Annual Reports

 
Quarterly Reports

 
8-K

 
Other

Circle Entertainment, Inc. 10-K 2010
fxre_10k.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-K
 
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
Commission File No. 001-33902
 
 FX Real Estate and Entertainment Inc.
 (Exact name of Registrant as specified in its charter)
 
Delaware
 
36-4612924
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
650 Madison Avenue
 
New York, New York 10022
 
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (212) 838-3100
Securities Registered Pursuant to Section 12(b) of the Act:
 
Title of Each Classt
Name of Each Exchange on Which Registered
 
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  o No  þ
 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o
Smaller reporting company   þ
   
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No  þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2009, based on the closing price of such stock on the Pink Sheets on such date, was $649,723.
 
As of April 9, 2010, there were 65,403,876 shares of the registrant’s common stock outstanding.
 
Documents Incorporated by Reference:>   None.
 


 
 

 
 
FX Real Estate and Entertainment Inc.
 
Annual Report on Form 10-K
 
December 31, 2009
 
     
Page
PART I
Item 1.
Business
   
3
 
Item 1A.
Risk Factors
   
20
 
Item 1B.
Unresolved Staff Comments
   
24
 
Item 2.
Properties
   
24
 
Item 3.
Legal Proceedings
   
24
 
Item 4.
RESERVED
   
25
 
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   
25
 
Item 6.
Selected Financial Data
   
27
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
29
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
   
42
 
Item 8.
Financial Statements and Supplementary Data
   
43
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
   
75
 
Item 9A(T).
Controls and Procedures
   
76
 
Item 9B.
Other Information
   
77
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
   
77
 
Item 11.
Executive Compensation
   
80
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   
83
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
   
87
 
Item 14.
Principal Accountant Fees and Services
   
91
 
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedule
   
92
 
 
 
2

 
 
PART I
 
 
ITEM 1.  BUSINESS>
 
In this Annual Report on Form 10-K, the words “we,” “us,” “our,” “FXRE,” and the “Company” collectively refer to FX Real Estate and Entertainment Inc., and its consolidated subsidiaries, FXL, Inc., FX Luxury Realty, LLC, BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC. In August 2008, FX Luxury Realty, LLC changed its name to FX Luxury, LLC, BP Parent, LLC changed its name to FX Luxury Las Vegas Parent, LLC, Metroflag BP, LLC changed its name to FX Luxury Las Vegas I, LLC and Metroflag Cable, LLC changed its name to FX Luxury Las Vegas II, LLC. On November 5, 2009, FX Luxury Las Vegas Parent, LLC and FX Luxury Las Vegas II, LLC were merged into FX Luxury Las Vegas I, LLC.  The words “Metroflag” or “Metroflag entities” refer to FX Luxury Realty and its predecessors, including BP Parent, LLC, Metroflag BP, LLC, Metroflag Cable, LLC, Metroflag Polo, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC and Metroflag Management, LLC, the predecessor entities through which our historical business was conducted prior to September 27, 2007. Prior to November 5, 2009, “Las Vegas Subsidiaries” refers to BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC, each as renamed as indicated above.  After November 5, 2009, “Las Vegas Subsidiaries” or “Las Vegas Subsidiary” refers to FX Luxury Las Vegas I, LLC, successor by merger to FX Luxury Las Vegas Parent, LLC and FX Luxury Las Vegas II, LLC.  Some of the descriptive material in this Annual Report on Form 10-K refers to the assets, liabilities, operations, results, activities or other attributes of the historical business conducted by the Metroflag entities.
 
Financial Condition of the Company and Going Concern Issues
 
As disclosed in more detail throughout this Form 10-K, the Company is in severe financial distress and may not be able to continue as a going concern. We have no current cash flow and cash on hand as of April 9, 2010 is not sufficient to fund our past due obligations and short-term liquidity needs, including our ordinary course obligations as they come due.  Substantially all of the Company’s business was through its Las Vegas Subsidiary, as owner of the Las Vegas Property.  The Company’s Las Vegas Subsidiary is in default under its $475 million mortgage loan, which is secured by the Las Vegas Property.  The Las Vegas Property is not operated or managed by our Las Vegas Subsidiary because the property is under the control of a court appointed receiver.  The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to a lock up agreement with the first lien lenders and/or the second lien lenders under the mortgage loan, as described below.  In either event, it is extremely unlikely the Company will receive any benefit as a consequence of the foregoing.  The loss of the Las Vegas Property, which is substantially the entire business of the Company, would have a material adverse effect on the Company’s business, financial condition, prospects, and ability to continue as a going concern.  If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.

