As filed with the Securities and Exchange Commission on June 21, 2007
Registration No. 333-      
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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 Numbers)
767 Fifth Avenue, Suite 4700
New York, New York 10153
(212) 702-4300
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant’s Principal Executive Offices)
Keith A. Meister
Principal Executive Officer and Vice Chairman of the Board
767 Fifth Avenue, Suite 4700
New York, New York 10153
(212) 702-4300
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
With copies to:
Julie M. Allen, Esq.
Ian B. Blumenstein, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
(212) 969-3000
Approximate date of commencement of proposed sale of the securities to the public: From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. ¨
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. ý
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ ____________
If this Form is a registration statement pursuant to General Instruction 1.D. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box. ¨
If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction 1.D. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box. ¨
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities
to be Registered
     
Amount to be Registered
     
Proposed Maximum Offering Price per Depositary Unit
     
Proposed Maximum
Aggregate Offering
Price
     
Amount of Registration Fee
                                                         
                
Depositary units
  
4,525,058(1)(2)
  
$94.96(3)
$429,699,508(3)
$13,191.77
——————
(1)
This number reflects the aggregate number of depositary units representing limited partnership interests issuable upon conversion of American Real Estate Partners, L.P.’s Variable Rate Senior Convertible Notes due 2013 at the conversion rate of $132.595 of our depositary units for each $1,000 principal amount of the notes.
(2)
In the event of a stock split, stock dividend or similar transaction involving the amount of depositary units of the Registrant, in order to prevent dilution, the number of depositary units registered hereby shall be automatically adjusted to cover the additional depositary units in accordance with Rule 416 under the Securities Act.
(3)
Based on the average of the high and low selling prices per unit as reported on the New York Stock Exchange on June 15, 2007. Estimated pursuant to Rule 457(c) under the Securities Act, solely for the purpose of calculating the registration fee.



The information in this prospectus is not complete and may be changed. We may not sell these depositary units until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these depositary units and it is not soliciting an offer to buy these depositary units in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 21, 2007

PROSPECTUS
4,525,058 Depositary Units
AMERICAN REAL ESTATE PARTNERS, L.P.
This prospectus relates to the resale of up to 4,525,058 depositary units of American Real Estate Partners, L.P. that may be offered and sold from time to time by the selling securityholders named in this prospectus and the persons to whom such selling securityholders may transfer their depositary units.
These depositary units include the 4,525,058 depositary units initially issuable upon conversion of American Real Estate Partner, L.P.’s Variable Rate Senior Convertible Notes due 2013, or the convertible notes. This prospectus also relates to any additional depositary units issuable upon conversion of the convertible notes in the event of a stock split, stock dividend or similar transaction involving the amount of depositary units of the Registrant.
We will not receive any proceeds from the sale of the depositary units covered by this prospectus.
Our depositary units are listed on the New York Stock Exchange under the symbol “ACP.”
Investing in our depositary units involves some risk. See “Risk Factors” beginning on page 4.
——————
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these depositary units or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
——————
The date of this prospectus is                  , 2007


TABLE OF CONTENTS
 
     
Page
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell securities. The information in this document may only be accurate on the date of this document.


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FORWARD-LOOKING STATEMENTS

This prospectus and the information incorporated herein by reference contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act; Section 27A of the Securities Act of 1933, as amended, or the Securities Act; and pursuant to the Private Securities Litigation Reform Act. These forward-looking statements are not historical facts, but rather our beliefs and expectations based on our current expectations, estimates, projections, beliefs and assumptions about our company and industry. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. There statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks include those set forth in the section of this prospectus called “Risk Factors.”
Those risks are representative of factors that could affect the outcome of the forward-looking statements. These and the other factors discussed elsewhere in this prospectus and the documents incorporated by reference herein are not necessarily all of the important factors that cause our results to differ materially from those expressed in our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which reflect our view only as of the respective dates of this prospectus and the documents incorporated herein by reference or other dates that are specified in those documents.


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OUR COMPANY

American Real Estate Partners, L.P., or AREP, is a master limited partnership formed in Delaware on February 17, 1987. We are a diversified holding company owning subsidiaries engaged in the following operating businesses: gaming, real estate and home fashion. On April 22, 2007, American Entertainment Properties Corp., or AEP, a wholly owned indirect subsidiary of AREP, entered into a purchase agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real Estate Funds, a series of real estate investment funds affiliated with Goldman, Sachs & Co., or Whitehall Street Real Estate Funds, to sell all of the issued and outstanding membership interests of American Casino & Entertainment Properties, LLC, or ACEP, which comprises our gaming operations. The parties expect to close the transaction in approximately December 2007. On February 9, 2007, we entered into an agreement and plan of merger, pursuant to which we would acquire Lear Corporation, or Lear, a publicly traded company that provides automotive interior systems worldwide, for an aggregate consideration of approximately $5.2 billion, including the assumption by the surviving entity of certain outstanding indebtedness of Lear and refinancing of Lear’s existing term loan and credit facility. The consummation of the transaction is subject to regulatory approvals and shareholder vote.
Our primary business strategy is to continually evaluate our existing operating businesses with a view to maximizing value to our depositary unitholders. We may also seek to acquire additional businesses that are distressed or in out-of-favor industries and will consider the divestiture of businesses. In addition, we invest our available liquidity in debt and equity securities with a view to enhancing returns as we continue to assess further acquisitions of operating businesses.
Our general partner is American Property Investors, Inc., the general partner, or API, a Delaware corporation, which is indirectly wholly owned by Carl C. Icahn. We own our businesses and conduct our investment activities through a subsidiary limited partnership, American Real Estate Holdings Limited Partnership, or AREH, in which we own a 99% limited partnership interest, and its subsidiaries. API also acts as the general partner for AREH. API has a 1% general partnership interest in each of us and AREH. As of March 31, 2007, affiliates of Mr. Icahn beneficially owned 55,655,382 units representing AREP limited partner interests, or the depositary units, representing approximately 90% of the outstanding depositary units, and 10,304,013 cumulative pay-in-kind redeemable preferred units, representing AREP limited partner interests, or the preferred units, representing approximately 86.5% of the outstanding preferred units.
Our depositary units, representing limited partnership interests, trade on the New York Stock Exchange under the symbol “ACP.”
As used in this prospectus, “we,” “us,” “our,” “company” and “AREP” mean American Real Estate Partners, L.P., and, unless the context indicates otherwise, include our subsidiaries.
Our principal executive offices are located at 767 Fifth Avenue, Suite 4700, New York, New York 10153. Our phone number is (212) 702-4300. Our website address is http:// www.AREP.com.


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ABOUT THIS PROSPECTUS

We are registering for resale by the selling securityholders up to 4,525,058 depositary units issuable upon conversion of the convertible notes, and any additional depositary units issuable upon conversion of the convertible notes in the event of a stock split, stock dividend or similar transaction involving the amount of depositary units of the Registrant. This prospectus is part of a Registration Statement that the selling securityholders filed with the Securities and Exchange Commission, or the SEC, using a “shelf” registration process. Under this shelf process, we may offer, from time to time depositary units. This prospectus does not contain all of the information included in the Registration Statement. The registration statement filed with the SEC includes exhibits that provide more details about the matters discussed in this prospectus.
We will not receive any of the proceeds from the sale by the selling securityholders of the depositary units. We will bear all fees and expenses incident to our obligation to register the depositary units. We may suspend the use of this prospectus for a period not to exceed sixty days in the aggregate during any twelve-month period, in each case for valid business reasons, to be determined in good faith by AREP in its reasonable judgment (which shall not include the avoidance of AREP’s obligations hereunder), including, without limitation, the acquisition or divestiture of assets, pending corporate developments, public filings with the SEC and similar events.
You should carefully read this prospectus, the related exhibits filed with the SEC and any prospectus supplement, together with the additional information described below under the headings “Where You Can Find More Information” and “Incorporation by Reference.” This prospectus incorporates important business and financial information about us that is not included in or delivered with this prospectus. We will provide without charge to each person to whom a copy of this prospectus is delivered, upon written or oral request of that person, a copy of any and all of this information. Requests for copies should be directed to Investor Relations Department, American Real Estate Partners, L.P., 769 Fifth Avenue, Suite 4700, New York, New York 10153; (212) 702-4300. Our web site address is http://www.AREP.com. You should request this information at least five business days in advance of the date on which you expect to make your decision with respect to the exchange offer.
You should rely only on the information contained or incorporated by reference in this prospectus and in any accompanying prospectus supplement. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should assume that the information appearing in this prospectus, any prospectus supplement and any other document incorporated by reference is accurate only as of the date on the front cover of those documents. We do not imply that there has been no change in the information contained in this prospectus or in our affairs since that date by delivering this prospectus.


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RISK FACTORS

Investing in our depositary units involves risks that could affect us and our business as well as the industries in which we operate and invest. Before purchasing our depositary units, you should carefully consider the following risks and the other information in this prospectus and any applicable prospectus supplement, as well as the documents incorporated by reference herein. Each of the risks described could result in a decrease in the value of our depositary units and your investment in them.
Risks Relating to Our Structure
Our general partner and its control person could exercise their influence over us to your detriment.
Mr. Icahn, through affiliates, currently owns 100% of API, our general partner, and approximately 86.5% of our outstanding preferred units and approximately 90% of our depositary units, and, as a result, has the ability to influence many aspects of our operations and affairs, including the timing and amount of any distribution to unitholders. API also is the general partner of AREH.
The interests of Mr. Icahn, including his interests in entities in which he and we have invested or may invest in the future, may differ from your interests as a unitholder and, as such, he may take actions that may not be in your interest. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Mr. Icahn’s interests might conflict with your interests.
In addition, if Mr. Icahn were to sell, or otherwise transfer, some or all of his interests in us to an unrelated party or group, a change of control could be deemed to have occurred under the terms of the indentures governing certain of our notes which would require us to offer to repurchase all such outstanding notes at 101% of their principal amount plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase. In the case of the convertible notes, we also would be obligated to make a “make whole” payment in the form of additional depositary units to any holder of convertible notes who converts such notes following a change of control. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of such notes.
We have engaged, and in the future may engage, in transactions with our affiliates.
We have invested and may in the future invest in entities in which Mr. Icahn also invests. We also have purchased and may in the future purchase entities or investments from him or his affiliates. Although API has never received fees in connection with our investments, our partnership agreement allows for the payment of these fees. Mr. Icahn may pursue other business opportunities in industries in which we compete and there is no requirement that any additional business opportunities be presented to us.
We have entered into an agreement and plan of merger pursuant to which we would acquire all of the issued and outstanding common stock of Lear for an aggregate consideration of approximately $5.2 billion, including the assumption by the surviving entity of certain outstanding indebtedness of Lear and the refinancing of Lear’s existing term loan and credit facility. The consummation of the transaction is subject to regulatory approvals and shareholder vote. Mr. Icahn beneficially owns approximately 16.0% of Lear’s outstanding common stock.
Mr. Icahn previously proposed that we acquire his interest in American Railcar, Inc., or American Railcar, and Philip Services Corporation, or Philip Services. American Railcar is a publicly traded company that is primarily engaged in the business of manufacturing covered hoppers and tank railcars. Philip Services is an industrial services company that provides industrial outsourcing, environmental services and metal services to major industry sectors throughout North America. A committee of independent directors of the board was formed to consider those proposals. Currently, at Mr. Icahn’s request, only the proposal regarding the potential acquisition of the metal services business of Philip Services is being considered by the committee. Any acquisition would be subject to, among other things, the negotiation, execution and closing of a definitive agreement and the receipt of a fairness opinion. We continuously identify, evaluate and engage in discussions concerning potential investments and acquisitions, including potential investments in and acquisitions of affiliates of Mr. Icahn. There cannot be any assurance that any potential transactions that we consider will be completed.


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Certain of our management are committed to the management of other businesses.

Certain of the individuals who conduct the affairs of API, including the chairman of our board of directors, Mr. Icahn, our principal executive officer and vice chairman of the board of directors, Keith A. Meister, and our president, Peter K. Shea, are, and will be, committed to the management of other businesses owned or controlled by Mr. Icahn and his affiliates. Accordingly, these individuals may focus significant amounts of time and attention on managing these other businesses. Conflicts may arise in the future between our interests and the other entities or business activities in which such individuals are involved. Conflicts of interest may arise in the future as we may compete with such affiliates for the same assets, purchasers and sellers of assets or financings.
To service our indebtedness and pay distributions with respect to our depositary units, we will require a significant amount of cash. Our ability to maintain our current cash position or generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, to pay distributions with respect to our depositary units and to fund operations will depend on existing cash balances and our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.
Our current businesses and businesses that we acquire may not generate sufficient cash to service our debt. In addition, we may not generate sufficient cash flow from operations or investments and future borrowings may not be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
We are a holding company and will depend on the businesses of our subsidiaries to satisfy our obligations.
We are a holding company. In addition to cash and cash equivalents, U.S. government and agency obligations, marketable equity and debt securities and other short-term investments, our assets consist primarily of investments in our subsidiaries. Moreover, if we make significant investments in operating businesses, it is likely that we will reduce the liquid assets at AREP and AREH in order to fund those investments and the ongoing operations of our subsidiaries. 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 dividends, distributions, loans or otherwise.
The operating results of our subsidiaries may not be sufficient to make distributions to us. In addition, our subsidiaries are not obligated to make funds available to us, and distributions and intercompany transfers from our subsidiaries to us may be restricted by applicable law or covenants contained in debt agreements and other agreements to which these subsidiaries may be subject or enter into in the future. The terms of any borrowings of our subsidiaries or other entities in which we own equity may restrict dividends, distributions or loans to us. For example, the notes issued by our indirect wholly owned subsidiary, ACEP, contain restrictions on dividends and distributions and loans to us, as well as on other transactions with us. ACEP also has a credit agreement which contains financial covenants that have the effect of restricting dividends or distributions. This agreement precludes our receiving payments from the operations of our gaming properties which account for a significant portion of our revenues and cash flows. We have credit facilities for WestPoint International, Inc., or WPI, our majority owned subsidiary, and our real estate development properties that also restrict dividends, distributions and other transactions with us. To the degree any distributions and transfers are impaired or prohibited, our ability to make payments on our debt will be limited.
We or our subsidiaries may be able to incur substantially more debt.
We or our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of our 8.125% senior notes due 2012, our 7.125% senior notes due 2013 and our Variable Rate Senior Convertible Notes due 2013 do not prohibit us or our subsidiaries from doing so. We and AREH may incur additional indebtedness if we comply with certain financial tests contained in the indentures that govern these notes. As of March 31, 2007, based on these tests, we and AREH could have incurred up to approximately $1.4 billion of additional indebtedness. Since that date, we issued $600.0 million principal amount of our Variable Rate Senior Convertible Notes due 2013, reducing the amount that we and AREH could incur based upon this test. If we complete the acquisition of Lear and


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fund the acquisition with borrowings, as we currently contemplate, under the financial tests contained in the indentures, AREP and AREH will not be able to incur additional indebtedness. However, our subsidiaries, other than AREH, are not subject to any of the covenants contained in the indentures with respect to our senior notes, including the covenant restricting debt incurrence. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we, and they, now face could intensify.

Our failure to comply with the covenants contained under any of our debt instruments, including the indentures governing our outstanding notes, including our failure as a result of events beyond our control, could result in an event of default which would materially and adversely affect our financial condition.
If there were an event of default under one of our debt instruments, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. In addition, any event of default or declaration of acceleration under one debt instrument could result in an event of default under one or more of our other debt instruments. It is possible that, if the defaulted debt is accelerated, our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments and we cannot assure you that we would be able to refinance or restructure the payments on those debt securities.
The market for our securities may be volatile.
The market for our equity securities may be subject to disruptions that could cause substantial volatility in their prices. Any such disruptions may adversely affect the value of your securities.
We have only recently made cash distributions to our unitholders, and future distributions, if any, can be affected by numerous factors.
While we made cash distributions with respect to each of the four quarters of 2006 in the amount of $0.10 per depositary unit and the first quarter of 2007 in the amount of $0.15 per depositary unit, the payment of future distributions will be determined by the board of directors of our general partner quarterly, based on a review of a number of factors, including those described below and other factors that it deems relevant at the time that declaration of a distribution is considered. Our ability to pay distributions will depend on numerous factors, including the availability of adequate cash flow from operations; the proceeds, if any, from divestitures; our capital requirements and other obligations; restrictions contained in our financing arrangements; and our issuances of additional equity and debt securities. The availability of cash flow in the future depends as well upon events and circumstances outside our control, including prevailing economic and industry conditions and financial, business and similar factors. No assurance can be given that we will be able to make distributions or as to the timing of any distribution. If distributions are made, there can be no assurance that holders of depositary units may not be required to recognize taxable income in excess of cash distributions made in respect of the period in which a distribution is made.
Holders of our depositary units have limited voting rights, rights to participate in our management and control of us.
Our general partner manages and operates AREP. Unlike the holders of common stock in a corporation, holders of our outstanding depositary units have only limited voting rights on matters affecting our business. Holders of depositary units have no right to elect the general partner on an annual or other continuing basis, and our general partner generally may not be removed except pursuant to the vote of the holders of not less than 75% of the outstanding depositary units. In addition, removal of the general partner may result in a default under our debt securities. As a result, holders of depositary units have limited say in matters affecting our operations and others may find it difficult to attempt to gain control or influence our activities.
Holders of depositary units may not have limited liability in certain circumstances and may be liable for the return of distributions that cause our liabilities to exceed our assets.
We conduct our businesses through AREH in several states. Maintenance of limited liability will require compliance with legal requirements of those states. We are the sole limited partner of AREH. Limitations on the liability of a limited partner for the obligations of a limited partnership have not clearly been established in several states. If it were determined that AREH has been conducting business in any state without compliance with the applicable limited partnership statute or the possession or exercise of the right by the partnership, as limited partner


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of AREH, to remove its general partner, to approve certain amendments to the AREH partnership agreement or to take other action pursuant to the AREH partnership agreement constituted “control” of AREH’s business for the purposes of the statutes of any relevant state, AREP and/or unitholders, under certain circumstances, might be held personally liable for AREH’s obligations to the same extent as our general partner. Further, under the laws of certain states, AREP might be liable for the amount of distributions made to AREP by AREH.

