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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant ý

Filed by a Party other than the Registrant o

Check the appropriate box:

ý

 

Preliminary Proxy Statement

o

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o

 

Definitive Proxy Statement

o

 

Definitive Additional Materials

o

 

Soliciting Material Pursuant to §240.14a-12

AMERICAN REAL ESTATE PARTNERS, L.P.

(Name of Registrant as Specified in Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o

 

No fee required.

ý

 

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

(1)

 

Title of each class of securities to which transaction applies:
Depositary Units Representing Limited Partnership Interests
        

    (2)   Aggregate number of securities to which transaction applies: 16,275,863
        

    (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): $28.00 per unit determined solely for the purpose of calculating the filing fee in accordance with Rule 0-11 under the Securities Exchange Act of 1934, based on the average of the high and low prices of the Registrant's Depositary Units as reported on the New York Stock Exchange on May 3, 2005.
        

    (4)   Proposed maximum aggregate value of transaction: $455,724,164
        

    (5)   Total fee paid: $53,639
        


o

 

Fee paid previously with preliminary materials.

o

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

 

Amount Previously Paid:
        

    (2)   Form, Schedule or Registration Statement No.:
        

    (3)   Filing Party:
        

    (4)   Date Filed:
        

Copies to:
Steven L. Wasserman, Esq.
DLA Piper Rudnick Gray Cary US LLP
1251 Avenue of the Americas
New York, New York 10020-1104
Telephone: (212) 835-6000
Facsimile: (212) 835-6001



MAY    , 2005

AMERICAN REAL ESTATE PARTNERS, L.P.
100 SOUTH BEDFORD ROAD
MT. KISCO, NEW YORK 10549

PROXY STATEMENT
ACTION TO BE TAKEN BY WRITTEN CONSENT

To the holders of Depositary Units of American Real Estate Partners, L.P.:

        This proxy statement is being furnished by American Property Investors, which we refer to as API or the General Partner, to the holders of Depositary Units of American Real Estate Partners, L.P., or AREP, a Delaware limited partnership, in connection with the proposed approval of the following actions:

        1.     The issuance of up to 16,275,863 of AREP's Depositary Units representing limited partnership interests of AREP, or the Depositary Units, in connection with AREP's acquisitions from affiliates of Carl C. Icahn, the beneficial owner of approximately 86.5% of our Depositary Units, of:

        These transactions are referred to as the Acquisitions.

        2.     The amendment of our Amended and Restated Agreement of Limited Partnership, dated May 12, 1987, as amended on February 22, 1995, August 16, 1996 and May 9, 2002, or the Partnership Agreement, to provide for amendments to (i) Section 3.01—Purposes and Business; (ii) Section 4.05(c)—Additional Issuance of Units; (iii) Section 6.18—Other Matters Concerning General Partner; (iv) Sections 5.03—Distributions; (v) Section 14.13—Action Without a Meeting; (vi) add new Section 4.13—Nevada Gaming Law Disposition; and (vii) other miscellaneous changes. We refer to this action as the LP Agreement Amendments.

        3.     The amendment of the Amended and Restated Agreement of Limited Partnership of American Real Estate Holdings Limited Partnership, or AREH, dated May 21, 1987, as amended August 16, 1996 and June 14, 2002 to provide for amendments to (i) Section 3.01—Purpose and Business and (ii) Section 5.03—Distributions. We refer to this action as the OLP Agreement Amendments.

        4.     The issuance to Keith A. Meister, Chief Executive Officer of our General Partner, of options to purchase an aggregate of 700,000 Depositary Units. We refer to this action as the Grant of the Meister Option.


        In accordance with the rules of the New York Stock Exchange, on which the Depositary Units are listed, the issuance of Depositary Units to affiliates of Mr. Icahn in connection with the Acquisitions and the Grant of the Meister Option require the approval of holders of our Depositary Units.

      Sincerely,

 

 

 

/s/  
KEITH A. MEISTER      
     
Keith A. Meister
Chief Executive Officer
of American Property Investors, Inc.,
the General Partner of American
Real Estate Partners, L.P.

        This proxy statement and the accompanying Unitholder Written Consent Card, or Consent Card, are being furnished to you in connection with the solicitation of consents from holders of Depositary Units in lieu of a meeting of the holders of Depositary Units to approve the proposed matters. Only record owners of the Depositary Units at the close of business on the Record Date will be entitled to consent to the proposed matters. This proxy statement and the accompanying Unitholder Written Consent Card are being sent or given to the holders of Depositary Units commencing on or about                          , 2005.

        Any holder of Depositary Units executing a Consent Card has the power to revoke it at any time before June     , 2005 by delivering written notice of such revocation to the transfer agent, as indicated in the Consent Card.

ii



TABLE OF CONTENTS TO SCHEDULE 14A PROXY STATEMENT

 
   
  Page
 
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION   (iv )
SUMMARY TERM SHEET   1  
PROXY STATEMENT—CONSENT      
    Voting Securities, Record Date and Outstanding Units   6  
    Required Vote   6  
    Solicitation of Consents   6  
ITEM 1:   ACQUISITIONS      
    Background of the Acquisitions   6  
    AREP's Reasons for the Acquisitions   10  
    Opinion of Financial Advisor   12  
    Oil and Gas Reserve Reports   27  
    The Purchase Agreements   33  
    Additional Provisions applicable to the NEG Holding, Panaco and GB Holdings Agreement   36  
    Registration Rights Agreement   36  
    Information about AREP, NEG Holding, Panaco and GB Holdings   36  
    Pro Forma Financial Data   37  
    Financial Statements   37  
    Regulation   37  
    Certain U.S. Federal Income Tax Consequences   37  
    Accounting Treatment   38  
    The Depositary Units   38  
    Appraisal Rights   41  
ITEM 2:   AMENDMENT TO AREP'S LIMITED PARTNERSHIP AGREEMENT   41  
ITEM 3:   AMENDMENT TO AREH'S LIMITED PARTNERSHIP AGREEMENT   44  
ITEM 4:   GRANT OF OPTIONS TO KEITH MEISTER   44  
EXECUTIVE COMPENSATION   45  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   47  
INTERESTS OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE ACTED UPON AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   48  
WHERE YOU CAN FIND MORE INFORMATION   52  
DELIVERY OF DOCUMENTS TO SECURITY HOLDERS SHARING AN ADDRESS   52  
APPENDIX A: AMERICAN REAL ESTATE PARTNERS L.P.   A-1  
APPENDIX B: NEG HOLDING LLC   B-1  
APPENDIX C: PANACO, INC.   C-1  
APPENDIX D: GB HOLDINGS, INC.   D-1  
           

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APPENDIX E: UNAUDITED PRO FORMA FINANCIAL DATA FOR AMERICAN REAL ESTATE PARTNERS, L.P.   E-1  
APPENDIX F: FINANCIAL STATEMENTS   F-1  
EXHIBIT A: OPINION OF MORGAN JOSEPH & CO. INC.,
DATED JANUARY 21, 2005—NEG HOLDING
  EX-A-1  
EXHIBIT B: OPINION OF MORGAN JOSEPH & CO. INC.,
DATED JANUARY 21, 2005—PANACO
  EX-B-1  
EXHIBIT C: OPINION OF MORGAN JOSEPH & CO. INC.,
DATED JANUARY 21, 2005—GB HOLDINGS
  EX-C-1  
EXHIBIT D: NEG HOLDING ACQUISITION AGREEMENT   EX-D-1  
EXHIBIT E: PANACO MERGER AGREEMENT   EX-E-1  
EXHIBIT F: GB HOLDINGS ACQUISITION AGREEMENT   EX-F-1  
EXHIBIT G: FORM OF AMENDMENT NO. 4 TO AREP'S AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP   EX-G-1  
EXHIBIT H: FORM OF AMENDMENT NO. 3 TO AREH'S AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP   EX-H-1  

*****

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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

        Statements included in this proxy statement which are not historical in nature, are intended to be, and are hereby identified as, "forward looking statements" for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and section 21(e) of the Securities Exchange Act of 1934, as amended by Public Law 104-67.

        This proxy statement contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, many of which are beyond our ability to control or predict. Foward-looking statements may be identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "will" or words of similar meaning and include, but are not limited to, statements about the expected future business and financial performance of AREP and its subsidiaries. Among these risks and uncertainties are changes in general economic conditions, the extent, duration and strength of any economic recovery, the extent of any tenant bankruptcies and insolvencies, our ability to maintain tenant occupancy at current levels, our ability to obtain, at reasonable costs, adequate insurance coverage, risks related to our hotel and casino operations, including the effect of regulation, substantial competition, rising operating costs and economic downturns, competition for investment properties, risks related to our oil and gas operations, including costs of drilling, completing and operating wells and the effects of regulation, and other risks and uncertainties detailed from time to time in our filings with the SEC. We undertake no obligation to publicly update or review any forward-looking information, whether as a result of new information, future developments or otherwise.

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SUMMARY TERM SHEET

        This summary term sheet highlights important information about the Acquisitions discussed in greater detail elsewhere in this proxy statement. This summary includes parenthetical references to pages in other portions of this proxy statement containing a more detailed description of the topics presented in this summary term sheet. This summary term sheet may not contain all of the information that is important to you. To more fully understand the Acquisitions discussed in this proxy statement, you should read carefully this entire document and the other documents to which we have referred you.

The Acquisitions (Page 36)   We are sending this proxy statement:
    To provide you with information about the Acquisitions, which are transactions with affiliates of Mr. Icahn, the beneficial owner of approximately 86.5% of our Depositary Units, pursuant to which we will acquire:
      The managing membership interest in NEG Holding which constitutes all of the membership interest other than the membership interest already owned by NEG, which is itself 50.01% owned by us;
      Panaco, pursuant to an agreement and plan of merger; and
      Approximately 41.2% of the common stock of GB Holdings and warrants to purchase, upon the occurrence of certain events, approximately 11.3% of the fully diluted common stock of its subsidiary, Atlantic Holdings. Atlantic Holdings owns 100% of ACE Gaming, the owner and operator of The Sands.
The Parties to the Acquisition Agreements (Pages 33-35)   The Acquisitions are structured and were negotiated as three separate transactions among us, certain of our wholly-owned subsidiaries and affiliates of Mr. Icahn.
    The parties to the NEG Holding purchase agreement are:
      American Real Estate Partners, L.P. (a Delaware master limited partnership) — We are a diversified holding company engaged in a variety of businesses. Our primary business strategy is to continue to grow our core businesses, including real estate, gaming and entertainment, and oil and gas. In addition, we seek to acquire undervalued assets and companies that are distressed or in out of favor industries. Our businesses currently include rental real estate and real estate development; hotel and resort operations; hotel and casino operations; oil and gas exploration and production; and investments in equity and debt securities. We may also seek opportunities in other sectors, including energy, industrial manufacturing and insurance and asset management.
    Gascon Partners (a New York general partnership) — Gascon Partners, or Gascon, is controlled by Mr. Icahn. Its only material asset is its managing membership interest in NEG Holding.
         

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    The parties to the Panaco merger agreement are:
    AREP;
    National Offshore LP (a Delaware limited partnership) — National Offshore LP, or National Offshore, is an indirect wholly-owned subsidiary of AREP and was formed solely for the purpose of effecting the merger with Panaco;
    Highcrest Investors Corp. (a Delaware corporation) — Highcrest Investors is controlled by Mr. Icahn and is a stockholder of Panaco;
    Arnos Corp. (a Nevada corporation) — Arnos is controlled by Mr. Icahn and is a stockholder of Panaco; and
    Panaco, Inc. (a Delaware corporation) — Panaco is wholly owned by Highcrest Investors and Arnos, entities controlled by Mr. Icahn and is engaged in the exploration and production of oil and gas, primarily in the Gulf of Mexico and the Gulf Coast Region and, at December 31, 2004, owned interests in 147 wells.
    The parties to the purchase agreement for the securities of GB Holdings and Atlantic Holdings are:
    AREP;
    Cyprus, LLC (a Delaware limited liability company) — Cyprus, LLC, or Cyprus is controlled by Mr. Icahn and owns approximately 41.2% of the outstanding common stock of GB Holdings and warrants to purchase, upon the occurrence of certain events, approximately 11.3% of the fully diluted common stock of Atlantic Holdings.
    The address and phone number of our and our subsidiaries' principal executive offices are:
      American Real Estate Partners, L.P.
100 South Bedford Rd.
Mt. Kisco, NY 10549
Telephone: (914) 242-7700
    The address and phone number of the executive offices of affiliates of Mr. Icahn other than Panaco that are parties to the Acquisitions are:
      c/o Icahn Associates Corp.
767 Fifth Avenue, Suite 4700
New York, NY 10153
Telephone: (212) 702-4300
    The address and phone number of the executive offices of Panaco are:
      1400 One Energy Square
4925 Greenville Avenue
Dallas, TX 75206
Telephone: (214) 692-9211
         

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Consideration (Pages 33-35)   Upon the closing of the Acquisitions:
    AREP will acquire the managing membership interest of NEG Holding owned by Gascon in consideration for up to 11,344,828 Depositary Units with an aggregate valuation of up to $329.0 million, based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit. NEG Holding owns NEG Operating LLC, which is engaged in the exploration and production of oil and gas, primarily in Arkansas, Louisiana, Texas and Oklahoma.
    Panaco will merge with and into National Offshore in consideration for up to 4,310,345 Depositary Units with an aggregate valuation of up to $125.0 million, based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit.
    AREP will acquire approximately 41.2% of the outstanding common stock of GB Holdings and warrants to purchase, upon the occurrence of certain events, approximately 11.3% of the fully diluted common stock of Atlantic Holdings in consideration for 413,793 Depositary Units with an aggregate valuation of $12.0 million, based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit, plus up to an additional 206,897 Depositary Units with an aggregate valuation of up to $6.0 million, based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit, if Atlantic Holdings meets certain earnings targets during 2005 and 2006. GB Holdings owns Atlantic Holdings, which is the indirect owner of The Sands.
The Effects of the Acquisitions
(Page 6)
  As a result of the Acquisitions:
    We will own a managing membership interest in NEG Holding and NEG, of which we own 50.01% of the outstanding common stock, will continue to own the other membership interest in NEG Holding;
    We will own Panaco; and
    We will own approximately 77.5% of the common stock of GB Holdings and warrants to purchase, upon the occurrence of certain events, approximately 21.3% of the fully diluted common stock of Atlantic Holdings.
Determination of the Consideration (Page 33)   The number of Depositary Units to be issued in the Acquisitions was determined by reference to the closing market price of our Depositary Units on January 19, 2005, two days prior to the date on which we entered into the purchase agreements.
Reasons for the Acquisitions
(Pages 10-12)
  Among the matters considered by the Audit Committee of API, our General Partner, were the following material factors:
    The potential strategic benefits of the Acquisitions;
    The financial terms of the Acquisitions; and
    The terms and condition of the Acquisitions.
         

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    the opinions of Morgan Joseph & Co., Inc., or Morgan Joseph, as to the fairness to AREP of the consideration to be paid by AREP, from a financial point of view.
United States Federal Income Tax Consequences (Page 37)   Each of the Acquisitions is intended to qualify as a non-recognition transaction.
Accounting Treatment of Acquisitions (Page 38)   The Acquisitions will be treated for accounting purposes in a manner similar to a pooling-of-interests due to the common control by Mr. Icahn of both us and each of the companies to be acquired.
Conditions to Closing (Page 33)   The consummation of each of the Acquisitions depends on the approval by Depositary Unit holder action as required by the New York Stock Exchange and, for the acquisition of the membership interest of NEG Holding and Panaco, the receipt of oil and gas reserve reports as of January 21, 2005 and the satisfaction or waiver of a number of customary conditions to closing described in greater detail in this document. The conditions that reserve reports be received have been satisfied. The condition to the acquisition of GB Holdings common stock and Atlantic Holdings warrants, that a bank pledge encumbering the GB Holdings common stock be removed has been satisfied.
Termination of the Acquisition Agreements (Pages 33-35)   Each of the purchase agreements may be terminated:
    By either us or the sellers if the respective transaction contemplated by such agreement is not consummated by September 30, 2005; or
    By either us or the sellers if there shall have been a material breach of any covenant, representation or warranty or other agreement of the other party which has not been remedied.
Financial Information (Pages A-i, F-i)   We have provided supplemental consolidated financial statements, selected financial data, and financial information included in Management's Discussion and Analysis of Financial Condition and Results of Operations to give effect to the acquisition by us in April 2005 of TransTexas Gas Corporation, or TransTexas, in a manner similar to a pooling-of-interest due to common control ownership. Upon consummation of the Acquisitions, we will restate our historical financial statements to account for the Acquisitions in a manner similar to a pooling-of-interest due to common control by Mr. Icahn of both us and each of the companies to be acquired. In addition, we have included, as Appendices to this Proxy Statement, historical financial statements for each of us, NEG Holding, Panaco and GB Holdings.
         

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Consent Required (Page 6)   As required by the rules of the New York Stock Exchange, Item 1 must be approved by a majority-in-interest of AREP's outstanding Depositary Units. Carl C. Icahn, the Chairman of the Board of the Directors of API, beneficially owns approximately 86.5% of the outstanding Depositary Units as of the date of this proxy statement. The written consent of affiliates of Mr. Icahn, as record owners of more than a majority-in-interest of the Depositary Units is sufficient to approve the Acquisitions. Mr. Icahn currently intends to have consents executed and delivered to approve Item 1. Mr. Icahn also currently intends to have executed and delivered the appropriate consents to approve Items 2-4. Upon receipt by AREP of such completed Consent Cards consenting to the approval of each of the Acquisitions, the LP Agreement Amendments, the OLP Agreement Amendments and the Grant of the Meister Option, AREP will have received written consents sufficient to approve each of the Items.
Consent Card (Page 6)   The Board of Directors of the General Partner requests that each record owner of Depositary Units on the Record Date complete, date, sign and mail the enclosed Consent Card promptly to the address indicated therein. A postage paid return envelope is enclosed for your convenience.
Revocation of Consents (Page 6)   Any consent executed and delivered by a record owner of Depositary Units on the Record Date may be revoked at any time provided that a written, dated revocation is executed and delivered to the Partnership on or prior to the effective date. A revocation may be in any written form validly signed by a record owner of Depositary Units on the Record Date as long as it clearly states that the consent previously given is no longer effective. The revocation should be sent to the place fixed for receipt of the Consent Cards.
Appraisal Rights (Page 41)   Holders of our Depositary Units do not have appraisal rights in connection with the Acquisitions and issuance of Depositary Units in connection with the Acquisitions.

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PROXY STATEMENT—CONSENT

Voting Securities, Record Date and Outstanding Units

        Under Delaware law and under AREP's Partnership Agreement, as amended, any action that may be taken at a meeting of holders of Depositary Units may be taken without a meeting, without prior notice and without a vote, if consents in writing, setting forth the action so taken, are signed by the holders of outstanding Depositary Units having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Depositary Units entitled to vote thereon were present and voted.

        On the Record Date, there were a total of    Depositary Units outstanding, which were held by approximately 9,000 recordholders.

Required Vote

        Items 1-4 each requires the approval of the recordholders of a majority of the outstanding Depositary Units as of the close of business on the Record Date.

        Carl C. Icahn, the Chairman of the Board of the Directors of API beneficially owned approximately 86.5% of the outstanding Depositary Units as of the Record Date and currently intends to have a Consent Form executed and delivered that approves Items 1-4 with respect to all such Depositary Units. Upon receipt by AREP of completed Consent Cards from affiliates of
Mr. Icahn, as record owners of more than a majority-in-interest of the Depositary Units, consenting to the approval of each of the Items, the Partnership will have received the written consents sufficient to approve of them.

        The Board of Directors of the General Partner requests that each record owner of Depositary Units on the Record Date complete, date, sign and mail the enclosed Consent Card promptly to the address indicated therein. A postage paid return envelope is enclosed for your convenience.

        Any consent executed and delivered by a record owner of Depositary Units on the Record Date may be revoked at any time provided that a written, dated revocation is executed and delivered to the Partnership on or prior to the effective date. A revocation may be in any written form validly signed by a record owner of Depositary Units on the Record Date as long as it clearly states that the consent previously given is no longer effective. The revocation should be sent to the place fixed for receipt of the Consent Cards.

Solicitation of Consents

        The cost of soliciting consents will be borne by AREP. AREP has not engaged any entity or made any arrangements to assist it in the solicitation of consents.


ITEM 1: ACQUISITIONS

        In accordance with the rules of the New York Stock Exchange, before we can issue Depositary Units to affiliates of Mr. Icahn in connection with the Acquisitions, we must obtain the approval of holders of our Depositary Units. Each of the Acquisitions described below was separately considered and approved by the Audit Committee of API, AREP's general partner, or the Audit Committee. The Audit Committee was advised as to each transaction by its own independent legal counsel and independent financial advisor.

        The written consent of affiliates of Mr. Icahn, as record owners of more than a majority-in-interest of the Depositary Units, is sufficient to ensure approval of the Acquisitions. Mr. Icahn currently intends to have consents executed and delivered that approve the Acquisitions.

Background of the Acquisitions

        As part of its primary business strategy to grow its core businesses, including real estate, gaming and entertainment, and oil and gas, the management of AREP continually reviews investment opportunities in these businesses with the objective of making acquisitions or investments which will increase value for holders of our Depositary Units. Mr. Icahn has, from time to time, proposed that AREP acquire one or more of his businesses. At such times, and pursuant to Section 6.13 of the Partnership Agreement, the Audit Committee considers the proposed transaction and, if in AREP's

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best interest, negotiates the proposed transaction with Mr. Icahn. The Audit Committee consists of independent directors, and they are assisted by their own independent legal counsel and financial advisor.

        On October 15, 2004, Mr. Icahn sent a letter to Mr. Jack G. Wasserman, Chairman of the Audit Committee, which proposed that AREP (a) purchase the interest in NEG Holding held by Gascon, an entity owned by Mr. Icahn, and (b) purchase (1) 4,121,033 shares of GB Holdings common stock, (2) warrants, expiring July 22, 2011, to purchase an aggregate of 1,133,284 shares of common stock of Atlantic Holdings, and (3) $37,009,500 face value amount of 3% Notes due 2008 of Atlantic Holdings, which we refer to as the Atlantic Holdings Notes. Mr. Icahn's letter further proposed that in consideration of the forgoing, AREP issue to Mr. Icahn's entities a new class of convertible preferred units with a liquidation preference of $390.0 million, which would increase at a rate of 8% per annum, compounded semi-annually. Finally, Mr. Icahn's offer letter contemplated that AREP would make a capital contribution to NEG Holding and would receive an additional 1% ownership interest in NEG Holding.

        In late October and early November, 2004, the Audit Committee had several telephone meetings to discuss Mr. Icahn's proposals. During this period, the Audit Committee also interviewed potential financial advisors.

        In mid-November, 2004, Mr. Icahn and Mr. Wasserman had a telephone conversation during which Mr. Icahn proposed that AREP purchase from entities owned by Mr. Icahn (a) $38.0 million of the senior secured indebtedness of Panaco, and (b) $27.5 million face amount of 10% senior secured indebtedness of TransTexas. Panaco is and TransTexas was owned by entities owned by Mr. Icahn. At Mr. Wasserman's request, on November 18, 2004, Mr. Icahn sent a letter to Mr. Wasserman which confirmed this proposal. Mr. Wasserman circulated this letter to the other members of the Audit Committee and its counsel.

        On November 22, 2004, the Audit Committee, together with an attorney from Debevoise & Plimpton LLP, or Debevoise, the Audit Committee's independent legal counsel, met to review in detail the terms of the various transactions proposed by Mr. Icahn's October 15 and November 18 letters. During this meeting, the Audit Committee approved the engagement of Morgan Joseph as financial advisor to the Audit Committee in connection with the proposed transactions.

        During the week of November 22, 2004, representatives of Morgan Joseph conducted a site visit of The Sands, which is the primary asset of Atlantic Holdings and GB Holdings, during which it met with senior management. During this week, representatives of Morgan Joseph also held a financial due diligence conference call with members of senior management of NEG, the entity which manages NEG Holding, Panaco and TransTexas.

        On November 30, 2004, the Audit Committee met at length with representatives of Morgan Joseph and Debevoise to continue the Audit Committee's consideration of the proposed transactions. Morgan Joseph updated the Audit Committee on the status of its business due diligence investigation and financial analyses of the proposed transactions.

        During late-November and early-December, 2004, it became the understanding of the parties that the acquisitions of Panaco and TransTexas debt, as well as the proposed acquisitions of Atlantic Holdings Notes would be negotiated before the other transactions. During this period, counsel for Mr. Icahn and the Audit Committee negotiated the agreements with respect to these transactions on behalf of their respective clients.

        On December 2nd and 3rd, 2004, a Debevoise attorney visited The Sands and performed a legal due diligence review of GB Holdings and Atlantic Holdings.

        On December 3, 2004, the Audit Committee met with representatives of Morgan Joseph and Debevoise to continue the Audit Committee's consideration of the proposal by Mr. Icahn set forth in his November 18, 2004 letter to have AREP purchase debt securities of TransTexas and Panaco. Representatives of Morgan Joseph reviewed with the Audit Committee the financial terms of the proposed transactions, including the terms of the securities to be acquired, the structure of the proposed transaction, and the histories of TransTexas and Panaco. After extensive discussion, the Audit Committee determined that Mr. Wasserman, acting on behalf of the Audit Committee, should continue discussions with Mr. Icahn.

7


        On December 6, 2004, the Audit Committee met to discuss (a) Mr. Icahn's proposal that AREP acquire interests in NEG Holding and GB Holdings, and (b) the acquisitions of the TransTexas and Panaco debt securities. At this meeting, Morgan Joseph delivered its opinions to the Audit Committee, with regard to the fairness of the proposed purchase price to be paid for the TransTexas and Panaco debt securities, from a financial point of view to AREP. The Audit Committee then approved those transactions and authorized the entering into of definitive agreements. Pursuant to the definitive agreements executed later that day, AREP (a) purchased $27.5 million aggregate principal amount of term notes issued by TransTexas for cash consideration of $28,245,890.41 from entities owned by Mr. Icahn, and (b) purchased all of the membership interests of Mid River LLC, or Mid River, for an aggregate purchase price of $38,125,998.63. The assets of Mid River consist of $38.0 million principal amount of term loans outstanding under the term loan and security agreement, dated as of November 16, 2004, among Panaco, as borrower, the lenders (as defined therein) and Mid River, as administrative agent, which we refer to as the Panaco Debt. Each of the sellers and Panaco is indirectly controlled by Mr. Icahn. We refer to these transactions as the December 2004 TransTexas and Panaco Debt Acquisitions.

        On December 8, 2004, Mr. Icahn sent a letter to Mr. Wasserman proposing that AREP or a subsidiary of AREH acquire 100% of the issued and outstanding stock of Panaco and TransTexas from entities owned by Mr. Icahn for an aggregate purchase price equal to $500 million.

        On December 9 and 10, 2004, representatives of Debevoise and Morgan Joseph visited the offices of NEG and performed a legal and financial due diligence review, respectively, with respect to proposed transactions by AREP involving NEG Holding, TransTexas and Panaco.

        On December 13, 2004, the Audit Committee met to receive a preliminary report from Debevoise regarding its legal due diligence of NEG Holding, TransTexas and Panaco and to review the transactions in detail.

        On December 20, 2004, the Audit Committee met extensively with representatives of Morgan Joseph and Debevoise. At this meeting, the Audit Committee reviewed the prospects of The Sands, as well as the gaming industry in general and the gaming industry market of Atlantic City in particular. Representatives of Morgan Joseph also discussed with the Audit Committee its preliminary valuation analysis with respect to the Atlantic Holdings Notes.

        On December 27, 2004, the Audit Committee met to continue discussions of the transactions with Mr. Icahn. At this meeting, Morgan Joseph delivered its opinion to AREP, with regard to the fairness of the proposed purchase price to be paid for the Atlantic Holdings Notes, from a financial point of view. After extensive discussions, the Audit Committee authorized those transactions and authorized the entering into of a definitive agreement. Later that day, pursuant to a definitive agreement, AREP acquired $37,009,500 principal amount of Atlantic Holdings Notes for cash consideration of $36 million from entities owned by Mr. Icahn. We refer to this transaction as the December 2004 Atlantic Holdings Debt Acquisition.

        On December 29, 2004, the Audit Committee met and reviewed and considered in detail the proposed acquisitions of interests in NEG Holding, TransTexas and Panaco.

        During the week of January 3, 2005 representatives of Morgan Joseph again visited the offices of NEG and performed additional financial due diligence review with respect to proposed transactions by AREP involving NEG Holding, TransTexas and Panaco.

        On January 11, 2005, the Audit Committee met and discussed with representatives of Morgan Joseph its valuation analyses of NEG Holding, TransTexas, Panaco and the securities of GB Holdings and Atlantic Holdings. The Audit Committee then discussed with representatives of Morgan Joseph the impact of the issuance of AREP securities as consideration in the various transactions under consideration. The Audit Committee also discussed the possibility of a purchase price adjustment for each of the oil and gas properties based on a reserve report prepared by independent engineers.

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Following this meeting, Mr. Wasserman and Mr. Icahn continued negotiations regarding the various proposed transactions.

        On January 12, 2005, the Audit Committee met with representatives of Morgan Joseph and Debevoise and discussed in detail the status of negotiations with Mr. Icahn. Mr. Wasserman reported that through their extensive negotiations, the sides had made progress on an agreement with respect to the prices of the various entities but remained without an agreement on TransTexas. The Audit Committee again discussed the possibility and parameters of a purchase price adjustment for each of the oil and gas properties based on a reserve report prepared by independent engineers. Mr. Wasserman indicated that during their negotiations, Mr. Icahn had tentatively agreed to such an adjustment. The Audit Committee then discussed in detail the valuation of TransTexas with representatives of Morgan Joseph, as well as the appropriate terms for the preferred securities of AREP to be used as consideration.

        Over the course of the following week, Mr. Wasserman, on behalf of the Audit Committee, continued negotiations with Mr. Icahn, while Morgan Joseph refined its valuation analyses and Debevoise negotiated definitive purchase agreements on behalf of the Audit Committee with Mr. Icahn's legal representatives.

        On January 19, 2005, the Audit Committee met with representatives of Morgan Joseph and Debevoise and discussed the status of negotiations with Mr. Icahn. At this meeting, representatives of Morgan Joseph also updated the Audit Committee on the status of its valuation analyses of Panaco, TransTexas, NEG Holding, and the securities of GB Holdings and Atlantic Holdings. The Audit Committee also discussed the status of negotiations with respect to the preferred securities of AREP to be used as acquisition currency, as well as other terms of the transactions. Later that day, Mr. Icahn and Mr. Wasserman agreed to an "earn out" mechanism with respect to the purchase price of the securities of GB Holdings and Atlantic Holdings whereby certain of the consideration would be contingent on the future earnings of GB Holdings. Mr. Icahn and Mr. Wasserman further agreed that the securities used as consideration in the transactions would be Depositary Units, rather than a new class of preferred securities.

        On January 21, 2005, the Audit Committee met to discuss the transactions. At this meeting, representatives of Morgan Joseph delivered its opinions to AREP, with regard to the fairness to AREP of the proposed purchase price to be paid by AREP for the interests in NEG Holding, Panaco, TransTexas and the securities of GB Holdings and Atlantic Holdings, from a financial point of view. The Audit Committee then authorized these transactions and authorized the entering into of definitive agreements. Later that day, pursuant to definitive agreements, AREP and/or its wholly owned subsidiaries, agreed to acquire (a) Gascon's managing membership interest in NEG Holding for a purchase price of up to 11,344,828 of the Depositary Units with an aggregate valuation of up to $329.0 million, based on the closing market price of the Depositary Units on January 19, 2005 of $29.00 per unit, (b) TransTexas for a purchase price of up to $180.0 million in cash, (c) Panaco, Inc. for a purchase price of up to 4,310,345 of the Depositary Units with an aggregate valuation of up to $125.0 million based on the closing market price of the Depositary Units on January 19, 2005 of $29.00 per unit, and (d) 4,121,033 shares of common stock of GB Holdings and 4,121,033 warrants of Atlantic Holdings, which are exercisable for an aggregate of 1,133,284 shares of common stock of Atlantic Holdings, in each case from entities owned by Mr. Icahn, in consideration for 410,793 Depositary Units with an aggregate valuation of $12.0 million, based on the closing price of the Depositary Units, on January 19, 2005, plus up to an additional 206,897 Depositary Units, based on the closing price of the Depositary Units on January 19, 2005, if Atlantic Holdings meets certain earnings targets during 2005 and 2006.

        The purchase agreements pursuant to which AREP agreed to acquire the interests in NEG Holding, Panaco, TransTexas, and the securities of GB Holdings and Atlantic Holdings were executed

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by the parties on January 21, 2005. Later that day, AREP issued a press release announcing the execution of the purchase agreements.

        In March, 2005, the independent engineering reports with respect to TransTexas were received and Mr. Icahn submitted the required closing statement which calculated the purchase price. On April 4, 2005, the TransTexas acquisition closed for a purchase price of $180.0 million in cash. Subsequently, independent engineering reports with respect to NEG Holding and Panaco have been received.

        The Audit Committee is composed of Mr. Wasserman, Mr. James L. Nelson and Mr. William A. Leidesdorf. The members of the Audit Committee each received a fee from AREP in connection with their work with respect to the Acquisitions and the other related transactions. Mr. Wasserman received a fee of $40,000, Mr. Nelson received a fee of $20,000, and Mr. Leidesdorf received a fee of $15,000.

Approval of the Audit Committee and its Reasons for the Acquisitions

        At a meeting held on January 21, 2005, the Audit Committee determined that the Acquisitions and the purchase agreements to be executed in connection with the Acquisitions, or the Purchase Agreements, are fair to, and in the best interests of, AREP and its Depositary Unit holders, and approved the three Purchase Agreements and the Acquisitions. Among the matters considered by the Audit Committee in its deliberations were the following material factors:

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        The Audit Committee also considered the following factors, uncertainties and risks in its deliberations concerning the acquisitions of the interest in NEG Holding and Panaco. However, the Audit Committee concluded that these risks were outweighed by the potential benefits:

11


        The Audit Committee also considered the following factors, uncertainties and risks in its deliberations concerning the acquisitions of the securities of Atlantic Holdings and GB Holdings. However, the Audit Committee concluded that these risks were outweighed by the potential benefits:

        It was not practical to, and thus the Audit Committee did not, quantify, rank or otherwise assign relative weights to the wide variety of factors it considered in evaluating the Acquisitions and the Purchase Agreements, nor did the Audit Committee determine that any one factor was of particular importance in deciding that the Purchase Agreements and associated transactions were in the best interests of AREP and its Depositary Unit holders. This discussion of information and material factors considered by the Audit Committee is intended to be a summary rather than an exhaustive list. In considering these factors, individual members of the Audit Committee may have given different weight to different factors. The Audit Committee conducted an overall analysis of the factors described above, and overall considered the factors to support its decision in favor of the Acquisitions and the Purchase Agreements. The decision of each member of the Audit Committee was based upon his own judgment, in light of all of the information presented, regarding the overall effect of the Purchase Agreements and associated transactions on AREP Depositary Unit holders as compared to any potential alternative transactions or courses of action. After considering this information, the Audit Committee unanimously approved the Purchase Agreements and the transactions contemplated by the Purchase Agreements, including the Acquisitions.

Opinion of Financial Advisor

        In connection with its review and analysis of the proposed acquisitions by AREP of (i) Gascon's 50% membership interest in NEG Holding for up to 11,344,828 Depositary Units, (ii) Panaco for up to 4,310,345 Depositary Units, as well as (iii) warrants to purchase 1,133,284 shares of common stock of Atlantic Holdings, or the Warrants, and 4,121,033 shares of common stock, or GB Shares, of GB Holdings for (a) 413,793 Depositary Units and (b) the contingent issuance of 206,897 Depositary Units

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upon achievement of certain thresholds in 2005 and 2006 related to earnings before interest, taxes, depreciation and amortization, or EBITDA, from entities controlled by Mr. Icahn, the Audit Committee engaged Morgan Joseph to advise the Audit Committee and render written opinions to the Audit Committee as to the fairness to AREP from a financial point of view of the consideration to be paid by AREP in connection with each of the proposed Acquisitions. AREP selected Morgan Joseph to render such opinions because it has substantial experience in transactions similar to the proposed Acquisitions. Morgan Joseph regularly engages in the valuation of businesses and securities in connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary distributions of listed and unlisted securities and private placements. Morgan Joseph assisted the Audit Committee and rendered opinions with regard to the fairness, from a financial point of view, to AREP in connection with the consideration paid pursuant to the December 2004 TransTexas and Panaco Debt Acquisitions, the December 2004 Atlantic Holdings Debt Acquisition and the acquisition of TransTexas, and received customary fees for those services.

        At the meeting of the Audit Committee on January 21, 2005, Morgan Joseph rendered its opinions, or the Morgan Joseph Opinions, that, as of such date, and based upon the assumptions made, matters considered and limits of review set forth in its written opinions, the consideration to be paid by AREP in connection with each of the proposed Acquisitions was fair, from a financial point of view, to AREP.

        The full text of the Morgan Joseph Opinions are attached to this document as Exhibits A through C. The description of those opinions set forth in this section is qualified in its entirety by reference to the full text of the Morgan Joseph Opinions set forth in Exhibits A through C. You are urged to read the Morgan Joseph Opinions in their entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the Morgan Joseph Opinions and the review undertaken by Morgan Joseph in rendering the Morgan Joseph Opinions.

        In furnishing the Morgan Joseph Opinions, Morgan Joseph did not admit that it is an expert within the meaning of the term "expert" as used in the Securities Act of 1933, as amended, or the Securities Act, nor did it admit that any of the Morgan Joseph Opinions constitute a report or valuation within the meaning of the Securities Act.

        THE MORGAN JOSEPH OPINIONS ARE DIRECTED TO THE AUDIT COMMITTEE AND ADDRESS ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION TO BE PAID BY AREP IN CONNECTION WITH EACH OF THE PROPOSED ACQUISITIONS. THEY DO NOT ADDRESS THE MERITS OF THE UNDERLYING BUSINESS DECISIONS OF AREP TO ENGAGE IN EACH OF THE PROPOSED ACQUISITIONS AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY AREP UNITHOLDER AS TO HOW A UNITHOLDER SHOULD VOTE WITH RESPECT TO THE PROPOSED ACQUISITIONS OR ANY OTHER MATTER IN CONNECTION WITH THE PROPOSED ACQUISITIONS.

        In connection with rendering the Morgan Joseph Opinions, Morgan Joseph reviewed and analyzed, among other things, the following:

        (i)    drafts of the Purchase Agreements;

        (ii)   that certain operating agreement for NEG Holding dated as of May 1, 2001, or the Operating Agreement;

        (iii)  that certain First Amended and Restated Agreement of Partnership of Gascon, the seller of the 50% membership interest in NEG Holding;

        (iv)  the Fifth Amended Joint Plan of Reorganization of Panaco dated August 25, 2004 and certain other documents related thereto;

        (v)   certain publicly available business and financial information concerning AREP, NEG (a publicly traded company which manages NEG Holding and Panaco and which owns the other 50%

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membership interest in NEG Holding), NEG Holding, Panaco, Atlantic Holdings, GB Holdings and ACE Gaming (a wholly subsidiary of Atlantic Holdings) as well as the industries in which they each respectively operate;

        (vi)  a draft of the audited consolidated financial statements for Panaco for the twelve months ended December 31, 2003, unaudited financial information for Panaco for the ten months ended October 31, 2004, and an estimated pro forma balance sheet of Panaco as of October 31, 2004;

        (vii) certain internal information and other data relating to each of NEG Holding, Panaco, Atlantic Holdings and ACE Gaming and their respective business and prospects, including their respective budgets and projections and in the cases of NEG Holding and Panaco, internal reserve reports which provide an evaluation of their respective oil and gas reserves as of December 31, 2004, or the Internal Reserve Reports, all prepared and provided by the respective managements of NEG, Atlantic Holdings and ACE Gaming to Morgan Joseph;

        (viii) in the case of NEG Holding, reserve reports prepared by (a) Netherland, Sewell & Associates, Inc. dated February 19, 2004, (b) DeGolyer and MacNaughton dated February 17, 2004 and (c) Prator Bett, L.L.C. dated February 13, 2004, which provide an evaluation of NEG Holding's oil and natural gas reserves as of December 31, 2003, and in the case of Panaco, reserve reports prepared by (a) McCune Engineering dated January 22, 2004; (b) Netherland, Sewell & Associates, Inc. dated March 2, 2004, (c) W.D. Von Gonten & Co. dated February 9, 2004 and (d) Ryder Scott Company dated February 24, 2004, which provide an evaluation of Panaco's oil and gas reserves as of January 1, 2004, or, collectively, with the Internal Reserve Reports, the Reserve Reports;

        (ix)  certain publicly available information concerning certain other companies and the trading markets for certain of such other companies' securities;

        (x)   the financial terms of certain recent business transactions which Morgan Joseph believed to be relevant;

        (xi)  a draft dated as of January 13, 2005 of the Preliminary Offering Memorandum relating to AREP's anticipated issuance of Senior Notes due 2013; and

        (xii) certain financial information regarding Barberry Corp., or Barberry, (an entity controlled by Mr. Icahn) as guarantor of the obligations of Cyprus (the seller of the GB Shares and the Warrants) under one of the Purchase Agreements.

        Morgan Joseph also met and had discussions with certain of the officers and employees of NEG, Atlantic Holdings and ACE Gaming concerning each of their respective businesses and operations, assets, financial condition and prospects of NEG Holding, Panaco, Atlantic Holdings and ACE Gaming and undertook other studies, analyses and investigations that it deemed appropriate.

        In performing its analyses, numerous assumptions were made with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Morgan Joseph, AREP, NEG, NEG Holding, Panaco, Atlantic Holdings and ACE Gaming. Any estimates contained in the analyses performed by Morgan Joseph are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by those analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which those businesses or securities might actually be sold. Accordingly, the analyses and estimates are inherently subject to substantial uncertainty.