The Las Vegas Subsidiary has agreed to file a chapter 11 bankruptcy proceeding under either the Old Lock Up Agreement (as defined below) or the New Lock Up Agreement (as defined below), pursuant to which the Las Vegas Subsidiary would be liquidated and the Company will no longer have an interest in the Las Vegas Property, which constitutes substantially all of the Company’s business.  As of the date hereof, the New Lock Up Agreement has been terminated and the parties under the Old Lock Up Agreement are pursuing the chapter 11 prepackaged bankruptcy in accordance with its terms.  The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth below.

We have received opinions from our auditors expressing substantial doubt as to our ability to continue as a going concern. Investors are encouraged to read the information set forth below in order to better understand the financial condition of, and risks of investing in, the Company.
 
The Company’s Current Business and its Financial Distress
 
The Company’s business consists of owning and operating 17.72 contiguous acres of land located at the southeast corner of Las Vegas Boulevard and Harmon Avenue in Las Vegas, Nevada. The Las Vegas Property is currently occupied by a motel and several commercial and retail tenants with a mix of short and long-term leases. The Company had commenced design and planning for a redevelopment plan for the Las Vegas Property that included a hotel, casino, entertainment, retail, commercial and residential development project. As a result of the disruption in the capital markets and the economic downturn in the United States in general, and Las Vegas in particular, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Las Vegas Property and intended to consider alternative plans with respect to the development of the property. Since then, however, as more fully described below, the Las Vegas Subsidiary defaulted on the $475 million mortgage loans secured by the Las Vegas Property as a result of failing to repay the loans at maturity on January 6, 2009, and the first lien lenders under the mortgage loans have commenced exercising their remedies.  The first lien lenders had a receiver appointed on June 23, 2009 to take control of the Property and as a consequence, the Las Vegas Subsidiary no longer manages or operates the Property.
 
 
3

 
 
As a result of such default and prior to the receiver’s appointment, on April 9, 2009, the first lien lenders sent a Notice of Breach and Election to Sell, initiating the trustee sale procedure against the Las Vegas Property. Under Nevada law, the Las Vegas Property may be sold in a trustee sale to satisfy the first lien lenders’ obligations secured by the property provided the lenders have satisfied the Nevada procedures and further provided that the sale has not been stayed through bankruptcy or other filings or by a consensual delay by such lenders. Although the second lien portion of the mortgage loans, which portion is $195 million, is also in default, pursuant to the inter-creditor agreement among the first and second lien lenders, the second lien lenders are restricted from exercising their remedies so long as the first lien lenders continue exercising their remedies.
 
On July 13, 2009, the Las Vegas Subsidiary received a Notice of Trustee’s Sale dated July 7, 2009, pursuant to which the trustee will cause the Las Vegas Property to be sold to the highest bidder for cash so as to satisfy the outstanding obligations to the first lien lenders secured by the property. Such proposed sale was initially scheduled for September 9, 2009 and has since been adjourned multiple times as follows:  to October 21, 2009, November 18, 2009, December 22, 2009, February 3, 2010, March 25, 2010, to April 22, 2010 and shall remain adjourned as long as either the Old Lock Up Agreement or New Lock Up Agreement remains effective.
 
Old Lock Up Agreement>
 
On October 30, 2009, the Company’s Las Vegas Subsidiaries entered into the Lock Up Agreement (“Old Lock Up Agreement”) with the first lien lenders with respect to their mortgage loan, and the Newco Entities, two corporate affiliates (LIRA Property Owner, LLC and its parent LIRA, LLC) of Robert F.X. Sillerman, Paul C. Kanavos and Brett Torino, who are directors, executive officers and/or greater than 10% stockholders of the Company (collectively the “Newco Entities Equity Sponsors”).
 