Holders of our depositary units may also have to repay AREP amounts wrongfully distributed to them. Under Delaware law, we may not make a distribution to holders of common units if the distribution causes our liabilities to exceed the fair value of our assets. Liabilities to partners on account of their partnership interests and nonrecourse liabilities are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that a limited partner who receives such a distribution and knew at the time of the distribution that the distribution violated Delaware law will be liable to the limited partnership for the distribution amount for three years from the distribution date.
Additionally, under Delaware law an assignee who becomes a substituted limited partner of a limited partnership is liable for the obligations, if any, of the assignor to make contributions to the partnership. However, such an assignee is not obligated for liabilities unknown to him or her at the time he or she became a limited partner if the liabilities could not be determined from the partnership agreement.
We may be subject to the pension liabilities of our affiliates.
Mr. Icahn, through certain affiliates, currently owns 100% of API and approximately 90% of our outstanding depositary units and 86.5% of our outstanding preferred units. Applicable pension and tax laws make each member of a “controlled group” of entities, generally defined as entities in which there are at least an 80% common ownership interest, jointly and severally liable for certain pension plan obligations of any member of the controlled group. These pension obligations include ongoing contributions to fund the plan, as well as liability for any unfunded liabilities that may exist at the time the plan is terminated. In addition, the failure to pay these pension obligations when due may result in the creation of liens in favor of the pension plan or the Pension Benefit Guaranty Corporation, or the PBGC, against the assets of each member of the controlled group.
As a result of the more than 80% ownership interest in us by Mr. Icahn’s affiliates, we and our subsidiaries are subject to the pension liabilities of all entities in which Mr. Icahn has a direct or indirect ownership interest of at least 80%. One such entity, ACF Industries LLC, or ACF, is the sponsor of several pension plans which, as of December 31, 2006, were not underfunded on an ongoing actuarial basis but would be underfunded by approximately $87.2 million if those plans were terminated, as most recently reported by the plans’ actuaries. These liabilities could increase or decrease, depending on a number of factors, including future changes in promised benefits, investment returns and the assumptions used to calculate the liability. As members of the controlled group, we would be liable for any failure of ACF to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of the ACF pension plans. In addition, other entities now or in the future within the controlled group that includes us may have pension plan obligations that are, or may become, underfunded and we would be liable for any failure of such entities to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of such plans.
The current underfunded status of the ACF pension plans requires ACF to notify the PBGC of certain “reportable events,” such as if we cease to be a member of the ACF controlled group, or if we make certain extraordinary dividends or stock redemptions. The obligation to report could cause us to seek to delay or reconsider the occurrence of such reportable events.
Starfire Holding Corporation, or Starfire, which is 100% owned by Mr. Icahn, has undertaken to indemnify us and our subsidiaries from losses resulting from any imposition of certain pension funding or termination liabilities that may be imposed on us and our subsidiaries or our assets as a result of being a member of the Icahn controlled group. The Starfire indemnity (which does not extend to pension liabilities of our subsidiaries that would be imposed on us as a result of our interest in these subsidiaries and not as a result of Mr. Icahn’s and his affiliates’ more than 80% ownership interest in us) provides, among other things, that so long as such contingent liabilities exist and could be imposed on us, Starfire will not make any distributions to its stockholders that would reduce its net worth to below $250.0 million. Nonetheless, Starfire may not be able to fund its indemnification obligations to us.


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We are subject to the risk of possibly becoming an investment company.

Because we are a holding company and a significant portion of our assets may, from time to time, consist of investments in companies in which we own less than a 50% interest, we run the risk of inadvertently becoming an investment company that is required to register under the Investment Company Act of 1940, as amended, or the Investment Company Act. Registered investment companies are subject to extensive, restrictive and potentially adverse regulation relating to, among other things, operating methods, management, capital structure, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we operate our business, nor are registered investment companies permitted to have many of the relationships that we have with our affiliated companies.
In order not to become an investment company required to register under the Investment Company Act, we monitor the value of our investments and structure transactions with an eye toward the Investment Company Act. As a result, we may structure transactions in a less advantageous manner than if we did not have Investment Company Act concerns, or we may avoid otherwise economically desirable transactions due to those concerns. In addition, events beyond our control, including significant appreciation or depreciation in the market value of certain of our publicly traded holdings or adverse developments with respect to our ownership of certain of our subsidiaries, such as our loss of control of WPI, could result in our inadvertently becoming an investment company.
If it were established that we were an investment company, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC, that we would be unable to enforce contracts with third parties or that third parties could seek to obtain rescission of transactions with us undertaken during the period it was established that we were an unregistered investment company.
We may become taxable as a corporation.
We believe that we have been and are properly treated as a partnership for federal income tax purposes. This allows us to pass through our income and deductions to our partners. However, the Internal Revenue Service, or IRS, could challenge our partnership status and we could fail to qualify as a partnership for past years as well as future years. Qualification as a partnership involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended. For example, a publicly traded partnership is generally taxable as a corporation unless 90% or more of its gross income is “qualifying” income, which includes interest, dividends, oil and gas revenues, real property rents, gains from the sale or other disposition of real property, gain from the sale or other disposition of capital assets held for the production of interest or dividends, and certain other items. We believe that in all prior years of our existence at least 90% of our gross income was qualifying income and we intend to structure our business in a manner such that at least 90% of our gross income will constitute qualifying income this year and in the future. However, there can be no assurance that such structuring will be effective in all events to avoid the receipt of more than 10% of non-qualifying income. If less than 90% of our gross income constitutes qualifying income, we may be subject to corporate tax on our net income, at a federal rate of up to 35% plus possible state taxes. Further, if less than 90% of our gross income constituted qualifying income for past years, we may be subject to corporate level tax plus interest and possibly penalties. In addition, if we register under the Investment Company Act, it is likely that we would be treated as a corporation for U.S. federal income tax purposes. The cost of paying federal and possibly state income tax, either for past years or going forward, could be a significant liability and would reduce our funds available to make distributions to holders of units, and to make interest and principal payments on our debt securities. To meet the qualifying income test, we may structure transactions in a manner that is less advantageous than if this were not a consideration, or we may avoid otherwise economically desirable transactions. Recently proposed legislation may affect the status of publicly traded partnerships such as AREP. Although as proposed the legislation would not impact AREP’s status as a partnership for tax purposes, it is unclear whether such legislation would be enacted or, if enacted, what its final form and effect would be.
Holders of depositary units may be required to pay tax on their share of our income even if they did not receive cash distributions from us.
Because we are treated as a partnership for income tax purposes, holders of depositary units are generally required to pay federal income tax, and, in some cases, state or local income tax, on the portion of our taxable income allocated to them, whether or not such income is distributed. Accordingly, it is possible that holders of


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depositary units may not receive cash distributions from us equal to their share of our taxable income, or even equal to their tax liability on the portion of our income allocated to them.

If we discover significant deficiencies in our internal controls over financial reporting or at any recently acquired entity, it may adversely affect our ability to provide timely and reliable financial information and satisfy our reporting obligations under federal securities laws, which also could affect the market price of our depositary units or our ability to remain listed with the New York Stock Exchange.
Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As of December 31, 2006, we completed remediation of previously reported significant deficiencies in internal controls, as defined under interim standards adopted by the Public Company Accounting Oversight Board, or PCAOB – two at the holding company and one at a subsidiary. A “significant deficiency” is a control deficiency, or combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles such that there is a more than remote likelihood that a misstatement of a company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.
To the extent that any material weakness or significant deficiency exists in our or our consolidated subsidiaries’ internal control over financial reporting, such material weakness or significant deficiency may adversely affect our ability to provide timely and reliable financial information necessary for the conduct of our business and satisfaction of our reporting obligations under federal securities laws, which could affect our ability to remain listed with the New York Stock Exchange. Ineffective internal and disclosure controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our depositary units or the rating of our debt.
Since we are a limited partnership, you may not be able to pursue legal claims against us in U.S. federal courts.
We are a limited partnership organized under the laws of the state of Delaware. Under the rules of federal civil procedure, you may not be able to sue us in federal court on claims other than those based solely on federal law, because of lack of complete diversity. Case law applying diversity jurisdiction deems us to have the citizenship of each of our limited partners. Because we are a publicly traded limited partnership, it may not be possible for you to attempt to sue us in a federal court because we have citizenship in all 50 U.S. states and operations in many states. Accordingly, you will be limited to bring any claims in state court. Furthermore, American Real Estate Finance Corp., our corporate co-issuer for our notes, has only nominal assets and no operations. While you may be able to sue the corporate co-issuer in a federal court, you are not likely to be able to realize on any judgment rendered against it.
Risks Related to our Businesses
General
In addition to the following risk factors specific to each of our businesses, all of our businesses are subject to the effects of the following:
·
the continued threat of terrorism;
·
economic downturn;
·
loss of any of our or our subsidiaries’ key personnel;
·
the unavailability, as needed, of additional financing; and
·
the unavailability of insurance at acceptable rates.
Our acquisition of Lear will require a significant investment or may not be successfully completed.
On February 9, 2007, we entered into an agreement and plan of merger, pursuant to which we would acquire Lear, a publicly traded company that provides automotive interior systems worldwide for aggregate consideration of


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approximately $5.2 billion, including the assumption by the surviving entity of certain outstanding indebtedness of Lear and the refinancing of Lear’s existing term loan and credit facility. The consummation of the transaction is subject to regulatory approvals and shareholder vote. If we complete the acquisition of Lear, it would require a significant investment by us, including approximately $1.3 billion in cash. Under the financial tests contained in the indentures that govern our notes due 2012 and 2013, AREP and AREH will not be able to incur additional indebtedness as a result of borrowings to finance the Lear acquisition, which may limit our flexibility in entering into future financing arrangements, including those to support our existing businesses or to acquire new businesses. Lear also has significant pension and related liabilities for which we could become liable as a member of a controlled group of entities.
Our agreement with Lear permitted Lear to solicit proposals from other potential purchasers for 45 days after the signing of the agreement and to respond to offers after that date and until Lear’s stockholders approve the transaction with us. No competing proposals were received as of the date of this prospectus. We cannot assure you that we will be able to complete the transaction or that the completion of the transaction will be for the consideration described above.
Furthermore, the proposed transaction is subject to additional risks and uncertainties, including, but not limited to, the satisfaction of conditions to closing, which requires Lear stockholder approval and U.S. and foreign antitrust approval. If we were to complete the acquisition, Lear’s business and operations would be subject to various risks, including the uncertainty of its financial performance following completion of the proposed transaction; general conditions affecting the automotive industry, particularly in the United States; and general domestic and international market conditions.
In addition, we have been named as defendants in various lawsuits challenging the transaction. Specifically, a consolidated action is pending in the Court of Chancery of the State of Delaware which alleges, among other things, that the purchase price is unfair to Lear stockholders. A preliminary injunction was issued requiring supplemental disclosure. The supplemental disclosure requirement has been satisfied and, consequently, the injunction has been dissolved. A consolidated action filed in Michigan state court making virtually identical allegations was dismissed by the court because of the prior-filed Delaware action. Plaintiffs in the Michigan state action have filed a motion for reconsideration which is pending. Finally, a complaint is pending in the United States District Court for the Eastern District of Michigan, which alleges that the transaction would violate certain provisions of the Employment Retirement Income Security Act (referred to as the Federal Action). Motions to dismiss the Federal Action have been fully briefed and await disposition, as does plaintiff’s application for preliminary injunction. Based upon the above there is a risk that the transaction may be enjoined, or, if the transaction is completed, liability may nevertheless be imposed thereafter.
Gaming
Our sale of ACEP may not be successfully completed.
On April 22, 2007, AEP entered into a Membership Interest Purchase Agreement with Whitehall Street Real Estate Funds to sell all of the issued and outstanding membership interests of ACEP, which comprises our gaming operations. The transaction is subject to the approval of the Nevada Gaming Commission and the Nevada State Gaming Control Board, as well as customary conditions. The parties expect to close the transaction in approximately December 2007; however, we cannot assure you that we will be able to consummate the transaction.
The gaming industry is highly regulated. The gaming authorities and state and municipal licensing authorities have significant control over our operations.
Our properties currently conduct licensed gaming operations in Nevada. Various regulatory authorities, including the Nevada State Gaming Control Board and the Nevada Gaining Commission, require our properties to hold various licenses and registrations, findings of suitability, permits and approvals to engage in gaming operations and to meet requirements of suitability. These gaming authorities also control approval of ownership interests in gaming operations. These gaming authorities may deny, limit, condition, suspend or revoke our gaming licenses, registrations, findings of suitability or the approval of any of our ownership interests in any of our licensed gaming operations, any of which could have a significant adverse effect on our business, financial condition and results of operations, for any cause they may deem reasonable. If we violate gaming laws or regulations that are applicable to us, we may have to pay substantial fines or forfeit assets. If, in the future, we operate or have an ownership interest


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in casino gaming facilities located outside of Nevada, we would also be subject to the gaming laws and regulations of those other jurisdictions.
The sale of alcoholic beverages at our gaming properties is subject to licensing and regulation by local authorities. Any limitation, condition, suspension or revocation of, or disciplinary action with respect to, any such license would reduce the number of visitors to our casinos to the extent the availability of alcoholic beverages is important to them. Any reduction in our number of visitors will reduce our revenue and cash flow.
Rising operating costs for our gaming properties could have a negative impact on our profitability.
The operating expenses associated with our gaming properties could increase due to some of the following factors:
·
our properties use significant amounts of electricity, natural gas and other forms of energy, and energy price increases may reduce our profitability;
·
our properties use significant amounts of water and a water shortage may adversely affect our operations;
·
some of our employees are covered by collective bargaining agreements and we may incur higher costs or work slow-downs or stoppages due to union activities; and
·
our reliance on slot machine revenues and the concentration of manufacturing of slot machines in certain companies could impose additional costs on us.
We face substantial competition in the gaming industry.
The gaming industry in general, and the markets in which we compete in particular, are highly competitive:
·
we compete with many world-class destination resorts with greater name recognition and different attractions, amenities and entertainment options;
·
we compete with the continued growth of gaming on Native American tribal lands;
·
the existence of legalized gambling in other jurisdictions may reduce the number of visitors to our properties;
·
certain states have legalized, and others may legalize, casino gaming in specific venues, including race tracks and/or in specific areas, including metropolitan areas from which we traditionally attract customers; and
·
our properties also compete, and will in the future compete, with all forms of legalized gambling.
Many of our competitors have greater financial, selling and marketing, technical and other resources than we do. We may not be able to compete effectively with our competitors and we may lose market share, which could reduce our revenue and cash flow.
We cannot guarantee that we will be able to recover our investment made in connection with the acquisition of the Aquarius.
On May 19, 2006, our wholly owned subsidiary, AREP Laughlin Corporation, acquired the Aquarius Casino Resort, or the Aquarius, from affiliates of Harrah’s Operating Company, Inc., or Harrah’s, for approximately $113.6 million, including working capital. Acquisitions generally involve significant risks, including difficulties in the assimilation of the operations, services and corporate culture of the acquired company.
Pursuant to the Membership Interest Purchase Agreement that AEP has entered into with Whitehall Street Real Estate Funds to sell the issued and outstanding membership interests of ACEP, we have agreed to make capital expenditures, including $10.5 million through 2007 to refurbish rooms, upgrade amenities and acquire new gaming equipment for the Aquarius.
There can be no assurance that this acquisition will be profitable or that we will be able to recover our investments either upon the sale of ACEP or, if the sale is not consummated, in our future gaming operations.


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Real Estate Operations
Our investment in property development may be more costly than anticipated.
We have invested and expect to continue to invest in unentitled land, undeveloped land and distressed development properties. These properties involve more risk than properties on which development has been completed. Unentitled land may not be approved for development. These investments do not generate any operating revenue, while costs are incurred to obtain government approvals and develop the properties. Construction may not be completed within budget or as scheduled and projected rental levels or sales prices may not be achieved and other unpredictable contingencies beyond our control could occur. We will not be able to recoup any of such costs until such time as these properties, or parcels thereof, are either disposed of or developed into income producing assets.
We may be subject to environmental liability as an owner or operator of development and rental real estate.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances, pollutants and contaminants released on, under, in or from its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such substances. To the extent any such substances are found in or on any property invested in by us, we could be exposed to liability and be required to incur substantial remediation costs. The presence of such substances or the failure to undertake proper remediation may adversely affect the ability to finance, refinance or dispose of such property. We generally conduct a Phase I environmental site assessment on properties in which we are considering investing. A Phase I environmental site assessment involves record review, visual site assessment and personnel interviews, but does not typically include invasive testing procedures such as air, soil or groundwater sampling or other tests performed as part of a Phase II environmental site assessment. Accordingly, there can be no assurance that these assessments will disclose all potential liabilities or that future property uses or conditions or changes in applicable environmental laws and regulations or activities at nearby properties will not result in the creation of environmental liabilities with respect to a property.
Home Fashion Operations
 Pending legal proceedings may result in our ownership of WPI’s common stock being reduced to less than 50%. A legal action in Delaware challenges the issuance to of the preferred stock of WPI. Uncertainties arising from these proceedings may adversely affect WPI’s operations and prospects and the value of our investment in it.
We currently own approximately 67.7% of the outstanding shares of common stock and 100% of the preferred stock of WPI. As a result of the decision of the U.S. District Court for the Southern District of New York reversing certain provisions of the Bankruptcy Court order pursuant to which we acquired our ownership of a majority of the common stock of WPI, the proceedings in the Bankruptcy Court on remand and the proceedings in the Delaware action, our percentage of the outstanding shares of common stock of WPI could be reduced to less than 50% and perhaps substantially less and our ownership of the preferred stock of WPI could also be affected. The Bankruptcy Court entered a stay of its order on remand. On May 9, 2007, the District Court issued an order conditioning the continuation of the Bankruptcy Court’s stay on the posting of a bond. No bond was posted. On May 22, 2007, WPI, its subsidiary WestPoint Home, Inc., and we filed a Petition for a Writ of Mandamus in the U.S. Court of Appeals for the Second Circuit requesting, among other relief, the reinstatement of the Sale Order. The Second Circuit scheduled oral argument on the Petition for Mandamus for June 26, 2007 and reinstated the stay pending its decision.
If we were to lose control of WPI, it could adversely affect the business and prospects of WPI and the value of our investment in it. In addition, we consolidated the balance sheet of WPI as of March 31, 2007 and WPI’s results of operations for the period from the date of acquisition through March 31, 2007. If we were to own less than 50% of the outstanding common stock or the challenge to our preferred stock ownership is successful, we would have to evaluate whether we should consolidate WPI and if so our financial statements could be materially different than as presented as of March 31, 2007, December 31, 2006 and December 31, 2005 and for the periods then ended.