        In preparing the Morgan Joseph Opinions, Morgan Joseph assumed and relied upon the accuracy and completeness of all financial and other information and data used by it and did not attempt independently to verify such information, nor did Morgan Joseph assume any responsibility to do so. Morgan Joseph also assumed and relied upon the assurances of NEG, Atlantic Holdings, ACE Gaming, GB Holdings, Barberry, Cyprus and other affiliates of Icahn, that no relevant information had been omitted or remained undisclosed to Morgan Joseph, including, without limitation, with respect to the

14



Reserve Reports or the respective financial conditions of NEG Holding, Panaco, Atlantic Holdings, ACE Gaming, Cyprus or Barberry and did not attempt independently to verify any such information, nor did Morgan Joseph assume any responsibility to do so. Morgan Joseph also assumed that there existed no facts as of January 21, 2005 that would give rise to a claim by AREP against Cyprus under the related Purchase Agreement. Morgan Joseph assumed that forecasts and projections of NEG Holding, Panaco, Atlantic Holdings and ACE Gaming provided to or reviewed by it were reasonably prepared based on the best current estimates and judgments of the respective managements of such companies as to the future financial condition and results of operations of such companies. Morgan Joseph did not express an opinion related to the forecasts, the projections or the assumptions on which they were based. Morgan Joseph also assumed that there were no material changes in the assets, financial condition, results of operations, business or prospects of NEG Holding, Panaco, Atlantic Holdings and ACE Gaming since the date of the last financial statements made available to Morgan Joseph. Morgan Joseph made no independent investigation of any legal, accounting or tax matters affecting NEG Holding, Panaco, Atlantic Holdings, ACE Gaming, Cyprus, Barberry or the 3% notes due 2008 of Atlantic Holdings, or the Atlantic Holdings Notes, and Morgan Joseph assumed the completeness of all legal, accounting and tax advice given to AREP and the Audit Committee. Morgan Joseph did not conduct a comprehensive physical inspection of any of the properties and facilities related to the proposed acquisitions, nor did it make or obtain any independent evaluation or appraisal of such properties and facilities except for the Reserve Reports. The Morgan Joseph Opinions relate solely to the consideration and do not address any other terms or aspects of the Purchase Agreements or the Atlantic Holdings Notes, including without limitation, the perfection and priority of the security interest with respect to the New Notes. Morgan Joseph also assumed that the Atlantic Holdings Notes were validly issued and are enforceable in accordance with their terms. Morgan Joseph also took into account its assessment of general economic, market and financial conditions and its experience in transactions that, in whole or in part, it deemed to be relevant for purposes of its analyses, as well as its experience in securities valuation in general. In each case, Morgan Joseph made the assumptions in the Morgan Joseph Opinions with the permission of the Audit Committee.

        The Morgan Joseph Opinions necessarily are based upon economic, market, financial and other conditions as they exist and can be evaluated on the date of those opinions and do not address the fairness of the proceeds proposed to be paid by AREP in connection with the proposed Acquisitions on any other date. Morgan Joseph expressed no opinion as to the price at which the Depositary Units or any other securities will trade at any future time.

        In connection with rendering the Morgan Joseph Opinions, Morgan Joseph performed a variety of financial analyses, including those summarized below. These analyses were presented to the Audit Committee at a meeting held on January 21, 2005. The summary set forth below does not purport to be a complete description of the analyses performed by Morgan Joseph in this regard. The preparation of opinions regarding fairness involves various determinations as to the most appropriate and relevant methods of financial analyses and the application of these methods to the particular circumstances, and, therefore, such opinions are not readily susceptible to a partial analysis or summary description. Accordingly, notwithstanding the separate analyses summarized below, Morgan Joseph believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors considered by it, without considering all of its analyses and factors, or attempting to ascribe relative weights to some or all of its analyses and factors, could create an incomplete view of the evaluation process underlying the Morgan Joseph Opinions.

        The financial forecasts furnished to Morgan Joseph and used by it in some of its analyses were prepared respectively by the managements of NEG (which manages NEG Holding and Panaco), Atlantic Holdings and ACE Gaming. NEG, NEG Holding, Panaco, Atlantic Holdings and ACE Gaming do not publicly disclose financial forecasts of the type provided to Morgan Joseph in connection with its review of the proposed acquisitions, and, as a result, these financial forecasts were not prepared with a view towards public disclosure. The financial forecasts were based on numerous

15



variables and assumptions which are inherently uncertain, including, without limitation, factors related to general economic and competitive conditions, and, accordingly, actual results could vary significantly from those set forth in such financial forecasts.

        No company or transaction used in the analyses described below is identical to AREP, Atlantic Holdings, ACE Gaming, GB Holdings, NEG, NEG Holding, Panaco or the proposed acquisitions. Accordingly, an analysis of the results thereof necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the proposed acquisitions or the public trading or other values of AREP, Atlantic Holdings, ACE Gaming, GB Holdings, NEG, NEG Holding, Panaco or companies to which they are being compared. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using selected acquisition or company data. In addition, in performing such analyses, Morgan Joseph relied on projections prepared by research analysts at established securities firms and on the Reserve Reports, any of which may or may not prove to be accurate.

        The following is a summary of the material analyses performed by Morgan Joseph in connection with the Morgan Joseph Opinions.

Atlantic Holdings and GB Holdings

        The Sands is wholly owned by ACE Gaming, a wholly owned direct subsidiary of Atlantic Holdings. On an undiluted basis (which assumes that the Atlantic Holdings Notes remain outstanding and are not converted and that none of the Atlantic Holdings warrants are exercised), Atlantic Holdings is wholly and directly owned by GB Holdings. The interest in Atlantic Holdings of GB Holdings is comprised of approximately 2.9 million shares of Atlantic Holdings common stock. Prior to the sale of the GB Shares by Cyprus to AREP, GB Holdings was owned approximately 41%, 36% and 23% by Cyprus, AREH (in which AREP owns a 99% limited partnership interest) and public stockholders, respectively. Prior to the sale of the Warrants by Cyprus to AREP, Cyprus, AREH and public stockholders of GB Holdings separately owned warrants to purchase approximately 1.1 million, 1.0 million and 0.6 million shares of common stock, respectively, of Atlantic Holdings. On a fully diluted basis (which assumes that the Atlantic Holdings Notes are converted and that all of the Atlantic Holdings warrants are exercised), GB Holdings would own approximately 29% of the common stock of Atlantic Holdings. In addition, after giving effect to the exercise of all of the Atlantic Holdings warrants and conversion of all of the Atlantic Holdings Notes, and prior to the sale of the GB Shares and the Warrants by Cyprus to AREP, Cyprus, AREH and public stockholders of GB Holdings would own approximately 11%, 52% and 8%, respectively, of the common stock of Atlantic Holdings in addition to their respective ownership interests in GB Holdings. The remaining 29% of the common stock of Atlantic Holdings would be owned by GB Holdings. The primary asset of GB Holdings is its ownership of approximately 2.9 million shares of Atlantic Holdings and GB Holdings has no revenues except for certain payments it is entitled to receive from Atlantic Holdings through September 2005. Atlantic Holdings is required to make payments to GB Holdings for the required interest payments of GB Holdings on approximately $43.7 million aggregate principal amount of 11% notes due September 2005, or the GB Notes, that were not exchanged in an exchange offer transaction of GB Holdings consummated on July 22, 2004. Given that any payment made by Atlantic Holdings to GB Holdings associated with principal payments on the GB Notes would be deemed restricted payments under the indenture pursuant to the New Notes and that the ability of GB Holdings to pay the principal amount of the GB Notes at maturity in September 2005 will depend upon its ability to refinance or restructure such notes, or to derive sufficient funds from the sale of its Atlantic Holdings common stock or from a borrowing, GB Holdings has disclosed that it may be required to seek bankruptcy protection unless the GB Notes are refinanced or restructured on or prior to their maturity. Accordingly, Morgan Joseph ascribed only nominal value to the GB Shares. As such, the valuation analysis set forth below relates solely to the Warrants.

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        Selected Acquisitions Analysis.    Using publicly available information, Morgan Joseph reviewed the purchase prices and multiples paid in the following selected small to medium size mergers, acquisitions and restructurings of gaming facilities in Atlantic City that have closed since 2000, or the Selected Gaming Transactions, presented in Acquiror/Target format with date of announcement:

        Of the Selected Gaming Transactions, Morgan Joseph considered the acquisitions of the Claridge Hotel & Casino and the Resorts Casino Hotel to be the more relevant transactions because they both compete directly with The Sands in the Atlantic City market. The financial information reviewed by Morgan Joseph included the purchase prices and multiples paid by the acquiring company of the acquired company's financial results over the twelve months preceding the acquisition, or LTM, and the expected financial performance of the acquired company over the twelve months subsequent to the acquisition, or NTM. The table below summarizes the results of this analysis:


Median Multiples Observed in the Selected Gaming Transactions

Transaction Value/LTM Net Sales   0.6 x
Transaction Value/LTM EBITDA   7.2 x
Transaction Value/LTM EBIT   10.7 x
Transaction Value/NTM Net Sales   NA  
Transaction Value/NTM EBITDA   8.1 x
Transaction Value/NTM EBIT   12.6 x

        Based on this analysis, Morgan Joseph derived a valuation range of 5.5x to 6.5x 2004 estimated EBITDA or 6.4x to 7.6x LTM EBITDA to arrive at an enterprise valuation for Atlantic Holdings. This enterprise valuation range implied a range of transaction values for the Warrants from approximately $9 million to approximately $13 million, assuming conversion of all of the Atlantic Holdings Notes, and approximately $12 million to $15 million, assuming no conversion of the Atlantic Holdings Notes.

        Selected Publicly Traded Companies Analysis.    Using publicly available information, Morgan Joseph reviewed the stock prices (as of January 19, 2005) and selected market trading multiples of the following companies, or the Selected Gaming Companies:

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        The financial information reviewed by Morgan Joseph included market trading multiples exhibited by the Selected Gaming Companies with respect to their LTM or 2004 estimated financial performance. The table below provides a summary of these comparisons:


Multiples Observed of the Selected Gaming Companies

 
  Median
  Mean
 
Enterprise Value/LTM EBITDA   10.7 x 11.3 x
Enterprise Value/2004E EBITDA   10.5 x 10.7 x

        Morgan Joseph gave little weight to this analysis because it determined that there were no publicly-traded companies that were reasonably comparable to Atlantic Holdings. Each of the Selected Gaming Companies, which it determined to be the most comparable in terms of line of business, are much larger companies with many facilities often in multiple gaming markets, while Atlantic Holdings has only one facility in the Atlantic City market.

NEG Holding

        Present Value Approach to Valuing NEG Holding's Reserves.    Morgan Joseph conducted a net asset valuation analysis to derive a range of values for Gascon's 50% membership interest in NEG Holding. Morgan Joseph performed its analysis based on a variety of data sources provided by the management of NEG. Using the Internal Reserve Reports, Morgan Joseph reviewed the present value of future cash flows associated with each category of proved reserves, probable reserves and possible reserves discounted at different discount rates in order to take into account the varying degrees of risk associated with the various classes of reserves as well as the rates of returns that could reasonably be expected in the acquisition of such reserves.

 
  Discount Rate Used in the Morgan Joseph
Calculation of the Present Value of the
Net Reserves' Cash Flows

 
 
  Low Case
  High Case
 
Proved Developed Producing Reserves   10 % 10 %
Proved Developed Non-Producing Reserves   15 % 10 %
Proved Undeveloped Reserves:          
  -    NEG other than Longfellow Ranch   20 % 15 %
  -    Longfellow Ranch   15 % 15 %
Probable Reserves:          
  -    NEG other than Longfellow Ranch   40 % 25 %
  -    Longfellow Ranch   25 % 20 %
Possible Reserves:          
  -    NEG other than Longfellow Ranch   60 % 40 %
  -    Longfellow Ranch   40 % 40 %

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        NEG estimated (i) the total quantity of reserves as of December 31, 2004, (ii) the future annual production of oil and gas from such reserves, (iii) the future oil and gas production (lifting) costs and other operating expenses, (iv) future production taxes, and (v) the capital expenditures necessary to develop the reserves. In its analysis of the present value of future cash flows from reserves, Morgan Joseph also reviewed recent "strip prices" of oil and gas futures prices for the period 2005-2007 plus, based on discussions with NEG management, estimated prices in 2008 and 2009 and all subsequent years which management used in the derivation of the estimated future cash flows in the Internal Reserve Reports. The strip prices approximate the prices at which NEG Holding could sell forward its oil and gas production in each year from 2005-2007 (based on the average of the monthly strip prices for each year).

 
  2005
  2006
  2007
  2008
  2009
  After 2009
Oil ($/Bbl)   $ 44.36   $ 41.35   $ 39.57   $ 37.50   $ 35.00   $ 35.00
Gas ($/Mcf)   $ 6.18   $ 6.27   $ 5.92   $ 5.75   $ 5.50   $ 5.50

        To derive the range of net asset values for NEG Holding, Morgan Joseph first calculated the sum of the discounted future cash flows for each category of proved reserves, probable reserves and possible reserves. The estimated values of the following items were then added to (+) or subtracted from (-) the above reserve valuation range:

        Based on this analysis, Morgan Joseph estimated the net asset value of NEG Holding to range from approximately $491 million to $544 million.

        Pursuant to the Operating Agreement, a Priority Amount (as defined in the Operating Agreement), which had a balance of $148.6 million as of September 30, 2004, is to be paid to NEG on or before November 6, 2006. The Priority Amount includes all outstanding debt owed to entities owned or controlled by Icahn, including the amount of NEG's 10.75% senior notes. In addition, Guaranteed Payments (as defined in the Operating Agreement) of interest are to be paid by NEG on the outstanding Priority Amount. An amount equal to the Priority Amount and all Guaranteed Payments paid to NEG, plus any additional capital contributions made by Gascon, less any distribution previously made by NEG Holding to Gascon, is to be paid to Gascon. Management of NEG estimated such

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amount due to Gascon, or the Gascon Amount, to be approximately $278 million as of January 15, 2005.

        After the deduction of the above distributions to NEG and Gascon, one half of the remaining net asset value balance (the remaining amount attributable to Gascon based on its 50% membership interest in NEG Holding) was then added to the Gascon Amount to derive the range of values for Gascon's 50% membership interest in NEG Holding. The total amount attributable to Gascon was estimated to range from approximately $311 million to $337 million.

        Additionally, Morgan Joseph reviewed a number of financial ratios including enterprise value to estimated 2004 earnings before interest and taxes, or EBIT, enterprise value to earnings before interest, taxes, depreciation, depletion and amortization, and exploration expenses, or EBITDAX, the implied market value of reserves, or IMVR, to the physical quantities of both proved and total reserves, and IMVR to pre-tax SEC PV-10 values. IMVR is calculated as enterprise value less the value of non-oil and gas assets. The ratio of IMVR to reserves is expressed on a $/mcfe basis. The term "mcfe" means thousand cubic feet equivalents. The SEC PV-10 value is an industry standard metric that represents the present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with Securities and Exchange Commission guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%.

        Selected Publicly Traded Companies Analysis.    Using publicly available information, Morgan Joseph reviewed the stock prices (as of January 11, 2005) and selected market trading multiples of the following companies, or the Selected Oil & Gas Companies:

        The financial information reviewed by Morgan Joseph included market trading multiples exhibited by the Selected Oil & Gas Companies with respect to their LTM financial performance and reserve information.

        Morgan Joseph compared the Selected Oil & Gas Companies' multiples to the multiples implied by the proposed acquisitions. The table below provides a summary of these comparisons:


Multiples Observed from the Selected Oil & Gas Companies

 
  25th Percentile
  50th Percentile
  75th Percentile
 
Multiple of Enterprise Value:                    
  /LTM EBIT     9.7   x   10.2   x   12.2   x
  /LTM EBITDAX     5.2   x   5.9   x   7.3   x
Multiple of IMVR:                    
  /Proved Reserves ($/mcfe)   $ 2.37   $ 2.72   $ 3.34  
  /Pre-tax SEC PV-10     0.9   x   1.1   x   1.2   x

20



Multiples Implied by the Present Value Approach to Valuing NEG Holding Reserves

 
  Low
  High
 
Multiple of Enterprise Value:              
  /LTM EBIT     13.7   x   15.0   x
  /LTM EBITDAX     9.0   x   9.9   x

Multiple of IMVR:

 

 

 

 

 

 

 
  /Proved Reserves ($/mcfe)   $ 2.27   $ 2.45  
  /Pre-tax SEC PV-10     0.8   x   0.9   x

        Morgan Joseph compared the multiples implied by its present value approach of valuing NEG Holding's reserves to the multiples observed in the Selected Oil & Gas Companies taking into account a number of factors including, without limitation, the varying geographies, oil and gas mixes, and reserve lives of the Selected Oil & Gas Companies as compared to NEG Holding.

        Selected Acquisitions Analysis.    Using publicly available information, Morgan Joseph reviewed the purchase prices and multiples paid in selected mergers and acquisitions. Morgan Joseph reviewed the following acquisitions (in Target/Acquirer format, with date of announcement), or the Selected Oil & Gas Transactions:

21


        The financial information reviewed by Morgan Joseph included the purchase prices, IMVR and multiples paid by the acquiring company of the acquired company's financial results over the LTM. The operating statistics reviewed by Morgan Joseph included the quantity of reserves by category within the last fiscal year preceding the acquisition and the production of reserves for the last fiscal year preceding the acquisition. The table below summarizes the results of this analysis:


Multiples Observed from the Selected Oil & Gas Transactions

 
  25th Percentile
  50th Percentile
  75th Percentile
 
Multiple of IMVR of Proved Reserves:                    
  /Proved Reserves ($/mcfe)   $ 1.03   $ 1.31   $ 1.77  
  /Pre-tax SEC PV-10     0.7   x   0.8   x   1.0   x

Multiple of IMVR:

 

 

 

 

 

 

 

 

 

 
  /Proved Reserves ($/mcfe)   $ 1.18   $ 1.46   $ 1.93  
  /Total Reserves ($/mcfe)   $ 0.65   $ 0.87   $ 1.21  
  /Pre-tax SEC PV-10     0.7   x   0.9   x   1.0   x

Multiple of Enterprise Value:

 

 

 

 

 

 

 

 

 

 
  /LTM EBITDAX     6.3   x   8.1   x   9.4   x
  /LTM EBIT     8.8   x   12.4   x   14.4   x


Multiples Implied by the Present Value Approach to Valuing NEG Holding Reserves

 
  Low
  High
 
Multiple of IMVR of Proved Reserves:              
  /Proved Reserves ($/mcfe)   $ 1.90   $ 1.95  
  /Pre-tax SEC PV-10     0.7x     0.7x  

Multiple of IMVR:

 

 

 

 

 

 

 
  /Proved Reserves ($/mcfe)   $ 2.27   $ 2.45  
  /Total Reserves ($/mcfe)   $ 1.67   $ 1.80  
  /Pre-tax SEC PV-10     0.8   x   0.9   x

Multiple of Enterprise Value:

 

 

 

 

 

 

 
  /LTM EBITDAX     9.0   x   9.9   x
  /LTM EBIT     13.7   x   15.0   x

        Morgan Joseph compared the multiples implied by its present value approach to valuing NEG Holding's reserves to the multiples observed in the Selected Oil & Gas Transactions taking into account a number of factors including, without limitation, the varying geographies, oil and gas mixes, and reserve lives of the companies involved in the Selected Oil & Gas Transactions as compared to NEG Holding.

22


        Selected Local Asset M&A Transactions Analysis.    Using publicly available information, Morgan Joseph reviewed the purchase prices and multiples paid in selected 2004 acquisitions involving (i) oil and gas assets located at or around the geographic region of NEG Holding reserves or (ii) assets that produce a similar gas/oil ratio as that of NEG Holding. Morgan Joseph reviewed the following transactions (in Seller/Buyer format, with date of announcement), or the Selected Local Asset Transactions:

        The table below summarizes the results of this analysis:


Multiples Observed from the Selected Local Asset Transactions

 
  25th Percentile
  50th Percentile
  75th Percentile
Multiple of IMVR:                  
  /Proved Reserves ($/mcfe)   $ 1.38   $ 1.52   $ 1.87


Multiples Implied by the Present Value Approach to Valuing NEG Holding Reserves

 
  Low
  High
Multiple of IMVR:            
  /Proved Reserves ($/mcfe)   $ 2.27   $ 2.45

        Morgan Joseph compared the multiples implied by its present value approach to valuing NEG Holding's reserves to the multiples observed in the Selected Local Asset Transactions taking into account a number of factors including, without limitation, the varying geographies, oil and gas mixes, and reserve lives of the assets involved in the Selected Local Asset Transactions as compared to NEG Holding.

23


Panaco

        Present Value Approach to Valuing Panaco's Reserves.    Morgan Joseph conducted a net asset valuation analysis to derive a range of values for Panaco. Morgan Joseph performed its analysis based on a variety of data sources provided by the management of NEG. Using the Internal Reserve Reports, Morgan Joseph reviewed the present value of future cash flows associated with each category of proved reserves, probable reserves and possible reserves discounted at different discount rates in order to take into account the varying degrees of risk associated with the various classes of reserves as well as the rates of returns that could reasonably be expected in the acquisition of such reserves.

 
  Discount Rate Used in the Morgan Joseph
Calculation of the Present Value of the
Net Reserves' Cash Flows

 
 
  Low Case
  High Case
 
Proved Developed Producing Reserves   10 % 10 %
Proved Developed Non-Producing Reserves   15 % 10 %
Proved Undeveloped Reserves   20 % 15 %
Probable Reserves   50 % 40 %
Possible Reserves:   NA (1) NA (1)

(1)
Morgan Joseph did not assign any value to Panaco's Possible Reserves.

        NEG management estimated (i) the total quantity of reserves as of December 31, 2004, (ii) the future annual production of oil and gas from such reserves, (iii) the future oil and gas production (lifting) costs and other operating expenses, (iv) future production taxes, and (v) the capital expenditures necessary to develop the reserves. In its analysis of the present value of future cash flows from reserves, Morgan Joseph also reviewed recent "strip prices" of oil and gas futures prices for the period 2005-2007 plus, based on discussions with NEG management, estimated prices in 2008 and 2009 and all subsequent years which management used in the derivation of the estimated future cash flows in the Internal Reserve Reports. The strip prices approximate the prices at which Panaco could sell forward its oil and gas production in each year from 2005-2007 (based on the average of the monthly strip prices for each year).

 
  2005
  2006
  2007
  2008
  2009
  After
2009

Oil ($/Bbl)   $ 44.36   $ 41.35   $ 39.57   $ 37.50   $ 35.00   $ 35.00
Gas ($/Mcf)   $ 6.18   $ 6.27   $ 5.92   $ 5.75   $ 5.50   $ 5.50

        To derive the range of net asset values for Panaco, Morgan Joseph first calculated the sum of the discounted future cash flows for each category of proved reserves, probable reserves and possible reserves. The estimated values of the following items were then added to (+) or subtracted from (-) the above reserve valuation range:

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        Based on this analysis, Morgan Joseph estimated the net asset value of Panaco to range from approximately $117 million to $139 million.

        Additionally, Morgan Joseph reviewed a number of financial ratios including enterprise value to estimated 2004 EBIT, enterprise value to EBITDAX, IMVR to the physical quantities of both proved and total reserves, and IMVR to pre-tax SEC PV-10 values.

        Selected Publicly Traded Companies Analysis.    Using publicly available information, Morgan Joseph reviewed the stock prices (as of January 11, 2005) and selected market trading multiples of the following companies, or the Other Selected Oil & Gas Companies:

        The financial information reviewed by Morgan Joseph included market trading multiples exhibited by the Other Selected Oil & Gas Companies with respect to their LTM financial performance and reserve information.

        Morgan Joseph compared the Other Selected Oil & Gas Companies' multiples to the multiples implied by the proposed acquisitions. The table below provides a summary of these comparisons:

Multiples Observed from by the Other Selected Oil & Gas Companies
 
  25th Percentile
  50th Percentile
  75th Percentile
Multiple of Enterprise Value:                  
  /LTM EBIT     7.6x     9.5x     10.1x
  /LTM EBITDAX     3.7x     3.8x     4.0x
Multiple of IMVR:                  
  /Proved Reserves ($/mcfe)   $ 2.40   $ 2.75   $ 3.26
  /Pre-tax SEC PV-10     1.0x     1.1x     1.1x
Multiples Implied by the Present Value Approach to Valuing Panaco Reserves
 
  Low
  High
Multiple of Enterprise Value:            
  /LTM EBIT     9.2x     10.7x
  /LTM EBITDAX     4.1x     4.7x
Multiple of IMVR:            
  /Proved Reserves ($/mcfe)   $ 2.64   $ 3.04
  /Pre-tax SEC PV-10     0.8x     0.9x

        Morgan Joseph compared the multiples implied by its present value approach of valuing Panaco's reserves to the multiples observed in the Other Selected Oil & Gas Companies taking into account a number of factors including, without limitation, the varying geographies, oil and gas mixes, and reserve lives of the Other Selected Oil & Gas Companies as compared to Panaco.

25



        Selected Acquisitions Analysis.    Using publicly available information, Morgan Joseph reviewed the purchase prices and multiples paid in the Selected Oil & Gas Transactions. The financial information reviewed by Morgan Joseph included the purchase prices, IMVR and multiples paid by the acquiring company of the acquired company's financial results over the LTM. The operating statistics reviewed by Morgan Joseph included the quantity of reserves by category (proved developed, proved undeveloped, estimated probable and possible) within the last fiscal year preceding the acquisition and the production of reserves for the last fiscal year preceding the acquisition. The table below summarizes the results of this analysis:

Multiples Implied by the Present Value Approach to Valuing Panaco Reserves
 
  Low
  High
Multiple of IMVR of Proved Reserves:            
  /Proved Reserves ($/mcfe)   $ 2.07   $ 2.28
  /Pre-tax SEC PV-10     0.6x     0.7x
Multiple of IMVR:            
  /Proved Reserves ($/mcfe)   $ 2.64   $ 3.04
  /Total Reserves ($/mcfe)   $ 1.38   $ 1.59
  /Pre-tax SEC PV-10     0.8x     0.9x
Multiple of Enterprise Value:            
  /LTM EBITDAX     4.1x     4.7x
  /LTM EBIT     9.2x     10.7x

        Morgan Joseph compared the multiples implied by its present value approach to valuing Panaco's reserves to the multiples observed in the Selected Oil & Gas Transactions taking into account a number of factors including, without limitation, the varying geographies, oil and gas mixes, and reserve lives of the companies involved in the Selected Oil & Gas Transactions as compared to Panaco.

        Selected Local Asset M&A Transactions Analysis.    Using publicly available information, Morgan Joseph reviewed the purchase prices and multiples paid in selected mergers and acquisitions involving (i) oil and gas assets located at or around the geographic region of Panaco reserves (offshore Gulf of Mexico) or (ii) assets that produce a similar percentage of gas/oil as those of Panaco. Morgan Joseph reviewed the following transactions (in Seller/Buyer format, with date of announcement), or the Other Selected Local Asset Transactions:

        The table below summarizes the results of this analysis:

Multiples Observed from the Other Selected Local Asset Transactions
 
  25th Percentile
  50th Percentile
  75th Percentile
Multiple of IMVR:                  
  /Proved Reserves ($/mcfe)   $ 1.33   $ 1.43   $ 1.50

26


Multiples Implied by the Present Value Approach to Valuing Panaco Reserves
 
  Low
  High
Multiple of IMVR:            
  /Proved Reserves ($/mcfe)   $ 2.64   $ 3.04

        Morgan Joseph compared the multiples implied by its present value approach to valuing Panaco's reserves to the multiples observed in the Other Selected Local Asset Transactions taking into account a number of factors including, without limitation, the varying geographies, oil and gas mixes, and reserve lives of the assets involved in the Other Selected Local Asset Transactions as compared to Panaco.

        AREP and Morgan Joseph entered into letter agreements dated October 22, 2004, December 6, 2004, December 6, 2004, December 27, 2004 and December 29, 2004 relating to the services to be provided by Morgan Joseph in connection with the December 2004 TransTexas and Panaco Debt Acquisitions, the December 2004 Atlantic Holdings Debt Acquisition, the acquisition of TransTexas, and the proposed Acquisitions. AREP paid Morgan Joseph a customary fee following the delivery of the Morgan Joseph Opinions. AREP also agreed to reimburse Morgan Joseph for its reasonable out-of-pocket expenses incurred in connection with its engagement, including certain fees and disbursements of its legal counsel. Under a separate letter agreement, AREP agreed to indemnify Morgan Joseph against liabilities relating to or arising out of its engagements, including liabilities under the securities laws.

Oil and Gas Reserve Reports

        The following summarizes reports with respect to oil and gas reserves that were prepared in connection with the proposed acquisitions of NEG Operating and Panaco.

NEG Operating LLC

        In recommending the proposed purchase of the interest in NEG Holding from Cyprus and determining the consideration to be paid, the Audit Committee considered reports prepared by the engineering firms, Prator Bett, L.L.C., DeGolyer and MacNaughton and Netherland, Sewell & Associates, Inc.

        Prator Bett is comprised of experienced engineers familiar with the subject properties. Prator Bett was selected to prepare the January 31, 2005 reserve report because of its expertise and NEG Holding's satisfaction with prior services provided to NEG Operating. During the past two years, NEG Operating paid approximately $57,000 to the firm as consideration for annual reserve reports. We intend to obtain future reports and evaluations from Prator Bett. Except for the provision of professional services on a fee basis, Prator Bett has no commercial arrangement with NEG Operating or any other person or company involved in the interests which are the subject of the report.

        The report provides an assessment of the Proved, Probable and Possible reserves of certain oil and gas properties owned by NEG Operating, as of January 31, 2005. The report was prepared as an independent assessment in connection with our purchase of the remaining interest in NEG Holding from Cyprus. Pursuant to the NEG Holding purchase agreement, the number of our Depositary Units to be issued in connection with the acquisition of the interest in NEG Holding was subject to reduction based in part on the results of the report.

        Since December 31, 2000, Prator Bett has prepared annual reports for NEG Operating covering Proved and Probable reserves and future net revenue of the properties reviewed in the January 31, 2005 report. The most recent report prepared by Prator Bett was as of December 31, 2004. The reserve estimate parameters used in the December 31, 2004 report are identical to those used in the January 31, 2005 report. Possible reserves were not considered in the December 31, 2004 report, but are included in the January 31, 2005 report.

27


        Prator Bett was instructed to generate a report as of January 31, 2005 of NEG Operating's reserves to enable Prator Bett to present the estimated value of NEG Operating's reserves. The scope of instructions for the January 31, 2005 report was not limited or varied as compared to the annual reports, except to request the inclusion of Possible reserves.

        In preparing the reserve report, Prator Bett projected production rates and timing of development expenditures and analyzed available geological, production and engineering data. Estimates of natural gas and oil reserves are inherently imprecise. The process requires various assumptions, including natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from estimates. Any significant variance could materially affect the estimated quantities and net present value of reserves.

        Extrapolation of performance history (production, water-cut, and/or pressure) was utilized for producing properties where sufficient history was available to suggest decline trends. Reserves assigned to the remaining producing properties, the nonproducing zones and the undeveloped locations were necessarily estimated utilizing volumetric calculations and analogy to nearby production. Estimates such as these are inherently subject to more variation than are estimates which are based on established decline trends.

        The Prator Bett reserve report concluded that NEG Operating's estimated net Proved and Unproved natural gas and oil reserves and the pre-tax net present value of its reserves at January 31, 2005 were as set forth in the following table. The pre-tax present value is not intended to represent the current market value of the estimated natural gas and oil reserves that NEG Operating owns. The pre-tax net present value of future cash flows attributable to its reserves was based upon specific oil and gas pricing schedules provided by AREP. These prices represent a specific five-year schedule of the Henry Hub cash price for gas and the Koch WTI posted price for oil. Adjustments were made to these pricing levels based on historical data on a property-by-property basis for items such as transportation, basis differentials, marketing, the quality and gravity of the crude oil, and the heating value of the gas. The Henry Hub cash price and Koch WTI posted price were forecasted to be $6.18 per Mcf of gas and $44.36 per barrel of oil in 2005. The cash pricing levels for the year 2009 of $35.00 per barrel and $5.50 per MMBtu were held constant throughout the remaining life of the properties.

 
  Total Proved Reserves as of January 31, 2005
 
  Developed
   
   
 
  Producing
  Nonproducing
  Undeveloped
  Total Proved
Natural Gas (MMcf)   4,723.3   1,567.0   1,083.4   7,373.7
Oil and condensate (bbls)   167,413   67,306   40,314   275,033
Total proved reserves (MMcfe)   5,727.8   1,970.8   1,325.3   9,023.9
Pre-tax net present value, Disc. at 10% ($)   13,366,507   3,787,811   2,736,602   19,890,920
 
  Total Unproved Reserves as of January 31, 2005
 
  Probable
  Possible
Natural Gas (MMcf)   2,672.4   640.9
Oil and condensate (bbls)   95,452   7,496
Total proved reserves (MMcfe)   3,245.1   685.9
Pre-tax net present value, Disc. at 10% ($)   5,088,559   457,426

28


        DeGolyer and MacNaughton is a leading international petroleum reservoir consultant and is familiar with the subject properties. DeGolyer and MacNaughton was selected to prepare the January 31, 2005 reserve report because of its expertise and NEG Operating's satisfaction with its prior services. During the past two years, NEG Operating paid approximately $96,173 to the firm as consideration for annual reserve reports. We intend to obtain future reports and evaluations from DeGolyer and MacNaughton. Except for the provision of professional services on a fee basis, DeGolyer and MacNaughton has no commercial arrangement with NEG Operating or any other person or company involved in the interests which are the subject of this report.

        The report provides an assessment of the Proved, Probable, and Possible reserves of certain oil and gas properties owned by NEG Operating as of January 31, 2005. The report was prepared as an independent assessment in connection with the purchase of the interest in NEG Holding from Cyprus. Pursuant to the NEG Holding purchase agreement, the number of our Depositary Units to be issued in connection with the acquisition of the interest in NEG Holding is subject to reduction based in part on the results of the reserve report.

        Since August 12, 2003, DeGolyer and MacNaughton has prepared semiannual and annual reserve reports, SEC compliant reserve evaluations and property appraisals for NEG Operating. The most recent annual report prepared by DeGolyer and MacNaughton is dated as of December 31, 2004. The reserve estimate parameters used in the December 31, 2004 report are identical to those used in the January 31, 2005 report. Possible reserves were not considered in the December 31, 2004 annual report, but are included in the January 31, 2005 report.

        DeGolyer and MacNaughton was instructed to generate a report as of January 31, 2005 of NEG Operating's reserves to enable DeGolyer and MacNaughton to present the estimated value of NEG Operating's reserves. The scope of the instructions for the January 31, 2005 report was not limited or varied as compared to the semiannual and annual reports, except to request the inclusion of Possible reserves.

        In preparing this reserve report, DeGolyer and MacNaughton projected production rates and timing of development expenditures and analyzed available geological, production and engineering data. The estimates for Proved Reserves used initial prices and costs and future price and cost assumptions specified by NEG Operating. Estimates of natural gas and oil reserves are inherently imprecise. The process requires various assumptions, including natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from estimates. Any significant variance could materially affect the estimated quantities and net present value of reserves.

        The DeGolyer and MacNaughton reserve report concluded that NEG Operating's estimated net Proved, Probable and Possible natural gas and oil reserves at January 31, 2005 were as set forth in the following table. Values for Proved and Probable reserves were based on projections of estimated future production and revenue prepared for these properties with no risk adjustment applied to the Probable

29



reserves. Probable reserves involve substantially higher risks than Proved reserves. Revenue values for Probable reserves have not been adjusted to account for such risks.

 
  Net Reserves
 
  Oil and Condensate (Mbbl)
  Sales Gas (MMcf)
Proved        
  Developed Producing   32   31,074
  Developed Nonproducing   47   12,528
   
 
Total Developed   79   43,602
    Undeveloped   539   83,890
   
 
Total Proved   618   127,492
Probable (Not Risk Adjusted)   570   32,011
Possible (Not Risk Adjusted)   1,513   100,918

        In the preparation of these reserves estimates, interest reversions indicated by NEG Operating were taken into account.

        Netherland, Sewell is a leading international petroleum reservoir consultant and is familiar with the subject properties. Netherland, Sewell was selected to prepare the February 1, 2005 reserve report because of its expertise and NEG Operating's satisfaction with its prior services. During the past two years, NEG Operating paid approximately $166,053 to the firm as consideration for annual reserve reports. We intend to obtain future reports and evaluations from Netherland, Sewell. Except for the provision of professional services on a fee basis, Netherland, Sewell has no commercial arrangement with NEG Operating or any other person or company involved in the interests which are the subject of this report.

        The report provides an assessment of the Proved, Probable, and Possible reserves of certain oil and gas properties owned by NEG Operating as of February 1, 2005. The report was prepared as an independent assessment in connection with our purchase of an interest in NEG Holding from Cyprus. Pursuant to the NEG Holding purchase agreement, the number of our Depositary Units to be issued in connection with the acquisition of the interest in NEG Holding was subject to reduction based in part on the results of the reserve report.

        Since 2001, Netherland, Sewell has prepared annual reserve reports, SEC compliant reserve evaluations and property appraisals for NEG Operating. The most recent annual report prepared by Netherland, Sewell was as of December 31, 2004. The reserve estimate parameters used in the December 31, 2004 report are identical to those used in the February 1, 2005 report. Possible reserves were not considered in the December 31, 2004 report, but are included in the February 1, 2005 report.

        Netherland, Sewell was instructed to generate a report of NEG Operating's reserves to enable Netherland, Sewell to present the estimated value of NEG Operating's reserves. The scope of the instructions for the February 1, 2005 report was not varied or limited as compared to the semiannual and annual reports, except to request the inclusion of Possible reserves.

        In preparing this reserve report, Netherland, Sewell projected production rates and timing of development expenditures and analyzed available geological, production and engineering data. The estimates for proved reserves used initial prices and costs and future price and cost assumptions specified by NEG Operating. Oil prices are based on NYMEX West Texas Intermediate process, and gas prices are based on NYMEX Henry Hub prices. Oil prices are adjusted by lease for quality, transportation fees, and regional price differentials. Gas prices are adjusted by lease for energy content, transportation fees, and regional price differentials. Estimates of natural gas and oil reserves are

30



inherently imprecise. The process requires various assumptions, including natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from estimates. Any significant variance could materially affect the estimated quantities and net present value of reserves.

        The Netherland, Sewell reserve report concluded that NEG Operating's estimated net Proved natural gas and oil reserves and future net revenue of NEG Operating's reserves at January 31, 2005 was as set forth in the following table. The oil reserves shown include crude oil and condensate. Oil volumes are expressed in barrels that are equivalent to 42 United States gallons. Gas volumes are expressed in thousands of standard cubic feet (MCF) at the contract temperature and pressure bases. Oil prices are adjusted for quality, transportation fees and regional price differentials. Gas prices are adjusted by lease for energy content, transportation fees and regional price differentials.

        The estimated reserves and future revenue shown are for Proved developed producing, Proved developed non-producing, Proved undeveloped, Probable, and Possible reserves. Any value which could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated was not included.

 
   
  Net Reserves
  Future Net Revenue ($)
Category

  Oil
(Barrels)

  Gas
(MCF)

  Total
  Present Worth
At 10%

Proved Developed                
Producing   3,040,278   54,826,203   304,542,500   188,680,500
Non-Producing   296,040   4,654,101   28,368,400   9,052,700
Proved Undeveloped   548,434   19,291,373   71,546,400   28,580,700
   
 
 
 
  Total Proved   3,884,752   78,771,677   404,457,300   226,313,900
Probable(1)   168,082   13,498,858   50,159,700   22,390,900
Possible(1)   434,928   10,186,215   66,020,500   38,085,400

(1)
These reserves and future revenue are not risk-weighted. Probable reserves are those reserves which geological and engineering data demonstrate to be potentially recoverable, but where some element of risk or insufficient data prevent classification as proved. Possible reserves are those speculative reserves estimated beyond proved and probable reserves where geologic and engineering data suggest the presence of additional reserves, but where the risk is relatively high.

Panaco

        Netherland, Sewell was selected to prepare the February 1, 2005 reserve report because of its expertise and Panaco's satisfaction with its prior services. During the past two years, Panaco paid approximately $29,759 to the firm as consideration for annual reserve reports. We intend to obtain future reports and evaluations from Netherland, Sewell. Except for the provision of professional services on a fee basis, Netherland, Sewell has no commercial arrangement with Panaco or any other person or company involved in the interests which are the subject of this report.

        The report provides an assessment of the Proved, Probable, and Possible reserves of certain oil and gas properties owned by Panaco, as of February 1, 2005. The report was prepared as an independent assessment in connection with the purchase of Panaco. Pursuant to the Panaco purchase agreement, the number of our Depositary Units to be issued in connection with our acquisition of Panaco is subject to reduction based in part on the results of the reserve report.

        Since 2004, Netherland, Sewell has prepared annual reserve reports, SEC compliant reserve evaluations and property appraisals for Panaco. The most recent annual report prepared by Netherland,

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Sewell was as of December 31, 2004. The reserve estimate parameters used in the December 31, 2004 report are identical to those used in the February 1, 2005 report. Probable and Possible reserves were not considered in the December 31, 2004 report, but are included in the February 1, 2005 report.

        Netherland, Sewell was instructed to generate a report of Panaco's reserves to enable us to present the estimated value of our reserves. The scope of the instructions for the February 1, 2005 report was not varied or limited as compared to the annual reports, except to request the inclusion of Probable and Possible reserves.

        In preparing this reserve report, Netherland, Sewell projected production rates and timing of development expenditures and analyzed available geological, production and engineering data. The estimates for Proved reserves used initial prices and costs and future price and cost assumptions that were specified by Panaco. Estimates of natural gas and oil reserves are inherently imprecise. The process requires various assumptions, including natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes, and availability of funds. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from estimates. Any significant variance could materially affect the estimated quantities and net present value of reserves.

        The Netherland, Sewell reserve report concluded that Panaco's estimated net Proved natural gas and oil reserves and the future net revenue of Panaco's reserves at February 1, 2005 were as set forth in the following table. The report was prepared using oil and gas price parameters specified by Panaco. The oil reserves shown include crude oil and condensate. Oil volumes are expressed in barrels that are equivalent to 42 United States gallons. Gas volumes are expressed in thousands of standard cubic feet (MCF) at the contract temperature and pressure bases. Oil prices are adjusted by lease for quality, transportation fees, and regional price differentials. Gas prices are adjusted by lease for energy content, transportation fees, and regional price differentials.

        The estimated reserves and future revenue shown are for proved developed producing, Proved developed non-producing, Proved undeveloped, Probable, and Possible reserves. Any value which could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated was not included.

 
   
  Net Reserves
  Future Net Revenue ($)
Category

  Oil
(Barrels)

  Gas
(MCF)

  Total
  Present Worth
At 10%

Proved Developed                
Producing   1,719,398   4,896,807   57,509,400   50,523,400
Non-Producing   634,910   8,320,946   43,444,300   31,111,600
Proved Undeveloped   2,273,942   11,614,761   78,124,300   45,835,900
Total Proved   4,628,250   24,832,514   179,078,000   127,470,900
Probable(1)   4,355,739   14,241,397   183,919,500   112,849,100
Possible(1)   19,225,750   19,640,851   701,345,500   334,742,700

(1)
These reserves and future revenue are not risk-weighted. Probable reserves are those reserves which geological and engineering data demonstrate to be potentially recoverable, but where some element of risk or insufficient data prevent classification as proved. Possible reserves are those speculative reserves estimated beyond proved and probable reserves where geologic and engineering data suggest the presence of additional reserves, but where the risk is relatively high.

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The Purchase Agreements

        The following describes the terms of the Acquisitions. None of the pending Acquisitions is conditioned upon the closing of the others. We may not complete all or any of the pending Acquisitions.

