10-Q
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form 10-Q
 
     
(Mark One)    
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    FOR THE TRANSITION PERIOD FROM           TO          
 
COMMISSION FILE NUMBER 1-9516
 
 
 
 
American Real Estate Partners, L.P.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  13-3398766
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
767 Fifth Avenue, Suite 4700, New York, NY
(Address of principal executive offices)
  10153
(Zip Code)
 
(212) 702-4300
(Registrant’s telephone number, including area code)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-b-2 of the Exchange Act. (Check One).
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o     
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of August 8, 2006, there were 61,856,830 depositary units and 11,340,243 preferred units outstanding.
 


 

 
INDEX
 
                 
        Page No.
 
  FINANCIAL INFORMATION    
  Financial Statements    
    Consolidated Balance Sheets — June 30, 2006 and December 31, 2005   3
    Consolidated Statements of Operations — Three Months Ended June 30, 2006 and 2005   4
    Consolidated Statements of Operations — Six Months Ended June 30, 2006 and 2005   5
    Consolidated Statement of Changes in Partners’ Equity and Comprehensive Income — Six Months Ended June 30, 2006   6
    Consolidated Statements of Cash Flows — Six Months Ended June 30, 2006 and 2005   7
    Notes to Consolidated Financial Statements   9
          1. General   9
          2. Related Party Transactions   10
          3. Acquisitions   11
          4. Operating Units   12
          5. Investments and Related Matters   17
          6. Inventories, Net   18
          7. Trade, Notes and Other Receivables, Net   18
          8. Other Current Assets   18
          9. Property, Plant and Equipment   19
         10. Other Non-Current Assets   19
         11. Other Non-Current Liabilities   19
         12. Minority Interests   20
         13. Long Term Debt   20
         14. Other Income (Expense)   22
         15. Unit Options   22
         16. Preferred Units   23
         17. Earnings Per Limited Partnership Unit   23
         18. Asset Retirement Obligations — Oil and Gas   24
         19. Oil and Gas Derivatives   24
         20. Segment Reporting   25
         21. Income Taxes   28
         22. Commitments and Contingencies   28
         23. Subsequent Events   29
  Management’s Discussion and Analysis of Financial Condition and Results of Operations    
          1. Overview   30
          2. Results of Operations   30
          3. Liquidity and Capital Resources   42
          4. Certain Trends and Uncertainties   48
  Quantitative and Qualitative Disclosures About Market Risk   48
  Controls and Procedures   48
  OTHER INFORMATION   49
  Legal Proceedings   49
  Risk Factors   50
  Exhibits    51
    Signatures   52
    Certifications   54
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION


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Table of Contents

 
Part I.  Financial Information
 
Item 1.   Financial Statements
 
AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
FORM 10-Q JUNE 30, 2006
 
CONSOLIDATED BALANCE SHEETS
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
    (In $000s)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 463,677     $ 576,123  
Investments
    901,262       820,699  
Inventories, net
    285,716       244,239  
Trade, notes and other receivables, net
    213,937       255,014  
Other current assets
    284,140       287,985  
                 
Total current assets
    2,148,732       2,184,060  
                 
Property, plant and equipment, net:
               
Oil and Gas
    796,250       742,459  
Gaming
    617,064       441,059  
Real Estate
    288,351       285,694  
Home Fashion
    115,986       166,026  
                 
Total property, plant and equipment, net
    1,817,651       1,635,238  
                 
Investments
    16,324       15,964  
Intangible assets
    26,714       23,402  
Other assets
    108,494       107,798  
                 
Total assets
  $ 4,117,915     $ 3,966,462  
                 
 
LIABILITIES AND PARTNERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 127,626     $ 93,807  
Accrued expenses
    158,209       225,690  
Current portion of long-term debt
    21,601       24,155  
Securities sold not yet purchased
    81,722       75,883  
Margin liability on marketable securities
    144,596       131,061  
                 
Total current liabilities
    533,754       550,596  
                 
Long-term debt
    1,506,287       1,411,666  
Other non-current liabilities
    77,751       89,085  
Preferred limited partnership units:
               
$10 liquidation preference, 5% cumulative pay-in-kind; 11,400,000 authorized; 11,340,243 and 10,800,397 issued and outstanding as of June 30, 2006 and December 31, 2005, respectively
    114,820       112,067  
                 
Total long-term liabilities
    1,698,858       1,612,818  
                 
Total liabilities
    2,232,612       2,163,414  
                 
Minority interests
    263,784       304,599  
                 
Commitments and contingencies (Note 21)
               
Partners’ equity:
               
Limited partners:
               
Depositary units: 67,850,000 authorized; 62,994,030 outstanding as of June 30, 2006 and December 31, 2005, respectively
    1,849,194       1,728,572  
General partner:
    (215,754 )     (218,202 )
Treasury units at cost:
               
1,137,200 depositary units
    (11,921 )     (11,921 )
                 
Partners’ equity
    1,621,519       1,498,449  
                 
Total liabilities and partners’ equity
  $ 4,117,915     $ 3,966,462  
                 
 
See notes to consolidated financial statements.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2006 and 2005
 
                 
    Three Months Ended
 
    June 30,  
    2006     2005  
    (Unaudited)  
    (In 000s, except per unit amounts)  
 
Revenues:
               
Oil and Gas
  $ 86,606     $ 73,360  
Gaming
    134,780       122,568  
Real Estate
    49,065       25,455  
Home Fashion
    237,148        
                 
      507,599       221,383  
                 
Expenses:
               
Oil and Gas
    40,078       40,933  
Gaming
    119,657       105,576  
Real Estate
    34,214       21,426  
Home Fashion
    285,487        
Holding Company
    3,675       1,939  
Acquisition costs
          3,362  
                 
      483,111       173,236  
                 
Operating income
    24,488       48,147  
Other income (expense), net:
               
Interest expense
    (31,614 )     (28,825 )
Interest income
    13,694       14,234  
Other income (expense), net
    46,122       (19,820 )
                 
Income from continuing operations before income taxes and minority interests
    52,690       13,736  
Income tax expense
    (9,155 )     (9,030 )
Minority interests
    25,828       615  
                 
Income from continuing operations
    69,363       5,321  
                 
Discontinued operations:
               
Income from discontinued operations
    440       388  
Gain on sales and disposition of real estate
    1,308       2,644  
                 
Income from discontinued operations
    1,748       3,032  
                 
Net earnings
  $ 71,111     $ 8,353  
                 
Net earnings (loss) attributable to:
               
Limited partners
  $ 69,696     $ (2,797 )
General partner
    1,415       11,150  
                 
    $ 71,111     $ 8,353  
                 
Net earnings per LP unit:
               
Basic earnings:
               
Income (loss) from continuing operations
  $ 1.10     $ (0.12 )
Income from discontinued operations
    0.03       0.06  
                 
Basic earnings (loss) per LP unit
  $ 1.13     $ (0.06 )
                 
Weighted average LP units outstanding:
    61,857       46,271  
                 
Diluted earnings:
               
Income (loss) from continuing operations
  $ 1.08     $ (0.12 )
Income from discontinued operations
    0.03       0.06  
                 
Diluted earnings (loss) per LP unit
  $ 1.11     $ (0.06 )
                 
Weighted average LP units and equivalent partnership units outstanding
    64,523       46,271  
                 
 
See notes to consolidated financial statements.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2006 and 2005
 
                 
    Six Months Ended
 
    June 30,  
    2006     2005  
    (Unaudited)
 
    (In 000s, except per
 
    unit amounts)  
 
Revenues:
               
Oil and Gas
  $ 194,898     $ 89,038  
Gaming
    261,498       245,235  
Real Estate
    70,399       43,410  
Home Fashion
    480,638        
                 
      1,007,433       377,683  
                 
Expenses:
               
Oil and Gas
    83,382       78,003  
Gaming
    227,020       209,579  
Real Estate
    51,649       37,255  
Home Fashion
    566,935        
Holding Company
    14,980       4,847  
Acquisition costs
          3,362  
                 
      943,966       333,046  
                 
Operating income
    63,467       44,637  
Other income (expense), net:
               
Interest expense
    (62,202 )     (52,005 )
Interest income
    26,286       26,585  
Other income (expense), net
    67,593       6,132  
                 
Income from continuing operations before income taxes and minority interests
    95,144       25,349  
Income tax expense
    (17,812 )     (12,436 )
Minority interests
    40,951       1,547  
                 
Income from continuing operations
    118,283       14,460  
                 
Discontinued operations:
               
Income from discontinued operations
    976       1,089  
Gain on sales and disposition of real estate
    1,559       21,367  
                 
Income from discontinued operations
    2,535       22,456  
                 
Net earnings
  $ 120,818     $ 36,916  
                 
Net earnings (loss) attributable to:
               
Limited partners
  $ 118,414     $ 40,330  
General partner
    2,404       (3,414 )
                 
    $ 120,818     $ 36,916  
                 
Net earnings per LP unit:
               
Basic earnings:
               
Income from continuing operations
  $ 1.87     $ 0.40  
Income from discontinued operations
    0.04       0.48  
                 
Basic earnings per LP unit
  $ 1.91     $ 0.88  
                 
Weighted average LP units outstanding:
    61,857       46,185  
                 
Diluted earnings:
               
Income from continuing operations
  $ 1.83     $ 0.40  
Income from discontinued operations
    0.04       0.48  
                 
Diluted earnings per LP unit
  $ 1.87     $ 0.88  
                 
Weighted average LP units and equivalent partnership units outstanding
    64,663       46,185  
                 
 
See notes to consolidated financial statements.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENT OF CHANGES
IN PARTNERS’ EQUITY AND COMPREHENSIVE INCOME
Six Months Ended June 30, 2006
 
                                         
          Limited
                   
    General
    Partners’
                   
    Partner’s
    Equity
                Total
 
    Equity
    Depositary
    Held in Treasury     Partners’
 
    (Deficit)     Units     Amounts     Units     Equity  
    (In $000s)  
    (Unaudited)  
 
Balance, December 31, 2005
  $ (218,202 )   $ 1,728,572     $ (11,921 )     1,137     $ 1,498,449  
Comprehensive income:
                                       
Net earnings
    2,404       118,414                   120,818  
Net unrealized gains on securities available for sale
    172       8,462                   8,634  
Other comprehensive income (loss)
          (7 )                 (7 )
                                         
Comprehensive income
    2,576       126,869                   129,445  
CEO LP unit options
    124       6,124                   6,248  
Partnership distribution
    (252 )     (12,371 )                 (12,623 )
                                         
Balance, June 30, 2006
  $ (215,754 )   $ 1,849,194     $ (11,921 )     1,137     $ 1,621,519  
                                         
 
Accumulated other comprehensive gains at June 30, 2006 were $8.8 million.
 
See notes to consolidated financial statements.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 2006 and 2005
 
                 
    Six Months Ended
 
    June 30,  
    2006     2005  
    (In $000s)  
    (Unaudited)  
 
Cash Flows from Operating Activities:
               
Income from continuing operations
  $ 118,283     $ 14,460  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    92,401       69,163  
Investment gains
    (62,661 )     (380 )
Change in fair market value of Oil and Gas derivative contracts
    (57,611 )     31,833  
Preferred LP unit interest expense
    2,753       2,636  
Minority interests
    (40,951 )     (1,547 )
Stock based compensation expense
    6,248        
Deferred income tax expense
    8,287       8,595  
Impairment loss on fixed assets
    26,726       175  
Net cash used in activities on trading securities
    (26,750 )     (3,987 )
Other, net
    (1,335 )     2,847  
Changes in operating assets and liabilities:
               
Decrease (increase) in trade notes and other receivables
    41,245       (19,638 )
Decrease in other assets
    30,065       18,827  
Increase in inventory
    (41,477 )      
Increase in accounts payable, accrued expenses and other liabilities
    2,068       9,449  
                 
Net cash provided by continuing operations
    97,291       132,433  
                 
Income from discontinued operations
    2,535       22,456  
Depreciation and amortization
    51       176  
Net gain from property transactions
    (1,559 )     (21,367 )
                 
Net cash provided by discontinued operations
    1,027       1,265  
                 
Net cash provided by operating activities
    98,318       133,698  
                 
Cash Flows from Investing Activities:
               
Capital expenditures
    (131,384 )     (148,512 )
Decrease in other investments
          33,928  
Purchases of marketable equity and debt securities
    (162,782 )     (116,820 )
Proceeds from sales from marketable equity and debt securities
    162,701       25,017  
Net proceeds from the sales and disposition of real estate
          8,414  
Net proceeds from sales and disposition of fixed assets
    11,806        
Acquisitions of businesses, net of cash acquired
    (169,649 )     (180,000 )
Other
          1,631  
                 
Net cash used in investing activities
    (289,308 )     (376,342 )
                 
Cash Flows from Discontinued Operations:
               
Net proceeds from the sales and disposition of real estate
    8,327       48,365  
                 
Net cash used in investing activities
    (280,981 )     (327,977 )
                 
 
(continued on next page)


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months ended June 30, 2006 and 2005
 
                 
    Six Months Ended
 
    June 30,  
    2006     2005  
    (In $000s)  
    (Unaudited)  
 
Cash Flows from Financing Activities:
               
Partners’ equity:
               
Members contribution
  $     $ 9,279  
Partnership distributions
    (12,623 )      
Debt:
               
Proceeds from senior notes payable
          480,000  
Proceeds from credit facilities
    60,000       62,100  
Repayment of credit facilities
    (4,009 )      
Decrease in due to affiliates
          (16,342 )
Proceeds from mortgages payable
    34,250       4,425  
Mortgages paid upon disposition of properties
          (3,775 )
Periodic principal payments
    (2,216 )     (2,932 )
Debt issuance costs
    (5,185 )     (8,587 )
                 
Net cash provided by financing activities
    70,217       524,168  
                 
Cash flows from discontinued operations:
               
Mortgages paid upon disposition of properties
          (6,927 )
                 
Net cash provided by financing activities
    70,217       517,241  
                 
Net increase (decrease) in cash and cash equivalents
    (112,446 )     322,962  
Cash and cash equivalents, beginning of period
    576,123       806,309  
                 
Cash and cash equivalents, end of period
  $ 463,677     $ 1,129,271  
                 
Supplemental information
               
Cash payments for interest, net of amounts capitalized
  $ 50,547     $ 24,667  
Cash payments for income taxes, net of refunds
  $ 8,389     $ 3,017  
Net unrealized gains (losses) on securities available for sale
  $ 8,634     $ (5,658 )
LP unit issuance
  $     $ 456,998  
Change in tax asset related to acquisition
  $     $ 4,105  
Debt conversion relating to Atlantic Coast
  $     $ 29,500  
 
See notes to consolidated financial statements.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
FORM 10-Q
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2006
 
Note 1.   General
 
American Real Estate Partners, L.P. (the “Company” or “AREP”) is a master limited partnership formed in Delaware on February 17, 1987. AREP is a diversified holding company owning subsidiaries engaged in the following operating businesses: (1) Oil and Gas; (2) Gaming; (3) Real Estate and (4) Home Fashion.
 
We own a 99% limited partner interest in American Real Estate Holdings Limited Partnership, or AREH. AREH, the operating partnership, holds our investments and conducts our business operations. Substantially all of our assets and liabilities are owned by AREH and substantially all of our operations are conducted through AREH and its subsidiaries. American Property Investors, Inc., or API, owns a 1% general partner interest in both us and AREH, representing an aggregate 1.99% general partner interest in us and AREH. API is owned and controlled by Mr. Carl C. Icahn.
 
The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes contained in our annual report on Form 10-K, as amended, for the year ended December 31, 2005. The financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission related to interim financial statements. The financial information contained herein is unaudited; however, all adjustments which, in the opinion of management, are necessary to present fairly the results for the interim periods, have been made. All such adjustments are of a normal and recurring nature. Certain prior year amounts have been reclassified in order to conform to the current year presentation.
 
The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries in which control can be exercised. The Company is considered to have control if it has a direct or indirect ability to make decisions about an entity’s activities through voting or similar rights. All material intercompany accounts and transactions have been eliminated in consolidation.
 
Because of the diversified nature of our business the results of operations for quarterly and other interim periods are not indicative of the results to be expected for the full year. Variations in the amount and timing of gains and losses on our investments and derivative contracts in our Oil and Gas segment can be significant. In addition, the results of our Gaming and Home Fashion segments are seasonal.
 
Change in Reporting Entity
 
Our historical financial statements were revised to reflect the acquisition of interests in five entities in the second quarter of 2005 which were under common control of Mr. Icahn. In accordance with generally accepted accounting principles, assets transferred between entities under common control are accounted for at historical cost similar to a pooling of interests, and the financial statements of such previously separate companies for periods prior to the acquisition, from the original date of their acquisition by Mr. Icahn, are revised on a combined basis.
 
Discontinued Operations
 
Certain of our real estate properties are classified as discontinued operations. The properties classified as discontinued operations have changed during 2006 and, accordingly, certain amounts in the statements of operations and cash flows for the six months ended June 30, 2005 have been reclassified to conform to the current classification of properties.
 
Acquisition of the Assets of WestPoint Stevens Inc.
 
On August 8, 2005, WestPoint International, Inc., or WPI, an indirect subsidiary of the Company, completed the acquisition of substantially all of the assets of WestPoint Stevens Inc., or WPS. Operating results for WPI are included with AREP’s results beginning as of August 8, 2005.