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WPI acquired its business from the former owners through bankruptcy proceedings. We cannot assure you that it will be able to operate profitably.
WPI acquired the assets of WestPoint Stevens Inc., or WestPoint Stevens, as part of its bankruptcy proceedings. Certain of the issues that contributed to WestPoint Stevens’ filing for bankruptcy, such as intense industry competition, the inability to produce goods at a cost competitive with overseas suppliers, the increasing prevalence of direct sourcing by principal customers and continued incurrence of overhead costs associated with an enterprise larger than the current business can profitably support, continue to exist and may continue to affect WPI’s business operations and financial condition adversely. In addition, during the protracted bankruptcy proceedings of WestPoint Stevens, several of its customers reduced the volume of business done with WestPoint Stevens. We have installed new management to address these issues, but we cannot assure you that new management will be effective.
WPI operated at a loss during fiscal year 2006 as well as for the three months ended March 31, 2007, and we expect that WPI will continue to operate at a loss during fiscal year 2007. We cannot assure you that it will be able to operate profitably in the future.
The loss of any of WPI’s large customers could have an adverse effect on WPI’s business.
During fiscal year 2006 and the three-month period ended March 31, 2007, WPI’s six largest customers accounted for approximately 50% and 52%, respectively, of its net sales. Other retailers have indicated that they intend to significantly increase their direct sourcing of home fashion products from foreign sources. The loss of any of WPI’s largest accounts, or a material portion of sales to those accounts, would have an adverse effect upon its business, which could be material.
A portion of WPI’s sales are derived from licensed designer brands. The loss of a significant license could have an adverse effect on WPI’s business.
A portion of WPI’s sales is derived from licensed designer brands. The license agreements for WPI’s designer brands generally are for a term of two or three years. Some of the licenses are automatically renewable for additional periods, provided that sales thresholds set forth in the license agreements are met. The loss of a significant license could have an adverse effect upon WPI’s business, which effect could be material. Under certain circumstances, these licenses can be terminated without WPI’s consent due to circumstances beyond WPI’s control.
A shortage of the principal raw materials WPI uses to manufacture its products could force WPI to pay more for those materials and, possibly, cause WPI to increase its prices, which could have an adverse effect on WPI’s operations.
Any shortage in the raw materials WPI uses to manufacture its products could adversely affect its operations. The principal raw materials that WPI uses in the manufacture of its products are cotton of various grades and staple lengths and polyester and nylon in staple and filament form. Since cotton is an agricultural product, its supply and quality are subject to weather patterns, disease and other factors. The price of cotton is also influenced by supply and demand considerations, both domestically and worldwide, and by the cost of polyester. Although WPI has been able to acquire sufficient quantities of cotton for its operations in the past, any shortage in the cotton supply by reason of weather patterns, disease or other factors, or a significant increase in the price of cotton, could adversely affect its operations. The price of man-made fibers, such as polyester and nylon, is influenced by demand, manufacturing capacity and costs, petroleum prices, cotton prices and the cost of polymers used in producing these fibers. In particular, the effect of increased energy prices may have a direct impact upon the cost of dye and chemicals, polyester and other synthetic fibers. Any significant prolonged petrochemical shortages could significantly affect the availability of man-made fibers and could cause a substantial increase in demand for cotton. This could result in decreased availability of cotton and possibly increased prices and could adversely affect WPI’s operations.
The home fashion industry is highly competitive and WPI’s success depends on WPI’s ability to compete effectively in the market.
The home fashion industry is highly competitive. WPI’s future success will, to a large extent, depend on its ability to remain a low-cost producer and to remain competitive. WPI competes with both foreign and domestic companies on, among other factors, the basis of price, quality and customer service. In the home fashion market, WPI competes with many companies. WPI’s future success depends on its ability to remain competitive in the areas


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of marketing, product development, price, quality, brand names, manufacturing capabilities, distribution and order processing. We cannot assure you of WPI’s ability to compete effectively in any of these areas. Any failure to compete effectively could adversely affect WPI’s sales and, accordingly, its operations. Additionally, the easing of trade restrictions over time has led to growing competition from low priced products imported from Asia and Latin America. The lifting of import quotas in 2005 has accelerated the loss of WPI’s market share. There can be no assurance that the foreign competition will not grow to a level that could have an adverse effect upon WPI’s ability to compete effectively.
WPI intends to increase the percentage of its products that are made overseas. There is no assurance that WPI will be successful in obtaining goods of sufficient quality on a timely basis and on advantageous terms. WPI will be subject to additional risks relating to doing business overseas.
WPI intends to increase the percentage of its products that are made overseas and may face additional risks associated with these efforts. Adverse factors that WPI may encounter include:
·
logistical challenges caused by distance;
·
language and cultural differences;
·
legal and regulatory restrictions;
·
the difficulty of enforcing agreements with overseas suppliers;
·
currency exchange rate fluctuations;
·
political and economic instability; and
·
potential adverse tax consequences.
There has been consolidation of retailers of WPI’s products that may reduce its profitability.
Retailers of consumer goods have become fewer and more powerful over time. As buying power has become more concentrated, pricing pressure on vendors has grown. With the ability to buy imported products directly from foreign sources, retailers’ pricing leverage has increased and also allowed for growth in private label brands that displace and compete with WPI proprietary brands. Retailers’ pricing leverage has resulted in a decline in WPI’s unit pricing and margins and resulted in a shift in product mix to more private label programs. If WPI is unable to diminish the decline in its pricing and margins, it may not be able to achieve or maintain profitability.
WPI is subject to various federal, state and local environmental and health and safety laws and regulations. If it does not comply with these regulations, it may incur significant costs in the future to become compliant.
WPI is subject to various federal, state and local laws and regulations governing, among other things, the discharge, storage, handling, usage and disposal of a variety of hazardous and non-hazardous substances and wastes used in, or resulting from, its operations, including potential remediation obligations under those laws and regulations. WPI’s operations are also governed by federal, state and local laws and regulations relating to employee safety and health which, among other things, establish exposure limitations for cotton dust, formaldehyde, asbestos and noise, and which regulate chemical, physical and ergonomic hazards in the workplace. Consumer product safety laws, regulations and standards at the federal and state level govern the manufacture and sale of products by WPI. Although WPI does not expect that compliance with any of these laws and regulations will adversely affect its operations, we cannot assure you that regulatory requirements will not become more stringent in the future or that WPI will not incur significant costs to comply with those requirements.
Investments
We may not be able to identify suitable investments, and our investments may not result in favorable returns or may result in losses.
Our partnership agreement allows us to take advantage of investment opportunities we believe exist outside of our operating businesses. The equity securities in which we may invest may include common stock, preferred stock and securities convertible into common stock, as well as warrants to purchase these securities. The debt securities in which we may invest may include bonds, debentures, notes or non-rated mortgage-related securities, municipal obligations, bank debt and mezzanine loans. Certain of these securities may include lower-rated or non-rated


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securities which may provide the potential for higher yields and therefore may entail higher risk and may include the securities of bankrupt or distressed companies. In addition, we may engage in various investment techniques, including derivatives, options and futures transactions, foreign currency transactions, “short” sales and leveraging for either hedging or other purposes. We may concentrate our activities by owning significant or controlling interest in certain investments. We may not be successful in finding suitable opportunities to invest our cash and our strategy of investing in undervalued assets may expose us to numerous risks.
Our investments may be subject to significant uncertainties.
Our investments may not be successful for many reasons, including, but not limited to:
·
fluctuation of interest rates;
·
lack of control in minority investments;
·
worsening of general economic and market conditions;
·
lack of diversification;
·
fluctuation of U.S. dollar exchange rates; and
·
adverse legal and regulatory developments that may affect particular businesses.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements that follow are presented to give effect to:
·
the pending acquisition of Lear for an aggregate cash purchase price of approximately $2.9 billion, funded in part by approximately $1.3 billion from our cash and cash equivalents and investments;
·
the issuance of $2.6 billion of notes to be issued to finance a portion of the Lear acquisition and finance and replace a portion of Lear’s existing credit facilities; and
·
the pending sale of American Casino & Entertainment Properties LLC, or ACEP, our indirect wholly owned subsidiary.
The unaudited pro forma condensed combined financial statements are based on the historical financial statements of AREP, ACEP and Lear, as well as the assumptions and adjustments described below and in the accompanying notes to the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined balance sheet as of March 31, 2007 is presented as if the pending acquisition of Lear and the notes to be issued to finance the Lear acquisition occurred on March 31, 2007. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2007 and the fiscal year ended December 31, 2006 has been prepared to give effect to the unaudited pro forma adjustments necessary as if the pending acquisition of Lear and the notes to be issued to finance the Lear acquisition had taken place on January 1, 2006.
As described in Note 3 to the pro forma condensed combined financial statements, on October 16, 2006 and March 31, 2007, Lear completed the divestiture of substantially all of its European and North American interior businesses, respectively. Accordingly, the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2007 gives effect to the IAC North America Transaction (as defined below) as if it had occurred as of January 1, 2007. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2006 gives effect to the IAC Europe Transaction (as defined below) and North America Transaction as if they had occurred as of January 1, 2006.
The unaudited pro forma condensed combined balance sheet as of March 31, 2007 is presented as if the pending sale of ACEP occurred on March 31, 2007. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2007 and the years ended December 31, 2006, 2005 and 2004 has been prepared to give effect to the unaudited pro forma adjustments necessary as if the pending sale of ACEP had taken place on January 1, 2004. In accordance with SEC guidelines, such historical pro forma statements of operations are presented for discontinued operations that are not yet required to be reflected in historical statements.
The preliminary allocation of the purchase price of Lear used in the unaudited pro forma condensed combined financial statements is based upon preliminary estimates. The estimates and assumptions, some of which cannot be made prior to completion of the Lear acquisition, are subject to change upon the acquisition date and finalization of the valuation of Lear’s assets and liabilities. Upon completion of the acquisition, AREP expects to make additional adjustments, and these valuations could change significantly from those used in the pro forma condensed combined financial data presented below. The final determination of the allocation of the purchase price will be based on the actual tangible and intangible assets of Lear that exist as of the acquisition date.
The unaudited pro forma condensed combined results do not purport to be indicative of the financial position and results of operations that we will obtain in the future, or that we would have obtained if the pending sale of ACEP and acquisition of Lear were effective as of the dates indicated above. The pro forma adjustments are based upon currently available information and upon certain assumptions that we believe are reasonable. The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements of AREP and Lear included in their respective annual reports on Form 10-K and quarterly reports on Form 10-Q, and related amendments.


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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
(amounts in 000s)
   
March 31, 2007
   
Historical
  
Pro Forma Adjustments
AREP
  
LEAR
Acquisition
of Lear
      
Sale of
ACEP
        
Pro Forma
Results
                                         
ASSETS
                                        
Current assets:
                                        
Cash and cash equivalents
    
$
2,331,521
    
$
330,400
    
$
(1,456,491
)    
(4a)
    
$
1,004,450
    
(5a)
  
    
$
2,209,880
Investments
    
563,552
    
—
    
—
        
(3,159
)
(5b)
      
560,393
Inventories, net
    
235,358
    
599,000
    
—
        
—
          
834,358
Trade, notes and other receivables,
net
    
169,841
    
2,412,700
    
—
        
(6,348
)
(5b)
      
2,576,193
Other current assets
    
124,594
    
355,900
    
—
        
(18,535
)
(5b)
      
461,959
Total current assets
    
3,424,866
    
3,698,000
    
(1,456,491
)
      
976,408
          
 6,642,783
Property, plant and equipment, net
    
898,594
    
1,425,900
    
—
        
(417,978
)
(5b)
      
1,906,516
Investments
    
201,943
    
183,200
    
—
        
—
          
385,143
Goodwill
    
—
    
2,006,600
    
2,182,900
  
(4b)
    
—
          
4,189,500
Intangible assets
    
25,772
    
40,900
    
—
        
(2,370
)
(5b)
      
64,302
Other non current assets
    
71,492
    
306,400
    
—
        
(41,631
)
(5b)
      
336,261
Total assets
  
$
4,622,667
  
$
7,661,000
  
$
726,409
      
$
514,429
        
$
13,524,505
                                         
LIABILITIES AND
PARTNERS’ EQUITY
                                        
Current liabilities:
                                        
Accounts payable
  
$
66,497
  
$
2,480,300
  
$
—
      
$
(6,749
)
(5b)
    
$
2,540,048
Accrued expenses and other current liabilities
    
168,744
    
1,181,000
    
—
        
210,981
  
(5b)
      
1,560,725
Current portion of long-term debt
    
23,620
    
26,400
    
—
        
(502
)
(5b)
      
49,518
Total current liabilities
    
258,861
    
3,687,700
    
—
        
203,730
          
4,150,291
Long-term debt
    
1,675,498
    
2,431,800
    
1,481,600
  
(4c)
    
(257,202
)
(5b)
(5c)
    
5,331,696
Other non-current liabilities
    
23,738
    
820,100
    
—
        
(6,144
)
(5b)
      
837,694
Preferred limited partnership units
    
119,073
    
—
    
—
        
—
          
119,073
Total long-term liabilities
    
1,818,309
    
3,251,900
    
1,481,600
        
(263,346
)
        
6,288,463
Total Liabilities
    
2,077,170
    
6,939,600
    
1,481,600
        
(59,616
)
        
10,438,754
                                         
Minority interests
    
198,019
    
28,900
    
—
        
—
          
226,919
Partners’ equity
    
2,347,478
    
692,500
    
(755,191
)
(4d)
    
574,045
  
(5d)
      
2,858,832
Total liabilities and partners’
equity
  
$
4,622,667
  
$
7,661,000
  
$
 726,409
      
$
514,429
        
$
13,524,505


17

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(amounts in 000s except per unit amounts)
   
Three Months Ended March 31, 2007
  
   
Historical
  
Pro Forma Adjustments
  
   
AREP
  
LEAR
  
Acquisition
of Lear
    
Lear IAC
Transaction
(4f)
    
Sale of
ACEP (5e)
  
Pro Forma
Results
  
                                           
Revenues:
                                          
Lear Automotive
    
$
—
    
$
4,406,100
    
$
—
    
  
$
(580,500
)   
  
$
—
    
$
3,825,600
  
Gaming
    
112,888
    
—
    
—
      
—
      
(112,888
)
  
—
  
Real Estate
    
27,887
    
—
    
—
      
—
      
—
    
27,887
  
Home Furnishings
    
210,604
    
—
    
—
      
—
      
—
    
210,604
  
     
351,379
    
4,406,100
    
—
      
(580,500
)
    
(112,888
)
  
4,064,091
  
Expenses:
                                          
Lear Automotive
   
—
    
4,220,700
    
—
      
(579,600
)
    
—
    
3,641,100
  
Loss on divestiture of Lear’s Interior business
    
—
    
25,600
    
—
      
(25,600
)
    
—
    
—
  
Gaming
    
89,661
    
—
    
—
      
—
      
(89,661
)
  
—
  
Real Estate
    
23,606
    
—
    
—
      
—
      
—
    
23,606
  
Home Furnishings
    
249,619
    
—
    
—
      
—
      
—
    
249,619
  
Holding Company Expenses
    
7,679
    
—
    
—
      
—
      
—
    
7,679
  
     
370,565
    
4,246,300
    
—
      
(605,200
)
    
(89,661
)
  
3,922,004
  
Operating income (loss)
    
(19,186
)
  
159,800
    
—
      
24,700
      
(23,227
)
  
142,087
  
Other income (expense), net:
                                          
Interest expense
    
(32,977
)
  
(51,500
)
  
(27,743
)
(4e)
  
200
      
5,436
    
(106,584
)
Interest and other income
    
31,458
    
—
    
—
      
—
      
(419
)
  
31,039
  
Other income (expense), net
    
84,781
    
(17,200
)
  
—
      
3,100
      
—
    
70,681
  
Equity on earnings of affiliate
    
—
    
1,300
    
—
      
(400
)
(4g)
  
—
    
900
  
Income (loss) from continuing operations before income taxes and minority interests
    
64,076
    
92,400
    
(27,743
)
    
27,600
      
(18,210
)
  
138,123
  
Income tax expense
    
(6,949
)
  
(32,400
)
  
—
      
1,600
  
(4h)
  
6,192
    
(31,557
)
Minority interests
    
11,590
    
(10,100
)
  
—
      
(300
)
    
—
    
1,190
  
Income (loss) from continuing operations
    
68,717
    
49,900
    
(27,743
)
    
28,900
      
(12,018
)
  
107,756
  
Income (loss) from discontinued operations
    
27,861
    
—
    
—
      
—
      
12,018
    
39,879
  
Net earnings
  
$
96,578
  
$
49,900
  
$
(27,743
)
  
$
28,900
    
$
—
  
$
147,635
  
Net earnings (loss) attributable to:
                                          
Limited partner
 
$
94,656
  
$
48,907
  
$
(27,191
)
  
$
28,325
    
$
—
  
$
144,697
  
General partner
   
1,922
    
993
    
(552
)
    
575
      
—
    
2,938
  
   
$
96,578
  
$
49,900
  
$
(27,743
)
  
$
28,900
    
$
—
  
$
147,635
  
Net earnings per limited partnership unit:
                                          
Basic earnings:
                                          
Income from continuing operations
  
$
1.09
                              
$
1.71
  
Income from discontinued operations
    
0.44
                                
0.63
  
Basic earnings (loss) per LP unit
  
$
1.53
                              
$
2.34
  
Weighted average limited partnership units outstanding:
    
61,857
                                
61,857
  
Diluted earnings:
                                          
Income from continuing operations
  
$
1.09
                              
$
1.70
  
Income from discontinued operations
    
0.44
                                
0.62
  
Diluted earnings per LP unit
  
$
1.53
                              
$
2.32
  
Weighted average LP units and equivalent partnership units outstanding
    
61,857
                                
62,920
  


See accompanying notes
18

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(amounts in 000s except per unit amounts)
   
Year Ended December 31, 2006
  
   
Historical
  
Pro Forma Adjustments
  
   
AREP
  
LEAR
  
Acquisition
of Lear
    
Lear IAC
Transactions
(4f)
    
Sale of
ACEP
(5e)
  
Pro Forma
Results
  
                                           
Revenues:
                                          
Lear Automotive
   
$
—
   
$
17,838,900
   
$
—
   
  
$
(3,067,200
) 
  
$
—
   
$
14,771,700
  
Gaming
    
385,699
    
—
    
—
      
—
      
(385,699
)
  
—
  
Real Estate
    
134,575
    
—
    
—
      
—
      
—
    
134,575
  
Home Furnishings
    
957,656
    
—
    
—
      
—
      
—
    
957,656
  
     
1,477,930
    
17,838,900
    
—
      
(3,067,200
)
    
(385,699
)
  
15,863,931
  
Expenses:
                                          
Lear Automotive
   
—
    
17,545,500
    
—
      
(3,247,300
)
    
—
    
14,298,200
  
Loss on divestiture of Lear’s Interior business
    
—
    
636,000
    
—
      
(636,000
)
    
—
    
—
  
Gaming
    
326,984
    
—
    
—
      
—
      
(326,984
)
  