NEG Holding LLC

        On January 21, 2005, we entered into a purchase agreement with Gascon Partners, Cigas Corp. and Astral Gas Corp., the general partner of Gascon, or the NEG Agreement, pursuant to which we will purchase Gascon's managing membership interest in NEG Holding for a purchase price of up to 11,344,828 Depositary Units with an aggregate valuation of up to $329.0 million based on the closing market price of the Depositary Units, on January 19, 2005 of $29.00 per unit. The number of Depositary Units to be issued is subject to reduction based upon NEG Holding's oil and gas reserve reports as of January 31, 2005, prepared by an independent reserve engineering firm. However, if the "Adjusted Purchase Amount" pursuant to the Panaco Agreement, described below, exceeds $125.0 million and/or the "Adjusted Purchase Amount" pursuant to our agreement to purchase TransTexas exceeds $180.0 million, the amounts of such excess will be applied to any reduction of the number of Depositary Units to be issued under the NEG Agreement. Upon the closing of the NEG Agreement, AREP will contribute the NEG Holding membership interest to American Real Estate Holdings Limited Partnership, or AREH, and AREH will contribute the membership interest to AREP Oil & Gas LLC, a recently formed wholly-owned subsidiary. The other member of NEG Holding is NEG. The purchase agreement contains customary representations and warranties, indemnification provisions, covenants regarding the conduct of business prior to closing and conditions to closing.

        The closing of the NEG Agreement is subject to the satisfaction or waiver of certain conditions, including, for each of the parties, no action or proceeding by any governmental authority or other person shall have been instituted or threatened which (1) might have a material adverse effect on NEG Holding or (2) could enjoin, restrain or prohibit, or could result in substantial damages in respect of, any provision of the NEG Agreement or the consummation of the transactions contemplated by it. The closing of the NEG Agreement is also subject to the approval by all Depositary Unit holder action required by the NYSE.

        For AREP, the closing of the NEG Agreement is also subject to (1) the satisfaction or waiver of the condition that no material adverse change with respect to NEG Holding shall have occurred and no event shall have occurred which, in the reasonable judgment of AREP, is reasonably likely to have a material adverse effect and (2) the receipt of NEG Holding's oil and gas reserve reports. Affiliates of Mr. Icahn have agreed to indemnify AREP against, and agreed to hold it harmless from, any and all losses it incurs associated with any breach of, or any inaccuracy in, any representation or warranty made by Gascon in the purchase agreement, or any breach of or failure by Gascon to perform any of its respective covenants or obligations set out or contemplated in the NEG Agreement.

        The NEG Agreement may be terminated if the transaction is not consummated by September 30, 2005 or by either us or the sellers if there shall have been a material breach of any covenant, representation or warranty or other agreement of the party which has not been remedied.

        The foregoing summary description of the NEG Agreement is subject in its entirety to the terms of the NEG Agreement, a copy of which is attached hereto as Exhibit D.

Panaco, Inc.

        On January 21, 2005, we and National Offshore LP, the 1% general partnership interest of which and the 99% limited partnership interest of which are owned, respectively, by two limited liability companies, each of which is a wholly-owned subsidiary of AREP, entered into an agreement and plan of merger with Highcrest, Arnos and Panaco, or the Panaco Agreement, pursuant to which Panaco will merge with and into National Offshore and all of the common stock of Panaco will be canceled and

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cease to exist in exchange for up to 4,310,345 Depositary Units with an aggregate valuation of up to $125.0 million based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit. The number of Depositary Units to be issued is subject to reduction based upon Panaco's oil and gas reserve reports as of February 1, 2005, prepared by an independent reserve engineering firm. However, if the "Adjusted Purchase Amount," as defined, pursuant to the NEG Agreement exceeds $329.0 million and/or the "Adjusted Purchase Amount," pursuant to our agreement to purchase TransTexas exceeds $180.0 million, the amounts of such excess will be applied to reduce the reduction of the number of Depositary Units to be issued under the Panaco Agreement. Immediately following the merger, AREP will contribute each of the general partner and limited partner of National Offshore to AREH and AREH will contribute each of these limited liability companies to AREP Oil & Gas. The Panaco Agreement contains customary representations and warranties, indemnification provisions, covenants regarding the conduct of business prior to closing and conditions to closing.

        The closing of the merger is subject to the satisfaction or waiver of certain conditions, including, for each of the parties, no action or proceeding by any governmental authority or other person shall have been instituted or threatened which (1) might have a material adverse effect on Panaco or (2) could enjoin, restrain or prohibit, or could result in substantial damages in respect of, any provision of the Panaco Agreement or the consummation of the transactions contemplated by the Panaco Agreement. The closing of the Panaco Agreement is also subject to the approval by all Depositary Unit holder action required by the NYSE.

        For National Offshore, the closing of the merger is also subject to (1) the satisfaction or waiver of the condition that no material adverse change with respect to Panaco shall have occurred and no event shall have occurred which, in the reasonable judgment of National Offshore, is reasonably likely to have a material adverse effect and (2) the receipt of Panaco's oil and gas reserve reports. Highcrest and Arnos have agreed to indemnify National Offshore against, and agreed to hold it harmless from, any and all losses it incurs associated with any breach of or any inaccuracy in any representation or warranty made by Highcrest and Arnos in the Panaco Agreement, or any breach of or failure by Highcrest and Arnos to perform any of their covenants or obligations set out or contemplated in the merger agreement.

        The Panaco Agreement may be terminated if the transaction is not consummated by September 30, 2005 or by either us or the other parties to the agreement if there shall have been a material breach of any covenant, representation or warranty or other agreement of the other party which has not been remedied.

        The foregoing summary description of the Panaco Agreement is subject in its entirety to the terms of the Panaco Agreement, a copy of which is attached hereto as Exhibit E.

GB Holdings, Inc. and Atlantic Coast Entertainment Holdings, Inc. (The Sands)

        On January 21, 2005, we entered into a purchase agreement with Cyprus, or The Sands Agreement, pursuant to which we will purchase 4,121,033 shares of common stock of GB Holdings and 4,121,033 Atlantic Holdings warrants which are exercisable, upon the occurrence of certain events, for an aggregate of 1,133,284 shares of common stock of Atlantic Holdings. Upon the closing of this transaction, we will transfer all of these securities to AREP Sands Holding LLC, a recently formed wholly-owned subsidiary of AREH.

        The purchase price for these securities is 413,793 Depositary Units with an aggregate valuation of $12.0 million based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit, plus up to an additional 206,897 Depositary Units with an aggregate valuation of $6.0 million based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit, if for each of fiscal 2005 and 2006 the EBITDA for Atlantic Holdings is equal to or greater than $24 million.

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        EBITDA means, for any period, as certified by Atlantic Holdings' independent registered public accounting firm and its Chief Financial Officer, Consolidated Net Income for the period plus the following to the extent deducted in calculating such Consolidated Net Income: (1) Consolidated Interest Expense, (2) provision for all taxes based on income, profits or capital and (3) depreciation and amortization (including, but not limited to, amortization of goodwill and intangibles).

        For purposes of determining EBITDA, allocations of expenses will be made on a basis consistent with past practice. Consolidated Net Income means, for any period, the net income (loss) of Atlantic Holdings and its subsidiaries, determined on a consolidated basis in accordance with generally accepted accounting principles; provided that there will not be included in Consolidated Net Income: (1) any net income (loss) of any person acquired by Atlantic Holdings or a subsidiary in a transaction accounted for in a manner similar to a pooling of interests for any period prior to the date of such acquisition; (2) any gain or loss realized upon the sale or other disposition of any asset of Atlantic Holdings or any subsidiary (including pursuant to any sale/leaseback transaction) that is not sold or otherwise disposed of in the ordinary course of business; (3) any item classified as an extraordinary, unusual or nonrecurring gain, loss or charge; (4) the cumulative effect of a change in accounting principles; (5) any unrealized gains or losses in respect of any foreign exchange contract, currency swap agreement or other similar agreement or arrangement (including derivative agreements or arrangements); and (6) any unrealized foreign currency translation gains or losses in respect of indebtedness denominated in a currency other than the functional currency of such debtor.

        Consolidated Interest Expense means, for any period, the total interest expense of Atlantic Holdings and its subsidiaries to the extent deducted in calculating Consolidated Net Income, net of any interest income of Atlantic Holdings and its subsidiaries, including, but not limited to, any such interest expense consisting of (a) interest expense attributable to an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP; (b) amortization of debt discount; (c) the interest portion of any deferred payment obligation; and (d) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, as determined on a consolidated basis in accordance with GAAP; provided that gross interest expense shall be determined after giving effect to any net payments made or received by Atlantic Holdings and its subsidiaries with respect to any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement (including derivative agreements or arrangements), and further provided that to avoid double counting, amortization of any item shall not be included in the calculation of Consolidated Interest Expense if it is already to be included in the calculation of EBITDA.

        The Sands Agreement contains customary representations and warranties, indemnification provisions, covenants regarding the conduct of business prior to closing and conditions to closing. The closing of the Sands Agreement is subject to the satisfaction or waiver of certain conditions, including, for each of the parties, no action or proceeding by any governmental authority or other person shall have been instituted or threatened which (1) might have a material adverse effect on GB Holdings or Atlantic Holdings or (2) could enjoin, restrain or prohibit, or could result in substantial damages in respect of, any provision of the purchase agreement or the consummation of the transactions contemplated by the purchase agreement. The closing of the Sands Agreement is also subject to the approval by all Depositary Unit holder action required by the NYSE.

        For AREP, the closing of the Sands Agreement is also subject to the satisfaction or waiver of the condition (1) that no material adverse change with respect to GB Holdings or Atlantic Holdings shall have occurred and no event shall have occurred which, in the reasonable judgment of AREP, is reasonably likely to have a material adverse effect and (2) that the GB Holdings and Atlantic Holdings securities are released from a bank pledge. Cyprus has agreed to indemnify us against, and agreed to

35



hold us harmless from, any and all losses we incur associated with any breach of or any inaccuracy in any representation or warranty made by Cyprus in the Sands Agreement, or any breach of or failure by Cyprus to perform any of its covenants or obligations set out or contemplated in the Sands Agreement.

        The Sands Agreement may be terminated if the transaction is not consummated by September 30, 2005 or by either us or the seller if there shall have been a material breach of any covenant, representation or warranty or other agreement of the other party which has not been remedied.

        The foregoing summary description of the Sands Agreement is subject in its entirety to the terms of the Sands Agreement, a copy of which is attached hereto as Exhibit F.

Additional Provisions applicable to the NEG Holding, Panaco and Sands Agreements

        The Panaco Agreement, the NEG Agreement and Sands Agreement each requires that AREP's Partnership Agreement be amended (1) as necessary to consummate the Acquisitions (including without limitation, modification of Section 4.5(c) of the Partnership Agreement to render such section inapplicable to any transactions approved by the Audit Committee of AREP), and (2) such that the general partner and the limited partners, as defined in the Partnership Agreement, may not cause AREP, or any successor entity of AREP, 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 of AREP 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.

Registration Rights Agreement

        Upon the consummation of the Acquisitions, we will enter into a registration rights agreement with Highcrest, Arnos, Cyprus and Gascon, each a Holder, and collectively the Holders, of Depositary Units.

        Pursuant to the registration rights agreement, we are required to notify in writing the Holders of our determination to register any of our equity securities or warrants to purchase equity securities, other than a registration statement on Form S-8 or on Form S-4 relating to Depositary Units to be issued solely in connection with any acquisition of any entity or business, and to use reasonable efforts to include, at our expense, in such registration statement all or any part of the Depositary Units any such Holder requests to be included in the registration statement. Our obligations to include Depositary Units in a registration statement with respect to an underwritten offering are subject to such limitations as are imposed by the managing underwriters of such offering.

        A Holder or Holders of at least a majority, determined by capital account balance, of the Depositary Units held by all Holders, upon written request, may cause us to use best efforts to file two registration statements, at our expense, as expeditiously as possible with the Securities and Exchange Commission to register the public sale of Depositary Units held by such Holders, provided that the request is with respect to at least 20% of the Depositary Units owned by all Holders. In addition, if the registration of Depositary Units can be effected on Form S-3, then, upon the request of Holders for the registration of at least 20% of the units held by all Holders, we will use our best efforts to, as expeditiously as possible, effect such registration.

        Pursuant to the registration rights agreement, we are required to use our best efforts to maintain the effectiveness for up to 90 days(or such shorter period of time as the underwriters, if any, of any offering need to complete the distribution of the registered offering), or one year in the case of a "shelf" registration on Form S-3, pursuant to which any of the Depositary Units are being offered. We have agreed to indemnify and hold harmless each Holder and each underwriter of Depositary Units from and against any and all losses, claims, damages, expenses or liabilities, joint or several, to which they or any of them become subject to under the Securities Act, applicable state securities laws or under any other statute or at common law and agree to reimburse them for any legal or other expenses

36



reasonably incurred by them or any of them in connection with investigating or defending such actions, subject to certain limitations described in the registration rights agreement.

Information about AREP, NEG Holding, Panaco and GB Holdings

        Appendices A, B, C and D set forth descriptions of our business and the businesses of each of NEG Holding, Panaco and GB Holdings. The Appendices also include "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for each of AREP, NEG Holding, Panaco and GB Holdings.

Pro Forma Financial Data

        Appendix E sets forth unaudited pro forma condensed consolidated financial statements presented to reflect the pro forma effects of the Acquisitions and the issuance of 16,068,966 Depositary Units with an aggregate valuation of $466.0 million based on the closing market price of the Depositary Units, on January 19, 2005, of $29.00 per unit and our issuance in February 2005 of $480.0 million principal amount of senior notes due 2013 with an interest rate of 71/8% per annum.

Financial Statements

        Financial information for each of us, on a historical and supplemental basis to give effect to the acquisition of TransTexas, American Property Investors, Inc., our general partner, NEG Holding, Panaco and GB Holdings are set forth in pages F-1 to F-177.

Regulation

        We are not required to obtain the consent or approval of any regulatory authority with respect to the Acquisitions.

Certain U.S. Federal Income Tax Consequences

        The following general discussion summarizes certain material United States federal income tax consequences of the Acquisitions. This summary does not consider state, local or foreign tax laws. This summary is based on the Internal Revenue Code of 1986, as amended, or the Code, and applicable Treasury Regulations, rulings, administrative pronouncements and decisions as of the date hereof, all of which are subject to change or differing interpretations at any time with possible retroactive effect. We have not sought and will not seek any rulings from the Internal Revenue Service with respect to the statements made and the conclusions reached in this summary, and there can be no assurance that the Internal Revenue Service will agree with such statements and conclusions. Each holder of Depositary Units is advised to consult the holder's tax advisor regarding specific federal, state, local and foreign income and other tax considerations in respect of the Acquisitions.

        The Acquisitions generally should not result in the recognition of gain or loss to AREP, the holders of Depositary Units, or the transferors of property acquired by AREP. AREP's initial tax basis in property acquired in an Acquisition should equal the transferor's adjusted tax basis in the property immediately prior to the Acquisition.

        In general, where property is acquired in an Acquisition with built-in gain or built-in loss (i.e., difference, if any, between the fair market value and adjusted tax basis of such property at the time of the Acquisition), such built-in gain or loss generally will be allocated to the transferor in accordance with section 704(c) of the Code when it is recognized. Where such built-in gain or loss property gives rise to depreciation, depletion or other cost-recovery deductions (as may be the case for property acquired in the merger of Panaco with and into National Offshore LP), the recognition of such built-in gain or built-in loss may effectively be accelerated. This is because the distributive share of such cost-recovery deductions allocated to the transferor may be required to be reduced in the case of built-in gain property or increased in the case of built-in loss property in accordance with section 704(c)

37



of the Code. The result to the other holders of Depositary Units is that they may be allocated more deductions than the transferor if there is built-in gain property or less deductions if there is built-in loss property.

        Further, in the case of the Acquisition of interests in NEG Holding, to the extent that Gascon previously contributed property to NEG Holding with built-in gain or loss, which built-in gain or loss has not been fully recognized by Gascon, any remaining amount of such built-in gain or loss will be allocated by NEG Holding under the above allocation rules to AREP as it would have been allocated to Gascon. Allocations by AREP of its distributive share of tax items allocated from NEG Holding with respect to such property will again be subject to the same allocation rules described in the above paragraph, with the result that such remaining amount of built-in gain or loss generally is allocated to Gascon.

        The character of the gross income that is likely to result from the property acquired in the Acquisitions should not adversely affect AREP's ability to continue to qualify as a partnership for tax purposes (and not be subject to tax as a corporation).

Accounting Treatment

        The Acquisitions will be treated for accounting purposes in a manner similar to a pooling-of-interest due to common control ownership.

The Depositary Units

        The following is a brief description of our Depositary Units which are proposed to be issued in the Acquisitions and certain provisions of the depositary agreement, as amended, or the Depositary Agreement, pursuant to which the Depositary Units have been issued, entered into among us, the Registrar and Transfer Company, as 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 any preferred units, each Depositary Unit evidences entitlement to a portion of AREP's distributed and an allocation of AREP's net income and net loss, as determined in accordance with our partnership agreement. The Depositary Units are registered under the Securities Exchange Act of 1934, and AREP is subject to the reporting requirements of the Exchange Act. We are required to file periodic reports containing financial and other information with the SEC. The Depositary Units are listed on the New York Stock Exchange under the symbol "ACP."

        Depositary Units are evidenced by depositary receipts issued by the Depositary. We are authorized to issue additional Depositary Units or other securities, including, without limitation preferred units 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 of units that may be issued. The Board of Directors of API, 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 thereof as the absolute owner for all purposes. A transfer of

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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 the transfer application.

        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 the Subsequent Transferees as substituted limited partners of AREP. If our general partner consents to a substitution, a Subsequent Transferee will be admitted to the partnership as a substituted limited partner upon the recordation of the Subsequent Transferee's name in our books and records. Upon admission, which is in the sole discretion of our general partner, the Subsequent Transferee 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 his pro rata share of distributions. 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 his Depositary Units to a purchaser or other transferee. Therefore, such Subsequent Transferee will not receive distributions from the partnership and will not 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. If the Subsequent Transferee does not furnish the required information, we will make certain assumptions concerning this information, which may result in the transferee receiving a lesser amount of consideration.

Withdrawal of Depositary Units from Deposit

        A unitholder may withdraw from the Depositary the Depositary Units represented by his depositary receipts, upon written request and surrender of the depositary receipts evidencing the Depositary Units, and receive, in exchange, 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 are therefore 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 his 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

39



law or to the partnership, a unitholder must redeposit the certificate evidencing the 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 the 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, [confirm] 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 his or her 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 thereby or to redeposit Depositary Units pursuant to the Depositary Agreement and receive a depositary receipt evidencing such 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 such 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 thereto, 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 such fee or charge, or change thereto, 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 is (1) in connection with us entering into a similar agreement with a new depositary selected by the general partner, (2) 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) in connection with our dissolution. The Depositary will terminate the Depositary Agreement, when directed to do so by us, by mailing notice of such 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 the 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 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

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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 such 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.

Appraisal Rights

        Under Delaware law, no dissenter's rights, or rights of non-consenting security holders to exchange interests in us for payment of their fair value, are available to any holder of Depositary Units regardless of whether the holder has consented to any significant transactions or other actions. Further, the Partnership Agreement does not provide appraisal rights with respect to any of the partnership actions and therefore the holders of Depositary Units dissenting from significant actions passed by at least a majority-in-interest of Depositary Units would not be entitled to appraisal rights.

ITEM 2: AMENDMENT TO AREP'S LIMITED PARTNERSHIP AGREEMENT

        The purpose of this proposal is to amend our Amended and Restated Agreement of Limited Partnership, as amended, as set forth in Amendment No.4 to the Partnership Agreement. These include changes to: (1) Section 3.01—Purposes and Business; (2) Section 4.05(c)—Additional Issuance of Units; (3) Section 6.18—Other Matters Concerning the General Partner; (4) Section 5.03—Distributions (prior to the Amendment, Distributions of Cash Flow and Capital Proceeds); (5) Section 14.13—Action Without a Meeting; and (6) add new Section 4.13—Nevada Gaming Law Disposition. We also propose to make other miscellaneous changes, as described below. All such amendments will be considered as a single proposal. The full text of Amendment No.4 to the Partnership Agreement is attached as Exhibit G to this proxy statement.

        Pursuant to Article XIV of the Partnership Agreement, the approval, including by written consent, by Record Holders, as defined, owning at least a majority-in-interest of the outstanding Depositary Units is sufficient for the adoption of an amendment to the Partnership Agreement, with certain exceptions (none of which is applicable to the proposed amendment). The written consent of affiliates of Mr. Icahn, as record owners of more than a majority-in-interest of the Depositary Units, is sufficient to ensure approval of this Amendment. Mr. Icahn currently intends to have consents executed and delivered that approve the Amendment.

        Under applicable law, no dissenter's rights (i.e. rights of non-consenting security holders to exchange interests in the Partnership for payment of fair value) are available to any holder of Depositary Units, regardless of whether such holder of Depositary Units has consented to the adoption of the Amendment.

Reasons and Effects of the Amendment

Section 3.01 Purposes and Business

        In 1996, the Partnership Agreement was amended to permit investments in companies that were not necessarily engaged as one of their principal activities in the ownership, development or management of real estate. As permitted by that amendment, we have developed into a diversified holding company engaged in a variety of businesses. Our current businesses include rental real estate; real estate development; hotel and resort operations; hotel and casino operations; oil and gas

41



exploration and production; and investments in equity and debt securities. Our primary business strategy is to continue to grow our core businesses. In addition, we seek to acquire undervalued assets that are distressed or in out of favor industries.

        We believe that Section 3.01, as proposed to be amended, provides us with added flexibility to pursue our strategy.

        The Partnership will continue to conduct its investment activities in such a manner so as not to be deemed an investment company under the Investment Company Act of 1940. Generally, this means that the Partnership does not intend to enter the business of investing in securities and that no more than 40% of the Partnership's total assets will be invested in securities. While the Partnership intends to operate so as to not be treated as an investment company under the 1940 Act, if it did not meet the exclusions under the 1940 Act, the Partnership would be required to register as an investment company under the 1940 Act and would be subject to the reporting requirements and regulatory constraints of the 1940 Act.

        Under applicable tax laws, the Partnership will structure its investments so as to continue to be taxed as a partnership rather than as a corporation under the publicly-traded partnership rules of Section 7704 of the Internal Revenue Code. While the General Partner intends to structure investments in non-real estate assets to satisfy these rules, it is possible that using the Partnership's cash for investments not related to real estate could result in income.

Section 5.03.

        Section 5.03(a) currently provides for distributions in the discretion of the General Partner, from Cash Flow, as defined. Section 5.03(b) currently provides for distributions from Capital Transactions. Cash flow is defined as "Net Cash Flow" as defined in the registration statement filed by the Partnership in connection with its formation in 1987. "Net Cash Flow" was defined as consisting of "operating revenues (excluding proceeds from sales and refinancings) less (i) operating expense (excluding non-cash expenses such as depreciation and amortization but including any management, reinvestment incentive and other fees payable to the General Partner and its affiliates), (ii) debt service, (iii) provisions for such reserves from operating revenues as the General Partner, in its sole discretion, deems appropriate, and (iv) capital transactions to the extent not made out of established revenues. Capital Transactions means "any (1) incurring of indebtedness secured by Partnership Assets, (2) refinancing of any indebtedness secured by Partnership Assets, (3) sale or exchange, liquidation or other disposition of any Partnership Assets, (4) net condemnation award or casualty loss recovery with respect to any Partnership Assets, (5) elimination of any funded reserve or (6) liquidation or dissolution of the Partnership."

        We believe that the proposed amendment to this provision will permit the Board of Directors greater flexibility in considering whether to make distributions from Partnership assets or otherwise, subject to the limitations under any of our debt or equity securities. The Board of Directors has commenced a review of the Partnership's distribution policy, and it is uncertain when the Board will conclude its review or whether the Board will authorize distributions.

        We also propose to change the definition of "Record Date" to conform to the changes to Section 5.04 and simplify the definition.

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Section 14.13—Action without a meeting

        We propose to add to Section 14.13, the following: "Notwithstanding the requirements of Section 14.02(b), if a consent in writing setting forth any action that may be taken at a meeting of Record Holders is signed by Record Holders owning not less than the number of Depositary Units or Units that would be necessary to authorize or take such action at a meeting, the General Partner shall not be required to seek the written consent of the Record Holders that have not signed such consent."

        The proposal will not change the provisions of the Partnership Agreement that govern amendments to the agreement or other matters for which Record Holders' approval is required or the vote required to approve any such matters. The proposal also will not affect requirements under the Partnership Agreement or otherwise that the Record Holders receive notice of action taken without meeting. The change to Section 14.13 would allow the Partnership to avoid the costs of soliciting consents from Record Holders that are not necessary to approve an action because the requisite votes already have been obtained.

Section 4.05(c) Additional Issuance of Units; Insurance of Securities. Section 6.18 Other Matters Concerning General Partner.

        In connection with the Acquisitions, our Audit Committee required that the Partnership Agreement be amended to restrict certain short-form merger transactions of AREP, or any successor of AREP, whether in its current form as a limited partnership or as converted to or succeeded by a corporation or other form of business combination of AREP or such successor, in each case pursuant to Section 253 of the Delaware General Corporation Law, or any successor statute, or any similar short-form merger statute under the laws of Delaware or any other jurisdiction. Section 253 of the Delaware General Corporation Law generally allows a holder of 90% or more of the voting securities of a corporation to cause that corporation to merge with another corporation without approval of the minority stockholder or of board of directors approval. This allows for the minority stockholders to be squeezed out in a cash out merger. There is not a similar provision in the Delaware Revised Uniform Limited Partnership.

        We propose to add a new subsection 6.18(c)(iii) to effect these restrictions. Section 6.18(c)(iii) also will require the unanimous vote of Record Holders to amend the proposed subsection 6.18(c)(iii), unless that amendment is approved by the Audit Committee.

        The amendment to Section 4.05(c) allows for the determination of the number of Depositary Units to be issued in exchange for property without the restrictions imposed by that section, including the issuance of the Units in the Acquisitions, if the consideration is approved by our Audit Committee. See "Item 1—The Acquisitions" for a description of the determinations of the consideration to be issued in the Acquisitions.

Section 4.13 Nevada Gaming Law Disposition

        We propose to add a provision applicable to any Limited Partner that is required to be licensed, qualified or found suitable under any Nevada Gaming Law and fails to apply for any license, qualification or finding of suitability within 30 days of being so required by an applicable Nevada Gaming Authority or is denied a license or qualification or not found suitable. The Partnership would have the right to require the Limited Partner to dispose of its interest or to redeem the interest. Upon a determination that a Limited Partner is not suitable or will not be licensed or qualified, the Limited Partner would not have the right to exercise any rights to which Limited Partners are entitled or to receive distributions. We also propose to add definitions related to this provision

        If the Nevada Gaming Commission determines that a person is unsuitable to own any of our securities, then pursuant to the Nevada Gaming Control Act, we can be sanctioned, including the loss

43



of our approvals for our Nevada hotels and casinos. The Partnership Agreement already contains similar provisions with respect to New Jersey regulation of casinos.


ITEM 3: AMENDMENT TO AREH'S LIMITED PARTNERSHIP AGREEMENT

        The purpose of this proposal is to amend the Amended and Restated Agreement of Limited Partnership of AREH (the "OLP Agreement"): (1) Section 3.01 Purposes and Business and (2) Section 5.03 Distributions. The amendments to the OLP Agreement is to conform these sections to the corresponding sections in the Partnership Agreement, as proposed to be amended in accordance with Item 3. The full text of Amendment No. 3 to the OLP Agreement is set forth as Exhibit H. The amendments will be considered as a single proposal.

        Section 6.08(b) of the Partnership Agreement provides that the General Partner of AREP shall have no authority to cause AREP, in its capacity as sole limited partnership AREH, to consent to any proposal submitted for the approval of the limited partners of AREH unless AREP's limited partners vote to approve the proposal in the same percentage as is required by the OLP Agreement for the approval of such proposal by the limited partners of AREH.

        Pursuant to Article XIV of the Partnership Agreement, the approval, including by written consent, by Record Holders, as defined, to an amendment to the OLP Partnership Agreement owning at least a majority-in-interest of the outstanding Depositary Units is sufficient for the adoption of an amendment to the OLP Agreement. The written consent of affiliates of Mr. Icahn, as record owners of more than a majority-in-interest of the Depositary Units, is sufficient to ensure approval of this amendment. Mr. Icahn currently intends to have consents executed and delivered that approve the OLP Agreement Amendments.


ITEM 4: GRANT OF OPTIONS TO KEITH MEISTER

        AREP proposes granting to Keith Meister, Chief Executive Officer of API, the General Partner, nonqualified unit options, which we refer to as the Options, pursuant to an option grant agreement, which we refer to as the Option Agreement. AREP would be providing these Options outside of an adopted equity incentive plan. The Options would be an inducement for the continuation of Mr. Meister's employment with the General Partner. In accordance with the rules of the New York Stock Exchange, before we can issue the Options to Mr. Meister, we must obtain the approval of holders of our Depositary Units. The written consent of affiliates of Mr. Icahn, as record owners of more than a majority-in-interest of the Depositary Units, is sufficient to ensure approval of the Options. Mr. Icahn currently intends to have consents executed and delivered that approve the Options. The following is a summary of the Option Agreement as proposed.

        Number of Units, Consideration, Vesting and Expiration.    The Options would permit Mr. Meister to purchase up to 700,000 Depositary Units, or Units, at an exercise price of $35.00 per Unit. Mr. Meister must pay the exercise price for the Units by (i) money order or other cash equivalent or (ii) a broker-assisted cashless exercise.

        The Options would vest at a rate of 100,000 Units on the first seven anniversaries of the date on which the Options are granted, which we refer to as the Grant Date, such that the Options will become fully vested by the seventh anniversary of the Grant Date.

        The Options would vest sooner upon the occurrence of two events: (a) a change of control, as defined, in the Option Agreement or (b) if Mr. Meister is terminated by AREP or the General Partner without "cause" as defined in the Option Agreement.

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        The Options would expire as to 600,000 of the vested Units on the last business day preceding the seventh anniversary of the Grant Date. The Options for the remaining 100,000 vested Units would expire after the last business day prior to the eighth anniversary of the Grant Date.

        All unvested Options would terminate immediately if Mr. Meister otherwise ceases being employed by AREP or the General Partner.

        Exercise of Options After Termination    With regard to vested Options which have not expired, Mr. Meister would have 180 days after termination of his employment to exercise the vested Options.

        Adjustments to Options.    The Options will have the benefit of anti-dilution protections.

        Federal Income Tax Consequences to Mr. Meister and AREP.    Mr. Meister would not recognize any taxable income at the time he is granted the Options. Upon exercise, Mr. Meister would recognize taxable ordinary income generally equal to the excess of the fair market value of the Units at exercise over the exercise price. Any gain or loss recognized upon disposition of the Units in excess of the amount treated as ordinary income is treated as long-term or short-term capital gain or loss, depending on the holding period. Upon Mr. Meister's exercise of the Options, AREP may have to adjust or create capital accounts to reflect Mr. Meister's investment in AREP. In addition, AREP may recognize a deduction for the amount of ordinary income recognized by Mr. Meister.

Executive Compensation

        The following table sets forth information in respect of the compensation of the Chief Executive Officer and each of the four most highly compensated other executive officers of AREP and its subsidiaries as of December 31, 2004 for services in all capacities to AREP for the fiscal years ended December 31, 2004, 2003 and 2002.


SUMMARY COMPENSATION TABLE

 
  Annual Compensation(1)

Name and Principal Position
  Year
  Salary($)
  Bonus($)
  All Other
Compensation($)(3)

Keith A. Meister(2)
President and Chief Executive Officer
  2004
2003
2002
  227,308
73,150
 

 

Martin L. Hirsch(2)(3)
Executive Vice President and Director of Acquisitions and Development
  2004
2003
2002
  295,000
269,923
231,000
  200,000
50,000
24,500
  4,000
4,000
3,667

John P. Saldarelli(2)(3)
Vice President, Chief Financial Officer, Secretary and Treasurer

 

2004
2003
2002

 

191,100
182,200
182,000

 

22,932
18,200
8,400

 

3,819
4,000
3,666

Richard P. Brown
President and Chief Executive Officer, American Casino & Entertainment Properties LLC

 

2004
2003
2002

 

461,155
316,154
274,988

 

250,000
20,000
20,000

 

8,335
8,315
6,459

Bob Alexander
President and Chief Executive Officer, National Energy Group, Inc.

 

2004
2003
2002

 

300,000
300,000
300,000

 

175,000
150,000

 




(1)
Pursuant to applicable regulations, certain columns of the Summary Compensation Table and each of the remaining tables required by such regulations have been omitted, as there has been no compensation awarded to, earned by or paid to any of the named executive officers by us, or by

45


(2)
On August 18, 2003, Keith A. Meister was elected President and Chief Executive Officer. Mr. Meister devotes approximately 50% of his time to the performance of services for AREP and its subsidiaries. Messrs. Saldarelli and Hirsch devote all of their time to the performance of services for AREP and its subsidiaries.

(3)
Represent matching contributions under AREP's 401(k) plan. In 2004, AREP made a matching contribution to the employee's individual plan account in the amount of one-third of the first six (6%) percent of gross salary contributed by the employee.

        Each of our executive officers may perform services for our affiliates which are reimbursed to us. However, Mr. Meister devotes approximately 50% of his time, to services for our businesses. He is compensated by affiliates of Mr. Icahn for the services he provides in connection with their businesses. His compensation from such affiliates includes a base salary and additional compensation, including incentive compensation.

Employment Agreements

        ACEP and Richard P. Brown, its President and Chief Executive Officer, entered into a two-year employment agreement effective April 1, 2004, or the Brown Agreement. The Brown agreement provides that Mr. Brown will be paid a base annual compensation of $500,000. The agreement also provides that Mr. Brown will receive an annual bonus of up to 50% of base compensation. The Brown Agreement further provides that if Mr. Brown is terminated without "Cause" (as defined in the Brown Agreement) or there is a "Change of Control" as defined in the Brown Agreement), then Mr. Brown will receive an immediate severance payment in the amount equal to the then current Base Salary. Mr. Brown was paid a bonus in 2004 for the year ended December 31, 2003 and a $250,000 bonus in 2005 for the year ended December 31, 2004.

Director Compensation

        Each executive officer and director will hold office until his successor is elected and qualified. Directors who are also audit committee members receive quarterly fees of $7,500 in 2004 and may receive additional compensation for special committee assignments. In 2004, Messrs. Wasserman, Nelson and Leidesdorf received audit and special committee fees of $50,030, $41,217 and $41,020, respectively. Mr. Icahn does not receive director's fees or other fees or compensation from us.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        As of March 1, 2005, affiliates of Mr. Icahn, including High Coast Limited Partnership, a Delaware limited partnership, owned 39,896,836 Depositary Units, or approximately 86.5% of the outstanding Depositary Units, and 8,900,995 preferred units, or approximately 86.5% of the outstanding preferred units.

        The affirmative vote of unitholders holding more than 75% of the total number of all Depositary Units then outstanding, including Depositary Units held by API and its affiliates, is required to remove API as the general partner. Thus, since Mr. Icahn, through affiliates, holds approximately 86.5% of the Depositary Units outstanding, API will not be able to be removed pursuant to the terms of our partnership agreement without Mr. Icahn's consent. Moreover, under the partnership agreement, the affirmative vote of API and unitholders owning more than 50% of the total number of all outstanding Depositary Units then held by unitholders, including affiliates of Mr. Icahn, is required to approve, among other things, selling or otherwise disposing of all or substantially all of our assets in a single sale or in a related series of multiple sales, our dissolution or electing to continue our partnership in certain

46



instances, electing a successor general partner, making certain amendments to the partnership agreement or causing us, in our capacity as sole limited partner of AREH, to consent to certain proposals submitted for the approval of the limited partners of AREH. Accordingly, as affiliates of Mr. Icahn hold in excess of 50% of the Depositary Units outstanding, Mr. Icahn, through affiliates, has effective control over such approval rights.

        The following table provides information, as of March 1, 2005, as to the beneficial ownership of our Depositary Units and preferred units for (1) each person known to us to be the beneficial owner of more than 5% of either our Depositary Units and preferred units, (2) each director of API, and (3) all directors and executive officers of API as a group.

NAME OF BENEFICIAL OWNER

  BENEFICIAL
OWNERSHIP OF
DEPOSITARY
UNITS

  PERCENT
OF
CLASS

  BENEFICIAL
OWNERSHIP OF
PREFERRED
UNITS(2)

  PERCENT
OF
CLASS

 
Carl C. Icahn(1)   39,896,836   86.5 % 8,900,995   86.5 %
William A. Leidesdorf          
James L. Nelson          
Jack G. Wasserman          
Keith A. Meister          
Martin L. Hirsch          
John P. Saldarelli          
Bob Alexander          
Richard P. Brown          
All directors and executive officers as a group (nine persons)   39,896,836   86.5 % 8,900,995   86.5 %

(1)
Carl C. Icahn, through affiliates, is the beneficial owner of the 39,896,836 Depositary Units set forth above and may also be deemed to be the beneficial owner of the 700 Depositary Units owned of record by API Nominee Corp., which in accordance with state law are in the process of being turned over to the relevant state authorities as unclaimed property; however, Mr. Icahn disclaims such beneficial ownership. The foregoing is exclusive of a 1.99% ownership interest which API holds by virtue of its 1% general partner interest in each of us and AREH. Furthermore, pursuant to a registration rights agreement entered into by affiliates of Mr. Icahn, we have agreed to pay any expenses incurred in connection with two demand and unlimited piggy-back registrations requested by affiliates of Mr. Icahn.

(2)
Upon the closing of the Acquisitions, AREP will issue an aggregate of up to 16,068,966 Depositary Units to affiliates of Mr. Icahn in consideration for the acquisition of the managing membership interest of NEG Holding, Panaco's equity and the securities of GB Holdings and Atlantic Holdings. The number of Depositary Units to be issued does not include up to an additional 206,897 Depositary Units that may be issued to affiliates of Mr. Icahn if Atlantic Holdings meets certain earnings targets during 2005 and 2006, as described above. Giving effect to the issuance of an additional 16,068,966 Depositary Units, Mr. Icahn would beneficially own approximately 90.1% of our Depositary Units.


INTERESTS OF CERTAIN PERSONS IN OR OPPOSITION TO MATTERS TO BE
ACTED UPON AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        As discussed above, affiliates of Mr. Icahn currently own approximately 86.5% of our Depositary Units and preferred units and, as a result of the Acquisitions, they will increase their holdings in us to up to approximately 90.1% of our Depositary Units. Please see above for more information about the current and post-Acquisitions holdings by affiliates of Mr. Icahn.

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Related Transactions with our General Partner and its Affiliates

Preferred and Depositary Units

        Mr. Icahn, in his capacity as majority unitholder, will not receive any additional benefit with respect to distributions and allocations of profits and losses not shared on a pro rata basis by all other unitholders. In addition, Mr. Icahn has confirmed to us that neither he nor any of his affiliates will receive any fees from us in consideration for services rendered in connection with non-real estate related investments by us. We may determine to make investments in which Mr. Icahn or his affiliates have independent investments in such assets. We may enter into other transactions with API and its affiliates, including, without limitation, buying and selling assets from or to API or its affiliates and participating in joint venture investments in assets with API or its affiliates, whether real estate or non-real estate related, provided the terms of all such transactions are fair and reasonable to us. Furthermore, it should be noted that our partnership agreement provides that API and its affiliates are permitted to have other business interests and may engage in other business ventures of any nature whatsoever, and may compete directly or indirectly with our business. Mr. Icahn and his affiliates currently invest in and perform investment management services with respect to assets that may be similar to those we may invest in and intend to continue to do so; pursuant to the partnership agreement, however, we shall not have any right to participate therein or receive or share in any income or profits derived therefrom. Pursuant to a registration rights agreement, Mr. Icahn has certain registration rights with regard to the preferred units.

        For the years ended December 31, 2004 and 2003, we made no payments with respect to the Depositary Units owned by API. However, in 2004 and 2003, API was allocated approximately $3.3 million and approximately $1.2 million, respectively, of our net earnings (exclusive of the earnings of NEG, TransTexas Gas Corporation, or TransTexas, and Arizona Charlie's Decatur and Arizona Charlie's Boulder, or the Arizona Charlie's entities, allocated to API prior to the acquisitions of NEG, TransTexas and the Arizona Charlie's entities) as a result of its combined 1.99% general partner interests in us and AREH.

        On March 31, 2003, Mr. Icahn received 403,673 preferred units as part of our scheduled annual preferred unit distribution and received an additional 423,856 preferred units on March 31, 2004 as part of such scheduled annual preferred unit distribution.

        Pursuant to a registration rights agreement, Mr. Icahn has certain registration rights with regard to the Depositary Units.

Oil and Gas

Purchases of Debt

        On December 6, 2004, AREP Oil & Gas, which is our indirect subsidiary, pursuant to a purchase agreement and related assignment and assumption agreement, each dated as of that date, with Thornwood, purchased $27.5 million aggregate principal amount of the TransTexas Notes. The purchase price for the TransTexas Notes was $28.2 million, which equaled the principal amount of the TransTexas Notes plus accrued but unpaid interest. The TransTexas Notes are payable in five annual installments, the first four of which are of $5 million, with the final installment of the unpaid principal payable on August 28, 2008. Interest is payable semi-annually on March 1 and September 1, at the rate of 10% per annum. The TransTexas Notes are secured by a first priority lien on all of TransTexas' assets. Thornwood and TransTexas each is controlled by Mr. Icahn.

        On December 6, 2004, AREP Oil & Gas, pursuant to a membership interest purchase agreement and related assignment and assumption agreement, each dated as of that date, by and among AREP Oil & Gas, as purchaser, and Arnos, High River and Hopper Investments, as sellers, purchased all of

48



the membership interests of Mid River for an aggregate purchase price of $38.1 million. The assets of Mid River consisted of $38.0 million principal amount of the Panaco Debt. The purchase price for the membership interests in Mid River equaled the outstanding principal amount of the Panaco Debt, plus accrued but unpaid interest. The principal is payable in 27 equal quarterly installments of $1.4 million commencing on March 15, 2005, through and including September 15, 2011. Interest is payable quarterly at a rate per annum equal to the LIBOR daily floating rate plus four percent. The term loan is secured by first priority liens on all of Panaco's assets. Each of the sellers and Panaco is controlled by Mr. Icahn.

        Each of the purchases described above was separately approved by our Audit Committee. Our Audit Committee was advised as to each transaction by its independent financial advisor and legal counsel. Our Audit Committee received an opinion as to the fairness to AREP of the consideration, from a financial point of view.

NEG Holding Ownership

        NEG owns a membership interest in NEG Holding. The other membership interest in NEG Holding is held by Gascon. Gascon is the managing member of NEG Holding. NEG Holding owns NEG Operating which is engaged in the business of oil and gas exploration and production with properties located on-shore in Texas, Louisiana, Oklahoma and Arkansas. NEG Operating owns interests in wells managed by NEG. Under the Operating Agreement, NEG is to receive guaranteed payments of approximately $32.0 million and a priority distribution of approximately $148.6 million before Gascon receives any distributions. The Operating Agreement contains a provision that allows Gascon, or its successor, at any time, in its sole discretion, to redeem NEG's membership interest in NEG Holding at a price equal to the fair market value of the interest determined as if NEG Holding had sold all of its assets for fair market value and liquidated. A determination of the fair market value of such assets will be made by an independent third party jointly engaged by Gascon and NEG.

Management Agreements

        The management and operation of each of NEG Operating, TransTexas and Panaco is undertaken by NEG pursuant to a separate management agreement with each. In 2004, NEG recorded management fees of $6.2 million, $4.7 million and $0.7 million from NEG Operating, TransTexas and Panaco, respectively.