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Acquisition of the Assets of the Flamingo Laughlin and Traymore Site
 
On May 19, 2006, our wholly owned subsidiaries, AREP Boardwalk Properties LLC and AREP Laughlin Corporation, consummated the purchase of the Flamingo Laughlin Hotel and Casino, or the Flamingo Laughlin, in Laughlin, Nevada and 7.7 acres of land, known as the Traymore Site, adjacent to the Sands Hotel and Casino, in Atlantic City, New Jersey, from affiliates of Harrah’s Operating Company, Inc. AREP Laughlin Corporation was formed by AREH to own and operate the Flamingo Laughlin and AREH contributed 100% of the stock of AREP Laughlin to American Casino and Entertainment Properties LLC, or ACEP, on April 4, 2006. Operating results for the Flamingo Laughlin are included with AREP’s results beginning as of May 19, 2006.
 
Investments
 
We classify our marketable securities as either “available-for-sale” or “trading” based upon whether the objective of the purchase is to generate profits on short-term differences in price. Securities that are classified as available-for-sale are reported at fair value with unrealized gains and losses reported as a separate component of partners’ equity. Trading securities are carried at fair value with unrealized gains and losses included in net earnings (loss). For purposes of determining gains and losses on sales, the cost of securities is based on specific identification. Effective January 1, 2006, certain trading securities were reclassified to available-for-sale based on a reassessment of the manner in which we hold investments. (See Note 5 for details of investments and note 14 for details of gains and losses on investments.)
 
Filing Status of Subsidiaries
 
National Energy Group, Inc., or National Energy Group, and Atlantic Coast Entertainment Holdings, Inc., or Atlantic Coast, are reporting companies under the Securities Exchange Act of 1934. In addition, ACEP, voluntarily files annual, quarterly and current reports.
 
On February 14, 2006, NEG, Inc., or NEG, our newly formed subsidiary, in connection with a planned initial public offering, filed with the Securities and Exchange Commission, or SEC, a Registration Statement on Form S-1. Amendments to the Form S-1 were filed May 5, 2006, June 22, 2006, and July 31, 2006. The Registration Statement has not yet become effective. On June 29, 2006, NEG, in connection with a planned merger with National Energy Group, filed with the SEC a Registration Statement on Form S-4. On July 31, 2006, NEG Oil & Gas LLC, which is currently our wholly-owned subsidiary, in connection with a planned offering of senior notes due 2014, filed with the SEC a Registration Statement on Form S-1.
 
New Accounting Pronouncements
 
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of the Interpretation on its financial statements.
 
Note 2.   Related Party Transactions
 
a.  Administrative Services
 
In July 2005, we entered into a new license agreement with an affiliate for the non-exclusive use of approximately 1,514 square feet of office space for which we pay monthly base rent of $13,000 plus 16.4% of certain “additional rent.” The terms of the license agreement were reviewed and approved by the audit committee of the Board of Directors of API. The license agreement expires in May 2012. Under the agreement, base rent is subject to increases in July 2008 and December 2011. Additionally, we are entitled to certain annual rent credits each December, beginning December 2005 and continuing through December 2011. In the three months ended June 30, 2006 and 2005, the Company paid rent of approximately $32,000 and $39,000, respectively. In the six months ended June 2006 and June 2005, the Company paid rent of approximately $85,000 and $78,000, respectively.


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In the three months ended June 30, 2006 and 2005, we paid approximately $197,000 and $340,000, respectively, to an affiliate for telecommunication services. In the six months ended June 30, 2006 and 2005, we paid approximately $415,000 and $567,000, respectively, to an affiliate for telecommunication services.
 
An affiliate provided certain professional services to WPI for which WPI incurred charges of approximately $81,000 and $139,000 in the three and six months ended June 30, 2006, respectively.
 
An affiliate provided certain administrative services to us for which we incurred charges of approximately $21,000 and $43,000 in the three and six months ended June 30, 2005, respectively. No such charges were incurred in 2006.
 
We provided certain administrative services to affiliates for which we charged $147,000 and $260,000 in the three and six months ended June 30, 2006, respectively, and $18,000 in the three and six months ended June 30, 2005. In May 2006, the affiliate remitted $500,000 to us as an advance payment for future services (including the services for the three months ended June 30, 2006). As of June 30, 2006, current liabilities in the consolidated balance sheet included $359,000 to be applied to our charges to the affiliate for services to be provided to it.
 
b.  Securities Ownership
 
As of August 8, 2006, affiliates of Mr. Icahn owned 9,813,346 preferred units and 55,655,382 depositary units, which represent 86.5% and 90.0% of the outstanding preferred units and depositary units, respectively.
 
Note 3.   Acquisitions
 
On May 19, 2006, our wholly owned subsidiaries, AREP Boardwalk Properties and AREP Laughlin Corporation, or AREP Laughlin, consummated the purchase of the Flamingo Laughlin and 7.7 acres of land adjacent to The Sands Hotel and Casino, or the Traymore Site, from affiliates of Harrah’s Operating Company, Inc. The transaction was completed pursuant to a previously announced asset purchase agreement, dated as of November 28, 2005, between AREP Laughlin, AREP Boardwalk LLC, Harrah’s and certain affiliated entities. Under the agreement, AREP Laughlin acquired the Flamingo and AREP Boardwalk Properties LLC, an assignee of AREP Boardwalk LLC, acquired the Traymore Site, for an aggregate purchase price of approximately $170.0 million (excluding transaction costs and working capital of approximately $5.7 million). We acquired the Flamingo Laughlin and the Traymore Site consistent with our strategy of buying undervalued and out-of-favor assets complimentary to our existing businesses.
 
The Flamingo Laughlin is located on approximately 18 acres of land located next to the Colorado River in Laughlin, Nevada and is a tourist-oriented gaming and entertainment destination. The Flamingo Laughlin is the largest hotel in Laughlin with 1,907 rooms in two 18-story towers and a 57,000 square-foot casino with seven restaurants, 35,000 square-feet of meeting space and a 3,300-seat amphitheater. The property features an outdoor pool, fitness center, lighted tennis courts and 2,420 parking spaces.
 
The following table summarizes the estimated fair values of the net assets acquired on May 19, 2006 (in $000s):
 
                         
    May 19, 2006
 
    Fair Value  
    Flamingo
             
    Laughlin     Traymore Site     Total  
 
Current assets
  $ 7,172     $     $ 7,172  
Land
    13,000       61,651       74,651  
Building and equipment
    95,336               95,336  
Intangible assets
    3,397               3,397  
                         
Assets acquired
    118,905       61,651       180,556  
                         
Liabilities assumed
    (4,874 )             (4,874 )
                         
Net assets acquired
  $ 114,031     $ 61,651     $ 175,682  
                         
 
The purchase price allocations for the Flamingo Laughlin are based on estimated fair values as determined by independent appraisers. Had the acquisitions of the Flamingo Laughlin and the Traymore Site occurred at the


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beginning of 2006, our consolidated unaudited pro forma net revenue, net income and diluted earnings per share for the three and six months ended June 30, 2006 would not have been materially different than the amounts we reported, and, therefore, pro forma results are not presented.
 
The results of operations of Flamingo Laughlin from May 19, 2006 to June 30, 2006 were included in the Company’s consolidated earnings for the three months and six months ended June 30, 2006.
 
Call Agreement
 
On June 5, 2006, AREH entered into a call agreement with ACE Gaming, LLC, or ACE Gaming, pursuant to which AREH granted ACE Gaming the right to acquire all of AREH’s membership interests in AREP Boardwalk Properties, LLC, or AREP Boardwalk Properties. ACE Gaming is a wholly owned subsidiary of Atlantic Coast which owns and operates The Sands Hotel and Casino in Atlantic City, New Jersey, or The Sands. AREP Boardwalk Properties purchased 7.7 acres of land adjacent to The Sands property, or the Traymore Site, on May 19, 2006 and has an arrangement with ACE Gaming to manage the surface parking lots on its behalf.
 
The Call Agreement allows ACE Gaming to acquire AREP Boardwalk Properties until June 5, 2007 for $61.7 million (the acquisition cost of the Traymore Site), plus certain closing, financing and operating costs as defined in the Call Agreement.
 
Note 4.   Operating Units
 
We conduct our operating businesses in four principal areas: Oil and Gas, Gaming, Real Estate and Home Fashion.
 
a.  Oil and Gas
 
We conduct our Oil and Gas operations through our wholly-owned subsidiary, NEG Oil & Gas LLC, or NEG Oil & Gas (formerly AREP Oil & Gas LLC). NEG Oil & Gas includes our 50.01% ownership interest in National Energy Group, a direct 50% membership interest in NEG Holding LLC, or NEG Holdings, an indirect membership interest (through National Energy Group) in NEG Holdings, and a 100% ownership interest in National Onshore LP and National Offshore LP. Our Oil and Gas operations consist of exploration, development, and production operations principally in Texas, Oklahoma, Louisiana, and Arkansas and offshore in the Gulf of Mexico.
 
Summary balance sheets for NEG Oil & Gas as of June 30, 2006 and December 31, 2005, included in the consolidated balance sheets, are as follows (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Current assets
  $ 111,742     $ 172,188  
Oil and gas properties, full cost method
    796,250       742,459  
Other assets
    43,120       43,648  
                 
Total assets
  $ 951,112     $ 958,295  
                 
Current liabilities
  $ 54,017     $ 103,726  
Credit facility (non-current)
    300,000       300,000  
Other noncurrent liabilities
    51,749       60,479  
                 
Total liabilities
  $ 405,766     $ 464,205  
                 


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Summarized unaudited statements of operations for the three and six month periods ended June 30, 2006 and 2005, including amounts related to unrealized derivative gains (losses), are as follows (in $000s):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Gross oil and gas revenues
  $ 71,135     $ 69,662     $ 152,318     $ 125,925  
Realized derivative losses
    (6,600 )     (4,834 )     (18,687 )     (7,967 )
Unrealized derivative gains (losses)
    20,359       6,936       57,611       (31,833 )
                                 
Oil and gas revenues
    84,894       71,764       191,242       86,125  
Plant revenues
    1,712       1,596       3,656       2,913  
                                 
Total revenues
    86,606       73,360       194,898       89,038  
                                 
Costs and expenses:
                               
Oil and gas operating expenses
    13,684       12,175       27,729       25,539  
Depreciation, depletion and amortization
    23,654       24,506       47,788       44,809  
General and administrative expenses
    2,740       4,252       7,865       7,655  
                                 
Total cost and expenses
    40,078       40,933       83,382       78,003  
                                 
Operating income
  $ 46,528     $ 32,427     $ 111,516     $ 11,035  
                                 
 
Oil and gas operating expenses comprise expenses that are directly attributable to exploration, development and production operations including lease operating expenses, transportation expenses, gas plant operating expenses, ad valorem and production taxes.
 
For the three months ended June 30, 2006 and 2005, natural gas comprised 63% and 68% of gross oil and gas revenues, respectively. For the six months ended June 30, 2006 and 2005, natural gas comprised 65% and 66% of gross oil and gas revenues, respectively.
 
b.  Gaming
 
We own and operate gaming properties in Nevada and Atlantic City. Our Nevada properties include the Stratosphere Casino Hotel and Tower, Arizona Charlie’s Decatur, and Arizona Charlie’s Boulder in Las Vegas and the Flamingo Laughlin Hotel and Casino in Laughlin. Results for the Flamingo Laughlin are included from the date of acquisition, May 19, 2006. Our Atlantic City operations are based on our ownership of The Sands through our majority ownership of Atlantic Coast.
 
Summary balance sheets for our Gaming segment as of June 30, 2006 and December 31, 2005, included in the consolidated balance sheets, are as follows (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Current assets
  $ 135,300     $ 158,250  
Property, plant and equipment, net
    617,064       441,059  
Other non-current assets
    61,039       57,632  
                 
Total assets
  $ 813,403     $ 656,941  
                 
Current liabilities
  $ 70,403     $ 59,271  
Long term debt
    280,005       217,335  
Other non-current liabilities
    12,743       14,926  
                 
Total liabilities
  $ 363,151     $ 291,532  
                 


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Summarized unaudited statements of operations for the three and six months ended June 30, 2006 and 2005 are as follows (in $000s):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Revenues:
                               
Casino
  $ 89,190     $ 81,168     $ 174,562     $ 166,238  
Hotel
    22,025       18,602       42,346       36,689  
Food and beverage
    25,024       23,307       47,499       45,249  
Tower, retail and other income
    10,000       10,241       18,757       19,118  
                                 
Gross revenues
    146,239       133,318       283,164       267,294  
Less promotional allowances
    11,459       10,750       21,666       22,059  
                                 
Net revenues
    134,780       122,568       261,498       245,235  
                                 
Expenses:
                               
Casino
    30,771       27,595       58,617       55,322  
Hotel
    9,261       8,033       17,332       14,759  
Food and beverage
    17,243       14,842       32,521       28,784  
Tower, retail and other income
    4,453       4,324       8,414       8,171  
Selling, general and administrative
    47,685       41,421       90,465       83,963  
Depreciation and amortization
    10,244       9,361       19,671       18,580  
                                 
Total costs and expenses
    119,657       105,576       227,020       209,579  
                                 
Operating income
  $ 15,123     $ 16,992     $ 34,478     $ 35,656  
                                 
 
c.  Real Estate
 
Our real estate operations consist of rental real estate, property development, and associated resort activities.
 
A summary of real estate assets as of June 30, 2006 and December 31, 2005, included in the consolidated balance sheets, is as follows (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Rental properties:
               
Finance leases, net
  $ 71,493     $ 73,292  
Operating leases
    45,681       50,012  
Property development
    125,187       116,007  
Resort properties
    45,990       46,383  
                 
Total real estate
  $ 288,351     $ 285,694  
                 
 
In addition to the above are properties held for sale. The amount included in other current assets related to such properties was $23.8 million and $27.2 million as of June 30, 2006 and December 31, 2005, respectively (see Note 8). The operating results of certain of these properties are classified as discontinued operations.


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Summarized unaudited statements of operations attributable to real estate operations are as follows (in $000s):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Revenues:
                               
Rental real estate:
                               
Interest income on financing leases
  $ 1,715     $ 1,801     $ 3,450     $ 3,767  
Rental income
    2,402       2,113       4,535       4,213  
Property development
    37,852       14,459       49,236       22,739  
Resort operations
    7,096       7,082       13,178       12,691  
                                 
Total revenues
    49,065       25,455       70,399       43,410  
                                 
Operating expenses:
                               
Rental real estate
    978       1,091       2,173       2,331  
Property development
    25,976       13,265       35,952       21,450  
Resort operations
    7,260       7,070       13,524       13,474  
                                 
Total expenses
    34,214       21,426       51,649       37,255  
                                 
Operating income
  $ 14,851     $ 4,029     $ 18,750     $ 6,155  
                                 
 
Rental Real Estate
 
As of June 30, 2006, we owned 47 rental real estate properties. These primarily consist of fee and leasehold interests in real estate in 23 states. Most of these properties are net-leased to single corporate tenants. Approximately 87% of these properties are currently net-leased, 4% are operating properties and 9% are vacant.
 
We market portions of our commercial real estate portfolio for sale. Unaudited sale activity was as follows (in $000s, except unit data):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Properties sold
    4       7       8       11  
Proceeds received
  $ 7,354     $ 4,856     $ 8,327     $ 48,320  
Mortgage debt repaid
  $     $     $     $ 10,702  
Total gain recorded
  $ 1,308     $ 2,644     $ 1,559     $ 15,844  
Gain recorded in operations
  $     $     $     $ 186  
Gain recorded in discontinued operations(i)
  $ 1,308     $ 2,644     $ 1,559     $ 15,658  
 
 
(i) A gain of $5.7 million on the sale of resort properties was recognized in the six months ended June 30, 2005 in addition to gains on the rental portfolio.
 
Property Development and Associated Resort Activities
 
We own, primarily through our Bayswater subsidiary, residential development properties. Bayswater, a real estate investment, management and development company, focuses primarily on the construction and sale of single-family houses, multi-family homes and lots in subdivisions and planned communities, and raw land for residential development. Our New Seabury development property in Cape Cod, Massachusetts, and our Grand Harbor and Oak Harbor development property in Vero Beach, Florida each include land for current and future residential development of approximately 425 and 1,000 units of residential housing, respectively. Both developments operate golf and resort activities. We are also developing residential communities in Naples, Florida and Westchester County, New York.


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Unaudited property development sales activity was as follows (in $000s except unit data):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Units sold
                               
New Seabury, Massachusetts
    20       1       30       1  
Grand Harbor/Oak Harbor, Florida
    6       5       8       11  
Falling Waters, Florida
    9       23       9       47  
Westchester, New York
    6       3       6       3  
                                 
      41       32       53       62  
                                 
Revenues
                               
New Seabury, Massachusetts
  $ 21,352     $ 423     $ 30,385     $ 423  
Grand Harbor/Oak Harbor, Florida
    4,123       3,250       6,444       6,673  
Falling Waters, Florida
    2,261       4,212       2,261       9,068  
Westchester, New York
    10,116       6,574       10,146       6,575  
                                 
    $ 37,852     $ 14,459     $ 49,236     $ 22,739  
                                 
 
d.  Home Fashion
 
We conduct our Home Fashion operations through our majority ownership in WPI.
 
