period, with the total at the close of the period, is shown below:
The aggregate cost of real estate owned for Federal income tax purposes is $398,245,532.
(Continued)
IV-15
SCHEDULE III PAGE 9.1
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND REVENUES EARNED YEAR ENDED DECEMBER 31, 1993
4. Net income applicable to the period in Schedule III is reconciled with net earnings as follows:
(Continued)
IV-16 Schedule III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1995 - -------------------------------------------------------------------------------
(Continued)
IV-17 Schedule III Page 10.1
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE (ACCOUNTED FOR UNDER THE OPERATING METHOD) DECEMBER 31, 1995 - --------------------------------------------------------------------------------
Amount at which Carried at Reserve for State Close of Year Depreciation ----- --------------- ------------ [S] [C] [C] Alabama $ 11,459,096 $ 265,568 Arizona 9,028,875 1,141,233 California 13,574,684 3,861,125 Connecticut 1,549,805 1,070,864 Florida 13,772,389 5,122,422 Georgia 7,750,258 797,977 Illinois 8,850,494 3,065,734 Indiana 8,635,584 2,954,479 Kansas 460,490 - Kentucky 14,851,240 1,052,938 Louisiana 11,313,683 2,479,819 Maryland 1,864,304 565,688 Massachusetts 2,916,915 1,429,333 Michigan 12,649,448 2,865,957 Minnesota 8,023,299 1,722,126 Missouri 1,946,471 323,448 New Jersey 4,437,341 1,489,539 New York 23,410,097 4,944,535 North Carolina 8,580,112 1,120,666 Ohio 3,635,082 357,702 Oregon 298,451 - Pennsylvania 10,386,463 6,045,388 South Carolina 3,101,170 907,373 Tennessee 335,367 205,951 Texas 4,302,872 2,810,501 Virginia 1,986,638 975,491 Washington 4,190,631 1,830,477 ------------ -----------
$ 193,311,259 $ 49,406,334 ============ ===========
(Continued)
IV-18
Schedule III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1994 - --------------------------------------------------------------------------------
(Continued)
IV-19 Schedule III Page 11.1
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED AND RESERVE FOR DEPRECIATION BY STATE (ACCOUNTED FOR UNDER THE OPERATING METHOD) DECEMBER 31, 1994 - --------------------------------------------------------------------------------
Amount at which Carried at Reserve for State Close of Year Depreciation ----- --------------- ------------ [S] [C] [C] Alabama $ 1,707,913 $ - Arizona 8,661,230 780,739 California 13,574,684 3,702,517 Connecticut 1,549,805 1,027,553 Florida 14,474,746 5,007,024 Georgia 8,219,782 612,349 Illinois 8,849,567 2,836,885 Indiana 8,635,584 2,645,196 Kansas 460,490 - Kentucky 14,470,363 691,180 Louisiana 12,638,536 2,975,581 Maryland 1,864,304 518,658 Massachusetts 2,916,915 1,349,837 Michigan 19,225,223 3,394,696 Minnesota 7,072,018 1,474,020 Missouri 1,946,471 289,549 New Jersey 4,293,403 1,471,681 New York 22,393,357 5,858,402 North Carolina 3,191,685 1,030,096 Ohio 3,635,192 299,308 Oregon 298,451 - Pennsylvania 10,273,909 5,843,239 South Carolina 3,101,170 857,047 Tennessee 335,368 196,998 Texas 4,302,872 2,730,561 Virginia 1,986,638 948,210 Washington 4,190,632 1,337,294 Canada 1,057,300 356,102 ------------ -----------
$ 185,327,608 $ 48,234,722 ============ ===========
(Continued)
IV-20
Schedule III AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1993 - --------------------------------------------------------------------------------
(Continued)
IV-21 Schedule III Page 12.1
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARY
REAL ESTATE OWNED BY STATE (ACCOUNTED FOR UNDER THE FINANCING METHOD) DECEMBER 31, 1993 - --------------------------------------------------------------------------------
Amount at which Carried at Reserve for State Close of Year Depreciation ----- --------------- ------------ [S] [C] [C] Alabama $ 736,694 $ 87,325 Arizona 8,419,901 432,415 California 12,931,574 3,463,370 Connecticut 1,549,805 965,696 Florida 14,636,201 4,438,112 Georgia 9,238,378 1,029,031 Illinois 8,850,494 2,604,653 Indiana 8,635,584 2,410,912 Kansas 460,490 - Kentucky 7,860,177 389,534 Louisiana 13,125,806 2,884,385 Maryland 1,238,325 474,818 Massachusetts 2,814,867 1,270,340 Michigan 19,225,223 3,044,807 Minnesota 6,776,010 1,243,786 Missouri 2,335,344 455,296 New Jersey 4,293,403 1,434,545 New York 21,711,796 5,430,334 North Carolina 1,591,685 1,008,960 Ohio 3,876,312 351,221 Oregon 298,451 - Pennsylvania 10,274,362 5,531,108 South Carolina 3,101,170 806,722 Tennessee 449,753 248,129 Texas 4,384,018 2,650,621 Virginia 1,986,638 920,929 Washington 4,190,632 1,129,111 Canada 1,057,300 334,624 ------------ -----------
$ 176,050,393 $ 45,040,784 ============ ===========
IV-22 SIGNATURES
Pursuant to the requirements of Section 13 or 15(a) of the Securities Exchange Act of 1934, AREP has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March, 1996.
AMERICAN REAL ESTATE PARTNERS, L.P.
By: AMERICAN PROPERTY INVESTORS, INC. General Partner
By: /s/ Carl C. Icahn --------------------------------- Carl C. Icahn Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of AREP and in the capacities and on the dates indicated.
EXHIBIT INDEX -------------
Exhibit 27 Financial Data Schedule