—
  
Real Estate
    
106,621
    
—
    
—
      
—
      
—
    
106,621
  
Home Furnishings
    
1,108,293
    
—
    
—
      
—
      
—
    
1,108,293
  
Holding Company Expenses
    
25,822
    
—
    
—
      
—
      
—
    
25,822
  
     
1,567,720
    
18,181,500
    
—
      
(3,883,300
)
    
(326,984
)
  
15,538,936
  
Operating income (loss)
    
(89,790
)
  
(342,600
)
  
—
      
816,100
      
(58,715
)
  
324,995
  
Other income (expense), net:
                                          
Interest expense
    
(106,612
)
  
(209,800
)
  
(110,972
)
(4e)
  
400
      
21,314
    
(405,670
)
Interest and other income
    
52,672
    
—
    
—
      
—
      
(2,239
)
  
50,433
  
Other income (expense), net
    
99,277
    
(101,000
)
  
—
      
6,000
      
239
    
4,516
  
Equity on earnings of affiliate
    
12,620
    
16,200
    
—
      
(43,400
)
(4g)
  
—
    
(14,580
)
Loss from continuing operations before
income taxes and minority interests
    
(31,833
)
  
(637,200
)
  
(110,972
)
    
779,100
      
(39,401
)
  
(40,306
)
Income tax expense
    
(13,271
)
  
(54,900
)
  
—
      
(13,700
)
(4h)
  
12,758
    
(69,113
)
Minority interests
    
68,173
    
(18,300
)
  
—
      
(1,100
)
    
—
    
48,773
  
Income (loss) from continuing operations
    
23,069
    
(710,400
)
  
(110,972
)
    
764,300
      
(26,643
)
  
(60,646
)
Income (loss) from discontinued operations
    
775,764
    
—
    
—
      
—
      
26,643
    
802,407
  
Income (loss) before cumulative effect of
a change in accounting principle
    
798,833
    
(710,400
)
  
(110,972
)
    
764,300
      
—
    
741,761
  
Cumulative effect of a change in accounting
principle
    
—
    
2,900
    
—
      
—
      
—
    
2,900
  
Net earnings (loss)
  
$
798,833
  
$
(707,500
)
$
(110,972
)
  
$
764,300
    
$
—
  
$
744,661
  
Net earnings (loss) attributable to:
                                          
Limited partner
  
$
782,936
  
$
(693,420
)
$
(108,764
)
  
$
749,090
    
$
—
  
$
729,842
  
General partner
   
15,897
    
(14,080
)
  
(2,208
)
    
15,210
      
—
    
14,819
  
   
$
798,833
  
$
(707,500
)
$
(110,972
)
  
$
764,300
    
$
—
  
$
744,661
  
Net earnings per limited partnership unit:
                                          
Basic earnings:
                                          
Income (loss) from continuing operations
  
$
0.40
                              
$
(0.93
)
Income from discontinued operations
    
12.29
                                
12.71
  
Cumulative effect of a change in
accounting principle
    
—
                                
0.05
  
Basic earnings (loss) per LP unit
  
$
12.69
                              
$
11.83
  
Weighted average limited partnership units outstanding:
    
61,857
                                
61,857
  
Diluted earnings:
                                          
Income (loss) from continuing operations
  
$
0.40
                              
$
(0.93
)
Income from discontinued operations
    
12.29
                                
12.71
  
Cumulative effect of a change in
accounting principle
    
—
                                
0.05
  
Diluted earnings per LP unit
  
$
12.69
                              
$
11.83
  
Weighted average LP units and equivalent
partnership units outstanding:
    
61,857
                                
61,857
  


See accompanying notes
19

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AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(amounts in 000s except per share amounts)
   
Year Ended December 31, 2005
  
   
Historical
  
Pro Forma
Adjustments
      
   
AREP
  
Sale of
ACEP (5e)
  
Pro Forma
Results
  
                     
Revenues:
                    
Gaming
     
$
327,982
     
$
(327,982
)     
$
—
  
Real Estate
    
100,299
    
—
    
100,299
  
Home Furnishings
    
472,681
    
—
    
472,681
  
     
900,962
    
(327,982
)
  
572,980
  
Expenses:
                    
Gaming
    
260,955
    
(260,955
)
  
—
  
Real Estate
    
82,512
    
—
    
82,512
  
Home Furnishings
    
495,110
    
—
    
495,110
  
Holding Company Expenses
    
12,478
    
—
    
12,478
  
Acquisition costs
    
4,664
    
—
    
4,664
  
     
855,719
    
(260,955
)
  
594,764
  
Operating income (loss)
    
45,243
    
(67,027
)
  
(21,784
)
Other income (expense), net:
                    
Interest expense
    
(91,174
)
  
18,846
    
(72,328
)
Interest and other income
    
42,791
    
(1,617
)
  
41,174
  
Other income (expense), net
    
(12,861
)
  
(25
)
  
(12,886
)
Equity on earnings of affiliate
    
1,375
    
—
    
1,375
  
Loss from continuing operations before income taxes and minority interests
    
(14,626
)
  
(49,823
)
  
(64,449
)
Income tax expense
    
(18,170
)
  
16,789
    
(1,381
)
Minority interests
    
10,140
    
—
    
10,140
  
Loss from continuing operations
    
(22,656
)
  
(33,034
)
  
(55,690
)
Income (loss) from discontinued operations
    
(3,013
)
  
33,034
    
30,021
  
Net loss
  
$
(25,669
)
$
—
  
$
(25,669)
  
Net loss attributable to:
                    
Limited partner
  
$
(20,292
)
$
—
  
$
(20,292
)
General partner
    
(5,377
)
  
—
    
(5,377
)
   
$
(25,669
)
$
—
  
$
(25,669
)
Net loss per limited partnership unit:
                    
Basic earnings:
                    
Loss from continuing operations
  
$
(0.31
)
      
$
(0.90
)
Income from discontinued operations
    
(0.05
)
        
0.54
  
Basic loss per LP unit
  
$
(0.36
)
      
$
(0.36
)
Weighted average limited partnership units outstanding:
    
54,085
          
54,085
  
Diluted earnings:
                    
Loss from continuing operations
  
$
(0.31
)
      
$
(0.90
)
Income (loss) from discontinued operations
    
(0.05
)
        
0.54
  
Diluted loss per LP unit
  
$
(0.36
)
      
$
(0.36
)
Weighted average LP units and equivalent partnership units outstanding
    
54,085
          
54,085
  


See accompanying notes
20

Back to Table of Contents

AMERICAN REAL ESTATE PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(amounts in 000s except per share amounts)
   
Year Ended December 31, 2004
 
   
Historical
  
Pro Forma
Adjustments
      
   
AREP
  
Sale of
ACEP (5e)
  
Pro Forma
Results
  
                     
Revenues:
                    
Gaming
     
$
299,981
     
$
(299,981
)     
$
—
  
Real Estate
    
61,557
    
—
    
61,557
  
     
361,538
    
(299,981
)
  
61,557
  
Expenses:
                    
Gaming
    
251,119
    
(251,119
)
  
—
  
Real Estate
    
49,681
    
—
    
49,681
  
Holding Company Expenses
    
4,327
    
—
    
4,327
  
Acquisition costs
    
414
    
—
    
414
  
     
305,541
    
(251,119
)
  
54,422
  
Operating income (loss)
    
55,997
    
(48,862
)
  
7,135
  
                     
Other income (expense), net:
                    
Interest expense
    
(47,320
)
  
18,939
    
(28,381
)
Interest and other income
    
42,145
    
(1,049
)
  
41,096
  
Other income (expense), net
    
24,453
    
—
    
24,453
  
Income (Loss) from continuing operations before income taxes
   
75,275
    
(30,972
)
  
44,303
  
Income tax expense
    
(10,099
)
  
10,099
    
—
  
Income (loss) from continuing operations
    
65,176
    
(20,873
)
  
44,303
  
Income from discontinued operations
    
88,578
    
20,873
    
109,451
  
Net earnings
  
$
153,754
  
$
—
  
$
153,754
  
Net earnings attributable to:
                    
Limited partner
  
$
130,850
  
$
—
  
$
130,850
  
General partner
    
22,904
    
—
    
22,904
  
   
$
153,754
  
$
—
  
$
153,754
  
Net earnings per limited partnership unit:
                    
Basic earnings:
                    
Income (loss) from continuing operations
  
$
0.96
        
$
0.51
  
Income (loss) from discontinued operations
    
1.88
          
2.33
  
Basic earnings (loss) per LP unit
  
$
2.84
        
$
2.84
  
Weighted average limited partnership units outstanding:
    
46,098
          
46,098
  
Diluted earnings:
                    
Income (loss) from continuing operations
  
$
0.95
        
$
0.51
  
Income (loss) from discontinued operations
    
1.69
          
2.33
  
Diluted earnings (loss) per LP unit
  
$
2.64
        
$
2.84
  
Weighted average LP units and equivalent partnership units outstanding
    
51,542
          
46,098
  


See accompanying notes
21

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF TRANSACTIONS
Potential Acquisition
On February 9, 2007, we entered into an agreement and plan of merger pursuant to which we would acquire Lear for an aggregate consideration of approximately $5.2 billion, including the assumption by the surviving entity of certain outstanding indebtedness of Lear and the refinancing of Lear’s existing term loan and credit facility. In connection with the planned merger, our subsidiary, AREP Car Holdings Corp., entered into a commitment letter with Bank of America, N.A., and Banc of America Securities LLC on February 8, 2007, pursuant to which Bank of America would act as the initial lender under two senior secured credit facilities in an aggregate principal amount of $3.6 billion, consisting of a $1.0 billion senior secured revolving facility and a $2.6 billion senior secured term loan B facility. The credit facilities, along with cash on hand, are intended to refinance and replace Lear’s existing credit facilities and to fund the transactions contemplated by the merger. We intend to fund approximately $1.3 billion of the purchase price from our cash and cash equivalents and investments. The transaction is conditioned upon (i) clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the applicable foreign antitrust laws of certain other jurisdictions, (ii) approval of the merger and adoption of the merger agreement by Lear stockholders and (iii) other customary closing conditions. AREP expects that the transaction will close on or about July 1, 2007, provided the foregoing conditions which have not yet been satisfied or waived are satisfied or waived. There can be no assurance that we will be able to consummate the transaction.
Pending Sale of American Casino & Entertainment Properties LLC
On April 22, 2007, American Entertainment Properties Corp, or AEP, a wholly owned indirect subsidiary of AREP, entered into a Membership Interest Purchase Agreement with W2007/ACEP Holdings, LLC, an affiliate of Whitehall Street Real Estate Funds, a series of real estate investment funds affiliated with Goldman, Sachs & Co., to sell all of the issued and outstanding membership interests of ACEP, which comprises our gaming operations, for $1.3 billion, plus or minus certain adjustments such as working capital, more fully described in the agreement. Pursuant to the terms of the agreement, AEP is required to cause ACEP to repay, from funds provided by AEP, the principal, interest, prepayment penalty or premium due on ACEP’s 7.85% senior secured notes due 2012 and ACEP’s senior secured credit facility. With this transaction, we anticipate realizing a gain of approximately $0.57 billion on our investments in ACEP, after income taxes. ACEP’s casino assets are comprised of the Stratosphere Casino Hotel & Tower, the Arizona Charlie’s Decatur, the Arizona Charlie’s Boulder and the Aquarius Casino Resort. The transaction is subject to the approval of the Nevada Gaming Commission and the Nevada State Gaming Control Board, as well as customary conditions. The parties expect to close the transaction in approximately December 2007; however, there can be no assurance that we will be able to consummate the transaction.
2. BASIS OF PRESENTATION
AREP accounts for acquisitions under Financial Accounting Standards Board Statement No. 141, Business Combinations. In accordance with business combination accounting, AREP will allocate the purchase price of Lear to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. AREP’s management has not yet determined the fair value of the assets and liabilities to be acquired as the acquisition has not yet been consummated. The final determination of such assumptions and estimates cannot be made until AREP completes the acquisition of Lear. Therefore, for purposes of the pro forma financial statements, the excess of the purchase price over the book value of Lear’s assets and liabilities has been allocated to goodwill.
3. LEAR ACQUISITION
The purchase price and purchase price allocation below are preliminary estimates as the acquisition has not been completed and the date for which the assets to be acquired and liabilities to be assumed has not been determined.


See accompanying notes
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
3. LEAR ACQUISITION – (continued)
Preliminary Purchase Price
The total preliminary purchase price to be allocated is comprised of:
   
(in 000s)
  
Purchase of outstanding common stock of Lear at $36.00 per share              
     
$
2,857,991
  
Less amount to be allocated to the general partner(1)
   
(62,691
)
Total preliminary purchase price to be allocated
  
$
2,795,300
  
——————
(1)
As of March 31, 2007, Icahn Partners LP, Icahn Partners Master Fund LP, Koala Holding Limited Partnership and High River Limited Partnership, which are affiliates of Mr. Icahn, beneficially owned approximately 16% of Lear’s outstanding common stock. In accordance with generally accepted accounting principles, in connection with the acquisition of Lear stock, the excess of cash disbursed over the historical cost of the shares beneficially owned by Mr. Icahn, which amounts to approximately $62.7 million, will be charged to AREP’s general partner’s equity.
Preliminary Purchase Price Allocation
For purposes of the pro forma financial statements, AREP has used Lear’s assets and liabilities as of March 31, 2007 as the basis for developing AREP’s fair value estimates.
The total preliminary purchase price will be allocated to Lear’s tangible and intangible assets acquired, and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the net tangible and identifiable intangible assets will be recorded as goodwill. For purposes of the accompanying pro forma financial statements, the total preliminary purchase price was allocated as follows:
   
(in 000s)
  
Current assets
     
$
3,579,600
  
Property, plant & equipment, net
   
1,425,900
  
Investments
    
183,200
  
Other non current assets
   
347,300
  
Goodwill, net
   
4,189,500
  
Current liabilities
   
(3,671,000
)
Long-term debt
   
(2,431,800
)
Other non current liabilities and minority interests
    
(827,400
)
Total preliminary purchase price allocation                                                     
  
$
2,795,300
  
Lear IAC Transactions
On October 16, 2006, Lear completed the contribution of substantially all of its European interior business to International Automotive Components Group, LLC (“IAC Europe”), its joint venture with WL Ross & Co. LLC and Franklin Mutual Advisers, LLC, in exchange for a one-third equity interest in IAC Europe (the “IAC Europe Transaction”). On March 31, 2007, Lear completed the transfer of substantially all of the assets of its North American interior business (as well as its interests in two China joint ventures) to International Automotive Components Group North America, Inc. (the “IAC North America Transaction”). In addition, a wholly owned subsidiary of Lear contributed approximately $27 million in cash to International Automotive Components Group North America, LLC (“IACNA”) in exchange for a 25% equity interest in IACNA and warrants for an additional 7% of the current outstanding common equity of IACNA. In connection with the IAC North America Transaction, International Automotive Components Group North America, Inc. assumed the ordinary course liabilities of Lear’s North American interior business, and Lear retained certain pre-closing liabilities, including pension and postretirement liabilities incurred through the closing date of the transaction.
For accounting purposes, Lear’s interests in IACNA and IAC Europe will be accounted for under the equity method of accounting. The pro forma adjustments related to Lear’s accounting for these equity investments do not reflect purchase accounting adjustments to be recorded by IACNA and IAC Europe and do not reflect the operations


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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
3. LEAR ACQUISITION – (continued)
of other businesses acquired by IAC Europe. Consequently, the amounts reflected in Lear’s unaudited pro forma condensed consolidated financial statements are subject to change.
4. PRO FORMA ADJUSTMENTS – LEAR ACQUISITION
The following pro forma adjustments are included in the unaudited pro forma condensed combined balance sheet:
4a
To record the following adjustments to cash:
   
(in 000s)
  
Estimated proceeds from borrowings
     
$
2,600,000
  
Estimated cash paid for Lear common stock                                                 
    
(2,857,991
)
Estimated transaction costs – Lear
    
(80,100
)
Estimated repayment of Lear debt
   
(1,118,400
)
Total adjustments to cash
 
$
(1,456,491
)
4b
To record the following adjustments to goodwill:
   
(in 000s)
Preliminary fair value                                                                                      
     
$
4,189,500
Historical amount
   
2,006,600
Increase
 
$
2,182,900
4c
To record the following adjustments to long-term debt:
   
(in 000s)
  
Estimated proceeds from borrowings                                                              
     
$
2,600,000
  
Estimated repayment of Lear debt
   
(1,118,400
)
Increase
 
$
1,481,600
  
4d
To eliminate Lear’s historical stockholders’ equity and to record $62.7 million of the purchase price of Lear stock allocated to the General Partner.
4e
To record additional interest expense associated with the net increase in debt as per Note 4c above.
4f
To eliminate the results of operations arising from the IAC North America Transaction and the IAC Europe Transaction.
4g
To reflect Lear’s estimated equity loss of $0.4 million and $42.1 million for the three months ended March 31, 2007 and the year ended December 31, 2006, respectively, related to its 25% ownership interest in IACNA and Lear’s estimated equity loss of $1.3 million for the year ended December 31, 2006 related to its one-third equity interest in IAC Europe. These adjustments do not reflect purchase accounting adjustments to be made by IACNA and IAC Europe and do not reflect the operations of other businesses acquired by IAC Europe.
4h
Primarily reflects the elimination of tax expense relating to the IAC North America Transaction for the three months ended March 31, 2007, and the elimination of tax benefits relating to the IAC North America Transaction and the IAC Europe Transaction for the year ended December 31, 2006.


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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
5. PRO FORMA ADJUSTMENTS – DISPOSITION OF ACEP
5a
To record the following adjustments to cash:
   
(in 000s)
  
Estimated gross proceeds from sale of ACEP
     
$
1,300,000
  
Add: net working capital
   
50,335
  
Total proceeds
    
1,350,335
  
Repayment of long-term debt (including redemption fees)                           
    
(263,600
)
Net proceeds
    
1,086,735
  
Estimated transaction costs
   
(6,757
)
ACEP’s cash balance included in net working capital
   
(70,528
)
Stay bonuses
   
(5,000
)
Total adjustments to cash
 
$
1,004,450
  
5b
Reflects the elimination of the March 31, 2007 carrying value of the assets and liabilities of ACEP.
5c
Reflects the payment of ACEP’s long-term debt by AREP of $255 million.
5d
Reflects the amount of the estimated net gain on the transaction, net of income taxes.
5e
Reflects the reversal of revenues and expenses included in income from continuing operations attributable to the sale of ACEP, net of income taxes.