Purchase Agreements

        For a description of the purchase agreements, see Item 1—The Acquisitions, above.

Hotel and Casino Operations

        On January 5, 2004, ACEP, our wholly-owned subsidiary, entered into an agreement to acquire two Las Vegas hotels and casinos, Arizona Charlie's Decatur and Arizona Charlie's Boulder from Mr. Icahn and an entity affiliated with Mr. Icahn, for aggregate consideration of $125.9 million. The closing of the acquisition occurred on May 26, 2004. The terms of the acquisition were approved by the Audit Committee, which received an opinion from its financial advisor as to the fairness of the consideration to be paid from a financial point of view.

        As of May 26, 2004, we have entered into an intercompany services arrangement with Atlantic Coast Entertainment Holdings, Inc., the owner of The Sands Hotel and Casino in Atlantic City, New Jersey, which is controlled by affiliates of Mr. Icahn. We are compensated based upon an allocation of salaries plus an overhead charge of 15% of the salary allocation, and reimbursement of reasonable

49



out-of-pocket expenses. During 2004, we billed for services provided in an amount equal to approximately $387,500.

        As of December 31, 2004, we were owed approximately $388,000 for reimbursable expenses from related parties.

        On December 27, 2004, AREP Sands, pursuant to a note purchase agreement, dated as of that date, with Barberry and Cyprus, purchased $37.0 million principal amount of 3% Notes due 2008 issued by Atlantic Holdings for cash consideration of $36.0 million. Interest on the notes is payable in kind, accreting annually at a rate of 3%. The notes are convertible, under certain circumstances, into 65.909 shares of common stock of Atlantic Holdings for each $1,000 of principal amount of such notes and are secured by all existing and future assets of Atlantic Holdings and ACE Gaming. Each of Cyprus and Barberry is controlled by Mr. Icahn.

        The purchase described above was approved by the Audit Committee. The Audit Committee received advice from its independent financial advisor and legal counsel. Our Audit Committee received an opinion from its financial advisor as to the fairness of the consideration to be paid by AREP Sands for the notes from a financial point of view.

Partnership Provisions Concerning Property Management

        API and its affiliates may receive fees in connection with the acquisition, sale, financing, development, construction, marketing and management of new properties acquired by us. As development and other new properties are acquired, developed, constructed, operated, leased and financed, API or its affiliates may perform acquisition functions, including the review, verification and analysis of data and documentation with respect to potential acquisitions, and perform development and construction oversight and other land development services, property management and leasing services, either on a day-to-day basis or on an asset management basis, and may perform other services and be entitled to fees and reimbursement of expenses relating thereto, provided the terms of such transactions are fair and reasonable to us in accordance with our partnership agreement and customary to the industry. It is not possible to state precisely what role, if any, API or any of its affiliates may have in the acquisition, development or management of any new investments. Consequently, it is not possible to state the amount of the income, fees or commissions API or its affiliates might be paid in connection therewith since the amount thereof is dependent upon the specific circumstances of each investment, including the nature of the services provided, the location of the investment and the amount customarily paid in such locality for such services. Subject to the specific circumstances surrounding each transaction and the overall fairness and reasonableness thereof to us, the fees charged by API and its affiliates for the services described below generally will be within the ranges set forth below:

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        There were not any fees paid under these provisions during 2004, 2003 or 2002.

Other Related Transactions

        As of December, 2004, we owned approximately 443,000 shares, or 4.4%, of common stock of Philip Services Corporation and $0.1 million principal amount of unsecured, subordinated payment-in-kind debt. The debt matures December 31, 2010 and bears interest at 3.6% per annum. Philip is an affiliate of Mr. Icahn.

        For the years ended December 31, 2004 and 2003, we paid approximately $325,000 and $273,000, respectively, to an affiliate, XO Communications, Inc. of API for telecommunication services.

        In 1997, we entered into a license agreement for a portion of office space from an affiliate of API. Pursuant to the license agreement, we have the non-exclusive use of approximately 2,275 square feet for which we pay monthly rent of $11,185 plus 10.77% of certain "additional rent." The agreement which expired in May 2004, has been extended on a month-to-month basis. For the year ended December 31, 2004, we paid an affiliate of API approximately $162,000, of rent in connection with this licensing agreement. The terms of such license agreement were reviewed and approved by our Audit Committee.

        We may also enter into other transactions with API and its affiliates, including, without limitation, buying and selling properties and borrowing and lending funds from or to API or its affiliates, joint venture developments and issuing securities to API or its affiliates in exchange for, among other things, assets that they now own or may acquire in the future, provided the terms of such transactions are fair and reasonable to us. API is also entitled to reimbursement by us for all allocable direct and indirect overhead expenses, including, but not limited to, salaries and rent, incurred in connection with the conduct of our business.

        In addition, our employees may, from time to time, provide services to affiliates of API, with us being reimbursed therefor. Reimbursement to us by such affiliates in respect of such services is subject to review and approval by our Audit Committee. For the year ended December 31, 2004, we received approximately $80,000 for such services. Also, an affiliate of API provided certain administrative services to us for the amount of approximately $82,000 in the year ended December 31, 2004.


WHERE YOU CAN FIND MORE INFORMATION

        We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. The Exchange Act file number for our SEC filings is 1-9516. You may read any document we file at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC toll free at 1-800-SEC-0330 for information about its public reference rooms. We file information electronically with the SEC. Our SEC filings are available from the SEC's Internet site at http: //www.sec.gov.

51



        Our internet address is www.areplp.com. The information contained on our website is not part of this proxy statement and is not incorporated by reference in this proxy statement.


DELIVERY OF DOCUMENTS TO SECURITY HOLDERS SHARING AN ADDRESS

        Only one copy of this proxy statement is being delivered to multiple unitholders sharing an address unless we have received contrary instructions from one or more of the unitholders. Upon written or oral request, we will promptly deliver a separate copy of the proxy statement to a unitholder at a shared address to which a single copy of the documents was delivered. If you share an address and are now receiving multiple copies of our mailings to unitholders and would prefer to receive one copy, or, if you are receiving a single copy for several persons and wish to receive your own copy, please contact us by telephone at (914) 242-7700 or write to American Real Estate Partners, L.P., 100 South Bedford Road, Mount Kisco, NY 10549, attention: John P. Saldarelli.

        , 2005   BY ORDER OF THE BOARD OF DIRECTORS
/s/
KEITH A. MEISTER
Keith A. Meister
Chief Executive Officer
of American Property Investors, Inc.,
the general partner of American
Real Estate Partners, L.P.

52



INDEX TO APPENDICES

American Real Estate Partners, L.P.    
  Business Summary   A-1  
  Summary Historical Consolidated Financial Data   A-5  
  Summary Supplemental and Pro Forma Consolidated Financial Data   A-7  
  Management's Discussion and Analysis of Financial Condition and Results of Operations   A-9  

NEG Holding LLC

 

 
  Business   B-1  
  Selected Financial Data   B-2  
  Management's Discussion and Analysis of Financial Condition and Results of Operations   B-4  

Panaco, Inc.

 

 
  Business   C-1  
  Selected Financial Data   C-1  
  Management's Discussion and Analysis of Financial Condition and Results of Operations   C-1  

GB Holdings, Inc.

 

 
  Overview   D-1  
  Selected Financial Data   D-12
  Management's Discussion and Analysis of Financial Condition and Results of Operations   D-15

Unaudited Pro Forma Financial Data for American Real Estate Partners, L.P.

 

E-1  
  Pro Forma Condensed Consolidated Balance Sheet at December 31, 2004   E-2  
  Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 2004   E-3  
  Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 2003   E-4  
  Pro Forma Condensed Consolidated Statement of Earnings for the year ended December 31, 2002   E-5  
  Notes to Unaudited Pro Forma Condensed Consolidated Financial Data   E-6  

A-i



APPENDIX A: AMERICAN REAL ESTATE PARTNERS, L.P.

OUR COMPANY

        We are a diversified holding company engaged in a variety of businesses. Our primary business strategy is to continue to grow our core businesses, including real estate, gaming and entertainment, and oil and gas. In addition, we seek to acquire undervalued assets and companies that are distressed or in out of favor industries.

        Our businesses currently include rental real estate; real estate development; hotel and resort operations; hotel and casino operations; oil and gas exploration and production and investments in equity and debt securities. We may also seek opportunities in other sectors, including energy, industrial manufacturing and insurance and asset management.

        In continuation of our strategy to grow our core businesses, we have recently acquired, and have entered into agreements to acquire, additional gaming and entertainment and oil and gas assets from affiliates of Mr. Icahn. See "The Acquisitions."

A-1


        Rental Real Estate.    Our rental real estate operations consist primarily of retail, office and industrial properties leased to single corporate tenants. To capitalize on favorable real estate market conditions and the mature nature of our commercial real estate portfolio, we have offered for sale our rental real estate portfolio. During the year ended December 31, 2004, we sold 57 rental real estate properties for approximately $245.4 million. These properties were encumbered by mortgage debt of approximately $93.8 million that we repaid from the sale proceeds. As of December 31, 2004, we owned 71 rental real estate properties with a book value of approximately $196.3 million, individually encumbered by mortgage debt which aggregated approximately $91.9 million. As of December 31, 2004, we had entered into conditional sales contracts or letters of intent for 15 rental real estate properties. Selling prices for the properties covered by the contracts or letters of intent would total approximately $97.9 million. These properties are encumbered by mortgage debt of approximately $36.0 million. We continue to seek opportunities to acquire and sell additional rental real estate properties.

        Real Estate Development.    Our real estate development operations focus primarily on the acquisition, development, construction and sale of single-family homes, custom-built homes, multi-family homes and lots in subdivisions and planned communities. We currently are developing seven residential subdivisions. Two subdivisions are in Westchester County, New York, one subdivision is in Putnam County, New York and one subdivision is in Naples, Florida. In addition, we are pursuing the development of our New Seabury property, a luxury second-home waterfront community in Cape Cod, Massachusetts, and Grand Harbor and Oak Harbor, waterfront communities in Vero Beach, Florida, which we acquired in July 2004 for approximately $75.0 million.

        Hotel and Resort Operations.    Our hotel and resort operations primarily consist of our New Seabury resort located in Cape Cod, Massachusetts. The property currently includes a golf club with two 18 hole championship golf courses, the Popponesset Inn, which is a casual waterfront dining and wedding facility, a private beach club, a fitness center and a 16 court tennis facility.

        Hotel and Casino Operations.    Our hotel and casino operations currently consist of the Stratosphere Casino Hotel & Tower, Arizona Charlie's Decatur and Arizona Charlie's Boulder, all in Las Vegas, Nevada. In addition, we own approximately 36.3% of the common stock of GB Holdings and approximately $63.9 million principal amount of the convertible debt of Atlantic Holdings, or approximately 96.4% of the principal amount outstanding. GB Holdings indirectly owns The Sands Hotel and Casino in Atlantic City, New Jersey. We also own warrants to purchase, upon the occurrence of certain events, approximately 10.0% of the fully diluted common stock of Atlantic Holdings. We have entered into an agreement with affiliates of Mr. Icahn to acquire an additional approximate 41.2% of the outstanding common stock of GB Holdings and warrants to purchase, upon the occurrence of certain events, an additional approximate 11.3% of the fully diluted common stock of Atlantic Holdings. See "The Acquisitions."

        Oil and Gas.    Our oil and gas operations involve the exploration, development and acquisition of oil and gas properties and the production and sale of oil and gas. In addition to owning 50.01% of the outstanding common stock of NEG, we own all of its approximately $148.6 million principal amount of 103/4% senior notes due 2006, or the NEG Notes. NEG owns a 50% a membership interest in NEG Holding which owns 100% of NEG Operating. NEG Operating is engaged in the exploration and production of oil and gas and, at December 31, 2004, owned interests in approximately 700 wells located in Arkansas, Louisiana, Oklahoma and Texas. We have entered into agreements with affiliates of Mr. Icahn to acquire the other membership interest in NEG Holding and 100% of the common stock of Panaco. Panaco is engaged in the exploration and production of oil and gas, primarily on the Gulf of Mexico and the Gulf Coast Region, and, at December 31, 2004, owned interests in 143 wells. On April 6, 2005, we acquired 100% of the equity of TransTexas. TransTexas is engaged in the exploration, production and transmission of oil and gas, primarily in South Texas, and, at December 31, 2004, owned interests in 45 wells. NEG manages the operations of NEG Operating, TransTexas and Panaco. See "The Acquisitions."

        Investments.    We seek to purchase undervalued securities to maximize our returns. Undervalued securities are those which we believe may have greater inherent value than indicated by their then current

A-2



trading price and may present the opportunity for "activist" bondholders or shareholders to act as catalysts to realize value. During 2004, our significant investment activity included:

        Additionally, we engage in real estate lending, including making second mortgage or secured mezzanine loans to developers for the purpose of developing single-family homes, luxury garden apartments or commercial properties.

Business Strategy

        We believe that we have developed significant management strength, industry relationships and expertise in our core real estate, gaming and entertainment and oil and gas businesses. The Acquisitions will increase our focus on our gaming and entertainment and gas businesses.

        We also believe that our core strengths include:

        The key elements of our business strategy include the following.

        Continue to Invest In and Grow Our Existing Operating Businesses.    We believe that we have developed a strong portfolio of businesses with experienced management teams. We may expand our existing businesses if appropriate opportunities are identified, as well as use our established businesses as a platform for additional Acquisitions in the same or other areas.

        Seek to Acquire Undervalued Assets.    We intend to continue to make investments in real estate and in companies or their securities which are undervalued. These may be undervalued due to market inefficiencies, may relate to opportunities in which economic or market trends have not been identified and reflected in market value, or may include investments in complex or not readily followed businesses or securities. Market inefficiencies and undervalued situations may arise from disappointing financial results, liquidity or capital needs, lowered credit ratings, revised industry forecasts or legal complications. We may acquire businesses or assets directly or we may establish an ownership position through the purchase of debt or equity securities of troubled entities and may then negotiate for the ownership or effective control of their assets.

        Actively Manage Our Businesses.    We believe that we can leverage off of our core businesses to better assess and increase the value of our Acquisitions. For instance, our homebuilding expertise allows us to appropriately assess the risks of a real estate development prior to making a mezzanine loan and also to complete a development if it is necessary or profitable to do so.

A-3



        Deploy Operating and Transaction Structuring Expertise of Existing Management Team into Related Fields.    Our management team has extensive experience in acquiring, developing and operating real estate, hotel and casino and oil and gas businesses and in identifying and acquiring undervalued assets. We believe there is significant opportunity to use this experience by acquiring or starting businesses in asset-intensive sectors, including other real estate development activities, industrial manufacturing, energy and insurance and asset management, in which we have had no or limited experience to date, but which may be undervalued and have potential for growth.

Reasons for the Acquisitions


Completed Acquisitions

        On December 6, 2004, AREP Oil & Gas LLC, pursuant to a membership interest purchase agreement and related assignment and assumption agreement with Arnos Corp., High River Limited Partnership and Hopper Investments LLC, purchased all of the membership interests of Mid River LLC for an aggregate purchase price of $38.1 million, which equaled the principal amount of the Panaco Debt plus accrued but unpaid interest. The assets of Mid River consisted of $38.0 million principal amount of the Panaco Debt. Arnos, High River and Hopper Investments are controlled by Mr. Icahn.

        On December 27, 2004, AREP Sands Holding LLC, our indirect subsidiary, pursuant to a note purchase agreement with Barberry Corp. and Cyprus, LLC, purchased $37.0 million principal amount of 3% notes due 2008 issued by Atlantic Holdings, or the Atlantic Holdings Notes. The purchase price was $36.0 million. The Atlantic Holdings notes are convertible, under certain circumstances, into 65.909 shares of common stock of Atlantic Holdings for each $1,000 of principal amount of such notes and are secured by all existing and future assets of Atlantic Holdings and ACE Gaming. Cyprus and Barberry are controlled by Mr. Icahn.

A-4



SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

        The following table summarizes certain selected historical consolidated financial data of AREP, which you should read in conjunction with its financial statements and the related notes contained in this Information Statement and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical consolidated financial data as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002, have each been derived from our audited consolidated financial statements at those dates and for those periods, contained elsewhere in this report. The selected historical consolidated financial data as of December 31, 2002 and 2001 and for the year ended December 31, 2001 has been derived from our audited consolidated financial statements at that date and for that period, not contained in this Information Statement. The selected historical consolidated financial data as of and for the years ended December 31, 2000 has been derived from our consolidated financial statements (unaudited) at that date and for that period.

 
  Year Ended December 31,
 
 
  2004
  2003
  2002
  2001
  2000
 
 
  (in $000's, except per unit amounts)

 
Total revenues   $ 453,581   $ 370,469   $ 435,729   $ 416,624   $ 378,957  
   
 
 
 
 
 
Operating income   $ 87,814   $ 68,213   $ 78,817   $ 64,463   $ 65,175  
Other gains and (losses):                                
  Gain on sale of marketable equity and debt securities     40,159     2,607         6,749      
  Unrealized losses on securities sold short     (23,619 )                
  Impairment loss on equity interest in GB Holdings, Inc.     (15,600 )                
  Gain (loss) on sale of other assets         (1,503 )   (353 )   27      
  Gain on sales and disposition of real estate     5,262     7,121     8,990     1,737     6,763  
  Write-down of marketable equity and debt securities and other investments         (19,759 )   (8,476 )        
  Gain (loss) on limited partnership interests             (3,750 )       3,461  
  Minority interest             (1,943 )   (450 )   (2,747 )
   
 
 
 
 
 
Income from continuing operations before income taxes     94,016     56,679     73,285     72,526     72,652  
Income tax (expense) benefit     (16,763 )   1,573     (10,096 )   25,664     379  
   
 
 
 
 
 
Income from continuing operations     77,253     58,252     63,189     98,190     73,031  
   
 
 
 
 
 
Discontinued operations:                                
  Income from discontinued operations     8,523     8,419     7,507     7,419     7,441  
  Gain on sales and disposition of real estate     75,197     3,353              
   
 
 
 
 
 
Total income from discontinued operations     83,720     11,772     7,507     7,419     7,441  
   
 
 
 
 
 
Net earnings   $ 160,973   $ 70,024   $ 70,696   $ 105,609   $ 80,472  
   
 
 
 
 
 
Net Earnings Attributable to:                                
  Limited partners   $ 152,507   $ 59,360   $ 63,168   $ 66,190   $ 72,225  
  General partner     8,466     10,664     7,528     39,419     8,247  
   
 
 
 
 
 
Net earnings   $ 160,973   $ 70,024   $ 70,696   $ 105,609   $ 80,472  
   
 
 
 
 
 

A-5


 
  Year Ended December 31,
 
  2004
  2003
  2002(1)
  2001(1)
  2000(1)
 
  (in $000's except per unit amounts)

Net earnings per limited partnership unit:                              
  Basic earnings:                              
    Income from continuing operations   $ 1.53   $ 0.99   $ 1.11   $ 1.18   $ 1.32
    Income from discontinued operations     1.78     0.25     0.16     0.16     0.16
   
 
 
 
 
  Basic earnings per LP Unit   $ 3.31   $ 1.24   $ 1.27   $ 1.34   $ 1.48
   
 
 
 
 
Weighted average limited partnership units outstanding     46,098,284     46,098,284     46,098,284     46,098,284     46,098,284
   
 
 
 
 
  Diluted earnings:                              
    Income from continuing operations   $ 1.46   $ 0.92   $ 0.99   $ 1.06   $ 1.16
    Income from discontinued operations     1.59     0.21     0.13     0.13     0.13
   
 
 
 
 
  Diluted earnings per LP Unit   $ 3.05   $ 1.13   $ 1.12   $ 1.19   $ 1.29
   
 
 
 
 

Weighted average limited partnership units and equivalent partnership units outstanding

 

 

51,542,312

 

 

54,489,943

 

 

56,466,698

 

 

55,599,112

 

 

56,157,079
   
 
 
 
 

Other financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (excluding property acquisitions)

 

$

16,221

 

$

33,324

 

$

21,896

 

$

68,199

 

$

52,598
 
  At December 31,
 
  2004
  2003
  2002(1)
  2001(1)
  2000(1)
 
  (in $000's)

Balance Sheet Data:                              
Cash and cash equivalents   $ 762,708   $ 487,498   $ 79,540   $ 83,975   $ 172,621
Hotel, casino and resort operating properties     339,492     340,229     335,121     339,201     264,566
Investment in U.S. Government and Agency obligations     102,331     61,573     336,051     313,641     475,267
Other investments     245,948     50,328     54,216     10,529     4,289
Total assets     2,263,057     1,646,606     1,706,031     1,721,100     1,566,597
Mortgages payable     91,896     180,989     171,848     166,808     182,049
Senior secured note payable     215,000                
Senior unsecured note payable     350,598                
Liability for preferred limited partnership units(1)     106,731     101,649            
Partners' equity   $ 1,303,126   $ 1,270,214   $ 1,245,437   $ 1,136,452   $ 1,154,400

(1)
On July 1, 2003, we adopted Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 requires that a financial instrument, which is an unconditional obligation, be classified as a liability. Previous guidance required an entity to include in equity financial instruments that the entity could redeem in either cash or stock. Pursuant to SFAS 150, our preferred units, which are an unconditional obligation, have been reclassified from "Partners' equity" to a liability account in the consolidated balance sheets and the preferred pay-in-kind distribution for the period from July 1, 2003 to December 31, 2003 of $2.4 million and all future distributions have been and will be recorded as "Interest expense" in the consolidated statements of earnings.

A-6



AMERICAN REAL ESTATE PARTNERS, L.P.
SUMMARY SUPPLEMENTAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA

        The following table summarizes certain historical and unaudited pro forma consolidated financial data for AREP, to give effect to the acquisition of TransTexas accounted for in a manner similar to a pooling of interests, which you should read in conjunction with AREP's supplemental financial statements and the related notes contained in this Information Statement and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical supplemental consolidated financial data as of December 31, 2004 and 2003, and for the years ended December 31, 2004 and 2003, have each been derived from our audited supplemental consolidated financial statements at those dates and for those periods, contained elsewhere in this proxy statement. The selected unaudited pro forma consolidated financial data as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 should be read in conjunction with the pro forma consolidated financial statements and related notes contained in this proxy statement.

 
  (in $000's, except per unit amounts)

 
 
  Year Ended December 31,
 
 
  2004
  2004
  2003
  2003
  2002
 
 
  (Supplemental)

  (Pro Forma)

  (Supplemental)

  (Pro Forma)

  (Pro Forma)

 
Total revenues   $ 507,765   $ 769,648   $ 390,189   $ 603,170   $ 623,185  
   
 
 
 
 
 
Operating income   $ 86,136   $ 38,695   $ 61,182   $ 56,566   $ 52,019  
Other gains and (losses):                                
    Gain on sale of marketable equity and debt securities     40,159     40,159     2,607     1,653     8,712  
    Unrealized losses on securities sold short     (23,619 )   (23,619 )           (347 )
    Impairment loss on equity interest in GB Holdings, Inc.     (15,600 )   (15,600 )            
    Gain (loss) on sale of other assets     1,680     1,680     (1,503 )   (1,531 )   (538 )
    Gain on sales and disposition of real estate     5,262     5,034     7,121     7,121     8,990  
    Write-down of marketable equity and debt securities and other investments             (19,759 )   (19,759 )   (8,476 )
    Loss on limited partnership interests                     (3,750 )
    Debt restructuring/reorganization costs         (3,084 )       (1,843 )    
    Severance tax refund     4,468     4,468              
    Dividend expense                     (145 )
    Minority interest     (812 )   2,074     (1,266 )   2,721     (295 )
   
 
 
 
 
 
Income from continuing operations before income taxes     97,674     49,807     48,382     44,928     56,170  
Income tax (expense) benefit     (17,326 )   4,565     16,750     15,792     (10,880 )
   
 
 
 
 
 
Income from continuing operations   $ 80,348   $ 54,372   $ 65,132   $ 60,720   $ 45,290  
   
 
 
 
 
 
  Discontinued operations:                                
    Income from discontinued operations     8,523           8,419              
    Gain on sales and disposition of real estate     75,197           3,353              
   
       
             
Total income from discontinued operations     83,720           11,772              
   
       
             
Net earnings   $ 164,068         $ 76,904              
   
       
             
Net earnings attributable to:                                
  Limited partners   $ 152,507         $ 59,360              
  General partner     11,561           17,544              
   
       
             
Net earnings   $ 164,068         $ 76,904              
   
       
             
Net earnings per limited partnership unit:                                
  Basic earnings:                                
    Income from continuing operations   $ 1.53   $ 0.72   $ 0.99   $ 0.71   $ 0.58  
         
       
 
 
    Income from discontinued operations     1.78           0.25              
   
       
             
    Basic earnings per LP unit   $ 3.31         $ 1.24              
   
       
             
Weighted average limited partnership units outstanding     46,098,283     62,167,250     46,098,284     57,856,905     57,856,905  
   
 
 
 
 
 
  Diluted earnings:                                
    Income from continuing operations   $ 1.46   $ 0.72   $ 0.92   $ 0.69   $ 0.56  
         
       
 
 
    Income from discontinued operations     1.59           0.21              
   
       
             
  Diluted earnings per LP unit   $ 3.05         $ 1.13              
   
       
             
Weighted average limited partnership units outstanding     51,542,312     62,167,250     54,489,942     66,248,564     68,225,319  
   
 
 
 
 
 
Other financial data:                                
  Capital expenditures (excluding property acquisitions)   $ 63,750   $ 150,854   $ 33,957   $ 86,841   $ 60,776  
  Book value per unit   $ 30.97   $ 23.76                    

A-7


 
  (in $000's)

 
  At December 31,
 
  2004
  2004
  2003
  2003
  2002
 
  (Supplemental)
  (Pro Forma)
  (Supplemental)
  (Pro Forma)
  (Pro Forma)
Balance Sheet Data:                          
Cash and cash equivalents   $ 768,918   $ 1,097,810   $ 504,369   N/A   N/A
Hotel, casino and resort operating properties     339,492     511,132     340,229   N/A   N/A
Oil and gas properties     168,136     506,900     168,921   N/A   N/A
Investment in U.S. Government and Agency Obligations     102,331     102,331     61,573   N/A   N/A
Other investments     245,948     245,948     50,328   N/A   N/A
Total assets     2,408,189     3,179,167     1,831,573   N/A   N/A
Mortgages payable     91,896     91,896     180,989   N/A   N/A
Senior secured note payable     215,000     215,000       N/A   N/A
Senior unsecured note payable     350,598     830,598       N/A   N/A
Liability for preferred limited partnership units     106,731     106,731     101,649   N/A   N/A
Partner's equity     1,427,435     1,477,355     1,393,347   N/A   N/A

Capital Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 
As reported   $ 63,750   $ 63,750   $ 33,957   N/A   N/A
Panaco     N/A     1,994     N/A   N/A   N/A
GB Holdings, Inc.     N/A     17,378     N/A   N/A   N/A
NEG Holding     N/A     67,732     N/A   N/A   N/A
   
 
 
 
 
    $ 63,750   $ 150,854   $ 33,957   N/A   N/A
   
 
 
 
 

A-8



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
SUPPLEMENTAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        We are a diversified holding company engaged in a variety of businesses. Our primary business strategy is to continue to grow our core businesses, including real estate, gaming and entertainment, and oil and gas. In addition, we seek to acquire undervalued assets and companies that are distressed or in out of favor industries.

        Our businesses currently include rental real estate; real estate development; hotel and resort operations; hotel and casino operations; oil and gas exploration and production; and investments in equity and debt securities. We may also seek opportunities in other sectors, including energy, industrial manufacturing, insurance and asset management.

        In continuation of our strategy to grow our core businesses, we have recently acquired, and have entered into agreements to acquire, additional gaming and entertainment and oil and as assets from affiliates of Mr. Icahn. See "Pending Acquisitions."

        To capitalize on favorable real estate market conditions and the mature nature of our commercial real estate portfolio, we have offered our rental real estate portfolio for sale. During the year ended December 31, 2004, we sold 57 rental real estate properties for approximately $245.4 million. These properties were encumbered by mortgage debt of approximately $93.8 million that we repaid from the sale proceeds. As of December 31, 2004, we owned 71 rental real estate properties with a book value of approximately $196.3 million, individually encumbered by mortgage debt which aggregated approximately $91.9 million. As of December 31, 2004, we had entered into conditional sales contracts or letters of intent for 15 rental real estate properties. Selling prices for the properties covered by the contracts or letters of intent would total approximately $97.9 million. These properties are encumbered by mortgage debt of approximately $36.0 million. Because of the conditional nature of sales contracts and letters of intent, we cannot be certain that these properties will be sold. We continue to seek purchasers for our remaining rental real estate portfolio. We cannot be certain that we will receive offers satisfactory to us or, if we receive offers, any of the properties will ultimately be sold at prices acceptable to us. From January 1, 2005 through March 1, 2005, we sold four of these rental real estate properties for approximately $46.5 million. These properties were encumbered by approximately $10.8 million of mortgage debt.

        Historically, substantially all of our real estate assets leased to others have been net-leased to single corporate tenants under long-term leases. With certain exceptions, these tenants are required to pay all expenses relating to the leased property and therefore we are not typically responsible for payment of expenses, such as maintenance, utilities, taxes and insurance associated with such properties.

        Expenses relating to environmental clean-up related to our development and rental real estate operations have not had a material effect on our earnings, capital expenditures or competitive position. We believe that substantially all such costs would be the responsibility of the tenants pursuant to lease terms. While most tenants have assumed responsibility for the environmental conditions existing on their leased property, there can be no assurance that we will not be deemed to be a responsible party or that the tenant will bear the costs of remediation. Also, as we acquire more operating properties, our exposure to environmental clean-up costs may increase. We have completed Phase I environmental site assessments on most of our properties through third-party consultants. Based on the results of these Phase I environmental site assessments, the environmental consultant has recommended that certain sites may have environmental conditions that should be further reviewed. We have notified each of the responsible tenants to attempt to ensure that they cause any required investigation and/or remediation to be performed and most tenants continue to take appropriate action. However, if the tenants fail to perform responsibilities under their leases referred to above, we could potentially be

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liable for these costs. Based on the limited number of Phase II environmental site assessments that have been conducted by the consultants, there can be no accurate estimate of the need for or extent of any required remediation, or the costs thereof. Phase I environmental site assessments will also be performed in connection with new acquisitions and with such property refinancings as we may deem necessary and appropriate. We are in the process of updating our Phase I environmental site assessments for certain of our environmentally sensitive properties. Approximately 75 updates were completed in 2003. No additional material environmental conditions were discovered. Although we conducted environmental investigations in 2004 for newly acquired properties and no environmental concerns were disclosed by such investigations, we did not conduct any updates to the Phase I environmental site assessments for our remaining portfolio in 2004.

        We have made investments in the gaming industry through our ownership of Stratosphere Casino Hotel & Tower in Las Vegas, Nevada and through our purchase of securities of the entity which owns The Sands Hotel and Casino in Atlantic City, New Jersey. One of our subsidiaries, formed for this purpose, entered into an agreement in January 2004 to acquire two Las Vegas hotels and casinos, Arizona Charlie's Decatur and Arizona Charlie's Boulder, from Mr. Icahn and an entity affiliated with Mr. Icahn, for aggregate consideration of $125.9 million. Upon obtaining all approvals necessary under gaming laws, the acquisition was completed in May 2004. We have entered into an agreement with affiliates of Mr. Icahn pursuant to which we will acquire approximately 41.2% of the outstanding common stock of GB Holdings and warrants to purchase, upon the occurrence of certain events, approximately 11.3% of the fully diluted common stock of Atlantic Holdings, the indirect owner of The Sands Hotel and Casino. We are considering additional gaming industry investments. These investments may include acquisitions from, or be made in conjunction with, our affiliates, provided that the terms thereof are fair and reasonable to us.

        We have entered into agreements with affiliates of Mr. Icahn to purchase the other membership interest in NEG Holding and 100% of the equity of TransTexas and Panaco, each an oil and gas exploration and production company. On April 6, 2005, we completed the purchase of TransTexas for $180.0 million of cash. A Form 8-K was filed on May 10, 2005, which included AREP's supplemental consolidated historical financial statements to give effect to the acquisition of TransTexas. See "Item 1—Business—Pending Acquisitions." NEG Operating, TransTexas and Panaco are affected by extensive regulation through various federal, state and local laws and regulations relating to the exploration for and development, production, gathering and marketing of oil and gas. NEG Operating, TransTexas and Panaco are also subject to numerous environmental laws, including but not limited to, those governing management of waste, protection of water, air quality, the discharge of materials into the environment, and preservation of natural resources. Non-compliance with environmental laws and the discharge of oil, natural gas, or other materials into the air, soil or water may give rise to liabilities to the government and third parties, including civil and criminal penalties, and may require us to incur costs to remedy the discharge. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose retroactive, strict, and joint and several liabilities rendering entities liable for environmental damage without regard to negligence or fault. We cannot assure you that new laws and regulations, or modifications of or new interpretations of existing laws and regulations, will not substantially increase the cost of compliance or otherwise adversely affect our oil and gas operations and financial condition or that material indemnity claims will not arise with respect to properties that we acquire. While we do not anticipate incurring material costs in connection with environmental compliance and remediation, we cannot guarantee that material costs will not be incurred.

        In accordance with GAAP, assets transferred between entities under common control are accounted for at historical costs similar to a pooling of interests and the financial statements of previously separate companies for periods prior to the acquisition are (and, in the case of the pending acquisitions, following the closing of the acquisitions, will be) restated on a combined basis.

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Supplemental Results of Operations

Calendar Year 2004 Compared to Calendar Year 2003

        Gross revenues increased by $117.6 million, or 30.1%, during 2004 as compared to 2003. This increase reflects increases of $37.5 million in oil and gas operating revenues, $37.1 million in hotel and casino operating revenues, $21.8 million in interest income on U.S. government and agency obligations and other investments, $13.3 million in land, house and condominium sales, $4.3 million in accretion of investment in NEG Holding LLC, $3.9 million in hotel and resort operating income, $0.3 million in NEG management fees, $1.4 million in equity in earnings of GB Holdings, $0.8 million in rental income, and $0.4 million in dividend and other income. These increases were partially offset by a decrease of $3.2 million in interest income on financing leases. The increase in oil and gas operating income was due to a full year of income for TransTexas compared to four months in 2003. The increase in hotel and casino operating income is primarily due to an increase in casino, hotel, and food and beverage revenues. The increase in interest income on U.S. government and agency obligations and other investments is primarily due to the repayment of two mezzanine loans, on which interest was accruing, and increased interest income from other investments. The increase in land, house and condominium sales is primarily due to sales of higher priced units. The increase in NEG management fees is primarily due to management fees received from Panaco. NEG entered into a management agreement with Panaco in November 2004. The decrease in interest income on financing leases is primarily due to property sales and reclassifications.

        Expenses increased by $92.6 million, or 28.2%, during 2004, as compared to 2003. This increase reflects increases of $22.6 million in interest expense, $10.7 million in hotel and casino operating expenses, $9.3 million in cost of land, house and condominium sales, $8.8 million in oil and gas operating expenses, $6.9 million in general and administrative expenses, $27.9 million in depreciation, depletion and amortization, $4.1 million in hotel and resort operating expenses and $2.4 million in provision for loss on real estate. These increases were partially offset by a decrease of $0.1 million in property expenses. The increase in interest expense is primarily attributable to interest on the $215 million principal amount of 7.85% senior secured notes issued by American Casino, the $353 million principal amount of 81/8% senior notes issued by us in May 2004 and interest expense pertaining to preferred limited partnership pay-in-kind distribution. The increase in hotel and casino operating expenses is primarily attributable to increased costs associated with increased revenues. The increase in the land, house and condominium expenses is primarily attributable to increased sales as discussed above. The increase in oil and gas operating expenses of $8.8 million was due to a full year of expenses in 2004 compared to four months in 2003. The increase in general and administrative expenses is primarily attributable to expenses incurred in connection with the increase in NEG management fees and as a result of the Grand Harbor acquisition in July 2004. The increase in depreciation, depletion and amortization is primarily due to increased depreciation and amortization with respect to American Casino and a full year of depletion with respect to TransTexas compared to four months in 2003.

        Operating income increased during 2004 by $25.0 million, or 40.8%, to $86.1 million from $61.2 million in 2003, as detailed above.

        Earnings from land, house and condominium operations increased by $4.0 million or 96.0% to $8.1 million in 2004 due to sales of higher priced units. Based on current information, sales are expected to decrease in early 2005. However, the Company currently expects that the effects of the acquisition of Grand Harbor, completed in July 2004, and the approval in March 2004 of a 35 unit sub-division in Westchester County, New York, should provide increased earnings from these operations in the second half of 2005.

        Earnings from hotel and casino operating properties increased by $26.4 million, or 57.5%, to $72.4 million during 2004 due to increased revenues at each of our three properties.

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        Earnings from oil and gas operating properties increased by $28.7 million, or 181.0% to $44.6 million.

        Gains on sales of property transactions and other assets from continuing operations increased by $1.3 million or 23.6%, to $6.9 million, in 2004.

        A gain on sale of marketable debt securities of $40.1 million was recorded in 2004, as compared to a gain of $2.6 million in 2003.

        A write-down of marketable equity and debt securities and other investments of $19.8 million was recorded in 2003. There was no such write-down in 2004.

        Unrealized losses on securities sold short of $23.6 million was recorded in 2004. There were no such losses in 2003. At March 1, 2005, the $23.6 million of unrealized losses has been reversed and a net gain of $3 million recorded.

        An impairment loss on equity interest in GB Holdings, Inc. of $15.6 million was recorded in 2004. The impairment reflects the price, $12 million, subject to increases up to $6 million based upon Atlantic Holdings meeting earnings targets in 2005 and 2006, used in the agreement to purchase, from an affiliate of Mr. Icahn, shares of GB Holdings common stock representing approximately 41.2% of the outstanding GB Holdings common stock. The purchase price pursuant to the agreement was less than our carrying value, approximately $26.2 million, for the approximately 36.3% of the outstanding GB Holdings common stock that we own. There was no such loss in 2003.

        A severance tax refund of $4.5 million was received in 2004. No such refund was received in 2003.

        Minority interest in the net earnings of TransTexas was $0.8 million in 2004 as compared to $1.3 million during 2003.

        Income from continuing operations before income taxes increased by $49.3 million in 2004 as compared to 2003, as detailed above.

        Income tax expense of $17.3 million was recorded in 2004 as compared to a $16.8 million income tax benefit in 2003 due to a reduction in the tax valuation allowance in 2003. Income tax expense was recorded by our corporate subsidiaries NEG, TransTexas and American Casino.

        Income from continuing operations increased by $15.2 million, or 23.4%, to $80.3 million in 2004.

        Income from discontinued operations increased by $71.9 million to $83.7 million in 2004. This reflects our decision to capitalize on favorable real estate markets and the mature nature of our commercial real estate portfolio, which resulted in gains on property dispositions.

        Net earnings for 2004 increased by $87.2 million, or 113.3%, to $164.1 million. This primarily was attributable to increased income from discontinued operations ($71.9 million), increased gain on marketable debt securities ($37.6 million), increased net oil and gas operating income ($28.7 million), increased net hotel and casino operating income ($26.4 million) and increased interest income ($21.8 million). These gains were partially offset by increased depreciation, depletion and amortization ($27.9 million) increased interest expense ($22.6 million), increase in unrealized losses on securities sold short ($23.6 million), increased income tax expense ($34.1 million) and impairment loss on equity interest in GB Holdings, Inc. ($15.6 million). Net earnings in 2003 also was affected by a write down of other investments of $19.8 million.

        Upon completion of the acquisitions described in Note 29 of the consolidated financial statements, the Company will consolidate the financial statements of NEG Holding, Panaco, and GB Holdings. Certain intercompany transactions will be eliminated. As a result, certain intercompany transactions will be eliminated, including, along others, the equity interest in GB Holdings for which we recorded an impairment loss in 2004, and NEG management fees.

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Calendar Year 2003 Compared to Calendar Year 2002

        Gross revenues decreased by $45.5 million, or 10.5%, during 2003 as compared to 2002. This decrease reflects decreases of (1) $62.8 million in land, house and condominium sales, (2) $8.0 million in interest income on U.S. government and agency obligations and other investments, (3) $3.8 million in equity in earnings of GB Holdings, Inc., (4) $2.7 million in accretion of investment in NEG Holding, (5) $1.6 million in financing lease income and (6) $1.0 million in NEG management fee (7) $0.3 million in hotel and resort operating income, partially offset by increases of $20.9 million in oil and gas operating income, $12.8 million in hotel and casino operating income, $0.5 million in rental income, $0.5 million in dividend and other income. The decrease in land, house and condominium sales is primarily due to a decrease in the number of units sold, as the Grassy Hollow, Gracewood and Stone Ridge properties were depleted by sales. During 2003, Hammond Ridge received necessary approvals and, along with Penwood, have commenced lot sales. The decrease in interest income on U.S. government and agency obligations and other investments is primarily attributable to the prepayment of a loan to Mr. Icahn in 2003 and a decline in interest rates on U.S. Government and Agency obligations as higher rate bonds were called in 2002. The decrease in equity in earnings of GB Holdings, Inc. is due to decreased casino revenue primarily attributable to a reduction in the number of table games as new slot machines were added in 2002. This business strategy had a negative effect on casino operations and was changed in 2003 to focus on the mid to high-end slot customer with a balanced table game business. The decrease in accretion of investment in NEG Holding is primarily attributable to priority distributions received from NEG Holding in 2003. The decrease in financing lease income is the result of lease expirations, reclassifications of financing leases and normal financing lease amortization. The decrease in NEG management fee was due to a decrease in costs associated with NEG. The decrease in rental income is primarily attributable to property dispositions. The increase in hotel and casino operating income is primarily attributable to an increase in hotel, food and beverage revenues and a decrease in promotional allowances. The average daily room rate, or ADR, at the Stratosphere increased $3 to $51 and percentage occupancy increased approximately 0.2% to 89.8%. The ADR at Arizona Charlie's Decatur decreased $1 to $43 and percentage occupancy increased 10.9% to 85.3%. The ADR at Arizona Charlie's Boulder increased less than $1 to $43 and percentage occupancy increased 0.5% to 55.7%.

        Expenses decreased by $27.9 million, or 7.8%, during 2003 as compared to 2002. This decrease reflects decreases of $45.5 million in the cost of land, house and condominium sales, $1.4 million in hotel and resort operating expenses, $1.1 million in hotel and casino operating expenses and $2.5 million in provision for loss on real estate, partially offset by increases of $5.0 million in oil and gas operating expenses, $0.9 million in rental property expenses and $16.9 million in depreciation, depletion and amortization. The decrease in the cost of land, house and condominium sales is due to decreased sales. Costs as a percentage of sales decreased from 72% in 2002 to 69% in 2003. The decrease in hotel and resort operating expenses is due to a decrease in payroll and related expenses. The decrease in hotel and casino operating expenses is primarily attributable to a decrease in selling, general and administrative expenses. Costs as a percentage of sales decreased from 87% in 2002 to 83% in 2003. A provision for loss on real estate of $0.8 million was recorded in 2003 as compared to $3.2 million in 2002. In 2002, there were more properties vacated due to tenant bankruptcies than in 2003. The increase in oil and gas operating expenses was due to no activity during 2002. The increase in depreciation, depletion and amortization was due to the inclusion of TransTexas in our operating results for four months in 2003.