Summary balance sheets for Home Fashion as of June 30, 2006 and December 31, 2005, as included in the consolidated balance sheets, are as follows (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Current assets
  $ 543,226     $ 583,496  
Property plant and equipment, net
    115,986       166,026  
Intangible and other assets
    25,888       23,402  
                 
Total assets
  $ 685,100     $ 772,924  
                 
Current liabilities
  $ 104,768     $ 103,931  
Other liabilities
    1,003       5,214  
                 
Total liabilities
  $ 105,771     $ 109,145  
                 
 
Unaudited summarized statements of operations for the three and six months ended June 30, 2006 are as follows (in $000s):
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2006     June 30, 2006  
 
Revenues
  $ 237,148     $ 480,638  
Costs and expenses:
               
Cost of sales
    224,222       452,582  
Selling, general and administrative
    40,698       84,015  
Restructuring and impairment charges
    20,567       30,338  
                 
Total costs and expenses
    285,487       566,935  
                 
Operating loss
  $ (48,339 )   $ (86,297 )
                 
 
Total depreciation for the three month period ended June 30, 2006 was $9.5 million, of which $7.7 million was included in cost of sales and $1.8 million was included in selling, general and administrative expenses. Total expenses for the three month period ended June 30, 2006 include $18.8 million of impairment charges related to the


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fixed assets of plants that will be closed and $1.7 million of restructuring charges (of which approximately $0.1 million relate to severance and $1.6 million relate to continuing costs related to closed plants).
 
For the six month period ended June 30, 2006, total depreciation was $19.9 million, of which $16.3 million was included in cost of sales and $3.6 million was included in selling, general and administrative expenses. Total expenses for the six month period include $26.5 million of impairment charges related to the fixed assets of plants that will be closed and $3.8 million of restructuring charges (of which approximately $1.3 million relate to severance and $2.5 million relate to continuing costs related to closed plants).
 
Impairment and restructuring charges for the three and six months ended June 30, 2006 are included in Home Fashion operating expenses in the accompanying consolidated statements of operations.
 
To improve WPI’s competitive position, we intend to restructure its operations to significantly reduce its cost of goods sold by closing certain plants located in the United States, sourcing goods from lower cost overseas facilities, and acquiring manufacturing facilities and entering into joint ventures. The Company has incurred impairment charges to write-down the value of WPI plants taken out of service to their estimated liquidation value.
 
Included in restructuring expenses are cash charges associated with the ongoing costs of closed plants, employee severance, benefits and related costs. The amount of accrued restructuring costs at December 31, 2005 was $0.1 million. During the six months ended June 30, 2006, we incurred additional restructuring costs of $3.8 million, of which $3.6 million was paid during the period. As of June 30, 2006 the accrued liability balance was $0.3 million which is included in accounts payable and accrued expenses in our consolidated balance sheet.
 
We expect our restructuring charges will continue to be incurred throughout 2006 and into 2007. As of June 30, 2006, WPI expects to incur future restructuring costs over the next year relating to the current restructuring plan of between $10 million and $15 million.
 
Note 5.   Investments and Related Matters
 
Investments consist of the following (in $000s):
 
                                 
    June 30, 2006     December 31, 2005  
          Carrying
          Carrying
 
    Cost     Value     Cost     Value  
    (Unaudited)              
 
Current Investments:
                               
Trading
                               
Marketable equity and debt securities
  $     $     $ 33,301     $ 39,232  
Other investments
          19,000              
                                 
Total current trading
          19,000       33,301       39,232  
                                 
Available for Sale
                               
U.S. Government and agency obligations
    3,237       3,189       3,346       3,346  
Marketable equity and debt securities
    845,221       853,348       746,731       746,839  
Other investments
    25,035       25,725       31,282       31,282  
                                 
Total current available for sale
    873,493       882,262       781,359       781,467  
                                 
Total current investments
  $ 873,493     $ 901,262     $ 814,660     $ 820,699  
                                 
Non-Current Investments:
                               
Other securities
    16,324       16,324       15,964       15,964  
                                 
Total non-current
  $ 16,324     $ 16,324     $ 15,964     $ 15,964  
                                 
 
In the third quarter of 2005, we began using the services of an unaffiliated third party investment manager to manage certain fixed income investments. As of June 30, 2006, $462.2 million had been invested at the discretion of such manager in a diversified portfolio consisting predominantly of short-term investment grade debt securities. Investments managed by the third party investment manager are classified as available for sale securities in the above table.


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Securities Sold Not Yet Purchased
 
As of June 30, 2006 and December 31, 2005, liabilities of $81.7 million (unaudited) and $75.9 million, respectively, had been recorded related to short sales of securities.
 
Margin Liability on Marketable Securities
 
As of June 30, 2006 and December 31, 2005, liabilities of $144.6 million (unaudited) and $131.1 million, respectively, had been recorded related to purchases of securities that had been made on margin. The margin liability is secured by the securities we purchased and cannot exceed certain pre-established percentages of the fair market value of the securities collateralizing the liability. If the margin liability exceeds such percentages, we will be subject to a margin call and required to fund the account to return the margin balance to the pre-established percentages of the fair market value of the securities collateralizing the liability.
 
Note 6.   Inventories, Net
 
Inventories, net, relate solely to our Home Fashion segment and consist of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Raw materials and supplies
  $ 32,777     $ 33,083  
Goods in process
    120,742       100,337  
Finished goods
    132,197       110,819  
                 
    $ 285,716     $ 244,239  
                 
 
Note 7.   Trade, Notes and Other Receivables, Net
 
Trade notes and other receivables, net, consist of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Trade receivables — Home Fashion
  $ 152,596     $ 173,050  
Allowance for doubtful accounts — Home Fashion
    (8,281 )     (8,313 )
Trade receivables — Oil and Gas
    48,101       58,956  
Allowance for doubtful accounts — Oil and Gas
    (4,903 )     (5,572 )
Other
    26,424       36,893  
                 
    $ 213,937     $ 255,014  
                 
 
Note 8.   Other Current Assets
 
Other current assets consist of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Assets held for sale
  $ 42,116     $ 49,876  
Restricted cash
    180,025       161,210  
Other
    61,999       76,899  
                 
    $ 284,140     $ 287,985  
                 
 
As of June 30, 2006, assets held for sale consists of $23.8 million of real estate assets and $18.3 million of WPI assets. As of December 31, 2005, assets held for sale consists of $27.2 million of real estate assets and $22.7 million of WPI assets.


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Restricted cash is primarily composed of funds required as collateral for the outstanding short securities and derivative positions. Additionally, restricted cash consists of balances for escrow deposits and funds held to collateralize letters of credit.
 
Note 9.   Property, Plant and Equipment
 
Property, plant and equipment consists of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Land
  $ 257,411     $ 182,539  
Buildings and improvements
    467,623       374,160  
Proved oil and gas properties
    1,331,324       1,229,923  
Machinery, equipment and furniture
    341,731       357,018  
Assets leased to others
    135,694       141,997  
Construction in progress
    91,877       69,893  
                 
      2,625,660       2,355,530  
                 
Less accumulated depreciation, depletion and amortization
    (808,009 )     (720,292 )
                 
Net property, plant and equipment
  $ 1,817,651     $ 1,635,238  
                 
 
Depreciation, depletion and amortization expense related to property, plant and equipment for the three month periods ended June 30, 2006 and 2005 were $44.6 million and $35.1 million, respectively. Depreciation, depletion and amortization expense related to property, plant and equipment for the six month periods ended June 30, 2006 and 2005 were $89.7 million and $66.2 million, respectively.
 
Note 10.   Other Non-Current Assets
 
Other non-current assets consist of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Deferred taxes
  $ 44,592     $ 51,511  
Deferred finance costs, net of accumulated amortization of $5,467 and $4,076 as of June 30, 2006 and December 31, 2005, respectively
    30,769       29,822  
Restricted deposits
    29,491       24,805  
Other
    3,642       1,660  
                 
    $ 108,494     $ 107,798  
                 
 
Restricted deposits primarily represent amounts escrowed with respect to asset retirement obligations at our Oil and Gas operations (see Note 18).
 
Note 11.   Other Non-Current Liabilities
 
Other non-current liabilities consist of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Asset retirement obligations (see Note 18)
  $ 42,589     $ 41,228  
Derivative liability (see Note 19)
    6,105       17,893  
Other long-term liabilities
    29,057       29,964  
                 
    $ 77,751     $ 89,085  
                 


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Note 12.   Minority Interests
 
Minority interests consist of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
WPI
  $ 206,241     $ 247,015  
Atlantic Coast
    57,543       57,584  
                 
    $ 263,784     $ 304,599  
                 
 
Note 13.   Long Term Debt
 
Long-term debt consists of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Senior unsecured 7.125% notes due 2013 — AREP
  $ 480,000     $ 480,000  
Senior unsecured 8.125% notes due 2012 — AREP
    351,083       350,922  
Senior secured 7.85% notes due 2012 — ACEP
    215,000       215,000  
Borrowings under credit facility — ACEP
    60,000        
Borrowings under credit facility — NEG Oil & Gas
    300,000       300,000  
Mortgages payable
    113,546       81,512  
Other
    8,259       8,387  
                 
Total long-term debt
    1,527,888       1,435,821  
Less current portion, including debt related to real estate held for sale
    21,601       24,155  
                 
    $ 1,506,287     $ 1,411,666  
                 
 
Senior unsecured notes restrictions and covenants — AREP
 
Both issuances of our senior unsecured notes restrict the payment of cash dividends or distributions, the purchase of equity interests or the purchase, redemption, defeasance or acquisition of debt subordinated to the senior unsecured notes. The notes also restrict the incurrence of debt, or the issuance of disqualified stock, as defined, with certain exceptions, provided that we may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of the aggregate principal amount of all outstanding indebtedness of AREP and its subsidiaries on a consolidated basis to the tangible net worth of AREP and its subsidiaries on a consolidated basis would have been less than 1.75 to 1.0. As of June 30, 2006, such ratio was less than 1.75 to 1.0. Based on this ratio, we and AREH could have incurred up to approximately $1.5 billion of additional indebtedness.
 
In addition, both issuances of notes require that on each quarterly determination date we and the guarantor of the notes (currently only AREH) maintain a minimum ratio of cash flow to fixed charges each as defined, of 1.5 to 1, for the four consecutive fiscal quarters most recently completed prior to such quarterly determination date. For the four quarters ended June 30, 2006, the ratio of cash flow to fixed charges was in excess of 1.5 to 1.0.
 
The notes also require, on each quarterly determination date, that the ratio of total unencumbered assets, as defined, to the principal amount of unsecured indebtedness, as defined, be greater than 1.5 to 1.0 as of the last day of the most recently completed fiscal quarter. As of June 30, 2006, such ratio was in excess of 1.5 to 1.0.
 
Senior secured 7.85% notes due 2012 — ACEP
 
ACEP’s 7.85% senior secured notes due 2012 restrict the payment of cash dividends or distributions by ACEP, the purchase of its equity interests, the purchase, redemption, defeasance or acquisition of debt subordinated to ACEP’s notes and investments as “restricted payments.” ACEP’s notes also prohibit the incurrence of debt, or the issuance of disqualified or preferred stock, as defined, by ACEP, with certain exceptions, provided that ACEP may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of consolidated cash flow to fixed charges (each as defined) for the most recently ended four full fiscal quarters for which internal


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financial statements are available immediately preceding the date on which such additional indebtedness is incurred or disqualified stock or preferred stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt incurrence or issuance. As of June 30, 2006, such ratio was in excess of 2.0 to 1.0. The ACEP notes also restrict the creation of liens, the sale of assets, mergers, consolidations or sales of substantially all of its assets, the lease or grant of a license, concession, other agreements to occupy, manage or use our assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The ACEP notes allow it to incur indebtedness, among other things, of up to $50 million under credit facilities, non-recourse financing of up to $15 million to finance the construction, purchase or lease of personal or real property used in its business, permitted affiliate subordinated indebtedness (as defined), the issuance of additional 7.85% senior secured notes due 2012 in an aggregate principal amount not to exceed 2.0 times net cash proceeds received from equity offerings and permitted affiliate subordinated debt, and additional indebtedness of up to $10.0 million.
 
ACEP Senior Secured Revolving Credit Facility
 
Effective May 11, 2006, ACEP, and certain of ACEP’s subsidiaries, as Guarantors, entered into an amended and restated credit agreement with Wells Fargo Bank N.A., as syndication agent, Bear Stearns Corporate Lending Inc., as administrative agent, and certain other lender parties. As of June 30, 2006, the interest rate on the outstanding borrowings under the credit facility was 6.76% per annum. The credit agreement amends and restates, and is on substantially the same terms, as a credit agreement entered into as of January 29, 2004. Under the credit agreement, ACEP will be permitted to borrow up to $60.0 million. Obligations under the credit agreement are secured by liens on substantially all of the assets of ACEP and its subsidiaries. The credit agreement has a term of four years and all amounts will be due and payable on May 10, 2010. As of June 30, 2006, there were $60.0 million of borrowings under the credit agreement. The borrowings were incurred to finance a portion of the purchase price of the Flamingo Laughlin.
 
The credit agreement includes covenants that, among other things, restrict the incurrence of additional indebtedness by ACEP and its subsidiaries, the issuance of disqualified or preferred stock, as defined, the creation of liens by ACEP or its subsidiaries, the sale of assets, mergers, consolidations or sales of substantially all of ACEP’s assets, the lease or grant of a license or concession, other agreements to occupy, manage or use ACEP’s assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The credit agreement also requires that, as of the last date of each fiscal quarter, ACEP’s ratio of consolidated first lien debt to consolidated cash flow not be more than 1.0 to 1.0. As of June 30, 2006, this ratio was 0.72 to 1.0. As of June 30, 2006, ACEP was in compliance with each of the covenants.
 
The restrictions imposed by ACEP’s senior secured notes and the credit facility likely will limit our receiving payments from the operations of our principal hotel and gaming properties.
 
NEG Oil & Gas LLC Senior Secured Revolving Credit Facility
 
On December 22, 2005, NEG Oil & Gas entered into a credit facility, with Citicorp USA, Inc., as administrative agent, Bear Stearns Corporate Lending Inc., as syndication agent, and certain other lenders. As of June 30, 2006, the interest rate on the outstanding borrowings under the credit facility was 7.38% per annum. Commitment fees for the unused credit facility range from 0.375% to 0.50% and are payable quarterly.
 
Under the credit facility, NEG Oil & Gas will be permitted to borrow up to the lesser of $500.0 million or the borrowing base, which is currently set at $335.0 million. Borrowings under the credit facility are subject to a borrowing base determination based on, among other things, the oil and gas properties of NEG Oil & Gas and its subsidiaries and the reserves and production related to those properties. The borrowing base is subject to semi-annual redeterminations, based on engineering reports to be provided by NEG Oil & Gas by March 31 and September 30 of each year, beginning March 31, 2006. The credit facility has a term of five years and all amounts will be due and payable on December 20, 2010. As of June 30, 2006, NEG Oil & Gas had remaining borrowing availability under the credit facility of $12.9 million representing the borrowing base less $300 million debt outstanding and outstanding letters of credit of $22.1 million.
 
The credit facility contains covenants that, among other things, restrict the incurrence of indebtedness by NEG Oil & Gas and its subsidiaries, the creation of liens by them, hedging contracts, mergers and issuances of securities by them and distributions and investments by NEG Oil & Gas and its subsidiaries. It also requires NEG Oil & Gas to maintain: (1) a ratio of consolidated total debt to consolidated EBITDA (for the four fiscal quarter periods ending on


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the date of the consolidated balance sheet used to determine consolidated total debt), as defined, of not more than 3.5 to 1.0; (2) consolidated tangible net worth, as defined, of not less than $240 million, plus 50% of consolidated net income for each fiscal quarter ending after December 31, 2005 for which consolidated net income is positive; and (3) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0. These covenants may have the effect of limiting distributions by NEG Oil & Gas. As of June 30, 2006, NEG Oil & Gas was in compliance with each of the covenants. The restrictions imposed by the NEG Oil & Gas credit facility likely will limit our receiving payments from the operations of our oil and gas properties.
 
Real Estate Mortgages Payable
 
On June 30, 2006, indirect subsidiaries of the Company engaged in property development and associated resort activities entered into a $32.5 million loan agreement with Textron Financial Corp. The loan is secured by a mortgage on the Company’s New Seabury golf course and resort in Mashpee, Massachusetts. The loan bears interest at the rate of 7.96% per annum and matures in five years with a balloon payment due of $30.0 million. Annual debt service payments of $3.0 million are required, which are payable in monthly installment amounts based on a 25 year amortization schedule.
 
WPI Secured Revolving Credit Agreement
 
On June 16, 2006, our subsidiary, WestPoint Home, Inc., entered into a loan and security agreement with Bank of America, N.A., as Administrative Agent and lender. Other lenders may be added from time to time. Under the five-year agreement, WestPoint Home will be permitted to borrow on a revolving credit basis up to $250.0 million (subject to a monthly borrowing base calculation) at any one time outstanding, including a $75.0 million sub-limit that may be used for letters of credit. Borrowings under the agreement bear interest, at the election of WestPoint Home, either at the prime rate adjusted by an applicable margin ranging from minus 0.25% to plus 0.50% or LIBOR adjusted by an applicable margin ranging from plus 1.25% to 2.00%. WestPoint Home pays an unused line fee of 0.25% to 0.275%. Obligations under the agreement are secured by WestPoint Home’s receivables, inventory and certain machinery and equipment.
 
The agreement contains covenants including, among others, restrictions on the incurrence of indebtedness, investments, redemption payments, distributions, acquisition of stock, securities or assets of any other entity and capital expenditures. However, WestPoint Home is not precluded from effecting any of these transactions if excess availability, after giving effect to such transaction, meets a minimum threshold.
 