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USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the sale of the depositary units under this prospectus. We will not receive any proceeds from these sales.
DILUTION
None of the depositary units offered and sold pursuant to this prospectus are being sold by us. Therefore, there will be no dilution in the net tangible book value per depositary units as a result of the sale of the depositary units offered and sold pursuant to this prospectus.


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DESCRIPTION OF DEPOSITARY UNITS
The following description of our depositary units does not purport to be complete and is qualified in its entirety by reference to applicable Delaware law, and to provisions of our partnership agreement, dated as of May 12, 1987, as amended, or our partnership agreement, and the depositary agreement, as amended, or the depositary agreement, entered into among us, the Registrar and Transfer Company, as depositary, or the depositary, and the unitholders.
General
The depositary units represent limited partner interests in AREP. The percentage interest in AREP represented by a depositary unit is equal to the ratio it bears at the time of such determination to the total number of depositary units in AREP (including any undeposited depositary units) outstanding, multiplied by 99%, which is the aggregate percentage interest in AREP of all holders of depositary units. Subject to the rights and preferences of preferred units, each depositary unit evidences entitlement to a portion of AREP’s distributions and an allocation of AREP’s net income and net loss, as determined in accordance with our partnership agreement. We are authorized to issue additional depositary units or other securities from time to time to unitholders or additional investors without the consent or approval of holders of depositary units, or unitholders. There is no limit to the number of depositary units or additional classes of units, including preferred units, which may be issued. The board of directors of our general partner has the power, without any further action by the unitholders, to issue units with such designations, preferences and relative, participating or other special rights, powers and duties, including rights, powers and duties senior to existing classes of depositary units or preferred units. The depositary units have no preemptive rights.
Transfer of Depositary Units
Until a depositary unit has been transferred on the books of the depositary, we and the depositary will treat the record holder of the unit as the absolute owner for all purposes. A transfer of depositary units will not be recognized by the depositary or us unless and until the transferee of the depositary units, or a subsequent transferee, executes and delivers a transfer application to the depositary. Transfer applications appear on the back of each depositary receipt and also will be furnished at no charge by the depositary upon receipt of a request for it. By executing and delivering a transfer application to the depositary, a subsequent transferee automatically requests admission as a substituted unitholder in the partnership, agrees to be bound by the terms and conditions of our partnership agreement and grants a power of attorney to our general partner.
On a monthly basis, the depositary will, on behalf of subsequent transferees who have submitted transfer applications, request the general partner to admit such subsequent transferees as substituted limited partners of AREP. If our general partner consents to such substitution, a subsequent transferee will be admitted to the partnership as a substituted limited partner upon the recordation of such subsequent transferee’s name in our books and records. Upon admission, which is in the sole discretion of our general partner, he will be entitled to all of the rights of a limited partner under the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, and pursuant to our partnership agreement.
A subsequent transferee will, after submitting a transfer application to the depositary but before being admitted to AREP as a substituted unitholder of record, have the rights of an assignee under the Delaware Act and our partnership agreement, including the right to receive its pro rata share of distributions. A subsequent transferee who does not execute and deliver a transfer application to the depositary will not be recognized as the record holder of depositary units and will only have the right to transfer or assign its depositary units to a purchaser or other transferee. Therefore, such subsequent transferee will neither receive distributions from the partnership nor be entitled to vote on partnership matters or any other rights to which record holders of depositary units are entitled under the Delaware Act or pursuant to our partnership agreement. Distributions made in respect of the depositary units held by such subsequent transferees will continue to be paid to the transferor of such depositary units.
A subsequent transferee will be deemed to be a party to the depositary agreement and to be bound by its terms and conditions whether or not such subsequent transferee executes and delivers a transfer application to the depositary. A transferor will have no duty to ensure the execution of a transfer application by a subsequent transferee and will have no liability or responsibility if such subsequent transferee neglects or chooses not to execute and deliver the transfer application to the depositary. Whenever depositary units are transferred, the transfer application requires that a subsequent transferee answer a series of questions. The required information is designed to provide us with the information necessary to prepare our tax information return.


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Withdrawal of Depositary Units from Deposit
A unitholder may withdraw from the depositary the depositary units represented by its depositary receipts upon written request and surrender of the depositary receipts evidencing the depositary units in exchange for a certificate issued by us evidencing the same number of depositary units. A subsequent transferee is required to become a unitholder of record before being entitled to withdraw depositary units from the depositary. Depositary units which have been withdrawn from the depositary, and therefore are not evidenced by depositary receipts, are not transferable except upon death, by operation of law, by transfer to us or redeposit with the depositary. A holder of depositary units withdrawn from deposit will continue to receive its respective share of distributions and allocations of net income and losses pursuant to our partnership agreement. In order to transfer depositary units withdrawn from the depositary other than upon death, by operation of law or to the partnership, a unitholder must redeposit the certificate evidencing such withdrawn depositary units with the depositary and request issuance of depositary receipts representing such depositary units, which depositary receipts then may be transferred. Any redeposit of such withdrawn depositary units with the depositary requires 60 days’ advance written notice and payment to the depositary of a redeposit fee initially $5.00 per 100 depositary units or portion thereof, and will be subject to the satisfaction of certain other procedural requirements under the depositary agreement.
Replacement of Lost Depositary Receipts and Certificates
A unitholder or subsequent transferee who loses or has its certificate for depositary units or depositary receipts stolen or destroyed may obtain a replacement certificate or depositary receipt by furnishing an indemnity bond and by satisfying certain other procedural requirements under the depositary agreement.
Amendment of Depositary Agreement
Subject to the restrictions described below, any provision of the depositary agreement, including the form of depositary receipt, may, at any time and from time to time, be amended by the mutual agreement of us and the depositary in any respect deemed necessary or appropriate by them, without the approval of the holders of depositary units. No amendment to the depositary agreement, however, may impair the right of a holder of depositary units to surrender a depositary receipt and to withdraw any or all of the deposited depositary units evidenced by a depositary receipt or to redeposit depositary units pursuant to the depositary agreement and receive a depositary receipt evidencing redeposited depositary units.
The depositary will furnish notice to each record holder of a depositary unit, and to each securities exchange on which depositary units are listed for trading, of any material amendment made to the depositary agreement. Each record holder of a depositary unit at the time any amendment of the depositary agreement becomes effective will be deemed, by continuing to hold the depositary unit, to consent and agree to the amendment and to be bound by the depositary agreement, as so amended.
The depositary will give notice of the imposition of any fee or charge, other than fees and charges provided for in the depositary agreement, or change to the fees and charges, upon record holders of depositary units to any securities exchange on which the depositary units are listed for trading and to all record holders of depositary units. The imposition of any fee or charge, or change to them, will not be effective until the expiration of 30 days after the date of such notice, unless it becomes effective in the form of an amendment to the depositary agreement effected by us and the depositary.
Termination of Depositary Agreement
We may not terminate the depositary agreement unless the termination (1) is in connection with us entering into a similar agreement with a new depositary selected by the general partner, (2) is as a result of our receipt of an opinion of counsel to the effect that the termination is necessary for us to avoid being treated as an “association” taxable as a corporation for federal income tax purposes or to avoid being in violation of any applicable federal or state securities laws or (3) is in connection with our dissolution.
The depositary will terminate the depositary agreement, when directed to do so by us, by mailing notice of termination to the record holders of depositary units then outstanding at least 60 days before the date fixed for the termination in such notice. Termination will be effective on the date fixed in such notice, which date must be at least 60 days after it is mailed. Upon termination of the depositary agreement, the depositary will discontinue the transfer of depositary units, suspend the distribution of reports, notices and disbursements and cease to perform any other


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acts under the depositary agreement, except in the event the depositary agreement is not being terminated in connection with us entering into a similar agreement with a new depositary, the depositary will assist in the facilitation of the withdrawal of depositary units by holders who desire to surrender their depositary receipts.
Resignation or Removal of Depositary
The depositary may resign as depositary and may be removed by us at any time upon 60 days’ written notice. The resignation or removal of the depositary becomes effective upon the appointment of a successor depositary by us and written acceptance by the successor depositary of its appointment. In the event a successor depositary is not appointed within 75 days of notification of such resignation or removal, the general partner will act as depositary until a successor depositary is appointed. Any corporation into or with which the depositary may be merged or consolidated will be the successor depositary without the execution or filing of any document or any further act.


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OUR PARTNERSHIP AGREEMENT AND CERTAIN
PROVISIONS OF DELAWARE LAW
The rights of a limited partner of the partnership are set forth in our partnership agreement and the Delaware Act. The following is a summary of certain provisions of our partnership agreement and the agreement of limited partnership of AREH, or the AREH partnership agreement, which is similar to our partnership agreement in all material respects (except for the preferred units). The following summary discusses certain provisions which relate to both, and is qualified in its entirety by reference to both our partnership agreement and the AREH partnership agreement. A reference to the “partnership agreement” in this prospectus refers to both of our partnership agreement and the AREH partnership agreement, unless otherwise indicated.
Removal of the General Partner
Subject to certain limitations on the exercise by unitholders of voting rights, the general partner may be removed by the written consent or affirmative vote of holders of depositary units owning more than 75% of the total number of all outstanding depositary units, voting as a class, then held by unitholders, including the general partner and its affiliates to the extent that they are holders of depositary units. Upon the removal of the general partner by holders of depositary units, the holders of depositary units will be obligated to elect a successor general partner and to continue the business of the partnership. At the election of the general partner, a successor general partner will be required, at the effective date of its admission as a general partner, to purchase API’s 1% general partner interest directly from API for a price equal to its “fair market value,” as described below.
If API does not elect to sell its interest, the successor general partner will be required to contribute to the capital of AREP cash in an amount equal to 1/99th of the product of the number of depositary units outstanding immediately prior to the effective date of such successor general partner’s admission (but after giving effect to the conversion of API’s general partner interest into depositary units described below) and the average price at which the depositary units had been trading over the 20-day period immediately preceding the successor general partner’s admission. Thereafter, the successor general partner will be entitled to one percent (1%) of all partnership allocations and distributions.
If API chooses not to sell its 1% general partner interest directly to a successor general partner, API’s general partner interest in AREP will be converted into depositary units, with the number of depositary units to be received to be based upon the “fair market value” of its general partner interest at the time of its removal and the average price at which the depositary units had been trading over the 20-day period preceding the effective date of API’s departure. In this regard, the “fair market value” of the departing general partner’s interest is the amount that would be distributable to API on account of the interest if AREP were to dispose of all of its assets in an orderly liquidation, commencing on the effective date of its removal at a price equal to the fair market value of those assets (discounted at the rate then payable on one-year U.S. Treasury obligations to the effective date of such removal to reflect the time reasonably anticipated to be necessary to consummate the sales), as agreed upon between API as the departing general partner and its successor, or, in the absence of an agreement, as determined by an independent appraiser.
Upon removal of API from the partnership, API also will be removed as general partner of AREH and its general partner interest in AREH will either be purchased by the successor general partner or converted into depositary units (in which case the successor shall also contribute to the capital of AREH) in the same manner as provided above with respect to the partnership.
The partnership agreement provides that, upon the departure of API and the conversion of its general partner interest in AREP to depositary units, AREP will, at the request of the departing general partner, file with the SEC up to three registration statements under the Securities Act registering the offering and sale of all or a portion of the depositary units owned by API, including those depositary units received upon conversion of its general partner interest in AREP and AREH. The cost of the first registrations will be borne by AREP and the cost of any other such registration will be borne by API.
Withdrawal of the General Partner
The general partner may withdraw, but only if:
(1)
the withdrawal is with the consent of a majority interest;


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(2)
API, with the consent of a majority interest, transfers all of its interest as general partner in the partnership;
(3)
the transferee consents to be bound by the partnership agreement and the transferee has the necessary legal authority to act as successor general partner of the partnership; and
(4)
AREP receives an opinion of counsel to the effect that a vote by the unitholders and the admission of a new general partner is in conformity with local law, will not cause the loss of limited liability to the unitholders and will not cause AREP to be treated as an “association” taxable as a corporation for federal income tax purposes.
Notwithstanding the foregoing, API may, without the consent of the unitholders (to the extent permitted by law), transfer its interest as general partner in AREP to any person or entity that has, by merger, consolidation or otherwise, acquired all or substantially all of the assets or stock of API and continued its business, provided that such person or entity has a net worth no less than that of API and has accepted and agreed to be bound by the terms and conditions of the partnership agreement. The general partner also may mortgage, pledge, hypothecate or grant a security interest in its interest as general partner in AREP without the consent of unitholders.
Distributions
The general partner has the power and authority to retain or use partnership assets or revenues as, in the sole and absolute discretion of the general partner, may be required to satisfy the anticipated present and future cash needs of the partnership, whether for operations, expansion, improvements, acquisitions or otherwise.
Subject to Section 17-607 of the Delaware Act and to the provision with respect to distributions upon liquidation or dissolution of the partnership, the general partner, in its sole and absolute discretion, may make such distribution from partnership assets or otherwise as it deems appropriate in its sole discretion, quarterly, annually or at any other time. Any distributions will be distributed to the general partner and the record holders in accordance with their respective percentage interests.
Distribution of proceeds on liquidation or dissolution of the partnership will be made: first, to the payment of any debts and liabilities of the partnership which are then due and payable; next, to the establishment of such reserves as the general partner deems reasonably necessary to provide for any future, contingent or unforeseen liabilities or obligations of the partnership; and next, pro rata in accordance with and to the extent of the positive balances in the general partner’s and record holders’ respective capital accounts.
Allocations of Income and Loss
Our partnership agreement provides, in general, that, after allocation to the holders of preferred units of an amount of income or gain equal to the 5% accrued distribution rate for the year, all items of income, gain, loss and deduction are allocated to API and to the holders of depositary units in accordance with their respective percentage ownership in the partnership. Items allocated to the holders of depositary units are further allocated among them pro rata in accordance with the respective number of depositary units owned by each of them. The partnership’s income gain, and loss and deduction, for federal income tax purposes, will be computed on an annual basis and apportioned equally among the calendar months among the general partner and record holders of depositary units in accordance with their percentage interests as of the close of business on the last day of the month in which taxable income or losses are apportioned. The partnership’s gains and losses from capital transactions generally will be allocated among the general partner and record holders of depositary units in proportion to their percentage interests as of the close of business on the last day of the month in which such gains and losses occurred. However, if gain from a capital transaction is recognized by the partnership over more than one calendar year, gain recognized by the partnership in years subsequent to the year in which the capital transaction occurred shall be allocated in the same manner as income of the partnership allocated.
Nevada Gaming Law Dispositions
If any Nevada gaming authority requires that a limited partner be licensed, qualified or found suitable under any applicable Nevada gaming law and the limited partner


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·
fails to apply for a license, qualification or a finding of suitability within 30 days, or such shorter period as may be required by the applicable Nevada gaming authority after being requested to do so by the Nevada gaming authority, or
·
is denied such license or qualification or not found suitable,
then the general partner will have the right, exercisable in its sole and absolute discretion,
·
to require each the limited partner to dispose of its partnership interest within 30 days, or such earlier date as may be required by the applicable Nevada gaming authority, of the occurrence of the event described above, or
·
to redeem the partnership interest of the limited partner, on behalf of and for the account of the partnership, at a redemption price equal to lowest of
·
the market price for the partnership interest on the filing date, as defined, which, in the case of a depositary unit, will be the unit price;
·
the price at which such limited partner acquired the partnership interest; and
·
such other lesser amount as may be required by any Nevada gaming authority.
Immediately upon a determination by a Nevada gaming authority that a limited partner will not be licensed, qualified or found suitable and must dispose of its partnership interest, the limited partner will, to the extent required by applicable Nevada gaming laws, have no further right to exercise, directly or indirectly, any rights to which limited partners or record holders are entitled under the Delaware Act or partnership agreement or to receive any distributions made by the partnership, except the redemption price.
New Jersey Gaming Law Dispositions
Securities of the partnership are held subject to the condition that if a holder of any security is found to be disqualified by the New Jersey Casino Control Commission pursuant to the provisions of the New Jersey Casino Control Act, or the Casino Control Act, the holder will dispose of his interest in the partnership in accordance with the Casino Control Act. The partnership agreement is deemed to include all provisions required by the Casino Control Act and the regulations under it.
Amendment of the Partnership Agreement
Amendments to the partnership agreement may be proposed by the general partner or by holders of depositary units owning at least 10% of the total number of depositary units outstanding then owned by all unitholders. Any proposed amendment (other than those described below) must be approved by the general partner in writing and, subject to limitations on the exercise by unitholders of voting rights, by at least a majority interest in order to be adopted. Unless approved by API in writing and, subject to limitations on the exercise by unitholders of voting rights, by all of the holders of depositary units, no amendment may be made to the partnership agreement if the amendment, in the opinion of counsel would result in the loss of the limited liability of unitholders or AREP as the sole limited partner of AREH or would cause AREP or AREH to be treated as an association taxable as a corporation for federal income tax purposes. In addition, no amendment to the partnership agreement may be made which would:
·
enlarge the obligations of the general partner or any unitholder or convert the interest of any unitholder into the interest of a general partner;
·
modify the expense reimbursement payable to the general partner and its affiliates pursuant to the partnership agreement or the fees and compensation payable to the general partner and its affiliates pursuant to the AREH partnership agreement;
·
modify the order and method for allocations of net income and net loss or distributions of net cash flow from operations without the consent of the general partner or the unitholders adversely affected; or
·
amend sections of the partnership agreement concerning amendments of the agreement without the consent of unitholders owning more than 95% of the total number of depositary units outstanding then held by all unitholders.