        Operating income decreased during 2003 by $17.6 million compared to 2002 as detailed above.

        Earnings from land, house and condominium operations decreased significantly in 2003 compared to 2002 due to a decline in inventory of completed units available for sale. Based on current information, sales will increase moderately during 2004. However, municipal approval of land inventory or the purchase of approved land is required to continue this upward trend into 2005 and beyond.

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        Earnings from hotel, casino and resort properties could be constrained by recessionary pressures, international tensions and competition.

        Earnings from oil and gas operations were $45.4 million in 2003 as compared to $33.4 million in 2002. The increase was due to the inclusion of TransTexas in our operating results in 2003.

        Gain on property transactions from continuing operations decreased by $1.9 million during 2003 as compared to 2002 due to the size and number of transactions.

        A loss on sale of other assets of $1.5 million was recorded in 2003 as compared to $0.4 million loss in 2002.

        A write-down of marketable equity and debt securities and other investments of $19.8 million, pertaining to our investment in the Philip notes, was recorded in 2003 as compared to a write-down of $8.5 million in 2002. These write downs relate to our investment in Philip Services Corp., which filed for bankruptcy protection in June 2003.

        A write-down of a limited partnership investment of $3.8 million was recorded in 2002. There was no such write-down in 2003.

        A gain on sale of marketable equity securities of $2.6 million was recorded in 2003. There was no such gain in 2002.

        Minority interest in the net earnings of Stratosphere Corporation was $1.9 million during 2002. As a result of the acquisition of the minority interest in December 2002, there was no minority interest in Stratosphere in 2003 or thereafter. Minority interest in the net earnings of TransTexas was $1.3 million during 2003.

        Income from continuing operations before income taxes decreased by $24.9 million in 2003 as compared to 2002, as detailed above.

        An income tax benefit of $16.8 million was recorded in 2003 as compared to an expense of $10.1 million in 2002. The effective tax rate on earnings of taxable subsidiaries was positively affected in 2003 by a reduction in the valuation allowance in deferred tax assets. We expect our effective tax rate on earnings of taxable subsidiaries to increase significantly in 2004.

        Income from continuing operations increased by $1.9 million in 2003 as compared to 2002, as detailed above.

        Income from discontinued operations increased by $4.3 million in 2003 as compared to 2002, primarily due to gains on property dispositions.

        Net earnings for 2003 increased by $6.2 million as compared to 2002 primarily due to oil and gas net operating income of $15.9 million in 2003, decreased income tax expense of $26.8 million, decreased write-down of limited partnership interests of $3.8 million, increased earnings from hotel and casino operations of $13.9 million, increased gain on the sale of marketable equity securities of $2.6 million and an increase in income from discontinued operations of $4.3 million which was partially offset by an increase in depreciation, depletion and amortization of $16.9 million, an increase in the write-down of marketable equity and debt securities and other investments of $11.3 million, decreased earnings from land, house and condominium operations of $17.2 million, decreased interest income of $8.0 million and decreased equity in earnings of GB Holdings of $3.8 million.

Liquidity and Capital Resources

        Net cash provided by operating activities was $98.0 million for 2004 as compared to $32.9 million for 2003. This increase of $65.1 million was primarily due to an increase in oil and gas operations ($28.7 million), hotel and casino operations ($26.4 million), an increase in interest income ($21.8 million), repayment of accounts payable and accrued expenses in 2003 and increased accounts payable and accrued expenses in 2004 ($134.6 million) and an increase in cash flow from other

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operations ($10.0 million), partially offset by an increase in interest expense ($22.6 million), an increase in due from brokers ($123.0 million) and an increase in receivables and other assets ($14.2 million).

        The following table reflects our contractual cash obligations as of December 31, 2004, due over the indicated periods and when they come due (in $ millions):

 
  Less than
1 Year

  1-3 Years
  3-5 Years
  After
5 Years

  Total
Mortgages payable   $ 4.8   $ 40.9   $ 9.3   $ 36.9   $ 91.9
Senior secured notes payable                 215.0     215.0
Senior unsecured notes payable                 353.0     353.0
Senior debt interest     78.3     159.5     159.5     211.3     608.6
Acquisition of TransTexas Gas Corp.     180.0                 180.0
Construction and development obligations     55.0                 55.0
Other debt     1.8     1.6             3.4
   
 
 
 
 
  Total   $ 319.9   $ 202.0   $ 168.8   $ 816.2   $ 1,506.9
   
 
 
 
 

Mortgages

        During the years ended December 31, 2004 and 2003, approximately $5.2 million and $6.5 million, respectively, of mortgage principal payments were repaid. These amounts do not include mortgage debt repaid in connection with sales of real estate. In 2004, mortgage financing proceeds were $10.0 million on commercial condo units located New York City. In May 2003, we obtained mortgage financing in the principal amount of $20.0 million on a distribution facility located in Windsor Locks, Connecticut. We intend to use asset sale, financing and refinancing proceeds for new investments.

Long-Term Debt

        In January 2004, ACEP issued senior secured notes due 2012. The notes, in the aggregate principal amount of $215.0 million, bear interest at the rate of 7.85% per annum. ACEP used the proceeds of the offering for the Arizona Charlie's acquisitions, to repay intercompany indebtedness and for distributions to AREH. ACEP also has a $20.0 million credit facility. At December 31, 2004, there were no borrowings under the credit facility. The restrictions imposed by ACEP's senior secured notes and the credit facility likely will preclude our receiving payments from the operations of our principal hotel and gaming properties. ACEP accounted for 67% of our revenues and 34% of our operating income in 2004.

        ACEP's 7.85% senior secured notes due 2012 restrict the payment of cash dividends or distributions by ACEP, the purchase of its equity interests, the purchase, redemption, defeasance or acquisition of debt subordinated to ACEP's notes and investments as "restricted payments." ACEP's notes also prohibit the incurrence of debt, or the issuance of disqualified or preferred stock, as defined by ACEP, with certain exceptions, provided that ACEP may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of consolidated cash flow to fixed charges (each as defined) for the most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional indebtedness is incurred or disqualified stock or preferred stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis giving effect to the debt incurrence or issuance. As of December 31, 2004, such ratio was 3.9 to 1.0. The ACEP notes also restrict the creation of liens, the sale of assets, mergers, consolidations or sales of substantially all of its assets, the lease or grant of a license, concession, other agreements to occupy, manage or use our assets, the issuance of capital stock of restricted subsidiaries and certain related party transactions. The ACEP notes allow it to incur indebtedness, among other things, of up to $50 million under credit facilities, non-recourse financing of up to $15 million to finance the construction, purchase or lease of personal or real property used in its business, permitted affiliate subordinated indebtedness (as defined), the issuance of additional 7.85%

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senior secured notes due 2012 in an aggregate principal amount not to exceed 2.0 times net cash proceeds received from equity offerings and permitted affiliate subordinated debt, and additional indebtedness of up to $10.0 million.

        Additionally, ACEP's senior secured revolving credit facility allows for borrowings of up to $20.0 million, including the issuance of letters of credit of up to $10.0 million. Loans made under the senior secured revolving facility will mature and the commitments under them will terminate in January 2008. At December 31, 2004, there were not any borrowings or letters of credit outstanding under the facility. The facility contains restrictive covenants similar to those contained in the 7.85% senior secured notes due 2012. In addition, the facility requires that, as of the last date of each fiscal quarter, ACEP's ratio of net property, plant and equipment for key properties, as defined, to consolidated first lien debt be not less than 5.0 to 1.0 and ACEP's ratio of consolidated first lien debt to consolidated cash flow not be more than 1.0 to 1.0. At December 31, 2004, these ratios were 83.9 to 1.0 and 0.1 to 1.0, respectively.

        On May 12, 2004, we and AREP Finance issued senior notes due 2012. The notes, in the aggregate principal amount of $353.0 million, and priced at 99.266% of principal amount, bear interest at a rate of 81/8% per annum. The notes are guaranteed by AREH. Net proceeds from the offering have been and will continue to be used for general business purposes, including to pursue our primary business strategy of acquiring undervalued assets in either our existing lines of business or other businesses and to provide additional capital to grow our existing businesses.

        On February 7, 2005, we and AREP Finance issued senior notes due 2013. The notes, in the aggregate principal amount of $480 million, bear interest at a rate of 71/8% per annum. The notes are guaranteed by AREH. Net proceeds from the offering will be used to fund the acquisition of TransTexas, to pay related fees and expenses, and for general business purposes, including to pursue our primary business strategy of acquiring undervalued assets in either our existing lines of business or other businesses and to provide additional capital to grow our existing businesses.

        Our 81/8% senior notes due 2012 and 71/8% notes due 2013 restrict the payment of cash dividends or distributions, the purchase of equity interests or the purchase, redemption, defeasance or acquisition of debt subordinated to the 81/8% senior notes due 2012 and 71/8% notes due 2013. The notes also restrict the incurrence of debt, or the issuance of disqualified stock, as defined, with certain exceptions, provided that we may incur debt or issue disqualified stock if, immediately after such incurrence or issuance, the ratio of the aggregate principal amount of all outstanding indebtedness of AREP and its subsidiaries on a consolidated basis to the tangible net worth of AREP and its subsidiaries on a consolidated basis would have been less than 1.75 to 1.0. As of December 31, 2004, such ratio was 0.46 to 1.0, and 0.79 to 1.0 giving pro forma effect to the issuance of the 71/8% notes due 2013. In addition, both issues of notes require that on each quarterly determination date that the Fixed Charge Coverage Ratio of us and the guarantor of the notes (currently only AREH) for the four consecutive fiscal quarters most recently completed prior to such quarterly determination date be at least 1.5 to 1.0. For the four quarters ended December 31, 2004, such ratio was 2.99 to 1.0. If the ratio is less than 1.5 to 1.0, we will be deemed to have satisfied this test if there is deposited cash, which together with cash previously deposited for such purpose and not released, equal to the amount of interest payable on the notes for one year. If at any subsequent quarterly determination date, the ratio is at least 1.5 to 1.0, such deposited funds will be released to us. The notes also require, on each quarterly determination date, that the ratio of total unencumbered assets, as defined, to the principal amount of unsecured indebtedness, as defined, be greater than 1.5 to 1.0 as of the last day of the most recently completed fiscal quarter. As of December 31, 2004, such ratio was 5.38 to 1.0, and 2.27 to 1.0, giving pro forma effect to the issuance of the 71/8% notes due 2013. The notes also restrict the creation of liens, mergers, consolidations and sales of substantially all of our assets, and transactions with affiliates. As of December 31, 2004, based upon these tests, on a pro forma basis, giving effect to the issuance of the 71/8% notes due 2013, we and AREH could have incurred up to approximately $1.1 billion of additional indebtedness.

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        Notes issued by GB Holdings and Atlantic Holdings also contain restrictions on dividends and distributions and loans to us, as well as other transactions with us. The operating subsidiary of NEG Holding, of which we have agreed to acquire a membership interest, has a credit agreement which contains covenants that have the effect of restricting dividends or distributions. These, together with the ACEP indenture and the indenture governing the notes, likely will preclude our receiving payments from the operations of our principal hotel and casino and certain of our oil and gas properties.

Asset Sales and Purchases

        During the year ended December 31, 2004, we sold 57 rental real estate properties for approximately $245.4 million, which were encumbered by mortgage debt of approximately $93.8 million which was repaid from the sales proceeds. As of December 31, 2004, we had entered into conditional sales contracts or letters of intent for 15 additional rental real estate properties, all of which contracts or letters of intent are subject to purchaser's due diligence and other closing conditions. Selling prices for the properties covered by the contracts or letters of intent would total approximately $97.9 million. These properties are encumbered by mortgage debt of approximately $36.0 million.

        Net proceeds from the sale or disposal of portfolio properties totaled approximately $151.6 million in the year ended December 31, 2004. During 2003, net sales proceeds totaled approximately $20.6 million.

        The types of assets we are pursuing, including assets that may not be readily financeable or generate positive cash flow, such as development properties, non-performing mortgage loans or securities of companies which may be undergoing restructuring, require significant capital investment or require us to maintain a strong capital base in order to own, develop and reposition these assets.

Capital Expenditures

        Capital expenditures for real estate, oil and gas operations, hotel and casino and hotel and resort operations were approximately $63.8 million and $34.0 million during the year ended December 31, 2004 and 2003, respectively. In the year ended December 31, 2004, we acquired a property for approximately $14.6 million, a hotel and resort property for approximately $16.5 million and development property for approximately $62.2 million, the latter two acquired in the Grand Harbor acquisition. We anticipate that, for 2005, capital expenditures for our current real estate and hotel and casino and hotel and resort operations will be approximately $28.1 million.

Leases

        In 2003, 17 leases covering 17 rental real estate properties and representing approximately $2.2 million in annual rentals expired. Twelve leases originally representing $1.6 million in annual rental income were renewed for $1.4 million in annual rentals. Such renewals are generally for a term of five years. Five properties with annual rental income of $0.6 million were not renewed.

        In 2004, 11 leases covering 11 rental real estate properties and representing approximately $1.8 million in annual rentals expired. Eight leases representing $1.5 million in annual rental income were renewed for $1.5 million in annual rentals. Such renewals are generally for a term of five years. Three properties with annual rentals of $0.3 million were not renewed.

        In 2005, 14 leases covering 24 rental real estate properties representing approximately $3.6 million in annual rentals are scheduled to expire. Six leases representing approximately $2.9 million in annual rentals were renewed for approximately $2.9 million. Such renewals are generally for a term of 10 years. Three properties with annual rentals of approximately $0.2 million have not been renewed. The status of five properties with annual rentals of approximately $0.5 million has not yet been determined.

Distributions

        We are continuing to pursue assets, including assets that may not generate positive cash flow, are difficult to finance or may require additional capital, such as properties for development, non-

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performing loans, securities of companies that are undergoing or that may undergo restructuring, and companies that are in need of capital. We are also continuing to identify shorter-term investments. All of these activities require us to maintain a strong capital base and liquidity. It has been our policy to hold our cash rather than to make distributions to partners. The Board of Directors has commenced a review of our distribution policy, and it is uncertain when the Board will conclude its review or whether the Board will authorize distributions.

        On March 31, 2004, we distributed to holders of record of our preferred units as of March 12, 2004, 489,657 additional preferred units. Pursuant to the terms of the preferred units, on March 4, 2005, we declared our scheduled annual preferred unit distribution payable in additional preferred units at the rate of 5% of the liquidation preference of $10.00. The distribution is payable on March 31, 2005 to holders of record as of March 15, 2005. In March 2005, the number of authorized preferred units was increased to 10,900,000.

        Our preferred units are subject to redemption at our option on any payment date, and the preferred units must be redeemed by us on or before March 31, 2010. The redemption price is payable, at our option, subject to the indenture, either all in cash or by the issuance of depositary units, in either case, in an amount equal to the liquidation preference of the preferred units plus any accrued but unpaid distributions thereon.

Cash and Cash Equivalents

        Our cash and cash equivalents and investment in U.S. government and agency obligations increased by $305.3 million during the year ended December 31, 2004 primarily due to proceeds from the issuance of our 81/8% senior notes due 2012 and ACEP's 7.85% senior secured notes due 2012 in the aggregate ($565.4 million), property sales proceeds ($151.6 million), proceeds from the sale of marketable equity in the aggregate and debt securities ($90.6 million), repayment of mezzanine loans ($49.1 million), cash provided by operations ($98.0 million), guaranteed payment from NEG Holding ($16.0 million), proceeds from mortgages payable ($10.0 million) and proceeds from the sale of other assets ($3.8 million) partially offset by the purchase of debt securities ($245.2 million), purchase of the Arizona Charlies' ($125.9 million), the Grand Harbor and Oak Harbor acquisition ($78.6 million), purchase of debt securities of affiliates ($65.5 million), purchase of Atlantic Holdings debt ($36 million), repayment of affiliate debt ($25.0 million), capital expenditures ($63.8 million), rental real estate acquisitions ($14.6 million), periodic principal payments ($14.6 million) and other ($10.0 million).

        Of our cash and cash equivalents at December 31, 2004, approximately $75.2 million is at ACEP. The terms of ACEP's 7.85% senior secured notes and its revolving credit facility restrict dividends and distributions to us, as well as redemptions of equity interests and other transactions that would make the cash available to AREP and its other subsidiaries.

        We received net proceeds of approximately $474 million from the issuance, in February 2005, of our 71/8% senior notes due 2013. Our cash will be used to fund the $180 million acquisition of TransTexas, and for general business purposes, including to pursue our primary business strategy of acquiring undervalued assets in either our existing lines of business or other businesses and to provide additional capital to grow our businesses.

Acquisitions

        On April 6, 2005, we acquired 100% of the equity of TransTexas, on oil and gas exploration and production company, for a purchase price of $180.0 million in cash.

        During December 2004, we acquired the following:

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        On May 26, 2004, ACEP acquired two Las Vegas hotels and casinos, Arizona Charlie's Decatur and Arizona Charlie's Boulder, from Mr. Icahn and an entity affiliated with Mr. Icahn, for aggregate consideration of $125.9 million. At the closing of those acquisitions, AREH transferred 100% of the common stock of Stratosphere to ACEP. As a result, ACEP owns and operates three gaming and entertainment properties in the Las Vegas metropolitan area.

        In October 2003, pursuant to a purchase agreement dated as of May 16, 2003, we acquired all of the debt and 50% of the equity securities of NEG from entities affiliated with Mr. Icahn for an aggregate consideration of approximately $148.1 million plus approximately $6.7 million of accrued interest on the debt securities.

        In July 2004, we acquired Grand Harbor and Oak Harbor, two waterfront communities in Vero Beach, Florida. The communities include three golf courses, a tennis complex, fitness center, beach club and an assisted living facility. In addition, we acquired approximately 400 acres of land to the north of Grand Harbor which currently has entitlements to build approximately 600 homes and an 18 hole golf course. The total purchase price was approximately $75.0 million.

        In January 2004, we purchased a 34,422 square foot commercial condominium unit in New York City for approximately $14.5 million.

Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

        Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Among others, estimates are used when accounting for valuation of investments, recognition of casino revenues and promotional allowances and estimated costs to complete its land, house and condominium developments. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

        We accounted for our acquisitions of NEG, TransTexas and the Arizona Charlie's hotels and casinos as assets transferred between entities under common control which requires that they be accounted for at historical costs similar to a pooling of interests. NEG's investment in NEG Holding constitutes a variable interest entity. In accordance with GAAP, we have determined that NEG is not the primary beneficiary of NEG Holding and therefore we do not consolidate NEG Holding in our consolidated financial statements.

        We believe the following accounting policies are critical to our business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of

        Long-lived assets held and used by us and long-lived assets to be disposed of, are reviewed for impairment whenever events or changes in circumstances, such as vacancies and rejected leases, indicate that the carrying amount of an asset may not be recoverable.

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        In performing the review for recoverability, we estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the carrying amount of the asset an impairment loss is recognized. Measurement of an impairment loss for long-lived assets that we expect to hold and use is based on the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Commitments and Contingencies—Litigation

        On an ongoing basis, we assess the potential liabilities related to any lawsuits or claims brought against us. While it is typically very difficult to determine the timing and ultimate outcome of such actions, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we make estimates of the amount of insurance recoveries, if any. We accrue a liability when we believe a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that we have previously made.

Marketable Equity and Debt Securities and Investment in U.S. Government and Agency Obligations

        Investments in equity and debt securities are classified as either held-to-maturity or available for sale for accounting purposes. Investment in U.S. government and agency obligations are classified as available for sale. Available for sale securities are carried at fair value on our balance sheet. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of partners' equity. Held-to-maturity securities are recorded at amortized cost.

        A decline in the market value of any held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend income is recorded when declared and interest income is recognized when earned.

Mortgages and Notes Receivable

        We have generally not recognized any profit in connection with the property sales in which certain purchase money mortgages receivable were taken back. Such profits are being deferred and will be recognized when the principal balances on the purchase money mortgages are received.

        We engage in real estate lending, including making second mortgage or secured mezzanine loans to developers for the purpose of developing single-family homes, luxury garden apartments or commercial properties. These loans are subordinate to construction financing and we target an interest rate in excess of 20% per annum. However interest is not paid periodically and is due at maturity or earlier from unit sales or refinancing proceeds. We defer recognition of interest income on mezzanine loans pending receipt of principal and interest payments.

Revenue Recognition

        Revenue from real estate sales and related costs are recognized at the time of closing primarily by specific identification. We follow the guidelines for profit recognition set forth by Financial Accounting Standards Board (FASB) Statement No. 66, Accounting for Sales of Real Estate.

Casino Revenues and Promotional Allowances

        We recognize revenues in accordance with industry practice. Casino revenue is recorded as the net win from gaming activities, the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots. Revenues include the retail value of rooms, food and beverage and other items that are provided to customers on a complimentary basis. A corresponding amount is deducted as promotional allowances. The cost of

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such complimentaries is included in "Hotel and casino operating expenses." We also reward customers, through the use of loyalty programs, with points based on amounts wagered, that can be redeemed for a specified period of time for cash. We deduct the cash incentive amounts from casino revenue.

Natural Gas Production Imbalances

        We account for natural gas production imbalances using the sales method, whereby we recognize revenue on all natural gas sold to our customers notwithstanding the fact its ownership may be less than 100% of the natural gas sold. We record liabilities for imbalances greater than our proportionate share of remaining natural gas reserves.

Hedging Agreements

        From time to time, we enter into commodity price swap agreements (the Hedge Agreements) to reduce our exposure to price risk in the spot market for natural gas. We follow Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which was amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These pronouncements established accounting and reporting standards for derivative instruments and for hedging activities, which generally require recognition of all derivatives as either assets or liabilities in the balance sheet at their fair value. The accounting for changes in fair value depends on the intended use of the derivative and its resulting designation. We elected not to designate these instruments as hedges for accounting purposes, accordingly both realized and unrealized gains and losses are included in oil and natural gas sales.

Oil and Natural Gas Properties

        The Company utilizes the full cost method of accounting for its crude oil and natural gas properties. Under the full cost method, all productive and nonproductive costs incurred in connection with the acquisition, exploration and development of crude oil and natural gas reserves are capitalized and amortized on the units-of-production method based upon total proved reserves. The costs of unproven properties are excluded from the amortization calculation until the individual properties are evaluated and a determination is made as to whether reserves exist. Conveyances of properties, including gains or losses on abandonments of properties, are treated as adjustments to the cost of crude oil and natural gas properties, with no gain or loss recognized.

        Under the full cost method, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% per year (the ceiling limitation). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, abandonment costs, and certain production related and ad-valorem taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes, which are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly basis.

Accounting for Asset Retirement Obligations

        We account for our asset retirement obligation under Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. SFAS 143 provides accounting requirements for costs associated with legal obligations to retire tangible, long-lived assets. Under SFAS 143, an asset retirement obligation is needed at fair value in the period in which it is incurred by increasing the carrying amount for the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset.

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Income Taxes

        No provision has been made for federal, state or local income taxes on the results of operations generated by partnership activities as such taxes are the responsibility of the partners. Stratosphere Corporation, National Energy Group, Inc. and TransTexas Gas Corporation, our corporate subsidiaries, account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.

        Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        Management periodically evaluates all evidence, both positive and negative, in determining whether a valuation allowance to reduce the carrying value of deferred tax assets is still needed. In 2004 and 2003, we concluded, based on the projected allocations of taxable income, that our corporate subsidiaries, NEG, Stratosphere and TransTexas, more likely than not will realize a partial benefit from their deferred tax assets and loss carryforwards. Ultimate realization of the deferred tax asset is dependent upon, among other factors, our corporate subsidiaries' ability to generate sufficient taxable income within the carryforward periods and is subject to change depending on the tax laws in effect in the years in which the carryforwards are used.

Properties

        Properties held for investment, other than those accounted for under the financing method, are carried at cost less accumulated depreciation unless declines in the value of the properties are considered other than temporary at which time the property is written down to net realizable value. Properties held for sale are carried at the lower of cost or net realizable value. Such properties are no longer depreciated and their operations are included in discontinued operations. A property is classified as held for sale at the time we determine that the criteria in SFAS 144 have been met.

Trends and Other Uncertainties

General

        Certain of the individuals who conduct the affairs of API, including our chairman, Carl C. Icahn, and our president and chief executive officer, Keith A. Meister, are and will in the future be committed to the management of other businesses owned or controlled by Mr. Icahn and his affiliates. Accordingly, these individuals will not be devoting all of their professional time to the management of us, and conflicts may arise between our interests and the other entities or business activities in which such individuals are involved. Conflicts of interest may arise in the future as such affiliates and we may compete for the same assets, purchasers and sellers of assets or financings.

        Mr. Icahn, through certain affiliates, currently owns 100% of API and approximately 86.5% of our outstanding depositary units and preferred units. Applicable pension and tax laws make each member of a "controlled group" of entities, generally defined as entities in which there is 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.

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        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, is the sponsor of several pension plans which are underfunded by a total of approximately $33.0 million on an ongoing actuarial basis and $149.0 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 ACF controlled group, we would be liable for any failure of ACF to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of the ACF pension plans. In addition, other entities now or in the future within the controlled group that includes us may have pension plan obligations that are, or may become, underfunded and we would be liable for any failure of such entities to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of such plans.

        The current underfunded status of the ACF pension plans requires ACF to notify the PBGC of certain "reportable events," such as if we cease to be a member of the ACF controlled group, or if we make certain extraordinary dividends or stock redemptions. The obligation to report could cause us to seek to delay or reconsider the occurrence of such reportable events.

        Starfire Holding Corporation, which is 100% owned by Mr. Icahn, has undertaken to indemnify us and our subsidiaries from losses resulting from any imposition of pension funding or termination liabilities that may be imposed on us and our subsidiaries or our assets as a result of being a member of the Icahn controlled group. The Starfire indemnity provides, among other things, that so long as such contingent liabilities exist and could be imposed on us, Starfire will not make any distributions to its stockholders that would reduce its net worth to below $250.0 million. Nonetheless, Starfire may not be able to fund its indemnification obligations to us.

        Because we are a holding company and a significant portion of our assets consists 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. 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.

        To avoid regulation 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, 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 operate as a partnership for federal income tax purposes. This allows us to pass through our income and deductions to our partners. We believe that we have been and are properly treated as a

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partnership for federal income tax purposes. However, the Internal Revenue Service, or IRS, could challenge our partnership status and we could fail to qualify as a partnership for past years as well as future years. Qualification as a partnership involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended. For example, a publicly traded partnership is generally taxable as a corporation unless 90% or more of its gross income is "qualifying" income, which includes interest, dividends, real property rents, gains from the sale or other disposition of real property, gain from the sale or other disposition of capital assets held for the production of interest or dividends, and certain other items. We believe that in all prior years of our existence at least 90% of our gross income was qualifying income and we intend to structure our business in a manner such that at least 90% of our gross income will constitute qualifying income this year and in the future. However, there can be no assurance that such structuring will be effective in all events to avoid the receipt of more than 10% of non-qualifying income. If less than 90% of our gross income constitutes qualifying income, we may be subject to corporate tax on our net income at regular corporate tax rates. Further, if less than 90% of our gross income constituted qualifying income for past years, we may be subject to corporate level tax plus interest and possibly penalties. In addition, if we register under the Investment Company Act of 1940, it is likely that we would be treated as a corporation for U.S. federal income tax purposes and subject to corporate tax on our net income at regular corporate tax rates. The cost of paying federal and possibly state income tax, either for past years or going forward, would be a significant liability and would reduce our funds available to make interest and principal payments on the notes.

Real Estate Operations

        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. Undeveloped land and distressed development properties do not generate any operating revenue, while costs are incurred to develop the properties. In addition, undeveloped land and development properties incur expenditures prior to completion, including property taxes and development costs. Also, 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 seek to acquire investments that are undervalued. Acquisition opportunities in the real estate market for value-added investors have become competitive to source and the increased competition may negatively impact the spreads and the ability to find quality assets that provide returns that we seek. These investments may not be readily financeable and may not generate immediate positive cash flow for us. There can be no assurance that any asset we acquire, whether in the real estate sector or otherwise, will increase in value or generate positive cash flow.

        We are currently marketing for sale our rental real estate portfolio. As of December 31, 2004, we owned 71 rental real estate properties with a book value of approximately $196.3 million, individually encumbered by mortgage debt which aggregated approximately $91.9 million. As of December 31, 2004, we had entered into conditional sales contracts or letters of intent for 15 rental real estate properties. Selling prices for the properties covered by the contracts or letters of intent would total approximately $97.9 million. These properties are encumbered by mortgage debt of approximately $36.0 million. Generally, these contracts and letters of intent may be terminated by the buyer with little or no

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penalty. We may not be successful in obtaining purchase offers for our remaining properties at acceptable prices and sales may not be consummated. Many of our properties are net-leased to single corporate tenants, it may be difficult to sell those properties that existing tenants decline to re-let. Our attempt to market the real estate portfolio may not be successful. Even if our efforts are successful, we cannot be certain that the proceeds from the sales can be used to acquire businesses and investments at prices or at projected returns which are deemed favorable. From January 1, 2005 through March 1, 2005, we sold four of these rental real estate properties for approximately $46.5 million. These properties were encumbered by approximately $10.8 million of mortgage debt.

        The bankruptcy or insolvency of our tenants may adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. If a tenant files for bankruptcy, we cannot evict the tenant solely because of such bankruptcy. A court, however, may authorize a tenant to reject or terminate its lease with us.

        We continue to pursue the approval and development of our New Seabury property in Cape Cod, Massachusetts. The development plans have been opposed by the Cape Cod Commission. We have appealed its administrative decision asserting jurisdiction over the development and a Massachusetts Superior Court ruled that a development proposal for up to 278 residential units was exempt from the commission's jurisdiction. However, the court has not ruled with respect to our initial proposal to build up to 675 residential/hotel units. We are currently in settlement discussions with the commission but these discussions may not be successful. We cannot predict the effect on our development of the property if we are unable to settle with the commission, if we lose any appeal from the court's decision or if the commission is ultimately successful in asserting jurisdiction over any of the development proposals.

        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.

Hotel and Casino Operations

        Our properties currently conduct licensed gaming operations in Nevada. In addition, we have entered in an agreement to acquire shares of GB Holdings that together with shares we currently own, will result in our owning approximately 77.5% of the common stock to GB Holdings and warrants to

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purchase, upon the occurrence of certain events, 21.3% of the fully diluted of its subsidiary, Atlantic Holdings, which owns and operates The Sands Hotel and Casino. Various regulatory authorities, including the Nevada State Gaming Control Board, Nevada Gaming Commission and the New Jersey Casino Control Commission, require our properties and The Sands Hotel and Casino 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 current or proposed ownership interests in any of the licensed gaming operations conducted in Nevada and New Jersey, any of which could have a significant adverse effect on our business, financial condition and results of operations, for any cause they may deem reasonable. If we violate gaming laws or regulations that are applicable to us, we may have to pay substantial fines or forfeit assets. If, in the future, we operate or have an ownership interest in casino gaming facilities located outside of Nevada or New Jersey, we may also be subject to the gaming laws and regulations of those other jurisdictions.

        The sale of alcoholic beverages at our Nevada properties is subject to licensing and regulation by the City of Las Vegas and Clark County, Nevada. The City of Las Vegas and Clark County have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action may, and revocation would, reduce the number of visitors to our Nevada casinos to the extent the availability of alcoholic beverages is important to them. If our alcohol licenses become in any way impaired, it would reduce the number of visitors. Any reduction in our number of visitors will reduce our revenue and cash flow.

        The operating expenses associated with our gaming and entertainment properties could increase due to some of the following factors:


        The hotel and casino industry in general, and the markets in which we compete in particular, are highly competitive.

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        Many of our competitors have greater financial, selling and marketing, technical and other resources than we do. We may not be able to compete effectively with our competitors and we may lose market share, which could reduce our revenue and cash flow.

        The strength and profitability of our business depends on consumer demand for hotel-casino resorts and gaming in general and for the type of amenities we offer. Changes in consumer preferences or discretionary consumer spending could harm our business.

        During periods of economic contraction, our revenues may decrease while some of our costs remain fixed, resulting in decreased earnings, because the gaming and other leisure activities we offer at our properties are discretionary expenditures, and participation in these activities may decline during economic downturns because consumers have less disposable income. Even an uncertain economic outlook may adversely affect consumer spending in our gaming operations and related facilities, as consumers spend less in anticipation of a potential economic downturn. Additionally, rising gas prices could deter non-local visitors from traveling to our properties.

        The terrorist attacks which occurred on September 11, 2001, the potential for future terrorist attacks and wars in Afghanistan and Iraq have had a negative impact on travel and leisure expenditures, including lodging, gaming and tourism. Leisure and business travel, especially travel by air, remain particularly susceptible to global geopolitical events. Many of the customers of our properties travel by air, and the cost and availability of air service can affect our business. Furthermore, insurance coverage against loss or business interruption resulting from war and some forms of terrorism may be unavailable or not available on terms that we consider reasonable. We cannot predict the extent to which war, future security alerts or additional terrorist attacks may interfere with our operations.

        Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, may be necessary from time to time to preserve the competitiveness of our hotels and casinos. The gaming industry market is very competitive and is expected to become more competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures, the competitive position of our hotels and casinos could deteriorate if our hotels and casinos are unable to raise funds for such purposes.

        The casino industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes. Future changes in state taxation of casino gaming companies cannot be predicted and any such changes could adversely affect the operating results of our hotels and casino.

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Oil and Gas

        The exploration for and production of oil and gas involves numerous risks. The cost of drilling, completing and operating wells for oil or gas is often uncertain, and a number of factors can delay or prevent drilling operations or production, including:

        The operations that we expect to acquire are affected by extensive regulation through various federal, state and local laws and regulations relating to the exploration for and development, production, gathering and marketing of oil and gas. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds or other financial responsibility requirements, reports concerning operations, the spacing of wells, unitization and pooling of properties, and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas.

        The operations that we expect to acquire are also subject to numerous environmental laws, including but not limited to, those governing management of waste, protection of water, air quality, the discharge of materials into the environment, and preservation of natural resources. Non-compliance with environmental laws and the discharge of oil, natural gas, or other materials into the air, soil or water may give rise to liabilities to the government and third parties, including civil and criminal penalties, and may require us to incur costs to remedy the discharge. Oil and gas may be discharged in many ways, including from a well or drilling equipment at a drill site, leakage from pipelines or other gathering and transportation facilities, leakage from storage tanks, and sudden discharges from oil and gas wells or explosion at processing plants. Hydrocarbons tend to degrade slowly in soil and water, which makes remediation costly, and discharged hydrocarbons may migrate through soil and water supplies or adjoining property, giving rise to additional liabilities. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose retroactive, strict, and joint and several liabilities rendering entities liable for environmental damage without regard to negligence or fault. In the past, we have agreed to indemnify sellers of producing properties against certain liabilities for environmental claims associated with those properties. We cannot assure you that new laws or regulations, or modifications of or new interpretations of existing laws and regulations, will not substantially increase the cost of compliance or otherwise adversely affect our oil and gas operations and financial condition or that material indemnity claims will not arise with respect to properties that we acquire. While we do not anticipate incurring material costs in connection with environmental compliance and remediation, we cannot guarantee that material costs will not be incurred.

        The operations that we expect to acquire depend upon financing or acquiring additional reserves.

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        The future success and growth of the operations that we expect to acquire depend upon the ability to find or acquire additional oil and gas reserves that are economically recoverable. Except to the extent that we conduct successful exploration or development activities or acquire properties containing proved reserves, our proved reserves will generally decline as they are produced. The decline rate varies depending upon reservoir characteristics and other factors. Future oil and gas reserves and production, and, therefore, cash flow and income will be highly dependent upon the level of success in exploiting current reserves and acquiring or finding additional reserves. The business of exploring for, developing or acquiring reserves is capital intensive. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, the ability to make the necessary capital investments to maintain or expand this asset base of oil and gas reserves could be impaired. Development projects and acquisition activities may not result in additional reserves. We may not have success drilling productive wells at economic returns sufficient to replace our current and future production. We may acquire reserves which contain undetected problems or issues that did not initially appear to be significant to us.

        The costs of drilling all types of wells are uncertain, as are the quantity of reserves to be found, the prices that NEG Holding, TransTexas or Panaco will receive for the oil or natural gas, and the costs to operate the well. While each has successfully drilled wells, you should know that there are inherent risks in doing so, and, if we complete the acquisitions, those difficulties could materially affect our financial condition and results of operations. Also, just because we complete a well and begin producing oil or natural gas, we cannot assure you that we will recover our investment or make a profit.

        The revenues, profitability and the carrying value of oil and gas properties that we have agreed to acquire are substantially dependent upon prevailing prices of, and demand for, oil and gas and the costs of acquiring, finding, developing and producing reserves. Historically, the markets for oil and gas have been volatile. Markets for oil and gas likely will continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuations in response to: (1) relatively minor changes in the supply of, and demand for, oil and gas; (2) market uncertainty; and (3) a variety of additional factors, all of which are beyond our control. These factors include, among others:

        The production of each of NEG Holding, TransTexas and Panaco is weighted toward natural gas, making earnings and cash flow more sensitive to natural gas price fluctuations.

        The oil and gas business involves a variety of operating risks, including, but not limited to, unexpected formations or pressures, uncontrollable flows of oil, natural gas, brine or well fluids into the environment (including groundwater contamination), blowouts, fires, explosions, pollution and other risks, any of which could result in personal injuries, loss of life, damage to properties and substantial

A-29


losses. Although NEG Holding, TransTexas and Panaco carry insurance at levels we believe are reasonable, they are not fully insured against all risks. Losses and liabilities arising from uninsured or under-insured events could have a material adverse effect on their and our financial condition and operations.

        NEG Holding and TransTexas typically hedge a portion of oil and gas production during periods when market prices for products are higher than historical average prices. During 2004, NEG Holding and TransTexas hedged 61% and 57%, respectively, of annual natural gas production and NEG Holding and TransTexas hedged 96% and 81%, respectively, of annual oil production.

        Typically, NEG Holding, TransTexas and Panaco have used swaps, cost-free collars and options to put products to a purchaser at a specified price, or floor. In these transactions, NEG Holding, TransTexas and Panaco will usually have the option to receive from the counterparty to the hedge a specified price or the excess of a specified price over a floating market price. If the floating price exceeds the fixed price, the hedging party is required to pay the counterparty all or a portion of this difference multiplied by the quantity hedged.

        There are many companies and individuals engaged in the exploration for and development of oil and gas properties. Competition is particularly intense with respect to the acquisition of oil and gas producing properties and securing experienced personnel. We encounter competition from various oil and gas companies in raising capital and in acquiring producing properties. Many of our competitors have financial and other resources considerably larger than ours.

Investments

        Our partnership agreement allows us to take advantage of investment opportunities we believe exist outside of the real estate market. The equity securities in which we may invest may include common stocks, preferred stocks and securities convertible into common stocks, as well as warrants to purchase these securities. The debt securities in which we may invest may include bonds, debentures, notes, or non-rated mortgage-related securities, municipal obligations, bank debt and mezzanine loans. Certain of these securities may include lower rated or non-rated securities which may provide the potential for higher yields and therefore may entail higher risk and may include the securities of bankrupt or distressed companies. In addition, we may engage in various investment techniques, including derivatives, options and futures transactions, foreign currency transactions, "short" sales and leveraging for either hedging or other purposes. We may concentrate our activities by owning one or a few businesses or holdings, which would increase our risk. 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 not be successful for many reasons including, but not limited to:

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Quantitative and Qualitative Disclosure About Market Risk

        The United States Securities and Exchange Commission requires that registrants include information about primary market risk exposures relating to financial instruments. Through our operating and investment activities, we are exposed to market, credit and related risks, including those described elsewhere herein. We may invest in debt or equity securities of companies undergoing restructuring or undervalued by the market, these securities are subject to inherent risks due to price fluctuations, and risks relating to the issuer and its industry, and the market for these securities may be less liquid and more volatile than that of higher rated or more widely followed securities.

        Other related risks include liquidity risks, which arise in the course of our general funding activities and the management of our balance sheet. This includes both risks relating to the raising of funding with appropriate maturity and interest rate characteristics and the risk of being unable to liquidate an asset in a timely manner at an acceptable price. Real estate investments by their nature are often difficult or time-consuming to liquidate. Also, buyers of minority interests may be difficult to secure, while transfers of large block positions may be subject to legal, contractual or market restrictions. Other operating risks for us include lease terminations, whether scheduled terminations or due to tenant defaults or bankruptcies, development risks, and environmental and capital expenditure matters, as described elsewhere herein. Our mortgages payable are primarily fixed-rate debt and, therefore, are not subject to market risk.

        We invest in U.S. Government and Agency obligations which are subject to interest rate risk. As interest rates fluctuate, we will experience changes in the fair value of these investments with maturities greater than one year. If interest rates increased 100 basis points, the fair value of these investments at December 31, 2004, would decline by approximately $200,000.

        At December 31, 2004, we had a short position with respect to 2.5 million shares of common stock of a company in bankruptcy. If the price of the common stock increased by 10% from the price at that date, we would have incurred an additional loss of approximately $10.0 million with respect to that position.

        Whenever practical, we employ internal strategies to mitigate exposure to these and other risks. We perform, on a case by case basis with respect to new investments, internal analyses of risk identification, assessment and control. We review credit exposures, and seek to mitigate counterparty credit exposure through various techniques, including obtaining and maintaining collateral, and assessing the creditworthiness of counterparties and issuers. Where appropriate, an analysis is made of political, economic and financial conditions, including those of foreign countries. Operating risk is managed through the use of experienced personnel. We seek to achieve adequate returns commensurate with the risk it assumes. We utilize qualitative as well as quantitative information in managing risk.

        The Company is exposed to market risk from adverse changes in prices for oil and natural gas.

        The Company's revenues, profitability, access to capital and future rate of growth are substantially dependent upon the prevailing prices of oil and natural gas. These prices are subject to wide fluctuations in response to relatively minor changes in supply and demand and a variety of additional factors beyond the Company's control. From time to time, the Company has utilized hedging transactions with respect to a portion of its oil and gas production to achieve a more predictable cash flow, as well as to reduce exposure to price fluctuations. While hedging limits the downside risk of adverse price movements, it may also limit future revenues from favorable price movements. Because

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gains or losses associated with hedging transactions are included in oil and gas revenues when the hedged volumes are delivered, such gains and losses are generally offset by similar changes in the realized prices of commodities.

        From time to time, TransTexas enters into commodity price swap agreements (the Hedge Agreements) to reduce its exposure to price risk in the spot market for natural gas. The Company follows Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities, which was amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These pronouncements established accounting and reporting standards for derivative instruments and for hedging activities, which generally require recognition of all derivatives as either assets or liabilities in the balance sheet at their fair value. The accounting for changes in fair value depends on the intended use of the derivative and its resulting designation.

        The following is a summary of natural gas and oil contracts entered into with Shell Trading (US) Company in January and November of 2004.