As of June 30, 2006, there were no borrowings under the agreement, but there were outstanding letters of credit of approximately $33.7 million.
 
Note 14.   Other Income (Expense)
 
Unaudited other income (expense), net, is comprised of the following (in $000s):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Net realized gains on sales of marketable securities
  $ 22,855     $ 5,009     $ 56,286     $ 5,009  
Net realized losses on securities sold short
    (27,044 )     (10,021 )     (32,175 )     (10,021 )
Unrealized gains (losses) on marketable securities
    4,272     $ (917 )     19,750       3,105  
Unrealized gains (losses) on securities sold short
    44,276       (15,395 )     18,800       2,287  
Other
    1,763       1,504       4,932       5,752  
                                 
    $ 46,122     $ (19,820 )   $ 67,593     $ 6,132  
                                 
 
Note 15.   Unit Options
 
On June 29, 2005, we granted 700,000 nonqualified unit options to our then chief executive officer. The option agreement permitted our chief executive officer to purchase up to 700,000 of our depositary units at an exercise price of $35 per unit and vested over a period of eight years. On March 14, 2006, our chief executive officer resigned


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from that position, became a director and Vice-Chairman of the Board of API, and was designated as principal executive officer. These changes in status caused the options to be cancelled in accordance with their terms.
 
In accordance with SFAS 123(R) Share Based Payment, the cancellation required that any previously unrecognized compensation cost be recognized at the date of cancellation and accordingly we recorded a compensation charge of $6.2 million related to the previously unrecognized compensation cost.
 
Note 16.   Preferred Units
 
Pursuant to the terms of the preferred units, on February 8, 2006 we declared our scheduled annual preferred unit distribution payable in additional preferred units at the rate of 5% of the liquidation preference per preferred unit of $10. The distribution was paid on March 31, 2006 to holders of record as of March 15, 2006. A total of 539,846 additional preferred units were issued. As of June 30, 2006, 11,340,243 preferred units are issued and outstanding. In March 2006, the number of authorized preferred units was increased to 11,400,000.
 
Note 17.   Earnings Per Limited Partnership Unit
 
Basic earnings per LP unit are based on earnings attributable to limited partners. Net earnings available for limited partners are divided by the weighted average number of limited partnership units outstanding. Diluted earnings per LP unit are based on earnings before the preferred unit distribution as the numerator with the denominator based on the weighted average number of units and equivalent units outstanding assuming conversion. The preferred units are considered to be equivalent units.
 
The following table sets forth the computation of basic and diluted earnings per LP units (in 000s, except per unit data) (unaudited).
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Attributable to limited partners:
                               
Basic income (loss) from continuing operations
  $ 67,983     $ (5,769 )   $ 115,929     $ 18,321  
Add preferred unit distribution(1)
    1,389             2,698        
                                 
Income (loss) before discontinued operations
    69,372     $ (5,769 )     118,627       18,321  
Income from discontinued operations
    1,713       2,972       2,485       22,009  
                                 
Diluted earnings (loss)
  $ 71,085     $ (2,797 )   $ 121,112     $ 40,330  
                                 
Weighted average LP units outstanding
    61,857       46,271       61,857       46,185  
Dilutive effect of redemption of preferred LP units(2)
    2,666             2,761        
Dilutive effect of unit options
                45        
                                 
Weighted average LP units and equivalent partnership units outstanding
    64,523       46,271       64,663       46,185  
                                 
Basic earnings:
                               
Income (loss) from continuing operations
  $ 1.10     $ (0.12 )   $ 1.87     $ 0.40  
Income from discontinued operations
    0.03       0.06       0.04       0.48  
                                 
Basic earnings (loss) per LP unit
  $ 1.13     $ (0.06 )   $ 1.91     $ 0.88  
                                 
Diluted earnings:
                               
Income (loss) from continuing operations
  $ 1.08     $ (0.12 )   $ 1.83     $ 0.40  
Income from discontinued operations
    0.03       0.06       0.04       0.48  
                                 
Diluted earnings (loss) per LP unit
  $ 1.11     $ (0.06 )   $ 1.87     $ 0.88  
                                 
 
 
(1) Includes adjustment for interest expense associated with Preferred LP units distribution (see Note 16).


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(2) As their effect would have been anti-dilutive, 3,904,994 and 3,788,634 units have been excluded from the weighted average LP units and equivalent partnership units outstanding for the three and six months ended June 30, 2005, respectively.
 
Note 18.   Asset Retirement Obligations — Oil and Gas
 
Our asset retirement obligations represent expected future costs to plug and abandon our wells, dismantle facilities, and reclamate sites at the end of the related assets’ useful lives.
 
As of June 30, 2006 and December 31, 2005, we had $28.5 million and $24.3 million, respectively, held in various escrow accounts relating to the asset retirement obligations for certain offshore properties, which is included in other non-current assets in the consolidated balance sheet. The following table summarizes changes in our asset retirement obligations during the six months ended June 30, 2006 and the year ended December 31, 2005, respectively (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Beginning of year
  $ 41,228     $ 56,524  
Add: Accretion
    1,361       3,019  
Drilling additions
          2,067  
Less: Revisions
          (2,813 )
Settlements
          (431 )
Dispositions
          (17,138 )
                 
End of period
  $ 42,589     $ 41,228  
                 
 
Note 19.   Oil and Gas Derivatives
 
The following is a summary of our commodity price collar agreements as of June 30, 2006:
 
                       
Type of Contract
  Production Month   Volume Per Month   Floor   Ceiling  
 
No cost collars
  July-Dec 2006   31,000 Bbls     41.65     45.25  
No cost collars
  July-Dec 2006   16,000 Bbls     41.75     45.40  
No cost collars
  July-Dec 2006   570,000 MMBTU     6.00     7.25  
No cost collars
  July-Dec 2006   120,000 MMBTU     6.00     7.28  
No cost collars
  July-Dec 2006   500,000 MMBTU     4.50     5.00  
No cost collars
  July-Dec 2006   46,000 Bbls*     60.00     68.50  
No cost collars
  Jan-Dec 2007   30,000 Bbls     57.00     70.50  
No cost collars
  Jan-Dec 2007   30,000 Bbls     57.50     72.00  
No cost collars
  Jan-Dec 2007   930,000 MMBTU     8.00     10.225  
No cost collars
  Jan-Dec 2007   1,000 Bbls     65.00     87.40  
No cost collars
  Jan-Dec 2007   7,000 Bbls     65.00     86.00  
No cost collars
  Jan-Dec 2007   330,000 MMBTU     9.60     12.10  
No cost collars
  Jan-Dec 2007   100,000 MMBTU     9.55     12.60  
No cost collars
  Jan -Dec 2008   46,000 Bbls     55.00     69.00  
No cost collars
  Jan-Dec 2008   750,000 MMBTU     7.00     10.35  
No cost collars
  Jan-Dec 2008   9,000 Bbls     65.00     81.25  
No cost collars
  Jan-Dec 2008   70,000 MMBTU     8.75     11.90  
No cost collars
  Jan-Dec 2008   270,000 MMBTU     8.80     11.45  
No cost collars
  Jan-Dec 2009   19,000 Bbls     65.00     78.50  
No cost collars
  Jan-Dec 2009   26,000 Bbls     65.00     77.00  
No cost collars
  Jan-Dec 2009   330,000 MMBTU     7.90     10.80  
No cost collars
  Jan-Dec 2009   580,000 MMBTU     7.90     11.00  


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The company participates in a second ceiling at $84.50 on July-Dec 2006 46,000 Bbls swap.
 
We record derivative contracts as assets or liabilities in the balance sheet at fair value. As of June 30, 2006 and December 31, 2005, these derivatives were recorded as a liability of $28.3 million (including a current liability of $22.2 million) and $85.9 million (including a current liability of $68.0 million), respectively. The long-term portion is included in other non-current liabilities. We have elected not to designate any of these instruments as hedges for accounting purposes and, accordingly, both realized and unrealized gains and losses are included in oil and gas revenues.
 
Note 20.   Segment Reporting
 
We report the following six reportable segments: (1) Oil and Gas; (2) Gaming; (3) Rental Real Estate; (4) Property Development; (5) Associated Resort Activities and (6) Home Fashion. Our three real estate related operating and reportable segments are all individually immaterial and have been aggregated for purposes of the accompanying consolidated balance sheets and statements of operations.
 
We assess and measure segment operating results based on segment earnings from operations as disclosed below. Segment earnings from operations are not necessarily indicative of cash available to fund cash requirements nor synonymous with cash flow from operations. As discussed above, the terms of financings for the Oil and Gas, Gaming, Home Fashion and Property Development segments impose restrictions on their ability to transfer funds to us, including restrictions on dividends, distributions, loans and other transactions.


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The revenues and net segment operating income for each of the reportable segments are summarized as follows for the three and six months ended June 30, 2006 and 2005 (in $000s) (unaudited):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Revenues:
                               
Oil and Gas
  $ 86,606     $ 73,360     $ 194,898     $ 89,038  
Gaming
    134,780       122,568       261,498       245,235  
Real Estate
                               
Rental real estate
    4,117       3,914       7,985       7,980  
Property development
    37,852       14,459       49,236       22,739  
Resort operations
    7,096       7,082       13,178       12,691  
                                 
Total real estate
    49,065       25,455       70,399       43,410  
                                 
Home Fashion
    237,148             480,638        
                                 
Total revenues
  $ 507,599     $ 221,383     $ 1,007,433     $ 377,683  
                                 
Net segment operating income (loss):
                               
Oil and Gas
  $ 46,528     $ 32,427     $ 111,516     $ 11,035  
Gaming
    15,123       16,992       34,478       35,656  
Real Estate
                               
Rental real estate
    3,139       2,823       5,812       5,649  
Property development
    11,876       1,194       13,284       1,289  
Resort operations
    (164 )     12       (346 )     (783 )
                                 
Total real estate earnings
    14,851       4,029       18,750       6,155  
                                 
Home Fashion
    (48,339 )           (86,297 )      
                                 
Total segment operating income (loss)
    28,163       53,448       78,447       52,846  
                                 
Holding Company costs(i)
    (3,675 )     (5,301 )     (14,980 )     (8,209 )
                                 
Total operating income
    24,488       48,147       63,467       44,637  
                                 
Interest expense
    (31,614 )     (28,825 )     (62,202 )     (52,005 )
Interest income
    13,694       14,234       26,286       26,585  
Other income (expense), net
    46,122       (19,820 )     67,593       6,132  
Income tax expense
    (9,155 )     (9,030 )     (17,812 )     (12,436 )
Minority interests
    25,828       615       40,951       1,547  
                                 
Income from continuing operations
  $ 69,363     $ 5,321     $ 118,283     $ 14,460  
                                 
 
 
(i) Holding company costs include general and administrative expenses and acquisition costs of the holding company. General and administrative expenses of the segments are included in their respective operating expenses in the accompanying statements of earnings.
 


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    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
    (Unaudited)     (Unaudited)  
 
Depreciation, depletion and amortization (D,D&A) by segment:
                               
Oil and Gas
  $ 23,654     $ 24,506     $ 47,788     $ 44,809  
Gaming
    10,244       9,361       19,671       18,580  
Real Estate:
                               
Rental real estate
    416       410       832       1,030  
Property development
    104             104        
Resort operations
    821       870       1,567       1,738  
                                 
Total real estate
    1,341       1,280       2,503       2,768  
                                 
Home Fashion
    9,534             19,898        
                                 
D,D&A in operating expenses
    44,773       35,147       89,860       66,157  
Amortization in interest expense
    1,257       1,407       2,541       3,006  
                                 
Total D,D&A for continuing operations
  $ 46,030     $ 36,554     $ 92,401     $ 69,163  
                                 
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Assets:
               
Oil and Gas
  $ 951,112     $ 958,295  
Gaming
    813,403       656,941  
Real Estate
    485,883       442,594  
Home Fashion
    685,100       772,924  
                 
Subtotal
    2,935,498       2,830,754  
Reconciling items (ii)
    1,182,417       1,135,708  
                 
Total assets
  $ 4,117,915     $ 3,966,462  
                 
 
 
(ii) Reconciling items relate principally to cash and investments of the Holding Company.
 
                 
    Six Months Ended
 
    June 30,  
    2006     2005  
    (Unaudited)  
 
Capital expenditures:
               
Oil and Gas
  $ 101,614     $ 134,017  
Gaming
    25,506       13,077  
Rental Real Estate
    32        
Hotel and resort operating properties
    1,224       1,418  
Home Fashion
    3,008        
                 
    $ 131,384     $ 148,512  
                 

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Note 21.   Income Taxes
 
Our subsidiaries recorded the following income tax expense attributable to continuing operations for its taxable subsidiaries for the three and six months ended June 30, 2006 and 2005 (in $000s) (unaudited):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Current
  $ (3,679 )   $ (2,488 )   $ (9,525 )   $ (3,841 )
Deferred
    (5,476 )     (6,542 )     (8,287 )     (8,595 )
                                 
    $ (9,155 )   $ (9,030 )   $ (17,812 )   $ (12,436 )
                                 
 
Our effective income tax rate was 17.4% and 65.7% for the three months ended June 30, 2006 and 2005, respectively. Our effective income tax rate was 18.7% and 49.1% for the six months ended June 30, 2006 and 2005, respectively. The difference between the effective tax rate and the statutory federal rate of 35% is principally due to income or losses from partnership entities in which taxes are the responsibility of the partners, and losses incurred by WPI for which no tax benefit was recognized.
 
Note 22.   Commitments and Contingencies
 
We and our subsidiaries are from time to time parties to various legal proceedings arising out of our businesses. We believe however, that other than the proceedings discussed below, there are no proceedings pending or threatened against us which, if determined adversely, would have a material adverse effect on our business, financial condition, results of operations or liquidity.
 
GB Holdings
 
On April 4, 2006, the Official Committee of Unsecured Creditors, or the Committee, of GB Holdings, Inc., or GBH, filed a proposed Plan of Reorganization, or the Plan, and Disclosure Statement in which they indicated that they intend to challenge the transaction in July 2004 that, among other things, resulted in the transfer of The Sands to ACE Gaming, a wholly owned subsidiary of Atlantic Coast, the exchange of certain of GBH’s notes for 3% senior secured convertible notes of Atlantic Coast, and our owning 58.2% of the outstanding Atlantic Coast shares of common stock. As of June 30, 2006, we owned 58.2% of the outstanding stock of Atlantic Coast and GBH owned 41.7% of such stock. We also own approximately 77.5% of the outstanding shares of common stock of GBH. If the Committee succeeds in challenging these transactions, they indicated that they intend to seek to rescind the July 2004 transactions and attempt to equitably subordinate, in bankruptcy, our claims against GBH to the claims of other creditors. Under the Plan, they propose to place all of the assets of GBH in a Liquidating Trust for the benefit of the creditors. The Trust would be managed by a five-member board, four of whom would be appointed by the other creditors and one of whom would be appointed by a limited group of equity holders of GBH that would not include us. The assets that would be placed in the Trust include the 2,882,938 shares of Atlantic Coast stock owned by GBH as well as any litigation claims owned by the debtor or the estate, including any claims challenging the July 2004 transactions. We filed an objection to the Disclosure Statement on several grounds. At a hearing held on May 31, 2006, the Bankruptcy Court directed the Committee to make several revisions to their Disclosure Statement before the Disclosure Statement and the Committee’s Plan could be distributed to GBH’s creditors and stockholders. The Committee has yet to make such revisions.
 
We cannot predict the outcome of the GBH Bankruptcy proceedings or the potential impact on us.
 
WPI litigation
 
In November and December 2005, the U.S. District Court for the Southern District of New York rendered a decision in Contrarian Funds Inc. v. WestPoint Stevens, Inc. et al., and issued orders reversing certain provisions of the bankruptcy court order pursuant to which we acquired our ownership of a majority of the common stock of a newly formed company, WPI. WPI acquired substantially all of the assets of WPS. On April 13, 2006, the Bankruptcy Court entered a remand order which provides, among other things, that all of the shares and rights to acquire shares of WPI issued to us and the other first lien lenders or held in escrow pursuant to court order constituted “replacement collateral”, be sold other than 5,250,000 shares that we acquired for cash. The 5,250,000 shares represent approximately 27% of the 19,498,389 shares of WPI now outstanding. According


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to the remand order, we would share pro rata with the other first lien lenders in proceeds realized from the disposition of the replacement collateral and, to the extent there is remaining replacement collateral after satisfying first lien lender claims, we would share pro rata with the other second lien lenders in any further proceeds. We were holders of approximately 39.99% of the outstanding first lien debt and approximately 51.21% of the outstanding second lien debt. On April 13, 2006, the Bankruptcy Court also entered an order staying the remand order pending its appeal. The other first lien lenders have filed a notice of appeal of the remand order, and have filed a motion with the District Court to lift the stay entered by the Bankruptcy Court. We have filed a notice of appeal of the remand order and an objection to the motion to lift the stay. No hearing has been scheduled on the motion of the other first lien lenders to lift the stay, and no order has been entered by the District Court on that motion. A hearing on the appeals of the remand order has been scheduled by the District Court for September, 20, 2006. We also intend to appeal the prior order of the District Court that modified and vacated portions of the original sale order as entered by the Bankruptcy Court.
 
We cannot predict the outcome of these proceedings or the ultimate impact on our investment in WPI or the business prospects of WPI.
 