The parties entered into the Old Lock Up Agreement for the purpose of pursuing an orderly liquidation of the Las Vegas Subsidiaries for the benefit of their creditors. The Old Lock Up Agreement contemplates implementation of the following transactions:
 
(a)        The Las Vegas Subsidiaries will be merged into one surviving entity (the “Debtor”) (such merger occurred on November 5, 2009);
 
(b)        The Debtor will commence a voluntary prepackaged chapter 11 bankruptcy proceeding on or about November 16, 2009 with the United States Bankruptcy Court for the District of Nevada for the purpose of disposing of the Las Vegas Property for the benefit of the Las Vegas Subsidiaries’ creditors either pursuant to an auction sale for at least $256 million or, if the auction sale is not completed, pursuant to a prearranged sale to the Newco Entities under the terms of the prepackaged chapter 11 bankruptcy proceeding’s plan of liquidation;
 
(c)        Under the prearranged sale to one of the Newco Entities (LIRA Property Owner, LLC) as contemplated by the plan of liquidation, such entity will acquire the Las Vegas Property for approximately $260 million (plus certain expenses, interest accruals and other items to the extent not paid during the prepackaged chapter 11 proceeding from the cash flows generated by the Las Vegas Property’s real estate activities); and
 
(d)         The first lien lenders will finance the prearranged sale to LIRA Property Owner LLC by entering into a new secured loan with it as the borrower under the following terms and conditions: (i) it will post a $2.2 million deposit before commencement of the prepackaged chapter 11 bankruptcy proceeding, (ii) it will fund up to $650,000 of expenses during the prepackaged chapter 11 bankruptcy proceeding, (iii) at closing, it will pay approximately $15 million in cash (in addition to the $2.2 million deposit referred to in preceding clause (i)), while the balance of the purchase price will be payable pursuant to the terms of the new secured loan, and it will prefund a minimum of $3.350 million of reserves (which reserves will be increased on a dollar-for-dollar basis to the extent that it does not fund the entire $650,000 of expenses under preceding clause (ii)), (iv) during the prepackaged chapter 11 bankruptcy proceeding, it will have to fund or assume other expenses as set forth in the Old Lock Up Agreement, (v) the Newco Entities Equity Sponsors will have to provide a “bad boy” guarantee of $60 million (decreasing over time to $20 million) in the event of a voluntary or collusive bankruptcy filing and/or misappropriation of funds, and (vi) in the event there is a fault-based termination of the Old Lock Up Agreement, it will forfeit its $2.2 million deposit to the first lien lenders and be obligated to pay the first lien lenders an additional $650,000 as liquidated damages.
 
 
4

 
 
The Old Lock Up Agreement is terminable by the first lien lenders, so long as they are not in breach of the Agreement, under certain conditions, including, without limitation, (i) if the prepackaged bankruptcy proceeding has not been initiated by November 16, 2009 (the “Petition Date”), (ii) if the interim cash collateral order for the case has not been entered within 10 business days of the Petition Date or the final cash collateral order for the case has not become a final order within 55 days of the Petition Date, (iii) if the Newco Entities Equity Sponsors do not each execute and deliver by November 11, 2009 a firm commitment to fund the $2.2 million deposit by November 11, 2009 and, at closing, to fund approximately $16.8 million (net of up to $650,000 for previously advanced expenses) to LIRA LLC and cause LIRA LLC to fund LIRA Property Owner, LLC to satisfy its obligations under the plan funding agreement for implementation of the plan and to consummate the transactions contemplated thereby and in the Old Lock Up Agreement, (iv) if the Newco Entities Equity Sponsors do not fund the $2.2 million deposit by November 11, 2009, (v) if the plan funding agreement for implementation of the plan of liquidation has not been executed and delivered by November 11, 2009, (vi) if it is reasonably certain that neither the auction sale of the Las Vegas Property nor the plan of liquidation’s effective date is capable of occurring prior to May 18, 2010 or (vii) if the Company or the Las Vegas Subsidiary or any of the Newco Entities Equity Sponsors (including entities controlled by any of them) (x) objects to, challenges or otherwise commences or participates in any proceeding opposing the transactions contemplated by the Old Lock Up Agreement, or takes any action that is inconsistent with, or that would delay or obstruct, consummation of the transactions or transaction documents contemplated by the Old Lock Up Agreement, (y) directly or indirectly seeks, solicits, supports or formulates or prosecutes any plan, sale, proposal or offer of dissolution, winding up, liquidation, reorganization, merger or restructuring of the Las Vegas Subsidiary that could be reasonably expected to prevent, delay or impede consummation of the transactions or transaction documents contemplated by the Old Lock Up Agreement or (z) directs or supports in any way any person to take (or who may take) any action that is inconsistent with its obligations under the Old Lock Up Agreement, or that could impede or delay implementation or consummation of the transactions contemplated by the Old Lock Up Agreement.
 