Type contract

  Production Month
  Volume per month
  Fixed
price

  Floor
  Ceiling
Fixed price   Feb–March 2004   300,000 MMBTU   $ 6.76        
Fixed price   April–June 2004   300,000 MMBTU   $ 5.44        
Fixed price   July–Sept 2004   300,000 MMBTU   $ 5.34        
No cost collars   Oct–Dec 2004   300,000 MMBTU       $ 5.25   $ 5.90
No cost collars   Jan–Dec 2004   25,000 Bbls       $ 28.72   $ 31.90
No cost collars   Jan–Dec 2005   15,000 Bbls       $ 42.50   $ 46.00
No cost collars   Jan–Dec 2005   400,000 MMBTU       $ 6.00   $ 8.35

        The Company has elected not to designate these instruments as hedges for accounting purposes. Accordingly, both realized and unrealized gains and losses are included in oil and natural gas sales. The following summarizes the Company's realized and unrealized gains and losses.

Realized (cash payments)   $ 3,906,326
Valuation loss     1,658,808
   
    $ 5,565,134
   

        A liability of $1,658,808 was recorded at December 31, 2004 representing the market value of the Company's derivatives.

        Subsequent to December 31, 2004, the Company entered into the following natural gas and oil contracts with Shell Trading (US) Company:

Type contract

  Production Month
  Volume per month
  Fixed
price

  Floor
  Ceiling
No cost collars   March–Dec 2005   9,000 Bbls     $ 44.50   $ 48.00
No cost collars   March–Dec 2005   210,000 MMBTU     $ 6.05   $ 7.30
No cost collars   Jan–Dec 2006   14,000 Bbls     $ 41.65   $ 45.25
No cost collars   Jan–Dec 2006   430,000 MMBTU     $ 6.00   $ 7.25

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APPENDIX B: NEG HOLDING LLC

BUSINESS

        We currently beneficially own 50.01% of the outstanding common stock of NEG. NEG owns a membership interest in NEG Holding. The other membership interest in NEG Holding is held by Gascon, an affiliate of Mr. Icahn. Gascon is the managing member of NEG Holding. NEG Holding owns NEG Operating which is engaged in the business of oil and gas exploration and production with properties located on-shore in Texas, Louisiana, Oklahoma and Arkansas. NEG Operating's oil and gas properties are managed by NEG. Under the Operating Agreement between NEG and Gascon, NEG is to receive, as of December 31, 2004, guaranteed payments of approximately $39.9 million and a priority distribution of approximately $148.6 million before Gascon receives any distributions. The Operating Agreement contains a provision that allows Gascon, or its successor, at any time, in its sole discretion, to redeem NEG's membership interest in NEG Holding at a price equal to the fair market value of the interest determined as if NEG Holding had sold all of its assets for fair market value and liquidated. A determination of the fair market value of such assets shall be made by an independent third party jointly engaged by Gascon and NEG.

        NEG Holding is developing and exploiting existing properties by drilling development and exploratory wells, and recompleting and reworking existing wells. NEG Holding anticipates that it will continue its drilling operations on existing properties and will selectively participate in drilling opportunities generated by third parties. NEG Holding also seeks to acquire existing producing properties or interests in them. In November 2002, NEG Holding completed the acquisition of producing oil and gas properties in Pecos County, Texas known as Longfellow Ranch Field for $45.4 million in cash. In December 2002, NEG Holding completed the acquisition of an additional interest in Longfellow Ranch Field for $2.9 million in cash.

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SELECTED FINANCIAL DATA

        The following table sets forth NEG Holdings' selected historical financial and operating data as of and for each of the four years in the period ended December 31, 2004. The financial data was derived from its historical financial statements and is not necessarily indicative of our future performance. NEG Holdings was formed in August 2000. The financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and NEG Holdings' consolidated financial statements and the related notes thereto included elsewhere herein. The selected historical consolidated financial data as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002, have each been derived from NEG Holding's audited consolidated financial statements at those dates and for those periods, contained elsewhere in this proxy statement. The selected historical consolidated financial data as of December 31, 2001 and for the year ended December 31, 2001 has been derived from NEG Holding's audited consolidated financial statements at that date and for that period, not contained in this proxy statement.

 
  Year Ended December 31,
 
 
  2004
  2003
  2002
  2001(1)(3)
 
 
  (In thousands, except for ratios and per unit data)

 
Statement of Operations Data:                          
Oil and natural gas sales   $ 76,677   $ 75,740   $ 35,320   $ 7,786  
Field and plant operations     2,050     1,866     581     203  
   
 
 
 
 
  Total revenue     78,727     77,606     35,901     7,989  
Costs and expenses:                          
  Lease operating     13,505     11,501     8,509     2,687  
  Field and plant operations     1,015     975     489     124  
  Oil and natural gas production taxes     5,732     5,771     1,875     721  
  Depreciation, depletion and amortization     21,386     23,443     15,509     4,349  
  Accretion of asset retirement obligation     261     243          
  Amortization of loan costs     494              
  General and administration     4,920     4,833     5,683     2,107  
   
 
 
 
 
  Total costs and expenses     47,313     46,766     32,065     9,988  
   
 
 
 
 
Operating income (loss)     31,414     30,840     3,836     (1,999 )
Other income:                          
  Interest expense     (2,222 )   (1,538 )   (96 )   (64 )
  Interest income     449     712     1,966     772  
Gain (loss) on sale of securities         (954 )   8,712      
Other     (518 )   (102 )   (492 )    
   
 
 
 
 
Income (loss) before cumulative effect of change in accounting principle     29,123     28,958     13,926     (1,291 )
          1,912          
   
 
 
 
 
Net income (loss)     29,123     30,870     13,926     (1,291 )
Cash Flow Data:                          
Net cash provided by (used in) operating activities     61,630     52,792     26,641     16,169  
Net cash used in investing activities     (67,730 )   (36,548 )   (68,278 )   (8,832 )
Net cash provided by (used in) financing activities     (8,418 )   (15,853 )   (21,653 )   70,964  
Balance Sheet Data (at period end):                          
Cash and cash equivalents     883     15,401     15,010     78,300  
Working capital (deficit)                          
Total assets     260,273     223,804     222,737     216,721  
Long-term debt                          
Members' equity     174,181     161,037     199,841     207,568  

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  Year Ended December 31,
 
  2004(4)
  2003(4)
  2002(4)
  2001(3)
Operating Data:                        
Production:                        
  Oil (Mbls)     565     629     629     246
  Natural gas (Mmcf)     13,106     13,437     7,827     2,713
  Natural gas equivalent (Mmcfe)     16,496     17,211     11,602     4,189
Average sales price:                        
  Oil (per Bbl)   $ 23.37   $ 26.54   $ 28.93   $ 20.81
  Natural gas (per Mcf)     5.21     4.39     3.06     2.63
Unit economics (per Mcfe):                        
  Average sales price   $ 5.11   $ 4.40   $ 3.36   $ 2.97
  Lease operating expenses     0.82     0.66     0.73     0.64
  Oil and natural gas production taxes (net of refunds in 2002)     0.35     0.34     0.16     0.17
  Depreciation, rate     1.28     1.25     1.29     1.00
  General and administrative     0.25     0.28     0.50     0.50

(1)
As mandated by NEG's Plan of Reorganization it contributed all of its assets and liabilities, except for $4.3 million in cash, to NEG Holding in exchange for a 50% membership interest and certain guaranteed amounts and priority distributions. The contribution was recorded as of September 1, 2001.

(2)
Accrual of interest on the NEG's Senior Notes was discontinued during the bankruptcy proceeding. Approximately $10.5 million of additional interest expense would have been recognized NEG during 2000, if not for the discontinuation of the interest accrual. As part of the Plan of Reorganization, $35.3 million of interest on the senior notes was reinstated.

(3)
Operating data is included only from August 31, 2001 when the oil and natural gas assets were contributed to Holding LLC.

(4)
See note 9 of notes to consolidated financial statements.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

2004 Compared to 2003

        Revenues.    Total revenues increased by $1.1 million, or 1.2%, to $78.7 million for 2004 from $77.6 million for 2003. The increase was due to increased oil and natural gas prices. Average natural gas prices increased $0.82 per Mcf to $5.21 per Mcf for 2004 from $4.39 per Mcf for 2003, and average oil prices increased $1.83 per barrel to $28.37 per barrel for 2004 from $26.54 per barrel for 2003.

        In 2004, NEG Holding produced 565 Mbbls of oil, a decrease compared to 629 Mbbls in 2003 and NEG Holdings produced 13,106 Mmcf of natural gas, a decrease from 13,437 Mmcf in 2003.

        Cost and Expenses.    Lease operating expenses increased by $2.0 million, or 13.3%, to $13.5 million for 2004 from $11.5 million for 2003. This increase was the result of rising prices in the service industries.

        Oil and natural gas production taxes were essentially stable at $5.7 million in 2004 and $5.8 million in 2003, reflecting the approximate 1.2% increase in oil and natural gas sales in 2004, offset in part by slightly lower production.

        Depletion, depreciation and amortization decreased $2.1 million, or 8.8%, to $21.4 million in 2004 from $23.4 million in 2003. The decrease was attributable to a lower rate due to increased reserves.

        General and administrative costs were essentially stable at $4.9 million in 2004 and $4.8 million in 2003. NEG Holding capitalized internal costs of $1.0 million and $0.65 million in 2004 and 2003, as costs of oil and gas natural gas properties. Such capitalized costs include salaries and related benefits of individuals directly involved in NEG Holding's, acquisition, exploration and development activities based on a percentage of their salaries.

        Other income (expenses).    Interest expense increased by $0.68 million, or 44.5%, to $2.2 million in 2004 from $1.5 million in 2003. Increased interest expense reflects increased average borrowings under the credit facility incurred to fund drilling and development costs. Equity in loss from an investment increased to $518,892 in 2004 from $102,000 in 2003. This is an investment in a CO2 recovery and sales venture. The high cost of natural gas has been a detriment to the development of this venture and resulted in losses.

        Income before cumulative effect of change in accounting principle essentially was unchanged in 2004, at $29.1 million, and $29.0 million in 2003. In 2003, NEG Holding recognized a cumulative effect of change in accounting principle of $1.9 million related to the adoption of SFAS 143 "Accounting for Asset Retirement Obligations", which resulted in net income of $30.9 million in 2003, compared to net income of $29.1 million in 2004.

2003 Compared to 2002

        Revenues.    Total revenues increased by $41.7 million, or 116%, to $77.6 million for 2003 from $35.9 million for 2002. The increase was due to increased oil and natural gas prices and an increase in production. Average natural gas prices increased $1.33 per Mcf to $4.39 per Mcf for 2003 from $3.06 per Mcf for 2002, and average oil prices increased $2.61 per barrel to $26.54 per barrel for 2003 from $23.93 per barrel for 2002.

        In 2003, NEG Holding produced 629 MBbls of oil, compared to the same volume for 2002, and NEG Holding produced 13,437 Mmcf of natural gas in 2003, a increase from 7,827 Mmcf in 2002. This

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increase was due to the acquisition of Longfellow Ranch in December 2002 and increased drilling activity.

        Cost and expenses.    Lease operating expenses increased by $3.0 million, or 3.5%, to $11.5 million in 2003 from $8.5 million for 2002. This increase is due to the acquisition of Longfellow Ranch in 2002 and additional wells added from drilling.

        Oil and gas production taxes increased by $3.9 million, or 209%, to $5.8 million in 2003 from $1.9 million in 2002. The increase directly resulted from increased oil and gas revenue in 2003.

        Depreciation, depletion and amortization increased $7.9 million, or 51.5%, to $23.4 million in 2003 from $15.5 million in 2002. The increase resulted from additional production in 2003.

        Despite the increase in revenues, general and administrative expenses decreased $0.85 million, or 15%, to $4.8 million in 2003 from $5.7 million in 2002. This resulted from the management agreement with TransTexas Gas in 2003 with less G&A allocated to NEG Holding. NEG Holding capitalized internal costs of $0.65 million in 2003 and $0.6 million in 2002.

        Other income (expense).    Interest expense increased by $1.4 million to $1.5 million in 2003 from $0.1 million in 2002 as a result of borrowing under the Mizuho Credit Facility to pay off long term debt. In 2002, NEG Holding had interest income of $1.2 million as a result of cash deposits compared to interest income of $0.5 million in 2003. In addition, in 2002, NEG Holding had interest income from affiliate of $0.5 million, as a result of a loan to National Energy Group, compared to $.1 million of such income in 2003. In 2002, NEG Holding had a gain on sale of securities of $8.7 million, compared to a loss of $1.0 million in 2002, as a result of sales of securities held for investment purposes.

        Net income.    Net income of $13.9 million was recognized for 2002, compared to net income of $30.0 million in 2003. Net income for 2003 included cumulative effect of accounting change of $1.9 million.

Liquidity and Capital Resources

Cash flows

        NEG Holding expects that its primary sources of cash in 2005 will be funds generated from operations and borrowings under its credit facility. Based on its current level of operations, NEG Holding believes that its cash flow from operations and available borrowings under the credit agreement will be adequate to meet its future liquidity needs for 2005.

        NEG Holding's operating activities provided cash flows of $61.6 million in 2004 compared to $52.8 million in 2003. The increase was primarily due to increases in change in fair value of derivative contracts by $4.5 million from $3.0 million at December 31, 2003 to $7.5 million at December 31, 2004 and in accounts payable and accrued liabilities by $7.5 million from $.5 million at December 31, 2003 to $8.0 million at December 31, 2004. These were offset by decrease in accounts receivable by $3.0 million and in other current assets by $2.0 million.

Capital Expenditures

        During the first two months of 2005, NEG Holding invested approximately $13.3 million in drilling activity. For the remainder of 2005, NEG Holding expects to expend approximately $57.6 million on additional drilling and leasing activities.

Credit Facility

        On December 29, 2003, NEG Holding's subsidiary, NEG Operating LLC, entered into a credit agreement with certain commercial lending institutions, including Mizuho Corporate Bank, Ltd. as the

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Administrative Agent and the Bank of Texas, N.A. and the Bank of Nova Scotia as Co-Agents. The credit agreement provides for a loan commitment amount of up to $120 million and a letter of credit commitment of up to $15 million (provided the outstanding aggregate amount of the unpaid borrowings plus the aggregate undrawn face amount of all outstanding letters of credit may not exceed the borrowing base under the credit agreement). The credit agreement provides further that the amount available to NEG Holding at any time is subject to certain restrictions, covenants, conditions and changes in the borrowing base calculation. In partial consideration of the loan commitment amount, NEG Holding has pledged a continuing security interest in all of its oil and natural gas properties and its equipment, inventory, contracts, fixtures and proceeds related to its oil and natural gas business.

        At Operating LLC's option, interest on borrowings under the credit agreement bear interest at a rate based upon either the prime rate or the LIBOR rate plus, in each case, an applicable margin that, in the case of prime rate loans, can fluctuate from 0.75% to 1.50% per annum, and, in the case of LIBOR rate loans, can fluctuate from 1.75% to 2.50% per annum. Fluctuations in the applicable interest rate margins are based upon Operating LLC's total usage of the amount of credit available under the credit agreement, with the applicable margins increasing as Operating LLC's total usage of the amount of credit available under the credit agreement increases. The credit agreement expires on September 1, 2006.

        At the closing of the credit agreement, Operating LLC borrowed $43.8 million to repay $42.9 million owed under an existing secured loan arrangement, which was then terminated, and to pay administrative fees in connection with this borrowing. The Company has capitalized $1.4 million of loan issuance costs in connection with the closing of this transaction. These costs will be amortized over the life of the loan using the interest method.

        As a condition to the lenders' obligations under the credit agreement, the lenders required that Operating LLC, NEG Holding and the members of NEG Holding, National Energy Group, Inc. and Gascon, execute and deliver at the closing a pledge agreement and irrevocable proxy in favor of Bank of Texas, N.A., its successors and assigns. Pursuant to the terms of the pledge agreement, in order to secure the performance of the obligations of Operating LLC (i) each of NEG and Gascon pledged their 50% membership interest in NEG Holding (such interests constituting 100% of the outstanding equity membership interest of NEG Holding); (ii) NEG Holding pledged its 100% equity membership interest in Operating LLC; and (iii) Operating LLC pledged its 100% equity membership interest in its subsidiary, Shana National LLC. The Pledge Agreement also provides for a continuing security interest in such collateral and that Bank of Texas, N.A. as the collateral agent, is the duly appointed attorney-in-fact of Operating LLC. The collateral agent may take all action deemed reasonably necessary for the maintenance, preservation and protection of the collateral and the security interest in it until such time that all of Operating LLC's obligations under the credit agreement are fulfilled, terminated or otherwise expired. If under the credit agreement an event of default shall have occurred and is continuing, the collateral agent may enforce certain rights and remedies, including, but not limited to, the sale of the collateral, the transfer of all or part of the collateral to the collateral agent or its nominee and/or the execution of all endorsements.

        Draws made under the credit facility are normally made to fund working capital requirements, acquisitions and capital expenditures. During 2004, outstanding balances under the credit facility have ranged from a low of $44 million to a high of $52 million. As of December 31, 2004 the outstanding balance under the credit facility was $52 million.

        The credit agreement requires, among other things, semiannual engineering reports covering oil and natural gas properties, and maintenance of certain financial ratios, including the maintenance of minimum interest coverage, a current ratio, and a minimum tangible net worth. Operating LLC was in compliance with all covenants at December 31, 2003. Operating LLC was not in compliance with the

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minimum interest coverage ratio covenant at December 31, 2004. Operating LLC obtained a waiver of compliance with respect to this covenant for the period ended December 31, 2004. Operating LLC was in compliance with all other covenants at December 31, 2004.

Derivative Instruments

        NEG Holding's financial results and cash flows can be significantly impacted as commodity prices fluctuate in response to changing market conditions. To manage its exposure to natural gas or oil price volatility, NEG Holding may enter into various derivative instruments consisting principally of collar options and swaps.

        While the use of derivative contracts can limit the downside risk of adverse price movements, it may also limit future gains from favorable movements. NEG Holding addresses market risk by selecting instruments whose value fluctuations correlate strongly with the underlying commodity. Credit risk related to derivative activities is managed by requiring minimum credit standards for counterparties, periodic settlements, and mark to market valuations.

        The following is a summary of the oil and natural gas no-cost commodity price collars entered into with Shell Trading company:

Date of Contract

  Volume/Month
  Production Month
  Floor
  Ceiling
August 2002   30,000 Bbls   2003   $ 23.55   $ 26.60
August 2002   300,000 MMBTU   2003   $ 3.25   $ 4.62
November 2002   300,000 MMBTU   2003   $ 3.50   $ 4.74
November 2002   300,000 MMBTU   2004   $ 3.35   $ 4.65
November 2002   300,000 MMBTU   2005   $ 3.35   $ 4.60
November 2003   45,000 Bbls   2004   $ 26.63   $ 29.85
February 2005   16,000 Bbls   2006   $ 41.75   $ 45.40
February 2005   120,000 MMBTU   2006   $ 6.00   $ 7.28

        On January 28, 2003, NEG Holding entered into an eleven month fixed price swap agreement with Plains Marketing, L.P., consisting of a contract for 28,000 barrels of oil per month at a fixed price of $28.35 effective February 2003 through December 2003.

        The following is a summary of oil and natural gas contracts entered into with Bank of Oklahoma on January 6, 2004 and November 15, 2004.

Type Contract

  Production Month
  Volume per Month
  Fixed Price
  Floor
  Ceiling
Fixed price   February—March 2004   400,000 MMBTU   $ 6.915   $ -   $ -
Fixed price   April—June 2004   400,000 MMBTU   $ 5.48   $ -   $ -
Fixed price   July—September 2004   400,000 MMBTU   $ 5.38   $ -   $ -
No Cost Collars   October—December 2004   400,000 MMBTU   $ -   $ 5.25   $ 5.85
No Cost Collars   2005   300,000 MMBTU   $ -   $ 4.75   $ 5.45
No Cost Collars   2006   500,000 MMBTU   $ -   $ 4.50   $ 5.00
No Cost Collars   2005   250,000 MMBTU   $ -   $ 6.00   $ 8.70
No Cost Collars   2005   25,000 Bbls   $ -   $ 43.60   $ 45.80

        A liability of $6.6 million and $14.1 million ($6.3 million as current, $7.8 million as long-term) was recorded by NEG Holding as of December 31, 2003 and 2004 respectively, in connection with these contracts. NEG Holding had $1.7 and $0.0 million on deposit with Shell Trading as of December 31, 2003 and 2004, respectively, to collateralize the contracts. As of December 31, 2004, NEG Holding had issued $11.0 million in letters of credit to Shell for this purpose

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Inflation and Prices

        The average price of NEG Holding's natural gas increased from $3.06 per Mcf in 2002 to $4.39 per Mcf in 2003, and $5.21 per Mcf in 2004. The average price of NEG Holding's oil increase from $23.93 per barrel in 2002 to $26.54 per barrel in 2003 and $28.37 in 2004. These prices reflect average prices for oil and gas sales of NEG Holding's continuing operations. The oil and natural gas prices include the effect of NEG Holding's hedging activity.

        The price of oil and natural gas has a significant impact on NEG Holding's results of operations. Oil and natural gas prices fluctuate based on market conditions and, accordingly, cannot be predicted. Costs to drill, complete and service wells can fluctuate based on demand for these services, which is generally influenced by high or low commodity prices. NEG Holding's costs and expenses may be subject to inflationary pressures if oil and gas prices are favorable.

        A large portion of NEG Holding's natural gas is sold subject to market sensitive contracts. Natural gas price risk has historically been mitigated (hedged) by the utilization of swaps, options or collars. Natural gas price hedging decisions have historically been made in the context of NEG Holding's strategic objectives, taking into account the changing fundamentals of the natural gas marketplace.

Contractual Obligations

        NEG Holding has various commitments primarily related to leases for office space, vehicles, natural gas compressors and computer equipment. NEG Holding expects to fund these commitments with cash generated from operations. NEG Holding has no off-balance sheet debt or other such unrecorded obligations, and has not guaranteed the debt of any other party.

        The Company is obligated to make semi-annual payments to NEG "Guaranteed Payments" as defined in the Holding LLC Operating Agreement referred herein. Two payments totaling $21.7 million were made in 2002, three payments totaling $18.2 million were made in 2003 and two payments totaling $16.0 million were made in 2004 under this obligation. In March 2003, the Company made a distribution of Priority Amount of $51.4 million to NEG.

        The following table summarizes NEG Holding's contractual obligations at December 31, 2004:

 
  Payment Due By Period
Contractual Obligations at December 31, 2004

  Total
  Less than 1
Year

  1-3 Years
  4-5 Years
  After 5 Years
 
  (in thousands)

Long-term debt   $ 51,917   $ 83   $ 51,834   $   $
   
 
 
 
 
Total contractual cash obligations   $ 51,917   $ 83   $ 51,834   $   $
   
 
 
 
 

        NEG Holding has entered into joint operating agreements, area of mutual interest agreements and joint venture agreements with other companies. These agreements may include drilling commitments or other obligations in the normal course of business.

        In the normal course of business, NEG Holding has performance obligations which are supported by surety bonds or letters of credit. These obligations are primarily site restoration and dismantlement, royalty payments and exploration programs where governmental organizations require such support. NEG Holding also has letters of credit with its hedging counterparty.

        NEG Holding has certain other commitments and uncertainties related to its normal operations, including obligations to plug wells.

Quantitative and Qualitative Disclosures About Market Risk

        Among other risks, NEG Holding is exposed to interest rate and commodity price risks.

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        The interest rate risk relates to the debt under NEG Holding's credit facility. If market interest rates for short-term borrowings increased 1%, the increase in NEG Holdings' annual interest expense would be approximately $0.5 million.

        NEG Holding's financial results can be significantly impacted as commodity prices fluctuate in response to changing market forces. From time to time NEG Holding may enter into various derivative instruments to manage its exposure to price volatility. NEG Holding employs a policy of hedging oil and gas production. These contracts may take the form of swaps or options. If gas prices decreased $0.50 per Mcf, NEG Holding's gas sales revenues for the year ended December 31, 2004 would have decreased by $6.5 million, after considering the effects of the derivative contracts in place at December 31, 2004. If the price of crude oil decreased $1.00 per Bbl, NEG Holding's oil sales revenues for the year ended December 31, 2004 would have decreased by $.6 million.

Critical Accounting Policies

        NEG Holding prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States and SEC guidance. See the "Notes to Consolidated Financial Statements" elsewhere in this information statement for a more comprehensive discussion of NEG Holding's significant accounting policies. GAAP requires information in financial statements about the accounting principles and methods used and the risks and uncertainties inherent in significant estimates including choices between acceptable methods. Following is a discussion of NEG Holding's most critical accounting policies:

Off-Balance Sheet Arrangements

        NEG Holding does not have any off-balance sheet arrangements.

Derivatives

        NEG Holding follows SFAS No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133" which require that all derivative instruments be recorded on the balance sheet at their respective fair value.

Oil and Natural Gas Properties

        NEG Holding utilizes the full cost method of accounting for its crude oil and natural gas properties. Under the full cost method, all productive and nonproductive costs incurred in connection with the acquisition, exploration, and development of crude oil and natural gas reserves are capitalized and amortized on the units-of-production method based upon total proved reserves. The costs of unproven properties are excluded from the amortization calculation until the individual properties are evaluated and a determination is made as to whether reserves exist. Conveyances of properties, including gains or losses on abandonments of properties, are treated as adjustments to the cost of crude oil and natural gas properties, with no gain or loss recognized.

        Under the full cost method, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed the estimated after-tax future net revenues from proved oil and natural gas properties, discounted at 10% per year (the ceiling limitation). In arriving at estimated future net revenues, estimated lease operating expenses, development costs, abandonment costs, and certain production related and ad-valorem taxes are deducted. In calculating future net revenues, prices and costs in effect at the time of the calculation are held constant indefinitely, except for changes which are fixed and determinable by existing contracts. The net book value is compared to the ceiling limitation on a quarterly basis. The excess, if any, of the net book value above the ceiling limitation is required to be written off as a non-cash expense. NEG Holding did not incur a ceiling writedown in

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2002, 2003 and 2004. There can be no assurance that there will not be writedowns in future periods under the full cost method of accounting as a result of sustained decreases in oil and natural gas prices or other factors.

        NEG Holding has capitalized internal costs of $1.0 million, $0.65 million and $0.60 million for the years ended December 31, 2004, 2003 and 2002, respectively, as costs of oil and natural gas properties. Such capitalized costs include salaries and related benefits of individuals directly involved in the Company's acquisition, exploration, and development activities based on a percentage of their salaries.

Recent Accounting Pronouncements

        On September 28, 2004, the SEC released Staff Accounting Bulletin ("SAB") 106 regarding the application of SFAS 143, "Accounting for Asset Retirement Obligations ("AROs")," by oil and gas producing companies following the full cost accounting method. Pursuant to SAB 106, oil and gas producing companies that have adopted SFAS 143 should exclude the future cash outflows associated with settling AROs (ARO liabilities) from the computation of the present value of estimated future net revenues for the purposes of the full cost ceiling calculation. In addition, estimated dismantlement and abandonment costs, net of estimated salvage values, that have been capitalized (ARO assets) should be included in the amortization base for computing depreciation, depletion and amortization expense. Disclosures are required to include discussion of how a company's ceiling test and depreciation, depletion and amortization calculations are impacted by the adoption of SFAS 143. SAB 106 is effective prospectively as of the beginning of the first fiscal quarter beginning after October 4, 2004. The adoption of SAB 106 is not expected to have a material impact on either the ceiling test calculation or depreciation, depletion and amortization.

        On December 16, 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payment" that will require compensation costs related to share-based payment transactions (e.g., issuance of stock options and restricted stock) to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Statement 123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." For NEG Holdings, SFAS 123(R) is effective for the first reporting period after June 15, 2005. Entities that use the fair-value-based method for either recognition or disclosure under SFAS 123 are required to apply SFAS 123(R) using a modified version of prospective application. Under this method, an entity records compensation expense for all awards it grants after the date of adoption. In addition, the entity is required to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, entities may elect to adopt SFAS 123(R) using a modified retrospective method where by previously issued financial statements are restated based on the expense previously calculated and reported in their pro forma footnote disclosures. The company had no share based payments subject to this standard.

        On December 16, 2004, the FASB issued Statement 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion No. 29, to clarify the accounting for nonmonetary exchanges of similar productive assets. SFAS 153 provides a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. NEG Holdings does not have any nonmonetary transactions for any period presented that this Statement would apply.

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        On March 30, 2005, FASB issued FASB FIN 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonable estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 20005 (December 31, 2005 for calendar year-end companies). Retrospective application of interim financial information is permitted but not required and early adoption is encouraged. The adoption of FIN 47 to have a material impact on the Company's financial statements.

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APPENDIX C: PANACO, INC.

BUSINESS

        Panaco is an independent oil and gas exploration and production company focused primarily on opportunities in the Gulf Coast Region and offshore opportunities on the Gulf of Mexico. Panaco is in the business of selling oil and gas, produced on properties it leases, to third party purchasers. It obtains reserves of crude oil and gas by either buying them from others or drilling developmental and exploratory wells on acquired properties. It acquires producing properties with a view toward further exploitation and development, capitalizing on 3-D seismic and advanced directional drilling technology to recover reserves that were bypassed or previously overlooked.


SELECTED FINANCIAL DATA.

        The following historical data is derived from Panaco's financial statements and the notes thereto.

 
  For the Years Ending December 31,
 
 
  2004
  2003
  2002
  2001
  2000
 
 
  (amounts in thousands)

 
Oil and natural gas sales   $ 51,234   $ 50,160   $ 39,065   $ 76,246   $ 88,550  
Gain (loss) on sale of assets     (76 )           3,967     1,938  
Lawsuit recoveries                     2,575  
   
 
 
 
 
 
Total revenues     51,158     50,160     39,065     80,213     93,063  
Total costs and expenses before income taxes and extraordinary item (1)     40,235     35,936     79,684     99,784     76,591  
Total other expense     1,785     2,655     8,798          
Reorganization costs (gains)     (56,408 )   2,898     2,258          
Income tax expense (benefit) (2)     (22,877 )           22,734     (22,683 )
Cumulative effect of accounting change         12,149              
   
 
 
 
 
 
Net income (loss) (3)   $ 88,423   $ (3,478 ) $ (51,675 ) $ (42,305 ) $ 39,155  
   
 
 
 
 
 
Net income (loss) per common share         $ (0.14 ) $ (2.12 ) $ (1.74 ) $ 1.61  
Total assets   $ 157,608   $ 125,814   $ 96,268   $ 146,064   $ 174,079  
Long-term debt   $ 32,571   $ 100,000   $ 102,249   $ 135,120   $ 121,693  
Stockholders' equity (deficit)   $ 55,290   $ (84,937 ) $ (81,459 ) $ (29,784 ) $ 12,408  

(1)
Results for the years ended December 31, 2001, include impairments of oil and gas properties of $9.1 million.

(2)
During 2001 Panaco re-established a deferred tax valuation allowance that had been eliminated in 2000. The change in the valuation allowance was primarily due to lower volumes and market prices for oil and natural gas, resulting in lower estimates of future net income, see "Panaco Management's Discussion and Analysis of Financial Condition and Results of Operations."


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2004 Reorganization Overview

        On July 16, 2002, Panaco filed a Voluntary Petition for Relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court of the Southern District of Texas. The filing was made primarily due to the Company's inability to pay its debts as they became due, including the existence of a significant working capital deficit and continuing lack of compliance with certain financial and technical covenants of the Company's various debt obligations.

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        An order of relief was entered by the Bankruptcy Court, placing Panaco under protection of the Bankruptcy Court, which precluded payment of the interest on the Senior Notes. In addition, payment of liabilities existing as of July 15, 2002 to certain unsecured creditors and pending litigation were stayed during the Bankruptcy proceeding. Panaco has been operating as a debtor-in-possession and continued to operate, conduct business and manage the company's assets in the ordinary course of business during the Chapter 11 proceeding. On November 3, 2004, the Court entered a confirmation order for the Plan of Reorganization (the "Plan"). The Plan became effective November 16, 2004 and Panaco began operating as a reorganized entity.

        In aggregate, approximately 55% or $63.8 million of liabilities were forgiven as part of the reorganization comprised of $51.3 million of unsecured Senior Notes and $12.5 million of unsecured creditors. Approximately, $52 million was converted into 100% or 1,000 shares of Panaco new common stock. Overall, at December 31, 2004, Panaco's debt obligations were reduced by 67% to $38 million. Panaco also had unrestricted cash of $23.8 million, working capital of $19.1 million and total equity of $32.2 million.

        Also as a requirement of the confirmation order for our Plan of Reorganization, Panaco entered into a management contract with National Energy Group, Inc. ("NEG") to manage and operate the Company's oil and gas operations, including but not limited to, all land, well, engineering, geological and geophysical, acquisition and divestiture, marketing, operations, contract and compliance functions. NEG also provide all management, administrative and accounting services and maintain insurance coverage usual and customary for companies in the oil and gas industry and consistent with the requirements of our agreements. Under the agreement, all services will be done in compliance with the Articles of Incorporation and Bylaws of Panaco to the extent allowed by the agreements, applicable laws and approval by the Board of Directors. NEG is an affiliate company, as defined in the agreement, and is to be compensated on a monthly basis an amount equal to 115% of the actual direct and indirect administrative overhead costs incurred by NEG in operating and/or administrating the Company's properties. The calculation of the costs will be provided to and approved by the Board of Directors.

Results of Operations

2004 Compared to 2003

        Total revenues increased by $1.0 million, or 2.0%, to $51.2 million for 2004 from $50.2 million for 2003. The increase was due to increased oil and natural gas prices, offset by lower gas and oil production. Average natural gas prices increased $0.45 per Mcf to $5.99 per Mcf for 2004 from $5.54 per Mcf for 2003, and average oil prices increased $9.73 per barrel to $40.61 per barrel for 2004 from $30.88 per barrel for 2003.

        In 2004, Panaco produced 643 Mbbls of oil, a 6.7% decrease compared to 689 Mbbls in 2003 and Panaco produced 3,938 Mmcf of natural gas, a 21.9% decrease from 5,044 Mmcf in 2003. The production decreases were primarily attributable to major storms in the gulf of Mexico, the Company's primary operating area. The Gulf of Mexico had seven named hurricanes in late summer and fall of 2004. Several properties were shut-in due to these storms and weather in general, for as many as three to four months. During this time, the Company also performed necessary maintenance on tangible property to enhance future production levels which delayed the production start up of several properties. In addition, the planned work over of several wells did not prove to be successful in enhancing production levels.

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        Lease operating expenses decreased by $3.2 million, or 18.6%, to $14.0 million for 2004 from $17.2 million for 2003. During mid 2004, Panaco signed agreements with several operators to utilize Panaco's platforms and production facilities to process natural gas and facilitate pipeline transportation of the operator's gas. The arrangements specify a minimum monthly charge for the use of the Panaco facilities, which reduced the company's lease operating costs. In addition, weather conditions did not allow for some maintenance activities to be performed in 2004. In 2003, an extensive amount of maintenance was performed to get the properties up to full production standards and maximum marketability post bankruptcy.

        Oil and natural gas production taxes decreased 30.4% or $.3 million to $0.7 million in 2004. The decrease is primary attributable to the 21.9% decrease in natural gas production.

        Geological and geophysical expenditures were essentially unchanged at $0.1 million.

        Depletion, depreciation and amortization increased $6.2 million, or 48.4%, to $19.0 million in 2004 from $12.8 million in 2003. The decrease was attributable to a higher rate due to a 33% decline in natural gas reserves.

        General and administrative costs, including management fees paid to related parties increased $0.9 million to $3.2 million in 2004 to $2.3 million in 2003. The increase was attributable to the management fees paid to National Energy Group pursuant to the management agreement entered into with NEG following the bankruptcy plan confirmation in November, 2003.

        Bad debt expense decreased $1.8 million to $0.1 million in 2004 from $1.9 million in 2003. The decrease was attributable to several large receivables from non-operators that were unable to pay their operating expenses in 2003.

        The Company recorded a $2.2 million gain on production payment during 2003 due to the unexpected cessation of production from certain wells associated with a non-recourse production payment. The Company's obligations to a former lender were payable solely from the production from certain oil and gas properties. During 2003, the wells associated with the production payment ceased production, thus canceling any further obligation of the Company.

        Interest income increased $0.4 million to $0.7 million due to higher average cash balances in 2004 compared to 2003. Interest expense, including interest expense from related parties, decreased $0.4 million, or 13.8%, to $2.5 million in 2004 from $2.9 million in 2003. Decreased interest expense reflects the lower debt balances since confirmation of the Bankruptcy plan.

        Income before reorganization costs, income taxes and cumulative effect of change in accounting principle essentially decreased $2.5 million from $11.6 million in 2003 to $9.1 million in 2004. The decrease is principally due the increased depletion, depreciation and amortization expense incurred in 2004

        Reorganization costs reflect the confirmation of Panaco's Bankruptcy plan and the forgiveness of $63.8 million of liabilities comprising $51.3 million of unsecured Senior Notes and $12.5 million of unsecured creditors. Approximately, $52 million was converted into 100% or 1,000 shares of Panaco new common stock. In addition, the Company incurred $3.8 million in professional fees associated with the bankruptcy proceedings in 2004 compared to $2.9 million in 2003. The fees are primarily comprised of legal fees.

        Deferred tax benefit increased $22.9 million in 2004 from nil in 2003. The 2004 benefit is primarily attributable to the reversal of the valuation allowance for the deferred tax asset. Following the

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confirmation of the bankruptcy plan and, based on projected future taxable income, management determined that it was more likely than not that the deferred tax asset would be realized.

        Panaco recognized a cumulative effect of change in accounting principle of $12.1 million related to the adoption of SFAS 143 "Accounting for Asset Retirement Obligations".

2003 Compared to 2002

        Total revenues increased by $11.1 million, or 28.4%, to $50.2 million for 2003 from $39.1 million for 2002. The increase was due to increased oil and natural gas prices and an increase in production. Average natural gas prices increased $0.64 per Mcf to $5.54 per Mcf for 2003 from $4.90 per Mcf for 2002, and average oil prices increased $6.36 per barrel to $30.88 per barrel for 2003 from $24.52 per barrel for 2002.

        In 2003, Panaco produced 689 MBbls of oil, compared to 916 MBbls in 2002, and Panaco produced 5,044 Mmcf of natural gas in 2003, a decrease from 5,622 Mmcf in 2002. This decrease was due to normal production declines.

        Lease operating expenses increased by $2.7 million, or 18.6%, to $17.2 million in 2003 from $14.5 million for 2002. In 2003, an extensive amount of maintenance was performed to get the properties up to full production standards and maximum marketability post bankruptcy.

        Oil and gas production taxes increased by $0.3 million, or 42.8%, to $1.0 million in 2003 from $0.7 million in 2002. The increase directly resulted from increased gas revenue in 2003.

        Depreciation, depletion and amortization decreased $24.2 million, or 65.4%, to $12.8 million in 2003 from $37.0 million in 2002. The decrease resulted from the property impairment of $23.3 million recorded in 2002. The 2002 impairment was primarily due to lower estimated of future net revenues from the Company's proved reserves caused mainly by an increase in the estimate of future obligations to plug and abandon the company's oil and gas properties.

        General and administrative expenses decreased $1.3 million, or 36%, to $2.3 million in 2003 from $3.6 million in 2002. This resulted from staff reductions in 2002.

        Interest expense decreased by $6.4 million to $2.9 million in 2003 from $9.3 million in 2002 as a result of the suspension of interest in the senior notes during bankruptcy proceedings. In addition, approximately $1.0 million of debt issuance costs was expensed when the company filed for bankruptcy protection.

        Net loss of $51.7 million was recognized for 2002, compared to net loss of $3.5 in 2003. Net loss 2003 included cumulative effect of accounting change of $12.1million. The 2002 net loss included an impairment expense of $23.2 million and higher depreciation, depletion and amortization in 2002.

Liquidity and Capital Resources

2005 Outlook

        Following the confirmation of the bankruptcy plan in November 2004, the Company has been concentrating on the development and growth of oil and natural gas assets. In early 2005, the company

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sold interests in West Delta properties and transferred the corresponding plugging and abandonment escrow funds and associated environmental, general, plugging and abandonment and other liabilities.

        Panaco expects that its primary sources of cash in 2005 will be cash on hand and funds generated from operations. Based on its current level of operations, Panaco believes that its cash on hand ($23.8 million at December 31, 2004) and cash flow from operations will be adequate to meet its future liquidity needs for 2005.

        Panaco's operating activities provided cash flows of $19.4 million in 2004 compared to $16.4 million in 2003. The increase was primarily due to changes in operating assets and liabilities, primarily driven by lower operating cost.

Capital Expenditures

        During the first two months of 2005, Panaco invested approximately $1.7 million in drilling activity. For the remainder of 2005, Panaco expects to expend approximately $20.9 million on additional drilling and leasing activities.

Derivative Instruments

        During late 2004, the company entered into some large hedging agreements to achieve managed cash flow and reduce exposure to downward price fluctuations.

        Panaco's financial results and cash flows can be significantly impacted as commodity prices fluctuate in response to changing market conditions. To manage its exposure to natural gas or oil price volatility, Panaco may enter into various derivative instruments consisting principally of collar options and swaps.

        While the use of derivative contracts can limit the downside risk of adverse price movements, it may also limit future gains from favorable movements. Panaco addresses market risk by selecting instruments whose value fluctuations correlate strongly with the underlying commodity. Credit risk related to derivative activities is managed by requiring minimum credit standards for counterparties, periodic settlements, and mark to market valuations.

        The following is a summary of the oil and natural gas no-cost commodity price collars entered into with Shell Trading company:

Date of Contract

  Volume/Month
  Production Month
  Floor
  Ceiling
November 2004   25,000 Bbls   2005   $ 42.50   $ 46.00
November 2004   150,000 MMBTU   2005   $ 6.00   $ 8.35

        A liability of $0.9 million was recorded by Panaco as of December 31, 2004 in connection with these contracts.

Inflation and Prices

        The average price of Panaco's natural gas increased from $4.90 per Mcf in 2002 to $5.54 per Mcf in 2003, and $5.99 per Mcf in 2004. The average price of Panaco's oil increase from $24.52 per barrel in 2002 to $30.88 per barrel in 2003, and $40.61 in 2004. These prices reflect average prices for oil and gas sales of the company's continuing operations. The oil and natural gas prices include the effect of Panaco's hedging activity.

        The price of oil and natural gas has a significant impact on Panaco's results of operations. Oil and natural gas prices fluctuate based on market conditions and, accordingly, cannot be predicted. Costs to

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drill, complete and service wells can fluctuate based on demand for these services, which is generally influenced by high or low commodity prices. Panaco's costs and expenses may be subject to inflationary pressures if oil and gas prices are favorable.

        A large portion of Panaco's natural gas is sold subject to market sensitive contracts. Natural gas price risk has historically been mitigated (hedged) by the utilization of swaps, options or collars. Natural gas price hedging decisions have historically been made in the context of Panaco's strategic objectives, taking into account the changing fundamentals of the natural gas marketplace.

Contractual Obligations

        Panaco has various commitments primarily related to funding escrow accounts that are required as collateral for Panaco's offshore retirement obligations. Panaco expects to fund these commitments with cash generated from operations. Panaco has no off-balance sheet debt or other such unrecorded obligations, and has not guaranteed the debt of any other party.