Note 23.   Subsequent Events
 
Declaration of Distribution on Depositary Units
 
On August 7, 2006, the Board of Directors approved payment of a quarterly cash distribution of $0.10 per unit on our depositary units in the third quarter of 2006 consistent with the distribution policy adopted in 2005. The distribution will be paid on September 5, 2006 to depositary unitholders of record at the close of business on August 21, 2006.
 
Oil & Gas Property Acquisition
 
On July 10, 2006, our Oil and Gas segment acquired an additional interest in its East Breaks 160 offshore block from BP America for approximately $14.1 million which increased our percentage interest in East Breaks 160 to approximately 66%. As a condition to closing the acquisition, we were required to issue a $16 million letter of credit to BP America to collateralize the potential plugging and abandonment liability associated with the offshore block. The purchase price was paid from cash on hand and the letter of credit reduced the availability under the Oil and Gas senior secured revolving credit facility to approximately $12.9 million.


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ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s discussion and analysis of financial condition and results of operations is comprised of the following sections:
 
1. Overview
 
2. Results of Operations
 
  •  Consolidated Financial Results
 
  •  Oil and Gas
 
  •  Gaming
 
  •  Real Estate
 
  •  Home Fashion
 
  •  Corporate and Investments
 
3. Liquidity and Capital Resources
 
  •  Consolidated Financial Results
 
  •  Oil and Gas
 
  •  Gaming
 
  •  Real Estate
 
  •  Home Fashion
 
4. Certain Trends and Uncertainties
 
Overview
 
American Real Estate Partners, L.P., or AREP, is a master limited partnership formed in Delaware on February 17, 1987. We are a diversified holding company owning subsidiaries engaged in the following operating businesses: (1) Oil and Gas; (2) Gaming; (3) Real Estate; and (4) Home Fashion. Our primary business strategy is to continue to grow and enhance the value of our businesses. We may also seek to acquire additional businesses that are distressed or in out-of-favor industries and will consider the divestiture of businesses from which we do not foresee adequate future cash flow or appreciation potential. In addition, we invest our available liquidity in debt and equity securities with a view to enhancing returns as we continue to assess further acquisitions of operating businesses.
 
We own a 99% limited partner interest in American Real Estate Holdings Limited Partnership, or AREH. AREH and its subsidiaries hold our investments and substantially all of our operations are conducted through AREH and its subsidiaries. American Property Investors, Inc., or API, owns a 1% general partner interest in both us and AREH, representing an aggregate 1.99% general partner interest in us and AREH. API is owned and controlled by Carl C. Icahn. As of June 30, 2006, affiliates of Mr. Icahn beneficially owned approximately 90% of our outstanding depositary units and approximately 86.5% of our outstanding preferred units.
 
In addition to our Oil and Gas, Gaming, Real Estate and Home Fashion segments, we discuss the Holding Company. The Holding Company includes the unconsolidated results of AREH and AREP and, principally, includes investment activity and expenses associated with the activities of a holding company.
 
Results of Operations
 
Overview
 
The key factors affecting the financial results for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 were:
 
  •  Increase in operating income of $14.1 million from Oil and Gas attributable primarily to an increase in unrealized gains on derivative positions of $13.4 million;
 
  •  Increase in operating income of $10.7 million from Real Estate property development attributable primarily to increased sales activity at our New Seabury and Westchester, New York properties;


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  •  Operating losses of $48.3 million from our Home Fashion segment, of which $20.5 million relates to restructuring costs, consisting primarily of impairment charges in connection with the closing of plants; offset in part by $25.7 million relating to the minority interests’ share in WPI’s losses.
 
  •  Increase in net realized and unrealized gains on investments of $65.7 million.
 
The key factors affecting the financial results for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 were:
 
  •  Increase in operating income of $100.5 million from Oil and Gas attributable primarily to an increase in unrealized gains on derivative positions of $89.4 million, partially offset by an increase in realized derivative losses of $10.7 million;
 
  •  Increase in operating income of $12.0 million from Real Estate property development, attributable primarily to $30.4 million of additional sales at our New Seabury and Westchester, New York properties;
 
  •  Operating losses of $86.3 million from our Home Fashion segment, of which $30.3 million relates to restructuring costs, consisting primarily of impairment charges in connection with the closing of plants, offset in part by $40.8 million relating to the minority interests’ share in WPI’s losses;
 
  •  Increase in Holding Company costs of $10.1 million principally due to a $6.2 million non-cash compensation charge related to the cancellation of unit options and higher legal and professional fees;
 
  •  Increase in net realized and unrealized gains on investments of $62.3 million; and
 
  •  Reduced income from discontinued operations resulting from a $19.9 million decline in gains on sales of net lease properties.
 
Consolidated Results
 
Three months ended June 30, 2006 compared to three months ended June 30, 2005.
 
Revenues for the second quarter of 2006 increased by $286.2 million, or 129.3%, as compared to the second quarter of 2005. This increase reflects the inclusion of WPI ($237.1 million), and increases of $13.2 million from Oil and Gas, $12.2 million from Gaming and $23.6 million from Real Estate.
 
Operating income for the second quarter of 2006 decreased by $23.7 million, or 49.1%, as compared to the second quarter of 2005. The decrease results primarily from the inclusion of operating losses from WPI of $48.3 million, of which $20.5 million relates to restructuring costs. Second quarter 2006 results were benefited by improved Oil and Gas and Real Estate operating performance contributing to increases in operating income for these segments of $14.1 million and $10.8 million, respectively.
 
Interest expense for the second quarter of 2006 increased by $2.8 million, or 9.7%, as compared to the second quarter of 2005. This increase is primarily due to an increase in borrowings under credit facilities and margin interest expense incurred in the holding company’s investment brokerage accounts. Other income increased by $65.9 million from the prior year, primarily reflecting net realized and unrealized gains on investments.
 
Six months ended June 30, 2006 compared to six months ended June 30, 2005.
 
Revenues for the first six months of 2006 increased by $629.8 million, or 166.7%, as compared to the first six months of 2005. This increase reflects the inclusion of WPI ($480.6 million), and increases of $105.9 million for Oil and Gas, $16.3 million for Gaming and $27.0 million for Real Estate.
 
Operating income for the first six months of 2006 increased by $18.8 million, or 42.2%, as compared to the first six months of 2005. The increase is primarily attributable to increases in operating income for Oil and Gas and Real Estate of $100.5 million and $12.6 million, respectively, offset by the inclusion of $86.3 of operating losses from WPI, of which $30.3 million relates to restructuring costs, and an increase in Holding Company costs of $10.1 million. The operating losses from WPI are offset, in part, by $40.8 million relating to the WPI minority interests’ share of such losses.
 
Interest expense for the first six months of 2006 increased by $10.2 million, or 19.6%, as compared to the first six months of 2005. This increase includes a full six months in 2006 of interest on the $480 million of senior notes issued on February 7, 2005, an increase in borrowings under credit facilities, as well as margin interest expense


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incurred in the holding company’s investment brokerage accounts. Other income (expense), net increased by $61.5 million from the prior period, primarily reflecting net realized and unrealized gains on investments.
 
Oil and Gas
 
The following table summarizes key operating data for the Oil and Gas segment (in $000s) (unaudited):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Gross oil and gas revenues
  $ 71,135     $ 69,662     $ 152,318     $ 125,925  
Realized derivative losses
    (6,600 )     (4,834 )     (18,687 )     (7,967 )
Unrealized derivative gains (losses)
    20,359       6,936       57,611       (31,833 )
                                 
Oil and gas revenues
    84,894       71,764       191,242       86,125  
Plant revenues
    1,712       1,596       3,656       2,913  
                                 
Total revenues
    86,606       73,360       194,898       89,038  
                                 
Costs and expenses:
                               
Oil and gas operating expenses
    13,684       12,175       27,729       25,539  
Depreciation, depletion and amortization
    23,654       24,506       47,788       44,809  
General and administrative expenses
    2,740       4,252       7,865       7,655  
                                 
Total cost and expenses
    40,078       40,933       83,382       78,003  
                                 
Operating income
  $ 46,528     $ 32,427     $ 111,516     $ 11,035  
                                 
 
For the three months ended June 30, 2006 and 2005, natural gas comprised 63% and 68% of gross oil and gas revenues, respectively. For the six months ended June 30, 2006 and 2005, natural gas comprised 65% and 66% of gross oil and gas revenues, respectively.


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Other data related to Oil and Gas operations is as follows (unaudited):
 
                                 
    Three Months
    Six Months Ended
 
    Ended June 30,     June 30,  
    2006     2005     2006     2005  
 
Production data:
                               
Oil (MBbls)
    350       378       718       731  
Natural gas (MMcf)
    7,316       6,970       14,720       12,993  
Natural gas liquids (MBbls)
    45       95       146       186  
Natural gas equivalents (MMcfe)
    9,688       9,810       19,904       18,492  
Average Sales Price(1):
                               
Oil average sales price (per Bbl)
                               
Price including realized gains or losses on derivative contracts
  $ 59.12     $ 47.56     $ 57.29     $ 47.88  
Price excluding realized gains or losses on derivative contracts
    70.22       51.87       66.27       51.25  
Natural gas average sales price (per Mcf)
                               
Price including realized gains or losses on derivative contracts
    5.77       6.31       5.91       5.95  
Price excluding realized gains or losses on derivative contracts
    6.14       6.77       6.74       6.38  
Natural gas liquids (per Bbl)
    36.54       29.93       37.64       30.17  
Expense per Mcfe:
                               
Total oil and gas operating expenses
  $ 1.41     $ 1.24     $ 1.39     $ 1.38  
Depreciation, depletion and amortization
    2.44       2.50       2.40       2.42  
General and administrative expenses
    .28       .43       .40       .41  
 
 
(1) Excludes the effect of unrealized gains and losses on derivative contracts.
 
Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 
Gross oil and gas revenues for the second quarter of 2006, before realized and unrealized derivative gains and losses, increased $1.5 million, or 2.1%, as compared to the second quarter of 2005. The increase is primarily attributable to higher average sales prices ($3.2 million) offset by a decrease in product volumes ($1.7 million). Including the effects of realized and unrealized derivative gains and losses, oil and gas revenues increased 18.3% to $84.9 million in the second quarter of 2006 from $71.8 million for the second quarter of 2005. Unrealized derivative gains in the second quarter of 2006 were $20.4 million compared to unrealized derivative gains of $6.9 million in the prior year period. Unrealized derivative gains and losses resulted from mark-to-market adjustments on our unsettled positions at the end of each period.
 
During the second quarter of 2006, our average realized price of natural gas, including the effects of realized derivative losses, decreased by 8.6% to $5.77 per Mcf from $6.31 per Mcf for the second quarter of 2005. Our natural gas production volume increased by 0.3 Bcf, or 5.0%, to 7.3 Bcf compared to 7.0 Bcf in second quarter of 2005. Our natural gas production volume increased primarily due to our successful drilling activity.
 
During the second quarter of 2006, our average realized price of oil, including the effects of realized derivative losses, increased by 24.3% to $59.12 per Bbl from $47.56 per Bbl for the second quarter of 2005. Our oil production volume decreased by 28 MBbls, or 7.4%, to 350 MBbls compared to 378 MBbls in the second quarter of 2005. Our oil production volume decreased primarily due to third party pipeline repairs and maintenance which shut down our production facility in South Texas for approximately one month during the quarter.
 
Oil and gas operating expenses for the second quarter of 2006 increased $1.5 million, or 12.4%, to $13.7 million compared to $12.2 million for the second quarter of 2005. Oil and gas operating expenses per Mcfe increased $0.17, or 13.7%, compared to the second quarter of 2005. The increase in oil and gas operating expenses is primarily due to an overall increase in costs in the oil and gas industry combined with an increase in the


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number of wells as a result of our drilling activity. This increase is partially offset by severance tax refunds of $1.4 million that we received in 2006 from drilling wells that qualified for severance tax exemptions.
 
Depletion, depreciation and amortization, or DD&A, for the second quarter of 2006 decreased $0.8 million, or 3.5%, to $23.7 million compared to $24.5 million during the second quarter of 2005. DD&A per Mcfe decreased $0.06, or 2.4%, to $2.44 per Mcfe as compared to $2.50 per Mcfe in the second quarter of 2005.
 
General and administrative expenses, or G&A, for the second quarter of 2006 decreased $1.6 million, or 35.6%, to $2.7 million as compared to $4.3 million during the second quarter of 2005. G&A per Mcfe decreased $0.15, or 34.9%, to $0.28 for the quarter compared to $0.43 for the second quarter of 2005. The decrease in general and administrative expenses was primarily attributable a reduction in franchise taxes and legal expenses compared to 2005.
 
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 
Gross oil and gas revenues for the first half of 2006, before realized and unrealized derivative gains and losses, increased $26.4 million, or 21.0%, as compared to the first half of 2005. The increase is primarily attributable to an increase in volume ($9.3 million) and an increase in average sales price ($17.1 million). Including the effects of realized and unrealized derivative gains and losses, oil and gas revenues increased 122.1% to $191.2 million in the first six months of 2006 from $86.1 million in the first half of 2005. Unrealized derivative gains in 2006 were $57.6 million compared to unrealized derivative losses of $31.8 million in 2005. Unrealized derivative gains and losses resulted from mark-to-market adjustments on our unsettled positions at the end of each period.
 
During the first half of 2006, our average realized price of natural gas, including the effects of realized derivative losses, decreased by 0.7% to $5.91 per Mcf from $5.95 per Mcf for the six months ended June 30, 2005. Our natural gas production volume increased by 1.7 Bcf, or 13.3%, to 14.7 Bcf compared to 13.0 Bcf in the six months ended June 30, 2005. Our natural gas production volume increased primarily due to our successful drilling activity.
 
During the first half of 2006, our average realized price of oil, including the effects of realized derivative losses, increased by 19.7% to $57.29 per Bbl from $47.88 per Bbl over the same period in 2005. Our oil production volume decreased by 13 MBbls, or 1.8%, to 718 MBbls compared to 731 MBbls in the six months ended June 30, 2005. Our oil production volume decreased primarily due to third party pipeline repairs and maintenance which shut in our production facility in South Texas for approximately one month during the second quarter of 2006.
 
Oil and gas operating expenses increased $2.2 million, or 8.6%, to $27.7 million for the first half of 2006 compared to $25.5 million for first half of 2005. Oil and gas operating expenses per Mcfe increased $.01, or 0.7%, compared to the first half of 2005. The increase in oil and gas operating expenses is primarily due to an overall increase in costs in the oil and gas industry combined with an increase in the number of wells as a result of our drilling activity. This increase is partially offset by severance tax refunds of $3.3 million that we received in 2006 from drilling wells that qualified for severance tax exemptions.
 
Depletion, depreciation and amortization increased $3.0 million, or 6.6%, to $47.8 million during the first half of 2006 as compared to $44.8 million during the first half of 2005. DD&A per Mcfe decreased $0.02, or 0.8%, to $2.40 per Mcfe as compared to $2.42 in the first half of 2005.
 
General and administrative expenses increased $0.2 million, or 2.7%, to $7.9 million during the first half of 2006 as compared to $7.7 million during the first half of 2005. G&A per Mcfe decreased $0.01, or 2.4%, to $0.40 for the first half of 2006 compared to $0.41 for the prior year period. The increase in general and administrative expenses was primarily attributable to the payment of employee bonuses in the first half of 2006 offset by a decrease in franchise taxes and legal expenses.


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Gaming
 
The following table summarizes the key operating data for our gaming segment for the periods indicated (in $000s) (unaudited):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Revenues
                               
Casino
  $ 89,190     $ 81,168     $ 174,562     $ 166,238  
Hotel
    22,025       18,602       42,346       36,689  
Food and beverage
    25,024       23,307       47,499       45,249  
Tower, retail and other income
    10,000       10,241       18,757       19,118  
                                 
Gross revenues
    146,239       133,318       283,164       267,294  
Less promotional allowances
    11,459       10,750       21,666       22,059  
                                 
Net revenues
    134,780       122,568       261,498       245,235  
                                 
Expenses
                               
Casino
    30,771       27,595       58,617       55,322  
Hotel
    9,261       8,033       17,332       14,759  
Food and beverage
    17,243       14,842       32,521       28,784  
Other operating expenses
    4,453       4,324       8,414       8,171  
Selling, general and administrative
    47,685       41,421       90,465       83,963  
Depreciation and amortization
    10,244       9,361       19,671       18,580  
                                 
      119,657       105,576       227,020       209,579  
                                 
Operating income
  $ 15,123     $ 16,992     $ 34,478     $ 35,656  
                                 
 
As disclosed in Note 3 to our consolidated financial statements, we acquired the Flamingo Laughlin on May 19, 2006. Net revenues and operating loss for Flamingo Laughlin through June 30, 2006 were $11.3 million and $1.0 million, respectively. These amounts are included in the table above. The results of operations discussed below refers to our gaming properties excluding the results of Flamingo Laughlin.
 
Three months ended June 30, 2006 compared to three months ended June 30, 2005
 
Gross revenues increased to $133.6 million, or 0.2%, from the second quarter of 2006 compared to $133.3 million for the second quarter of 2005. Nevada and Atlantic City gross revenues increased 0.7% and decreased 0.8%, respectively.
 
Casino revenues increased to $81.6 million, or 0.5%, for the second quarter of 2006 compared to $81.2 million for the second quarter of 2005. Slot machine, table games and other casino revenues were $63.0 million, $16.4 million and $2.2 million, respectively, compared to $64.5 million, $14.7 million and $2.0 million, respectively, for the second quarter of 2006 compared to the second quarter of 2005. The increase was primarily due to an increase in slot and table games hold percentage offset by reduced coin-in and anticipated disruptions at the Arizona Charlies location in Boulder resulting from our renovations to expand the casino floor. The renovations were completed in July 2006. Nevada and Atlantic City casino revenues increased 0.5% and 0.6%, respectively.
 