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Notwithstanding the foregoing, the general partner may make amendments to the partnership agreement without the consent of the unitholders, if such amendments are necessary or appropriate:
·
to reflect a change in the name or location of the principal office of the partnership;
·
to reflect the admission, substitution, termination, or withdrawal of unitholders in accordance with the partnership agreement;
·
to qualify AREP as a limited partnership or to ensure that AREP will not be treated as an association taxable as a corporation for federal income tax purposes;
·
in connection with or as a result of the general partner’s determination that AREP does not or no longer will qualify as a partnership for federal income tax purposes, including, without limitation, an amendment reflecting the reorganization of AREP into a qualified “real estate investment trust”;
·
to reflect a change that is of an inconsequential nature and does not adversely affect the unitholders in any material respect, or to cure any ambiguity, correct or supplement any provision in the partnership agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under the partnership agreement that will not be inconsistent with law or with the provisions of the partnership agreement;
·
to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a federal or state agency or contained in federal or state law;
·
to facilitate the trading of the depositary units or comply with any requirement or guideline of any securities exchange on which the depositary units are or will be listed for trading;
·
to make any change required or contemplated by the partnership agreement;
·
to amend any provisions requiring any action by the general partner if applicable provisions of the Delaware Act related to AREP or AREH are amended or changed so that such action is no longer necessary; or
·
to authorize AREP to issue units (or other securities) in one or more additional classes, or one or more series of classes, with any designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to existing classes of depositary units or preferred units, as shall be fixed by the general partner.
Issuance of Additional Securities
The partnership is authorized to issue additional depositary units or other securities from time to time to unitholders or additional investors without the consent or approval of unitholders. There is no limit to the number of depositary units or additional classes that may be issued. The board of directors of the general partner has the power, without any further action by the unitholders, to issue securities with such designations, preferences and relative, participating or other special rights, powers and duties, including rights, powers and duties senior to existing classes of depositary units or preferred units.
Meetings; Voting Rights of Unitholders
Any action that is required or permitted to be taken by unitholders may be taken either at a meeting of the holders of depositary units or without a meeting if consents in writing setting forth the action so taken are signed by holders of depositary units owning not less than the minimum number of depositary units or preferred units that would be necessary to authorize or take such action at a meeting. Meetings of the holders of depositary units may be called by the general partner or by unitholders owning at least 10% of the total depositary units outstanding then owned by all such unitholders. Holders of depositary units may vote either in person or by proxy at meetings.
Matters submitted to the unitholders for their consent will be determined by the affirmative vote, in person or by proxy, of a majority interest, except that a higher vote will be required for certain amendments described above, the removal of the general partner and the continuation of AREP after certain events that would otherwise cause dissolution.
Each unitholder will have one vote for each depositary unit as to which the unitholder has been admitted as a unitholder. A subsequent transferee of depositary units who has not been admitted as a unitholder of record with


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respect to the depositary units will have no voting rights with respect to the depositary units, even if such subsequent transferee holds other depositary units as to which it has been admitted as a unitholder. The voting rights of a unitholder who transfers a depositary unit will terminate with respect to that depositary unit upon its transfer, whether or not the subsequent transferee is admitted as a unitholder of record with respect thereto. The partnership agreement does not provide for annual meetings of the unitholders.
Restriction on Short-Form Mergers
Neither the general partner nor its affiliates will cause the partnership (in the event that the Delaware Act is amended to permit partnerships to engage in short-form merger transactions), or any successor entity of the partnership, whether in its current form as a limited partnership or as converted to or succeeded by a corporation or other form of business association, to effect a merger or other business combination (in the event that such short-form merger statute applies to other business combinations) of the partnership or such successor, in each case pursuant to Section 253 of the General Corporation Law of Delaware, or any successor statute, or any similar short-form merger statute under the laws of Delaware or any other jurisdiction. This provision does not apply to any other merger or business combination transaction. In addition, no amendment to this provision is permitted without a unanimous vote of the record holders, unless the amendment has been approved by the audit committee, in which event only a majority interest, as defined, is required for approval of the amendment.
Liability of General Partner and Unitholders
The general partner will be liable for all general obligations of the partnership to the extent not paid by the partnership. The general partner will not, however, be liable for the nonrecourse obligations of the partnership. Assuming that a unitholder does not take part in the control of the business of AREP and otherwise acts in conformity with the provisions of the partnership agreement, the liability of the unitholder will, under the Delaware Act, be limited, subject to certain possible exceptions, generally to the amount contributed by the unitholder or the unitholder’s predecessor in interest to the capital of the partnership, plus the unitholder’s share of any undistributed partnership income, profits or property. However, under the Delaware Act, a unitholder who receives a distribution from AREP that is made in violation of the Delaware Act and who knew at the time of the distribution that the distribution was improper, is liable to AREP for the amount of the distribution. Such liability or liability under other applicable Delaware law (such as the law of fraudulent conveyances) ceases after expiration of three years from the date of the applicable distribution.
Under the Delaware Act, a partnership is prohibited from making a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the partnership, exceed the fair value of the assets of the partnership (except that fair value of property that is subject to a liability for which the recourse of creditors is limited is included in the assets of the partnership only to the extent that the fair value of the property exceeds that liability). An assignee of a limited partner who becomes a substituted limited partner does not, under the Delaware Act, become liable for any obligation of the assignor to restore prior distributions.
Books and Reports
The general partner is required to keep complete and accurate books with respect to the partnership’s business at the principal office of the partnership. The books are maintained for financial accounting purposes on the accrual basis, in accordance with generally accepted accounting principles. The fiscal year of AREP is the calendar year.
Unitholders will be entitled to have access to AREP books and certain other records at reasonable times upon reasonable notice to the general partner, subject to certain limitations including those intended to protect confidential business information.
The general partner will furnish to each unitholder, within 120 days after the close of each fiscal year, reports containing certain financial statements of AREP for the fiscal year, including a balance sheet and statements of income, unitholders’ equity and changes in financial position, which will be audited by a nationally recognized firm of independent certified public accountants. Within 90 days after the close of each taxable year, AREP will use its best efforts to furnish to each unitholder as of the last day of any month during such taxable year such information as may be required by the unitholders for the preparation of their individual federal, state and local tax returns. This


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information will be furnished in summary form so that certain complex calculations normally required can be avoided. The partnership’s ability to furnish such summary information may depend on the cooperation of unitholders in supplying certain information to the partnership.
Power of Attorney
Pursuant to the AREP partnership agreement, each unitholder of record appoints API and each of API’s authorized officers as the unitholder’s or substituted unitholder’s attorney-in-fact:
·
to enter into the depositary agreement and deposit the depositary units of the unitholder or substituted unitholder in the deposit account established by the depositary and admit the holders of depositary units and preferred units as limited partners in AREP, and
·
to make, execute, file and/or record
·
instruments with respect to any amendment of the partnership agreement;
·
conveyances and other instruments and documents with respect to the dissolution, termination and liquidation of AREP pursuant to the terms of the partnership agreement;
·
financing statements or other documents necessary to grant or perfect a security interest, mortgage, pledge or lien on all or any of the assets of the partnership;
·
instruments or papers required to continue the business of AREP pursuant to the partnership agreement
·
instruments relating to the admission of substituted limited partners in the partnership; and
·
all other instruments deemed necessary or appropriate to carry out the provisions of the partnership agreement.
The power of attorney is irrevocable, will survive the subsequent death, incompetency, dissolution, disability, incapacity, bankruptcy or termination of the granting unitholder, and will extend to such unitholder’s heirs, successors and assigns.
Death, Bankruptcy or Incompetency of a Unitholder
The death, bankruptcy or adjudication of incompetency of a unitholder will not dissolve the partnership. In such event, the legal representatives of the unitholder will have all the rights of a unitholder for the purpose of settling or managing the estate and such power as the deceased, bankruptcy or incompetent unitholder possessed to assess, sell or transfer any part of his interest. The transfer of depositary units and preferred units by the legal representative to any person or entity is subject to all of the restrictions to which such transfer would have been subject if it had been made by the deceased, bankrupt or incompetent unitholder.
Termination, Dissolution and Liquidation
The partnership will continue until December 31, 2085, unless sooner dissolved or terminated and its assets liquidated upon the occurrence of the earliest of:
·
the withdrawal, removal or bankruptcy of the general partner (subject to the right of the unitholders to reconstitute and continue the business of AREP by written agreement of a majority interest and designation by them of a successor general partner within 90 days);
·
the written consent or affirmative vote of a majority interest, with the approval of the general partner, to dissolve and terminate the partnership;
·
the sale or other disposition of all or substantially all of the assets of the partnership;
·
the partnership’s insolvency or bankruptcy; or
·
any other event causing or requiring dissolution under the Delaware Act.
The unitholders’ right to continue AREP described above is subject to the receipt of an opinion of counsel to the effect that the continuation and the selection of a successor general partner will not result in the loss of limited liability of the unitholders and will not cause AREP to be treated as an association taxable as a corporation for federal income tax purposes. Upon dissolution, the general partner or other entity or person authorized to wind up the affairs of AREP will proceed to liquidate the assets of AREP and apply the proceeds of liquidation in the order of priority set forth in the partnership agreement.


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SELLING SECURITYHOLDERS
 The depositary units being offered by the selling securityholders are issuable upon conversion of the convertible notes. We are registering the depositary units in order to permit the selling securityholders to offer the depositary units for resale from time to time. Except for the ownership of the convertible notes issued pursuant to the Indenture, dated as of April 5, 2007, by and among AREP, AREP Finance, AREH, as guarantor, and Wilmington Trust Company, as Trustee, the selling securityholders have not had any material relationship with us within the past three years.
The table below lists the selling securityholders and other information regarding the beneficial ownership of the depositary units by each of the selling securityholders. The second column lists the number of depositary units beneficially owned by each selling securityholder, based on its ownership of the convertible notes, as of June 1, 2007, assuming conversion of all convertible notes held by the selling securityholders on that date, without regard to any limitations on conversions.
The third column lists the depositary units being offered by this prospectus by each selling securityholder.
In accordance with the terms of a registration rights agreement by and among the AREP, Portside Growth and Opportunity Fund, or Portside, and Highbridge International LLC, or Highbridge, this prospectus generally covers the resale of the depositary units issued or issuable upon conversion of the convertible notes as of the trading day immediately preceding the date the Registration Statement is initially filed with the SEC. Because the conversion price of the convertible notes may be adjusted, the number of depositary units that will actually be issued may be more or less than the number of depositary units being offered by this prospectus. The fourth column assumes the sale of all of the depositary units offered by the selling securityholders pursuant to this prospectus.
The selling securityholders may sell all, some or none of their depositary units in this offering. See “Plan of Distribution.”
Name of Selling Securityholder
  
Number of
Depositary Units
Owned Prior to
Offering
  
Maximum Number
of Depositary Units
to be Sold Pursuant
to this Prospectus
  
Number of
Depositary Units
Owned After
Offering
             
Portside Growth & Opportunity Fund(1)
     
4,977
     
4,977
     
0
Ramius Capital Group, LLC
  
284
  
284
  
0
Highbridge International LLC(2)
  
937,064
  
937,064
  
0
Highbridge Convertible Arbitrage Master
Fund, L.P.(3)
  
62,220
  
62,220
  
0
Linden Capital LP
  
226,253
  
226,253
  
0
Lyxor/Context Fund Ltd.
  
6,938
  
6,938
  
0
AHFP Context
  
2,187
  
2,187
  
0
Finch Tactical Plus Class B
  
1,282
  
1,282
  
0
Worldwide Transactions Limited
  
1,735
  
1,735
  
0
Altma Fund SICAV Plc in Repsect of the
Grafton Sub Fund
  
8,296
  
8,296
  
0
Casam Context Offshore Advantage Fund Limited
  
3,922
  
3,922
  
0
Institutional Benchmarks Series (Master Feeder)
Limited in Respect of Alcor Series
  
1,282
  
1,282
  
0
Context Advantage Master Fund, L.P.
  
30,921
  
30,921
  
0
SGAM A.I. Boreal
  
22,626
  
22,626
  
0
Altma Fund SICAV in respect of Trinity
Sub-Fund
  
27,995
  
27,995
  
0
AM Master Fund I, L.P.
  
89,091
  
89,091
  
0
Lyxor/AM Investment Fund Ltd.
  
15,272
  
15,272
  
0
AM International E Mac 63 Ltd.
  
71,270
  
71,270
  
0
Lehman Brothers Inc.
  
150,835
  
150,835
  
0
Xavex Convertible Arbitrage 10 Fund
  
23,530
  
23,530
  
0
Xavex Convertible Arbitrage 2 Fund
  
3,545
  
3,545
  
0
CNH CA Master Account, L.P.
  
75,418
  
75,418
  
0
Argent LowLev Convertible Arbitrage
Fund II, LLC
  
453
  
453
  
0


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Name of Selling Securityholder
  
Number of
Depositary Units
Owned Prior to
Offering
  
Maximum Number
of Depositary Units
to be Sold Pursuant
to this Prospectus
  
Number of
Depositary Units
Owned After
Offering
             
Argent Classic Convertible Arbitrage
Fund, L.P.
  
36,200
  
36,200
  
0
Argent Classic Convertible Arbitrage
Fund II, L.P
  
8,598
  
8,598
  
0
Lyxor Master Fund
 
6,184
  
6,184
  
0
Partners Group Alternative Strategies
PCC Ltd.
  
12,067
  
12,067
  
0
HFR CA Global Select Master Trust
Account
  
3,545
  
3,545
  
0
Class C Trading Company, Ltd.
  
18,779
  
18,779
  
0
DBAG London
  
88,616
  
88,616
  
0
RCG PB, Ltd.
  
683
  
683
  
0
Bank Austria Special Situation
  
398
  
398
  
0
RCG Baldwin, L.P.
  
171
  
171
  
0
RCG Latitude Master Fund, Ltd.
  
1,024
  
1,024
  
0
Credit Suisse Securities Europe Ltd.
  
94,272
  
94,272
  
0
PBGC Maintenance
  
1,855
  
1,855
  
0
Redbourn Partners Ltd.
  
37,709
  
37,709
  
0
——————
(1)
 Ramius Capital Group, LLC, or Ramius Capital, is the investment adviser of Portside, and consequently has voting control and investment discretion over securities held by Portside. Ramius Capital disclaims beneficial ownership of the units held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon are the sole managing members of C4S& Co., LLC, the sole managing member of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon may be considered beneficial owners of any units deemed to be beneficially owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim beneficial ownership of these units.
(2)
 Highbridge Capital Management, LLC, or Highbridge Capital, is the trading manager of Highbridge and has voting control and investment discretion over the securities held by Highbridge. Glenn Dubin and Henry Swieca control Highbridge Capital and have voting control and investment discretion over the securities held by Highbridge. Each of Highbridge Capital, Glenn Dubin and Henry Swieca disclaims beneficial ownership of the securities held by Highbridge.
(3)
 Highbridge Capital is the trading manager of Highbridge Convertible Arbitrage Master Fund, L.P., or Highbridge Master Fund, and has voting control and investment discretion over the securities held by Highbridge Master Fund. Glenn Dubin and Henry Swieca control Highbridge Capital and have voting control and investment discretion over the securities held by Highbridge Master Fund. Each of Highbridge Capital, Glenn Dubin and Henry Swieca disclaims beneficial ownership of the securities held by Highbridge Master Fund.


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PLAN OF DISTRIBUTION
We are registering the depositary units issuable upon conversion of the convertible notes to permit the resale of these depositary units by the holders of the convertible notes from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling securityholders of the depositary units. We will bear all fees and expenses incident to our obligation to register the depositary units.
The selling securityholders may sell all or a portion of the depositary units beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the depositary units are sold through underwriters or broker-dealers, the selling securityholders will be responsible for underwriting discounts or commissions or agent’s commissions. The depositary units may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be affected in transactions, which may involve crosses or block transactions:
·
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
·
in the over-the-counter market;
·
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
·
through the writing of options, whether such options are listed on an options exchange or otherwise;
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer will attempt to sell the units as agent but may position and resell a portion of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
·
an exchange distribution in accordance with the rules of the applicable exchange;
·
privately negotiated transactions;
·
short sales;
·
sales pursuant to Rule 144;
·
broker-dealers may agree with the selling securityholders to sell a specified number of such units at a stipulated price per unit;
·
a combination of any such methods of sale; and
·
any other method permitted pursuant to applicable law.
If the selling securityholders effect such transactions by selling depositary units to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling securityholders or commissions from purchasers of the depositary units for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the depositary units or otherwise, the selling securityholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the depositary units in the course of hedging in positions they assume. The selling securityholders may also sell depositary units short and deliver depositary units covered by this prospectus to close out short positions and to return borrowed units in connection with such short sales. The selling securityholders may also loan or pledge depositary units to broker-dealers that in turn may sell such units.
The selling securityholders may pledge or grant a security interest in some or all of the depositary units owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the depositary units from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending, if necessary, the list of selling securityholders to include the pledgee, transferee or other successors in interest as selling securityholders under this prospectus. The selling securityholders also may transfer and donate the depositary units in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.


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The selling securityholders and any broker-dealer participating in the distribution of the depositary units may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the depositary units is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of depositary units being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling securityholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the depositary units may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the depositary units may not be sold unless such units have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any selling securityholder will sell any or all of the depositary units registered pursuant to the registration statement, of which this prospectus forms a part.
The selling securityholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the depositary units by the selling securityholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the depositary units to engage in market-making activities with respect to the depositary units. All of the foregoing may affect the marketability of the depositary units and the ability of any person or entity to engage in market-making activities with respect to the depositary units.
We will pay all expenses of the registration of the depositary units pursuant to the registration rights agreement, estimated to be $[_] in total, including, without limitation, SEC filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, that a selling securityholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling securityholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling securityholders will be entitled to contribution. We may be indemnified by the selling securityholders against civil liabilities, including liabilities under the Securities Act, which may arise from any written information furnished to us by the selling securityholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
Once sold under the Registration Statement, of which this prospectus forms a part, the depositary units will be freely tradable in the hands of persons other than our affiliates.
LEGAL MATTERS
Proskauer Rose LLP will provide us with an opinion as to certain legal matters in connection with the depositary units we are offering, including the validity of the depositary units being offered hereby.
EXPERTS
The consolidated financial statements of American Real Estate Partners, L.P. and Subsidaries as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 and management’s assessment of effectiveness of internal control over financial reporting as of December 31, 2006 incorporated by reference in this prospectus have been audited by Grant Thornton LLP, independent registered public accountants, as indicated in their reports with respect thereto (which report on the consolidated financial statements refers to the change in accounting for the Partnership’s investment in ImClone Systems Incorporated and Subsidiary from an available for sale security to the equity method) and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports.
The balance sheet of American Property Investors, Inc., as of December 31, 2006, included in this prospectus has been audited by Grant Thornton LLP, independent accountants, as stated in its report with respect thereto, and is included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report.