        The following table summarizes Panaco's contractual obligations at December 31, 2004:

 
  Payment Due By Period
Contractual Obligations at
December 31, 2004

  Total
  Less than
1 Year

  1-3 Years
  4-5 Years
  After 5
Years

 
  (in thousands)

Long-term debt   $ 38,000,000   $ 5,429,000   $ 16,287,000   $ 10,858,000   $ 5,426,000
Escrow funding   $ 18,000,000   $ 3,200,000   $ 9,600,000   $ 5,200,000   $
   
 
 
 
 
Total contractual cash obligations   $ 56,000,000   $ 8,629,000   $ 25,887,000   $ 16,058,000   $ 5,426,000
   
 
 
 
 

        Panaco has entered into joint operating agreements, area of mutual interest agreements and joint venture agreements with other companies. These agreements may include drilling commitments or other obligations in the normal course of business.

        In the normal course of business, Panaco has performance obligations which are supported by surety bonds or letters of credit. These obligations are primarily site restoration and dismantlement, royalty payments and exploration programs where governmental organizations require such support.

        Panaco has certain other commitments and uncertainties related to its normal operations, including obligations to plug wells.

Quantitative and Qualitative Disclosures About Market Risk

        Among other risks, Panaco is exposed to interest rate and commodity price risks.

        The interest rate risk relates to the debt under Panaco's term loan. If market interest rates for short-term borrowings increased 1%, the increase in Panaco's annual interest expense would be approximately $0.4 million.

        Panaco's financial results can be significantly impacted as commodity prices fluctuate in response to changing market forces. From time to time Panaco may enter into various derivative instruments to manage its exposure to price volatility. Panaco employs a policy of hedging oil and gas production. These contracts may take the form of swaps or options. If gas prices decreased $0.50 per Mcf, Panaco's gas sales revenues for the year ended December 31, 2004 would have decreased by $2.5 million, after considering the effects of the derivative contracts in place at December 31, 2004. If the price of crude oil decreased $1.00 per Bbl, Panaco's oil sales revenues for the year ended December 31, 2004 would have decreased by $0.6 million.

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Off-Balance Sheet Arrangements

        Panaco does not have any off-balance sheet arrangements

Critical Accounting Policies

        Panaco prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States and SEC guidance. See the "Notes to Consolidated Financial Statements" elsewhere in this information statement for a more comprehensive discussion of Panaco's significant accounting policies. GAAP requires information in financial statements about the accounting principles and methods used and the risks and uncertainties inherent in significant estimates including choices between acceptable methods. Following is a discussion of Panaco's most critical accounting policies:

Derivatives

        Panaco follows SFAS No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133" which require that all derivative instruments be recorded on the balance sheet at their respective fair value.

        Proved Reserves—Our estimates of proved reserves are based on quantities of oil and natural gas reserves which current geological and engineering data demonstrate are recoverable in future years from known reservoirs under existing economic and operating conditions. However, there are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future revenues, rates of production and timing of development expenditures, including many factors beyond our control. The estimation process relies on assumptions and interpretations of available geologic, geophysical, engineering and production data and, the accuracy of reserve estimates is a function of the quality and quantity of available data, engineering and geological interpretation and judgment. In addition, as a result of changing market conditions, commodity prices and future development costs will change from year to year, causing estimates of proved reserves to also change. For the years ended December 31, 2004 and 2003, we revised our proved reserves downward by approximately 17.5 and 7.8 Bcfe, respectively, due to proved undeveloped reserves that were depleted or otherwise not recoverable, or from production performance indicating less oil and gas in place or smaller reservoir size than initially estimated. Estimates of proved reserves are key components of our most significant financial estimates involving our unevaluated properties, our rate for recording depreciation, depletion and amortization. Our reserves are fully engineered on an annual basis by independent petroleum engineers (See Note 12—"Supplemental Information Related to Oil and natural Gas Producing Activities (Unaudited)").

        Oil and Natural Gas Properties—We utilize the successful efforts method of accounting for our oil and natural gas properties. Under this method, lease acquisition costs and exploratory drilling costs are initially capitalized. If proved reserves are not discovered related to these costs, they are expensed. All development costs are capitalized, while all non-drilling exploratory costs, including seismic and rentals are expensed as incurred. We assess periodically on a property by property basis unproved leaseholds with significant acquisitions cost and recognize a loss to the extent that the cost of the property has been impaired. For those unproved leaseholds that are not individually significant, we aggregate such costs and amortized them over an average holding period. In all cases, as unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds and depleted on a unit basis. The depletion rates per Mcfe for December 31, 2004 and 2003 were $2.44and $1.95, respectively with the increase due to a decrease in reserves. We also review our properties quarterly when circumstances suggest the need and for impairment. During 2004 and 2003 no impairment was recorded. We did record a $23.3 million oil and natural gas impairment in 2002 due to lower estimates

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of future net cash flow from our proved reserves caused mainly be an increase in the estimate of future obligations to plug and abandon the wells and platforms used on its properties and a negative

Recent Accounting Pronouncements

        On December 16, 2004, the FASB issued Statement 123 (revised 2004), "Share-Based Payment" that will require compensation costs related to share-based payment transactions (e.g., issuance of stock options and restricted stock) to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. Statement 123(R) replaces SFAS 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." For NEG Holdings, SFAS 123(R) is effective for the first annual reporting period after December 15, 2005. Entities that use the fair-value-based method for either recognition or disclosure under SFAS 123 are required to apply SFAS 123(R) using a modified version of prospective application. Under this method, an entity records compensation expense for all awards it grants after the date of adoption. In addition, the entity is required to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, entities may elect to adopt SFAS 123(R) using a modified retrospective method where by previously issued financial statements are restated based on the expense previously calculated and reported in their pro forma footnote disclosures. The company had no share based payments subject to this standard.

        On December 16, 2004, the FASB issued Statement 153, "Exchanges of Nonmonetary Assets," an amendment of APB Opinion No. 29, to clarify the accounting for nonmonetary exchanges of similar productive assets. SFAS 153 provides a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Statement will be applied prospectively and is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Panaco does not have any nonmonetary transactions for any period presented that this Statement would apply.

        On March 30, 2005, FASB issued FASB FIN 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonable estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 20005 (December 31, 2005 for calendar year-end companies). Retrospective application of interim financial information is permitted but not required and early adoption is encouraged. The adoption of FIN 47 to have a material impact on the Company's financial statements.

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APPENDIX D: GB HOLDINGS, INC.

        The information included in this Appendix is taken from the GB Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 2004.


OVERVIEW

        GB Holdings is a Delaware corporation and was a wholly-owned subsidiary of Pratt Casino Corporation, or PCC, through December 31, 1998. PCC, a Delaware corporation, was incorporated in September 1993 and was wholly-owned by PPI Corporation, a New Jersey corporation and a wholly-owned subsidiary of Greate Bay Casino Corporation, or GBCC. Effective after December 31, 1998, PCC transferred 21% of the stock ownership in GB Holdings to PBV, Inc., a newly formed entity controlled by certain stockholders of GBCC. As a result of a certain confirmed plan of reorganization of PCC and others in October 1999, the remaining 79% stock interest of PCC in GB Holdings was transferred to Greate Bay Holdings, LLC, or GBLLC, whose sole member as a result of the same reorganization was PPI. In February 1994, GB Holdings acquired Greate Bay Hotel and Casino, Inc., or GBHC, a New Jersey corporation, through a capital contribution by its then parent. From its creation until July 22, 2004, GBHC's principal business activity was its ownership of The Sands Hotel and Casino located in Atlantic City, New Jersey. GB Property Funding Corp., or Property, a Delaware corporation and a wholly-owned subsidiary of GB Holdings, was incorporated in September 1993 as a special purpose subsidiary of GB Holdings for the purpose of borrowing funds for the benefit of GBHC.

        On January 5, 1998, GB Holdings, and its then existing subsidiaries, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey. On August 14, 2000, the Bankruptcy Court entered an order, or the Confirmation Order, confirming the Modified Fifth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code Proposed by the Official Committee of Unsecured Creditors and High River Limited Partnership and its affiliates, or the Plan, for GB Holdings and its then existing subsidiaries. High River is an entity controlled by Mr. Icahn. On September 13, 2000, the New Jersey Casino Control Commission, or NJCCC, approved the Plan. On September 29, 2000, the Plan became effective. All material conditions precedent to the Plan becoming effective were satisfied on or before September 29, 2000. In addition, as a result of the Confirmation Order and the occurrence of the effective date of the Plan, and in accordance with Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code", or SOP 90-7, GB Holdings has adopted "fresh start reporting" in the preparation of the accompanying consolidated financial statements. GB Holdings' emergence from Chapter 11 resulted in a new reporting entity with no retained earnings or accumulated deficit as of September 30, 2000.

        On the effective date of the Plan, Property's existing debt securities, consisting of its 107/8% First Mortgage Notes due January 15, 2004, or the Old Notes, and all of GB Holdings' issued and outstanding shares of common stock owned by PBV and GBLLC, or the Old Common Stock, were cancelled. As of the effective date of the Plan, an aggregate of 10,000,000 shares of new common stock, par value $.01 per share, of GB Holdings were issued and outstanding, and $110,000,000 of 11% Notes were issued by Property. Holders of the Old Notes received a distribution of their pro rata shares of (i) the 11% Notes and (ii) 5,375,000 shares of the GB Holdings' common stock, or the Stock Distribution.

        In October 2003, Atlantic Holdings, a Delaware corporation and a wholly-owned subsidiary of GBHC, was formed. ACE Gaming, a New Jersey limited liability company and a wholly-owned subsidiary of Atlantic Holdings, was formed in November 2003. Atlantic Holdings and ACE were formed in connection with a transaction, which included a Consent Solicitation and Offer to Exchange in which holders of $110 million of 11% Notes due 2005, issued by Property, were given the

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opportunity to exchange such notes, on a dollar for dollar basis, for $110 million of 3% Notes due 2008, issued by Atlantic Holdings. The transaction was consummated on July 22, 2004, and holders of approximately $66.3 million of 11% Notes exchanged such notes for approximately $66.3 million of 3% Notes. Also on July 22, 2004, in connection with the Consent Solicitation and Offer to Exchange, the indenture governing the 11% Notes was amended to eliminate certain covenants and to release the liens on the collateral securing such notes. The transaction included, among other things, the transfer of substantially all of the assets of GB Holdings to Atlantic Holdings. The transfer of assets has been accounted for as an exchange of net assets between entities under common control, whereby the entity receiving the assets shall initially recognize the assets and liabilities transferred at their historical carrying amount in the accounts of the transferring entity at the date of transfer. No gain or loss was recorded relating to the transfer. Also on July 22, 2004, in connection with the consummation of the transaction, GBHC and Property merged into GB Holdings with GB Holdings as the surviving entity. Atlantic Holdings and ACE Gaming own and operate The Sands and prior to July 22, 2004, Atlantic Holdings and its subsidiary, ACE Gaming, had limited operating activities. GB Holdings has no operating activities and it has no income. GB Holdings' only significant asset is its investment in Atlantic Holdings.

        In connection with the transfer of the assets and certain liabilities of GB Holdings, including the assets and certain liabilities of GBHC, Atlantic Holdings issued 2,882,938 shares of common stock to GBHC which, following the merger of GBHC, became the sole asset of GB Holdings. Substantially all of the assets and liabilities of GB Holdings and GBHC, with the exception of the remaining 11% Notes and accrued interest thereon, the Atlantic Holdings common stock, and the related pro rata share of deferred financing costs were transferred to Atlantic Holdings or ACE Gaming. As part of the transaction, an aggregate of 10,000,000 warrants issued by Atlantic Holdings were distributed on a pro rata basis to the stockholders of GB Holdings upon the consummation of the transaction. These warrants allow the holders to purchase from Atlantic Holdings, at an exercise price of $.01 per share, an aggregate of 2,750,000 shares of Atlantic Holdings common stock and are only exercisable following the earlier of (1) either the 3% Notes being paid in cash or upon conversion, in whole or in part, into Atlantic Holdings common stock, (2) payment in full of the outstanding principal of the 11% Notes exchanged, or (3) a determination by a majority of the board of directors of Atlantic Holdings, including at least one independent director of Atlantic Holdings, that the warrants may be exercised. The Sands' New Jersey gaming license was transferred to ACE Gaming in accordance with the approval of the NJCCC.

        GB Holdings owns 2,882,938 shares of Atlantic Holdings common stock, which, on a non-diluted basis, represents 100% of the outstanding Atlantic Holdings common stock. At the election of the holders of a majority of the aggregate principal amount of the 3% Notes outstanding, which they may exercise at any time in their sole discretion, the notes are convertible into 4,367,062 shares of Atlantic Holdings common stock. Also, as set forth above, if such holders so elect, the warrants will become exercisable for 2,750,000 shares of Atlantic Holdings common stock. Currently, affiliates of Mr. Icahn own approximately 96% of the 3% Notes and have the ability, which they may exercise prior to the maturity of the 11% Notes or at any other time in their sole discretion, to determine when and whether the 3% Notes will be paid in or convertible into Atlantic Holdings common stock at, or prior to, maturity, thereby making the warrants exercisable. If the 3% Notes are converted into Atlantic Holdings common stock and if the warrants are exercised, GB Holdings will own 28.8% of the Atlantic Holdings common stock and affiliates of Mr. Icahn will beneficially own approximately 63.4% of the Atlantic Holdings common stock (without giving effect to the affiliates of Mr. Icahn's interest in Atlantic Holdings common stock which is owned by GB Holdings). Affiliates of Mr. Icahn currently own approximately 77.5% of GB Holdings common stock.

        The consolidated financial statements included in GB Holdings' financial statements include the accounts and operations of GB Holdings and its subsidiaries, Atlantic Holdings and ACE, and also

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Property and GBHC until July 22, 2004. All references to GB Holdings, Atlantic Holdings and ACE Gaming refer to such entities as they existed following the consummation of the transaction. All significant intercompany balances and transactions have been eliminated.

        GB Holdings and Property listed the GB Holdings' Common Stock and 11% Notes, respectively, on the American Stock Exchange, or AMEX, on March 27, 2001. On January 13, 2004, the SEC granted GB Holdings application to delist the 11% Notes from trading on the AMEX. On January 14, 2004, AMEX halted trading on the 11% Notes and on February 2, 2004 trading resumed. On April 12, 2004, the SEC granted GB Holdings application to delist the 11% Notes from trading on the AMEX. On April 19, 2004 the AMEX delisted the 11% Notes. On September 2, 2004, the SEC granted GB Holdings' application to delist the GB Holdings' common stock from trading on the AMEX effective at the opening of business on September 3, 2004. On September 4, 2004, the AMEX delisted the GB Holdings common stock.

        GB Holdings primarily generates revenues from gaming operations in its Atlantic City facility. GB Holdings' other business activities, including rooms, entertainment, retail store and food and beverage operations, also generate revenues, which are nominal in comparison to the casino operations. The non-casino operations primarily support the casino operation by providing complimentary goods and services to deserving casino customers. The Company competes in a capital intensive industry that requires continual reinvestment in its facility and technology.

The Sands

        The Sands has segregated its gaming customers into three broad segments:

Business Strategy

        Traditionally, The Sands' marketing strategy in the highly competitive Atlantic City market has consisted of seeking premium category patrons. In the past, The Sands has been successful in its marketing efforts towards these premium patrons through its offering of private, limited-access facilities, related amenities and use of information technology to monitor patron play, control certain casino operating costs and target marketing efforts toward frequent visitors with above average gaming budgets. While The Sands strived to maintain market share within this category, competition within the industry for the premium category (both table and slot) reduced The Sands' ability to retain or attract this type of player on a profitable basis.

        In the second quarter of 2002, The Sands changed its marketing strategy to reduce its focus on the lower profit margin premium table games and slot business segments and focus almost exclusively on the mass slot machine segment. In the process, The Sands reduced the number of table games from 69 to 26 and increased its number of slot machines by 400. Towards the end of 2002, it had become apparent that the gain in slot machine revenue could not offset the loss of table game revenue. In addition, the volume required from the mass slot player segment, to make up the loss of the middle to premium slot player segments, could not be accommodated in a property with the physical constraints of The Sands. Subsequent review of marketing data revealed that the loss in table game play had a direct effect on the loss in some slot machine play, as many slot patrons who frequented The Sands with family and friends were forced to patronize competitors to find the variety of gaming experience

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they desired. As a result, by the end of the fourth quarter of 2002, The Sands had redirected its marketing strategy to focus more on the middle to premium categories of slot players and try to recapture the table game segment. The Sands continues to direct its marketing strategy to both the middle and premium slot and table game segments and is aggressively focused on the recovery of inactive players, those specific players who have had prior play at The Sands and are not current customers, and the acquisition of new players with a strong program to generate repeat visits. There will be a significant emphasis to grow the player database through an aggressive attraction program and the redistribution of events, entertainment and promotion expenditures to target the defined customer segments.

        GB Holdings has recognized that the "Sands" name has a strong brand recognition and a rich heritage in gaming that went back to the original property in Las Vegas, Nevada, of the 1950's. Beginning in 2003, GB Holdings began to leverage the heritage of The Sands and promote the property as a boutique casino hotel that provides outstanding value and service that exceeds expectations. The tagline "The Players Place," was developed and encapsulates the benefits of playing slots and tables, as well as communicating the promise that The Sands provide personalized service to its players in an intimate atmosphere offering outstanding gaming odds, highest table game limits, more liberal player rewards towards the avid customer and unparalleled, personal boutique service.

        During the prior three years, The Sands has continued to invest in improvements and upgrades to the casino hotel complex that support this theme. These improvements included new slot machines, renovations to the first floor casino, the showroom, two private lounges for casino guests and hotel room and suite renovations to both The Sands and the Madison House Hotel.

        The first floor casino renovation included the addition of a high limit pit and The Swingers lounge was constructed in the center of the casino to provide a multi-faceted state-of-the-art entertainment experience. The Swingers lounge includes bartop slot machines and is staffed by "Flair Bartenders", part mixologist, part performance artist. In addition, further renovations to the bus lobby entrance, the promotions center and the Platinum Club improved the customer experience by providing easier access to facilities. The slot product has continually been upgraded including converting a majority of all slot machines to ticket-in/ticket-out technology. These slots accept paper cash, coin or coupons and allow the player an option to return winnings or cash-outs in the form of redeemable tickets.

        This technology has gained customer acceptance at competitors and management believes it will enhance profitability by reducing labor intensive slot transactions while providing greater customer service and more uninterrupted player time on machines.

        The Sands uses a player tracking system to record and rate patrons' play through the use of identification cards, which it issues to patrons, or "casino players' cards". All Sands' slot machines are connected with, and information with respect to table games activity can be input into, a computer network. When patrons insert their casino players' card into slot machines or present them to supervisors at table games, meaningful information, including amounts wagered and duration of play, is transmitted in real-time to a casino management database. The information contained in the database facilitates the implementation of targeted and cost effective marketing programs, which appropriately recognize and reward patrons during current and future visits to The Sands. Certain of these marketing programs allow patrons to obtain complimentaries based on levels of play. Such complimentaries include free meals, hotel accommodations, entertainment, retail merchandise, parking, and sweepstakes giveaways. Management believes that its ability to reward its customers on a "same-visit" basis is valuable in encouraging the loyalty of repeat visits. The computer systems also allow The Sands to monitor, analyze and control the granting of gaming credit, promotional expenses and other marketing costs.

        Management primarily focuses its marketing efforts on patrons who have been identified by its casino management computer system as profitable patrons. Management believes that its philosophy of

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encouraging participation in its casino players' card program, using the information obtained thereby to identify the relative playing patterns of patrons and tailoring specific marketing programs and property amenities to this market category enhances profitability of The Sands.

        The Sands also markets to the mass casino patron market through various forms of direct and indirect advertising, and group and bus tour programs. Once new patrons are introduced to The Sands' players' card program, management uses its information technology capabilities to directly market to these patrons to encourage repeat patronage.

Competition.

        The Sands faces intense competition from the eleven other Atlantic City casinos, including the Borgata which opened in July 2003. According to reports of the NJCCC, the twelve Atlantic City casinos currently offer approximately 1.4 million square feet of gaming space.

        On July 3, 2003, The Borgata, a joint venture of Boyd Gaming Corporation and MGM Mirage, opened in the marina district of Atlantic City. The Borgata features a 40-story tower with 2,010 rooms and suites, as well as a 135,000 square-foot casino, restaurants, retail shops, a spa and pool, and entertainment venues. This project represents a significant increase to capacity in the market. In addition, other of The Sands' competitors in Atlantic City have recently completed expansions of their hotels or have announced expansion projects. For example, Resorts Casino opened a 399-room hotel tower addition in July 2004 and the Tropicana Atlantic City has completed a significant expansion which included a 502-room hotel tower, a 25-room conference center, a 2,400 space parking garage, an expanded casino floor and a 200,000 square foot themed shopping, dining and entertainment complex called The Quarter. During 2003, Showboat Atlantic City opened a new 544-room hotel tower and expanded its gaming space to 101,000 square feet and increased its slot machines to 3,972 and has recently announced an expansion and affiliation with House of Blues. The business of the Company may be adversely impacted (1) by the additional gaming and room capacity generated by this increased competition in Atlantic City and/or (2) by other projects not yet announced in New Jersey or in other markets, including Pennsylvania, New York and Maryland. Accordingly, the existing and future competing forces could have a materially adverse impact on the operations of The Sands.

        After the announced acquisition of Caesars Entertainment Corp. by Harrahs Entertainment, Inc. and the related divestiture of the Atlantic City Hilton, of the twelve Atlantic City casinos, Harrahs Entertainment will control four casinos and Colony Capital will control two. Harrahs Entertainment will also control the so-called Traymore site located between the boardwalk and The Sands and has acquired a property contiguous to The Sands' parking garage that formerly contained the Continental Motel property. The Trump Organization controls three of the twelve Atlantic City casinos. The gaming industry is highly competitive and the Company's competitors may have greater resources than the Company. If other properties operate more successfully, if existing properties are enhanced or expanded, or if additional hotels and casinos are established in and around the location in which the Company conducts business, the Company may lose market share. In particular, expansion of gaming in or near the geographic area from which The Sands attracts or expects to attract a significant number of customers could have a significant adverse effect on GB Holdings' business, financial condition and results of operations. The Sands competes, and will in the future compete, with all forms of existing legalized gaming and with any new forms of gaming that may be legalized in the future. Additionally, GB Holdings faces competition from all other types of entertainment.

        The Casino Reinvestment Development Authority, or CRDA, is a governmental agency that administers the statutorily mandated investments required to be funded by casino licensees. Legislation enacted during 1993 and 1996 allocated an aggregate of $175 million of CRDA funds and credits to subsidize and encourage the construction of additional hotel rooms by Atlantic City casino licensees. Competitors of The Sands that have the financial resources to construct hotel rooms can take

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advantage of such credits more readily than The Sands. The Sands has an approved hotel expansion program with the CRDA and a retail entertainment development project. Plans have been announced by other casino operators to complete expansions within the required subsidy period. The expansion of existing gaming facilities and the addition of new casinos will continue to increase competition within the Atlantic City market.

        In April 2004, the casino industry, the CRDA and the New Jersey Sports and Exposition Authority agreed to a plan regarding New Jersey video lottery terminals, or VLTs. Under the plan, casinos will pay a total of $96 million over a period of four years, of which $10 million will fund, through project grants, North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports and Exposition Authority who will then subsidize certain New Jersey horse tracks to increase purses and attract higher-quality races that would allow them to compete with horse tracks in neighboring states. In return, the race tracks and New Jersey have committed to postpone any attempts to install VLTs for at least four years. $52 million of the $86 million would be donated by the CRDA from the casinos' North Jersey obligations and $34 million would be paid by the casinos directly. It is currently estimated that The Sands' current CRDA deposits for North Jersey projects are sufficient to fund The Sands' proportionate obligations with respect to the $10 million and $52 million commitments. The Sands' proportionate obligation with respect to the $34 million commitment is estimated to be approximately $1.3 million payable over a four year period. The Sands' proportionate obligation with respect to the combined $10 million and $52 million commitment is estimated to be approximately $2.5 million payable over a four year period.

        On March 1, 2005, the Acting Governor of the State of New Jersey proposed a state budget for the 2005-2006 fiscal year which includes as a revenue source the proceeds from installation and operation of 1,500 to 2,000 VLTs at the Meadowlands Racetrack in East Rutherford, New Jersey. This location in Northern New Jersey would be in direct competition for gamblers who now frequent the Atlantic City casinos. At this time, there is no certainty that the Legislature of New Jersey will enact the necessary legislation to permit the installation and operation of these VLTs.

        The Sands also competes with legalized gaming from casinos located on Native American tribal lands. In July 2004, the Appellate Division of the Supreme Court of New York unanimously ruled that Native American owned casinos could legally be operated in New York under the New York State law passed in October 2001. That law permits three casinos in Western New York, all of which would be owned by the Seneca Indian Nation. The law also permits up to three casinos in the Catskills in Ulster and Sullivan Counties, also to be owned by Native American Tribes. In addition, the legislation allows slot machines to be placed in Native American-owned casinos. The court also ruled that New York could participate in the Multi-State Mega Millions Lottery Game.

        The New York law had also permitted the installation of VLTs at five racetracks situated across the State of New York. In the July 2004 ruling, the Appellate Division ruled that a portion of the law was unconstitutional because it required a portion of the VLTs revenues to go to horse-racing, breeding funds and track purses. It is anticipated that ruling will be appealed.

        The Pennsylvania legislature passed and the governor signed a bill in July 2004 that will allow for up to 61,000 slot machines state wide in up to 14 different locations, seven or eight of which would be racetracks plus four or five slot parlors in Philadelphia and Pittsburgh and two small resorts.

        Maryland is among the other states contemplating some form of gaming legislation. Maryland's proposed legislation would authorize VLTs at some of Maryland's racing facilities. The Maryland Legislature did not enact any legalized gaming legislation during their 2004 legislative sessions.

        In this highly competitive environment, each property's relative success is affected by a great many factors that relate to its location and facilities. These include the number of parking spaces and hotel rooms it possesses, close proximity to Pacific Avenue, the Boardwalk and to other casino/hotels and

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access to the main expressway entering Atlantic City. During 2003, the Pacific Avenue front entrance was redesigned and refurbished as an exclusive entrance for Sands bus patrons, complete with a new and expanded bus waiting lounge. Also during 2003, the porte cochere was renovated and expanded in order to make The Sands more easily accessible to the drive-in customer. In 2004, The Sands renovated an entire floor of standard rooms into suites providing a competitive resource to attract and retain customers in the Middle and Premium Segments. The Sands continued to invest in its slot product by purchasing new slot machines, most of which included ticket-in/ticket-out technology. The ticket-in/ticket-out slot machines are less labor intensive in operation than traditional slot machines.

Industry Developments.

        On July 1, 2003, the State of New Jersey amended the NJCCA to impose various tax increases on Atlantic City casinos, including The Sands. Among other things, the amendments to the NJCCA include the following new tax provisions: (1) a new 4.25% tax on casino complimentaries, with proceeds deposited to the Casino Revenue Fund; (2) an 8% tax on casino service industry multi-casino progressive slot machine revenue, with the proceeds deposited to the Casino Revenue Fund; (3) a 7.5% tax on adjusted net income of licensed casinos, or the Casino Net Income Tax, in State fiscal years 2004 through 2006, with the proceeds deposited to the Casino Revenue Fund; (4) a fee of $3.00 per day on each hotel room in a casino hotel facility that is occupied by a guest, for consideration or as a complimentary item, with the proceeds deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007, $2.00 of the fee deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA; (5) an increase of the minimum casino hotel parking fee from $1.50 to $3.00, with $1.50 of the fee to be deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007, $0.50 to be deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA for its purposes pursuant to law, and for use by the CRDA to post a bond for $30 million for deposit into the Casino Capital Construction Fund, which was also created by the July 1, 2003 Act; and (6) the elimination of the deduction from casino licensee calculation of gross revenue for uncollectible gaming debt. These changes to the NJCCA, and the new taxes imposed on The Sands and other Atlantic City casinos, will reduce GB Holdings' profitability. For the year ended December 31, 2004, these new and increased taxes have cost The Sands approximately $1.9 million annually in additional net expenses.

        Slot machines continue to be more popular than table games particularly with frequent patrons and with recreational and other casual visitors. Casino operators have been catering increasingly to slot patrons through new forms of promotions and incentives such as slot machines that are linked among the various casinos enabling the pay out of large pooled jackpots, and through more attractive and entertaining gaming machines with secondary jackpots. Various competitors have committed efforts to provide ticket-in/ticket-out technology in their slot product, which appears to be an industry trend for the future. Slot machines generally produce higher margins and profitability than table games because they require less labor and have lower operating costs. As a result, slot machine revenue growth has outpaced table game revenue growth in recent years. In 2004, according to Commission filings, slot win accounted for approximately 73.8% of total Atlantic City gaming win. However, table games remain important to a select category of gaming patrons and industry table game drop has shown two consecutive years of growth in 2004 and 2003 after three straight years of decline. Management believes the availability of table games provides a varied gaming experience that benefits both slot and table game revenues.

Casino Credit.

        Casino operations are conducted on both a credit and a cash basis. Patron gaming debts incurred in accordance with the NJCCA are enforceable under New Jersey law. For the year ended December 31, 2004, gaming credit extended to The Sands' table game patrons accounted for

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approximately 21.8% of overall table game wagering, and table game wagering accounted for approximately 12.1% of overall casino wagering during the period. At December 31, 2004, gaming receivables amounted to $7.8 million before an allowance for uncollectible gaming receivables of $3.5 million. Management believes that such allowance is adequate.

Seasonality.

        Historically, The Sands' operations have been highly seasonal in nature, with the peak activity occurring from May to September. Consequently, the results of operations for the first and fourth quarters are traditionally less profitable than the other quarters of the fiscal year. Such seasonality and fluctuations may materially affect casino revenues and profitability.

Environmental Matters.

        We are subject to various federal, state and local laws, ordinances and regulations that (1) govern activities or operations that may have adverse environmental effects, such as discharges to air and water or (2) may impose liability for the costs of cleaning up and certain damages resulting from sites of past spills, disposals or other releases of hazardous or toxic substances or wastes. We endeavor to maintain compliance with environmental laws, but from time to time, current or historical operations on, or adjacent to, our property may have resulted or may result in noncompliance or liability for cleanup pursuant to environmental laws. In that regard, we may incur costs for cleaning up contamination relating to historical uses of certain of our properties.

License Agreement.

        GB Holdings' rights to the trade name "The Sands" were derived from a license agreement with an unaffiliated third party. Amounts payable by GB Holdings for these rights were equal to the amounts paid to the unaffiliated third party. On September 29, 2000, High River assigned GB Holdings the rights under a certain agreement with the owner of the trade name to use the trade name as of September 29, 2000 through May 19, 2086, subject to termination rights for a fee after a certain minimum term. High River received no payments for its assignment of these rights. Payment is made directly to the owner of the trade name. On or about July 14, 2004, GB Holdings entered into a license agreement with the Las Vegas Sands, Inc., for the use of the trade name "Sands" through May 19, 2086, subject to termination rights for a fee after a certain minimum term. This new license agreement superseded and replaced the above-mentioned trade name rights assigned to GB Holdings by High River. In connection with the transaction discussed above, the July 14, 2004 license agreement was assigned to ACE Gaming as of July 22, 2004. The payments made to the licensor in connection with the trade name amounts to $259,000, $263,000 and $272,000, respectively, for the years ended December 31, 2004, 2003 and 2002.

Employees and Labor Relations.

        In Atlantic City, all employees, except certain hotel employees, must be licensed under the NJCAA. Due to the seasonality of the operations of The Sands, the number of employees varies during the course of the year. At December 31, 2004, The Sands had approximately 1,938 employees. The Sands has collective bargaining agreements with three unions that represent approximately 804 employees. Management considers its labor relations to be good.

Casino Regulation

        Casino gaming is strictly regulated in Atlantic City under the NJCCA and the regulations of the NJCCC, which affect virtually all aspects of the operations of The Sands. The NJCCA and regulations affecting Atlantic City casino licensees concern primarily the financial stability, integrity and character

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of casino operators, their employees, their debt and equity security holders and others financially interested in casino operations; the nature of casino/hotel facilities; the operation methods (including rules of games and credit granting procedures) and financial and accounting practices used in connection with casino operations. A number of these regulations require practices that are different from those in casinos in Nevada and elsewhere, and some of these regulations result in casino operating costs greater than those in comparable facilities in Nevada and elsewhere.

Casino Licenses.

        NJCCA requires that all casino owners and management contractors be licensed by the NJCCC and that all employees, except for certain non-casino related job positions, major shareholders and other persons or entities financially interested in the casino operation be either licensed or approved by the NJCCC. A license is not transferable and may be revoked or suspended under certain circumstances by the NJCCC. A plenary license authorizes the operation of a casino with the games authorized in an operation certificate issued by the NJCCC, and the operation certificate may be issued only on a finding that the casino conforms to the requirements of the NJCCA and applicable regulations and that the casino is prepared to entertain the public. Under such determination, ACE Gaming has been issued a plenary casino license. The plenary license issued to The Sands was renewed by the NJCCC in September 2004 for a period of four years.

        In order to renew The Sands' casino license, the NJCCC determined that Atlantic Holdings and ACE Gaming are financially stable. In order to be found "financially stable" under the NJCCA, Atlantic Holdings and ACE Gaming must demonstrate, among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. During July 2004, The Sands filed a timely renewal application of its casino license for a four year term. The NJCCC approved The Sands casino license renewal application for a four year term on September 29, 2004 with certain conditions, including monthly written reports on the status of the 11% Notes, and a definitive plan to address the maturity of the 11% Notes to be submitted no later than August 1, 2005 as well as other standard industry reporting requirements.

        The NJCCA provides for a casino license fee of not less than $200,000 based upon the cost of the investigation and consideration of the license application, and a renewal fee of not less than $100,000 or $200,000 for a one year or four year renewal, respectively, based upon the cost of maintaining control and regulatory activities. In addition, a licensee must pay annual taxes of 8% of casino win, as defined in the NJCCA.

        The NJCCA also requires casino licensees to pay an investment alternative tax of 2.5% of Gross Revenue, or the 2.5% Tax, or, in lieu thereof, to make quarterly deposits of 1.25% of quarterly Gross Revenue with the CRDA, or the Deposits. The Deposits are then used to purchase bonds at below-market interest rates from the CRDA or to make qualified investments approved by the CRDA. The CRDA administers the statutorily mandated investments required to be funded by casino licensees and is required to expend the monies received by it for eligible projects as defined in the NJCCA. The Sands has elected to make the Deposits with the CRDA rather than pay the 2.5% Tax.

        The NJCCA also imposes certain restrictions upon the ownership of securities issued by a corporation that holds a casino license or is a holding company of a corporate licensee. Among other restrictions, the sale, assignment, transfer, pledge or other disposition of any security issued by a corporate licensee or holding company is subject to the regulation of the NJCCC. The NJCCC may require divestiture of any security held by a disqualified holder such as an officer, director or controlling stockholder who is required to be qualified under the NJCCA.

        Note holders are also subject to the qualification provisions of the NJCCA and may, in the sole discretion of the NJCCC, be required to make filings, submit to regulatory proceedings and qualify

D-9



under the NJCCA. If an investor is an "Institutional Investor" such as a retirement fund for governmental employees, a registered investment company or adviser, a collective investment trust, or an insurance company, then, in the absence of a prima facie showing by the New Jersey Division of Gaming Enforcement that the "Institutional Investor" may be found unqualified, the NJCCC shall grant a waiver of this qualification requirement with respect to publicly traded debt or equity securities of parent companies or affiliates if the investor will own (i) less than 10% of the common stock of the company in question on a fully diluted basis, or (ii) less than 20% of such company's overall indebtedness provided the investor owns less than 50% of an outstanding issue of indebtedness of such company; the NJCCC, upon a showing of good cause, may, in its sole discretion, grant a waiver of qualification to an "Institutional Investor" not satisfying the above percentage criteria. An "Institutional Investor" must also purchase securities for investment and have no intent to influence the management or operations of such company. The NJCCC may, in its sole discretion, grant a waiver of the qualification requirement to investors not qualifying as "Institutional Investors" under the NJCCA if such investors will own less than 5% of the publicly traded common stock of such company on a fully diluted basis or less than 15% of the publicly traded outstanding indebtedness of such company.

Properties

        The Sands is located in Atlantic City, New Jersey on approximately 6.1 acres of land one-half block from the Boardwalk at Brighton Park between Indiana Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands' facility currently consists of a casino and simulcasting facility with approximately 78,000 square feet of gaming space containing approximately 2,205 slot machines and approximately 73 table games; 2 hotels (see discussion on the Madison House Hotel immediately below) with an overall total of 620 rooms (including 187 suites); five restaurants; two cocktail lounges; two private lounges for invited guests; an 800-seat cabaret theater; retail space; an adjacent nine-story office building with approximately 77,000 square feet of office space for its executive, financial and administrative personnel; the "People Mover", an elevated, enclosed, one-way moving sidewalk connecting The Sands to the Boardwalk using air rights granted by an easement from the City of Atlantic City and a garage and surface parking for approximately 1,684 vehicles.

        The Sands entered into a long-term lease of the Madison House Hotel. The initial lease period is from December 2000 to December 2012 with lease payments ranging from $1.8 million per year to $2.2 million per year. The Madison House is physically connected at two floors to the existing Sands casino-hotel complex. The Sands completed renovations in 2002 to upgrade and combine the rooms of the Madison House into a total of 113 suites and 13 single rooms. It is the intention of The Sands to maintain and operate the Madison House at the same quality level as The Sands.

        With the exception of the land over which the People Mover is constructed and the Madison House Hotel land, The Sands owns the land and improvements comprising The Sands' facility. The Sands owns and operates the casino, the hotel, all of the restaurants, the cocktail lounge, the private lounges, the theatre and a retail gift shop. In addition, The Sands has licensed certain space within the hotel building to unrelated third parties who operate a beauty shop, a peanut shop, a game room and a coffee stand.

Legal Proceedings

        GB Holdings is, from time to time, party to various legal proceedings arising out of its businesses. Management of GB Holdings believes, however, that other than the proceedings discussed below, there are no proceedings pending or threatened against it, which, if determined adversely, would have a material adverse effect upon its business, financial conditions, results of operations or liquidity.

        Tax appeals on behalf of ACE and the City of Atlantic City challenging the amount of ACE's real property assessments for tax years 1996 through 2003 are pending before the NJ Tax Court.

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        By letter dated January 23, 2004, Sheffield Enterprises, Inc. asserted potential claims against The Sands under the Lanham Act for permitting a show entitled The Main Event, to run at The Sands during 2001. Sheffield also asserts certain copyright infringement claims growing out of the Main Event performances. This matter was concluded by a confidential settlement entered in to by the parties in January 2005. Under the settlement, The Sands was fully indemnified by Main Event's insurer for the amount of the stipulated damages. The Sands was responsible for payment of its own legal fees, which were not material.

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SELECTED FINANCIAL DATA

        The following table summarizes certain selected historical consolidated financial data of GB Holdings, and is qualified in its entirety by, and should be read in conjunction with GB Holdings' consolidated financial statements and related notes thereto contained elsewhere herein. The data as of December 31, 2004, 2003, 2002, 2001 and 2000 and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from the audited consolidated financial statements of GB Holdings at those dates and for those periods.

        All references herein to GB Holdings are on a consolidated basis and all operating assets, including cash, are owned by GB Holdings' subsidiaries, Atlantic Coast Entertainment Holdings Inc. and ACE Gaming LLC, and GB Holdings' sole asset is 2,882,938 shares of Atlantic Holdings Common Stock.

        GB Holdings implemented Statement of Position No. 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" and, therefore, adopted "fresh start reporting" as of September 30, 2000. The Company's emergence from its Chapter 11 proceedings resulted in a new reporting entity with no retained earnings or accumulated deficit as of September 30, 2000. Accordingly, GB Holdings' consolidated financial statements for periods prior to September 30, 2000 are not comparable to consolidated financial statements presented on or subsequent to September 30, 2000. Column headings have been included on the accompanying consolidated statement of operations data to distinguish between the pre-reorganization and post-reorganization entities.

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GB HOLDINGS, INC. AND SUBSIDIARIES
(Dollars in thousands, except share data)

Statements of Operations Data:

 
  Post-reorganization
  Pre-
Reorganization

 
 
  Year
Ended
12/31/04

  Year
Ended
12/31/03

  Year
Ended
12/31/02

  Year
Ended
12/31/01

  10/01/00
through
12/31/00

  01/01/00
through
09/30/00

 
Total Revenues   $ 194,389   $ 191,683   $ 213,273   $ 237,463   $ 47,910   $ 168,634  
Promotional Allowances     (23,146 )   (23,934 )   (23,356 )   (29,298 )   (7,099 )   (20,922 )
   
 
 
 
 
 
 
Net revenues     171,243     167,749     189,917     208,165     40,811     147,712  
   
 
 
 
 
 
 
Expenses:                                      
  Departmental     153,087     155,122     169,046     189,393     41,702     124,897  
  Depreciation and amortization     14,898     14,123     13,292     10,511     2,756     8,561  
  Provision for obligatory investments     1,165     1,434     1,521     1,238     1,068     853  
  Loss on impairment of assets             1,282              
  Loss on disposal of fixed assets     152     28     185     20     11     10  
   
 
 
 
 
 
 
    Total Expenses     169,302     170,707     185,326     201,162     45,537     134,321  
   
 
 
 
 
 
 
  Income (loss) from operations     1,941     (2,958 )   4,591     7,003     (4,726 )   13,391  
   
 
 
 
 
 
 
Non-operating income (expense):                                      
  Interest income     422     627     1,067     2,671     1,338     518  
  Interest expense     (11,115 )   (12,581 )   (12,195 )   (11,453 )   (3,143 )   (366 )
  Debt restructuring costs     (3,084 )   (1,843 )                
  Reorganization costs                     34     (2,807 )
  Gain on prepetition debt discharge                         14,795  
   
 
 
 
 
 
 
    Total non-operating expense, net     (13,777 )   (13,797 )   (11,128 )   (8,782 )   (1,771 )   12,140  
   
 
 
 
 
 
 
(Loss) income before income taxes     (11,836 )   (16,755 )   (6,537 )   (1,779 )   (6,497 )   25,531  
Income tax provision     (986 )   (958 )   (784 )   (55 )        
   
 
 
 
 
 
 
Net (loss) income   $ (12,822 ) $ (17,713 ) $ (7,321 ) $ (1,834 ) $ (6,497 ) $ 25,531  
   
 
 
 
 
 
 
Basic/diluted (loss) income per common share:   $ (1.28 ) $ (1.77 ) $ (0.73 ) $ (0.18 ) $ (0.65 ) $ 2.55 (1 )
   
 
 
 
 
 
 
Weighted average common shares outstanding     10,000,000     10,000,000     10,000,000     10,000,000     10,000,000     10,000,000  

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Capital Expenditures   $ 17,378   $ 12,825   $ 14,058   $ 23,095   $ 2,934   $ 14,422  
Ratio of earnings to fixed charges(3)     0.0x     (0.2 )x   0.5x     0.9x     5.9x (2)      
Deficiency of less than one-to-one ratio   $ 11,483   $ 16,452   $ 6,300   $ 1,779   $        

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Balance Sheet Data:

 
  As of
12/31/04

  As of
12/31/03

  As of
12/31/02

  As of
12/31/01

  As of
12/31/00

Total assets   $ 216,958   $ 227,563   $ 244,712   $ 255,922   $ 264,247
Total current capital leases     248                
Total current portion long-term debt     43,741                
Total non-current capital leases     432                
Total long-term debt     66,259     110,000     110,000     110,371     110,838
Shareholder's equity     35,226     91,635     109,348     116,669     118,503

(1)
Income (loss) per share information is presented on a pro forma basis for periods presented prior to the September 30, 2000.