Non-casino revenues decreased to $52.0 million, or 0.4%, for the second quarter of 2006 compared to $52.3 million for the second quarter of 2005. Hotel revenues increased by $1.2 million as a result of increased occupancy, which was offset by decreased food and beverage and other revenues. Nevada and Atlantic City non-casino revenues increased 0.9% and decreased 6.3%, respectively.
 
Promotional allowances decreased to $10.1 million, or 6.5%, for the second quarter of 2006, from $10.8 million for the second quarter of 2005. The decrease was primarily due to redirecting our Atlantic City spending to more profitable players which was partially offset by increased expenses for our casino player acquisition program in Nevada.


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Casino operating expenses increased to $27.8 million, or 0.7%, for the second quarter of 2006, compared to $27.6 million for the second quarter of 2005. This increase was primarily due to increased participation expense and labor costs in Nevada, partially offset by decreased labor costs and reduced participation expense in Atlantic City.
 
Non-casino operating expenses increased to $27.8 million, or 2.2%, for the second quarter of 2006 compared to $27.2 million for the second quarter of 2005. The increase was primarily due to labor, services and guest relations costs as a result of increased hotel occupancy and union benefits.
 
Selling, general and administrative expenses increased to $42.9 million, or 3.7%, for the second quarter of 2006 compared to $41.4 million for the second quarter of 2005. The increase was primarily due to increases in payroll and marketing expenses in Nevada partially offset by reductions in marketing and insurance expenses in Atlantic City.
 
Six months ended June 30, 2006 compared to six months ended June 30, 2005
 
Gross revenues increased to $270.5 million, or 1.2%, for the first half of 2006 compared to $267.3 million for the first half of 2005. Nevada and Atlantic City gross revenues increased 2.1% and decreased 0.4%, respectively.
 
Casino revenues increased to $167.0 million, or 0.5%, for the first half of 2006 compared to $166.2 million for the first half of 2005. Slot machine, table games and other casino revenues were $125.8 million, $36.0 million and $5.2 million, respectively, compared to $128.4 million, $32.3 million and $5.5 million, respectively, for the first half of 2006 compared to the first half of 2005. The increase was primarily due to an increase in slot and table games hold percentage offset by reduced coin-in. Nevada and Atlantic City casino revenues increased 0.5% and 0.4%, respectively.
 
Non-casino revenues increased to $103.5 million, or 2.4%, for the first half of 2006 compared to $101.4 million for the first half of 2005. Hotel revenues increased by $3.5 million as a result of increased occupancy, which was offset by decreased food and beverage and other revenues. Nevada and Atlantic City non-casino revenues increased 3.7% and decreased 3.5%, respectively.
 
Promotional allowances decreased to $20.3 million, or 8.1%, for the first half of 2006 compared to $22.2 million for the first half of 2005. The decrease was primarily due to redirecting our Atlantic City spending to more profitable players which was partially offset by increased expenses for our casino player acquisition program in Nevada.
 
Casino operating expenses increased to $55.7 million, or 0.7%, for the first half of 2006 compared to $55.3 million for the first half of 2005. This increase was primarily due to increased participation expense and labor costs in Nevada, partially offset by decreased labor costs and reduced participation expense in Atlantic City.
 
Non-casino operating expenses increased to $55.1 million, or 6.6%, for the first half of 2006 compared to $51.7 million for the first half of 2005. The increase was primarily due to labor, services and guest relations costs as a result of increased hotel occupancy and union benefits.
 
Selling, general and administrative expenses increased to $85.2 million, or 1.4%, for the first half of 2006 compared to $84.0 million for the first half of 2005. The increase was primarily due to increases in payroll and marketing expenses in Nevada partially offset by reductions in marketing and insurance expenses in Atlantic City.


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Results by Location
 
The following is an analysis of revenue and operating income, by geographical location, (including the Flamingo Laughlin), for our Gaming segment (in $000s):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Net revenues:
                               
Nevada
  $ 93,124     $ 81,509     $ 179,069     $ 164,347  
Atlantic City
    41,656       41,059       82,429       80,888  
                                 
Total gaming
  $ 134,780     $ 122,568     $ 261,498     $ 245,235  
                                 
Operating income (loss):
                               
Nevada
  $ 14,681     $ 17,757     $ 33,304     $ 37,797  
Atlantic City
    442       (765 )     1,174       (2,141 )
                                 
Total gaming
  $ 15,123     $ 16,992     $ 34,478     $ 35,656  
                                 
 
During 2005, we began to incur operating losses relating to the operation of The Sands, one of the casinos included in our Gaming segment. Although those operating losses have recently been eliminated and The Sands has continued to generate positive cash flow, there can be no assurance that our efforts will continue to be successful. Accordingly, we continue to evaluate whether there is an impairment under SFAS No. 144. In the event that a change in operations results in a future reduction of cash flows, we may determine that an impairment under SFAS No. 144 has occurred at The Sands, and an impairment charge may be required. The carrying value of property, plant and equipment of The Sands at June 30, 2006 was $141.6 million.
 
Real Estate
 
Our real estate activities comprise three segments: rental real estate, property development, and associated resort activities. The operating performance of the three segments was as follows (in $000s) (unaudited):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
 
Revenues:
                               
Rental real estate:
                               
Interest income on financing leases
  $ 1,715     $ 1,801     $ 3,450     $ 3,767  
Rental income
    2,402       2,113       4,535       4,213  
Property development
    37,852       14,459       49,236       22,739  
Resort operations
    7,096       7,082       13,178       12,691  
                                 
Total revenues
    49,065       25,455       70,399       43,410  
                                 
Operating expenses:
                               
Rental real estate
    978       1,091       2,173       2,331  
Property development
    25,976       13,265       35,952       21,450  
Resort operations
    7,260       7,070       13,524       13,474  
                                 
Total expenses
    34,214       21,426       51,649       37,255  
                                 
Operating income
  $ 14,851     $ 4,029     $ 18,750     $ 6,155  
                                 


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Rental Real Estate
 
We market portions of our commercial real estate portfolio for sale. Unaudited sale activity was as follows (in $000s, except unit data):
 
                                 
    Three Months Ended
       
    June 30,     Six Month  Ended June 30,  
    2006     2005     2006     2005  
 
Properties sold
    4       7       8       11  
Proceeds received
  $ 7,354     $ 4,856     $ 8,327     $ 48,320  
Mortgage debt repaid
  $     $     $     $ 10,702  
Total gain recorded
  $ 1,308     $ 2,644     $ 1,559     $ 15,844  
Gain recorded in operations
  $     $     $     $ 186  
Gain recorded in discontinued operations(i)
  $ 1,308     $ 2,644     $ 1,559     $ 15,658  
 
 
(i) A gain of $5.7 million on the sale of resort properties was recognized in the six months ended June 30, 2005 in addition to gains on the rental portfolio.
 
Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 
Revenues increased to $4.1 million, or 5.2%, in the second quarter of 2006 from $3.9 million in the second quarter of 2005. The increase was primarily attributable to leasing of previously vacant space. Operating expenses decreased to $1.0 million, or 10.3%, in the second quarter of 2006, from $1.1 million in the second quarter of 2005, primarily due to decreased environmental expenses.
 
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 
Revenues were $8.0 million in both the first half of 2006 and 2005. Increased rents in 2006 were offset by increased financing lease amortization and the sale of a financing lease property in 2005. Operating expenses decreased to $2.2 million, or 6.8%, in the first half of 2006 from $2.3 million in the first half of 2005, primarily due to decreased environmental expenses.
 
Property Development
 
Property development sales activity was as follows (in $000s except unit data) (unaudited):
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2006     2005     2006     2005  
                (Unaudited)  
 
Units sold
                               
New Seabury, Massachusetts
    20       1       30       1  
Grand Harbor/Oak Harbor, Florida
    6       5       8       11  
Falling Waters, Florida
    9       23       9       47  
Westchester, New York
    6       3       6       3  
                                 
      41       32       53       62  
                                 
Revenues
                               
New Seabury, Massachusetts
  $ 21,352     $ 423     $ 30,385     $ 423  
Grand Harbor/Oak Harbor, Florida
    4,123       3,250       6,444       6,673  
Falling Waters, Florida
    2,261       4,212       2,261       9,068  
Westchester, New York
    10,116       6,574       10,146       6,575  
                                 
    $ 37,852     $ 14,459     $ 49,236     $ 22,739  
                                 


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Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 
Revenues increased to $37.9 million, or 161.8%, in the second quarter of 2006 from $14.5 million in the second quarter of 2005. This increase was due to an increase in the number and prices of units sold.
 
Operating expenses increased to $26.0 million, or 95.8%, in the second quarter of 2006 from $13.3 million in the same period in 2005. Operating expenses increased due to an increase in the number and costs of higher priced units sold. In the second quarter of 2006, we sold 41 units with an average cost of $634,000 and profit margin of 31.4%. In the second quarter of 2005, we sold 32 units with an average cost of $415,000 and profit margin of 8.3%.
 
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 
Revenues increased to $49.2 million, or 116.5%, in the first half of 2006 from $22.7 million in the first half of 2005. This increase was due to an increase in the average price of units sold partially offset by a decrease in the number of units sold.
 
Operating expenses increased to $36.0 million, or 67.6%, in the first half of 2006 from $21.5 million in the first half of 2005. This increase was due to an increase in the costs of higher priced units sold partially offset by a decrease in the number of units sold. In the first half of 2006, we sold 53 units with an average cost of $678,000 and profit margin of 27.0%. In the first half of 2005, we sold 62 units with an average cost of $346,000 and profit margin of 5.7%.
 
The primary driver of our increased property development sales and profits was the recent approval of the development of our New Seabury resort property located in Cape Cod, Massachusetts. However, due to the current residential/vacation real estate slowdown our property development sales and profits are expected to decline from current levels for the balance of 2006 and possibly into 2007.
 
Resort Activities
 
Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 
Revenues were $7.1 million in both the second quarter of 2006 and 2005. Operating expenses increased to $7.3 million, or 2.7%, in the second quarter of 2006, from $7.1 million in the second quarter of 2005.
 
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 
Revenues increased to $13.2 million, or 3.8%, in the first half of 2006, from $12.7 million in the first half of 2005. This increase is primarily attributable to increased club dues. Operating expenses were $13.5 million in both the first half of 2006 and 2005.
 
Home Fashion
 
WPI, through its wholly-owned indirect subsidiary, WestPoint Home, Inc., is engaged in the business of manufacturing, sourcing, marketing and distributing bed and bath home fashion products, including among others, sheets, pillowcases, comforters, blankets, bedspreads, pillows, mattress pads, towels and related products. WPI recognizes revenue primarily through the sale of home fashion products to a variety of retail and institutional customers. WPI also operates 32 retail outlet stores that sell home fashion products consisting principally of products manufactured by WPI. In addition, WPI receives a small portion of its revenues through the licensing of its trade marks.
 
A recent court order may result in our ownership of WPI being reduced to less than 50%. If we were to own less than 50% of the outstanding common stock, we would have to evaluate whether we should consolidate WPI and our financial statements could be materially different than those presented as of June 30, 2006 and for the period then ended. (See Note 22 of notes to the consolidated financial statements.)


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Results of Operations
 
Summarized statement of operations for the three and six months ended June 30, 2006 is as follows (in $000s) (unaudited):
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2006     June 30, 2006  
 
Revenues
  $ 237,148     $ 480,638  
Costs and expenses:
               
Cost of sales
    224,222       452,582  
Selling, general and administrative
    40,698       84,015  
Restructuring and impairment charges
    20,567       30,338  
                 
Total costs and expenses
    285,487       566,935  
                 
Operating loss
  $ (48,339 )   $ (86,297 )
                 
 
On August 8, 2005, WestPoint International, Inc., or WPI, an indirect subsidiary of the Company, completed the acquisition of substantially all of the assets of WestPoint Stevens Inc., or WPS. Operating results for WPI are included with AREP’s results beginning as of August 8, 2005. Therefore, no comparable data is available for the three and six months ended June 30, 2005.
 
Three months ended June 30, 2006
 
Net sales for the second quarter of 2006 were $237.1 million. Bed product revenues were $134.8 million and bath product revenues were $84.4 million. Other sales, consisting primarily of sales from WPI’s retail outlet stores, were $17.9 million. Total depreciation for the period was $9.5 million, of which $7.7 million was included in cost of sales and $1.8 million was included in selling, general and administrative expenses.
 
Gross earnings before selling, general and administrative expenses for the period were $12.9 million and reflect a gross profit margin of 5.5%. Gross margins during the second quarter were impacted by the carrying costs of certain U.S. based manufacturing facilities scheduled to be closed during 2006 and 2007. Selling, general and administrative expenses were $40.7 million for the period and as a percentage of net sales represent 17.2%.
 
Total expenses for the period include $18.8 million of impairment charges related to the fixed assets of plants that will be closed and $1.7 million of restructuring charges (of which approximately $1.6 million relates to continuing costs related to closed plants).
 
Six months ended June 30, 2006
 
Net sales for the first half of 2006 were $480.6 million. Bed product revenues were $270.8 million and bath product revenues were $174.9 million. Other sales, consisting primarily of sales from WPI’s retail outlet stores were $34.9 million. Total depreciation for the period was $19.9 million, of which $16.3 million was included in cost of sales and $3.6 million was included in selling, general and administrative.
 
Gross earnings before selling, general and administrative expenses for the period were $28.1 million and reflect a gross profit margin of 5.8%. Gross margins during the period were impacted by the carrying costs of certain U.S. based manufacturing facilities scheduled to be closed during 2006 and 2007. Selling, general and administrative expenses were $84.0 million for the period and as a percentage of net sales represent 17.5%.
 
Total expenses for the period include $26.5 million of impairment charges related to the fixed assets of plants that will be closed and $3.8 million of restructuring charges (of which approximately $1.3 million relates to severance and $2.5 million relates to continuing costs related to closed plants).
 
We expect to continue our restructuring efforts and, accordingly, expect that restructuring charges and operating losses will continue to be incurred throughout 2006 and 2007. If our restructuring efforts are unsuccessful, we may be required to record additional impairment charges related to the carrying value of long-lived assets. Additionally, as part of the restructuring efforts, we expect to record impairment charges as additional plants are closed.


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Holding Company
 
Investment Activities
 
The Holding Company invests a portion of its available liquidity in short-term fixed income instruments managed by a third party investment manager to achieve a targeted quarterly return in excess of LIBOR. Other Holding Company investments include investments in debt and equity-related securities based upon management’s view that the Company will, over time, achieve a superior rate of return. For the second quarter and first half of 2006, we had significant realized and unrealized gains and losses from several positions, including short positions and activity relating to derivative instruments.
 
General and Administrative Expenses
 
General and administrative expenses related to the Holding Company are principally related to payroll and professional fees and expenses of the Holding Company.
 
Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 
General and administrative costs increased $1.8 million, or 89.5%, to $3.7 million in the second quarter of 2006, as compared to $1.9 million in the second quarter of 2005 due largely to higher legal and professional fees.
 
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 
General and administrative costs increased $10.1 million, or 209.1%, to $15.0 million in the first half of 2006, as compared to $4.9 million in the first half of 2005 due largely to the impact of a compensation charge related to the cancellation of options ($6.2 million), and higher legal and professional fees.
 
On June 29, 2005, we granted 700,000 nonqualified unit options to our chief executive officer. The option agreement permitted our chief executive officer to purchase up to 700,000 of our depositary units at an exercise price of $35 per unit and vested over a period of eight years. On March 14, 2006, our chief executive officer resigned from that position, became a director and Vice-Chairman of the Board of API, and was designated to be principal executive officer. These changes in status caused the options to be cancelled in accordance with their terms. In accordance with SFAS 123(R) Share Based Payment, the cancellation required that any previously unrecognized compensation cost be recognized at the date of cancellation and accordingly we recorded a compensation charge of $6.2 million related to the previously unrecognized compensation cost.
 
Interest Income and Expense
 
Three months ended June 30, 2006 compared to the three months ended June 30, 2005
 
Interest expense increased 9.7%, to $31.6 million, during the second quarter of 2006 as compared to $28.8 million in the second quarter of 2005. This increase is primarily attributable to the margin interest expense incurred in the holding company’s brokerage accounts and additional borrowings at ACEP. Interest income was consistent with the prior period due to higher interest earned on cash balances during the period, offsetting $5.1 million earned on WPS secured bank debt in the six months ended June 30, 2005.
 
Six months ended June 30, 2006 compared to the six months ended June 30, 2005
 
Interest expense increased 19.6% to $62.2 million, during the six months ended June 30, 2006 as compared to $52.0 million in the six months ended June 30, 2005. This increase reflects higher borrowing levels in 2006 as a result of the issuance of the $480 million senior notes in February 2005 and additional borrowings at ACEP. Interest income was consistent with the prior period due to higher interest earned on cash balances during the period, offsetting $5.1 million earned on WPS secured bank debt in the first half of 2005.
 
Other Income (Expense), net
 
See Note 14 of notes to the consolidated financial statements for discussion of Other Income (Expense).


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Minority Interests
 
Minority interest increased by $25.2 million and $39.4 million for the three and six months ended June 30, 2006, respectively, compared to the comparable periods in the prior year primarily as a result of the impact of the minority interests’ share of the losses incurred by WPI.
 