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The consolidated financial statements of ImClone Systems Incorporated and subsidiary as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, have been incorporated by reference herein in reliance upon the report of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The audit report covering the December 31, 2006 consolidated financial statements refers to the Company’s adoption of the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.”
The consolidated financial statements of GB Holdings, Inc. and subsidiaries for the year ended December 31, 2004 have been incorporated by reference herein in reliance upon the report of KPMG LLP, independent registered public accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements and financial statement schedule of Lear Corporation as of December 31, 2006 and 2005 and for each of the three years in the period ended December 31, 2006 included elsewhere in this prospectus have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a Registration Statement on Form S-3 under the Securities Act to register the depositary units offered by this prospectus. This prospectus is part of the Registration Statement. This prospectus does not contain all the information contained in the Registration Statement because we have omitted certain parts of the Registration Statement in accordance with the rules and regulations of the SEC. For further information, we refer you to the Registration Statement, which you may read and copy at the public reference facilities maintained by the SEC at 100 F Street, N. E. Room 1580, Washington, D.C. 20549. You may obtain copies at the prescribed rates from the Public Reference Section of the SEC at its principal office in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding us. You may access the SEC’s web site at http://www.sec.gov.
We are subject to the informational requirements of the Exchange Act. As a result, we are required to file reports, proxy statements and other information with the SEC. These materials can be copied and inspected at the locations described above. Copies of these materials can be obtained from the Public Reference Section of the SEC at 100 F Street, N. E. Room 1580, Washington, D.C. 20549, at prescribed rates. Our depositary units are listed on the New York Stock Exchange under the symbol “ACP.”
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to “incorporate by reference” the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below, all filings made pursuant to the Exchange Act after the date of the initial registration statement and prior to effectiveness of the Registration Statement and any other future filings we will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act (other than Current Reports on Form 8-K containing disclosure furnished under Items 2.02, 7.01 or 8.01 of Form 8-K, unless otherwise indicated therein):
·
Our Annual Report on Form 10-K and Form 10-K/A, Amendment No. 1, for the fiscal year ended December 31, 2006, filed with the SEC on March 6, 2007 and March 16, 2007, respectively (SEC File No. 001-09516);
·
Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2007, filed with the SEC on May 10, 2007 (SEC File No. 001-09516);


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·
Our Current Reports on Form 8-K, filed with the SEC on April 3, 2007, April 5, 2007, April 17, 2007, April 24, 2007, April 27, 2007 and May 10, 2007 (SEC File No. 001-09516); and
·
The description of the depositary units contained in the Registration Statement on Form 8-A, initially filed on May 12, 1987, and any subsequent amendment thereto filed for the purpose of updating such description.
You may request a copy of these filings (not including the exhibits to such documents unless the exhibits are specifically incorporated by reference in the information contained in this prospectus), at no cost, by writing or telephoning us at the following address:
American Real Estate Partners, L.P.
767 Fifth Avenue, Suite 4700
New York, New York 10153
Attn: Chief Financial Officer
Telephone requests may be directed to (212) 702-4300
This prospectus is part of a Registration Statement we filed with the SEC. You should rely only on the information or representations provided in this prospectus. We have authorized no one to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted.
You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document.
Statements contained in this prospectus as to the contents of any contract or document are not necessarily complete and in each instance reference is made to the copy of that contract or document filed as an exhibit to the Registration Statement or as an exhibit to another filing, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto.


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INDEX TO FINANCIAL STATEMENTS
American Property Investors, Inc.
    
        
 
 
 
     
Lear Corporation
    
 
 
 
 
 
 
 
     
 
 
 
 


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
American Property Investors, Inc.
We have audited the accompanying balance sheet of American Property Investors, Inc. as of December 31, 2006. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in that balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of American Property Investors, Inc. as of December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
New York, New York
June 15, 2007


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AMERICAN PROPERTY INVESTORS, INC.

BALANCE SHEET
   
December 31,
2006
 
     
    
ASSETS
 
    
Cash and cash equivalents
  
$
1,204,034
Investment in partnerships (Note B)
    
52,342,623
   
$
53,546,657
       
LIABILITIES AND STOCKHOLDER’S EQUITY
      
       
Accounts payable and accrued expenses
    
6,059
       
Stockholder’s equity:
      
Common stock – $1 par value, 1,216 shares authorized,
216 shares outstanding
    
216
Additional paid-in capital
    
35,507,904
Note receivable from affiliate (Note C)
    
(9,500,000)
Retained earnings
    
26,938,478
Accumulated other comprehensive income                                                   
    
594,000
Total stockholder’s equity
    
53,540,598
Total liabilities and stockholder's equity
  
$
53,546,657


See notes to balance sheet.
F-3

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AMERICAN PROPERTY INVESTORS, INC.
Notes to Balance Sheet
December 31, 2006
Note A — Business and Summary of Significant Accounting Policies
1. Organization
American Property Investors, Inc. (“API” or “the Company”) is the general partner of both American Real Estate Partners, L.P. (“AREP”) and American Real Estate Holdings Limited Partnership (“AREH”). API has 1% general partnership interest in both AREP and AREH. API is a wholly-owned subsidiary of Becton Corporation (“Becton”) which in turn is owned by Carl C. Icahn. Mr. Icahn also owns, indirectly, approximately 90% of the limited partnership interests of AREP, a New York Stock Exchange master limited partnership.
2. Cash and Cash Equivalents
The Company considers all temporary cash investments with maturity at the date of purchase of three months or less to be cash equivalents.
3. Use of Estimates
Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statement to prepare this balance sheet in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
4. Income Taxes
The Company and its parent have elected and the stockholders have consented, under the applicable provisions of the Internal Revenue Code, to report their income for Federal income tax purposes as a Subchapter S Corporation. The stockholders report their respective shares of the net taxable income or loss on their personal tax returns. Accordingly, no liability has been accrued for current or deferred Federal income taxes related to the operations of the Company in the accompanying balance sheet. State and local taxes are de minimus
5. Investments in Partnerships
The Company evaluates its investments in partially-owned entities in accordance with FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46R. If the partially-owned entity is a “variable interest entity,” or a “VIE,” and that the Company is the “primary beneficiary” as defined in FIN 46R, the Company would account for such investment as if it were a consolidated subsidiary.
For a partnership investment which is not a VIE or in which the Company is not the primary beneficiary, the Company follows the accounting set forth in AICPA Statement of Position No. 78-9 – Accounting for Investments in Real Estate Ventures (SOP 78-9). In accordance with this pronouncement, investments in joint ventures are accounted for under the equity method when its ownership interest is less than 50% and it does not exercise direct or indirect control. Factors that are considered in determining whether or not the Company exercises control include important rights of partners in significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representation and authority and other contractual rights of the partners. To the extent that the Company is deemed to control these entities, these entities would be consolidated.
The Company has determined that the AREP and AREH partnerships are not VIEs and therefore it accounts for these investments under the equity method of accounting as the limited partners have important rights as defined in SOP 78-9. This investment was recorded initially at cost and was subsequently adjusted for equity in earnings or losses and cash contributions and distributions as well as other comprehensive income/loss.


F-4

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AMERICAN PROPERTY INVESTORS, INC.
Notes to Balance Sheet
December 31, 2006
Note A — Business and Summary of Significant Accounting Policies – (continued)
On a periodic basis the Company evaluates whether there are any indicators that the value of its investments in partnerships are impaired. An investment is considered to be impaired if the Company’s estimate of the value of the investment is less than the carrying amount. The ultimate realization of the Company’s investments in partnerships is dependent on a number of factors including the performance of that entity and market conditions. If the Company determines that a decline in the value of a partnership is other than temporary, then the Company would record an impairment charge.
Note B — Investment in Partnerships
The Company has a 1% general partnership interest in both AREP and AREH. AREP is the 99% limited partner and holding company of AREH which is involved in the following operating businesses: (i) Oil & Gas; (ii) Gaming; (iii) Real Estate; and (iv) Home Fashion.
The carrying amount of the investment in partnerships on the Company’s balance sheet exceeds the underlying equity in the net assets of the partnerships by $254,382,000. This difference is as a result of adjustments reflected in AREP’s equity to account for certain acquisitions from affiliates of the general partner. The differences between the historical cost of companies acquired and the purchase price paid to the affiliates of the general partner were accounted for as contributions from or distributions to the general partner.



F-5

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AMERICAN PROPERTY INVESTORS, INC.
Notes to Balance Sheet
December 31, 2006
Summarized financial information for American Real Estate Partners, L.P. and subsidiaries as of December 31, 2006 is as follows (in thousands of dollars):
   
December 31,
2006
 
     
    
ASSETS
      
Cash and cash equivalents
  
$
1,912,235
Investments
    
539,115
Inventories, net
    
245,502
Trade, notes and other receivables, net
    
176,496
Other current assets
    
134,987
Assets held for sale
    
47,503
Total current assets
    
3,055,838
Property, plant and equipment, net
      
Gaming
    
422,715
Real Estate
    
283,974
Home Fashion
    
200,382
Total property, plant and equipment                                                         
    
907,071
Equity investment and other
    
179,932
Intangible assets
    
25,916
Other assets
    
75,990
Total assets
  
$
4,244,747
       
LIABILITIES AND PARTNERS’ EQUITY
      
Accounts payable
  
$
69,853
Accrued expenses and other current liabilities
    
197,792
Current portion of long-term debt
    
23,970
Securities sold not yet purchased
    
25,398
Margin liability on marketable securities
    
—
Liabilities of discontinued operations held for sale
    
—
Total current liabilities
    
317,013
Long-term debt
    
1,184,990
Other non-current liabilities
    
22,212
Preferred limited partnership units
    
117,656
Minority interests
    
292,221
Partners’ equity
    
2,310,655
Total liabilities and partners’ equity
  
$
4,244,747
Note C — Note Receivable
The Company has an unsecured demand note receivable due from Carl C. Icahn, in the amount of $9,500,000. Interest on the note accrues at the rate of 3.75% per annum and is payable on the last day of April and October. Interest has been paid through December 31, 2006.


F-6

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Lear Corporation
We have audited the accompanying consolidated balance sheets of Lear Corporation and Subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule for the three years in the period ended December 31, 2006, included in Item 8. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the three years in the period ended December 31, 2006, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2006 the Company changed its method of accounting for stock-based compensation.
As discussed in Note 10 to the consolidated financial statements, in 2006 the Company changed its method of accounting for pension and other postretirement benefit plans.
/s/ Ernst & Young LLP
Detroit, Michigan
February 20, 2007


F-7

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
   
December 31,
  
   
2006
  
2005
  
   
(in millions,
except share data)
  
ASSETS
              
Current Assets:
     
$
502.7
     
$
197.3
  
Cash and cash equivalents
             
Accounts receivable
   
2,006.9
    
2,000.1
  
Inventories
   
581.5
    
595.6
  
Current assets of business held for sale
   
427.8
    
607.7
  
Other
   
371.4
    
445.7
  
Total current assets
    
3,890.3
    
3,846.4
  
Long-Term Assets:
              
Property, plant and equipment, net
    
1,471.7
    
1,614.7
  
Goodwill, net
   
1,996.7
    
1,939.8
  
Long-term assets of business held for sale
    
—
    
485.2
  
Other
   
491.8
    
402.3
  
Total long-term assets
   
3,960.2
    
4,442.0
  
   
$
7,850.5
    
$8,288.4
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current Liabilities:
              
Short-term borrowings
  
$
39.3
  
$
23.4
  
Accounts payable and drafts
   
2,317.4
    
2,516.0
  
Accrued liabilities
   
1,099.3
    
1,008.6
  
Current liabilities of business held for sale
    
405.7
    
549.3
  
Current portion of long-term debt
   
25.6
    
9.4
  
Total current liabilities
    
3,887.3
    
4,106.7
  
Long-Term Liabilities:
              
Long-term debt
   
2,434.5
    
2,243.1
  
Long-term liabilities of business held for sale
   
48.5
    
27.6
  
Other
   
878.2
    
800.0
  
Total long-term liabilities
   
3,361.2
    
3,070.7
  
Stockholders’ Equity:
              
Common stock, par value $0.01 per share, 150,000,000 shares authorized,
81,984,306 shares and 73,281,653 shares issued as of December 31, 2006
and 2005, respectively
   
0.7
    
0.7
  
Additional paid-in capital
    
1,338.1
    
1,108.6
  
Common stock held in treasury, 5,732,316 shares and 6,094,847 shares as of
December 31, 2006 and 2005, respectively, at cost                                                              
    
(210.2
)
  
(225.5
)
Retained earnings (deficit)
    
(362.5
)
  
361.8
  
Accumulated other comprehensive loss
    
(164.1
)
  
(134.6
)
Total stockholders’ equity
    
602.0
    
1,111.0
  
   
$
7,850.5
  
$
8,288.4
  


The accompanying notes are an integral part of these consolidated financial statements.
F-8

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
   
For the Year Ended December 31,
  
   
2006
  
2005
  
2004
  
   
(in million, except per share data)
  
Net sales
     
$
17,838.9
     
$
17,089.2
     
$
16,960.0
  
Cost of sales
   
16,911.2
    
16,353.2
    
15,557.9
  
Selling, general and administrative expenses
    
646.7
    
630.6
    
633.7
  
Goodwill impairment charge
    
2.9
    
1,012.8
    
—
  
Loss on divestiture of Interior business
    
636.0
    
—
    
—
  
Interest expense
    
209.8
    
183.2
    
165.5
  
Other expense, net
    
85.7
    
38.0
    
38.6
  
Income (loss) before provision for income taxes, minority interests
in consolidated subsidiaries, equity in net (income) loss of affiliates
and cumulative effect of a change in accounting principle
    
(653.4
)
  
(1,128.6
)
  
564.3
  
Provision for income taxes
    
54.9
    
194.3
    
128.0
  
Minority interests in consolidated subsidiaries
    
18.3
    
7.2
    
16.7
  
Equity in net (income) loss of affiliates
    
(16.2
)
  
51.4
    
(2.6
)
Income (loss) before cumulative effect of a change in accounting
principle
    
(710.4
)
  
(1,381.5
)
  
422.2
  
Cumulative effect of a change in accounting principle
    
2.9
    
—
    
—
  
Net income (loss)
  
$
(707.5
)
$
(1,381.5
)
$
422.2
  
Basic net income (loss) per share:
                   
Income (loss) before cumulative effect of a change in accounting principle
  
$
(10.35
)
$
(20.57
)
$
6.18
  
Cumulative effect of change in accounting principle
    
0.04
    
—
    
—
  
Basic net income (loss) per share
 
$
(10.31
)
$
(20.57
)
$
6.18
  
Diluted net income (loss) per share:
                    
Income (loss) before cumulative effect of a change in accounting
principle
  
$
(10.35
)
$
(20.57
)
$
5.77
  
Cumulative effect of change in accounting principle
    
0.04
    
—
    
—
  
Diluted net income (loss) per share
  
$
(10.31
)
$
(20.57
)
$
5.77
  


The accompanying notes are an integral part of these consolidated financial statements.
F-9

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
   
December 31,
  
   
2006
  
2005
  
2004
  
   
(In millions, except share data)
  
Common Stock
                  
  
Balance at beginning and end of period
     
$
0.7
     
$
0.7
     
$
0.7
  
Additional Paid-in Capital
                  
  
Balance at beginning of period
  
$
1,108.6
  
$
1,064.4
  
$
1,027.7
  
Net proceeds from the issuance of 8,695,653 shares of common stock               
    
199.2
    
—
    
—
  
Stock-based compensation
    
30.7
    
43.8
    
26.4
  
Cumulative effect of a change in accounting principle
    
(0.4
)
  
—
    
—
  
Tax benefit of stock options exercised
    
—
    
0.4
    
10.3
  
Balance at end of period
  
$
1,338.1
  
$
1,108.6
  
$
1,064.4
  
Treasury Stock
                  
  
Balance at beginning of period
  
$
(225.5
)
$
(204.1
)
$
(110.8
)
Issuances of 362,531 shares at an average price of $42.40
    
15.3
    
—
    
—
  
Purchases of 490,900 shares at an average price of $51.75
    
—
    
(25.4
)
  
—
  
Issuances of 126,529 shares at an average price of $31.99
    
—
    
4.0
    
—
  
Purchases of 1,834,300 shares at an average price of $53.29
    
—
    
—
    
(97.7
)
Issuances of 395,126 shares at an average price of $11.12 per share in settlement of
stock-based compensation
    
—
    
—
    
4.4
  
Balance at end of period
  
$
(210.2
)
$
(225.5
)
$
(204.1
)
Retained Earnings (Deficit)
                  
  
Balance at beginning of period
  
$
361.8
  
$
1,810.5
  
$
1,441.8
  
Net income (loss)
    
(707.5
)
  
(1,381.5
)
  
422.2
  
Dividends declared of $0.25 per share in 2006, $1.00 per share in 2005 and $0.80 per share in 2004
    
(16.8
)
  
(67.2
)
  
(53.5
)
Balance at end of period
  
$
(362.5
)
$
361.8
  
$
1,810.5
  
Accumulated Other Comprehensive Income (Loss)
                  
  
Defined Benefit Plans
                  
  
Balance at beginning of period
  
$
(115.0
)
$
(72.6
)
$
(62.2
)
Defined benefit plan adjustments
    
17.4
    
(42.4
)
  
(10.4
)
Adoption of SFAS No. 158
    
(166.6
)
  
—
    
—
  
Balance at end of period
  
$
(264.2
)
$
(115.0
)
$
(72.6
)
Derivative Instruments and Hedging Activities
                  
  
Balance at beginning of period
  
$
9.0
  
$
17.4
  
$
(13.7
)
Derivative instruments and hedging activities adjustments
    
5.7
    
(8.4
)
  
31.1
  
Balance at end of period
  
$
14.7
  
$
9.0
  
$
17.4
  
Cumulative Translation Adjustments
                  
  
Balance at beginning of period
  
$
(86.8
)
$
65.6
  
$
(61.5
)
Cumulative translation adjustments
    
90.7
    
(152.4
)
  
127.1
  
Balance at end of period
  
$
3.9
  
$
(86.8
)
$
65.6
  
Deferred Income Tax Asset
                  
  
Balance at beginning of period
  
$
58.2
  
$
48.2
  
$
35.5
  
Deferred income tax asset adjustments
    
23.3
    
10.0
    
12.7
  
Balance at end of period
  
$
81.5
  
$
58.2
  
$
48.2
  
Accumulated other comprehensive income (loss)
  
$
(164.1
)
$
(134.6
)
$
58.6
  
Total Stockholders’ Equity
  
$
602.0
  
$
1,111.0
  
$
2,730.1
  
Comprehensive Income (Loss)
                  
  
Net income (loss)
  
$
(707.5
)
$
(1,381.5
)
$
422.2
  
Defined benefit plan adjustments
    
17.4
    
(42.4
)
  
(10.4
)
Derivative instruments and hedging activities adjustments
    
5.7
    
(8.4
)
  
31.1
  
Cumulative translation adjustments
    
90.7
    
(152.4
)
  
127.1
  
Deferred income tax asset adjustments
    
23.3
    
10.0
    
12.7
  
Comprehensive Income (Loss)
  
$
(570.4
)
$
(1,574.7
)
$
582.7
 


The accompanying notes are an integral part of these consolidated financial statements.
F-10

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LEAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
For the Year Ended December 31,
  
   
2006
  
2005
  
2004
  
   
(In millions)
  
Cash Flows from Operating Activities:
                    
Net income (loss)
     
$
(707.5
)     
$
(1,381.5
)     
$
422.2
  
Adjustments to reconcile net income (loss) to net cash provided by operating activities —
                    
Cumulative effect of a change in accounting principle
    
(2.9
)
  