(2)
Includes $14,795 of gain on pre-petition debt discharge and is presented for combined full year 2000.

(3)
For purposes of calculating this ratio, earnings consist of the sum of (a) pretax income, (b) fixed charges and (c) amortization of capitalized interest, less the sum of interest capitalized. Fixed charges consists of (a) interest expensed and capitalized, (b) amortized premiums, discounts and capitalized expenses related to indebtedness, and (c) our estimate of the interest within rental expense.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        In connection with the Consent Solicitation and Offer to Exchange described above, holders of $66,258,970 of 11% Notes exchanged such notes for an equal principal amount of 3% Notes. As a result, $43,741,030 of principal amount of the 11% Notes remain outstanding and will mature on September 29, 2005. GB Holdings' ability to pay the interest and principal amount of the remaining 11% Notes at maturity in September 2005 will depend upon its ability to refinance such Notes on favorable terms or at all or to derive sufficient funds from the sale of its Atlantic Holdings Common Stock or from a borrowing. If GB Holdings is unable to pay the interest and principal due on the remaining 11% Notes at maturity it could result in, among other things, the possibility of GB Holdings seeking bankruptcy protection or being forced into bankruptcy or reorganization. The status of the 11% Notes due September 2005 is currently being reviewed by the Company and various alternatives are being evaluated.

        GB Holdings management believes that cash flows generated from operations of its subsidiaries during 2005, as well as available cash reserves, will be sufficient to meet their operating plan. Based upon expected cash flow generated from operations, GB Holdings' management determined that it would be prudent for GB Holdings' subsidiaries to obtain a line of credit to provide additional cash availability, to meet the working capital needs of the subsidiaries, in the event that anticipated cash flow is less than expected or expenses exceed those anticipated. As a result of this determination, on November 12, 2004, Atlantic Holdings and ACE entered into a senior secured revolving credit facility, with Fortress Credit Corp, or Fortress, which provides for working capital loans of up to $10 million to be used for working capital purposes, in the operation of The Sands. The loan agreement and the loans thereunder have been designated by the Board of Directors of Atlantic Holdings and Atlantic Holdings, as manager of ACE, as Working Capital Indebtedness (as that term is defined in the Indenture, dated as of July 22, 2004, among Atlantic Holdings, as issuer, ACE, as guarantor, and Wells Fargo Bank, National Association, as trustee). As of December 31, 2004, Atlantic Holdings had not borrowed any funds available under the $10 million credit facility.

        Atlantic Holdings and ACE are currently exploring various plans for potential expansion and improvements. If they decide to expand and improve the facilities, they will need to obtain additional financing since internally generated funds and amounts available for borrowing under existing facilities would not be sufficient. They may not be able to obtain the required consents or additional financing.

Operating Activities

        At December 31, 2004, GB Holdings had cash and cash equivalents of $12.8 million. GB Holdings generated $4.4 million of net cash provided by operating activities during the year ended December 31, 2004 compared to $2.3 million used in operating activities and $9.7 million provided by operating activities during the years ending December 31, 2003 and 2002, respectively.

Investing Activities

        Capital expenditures for the year ended December 31, 2004 amounted to $17.4 million compared to $12.8 million and $14.1 million in 2004, 2003 and 2002, respectively. The 2004 expenditures primarily included the 15th floor suite renovations, new slot machines and refurbishing premium slot and table game areas of the casino. In order to enhance its competitive position in the market place, The Company may determine to incur additional substantial costs and expenses to maintain, improve and expand its facilities and operations depending on availability of cash flow.

        GB Holdings is required by the NJCCA to make certain quarterly deposits based on gross revenue with the CRDA in lieu of a certain investment alternative tax. Deposits for the years ended

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December 31, 2004, 2003 and 2002 amounted to $2.3 million, $2.3 million and $2.5 million, respectively.

Financing Activities

        In connection with the Consent Solicitation and Offer to Exchange described above, holders of approximately $66,259,000 of 11% Notes exchanged such notes for an equal principal amount of 3% Notes. As a result, approximately $43,741,000 of principal amount of the 11% Notes remain outstanding and mature on September 29, 2005. GB Holdings' ability to pay the interest and principal amount of the remaining 11% Notes at maturity on September 29, 2005 will depend upon its ability to refinance such Notes on favorable terms or at all or to derive sufficient funds from the sale of its Atlantic Holdings Common Stock or from a borrowing. If GB Holdings is unable to pay the interest and principal due on the remaining 11% Notes at maturity it could result in, among other things, the possibility of GB Holdings seeking bankruptcy protection or being forced into bankruptcy or reorganization. The 3% Notes mature on July 22, 2008.

        At December 31, 2004 and 2003, accrued interest on the 11% Notes was $1,216,000 and $3,092,000, respectively. Interest on the 11% Notes is due semi-annually on March 29th and September 29th. Accrued interest on the 3% Notes was $883,000 at December 31, 2004. Interest on the 3% Notes is due at maturity, on July 22, 2008.

        On November 12, 2004, Atlantic Holdings and ACE entered into a Loan and Security Agreement or the Loan Agreement, by and among Atlantic Holdings, as borrower, ACE, as guarantor, and Fortress Credit Corp., as lender, and certain related ancillary documents, pursuant to which, Fortress agreed to make available to Atlantic Holdings a senior secured revolving credit line providing for working capital loans of up to $10 million or the Loans, to be used for working capital purposes in the operation of The Sands. The Loan Agreement and the Loans thereunder have been designated by the Board of Directors of Atlantic Holdings and Atlantic Holdings, as manager of ACE, as Working Capital Indebtedness (as that term is defined in the Indenture) or the Indenture, dated as of July 22, 2004, among Atlantic Holdings, as issuer, ACE, as guarantor, and Wells Fargo Bank, National Association, as trustee or the Trustee.

        The aggregate amount of the Loans shall not exceed $10 million plus interest. All Loans under the Loan Agreement are payable in full by no later than the day immediately prior to the one-year anniversary of the Loan Agreement, or any earlier date on which the Loans are required to be paid in full, by acceleration or otherwise, pursuant to the Loan Agreement.

        The outstanding principal balance of the Loan Agreement will accrue interest at a fixed rate to be set monthly which is equal to one month LIBOR (but not less than 1.5%), plus 8% per annum. In addition to interest payable on the principal balance outstanding from time to time under the Loan Agreement, Atlantic Holdings is required to pay to Fortress an unused line fee for each preceding three-month period during the term of the Loan Agreement in an amount equal to .35% of the excess of the available commitment over the average outstanding monthly balance during such preceding three-month period.

        The Loans are secured by a first lien and security interest on all of Atlantic Holdings' and ACE's personal property and a first mortgage on The Sands. Fortress entered into an Intercreditor Agreement, dated as of November 12, 2004, with the Trustee pursuant to the Loan Agreement. The Liens (as that term is defined in the Indenture) of the Trustee on the Collateral (as that term is defined in the Indenture), are subject and inferior to Liens which secure Working Capital Indebtedness such as the Loans.

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        Fortress may terminate its obligation to advance and declare the unpaid balance of the Loans, or any part thereof, immediately due and payable upon the occurrence and during the continuance of customary defaults which include payment default, covenant defaults, bankruptcy type defaults, attachments, judgments, the occurrence of certain material adverse events, criminal proceedings, and defaults by Atlantic Holdings or ACE under certain other agreements.

        The Borrower and Guarantor on the Loan Agreement are required to maintain the following financial covenants; (1) a minimum EBITDA (as defined in the Loan Agreement) of $12.5 million, which shall be measured and confirmed as of the twelve month period ended each respective January 1, April 1, July 1 and October 1 of each year until the full and final satisfaction of the loan and (2) a Minimum Leverage Ratio of which the Borrower shall not permit its ratio of defined Total Debt to EBITDA, as measured and confirmed annually on a trailing twelve month basis to exceed 6.25:1. As of December 31, 2004, GB Holdings is in compliance with these covenants.

        Pursuant to New Jersey law, the corporate owner of The Sands is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands were required to be renewed in 2004, which required that the CCC determine that among other things, Atlantic Holdings and ACE are financially stable. In order to be found "financially stable" under NJCCA, Atlantic Holdings and ACE had to demonstrate among other things, its ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. During July 2004, The Sands filed a timely renewal application of its casino license for a four year term. The CCC approved The Sands' casino license renewal application on September 29, 2004 with certain conditions, including monthly written reports on the status of the 11% Notes, a definitive plan to address the maturity of the 11% Notes, to be submitted no later than August 1, 2005 as well as other standard industry reporting requirements.

Critical Accounting Policies and Estimates

        GB Holdings' discussion and analysis of its results of operations and financial condition are based upon its consolidated financial statements that have been prepared in accordance with US generally accepted accounting principles or US GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Estimates and assumptions are evaluated on an ongoing basis and are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed within Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in the notes to the consolidated financial statements, if applicable, where such estimates, assumptions, and accounting policies affect GB Holdings' reported and expected financial results.

        GB Holdings believes the following accounting policies are critical to its business operations and the understanding of results of operations and affect the more significant judgments and estimates used in the preparation of its consolidated financial statements:

        Allowance for Doubtful Accounts—GB Holdings maintains accounts receivable allowances for estimated losses resulting from the inability of its customers to make required payments. The adequacy of the allowance is determined by management based on a periodic review of the receivable portfolio. Additional allowances may be required if the financial condition of GB Holdings' customers deteriorates.

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        Commitments and Contingencies—Litigation—On an ongoing basis, GB Holdings assesses the potential liabilities related to any lawsuits or claims brought against GB Holdings. While it is typically very difficult to determine the timing and ultimate outcome of such actions, GB Holdings uses its best judgment to determine if it is probable that it will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, GB Holdings makes estimates of the amount of insurance recoveries, if any. GB Holdings accrues a liability when it believes a loss is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertainties related to the eventual outcome of litigation and potential insurance recovery, it is possible that certain matters may be resolved for amounts materially different from any provisions or disclosures that GB Holdings has previously made.

        Long-Lived Assets—GB Holdings periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the determination of impairment losses, such as future cash flows and disposition costs, may affect the carrying value of long-lived assets and possible impairment expense in GB Holdings' consolidated financial statements.

        Self-Insurance—GB Holdings retains the obligation for certain losses related to customer's claims of personal injuries incurred while on GB Holdings property as well as workers compensation claims beginning in 2002 and major medical claims for non-union employees beginning in 2003. GB Holdings accrues for outstanding reported claims, claims that have been incurred but not reported and projected claims based upon management's estimates of the aggregate liability for uninsured claims using historical experience, and adjusting company's estimates and the estimated trends in claim values. Although management believes it has the ability to adequately project and record estimated claim payments, it is possible that actual results could differ significantly from the recorded liabilities.

        Income Taxes—GB Holdings accounts for income tax assets and liabilities in accordance with Statement of Financial Accounting Standards, Accounting for Income Taxes, or SFAS No. 109. SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. GB Holdings maintains valuation allowances where it is determined more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, Management takes into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax planning strategies. Management believes that it is more likely than not that the tax benefits of certain future deductible temporary differences will be realized based on the reversal of existing temporary differences, and therefore, a valuation allowance has not been provided for these deferred tax assets. Additionally, management has determined that the realization of certain of GB Holdings' deferred tax assets is not more likely than not and, as such, has provided a valuation allowance against those deferred tax assets at December 31, 2004 and 2003.

        Allowance for Obligatory Investments—GB Holdings obligatory investment allowances for its investments made in satisfaction of its CRDA obligation. The obligatory investments may ultimately take the form of CRDA issued bonds, which bear interest at below market rates, direct investments or donations. CRDA bonds bear interest at approximately one-third below market rates. Management bases its reserves on the type of investments the obligation has taken or is expected to take. Donations of The Sands' quarterly deposits to the CRDA have historically yielded a 51% future credit or refund of obligations. Therefore, management has reserved the predominant balance of its obligatory investments at between 33% and 49%.

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Results of Operations

Gaming Operations

        Information contained herein, regarding Atlantic City casinos other than The Sands, was obtained from reports filed with the Commission.

        Table game drop increased by $30.0 million (13.8%) during 2004 compared with 2003 and decreased by $24.7 million (10.2%) in 2003 compared to 2002. By comparison, according to Commission reports, table game drop at all other Atlantic City casinos increased 10.3% in 2004 compared to 2003 and by 2.6% in 2003 compared to 2002. During 2004, The Sands has gradually increased its number of table games to 83 units at December 31, 2004 after increasing to 73 units in 2003 from 40 units at the end of 2002. The table game product was supported by marketing, player development and customer service programs that focused on attracting premium and middle category table game players.

        Slot machine handle decreased $124.0 million (6.5%) during 2004, compared with 2003 and $307.5 million (13.8%) in 2003 compared to 2002. By comparison, according to Commission reports, the percentage increase in slot machine handle for all other Atlantic City casinos for the same periods was 6.7% and 2.1%, respectively. The decreased Sands slot handle during 2004 and 2003 can be attributed to an increase in competitive capacity of both gaming space and hotel rooms in the Atlantic City Market. The number of slot machines increased slightly at The Sands to 2,205 at December 31, 2004 compared to 2,202 at December 31, 2003. For all other Atlantic City casinos, the number of slot machines decreased 1.9% in 2004 compared to 2003.

        Casino revenues at The Sands increased by $2.8 million (1.8%) in 2004 compared to 2003 and decreased by $20.3 million (11.5%) in 2003 compared to 2002. The 2004 increase was due to the $7.0 million increase in table game revenues, which was a result of the $30.0 million (13.8%) increase in table game drop and a 1.0% increase in table hold percentage. An increase in slot hold percentage from 7.78% in 2003 to 8.15% in 2004 slightly offset the impact of the decrease in slot handle. The 2003 decrease was due to the $19.3 million decline in slot revenues, which was a result of the $307.5 million (13.8%) decrease in slot handle. The decrease in slot handle was primarily due to an increase in competitive capacity in the Atlantic City market.

        Room revenues decreased by $86,000 (0.8%) in 2004 compared to 2003 and by $149,000 (1.3%) in 2003 compared to 2002. The 2004 decrease is due to a decrease in occupied room nights offset slightly by an increase in average room rates. The 2004 decrease in occupied room nights was due to the continuing increased rooms inventory in the Atlantic City market and a conscious decision to reduce the number of complimentary rooms allotted to lower rated customers as compared to the prior year. The 2003 decrease is due to a decrease in occupied room nights while average room rates remained flat. This was a result of a decrease in occupied room nights for cash sales, offset slightly by an increase in occupied room nights for complimentary rooms. The 2003 decline in occupied room nights for cash sales is primarily due to the increased rooms inventory in the Atlantic City market as a result of the Borgata, which opened in July 2003, as well as room additions at existing competitors.

        Food and beverage revenues decreased $64,000 (0.3%) in 2004 compared to 2003 and decreased by $1.4 million (5.8%) in 2003 compared to 2002. The 2004 decrease is due to a $662,000 decrease in food revenue offset by a $598,000 increase in beverage revenues. The decrease in food revenue is primarily due to a decrease in cash sales and covers in the Boardwalk Buffet. The increase in beverage revenue is due to increased sales (cash and complimentary) in Swingers Lounge. The 2003 decrease is due to a decrease in food revenue ($2.2 million) partially offset by an increase in beverage revenues

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($841,000). The decrease in food revenue occurred predominantly in the high volume outlets (Boardwalk Buffet and Food Factory). The Food Factory has been closed since December 2002. In 2002, these outlets were the preferred choice of and marketed to the mass category slot player. The 2003 increase in beverage revenue is primarily due to the new Swingers lounge, which opened in July 2003, as well as increases in room service and casino service bars.

        Other revenues increased $26,000 in 2004 compared to 2003 and by $179,000 (4.8%) in 2003 compared to 2002. The 2004 increase is due to increased revenue from outlet rentals, parking and commissions offset by decreases in entertainment and retail sales. The 2003 increase is due to increased revenue in entertainment, lobby store sales and parking. These increases were primarily from complimentaries provided to customers in the middle and premium segments.

        Promotional allowances are comprised of the estimated retail value of complimentary goods and services provided to the casino customers under various marketing programs. As a percentage of casino revenues, promotional allowances decreased to 14.7% during 2004 compared to 15.5% during 2003 and increased from 13.3% in 2002. The 2004 decrease is primarily attributable to a Company emphasis to provide increased profitability of customers and less reliance on lower rated room customers. The 2003 increase is a result of the marketing, player development and customer service programs implemented to maintain and recapture lost market share in the middle and premium player segments due to the reduction in table games and the marketing program during the summer of 2002 that focused on the mass slot player segments.

        Casino expenses at The Sands decreased by $2.2 million (4.2%) in 2004 compared to 2003 and by $7.3 million (12.2%) in 2003 compared to 2002. The 2004 decrease is primarily due to reduced payroll and benefits costs ($1.9 million) as a result of the increased utilization of ticket-in/ticket-out slot technology, which reduces related slot and cashier labor. The 2003 decrease is primarily due to a reduction in casino payroll and employee benefits ($2.4 million) as a result of a full year of lower employment levels related to a series of layoffs and job eliminations beginning in 2001. Other favorable casino expense variances in 2003 were directly related to the lower casino revenues, including gaming taxes ($1.8 million). The 2002 decrease in casino expenses is primarily due to the reduction of complimentary costs associated with food and beverage and decreased Casino payroll expenses due to the reduction in table games. The decrease in the provision for doubtful accounts expense was caused by a reduction in credit issuance due to lower table game activity. Lower costs for customer transportation were a result of reduced volume in air travel and ground transportation. Reductions in advertising expense and gaming revenue tax also contributed significantly to the decreases in casino expenses in 2002.

        Rooms expenses increased by $720,000 (26.9%) in 2004 compared to 2003 and decreased by $962,000 (26.4%) in 2003 compared to 2002. The 2004 increase is primarily due to less allocable cost related to a decrease in complimentary rooms utilization by Casino and Marketing departments ($849,000). The 2003 decrease is primarily due to reductions in staffing, which reduced payroll and employee benefits. Linen usage and laundry expense decreased as a result of fewer occupied rooms in 2003 compared to 2002.

        Food and beverage expenses decreased by $551,000 (6.5%) in 2004 compared to 2003 and by $1.9 million (18.0%) in 2003 compared to 2002. The 2004 decrease is primarily due to lower payroll and employee benefits ($1.2 million) and cost of food sales ($139,000) offset by increased costs as a result of lower allocable costs for complimentaries ($366,000) and employee meals ($240,000). Cost of beverage sales increased also ($203,000) as a direct result of increased sales. The 2003 decrease is due

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to a decrease in payroll and employee benefits as a result of staffing reductions. Food cost of sales decreased as a result of lower food costs in the Boardwalk Buffet and the closing of the Food Factory in 2002. These favorable variances were offset slightly by lower allocable food and beverage costs transferred to other departments.

        Other expenses decreased by $427,000 (32.9%) in 2004 compared to 2003 and increased by $75,000 (6.1%) in 2003 compared to 2002. The 2004 decrease is due to lower costs for headline entertainment and allocable cost of complimentaries as a result of fewer headline shows in 2004 than 2003. The 2003 increase was due to increased entertainment costs as the theatre was open more often with headliner entertainers than it was in 2002.

        Selling, general and administrative expenses increased by $413,000 (0.5%) in 2004 compared to 2003 and decreased by $3.9 million (4.1%) in 2003 compared to 2002. The 2004 increase is due to increases in utilities ($443,000), advertising and payroll taxes ($362,000) partially offset by decreases in allocated cost of complimentaries ($1.0 million). The 2003 decrease was primarily due to lower payroll and benefits costs ($2.1 million) as a result of continued labor efficiencies. Also contributing to the decrease in 2003, was lower severance payouts ($1.6 million) than in 2002 as a result of smaller adjustments in staffing levels than in the prior year. These favorable variances were offset somewhat by increases in insurance premiums and reserves due to market conditions and higher payouts and more significant claims in 2003.

        Depreciation and amortization increased by $775,000 (5.5%) in 2004 compared to 2003 and by $831,000 (5.7%) in 2003 compared to 2002. The 2004 and 2003 increase is due to increased depreciation expense ($773,000 and $826,000, respectively) resulting from further renovations and upgrades to infrastructure and public areas such as the replacement of slot machines, the 15th floor suite renovations, Swingers Lounge, Platinum Club and the new bus entrance and waiting area.

        Interest income decreased by $205,000 (32.7%) in 2004 compared to 2003 and by $440,000 (41.2%) in 2003 compared to 2002. The 2004 and 2003 decreases were due to lower invested cash reserves, which were used to fund capital expenditures, debt restructuring costs and consent fees during those years.

        Interest expense decreased by $1.5 million (11.7%) in 2004 compared to 2003 and increased by $386,000 (3.2%) in 2003 compared to 2002. The 2004 decrease is primarily due to the modification of debt resulting in the exchange of approximately $66.3 million in notes accruing interest at 11% for an equal amount at 3% interest. The increase in 2003 is due to lower levels of capitalized interest than in 2002.

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        Income tax provision increased $28,000 (2.9%) in 2004 compared to 2003 and $174,000 (22.2%) in 2003 compared to 2002. The 2004 increase is primarily due to the increase in net revenues, which is the basis for the New Jersey Alternative Minimum Assessment. The 2003 increase is predominantly due to the newly enacted New Jersey Casino Net Income Tax ($175,000), which became effective in July 2003.

Contractual Obligations

        The following table sets forth the contractual obligations of GB Holdings at December 31, 2004.

 
  Payments Due By Period
Contractual Obligations

  Total
  Less Than
1 Year

  1-3
Years

  3-5
Years

  More Than
5 Years

Long-Term Debt   $ 110,000,000   $ $43,741,000   $   $ 66,259,000   $
Capital Lease Obligations     760,000     286,000     474,000        
Obligatory Contributions:                              
  CRDA Obligation     4,736,000     74,000     154,000     2,244,000     2,264,000
  VLT Agreement     2,860,000     953,000     1,907,000        
Operating Leases:                              
  Madison House     16,226,000     1,800,000     3,996,000     3,996,000     6,434,000
  Equipment     167,000     167,000            
   
 
 
 
 
  Total Contractual Obligations   $ 134,749,000   $ $47,021,000   $ 6,531,000   $ 72,499,000   $ 8,698,000
   
 
 
 
 

Private Securities Litigation Reform Act

        The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-K and other materials filed or to be filed by GB Holdings, with the SEC (as well as information included in oral statements or other written statements made by such companies) contains statements that are forward-looking, such as statements relating to future expansion plans, future construction costs and other business development activities including other capital spending, economic conditions, financing sources, competition and the effects of tax regulation and state regulations applicable to the gaming industry in general or GB Holdings in particular. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of GB Holdings. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, activities of competitors and the presence of new or additional competition, fluctuations and changes in customer preference and attitudes, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions).

Risk Factors Related to the Business of GB Holdings

GB Holdings may be unable to pay the interest or principal on the 11% Notes at maturity which may impact our ability to continue as a going concern.

        GB Holdings' ability to pay the interest and principal amount of the remaining 11% Notes at maturity on September 29, 2005 will depend upon its ability to refinance such Notes on favorable terms or at all or to derive sufficient funds from the sale of its Atlantic Holdings Common Stock or from a borrowing. If GB Holdings is unable to pay the interest and principal due on the remaining 11% Notes

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at maturity it could result in, among other things, the possibility of GB Holdings seeking bankruptcy protection or being forced into bankruptcy or reorganization.

The Sands must maintain its casino license in order to operate.

        Pursuant to New Jersey law, the corporate owner of The Sands is required to maintain a casino license in order to operate The Sands. The gaming licenses required to own and operate The Sands were required to be renewed in 2004, which required that the CCC determine that among other things, Atlantic Holdings and ACE are financially stable. In order to be found "financially stable" under the NJCCA, Atlantic Holdings and ACE must demonstrate among other things, their ability to pay, exchange, or refinance debts that mature or otherwise become due and payable during the license term, or to otherwise manage such debts. During July 2004, a timely renewal application of its casino license for a four year term was filed. The CCC approved the casino license renewal application for a four year term on September 29, 2004 with certain conditions, including monthly written reports on the status of the 11% Notes, a definitive plan by GB Holdings to address the maturity of the 11% Notes, to be submitted no later than August 1, 2005 as well as other standard industry reporting requirements.

Going Concern Consideration.

        GB Holdings consolidated financial statements have been prepared assuming it will continue as a going concern. Its independent registered public accounting firm's report on our consolidated financial statements, includes an explanatory paragraph relating to substantial doubt as to the ability of GB Holdings to continue as a going concern, due to GB Holdings' recurring net losses, net working capital deficiency and significant current debt obligations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. On September 29, 2005, the 11% Notes will mature and GB Holdings will owe approximately $46.1 million in interest and principal payments. If GB Holdings is unable to pay the interest and principal due at maturity it will be in default on the 11% Notes.

GB Holdings may need to increase capital expenditures to compete effectively.

        Capital expenditures, such as room refurbishments, amenity upgrades and new gaming equipment, are necessary from time to time to preserve the competitiveness of GB Holdings. The gaming industry is very competitive and is expected to become more competitive in the future. If cash from operations is insufficient to provide for needed levels of capital expenditures, The Sands' competitive position could deteriorate if GB Holdings is unable to borrow funds for such purposes.

If GB Holdings fails to offer competitive products and services or maintain the loyalty of The Sands' patrons, its business will be adversely affected.

        In addition to capital expenditures, GB Holdings is required to anticipate the changing tastes of The Sands' patrons and offer both competitive and innovative products and services to ensure that repeat patrons return and new patrons visit The Sands. The demands of meeting GB Holdings' debt service payments and the need to make capital expenditures limits the available cash to finance such products and services. In addition, the consequences of incorrect strategic decisions may be difficult or impossible to anticipate or correct in a timely manner.

GB Holdings' quarterly operating results are subject to fluctuations and seasonality, and if GB Holdings fails to meet the expectations of securities analysts or investors, GB Holdings' share price may decrease significantly.

        GB Holdings' quarterly operating results are highly volatile and subject to unpredictable fluctuations due to unexpectedly high or low losses, changing customer tastes and trends, unpredictable

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patron gaming volume, the proportion of table game revenues to slot game revenues, weather and discretionary decisions by The Sands' patrons regarding frequency of visits and spending amounts. GB Holdings' operating results for any given quarter may not meet analyst expectations or conform to the operating results of GB Holdings' local, regional or national competitors. If GB Holdings' operating results do not conform to such expectations our share price may be adversely affected. Conversely, favorable operating results in any given quarter may be followed by an unexpected downturn in subsequent quarters.

Increased state taxation of gaming and hospitality revenues could adversely affect GB Holdings' results of operations.

        The casino industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. Gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes. For example, casinos in Atlantic City pay for licenses as well as special taxes to the city and state. New Jersey taxes annual gaming revenues at the rate of 8.0%. New Jersey also levies an annual investment alternative tax of 2.5% on annual gaming revenues in addition to normal federal and state income taxes. This 2.5% obligation, however, can be satisfied by purchasing certain bonds or making certain investments in the amount of 1.25% of annual gaming revenues. On July 3, 2002, the State of New Jersey passed the New Jersey Business Tax Reform Act, which, among other things, suspended the use of the New Jersey net operating loss carryforwards for two years and introduced a new alternative minimum assessment under the New Jersey corporate business tax based on gross receipts or gross profits. For the years ended December 31, 2004 and 2003, there was a charge to income tax provision of $636,000 and $778,000, respectively, related to the impact of the New Jersey Business Tax Reform Act.

        On July 1, 2003, the State of New Jersey amended the NJCCA to impose various tax increases on Atlantic City casinos, including The Sands. Among other things, the amendments to the NJCCA include the following new tax provisions: (i) a new 4.25% tax on casino complimentaries, with proceeds deposited to the Casino Revenue Fund; (ii) an 8% tax on casino service industry multi-casino progressive slot machine revenue, with the proceeds deposited to the Casino Revenue Fund; (iii) a 7.5% tax on adjusted net income of licensed casinos or the Casino Net Income Tax in State fiscal years 2004 through 2006, with the proceeds deposited to the Casino Revenue Fund; (iv) a fee of $3.00 per day on each hotel room in a casino hotel facility that is occupied by a guest, for consideration or as a complimentary item, with the proceeds deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007 $2.00 of the fee deposited into the Casino Revenue Fund and $1.00 transferred to the CRDA; (v) an increase of the minimum casino hotel parking charge from $2 to $3, with $1.50 of the fee to be deposited into the Casino Revenue Fund in State fiscal years 2004 through 2006, and beginning in State fiscal year 2007, $0.50 to be deposited into the Casino Revenue Fund and $1.00 to be transferred to the CRDA for its purposes pursuant to law, and for use by the CRDA to post a bond for $30 million for deposit into the Casino Capital Construction Fund, which was also created by the July 1, 2003 Act; and (vi) the elimination of the deduction from casino licensee calculation of gross revenue for uncollectible gaming debt. These changes to the NJCCA, and the new taxes imposed on The Sands and other Atlantic City casinos, has reduced the Company's profitability.

        Future changes in New Jersey state taxation of casino gaming companies cannot be predicted and any such changes could adversely affect The Company's profitability.

Energy price increases may adversely affect GB Holdings' costs of operations and revenues of The Sands.

        The Sands uses significant amounts of electricity, natural gas and other forms of energy. While no shortages of energy have been experienced, substantial increases in the cost of forms of energy in the U.S. will negatively affect GB Holdings' operating results. The extent of the impact is subject to the

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magnitude and duration of the energy price increases, but this impact could be material. In addition, higher energy and gasoline prices which affect The Sands' customers may result in reduced visitation to The Sands' property and a reduction in revenues.

A downturn in general economic conditions may adversely affect GB Holdings' results of operations.

        GB Holdings' business operations are affected by international, national and local economic conditions. A recession or downturn in the general economy, or in a region constituting a significant source of customers for The Sands' property, could result in fewer customers visiting GB Holdings' property and a reduction in spending by customers who do visit GB Holdings' property, which would adversely affect the Company's revenues while some of its costs remain fixed, resulting in decreased earnings.

        A majority of The Sands' patrons are from automobile travel and bus tours. Higher gasoline prices could reduce automobile travel to The Sands' location and could increase bus fares to The Sands. In addition, adverse winter weather conditions could reduce automobile travel to The Sands' location and could reduce bus travel. Accordingly, GB Holdings' business, assets, financial condition and results of operations could be adversely affected by a weakening of regional economic conditions and higher gasoline prices or adverse winter weather conditions.

Acts of terrorism and the uncertainty of the outcome and duration of the activity in Iraq and elsewhere, as well as other factors affecting discretionary consumer spending, have impacted the gaming industry and may harm GB Holdings' operating results and GB Holdings' ability to insure against certain risks.

        The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties which could adversely affect GB Holdings' business and results of operations. Future acts of terror in the U.S. or an outbreak of hostilities involving the United States, may again reduce The Sands' guests' willingness to travel with the result that GB Holdings' operations will suffer.

GB Holding may incur losses that would not be covered by insurance and the cost of insurance will increase.

        Although GB Holdings is required to maintain insurance customary and appropriate for its business GB Holding cannot assure you that insurance will be available or adequate to cover all loss and damage to which GB Holdings' business or GB Holdings' assets might be subjected. In connection with insurance renewals subsequent to September 11, 2001, the insurance coverage for certain types of damages or occurrences has been diminished substantially and is unavailable at commercial rates. GB Holdings is self-insured for certain risks. The lack of insurance for certain types or levels of risk could expose GB Holding to significant losses in the event that an uninsured catastrophe occurred. Any losses GB Holding incurs that are not covered by insurance may decrease its future operating income, require it to find replacements or repairs for destroyed property and reduce the funds available for payments of its obligations on the 11% Notes and 3% Notes.

There are risks related to the creditworthiness of patrons of the casinos.

        GB Holding is exposed to certain risks related to the creditworthiness of its patrons. Historically The Sands has extended credit on a discretionary basis to certain qualified patrons. For the year ended December 31, 2004, gaming credit extended to The Sands' table game patrons accounted for approximately 21.8% of overall table game wagering, and table game wagering accounted for approximately 12.1% of overall casino wagering during the period. At December 31, 2004, gaming receivables amount to $7.8 million before an allowance for uncollectible gaming receivables of $3.5 million. There can be no assurance that defaults in the repayment of credit by patrons of The

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Sands would not have a material adverse effect on the results of operations of The Sands and, consequently GB Holding.

GB Holdings' success depends in part on the availability of qualified management and personnel and on GB Holdings' ability to retain such employees.

        The quality of individuals hired for positions in the hotel and gaming operations will be critical to the success of GB Holdings' business. It may be difficult to attract, retain and train qualified employees due to the competition for employees with other gaming companies and their facilities in GB Holdings' jurisdiction and nationwide. The Borgata opening and other Atlantic City casino expansions has aggravated this problem. Future expansions, in Atlantic City or other neighboring jurisdictions, could further exacerbate this situation. There can be no assurance that GB Holdings will be successful in retaining current personnel or in hiring or retaining qualified personnel in the future. A failure to attract or retain qualified management and personnel at all levels or the loss of any of GB Holdings' or Operating's key executives could have a material adverse effect on the Company's financial condition and results of operations.

Risk Factors Related to the Gaming Industry

The gaming industry is highly competitive.

        The gaming industry is highly competitive and GB Holdings' competitors may have greater resources than GB Holdings. If other properties operate more successfully, if existing properties are enhanced or expanded, or if additional hotels and casinos are established in and around the location in which GB Holdings conducts business, GB Holding may lose market share. In particular, expansion of gaming in or near the geographic area from which GB Holding attracts or expects to attract a significant number of customers could have a significant adverse effect on GB Holdings' business, financial condition and results of operations. The Sands competes, and will in the future compete, with all forms of existing legalized gaming and with any new forms of gaming that may be legalized in the future. Additionally, GB Holdings faces competition from all other types of entertainment.

Pending and enacted gaming legislation from neighboring States and New Jersey may harm The Sands.

        In the summer of 2003, the State of New Jersey considered approving VLTs at the racetracks in the state and on July 1, 2003, the NJCCA was amended to impose various new and increased taxes on casino license revenues. There is no guarantee that New Jersey will not consider approving VLTs in the future, and if VLTs are approved, it could adversely affect GB Holdings' operations, and an increase in the gross gaming tax without a significant simultaneous increase in revenue would adversely affect GB Holdings' results of operations.

        In April 2004, the casino industry, the CRDA and the New Jersey Sports and Exposition Authority agreed to a plan regarding New Jersey VLTs. Under the plan, casinos will pay a total of $96 million over a period of four years, of which $10 million will fund, through project grants, North Jersey CRDA projects and $86 million will be paid to the New Jersey Sports and Exposition Authority who will then subsidize certain New Jersey horse tracks to increase purses and attract higher-quality races that would allow them to compete with horse tracks in neighboring states. In return, the race tracks and New Jersey have committed to postpone any attempts to install VLTs for at least four years. $52 million of the $86 million would be donated by the CRDA from the casinos' North Jersey obligations and $34 million would be paid by the casinos directly. It is currently estimated that The Sands' current CRDA deposits for North Jersey projects are sufficient to fund The Sands' proportionate obligations with respect to the $10 million and $52 million commitments. The Sands' proportionate obligation with respect to the $34 million commitment is estimated to be approximately $1.3 million payable over a

D-26



four year period. The Sands' proportionate obligation with respect to the combined $10 million and $52 million commitment is estimated to be approximately $2.5 million payable over a four year period.

        The Sands also competes with legalized gaming from casinos located on Native American tribal lands. In July 2004, the Appellate Division of the Supreme Court of New York unanimously ruled that Native American owned casinos could legally be operated in New York under the New York State law passed in October 2001. That law permits three casinos in Western New York, all of which would be owned by the Seneca Indian Nation. The law also permits up to three casinos in the Catskills in Ulster and Sullivan Counties, also to be owned by Native American Tribes. In addition, the legislation allows slot machines to be placed in Native American-owned casinos. The court also ruled that New York could participate in the Multi-State Mega Millions Lottery Game.

        The New York law had also permitted the installation of VLTs at five racetracks situated across the State of New York. In the July 2004 ruling, the Appellate Division ruled that a portion of the law was unconstitutional because it required a portion of the VLTs revenues to go to horse-racing, breeding funds and track purses. It is anticipated that ruling will be appealed.

        The Pennsylvania legislature passed and the governor signed a bill in July 2004 that will allow for up to 61,000 slot machines state wide in up to 14 different locations, seven or eight of which would be racetracks plus four or five slot parlors in Philadelphia and Pittsburgh and two small resorts.

        Maryland is among the other states contemplating some form of gaming legislation. Maryland's proposed legislation would authorize VLTs at some of Maryland's racing facilities. The Maryland Legislature did not enact any legalized gaming legislation during their 2004 legislative sessions which ended September 30, 2004.

        The Sands' market is primarily a drive-to market, and legalized gambling in Pennsylvania, the Catskills and any other neighboring state within close proximity to New Jersey could have a material adverse effect on the Atlantic City gaming industry overall, including The Sands.

        On March 1, 2005, the Acting Governor of the State of New Jersey proposed a state budget for the 2005-2006 fiscal year which includes as a revenue source the proceeds from installation and operation of 1,500 to 2,000 VLTs at the Meadowlands Racetrack in East Rutherford, New Jersey. This location in Northern New Jersey would be in direct competition for gamblers who now frequent the Atlantic City casinos. At this time, there is no certainty that the Legislature of New Jersey will enact the necessary legislation to permit the installation and operation of these VLTs.

Holders of the Company's securities are subject to the CCC and the NJCCA.

        The holders of the GB Holding common stock, the 11% Notes and the 3% Notes are subject to certain regulatory restrictions on ownership. While holders of publicly traded obligations such as the 11% Notes and the 3% Notes are generally not required to be investigated and found suitable to hold such securities, the CCC has the discretionary authority to (i) require holders of securities of corporations governed by New Jersey gaming law to file applications; (ii) investigate such holders; and (iii) require such holders to be found suitable or qualified to be an owner or operator of a gaming establishment. Pursuant to the regulations of the CCC such gaming corporations may be sanctioned, including the loss of its approvals, if, without prior approval of the CCC, it (i) pays to the unsuitable or unqualified person any dividend, interest or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable or unqualified person in connection with the securities; (iii) pays the unsuitable or unqualified person remuneration in any form; or (iv) makes any payments to the unsuitable or unqualified person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. If GB Holdings is served with notice of disqualification of any holder, such holder will be prohibited by the NJCCA from receiving any payments on, or exercising any rights connected to, the GB Holdings' Common Stock, the 11% Notes, or the 3% Notes as applicable.

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Quantitative and Qualitative Disclosures About Market Risk

        Market risk is the risk of loss arising from changes in market rates and prices, such as interest rates and foreign currency exchange rates. GB Holdings does not have securities subject to interest rate fluctuations and has not invested in derivative-based financial instruments. The note entitled "Long-Term Debt" in the Notes to the Consolidated Financial Statements of GB Holdings included in this information statement outlines the principal amounts, interest rates, fair values and other terms required to evaluate the expected sensitivity of interest rate changes on the fair value of GB Holdings' long-term debt.

        No market exists for GB Holdings' 11% notes since April 16, 2004, the last full trading day prior to the delisting of the 11% notes from trading on the American Stock Exchange, therefore the fair market value of GB Holdings' fixed rate debt was $35.4 million compared with its carrying amount of $43.7 million at December 31, 2004.

D-28



APPENDIX E: UNAUDITED PRO FORMA FINANCIAL DATA
FOR AMERICAN REAL ESTATE PARTNERS, L.P.

        The unaudited pro forma condensed consolidated financial statement information set forth below is presented to reflect the pro forma effects of the following transactions as if they occurred on the dates indicated as discussed below:

        (i)    The Acquisitions; and

        (ii)   The issuance of $480.0 million of Senior Notes due 2013 at an interest rate of 71/8% per annum in February 2005.

        The Acquisitions will be accounted for as a combination of entities under common control and are recorded at the historical basis of the entities as of the date acquired by AREP. AREP will prepare restated financial statements to include the historical financial position and results of operations up to the date of the Acquisitions for periods that the entities were under common control. The unaudited condensed historical combined balance sheet at December 31, 2004 included herein includes the combination of NEG Holding, GB Holdings and Panaco, which presentation AREP anticipates will be materially consistent with AREP's presentation of its actual consolidated balance sheet after the consummation of the Acquisitions.

        The unaudited pro forma condensed consolidated balance sheet has been prepared as if the Acquisitions and the other transactions described above had occurred on December 31, 2004. The unaudited pro forma condensed consolidated balance sheet as of December 31, 2004 gives effect to the unaudited pro forma adjustments necessary to account for the Acquisitions and the other transactions described above.

        The unaudited condensed historical combined statements of earnings for each of the years ended December 31, 2004, 2003 and 2002 (1) combine the historical consolidated statements of earnings of NEG Holding and GB Holdings for each such year, which financial statements are included elsewhere in this information statement, and (2) reflects the combination of such companies during a period of common control, which presentation AREP anticipates will be materially consistent with AREP's presentation of restated consolidated statements of earnings after the consummation of the Acquisitions.

        The unaudited pro forma condensed consolidated financial statement information is based on, and should be read together with, (1) AREP's consolidated financial statements as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 of each; (2) AREP's supplemental consolidated financial statements filing on Form 8-K, dated May 10, 2005, giving effect to the acquisition of TransTexas on April 6, 2005 for $180.0 million of cash and included herein; (3) the consolidated financial statements as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 of each of NEG Holding and GB Holdings and (4) Panaco's financial statement as of December 31, 2004 and for the year ended December 31, 2004.

E-1


AMERICAN REAL ESTATE PARTNERS, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 2004
(In thousands)

 
  HISTORICAL(1)
   
   
   
   
 
 
  PRO FORMA ADJUSTMENTS
   
   
 
 
  AREP
(RESTATED)(2)

  NEG
HOLDING

   
  GB
HOLDINGS

  INTERCOMPANY
ADJUSTMENTS

  HISTORICAL
COMBINED

  PRO FORMA INTERCOMPANY ADJUSTMENTS (4)
   
 
 
  PANACO
  ACQUISITIONS(1)(2)
  DEBT OFFERING(3)
  PRO FORMA
 
ASSETS                                                              
Current Assets                                                              
Cash and cash equivalents   $ 768,918   $ 883   $ 23,753   $ 12,756   $     $ 806,310   $ (180,000 ) $ 471,500   $     $ 1,097,810  
Investment in U.S. Government and Agency obligations     96,840                             96,840                       96,840  
Marketable equity and debt securities     2,248                             2,248                       2,248  
Due from brokers     123,001                             123,001                       123,001  
Restricted cash     19,856                             19,856                       19,856  
Receivables and other assets     59,274     22