Effective Income Tax Rate
 
Our effective income tax rate was 17.4% and 65.7% for the three months ended June 30, 2006 and 2005, respectively. Our effective income tax rate was 18.7% and 49.1% for the six months ended June 30, 2006 and 2005, respectively. The difference between the effective tax rate and the statutory federal rate of 35% is principally due to income or losses from partnership entities in which taxes are the responsibility of the partners, and losses incurred by WPI for which no tax benefit was recognized.
 
During the six months ended June 30, 2006 and 2005, we paid $8.4 million and $3.0 million in income taxes, respectively.
 
Seasonality
 
The results of operations for Gaming, Resort operations, Property Development operations and Home Fashion are seasonal in nature. Results for Oil & Gas and Rental Real Estate are generally not seasonal. Generally, our Nevada gaming and entertainment properties are not affected by seasonal trends. However, we tend to have increased customer flow in the fourth quarter of the year. Our Atlantic City property is highly seasonal in nature, with peak activity occurring from May to September. Resort operations are highly seasonal with peak activity in Cape Cod from June to September and in Florida from November to February. Sales activity for our Property Development operations in Cape Cod and New York typically peak in late summer and remain active in the fall and spring months while in Florida our peak selling season is during the winter months. The Home Fashion segment experiences its peak sales season in the fall.
 
Liquidity and Capital Resources
 
Consolidated Financial Results
 
We are a holding company. In addition to cash and cash equivalents, U.S. government and agency obligations, marketable equity and debt securities and other short-term investments, our assets consist primarily of investments in our subsidiaries. As we continue to make significant investments in operating businesses, we will reduce the liquid assets at AREP and AREH to fund those businesses. Consequently, our cash flow and our ability to meet our debt service obligations and make distributions with respect to depositary units and preferred units likely will depend on the cash flow of our subsidiaries and the payment of funds to us by our subsidiaries in the form of loans, dividends, distributions or otherwise.
 
The operating results of our subsidiaries may not be sufficient to make distributions to us. In addition, our subsidiaries are not obligated to make funds available to us, and distributions and intercompany transfers from our subsidiaries to us may be restricted by applicable law or covenants contained in debt agreements and other agreements to which these subsidiaries may be subject or enter into in the future. The terms of any borrowings of our subsidiaries or other entities in which we own equity may restrict dividends, distributions or loans to us. For example, the notes issued by our indirect wholly-owned subsidiary, ACEP, contain restrictions on dividends and distributions and loans to us, as well as on other transactions with us. ACEP, NEG Oil & Gas, WPI and the resort operations at our New Seabury development each also have financing agreements that have the effect of restricting dividends, distributions and other transactions with us. These agreements may preclude our receiving payments from our subsidiaries which account for a significant portion of our revenues and cash flows. We may enter into similar agreements for other segments or subsidiaries. To the degree any distributions and transfers are impaired or prohibited, our ability to make payments on our debt will be limited.
 
As of June 30, 2006, the Holding Company had a cash and cash equivalents balance of $162.5 million, short-term investments of $897.3 million (of which $462.2 million was invested in short-term fixed-income securities) and total debt of $831.1 million, which primarily relates to the senior unsecured notes.


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We actively pursue various means to raise cash from our subsidiaries. To date, such means include payment of dividends from subsidiaries, obtaining loans or other financings based on the asset values of subsidiaries or selling debt or equity securities of subsidiaries through capital market transactions. As a result of financing transactions at our subsidiaries, we will face significant limitations on the amounts of cash that we can receive from our subsidiaries. Our ability to make future interest payments, therefore, will be based on receiving cash from those subsidiaries that do not have restrictions and from other financing and liquidity sources available to AREP and AREH.
 
In February 2005, we issued $480.0 million principal amount of 7.125% senior notes due 2013. In May 2004, we issued $353.0 million principal amount of 8.125% senior notes due 2012. Additionally, in December 2005, NEG Oil & Gas entered into a revolving credit facility which allows for borrowings of up to $500.0 million based upon a borrowing base determination. The borrowing base is $335.0 million, of which $300.0 million has been borrowed at closing and is outstanding. See “Borrowings” below for additional information concerning credit facilities for our gaming, real estate and home fashion segments.
 
Cash Flows
 
Net cash provided by continuing operating activities was $97.3 million for the first half of 2006 as compared to net cash provided by continuing operating activities of $132.4 million in the first half of 2005. The change in cash provided by continuing operations for the six months ended June 30, 2006 was due to cash requirements related to trading securities and changes in various working capital asset categories. Our cash and cash equivalents and investments in marketable equity and debt securities decreased by $31.5 million at June 30, 2006, from December 31, 2005, primarily due to capital expenditures of $131.4 million and acquisitions of $169.6 million, offset in part by cash generated from operations of $98.3 million and proceeds from borrowings of $94.2 million.
 
We are continuing to pursue the purchase of assets, including assets that may not generate positive cash flow, are difficult to finance or may require additional capital, such as properties for development, non-performing loans, securities of companies that are undergoing or that may undergo restructuring, and companies that are in need of capital. All of these activities require us to maintain a strong capital base and liquidity.
 
Borrowings
 
Long-term debt consists of the following (in $000s):
 
                 
    June 30,
    December 31,
 
    2006     2005  
    (Unaudited)        
 
Senior unsecured 7.125% notes due 2013 — AREP
  $ 480,000     $ 480,000  
Senior unsecured 8.125% notes due 2012 — AREP
    351,083       350,922  
Senior secured 7.85% notes due 2012 — ACEP
    215,000       215,000  
Borrowings under credit facility — ACEP
    60,000        
Borrowings under credit facility — NEG Oil & Gas
    300,000       300,000  
Mortgages payable
    113,546       81,512  
Other
    8,259       8,387  
                 
Total long-term debt
    1,527,888       1,435,821  
Less current portion, including debt related to real estate held for sale
    21,601       24,155  
                 
    $ 1,506,287     $ 1,411,666  
                 
 
Senior unsecured notes restrictions and covenants — AREP
 
Both issuances of our senior unsecured notes restrict the payment of cash dividends or distributions, the purchase of equity interests or the purchase, redemption, defeasance or acquisition of debt subordinated to the senior unsecured notes. The notes also restrict the incurrence of debt, or the issuance of disqualified stock, as defined, with certain exceptions, provided that we may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of the aggregate principal amount of all outstanding indebtedness of AREP and its subsidiaries on a consolidated basis to the tangible net worth of AREP and its subsidiaries on a consolidated


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basis would have been less than 1.75 to 1.0. As of June 30, 2006, such ratio was less than 1.75 to 1.0, and accordingly, based on this ratio, we and AREH could have incurred up to approximately $1.5 billion of additional indebtedness.
 
In addition, both issuances of notes require that on each quarterly determination date we and the guarantor of the notes (currently only AREH) maintain a minimum ratio of cash flow to fixed charges each as defined, of 1.5 to 1, for the four consecutive fiscal quarters most recently completed prior to such quarterly determination date. For the four quarters ended June 30, 2006, the ratio of cash flow to fixed charges was in excess of 1.5 to 1.0.
 
The notes also require, on each quarterly determination date, that the ratio of total unencumbered assets, as defined, to the principal amount of unsecured indebtedness, as defined, be greater than 1.5 to 1.0 as of the last day of the most recently completed fiscal quarter. As of June 30, 2006, such ratio was in excess of 1.5 to 1.0.
 
Senior secured 7.85% notes due 2012 — ACEP
 
ACEP’s 7.85% senior secured notes due 2012 restrict the payment of cash dividends or distributions by ACEP, the purchase of its equity interests, the purchase, redemption, defeasance or acquisition of debt subordinated to ACEP’s notes and investments as “restricted payments.” ACEP’s notes also prohibit the incurrence of debt, or the issuance of disqualified or preferred stock, as defined, by ACEP, with certain exceptions, provided that ACEP may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of consolidated cash flow to fixed charges (each as defined) for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or disqualified stock or preferred stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt incurrence or issuance. As of June 30, 2006, such ratio was in excess of 2.0 to 1.0. The ACEP notes also restrict the creation of liens, the sale of assets, mergers, consolidations or sales of substantially all of its assets, the lease or grant of a license, concession, other agreements to occupy, manage or use our assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The ACEP notes allow it to incur indebtedness, among other things, of up to $50 million under credit facilities, non-recourse financing of up to $15 million to finance the construction, purchase or lease of personal or real property used in its business, permitted affiliate subordinated indebtedness (as defined), the issuance of additional 7.85% senior secured notes due 2012 in an aggregate principal amount not to exceed 2.0 times net cash proceeds received from equity offerings and permitted affiliate subordinated debt, and additional indebtedness of up to $10.0 million.
 
ACEP Senior Secured Revolving Credit Facility
 
Effective May 11, 2006 ACEP and certain of ACEP’s subsidiaries, as Guarantors, entered into an amended and restated credit agreement with Wells Fargo Bank N.A., as syndication agent, Bear Stearns Corporate Lending Inc., as administrative agent, and certain other lender parties. As of June 30, 2006, the interest rate on the outstanding borrowings under the credit facility was 6.76% per annum. The credit agreement amends and restates, and is on substantially the same terms, as a credit agreement entered into as of January 29, 2004. Under the credit agreement, ACEP will be permitted to borrow up to $60.0 million. Obligations under the credit agreement are secured by liens on substantially all of the assets of ACEP and its subsidiaries. The credit agreement has a term of four years and all amounts will be due and payable on May 10, 2010.
 
The credit agreement includes covenants that, among other things, restrict the incurrence of additional indebtedness by ACEP and its subsidiaries, the issuance of disqualified or preferred stock, as defined, the creation of liens by ACEP or its subsidiaries, the sale of assets, mergers, consolidations or sales of substantially all of ACEP’s assets, the lease or grant of a license or concession, other agreements to occupy, manage or use ACEP’s assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The Credit agreement also requires that, as of the last date of each fiscal quarter, ACEP’s ratio of consolidated first lien debt to consolidated cash flow not be more than 1.0 to 1.0. As of June 30, 2006, this ratio was 0.72 to 1.0.
 
The restrictions imposed by ACEP’s senior secured notes and the credit facility likely will limit our receiving payments from the operations of our principal hotel and gaming properties.


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NEG Oil & Gas LLC Senior Secured Revolving Credit Facility
 
On December 22, 2005, NEG Oil & Gas entered into a credit facility, with Citicorp USA, Inc., as administrative agent, Bear Stearns Corporate Lending Inc., as syndication agent, and certain other lender parties. As of June 30, 2006, the interest rate on the outstanding borrowings under the credit facility was 7.38%. Commitment fees for the unused credit facility range from 0.375% to 0.50% and are payable quarterly.
 
Under the credit facility, NEG Oil & Gas will be permitted to borrow up to the lesser of $500.0 million or the borrowing base, which is currently set at $335.0 million. Borrowings under the credit facility are subject to a borrowing base determination based on the oil and gas properties of NEG Oil & Gas and its subsidiaries and the reserves and production related to those properties. The initial borrowing base was set at $335.0 million and will be subject to semi-annual redeterminations, based on engineering reports to be provided by NEG Oil & Gas by March 31 and September 30 of each year, beginning March 31, 2006. The credit facility has a term of five years and all amounts will be due and payable on December 20, 2010. As of June 30, 2006, NEG Oil & Gas had remaining borrowing availability under the credit facility of $12.9 million representing the borrowing base less $300 million debt outstanding and outstanding letters of credit of $22.1 million.
 
The credit facility contains covenants that, among other things, restrict the incurrence of indebtedness by NEG Oil & Gas and its subsidiaries, the creation of liens by them, hedging contracts, mergers and issuances of securities by them and distributions and investments by NEG Oil & Gas and its subsidiaries. It also requires NEG Oil & Gas to maintain: (1) a ratio of consolidated total debt to consolidated EBITDA (for the four fiscal quarter period ending on the date of the consolidated balance sheet used to determine consolidated total debt), as defined, of not more than 3.5 to 1.0; (2) consolidated tangible net worth, as defined, of not less than $240 million, plus 50% of consolidated net income for each fiscal quarter ending after December 31, 2005 for which consolidated net income is positive; and (3) a ratio of consolidated current assets to consolidated current liabilities of not less than 1.0 to 1.0. These covenants may have the effect of limiting distributions by NEG Oil & Gas. As of June 30, 2006, NEG Oil & Gas was in compliance with each of the covenants.
 
Real Estate Mortgages Payable
 
On June 30, 2006, indirect subsidiaries of the Company engaged in property development and associated resort activities entered into a $32.5 million loan agreement with Textron Financial Corp. The loan is secured by a mortgage on the Company’s New Seabury golf course and resort in Mashpee, Massachusetts. The loan bears interest at the rate of 7.96% per annum and matures in five years with a balloon payment due of $30.0 million. Annual debt service payments of $3.0 million are required, which are payable in monthly installments based on a 25 year amortization schedule.
 
WPI Secured Revolving Credit Agreement
 
On June 16, 2006, our subsidiary, WestPoint Home, Inc., entered into a loan and security agreement with Bank of America, N.A., as Administrative Agent and lender. Other lenders may be added from time to time. Under the five-year agreement, WestPoint Home will be permitted to borrow on a revolving credit basis up to $250.0 million (subject to a monthly borrowing base calculation) at any one time outstanding, including a $75.0 million sub-limit that may be used for letters of credit. Borrowings under the agreement bear interest, at the election of WestPoint Home, either at the prime rate adjusted by an applicable margin ranging from minus 0.25% to plus 0.50% or LIBOR adjusted by an applicable margin ranging from plus 1.25% to 2.00%. WestPoint Home pays an unused line fee of 0.25% to 0.275%. Obligations under the agreement are secured by WestPoint Home’s receivables, inventory and certain machinery and equipment.
 
The agreement contains covenants including, among others, restrictions on the incurrence of indebtedness, investments, redemption payments, distributions, acquisition of stock, securities or assets of any other entity and capital expenditures. However, WestPoint Home is not precluded from effecting any of these transactions if excess availability, after giving effect to such transaction, meets a minimum threshold.
 
As of June 30, 2006, there were no borrowings under the agreement, but there were outstanding letters of credit of approximately $33.7 million.


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Quarterly Distribution
 
On May 10, 2006, our directors voted to approve management’s recommendation to pay a dividend of $0.10 per depositary unit in the second quarter of 2006. The distribution was paid on June 1, 2006 to depositary unit holders of record at the close of business on May 22, 2006. On August 7, 2006, the Board of Directors approved payment of a quarterly cash distribution of $0.10 per unit on its depositary units in the third quarter of 2006 consistent with the distribution policy adopted in 2005. The distribution will be paid on September 5, 2006 to depositary unitholders of record at the close of business on August 21, 2006.
 
The payment of future distributions will be determined by the Board of Directors quarterly, based upon the factors described above and other factors that it deems relevant at the time that declaration of a distribution is considered. There can be no assurance as to whether or in what amounts any future distributions might be paid.
 
Contractual Commitments
 
As of June 30, 2006, other than the increase in long-term debt in our gaming and real estate segments totaling $94.2 million and the changes noted below relating to our oil and gas derivative contracts there were no other material changes in our contractual obligations or any other long-term liabilities reflected on our consolidated balance sheet as compared to those reported in our Form 10-K, as amended, filed with the Securities and Exchange Commission on March 31, 2006.
 
Derivative Obligations
 
As discussed in Note 19 to the consolidated financial statements, our derivative obligations decreased to $28.3 million as of June 30, 2006 as compared to $85.9 million as of December 31, 2005. The fair value of the derivative contracts that mature in less than a year is $22.2 million. The amount, if any, that we will be required to pay with respect to any contract will be determined at the maturity date and may vary from the fair value as reported at this time depending on market prices for oil and gas and the stated contract terms.
 
Off Balance Sheet Arrangements
 
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others.
 
Segment Liquidity and Capital Resources
 
Oil and Gas
 
NEG Oil & Gas derives its cash primarily from the sale of oil and natural gas and borrowings. During the first half of 2006, cash flows from operations provided by our oil and gas segment was $97.0 million compared to $56.1 million in 2005. The increase was primarily attributable to higher revenues due to increased production and higher price realizations.
 
During the first half of 2006, our oil and gas capital expenditures aggregated $101.6 million. NEG Oil & Gas capital expenditures for the remainder of 2006 are forecasted to be approximately $111.5 million. The planned capital expenditures do not include any major acquisitions that we may consider from time to time and for which NEG Oil & Gas may need to obtain additional financing.
 
As of June 30, 2006, NEG Oil & Gas had $55.5 million in unrestricted cash and $12.9 million in availability under its credit facility. NEG Oil & Gas believes that cash flows from operations, cash on hand and availability under its credit facility will be sufficient to fund the forecasted capital expenditures for the remainder of 2006.
 
Historically, we have funded our Oil and Gas capital expenditures from Oil and Gas operating cash flows and bank borrowings. Our Oil and Gas operating cash flows may fluctuate significantly due to changes in oil and gas commodity prices, production interruptions and other factors. The timing of most of our Oil and Gas capital expenditures is discretionary because we have no long-term capital expenditure commitments. We may vary our capital expenditures as circumstances warrant in the future.
 