—
    
—
  
Goodwill impairment charges
    
2.9
    
1,012.8
    
—
  
Loss on divestiture of Interior business
    
636.0
    
—
    
—
  
Fixed asset impairment charges
    
15.8
    
97.4
    
3.0
  
Deferred tax provision (benefit)
    
(55.0
)
  
44.7
    
8.7
  
Equity in net (income) loss of affiliates
    
(16.2
)
  
51.4
    
(2.6
)
Depreciation and amortization
    
392.2
    
393.4
    
355.1
  
Net change in recoverable customer engineering and tooling
    
194.9
    
(112.5
)
  
(32.5
)
Net change in working capital items
    
(110.1
)
  
9.7
    
(62.4
)
Net change in sold accounts receivable
    
(178.0
)
  
411.1
    
(70.4
)
Other, net
    
113.2
    
34.3
    
54.8
  
Net cash provided by operating activities
    
285.3
    
560.8
    
675.9
  
Cash Flows from Investing Activities:
                    
Additions to property, plant and equipment
    
(347.6
)
  
(568.4
)
  
(429.0
)
Cost of acquisitions, net of cash acquired
    
(30.5
)
  
(11.8
)
  
(103.0
)
Net proceeds from disposition of businesses and other assets
    
65.9
    
33.3
    
56.3
  
Other, net
    
—
    
5.3
    
3.2
  
Net cash used in investing activities
    
(312.2
)
  
(541.6
)
  
(472.5
)
Cash Flows from Financing Activities:
                    
Issuance of senior notes
    
900.0
    
—
    
399.2
  
Repayment of senior notes
    
(1,356.9
)
  
(600.0
)
  
—
  
Primary credit facility borrowings, net
    
597.0
    
400.0
    
—
  
Other long-term debt repayments, net
    
(36.5
)
  
(32.7
)
  
(49.4
)
Short-term debt repayments, net
    
(11.8
)
  
(23.8
)
  
(29.8
)
Net proceeds from the sale of common stock
    
199.2
    
—
    
—
  
Dividends paid
    
(16.8
)
  
(67.2
)
  
(68.0
)
Proceeds from exercise of stock options
    
0.2
    
4.7
    
24.4
  
Repurchase of common stock
    
—
    
(25.4
)
  
(97.7
)
Increase (decrease) in drafts
    
3.0
    
(3.3
)
  
(12.6
)
Other, net
    
—
    
0.7
    
—
  
Net cash provided by (used in) financing activities
    
277.4
    
(347.0
)
  
166.1
  
Effect of foreign currency translation
    
54.9
    
(59.8
)
  
46.1
  
Net Change in Cash and Cash Equivalents
    
305.4
    
(387.6
)
  
415.6
  
Cash and Cash Equivalents at Beginning of Year
    
197.3
    
584.9
    
169.3
  
Cash and Cash Equivalents at End of Year
  
$
502.7
  
$
197.3
  
$
584.9
  
Changes in Working Capital:
                    
Accounts receivable
  
$
153.2
  
$
(250.3
)
$
(147.7
)
Inventories
    
29.4
    
(76.9
)
  
(7.0
)
Accounts payable
    
(358.9
)
  
298.1
    
189.8
  
Accrued liabilities and other
    
66.2
    
38.8
    
(97.5
)
Net change in working capital items
  
$
(110.1
)
$
9.7
  
$
(62.4
)
Supplementary Disclosure:
                    
Cash paid for interest
  
$
218.5
  
$
172.6
  
$
153.5
  
Cash paid for income taxes, net of refunds received of $30.7 in 2006,
$76.7 in 2005 and $52.7 in 2004
  
$
84.8
  
$
112.7
  
$
140.0
  









The accompanying notes are an integral part of these consolidated financial statements.
F-11

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The consolidated financial statements include the accounts of Lear Corporation (“Lear” or the “Parent”), a Delaware corporation and the wholly owned and less than wholly owned subsidiaries controlled by Lear (collectively, the “Company”). In addition, Lear consolidates variable interest entities in which it bears a majority of the risk of the entities’ potential losses or stands to gain from a majority of the entities’ expected returns. Investments in affiliates in which Lear does not have control, but does have the ability to exercise significant influence over operating and financial policies, are accounted for under the equity method (Note 6, “Investments in Affiliates and Other Related Party Transactions”).
The Company and its affiliates design and manufacture complete automotive seat systems, electrical distribution systems and various electronic products. The Company also supplies automotive interior systems and components, including instrument panels and cockpit systems, headliners and overhead systems, door panels and flooring and acoustic systems. The Company’s main customers are automotive original equipment manufacturers. The Company operates facilities worldwide (Note 13, “Segment Reporting”).
(2) Summary of Significant Accounting Policies
Assets and Liabilities of Business Held for Sale
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classifies the assets and liabilities of a business as held for sale when management approves and commits to a formal plan of sale and it is probable that the sale will be completed. The carrying value of the net assets of the business held for sale are then recorded at the lower of their carrying value or fair market value, less costs to sell. As of December 31, 2006, the assets and liabilities of the Company’s North American interior business are classified as held for sale and all prior period balance sheet information has been restated (Note 3, “Divestiture of Interior Business”).
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities of ninety days or less.
Accounts Receivable
The Company records accounts receivable as its products are shipped to its customers. The Company’s customers are the major automotive manufacturers in the world. The Company records accounts receivable reserves for known collectibility issues, as such issues relate to specific transactions or customer balances. As of December 31, 2006 and 2005, accounts receivable are reflected net of reserves of $14.9 million and $20.4 million, respectively. The Company writes off accounts receivable when it becomes apparent based upon age or customer circumstances that such amounts will not be collected. Generally, the Company does not require collateral for its accounts receivable.


F-12

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of Significant Accounting Policies – (continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. The Company records inventory reserves for inventory in excess of production and/or forecasted requirements and for obsolete inventory in production and service inventories. As of December 31, 2006 and 2005, inventories are reflected net of reserves of $87.1 million and $85.7 million, respectively. A summary of inventories is shown below (in millions):
   
December 31,
   
2006
  
2005
             
Raw materials                                                                                                                                   
     
$
439.9
     
$
449.2
Work-in-process
    
35.6
    
36.7
Finished goods
    
106.0
    
109.7
Inventories
  
$
581.5
  
$
595.6
Pre-Production Costs Related to Long-Term Supply Arrangements
The Company incurs pre-production engineering, research and development (“ER&D”) and tooling costs related to the products produced for its customers under long-term supply agreements. The Company expenses all pre-production ER&D costs for which reimbursement is not contractually guaranteed by the customer. In addition, the Company expenses all pre-production tooling costs related to customer-owned tools for which reimbursement is not contractually guaranteed by the customer or for which the customer has not provided a non-cancelable right to use the tooling. During 2006 and 2005, the Company capitalized $122.0 million and $227.2 million, respectively, of pre-production ER&D costs for which reimbursement is contractually guaranteed by the customer. During 2006 and 2005, the Company also capitalized $449.0 million and $638.6 million, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. These amounts are included in other current and other long-term assets in the consolidated balance sheets. During 2006 and 2005, the Company collected $765.0 million and $715.8 million, respectively, of cash related to ER&D and tooling costs.
During 2006 and 2005, the Company capitalized $17.4 million and $44.4 million, respectively, of Company-owned tooling. These amounts are included in property, plant and equipment, net, in the consolidated balance sheets.
The classification of capitalized pre-production ER&D and tooling costs related to long-term supply agreements is shown below (in millions):
   
December 31,
   
2006
  
2005
             
Current
     
$
87.7
     
$
160.4
Long-term
    
116.2
    
146.9
Recoverable customer engineering and tooling                                                                            
  
$
203.9
  
$
307.3
Gains and losses related to ER&D and tooling projects are reviewed on an aggregate program basis. Net gains on projects are deferred and recognized over the life of the related long-term supply agreement. Net losses on projects are recognized as costs are incurred.


F-13

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of Significant Accounting Policies – (continued)
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciable property is depreciated over the estimated useful lives of the assets, using principally the straight-line method as follows:
Buildings and improvements                                                                                                    
     
20 to 40 years
Machinery and equipment
  
5 to 15 years
A summary of property, plant and equipment is shown below (in millions):
   
December 31,
  
   
2006
  
2005
  
               
Land                                                                                                                                      
     
$
131.0
     
$
131.5
  
Buildings and improvements
    
516.7
    
572.8
  
Machinery and equipment
    
2,077.5
    
2,116.0
  
Construction in progress
    
60.7
    
56.1
  
Total property, plant and equipment
    
2,785.9
    
2,876.4
  
Less — accumulated depreciation
    
(1,314.2
)
  
(1,261.7
)
Net property, plant and equipment
  
$
1,471.7
  
$
1,614.7
  
Depreciation expense was $387.0 million, $388.5 million and $350.6 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Costs associated with the repair and maintenance of the Company’s property, plant and equipment are expensed as incurred. Costs associated with improvements which extend the life, increase the capacity or improve the efficiency or safety of the Company’s property, plant and equipment are capitalized and depreciated over the remaining life of the related asset.
Impairment of Goodwill
Goodwill is not amortized but is tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment, or decline in value, may have occurred. In conducting its impairment testing, the Company compares the fair value of each of its reporting units to the related net book value. If the fair value of a reporting unit exceeds its net book value, goodwill is considered not to be impaired. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment testing on the first day of the fourth quarter each year.
The Company utilizes an income approach to estimate the fair value of each of its reporting units. The income approach is based on projected debt-free cash flow which is discounted to the present value using discount factors that consider the timing and risk of cash flows. The Company believes that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical trends that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally-developed forecasts, as well as commercial, wage and benefit, inflation and discount rate assumptions. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, the Company believes that the income approach provides a reasonable estimate of the fair value of its reporting units.


F-14

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of Significant Accounting Policies – (continued)
The Company’s 2006 annual goodwill impairment analysis, completed as of October 1, resulted in no impairment.
During the third and fourth quarters of 2005, events occurred which indicated a significant decline in the fair value of the Company’s interior segment, as well as an impairment of the related goodwill. These events included unfavorable operating results, primarily as a result of higher raw material costs, lower production volumes on key platforms, industry overcapacity, insufficient customer pricing and changes in certain customers’ sourcing strategies, as well as the Company’s decision to evaluate strategic alternatives with respect to this segment. The Company evaluated the net book value of goodwill within its interior segment by comparing the fair value of the reporting unit to the related net book value. As a result, the Company recorded total goodwill impairment charges of $1.0 billion in 2005 related to the interior segment. The Company also recognized a $2.9 million goodwill impairment charge related to this segment during the second quarter of 2006. The goodwill resulted from a $19.0 million purchase price adjustment for an indemnification claim related to the Company’s acquisition of UT Automotive, Inc. (“UT Automotive”) from United Technologies Corporation (“UTC”) in May 1999. The purchase price adjustment was allocated to the Company’s electronic and electrical and interior segments (Note 12, “Commitments and Contingencies”).
A summary of the changes in the carrying amount of goodwill, by reportable operating segment, for each of the two years in the period ended December 31, 2006, is shown below (in millions):
   
Seating
  
Electronic and
Electrical
  
Interior
  
Total
  
                           
Balance as of January 1, 2005                                                    
     
$
1,075.7
     
$
945.9
     
$
1,017.8
     
$
3,039.4
  
Goodwill impairment charges
    
—
    
—
    
(1,012.8
)
  
(1,012.8
)
Foreign currency translation and other
    
(41.5
)
  
(40.3
)
  
(5.0
)
  
(86.8
)
Balance as of December 31, 2005
  
$
1,034.2
  
$
905.6
  
$
—
  
$
1,939.8
  
Purchase price adjustment
    
—
    
16.1
    
2.9
    
19.0
  
Goodwill impairment charges
    
—
    
—
    
(2.9
)
  
(2.9
)
Foreign currency translation and other
    
26.5
    
14.3
    
—
    
40.8
  
Balance as of December 31, 2006
  
$
1,060.7
  
$
936.0
  
$
—
  
$
1,996.7
  
Intangible Assets
The Company’s intangible assets acquired through business acquisitions are valued based on independent appraisals. A summary of intangible assets as of December 31, 2006 and 2005, is shown below (in millions):
   
Gross
Carrying
Value
  
Accumulated
Amortization
  
Net
Carrying
Value
  
Weighted
Average
Useful Life
(Years)
                       
Technology                                                                     
     
$
2.8
     
$
(0.8
)     
$
2.4
     
10.0
Customer contracts
    
23.0
    
(8.4
)
  
14.6
  
7.7
Customer relationships
    
29.8
    
(4.5
)
  
25.3
  
19.0
Balance as of December 31, 2006
  
$
55.6
  
$
(13.7
)
$
41.9
  
14.7


F-15

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of Significant Accounting Policies – (continued)
   
Gross
Carrying
Value
  
Accumulated
Amortization
  
Net
Carrying
Value
  
Weighted
Average
Useful Life
(Years)
                       
Technology                                                                                 
     
$
2.8
     
$
(0.4
)     
$
2.4
     
10.0
Customer contracts
    
20.8
    
(4.9
)
  
15.9
  
7.7
Customer relationships
    
27.2
    
(2.4
)
  
24.8
  
18.8
Balance as of December 31, 2005
  
$
50.8
  
$
(7.7
)
$
43.1
  
14.2
Excluding the impact of any future acquisitions, the Company’s estimated annual amortization expense is approximately $5.0 million in each of the three succeeding years, decreasing to approximately $4.5 and $4.0 million in the two years thereafter.
Impairment of Long-Lived Assets
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” If impairment indicators exist, the Company performs the required analysis and records impairment charges in accordance with SFAS No. 144. In conducting its analysis, the Company compares the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Changes in economic or operating conditions impacting these estimates and assumptions could result in the impairment of long-lived assets.
The Company recorded fixed asset impairment charges related to certain operating locations within its interior segment of $10.0 million and $82.3 million in the years ended December 31, 2006 and 2005, respectively. The remaining fixed assets of the Company’s North American interior business were written down to zero in the fourth quarter of 2006 as a result of entering into the agreement relating to the divestiture of the North American interior business (Note 3, “Divestiture of Interior Business”).
In the years ended December 31, 2006 and 2005, the Company also recognized fixed asset impairment charges of $5.8 million and $15.1 million, respectively, in conjunction with its restructuring actions. In the year ended December 31, 2004, the Company recognized fixed asset impairment charges of $3.0 million related to certain facility consolidations. See Note 5, “Restructuring.” The Company has certain other facilities that have generated operating losses in recent years. The results of the related impairment analyses indicated that impairment of the fixed assets was not required. However, the Company will continue to monitor the operating plans of these facilities for potential impairment.
These fixed asset impairment charges are recorded in cost of sales in the consolidated statements of operations for the years ended December 31, 2006, 2005 and 2004.
Revenue Recognition and Sales Commitments
The Company enters into agreements with its customers to produce products at the beginning of a vehicle’s life. Although such agreements do not provide for minimum quantities, once the Company enters into such agreements, the Company is generally required to fulfill its customers’ purchasing requirements for the entire production life of the vehicle. These agreements generally may be terminated by the customer at any time. Historically, terminations of these agreements have been minimal. In certain instances, the Company may be committed under existing agreements to supply products to its customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, the Company recognizes losses as they are incurred.


F-16

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of Significant Accounting Policies – (continued)
The Company receives blanket purchase orders from its customers on an annual basis. Generally, each purchase order provides the annual terms, including pricing, related to a particular vehicle model. Purchase orders do not specify quantities. The Company recognizes revenue based on the pricing terms included in its annual purchase orders as its products are shipped to its customers. The Company is asked to provide its customers with annual cost reductions as part of certain agreements. The Company accrues for such amounts as a reduction of revenue as its products are shipped to its customers. In addition, the Company has ongoing adjustments to its pricing arrangements with its customers based on the related content, the cost of its products and other commercial factors. Such pricing accruals are adjusted as they are settled with the Company’s customers.
Amounts billed to customers related to shipping and handling costs are included in net sales in the consolidated statements of operations. Shipping and handling costs are included in cost of sales in the consolidated statements of operations.
Cost of Sales and Selling, General and Administrative Expenses
Cost of sales includes material, labor and overhead costs associated with the manufacture and distribution of the Company’s products. Distribution costs include inbound freight costs, purchasing and receiving costs, inspection costs, warehousing costs and other costs of the Company’s distribution network. Selling, general and administrative expenses include selling, research and development and administrative costs not directly associated with the manufacture and distribution of the Company’s products.
Research and Development
Costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the Company’s customers, are charged to selling, general and administrative expenses as incurred. These costs amounted to $169.8 million, $174.0 million and $197.6 million for the years ended December 31, 2006, 2005 and 2004, respectively.
Other Expense, Net
Other expense includes state and local non-income related taxes, foreign exchange gains and losses, discounts and expenses associated with the Company’s asset-based securitization and factoring facilities, losses on the extinguishment of debt (see Note 8, “Long-Term Debt”), gains and losses on the sales of fixed assets and other miscellaneous income and expense. A summary of other expense is shown below (in millions):
   
For the Year Ended
December 31,
   
2006
  
2005
  
2004
                   
Other expense                                                                                                               
     
$
101.3
     
$
41.8
     
$
38.6
Other income
    
(15.6
)
  
(3.8
)
  
—
Other expense, net
  
$
85.7
  
$
38.0
  
$
38.6
Foreign Currency Translation
With the exception of foreign subsidiaries operating in highly inflationary economies, which are measured in U.S. dollars, assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the foreign exchange rates in effect at the end of the period. Revenues and expenses of foreign subsidiaries are translated using an average of the foreign exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary’s financial statements from the functional currency to U.S. dollars are reflected in accumulated other comprehensive loss in the consolidated balance sheets.
Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of a foreign currency investment position, are included in the statements of operations as incurred.


F-17

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LEAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Summary of Significant Accounting Policies – (continued)
Stock-Based Compensation
On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” using the modified prospective transition method and recognized income of $2.9 million as a cumulative effect of a change in accounting principle related to a change in accounting for forfeitures. There was no income tax effect resulting from this adoption (Note 9, “Income Taxes”). SFAS No. 123(R) requires the estimation of expected forfeitures at the grant date and the recognition of compensation cost only for those awards expected to vest. Previously, the Company accounted for forfeitures as they occurred. The adoption of SFAS No. 123(R) did not  result in the recognition of additional compensation cost related to outstanding unvested awards, as the Company recognized compensation cost using the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for all employee awards granted after January 1, 2003. The pro forma effect on net income (loss) and net income (loss) per share, as if the fair value recognition provisions had been applied to all outstanding and unvested awards granted prior to January 1, 2003, is shown below (in millions, except per share data):
   
For