On November 16, 2009, the first lien collateral agent, as permitted by the terms of the Old Lock Up Agreement, waived the non-occurrence of the events specified in clauses (i), (iii), (iv) and (v) of the immediately preceding paragraph by the dates specified therein, and extended the dates on which these events specified in clauses (i), (iii), (iv) and (v) are required to occur. In particular, the date specified in clause (i) was extended to December 4, 2009 and the dates specified in clauses (iii), (iv) and (v) were extended to November 18, 2009. The events specified in clauses (iii), (iv) and (v) occurred by such extended dates. In addition, the first lien collateral agent also extended the date on which the form of final cash collateral order should have been agreed upon to November 24, 2009 from November 11, 2009. The form of final cash collateral order was agreed upon prior to the expiry of such extended date. If the first lien collateral agent had not waived the non-occurrence of these events (including agreeing upon the final form of cash collateral order) and extended their dates of occurrence, the Old Lock Up Agreement would have automatically terminated in accordance with its terms. Also, on November 16, 2009, as a result of waiving the non-occurrence of these events and extending their dates of occurrence, the first lien lenders adjourned the pending trustee’s sale of the Las Vegas Property to December 22, 2009 from November 18, 2009 (it was subsequently adjourned to February 3, 2010, to March 25, 2010, and then to April 22, 2010, and shall remain adjourned as long as either the Old Lock Up Agreement or New Lock Up Agreement remains effective.
 
The Old Lock Up Agreement is terminable by the Debtor, so long as neither the Debtor nor the Newco Entities are in breach of the Agreement, if any of the first lien lenders breach any of their obligations under the Old Lock Up Agreement after giving effect to any applicable notice and cure period.
 
The Old Lock Up Agreement is terminable by either the Debtor or the Newco Entities if the final order has not been entered confirming the plan of liquidation and allowing the effective date for the plan of liquidation to occur on or before May 18, 2010. (See "Standstill Agreement" for amendment).
 
If the Las Vegas Property is sold under the Old Lock Up Agreement pursuant to the auction sale, it is highly unlikely that the Company will receive any benefit from such auction sale. If the auction sale is not completed and the Las Vegas Property is sold under the Old Lock Up Agreement pursuant to the prearranged sale to the Newco Entities, the Company will not receive any benefit from any such prearranged sale.
 
The Las Vegas Property has been under the exclusive possession and control of a court-appointed receiver, at the request of the first lien lenders, since June 23, 2009. Upon commencing the prepackaged chapter 11 bankruptcy proceeding, the court-appointed receiver shall be discharged and the receivership of the Las Vegas Property shall terminate. During the prepackaged chapter 11 bankruptcy proceeding, subject to the Bankruptcy Court entering the interim and final cash collateral orders contemplated by the Old Lock Up Agreement, most of the Debtor’s expenses will be funded from cash flows generated by the Las Vegas Property’s real estate activities.
 
Because the Old Lock Up Agreement and the transactions contemplated thereby involve the Newco Entities Equity Sponsors, who are directors, executive officers and/or greater than 10% stockholders of the Company, a majority of the Company’s disinterested directors authorized the Las Vegas Subsidiaries to enter into the Old Lock Up Agreements and consummate the transactions contemplated thereby.
 
 
5

 
 
On November 12, 2009, the second lien lenders under the mortgage loans initiated litigation against the Company, the Las Vegas Subsidiary and others contesting the validity of the Old Lock Up Agreement.  Upon entry into the New Lock Up Agreement, the participating second lien lenders agreed to dismiss without prejudice their pending litigation against the first lien lenders, the Company, the Las Vegas Subsidiary (and its predecessor entities) and others contesting the validity of the Old Lock Up Agreement. The participating second lien lenders have agreed to grant the named parties to such pending litigation a release therefrom upon confirmation of the prepackaged chapter 11 bankruptcy case’s plan of liquidation contemplated under the New Lock Up Agreement.
 