On February 14, 2006, NEG, Inc., or NEG, our newly formed subsidiary, in connection with a planned initial public offering, filed with the SEC, a Registration Statement on Form S-1. Amendments to the Form S-1 were filed


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May 5, 2006, June 22, 2006, and July 31, 2006. The Registration Statement has not yet become effective. On June 29, 2006, NEG, in connection with a planned merger with National Energy Group, filed with the SEC a Registration Statement on Form S-4. On July 31, 2006, NEG Oil & Gas LLC, which is currently our wholly-owned subsidiary, in connection with a planned offering of senior notes due 2014, filed with the SEC a Registration Statement on Form S-1.
 
Gaming
 
Our Gaming segment derives cash primarily from casino, hotel and related activities. During the first half of 2006, cash flows from operations provided by our gaming segment was $47.2 million compared to $37.5 million in 2005. The increase from 2005 to 2006 was due to increased revenues. Management believes that cash flows from operations and cash on hand will be sufficient to fund the forecasted capital expenditures for the remainder of 2006.
 
Under terms of the senior secured notes of ACEP, the ability to pay dividends and engage in other transactions with AREP are limited.
 
Capital spending for the existing Nevada operations was $16.6 million and $11.6 million for the first half of 2006 and 2005, respectively. Capital spending for the Atlantic City operations was $8.9 million (including $5.8 million for purchases of land) and $1.5 million for the first half of 2006 and 2005, respectively. We have estimated our combined capital expenditures for the remainder of 2006 to be $29.6 million for Nevada and Atlantic City, excluding Flamingo Laughlin.
 
Real Estate
 
Our real estate operations generate cash through rentals and leases and asset sales (principally sales of rental properties) and the operation of resorts. All of these operations generate cash flows from operations.
 
Real estate development activities require a significant use of funds. With our renewed development activity at New Seabury and Grand Harbor, it is expected that cash expenditures over the next year will approximate $75 million. Such amounts will be funded through advances from our existing cash reserves and then from unit sales and, to the extent such proceeds are insufficient, by AREP from available cash.
 
Home Fashion
 
For the first half of 2006, our Home Fashion segment had a negative cash flow from operations of $46.2 million. Such negative cash flow was principally due to ongoing restructuring actions and changes in working capital. As discussed above, we expect to continue our restructuring efforts and, accordingly, expect that restructuring charges and operating losses will continue to be incurred throughout 2006 and 2007.
 
At June 30, 2006, the Home Fashion segment had approximately $81.4 million of unrestricted cash and cash equivalents. On June 16, 2006, WPI’s operating subsidiary, WestPoint Home, entered into a $250.0 million senior secured revolving credit facility, or the Senior Credit Facility, from a third party with an expiration date of June 15, 2011. With the Senior Credit Facility in place, funds totaling approximately $31.5 million previously required to cash collateralize letters of credit were returned to WPI. The borrowing availability under the Senior Credit Facility is subject to a monthly borrowing base calculation less outstanding loans, letters of credit and other reserves under the facility. At June 30, 2006, WPI had unused borrowing availability of approximately $168.7 million resulting from a calculated borrowing base of $227.4 million, less an availability block of $25.0 million and outstanding letters of credit of approximately $33.7 million. The new Senior Credit Facility imposes various operating and financial restrictions on WPI and its subsidiaries. These restrictions include limitations on indebtedness, liens, asset sales, transactions with affiliates, acquisitions, mergers, capital expenditures, dividends and investments. Borrowing under the Senior Credit Facility will be used for general business purposes including restructuring and international expansion.
 
Capital expenditures by WPI were $3.0 million for the period January 1, 2006 through June 30, 2006. Capital expenditures for the remainder of 2006 are expected to total approximately $9.3 million. Additionally, WPI may expend significant amounts in connection with exploring overseas joint ventures and acquisitions, and such amounts may be significant.


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Forward Looking Statements
 
Statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are not historical in nature are intended to be, and are hereby identified as, “Forward Looking Statements” for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended by Public Law 104-67.
 
Forward looking statements regarding management’s present plans or expectations involve risks and uncertainties and changing economic or competitive conditions, as well as the negotiation of agreements with third parties, which could cause results to differ from present plans or expectations, and such differences could be material. Readers should consider that such statements speak only as of the date hereof.
 
Certain Trends and Uncertainties
 
We have in the past and may in the future make forward looking statements. Certain of the statements contained in this document involve risks and uncertainties. Our future results could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed in this document. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those predicted. Also, please see Risk Factors in our annual report on Form 10-K, as amended, for the year ended December 31, 2005.
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our significant market risks are primarily associated with interest rates, equity prices and derivatives. Reference is made to Part II, item 7A of Form 10-K/A for 2005 that we filed with the Securities and Exchange Commission on March 31, 2006 for disclosures relating to interest rates and our equity prices. As of June 30, 2006 there have been no material changes in the market risks in these two categories. The following address our market risks associated with commodity price risks.
 
Our Home Fashion and Oil and Gas operating units selectively use commodity futures contracts, forward purchase commodity contracts, option contracts and price “collars” primarily to reduce the risk of changes to cotton and oil and gas prices. The Holding Company currently holds derivative instruments for trading purposes.
 
The Oil and Gas segment’s revenues are derived from the sale of its crude oil and natural gas production. The prices for oil and gas remain extremely volatile and sometimes experience large fluctuations as a result of relatively small changes in supply, weather conditions, economic conditions and government actions. If energy prices decline significantly, revenues and cash flow would significantly decline. In addition, a noncash write-down of our oil and gas properties could be required under full cost accounting rules if prices declined significantly, even if it is only for a short period of time. From time to time, we enter into derivative financial instruments to manage oil and gas price risk related to revenue.
 
We use price “collars” to reduce the risk of changes in oil and gas prices. Under these arrangements, no payments are due by either party so long as the market price is above the floor price set in the collar below the ceiling. If the price falls below the floor, the counter-party to the collar pays the difference to us and if the price is above the ceiling, the counter-party receives the difference from us.
 
See Note 19 to the consolidated financial statements for details on our commodity price collar agreements.
 
Item 4.   Controls and Procedures
 
As of June 30, 2006, our management, including our Principal Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s and our subsidiaries’ disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon such evaluation, our Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are currently effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management,


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including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
During the first half of 2006, we continued to implement processes to address a significant deficiency in our consolidation process noted by management in 2004 during its evaluation of the effectiveness of the design and operation of our disclosure controls and procedures and our internal controls over financial reporting. These processes included the implementation and testing of our new accounting and consolidation program and continuing to retain the services of an independent consultant to evaluate the effectiveness of our internal controls. We continue to monitor the progress of our subsidiaries in implementing processes to correct any significant deficiencies noted in their disclosure and control procedures.
 
During the third quarter of 2005, we identified a significant deficiency related to our periodic reconciliation, review and analysis of investment accounts. This significant deficiency is not believed to be a material weakness and arose from a lack of monitoring and review controls. We have hired additional personnel in order to provide the appropriate level of control.
 
Changes in Internal Control Over Financial Reporting
 
There have not been any changes in our internal control over financial reporting during the six months ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
We are from time to time parties to various legal proceedings arising out of our businesses. We believe however, that other than the proceedings discussed below, there are no proceedings pending or threatened against us which, if determined adversely, would have a material adverse effect on our business, financial condition, results of operations or liquidity.
 
GB Holdings
 
On April 4, 2006, the Official Committee of Unsecured Creditors, or the Committee, of GB Holdings, Inc., or GBH, filed a proposed Plan of Reorganization, or the Plan, and Disclosure Statement in which they indicated that they intend to challenge the transaction in July 2004 that, among other things, resulted in the transfer of The Sands to ACE Gaming LLC, a wholly owned subsidiary of Atlantic Coast, the exchange of certain of GBH’s notes for 3% senior secured convertible notes of Atlantic Coast, and our owning 58.2% of the outstanding Atlantic Coast shares of common stock. As of June 30, 2006, we owned 58.2% of the outstanding stock of Atlantic Coast and GBH owned 41.7% of such stock. We also own approximately 77.5% of the outstanding shares of common stock of GBH. If the Committee succeeds in challenging these transactions, they indicated that they intend to seek to rescind the July 2004 transactions and attempt to equitably subordinate, in bankruptcy, AREP’s claims against GBH to the claims of other creditors. Under the Plan, they propose to place all of the assets of GBH in a Liquidating Trust for the benefit of the creditors. The Trust would be managed by a five-member board, four of whom would be appointed by the other creditors and one of whom would be appointed by a limited group of equity holders of GBH that would not include us. The assets that would be placed in the Trust include the 2,882,938 shares of Atlantic Coast stock owned by GBH as well as any litigation claims owned by the debtor or the estate, including any claims challenging the July 2004 transactions. We filed an objection to the Disclosure Statement on several grounds. At a hearing held on May 31, 2006, the Bankruptcy Court directed the Committee to make several revisions to their Disclosure Statement before the Disclosure Statement and the Committee’s Plan could be distributed to GBH’s creditors and stockholders. The Committee has yet to make such revisions.
 
We cannot predict the outcome of the GBH Bankruptcy proceedings or the potential impact on us.
 
WPI litigation
 
In November and December 2005, the U.S. District Court for the Southern District of New York rendered a decision in Contrarian Funds Inc. v. WestPoint Stevens, Inc. et al., and issued orders reversing certain provisions of


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the bankruptcy court order pursuant to which we acquired our ownership of a majority of the common stock of a newly formed company, WPI. WPI acquired substantially all of the assets of WPS. On April 13, 2006, the Bankruptcy Court entered a remand order which provides, among other things, that all of the shares and rights to acquire shares of WPI issued to us and the other first lien lenders or held in escrow pursuant to court order constituted “replacement collateral”, be sold other than 5,250,000 shares that we acquired for cash. The 5,250,000 shares represent approximately 27% of the 19,498,389 shares of WPI now outstanding. According to the remand order, we would share pro rata with the other first lien lenders in proceeds realized from the disposition of the replacement collateral and, to the extent there is remaining replacement collateral after satisfying first lien lender claims, we would share pro rata with the other second lien lenders in any further proceeds. We were holders of approximately 39.99% of the outstanding first lien debt and approximately 51.21% of the outstanding second lien debt. On April 13, 2006, the Bankruptcy Court also entered an order staying the remand order pending its appeal. The other first lien lenders have filed a notice of appeal of the remand order, and have filed a motion with the District Court to lift the stay entered by the Bankruptcy Court. We have filed a notice of appeal of the remand order and an objection to the motion to lift the stay. No hearing has been scheduled on the motion of the other first lien lenders to lift the stay, and no order has been entered by the District Court on that motion. A hearing on the appeals of the remand order has been scheduled by the District Court for September 20, 2006. We also intend to appeal the prior order of the District Court that modified and vacated portions of the original sale order as entered by the Bankruptcy Court.
 
We cannot predict the outcome of these proceedings or the ultimate impact on our investment in WPI or the business prospects of WPI.
 
Item 1A.   Risk Factors
 
In addition to the risk factor set forth below, the discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report of Form 10-K for the fiscal year ended December 31, 2005, filed with the Securities and Exchange Commission on March 16, 2006, and amended on March 31, 2006, which describe various risks and uncertainties to which we are or may become subject. This report is available, without charge, on our website, http://www.areplp.com/investor.shtml as soon as reasonably practicable after they are filed electronically with the SEC. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.
 
Home Fashion
 
A recent court order may result in our ownership of WPI being reduced to less than 50%. Uncertainties arising from this decision may adversely affect WPI’s operations and prospects and the value of our investment in it.
 
In November and December 2005, the U.S. District Court for the Southern District of New York rendered a decision in Contrarian Funds Inc. v. WestPoint Stevens, Inc. et al., and issued orders reversing certain provisions of the bankruptcy court order pursuant to which we acquired our ownership of a majority of the common stock of a newly formed company, WPI. WPI acquired substantially all of the assets of WPS. On April 13, 2006, the Bankruptcy Court entered a remand order which provides, among other things, that all of the shares and rights to acquire shares of WPI issued to us and the other first lien lenders or held in escrow pursuant to court order constituted “replacement collateral”, other than 5,250,000 shares that we acquired for cash. The 5,250,000 shares represent approximately 27% of the 19,498,389 shares of WPI now outstanding. According to the remand order, we would share pro rata with the other first lien lenders in proceeds realized from the disposition of the replacement collateral and, to the extent there is remaining replacement collateral after satisfying first lien lender claims, we would share pro rata with the other second lien lenders in any further proceeds. We were holders of approximately 39.99% of the outstanding first lien debt and approximately 51.21% of the outstanding second lien debt. On April 13, 2006, the Bankruptcy Court also entered an order staying the remand order pending its appeal. The other first lien lenders have filed a notice of appeal of the remand order, and have filed a motion with the District Court to lift the stay and no ordered has been entered by the District Court on that motion. A hearing on the appeals of the remand order has been scheduled by the District Court for September 20, 2006. We also intend to appeal the prior order that modified and vacated portions of the original sale order.


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We currently own approximately 67.7% of the outstanding shares of common stock of WPI. As a result of the District Court’s order and the proceedings on remand, our percentage of the outstanding shares of common stock of WPI could be reduced to less than 50% and perhaps substantially less. If we were to lose control of WPI, it could adversely affect the business and prospects of WPI and the value of our investment in it. In addition, we consolidated the results and balance sheet of WPI as of June 30, 2006 and December 31, 2005 and for the period from the date of acquisition through June 30, 2006. If we were to own less than 50% of the outstanding common stock, we would have to evaluate whether we should consolidate WPI and our financial statements could be materially different than as presented as of June 30, 2006 and December 31, 2005 and for the periods then ended.
 
We cannot guarantee that we will be able to recover our investment made in connection with the acquisition of the Flamingo Laughlin and we may have difficulties combining the operations of the Flamingo Laughlin with our existing operations.
 
On May 19, 2006, our wholly-owned subsidiary, AREP Laughlin, acquired the Flamingo Laughlin from affiliates of Harrah’s Operating Company, Inc., or Harrah’s. The transaction was completed pursuant to an asset purchase agreement, dated as of November 28, 2005, between AREP Laughlin, AREP Boardwalk LLC, a wholly-owned subsidiary of AREP, Harrah’s and certain affiliated entities. Under the agreement, AREP Laughlin acquired the Flamingo and AREP Boardwalk Properties LLC, as assignee of AREP Boardwalk LLC, acquired 7.7 acres of land in Atlantic City, New Jersey, known as the Traymore site, for an aggregate purchase price of approximately $170.0 million, subject to adjustment. The portion of the purchase price attributable to the Flamingo Laughlin is approximately $109.0 million.
 
In addition, we currently plan to spend approximately $40.0 million through 2008 to refurbish rooms, upgrade amenities and acquire new gaming equipment for the Flamingo Laughlin. Acquisitions generally involve significant risks, including difficulties in the assimilation of the operations, services and corporate culture of the acquired company. We may not be able to combine successfully the operations of the Flamingo Laughlin with our existing operations. There are a large number of systems that must be integrated including management information, purchasing, accounting and finance, sales, billing and payroll and benefits. The integration of the Flamingo Laughlin into our existing operations also will require significant attention from management, possibly reducing its ability to focus on other operations or projects. Any delays or increased costs of combining could adversely affect us and disrupt our operations.
 
The benefits from the acquisition of the Flamingo Laughlin are based on projections and assumptions, including, related to our program to upgrade and refurbish the facilities, as well as recent results. As a result, we cannot be certain that we will realized the anticipated benefits.
 
Item 6.   Exhibits
 
The list of exhibits required by Item 601 of Regulation S-K and filed as part of this report is set forth in the Exhibit Index.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AMERICAN REAL ESTATE PARTNERS, L.P.
 
By: American Property Investors, Inc., its general
partner
 
  By: 
/s/  HILLEL MOERMAN
Hillel Moerman
Chief Financial Officer (Principal
Financial Officer and duly authorized officer)
 
Date: August 9, 2006


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Exhibits Index
 
         
Exhibit No.
 
Description
 
  Exhibit 10 .1 -   Amended and Restated Credit Agreement, dated as of May 9, 2006, among American Casino & Entertainment Properties LLC, Bear Stearns Corporate Lending Inc., as Administrative Agent, Wells Fargo Bank, as Syndication Agent, CIT Services Corporation and Comerica West Incorporated as Co- Documentation Agents, and other lender parties thereto (incorporated by reference to Exhibit 10.1 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .2 -   Reaffirmation Agreement, dated as of May 9, 2006, among the Grantors thereto and Bear Sterns Corporate Lending Inc., as Administrative Agent (incorporated by reference to Exhibit 10.2 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .3 -   First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Stratosphere Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Wilmington Trust Company, in its capacity as Indenture Trustee, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.3 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .4 -   First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Stratosphere Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Sterns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.4 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .5 -   First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Stratosphere Land Corporation, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Sterns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.5 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .6 -   First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Fresca, LLC, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Sterns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.6 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .7 -   First Modification to Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing made by Arizona Charlie’s, LLC, as Trustor, to Lawyers Title of Nevada, as Trustee, for the benefit of Bear Sterns Corporate Lending Inc., in its capacity as Administrative Agent, for the benefit of the Secured Parties, as Beneficiary, dated as of May 9, 2006 (incorporated by reference to Exhibit 10.7 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on May 17, 2006).
  Exhibit 10 .8 -   Loan and Security Agreement, dated as of June 16, 2006, among WestPoint Home, Inc., as the Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as the Administrative Agent (incorporated by reference to Exhibit 10.1 to American Real Estate Partners, L.P.’s Form 8-K (SEC File No. 1-9156), filed on June 22, 2006).
  Exhibit 31 .1 -   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a).
  Exhibit 31 .2 -   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a).
  Exhibit 32 .1 -   Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  Exhibit 32 .2 -   Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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