On December 23, 2009, the Old Lock Up Agreement was amended by a standstill agreement, pursuant to which the prepackaged bankruptcy under such Old Lock Up Agreement has been delayed pending the implementation of the New Lock Up Agreement executed with the first lien lenders, first and second lien agents and 68% of the second lien lenders, pursuant to which the Las Vegas Subsidiary would be liquidated for the benefit of its creditors in accordance with a chapter 11 bankruptcy proceeding.
 
New Lock-Up Agreement
 
As set forth above, on December 23, 2009, the Company’s Las Vegas Subsidiary entered into a Lock Up and Plan Support Agreement (the "New Lock Up Agreement") with the first lien lenders, certain of the second lien lenders (the "Participating Second Lien Lenders") and the first and second lien agents under the Las Vegas Subsidiary’s $475 million mortgage loans, and LIRA LLC (the "Equity Parent"), a corporate affiliate of Robert F.X. Sillerman, Paul C. Kanavos and Brett Torino, who are directors, executive officers and/or greater than 10% stockholders of the Company (the "Equity Sponsors").
 
The New Lock Up Agreement primarily differs from the Old Lock Up Agreement with the first lien lenders and the Equity Parent and LIRA Property Owner, LLC , another corporate affiliate of the Equity Sponsors (collectively with the Equity Parent, the "New Entities") in that the first lien lenders and the Participating Second Lien Lenders are both parties to it and the Las Vegas Subsidiary’s Las Vegas Property will be sold in a prearranged sale (not conditioned upon an unsuccessful public auction) to an entity co-owned by the Equity Sponsors and the Participating Second Lien Lenders (and potentially other participating unsecured creditors) pursuant to a prepackaged chapter 11 bankruptcy case to be filed by the Company’s Las Vegas Subsidiary.
 
The purpose of the New Lock Up Agreement, like the Old Lock Up Agreement, is to pursue an orderly liquidation of the Company’s Las Vegas Subsidiary for the benefit of its (and its predecessor entities’) creditors.
 
Under the prearranged sale pursuant to the prepackaged chapter 11 bankruptcy case, the entity co-owned by the Equity Sponsors and the Participating Second Lien Lenders (and potentially other participating unsecured creditors) (the "New Property Owner") will acquire the Las Vegas Property for approximately $260 million (plus certain expenses, interest accruals and other items to the extent not paid during the prepackaged chapter 11 proceeding from the cash flows generated by the Las Vegas Property’s real estate activities). Upon entry into the New Lock Up Agreement, the Equity Sponsors, as a group, and the Participating Second Lien Lenders, as a group, each deposited into escrow $6.5 million (consisting of cash and letters of credit) of a required $13 million purchase price deposit. Of the $6.5 million deposited by the Equity Sponsors, $2.85 million is forfeitable as liquidated damages to the first lien lenders in the event the New Lock Up Agreement is terminated because of a "debtor fault-based termination" (as defined in the New Lock Up Agreement).
 
The first lien lenders will finance the prearranged sale to the New Property Owner by entering into a new secured loan with it as the borrower under the following terms and conditions: (i) the loan will be for an initial term of 6 years, with three 1-year extensions; (ii) at closing, it will pay approximately $10 million in cash (from the $13.0 million deposit referred to in the preceding paragraph), and it will prefund a minimum of $3.0 million of reserves (from the deposit), (iii) it may have to fund or assume certain expenses, interest accruals and other items to the extent not paid from the cash flows generated by the Las Vegas Property’s real estate activities, (iv) the Equity Sponsors will have to provide a joint and several "bad boy" guarantee in the same amount as under the Old Lock Up Agreement in the event of a voluntary or collusive bankruptcy filing and/or misappropriation of funds and (v) the Participating Second Lien Lenders (including any other participating unsecured creditors) will have to provide a several (but not joint) "bad boy" guarantee in the same amount as the Equity Sponsors in the event of a voluntary or collusive bankruptcy filing and/or misappropriation of funds. Under the "bad boy" guarantees, the party responsible for the loss will be liable therefor.
 
The New Lock Up Agreement will automatically terminate and be of no further force and effect on January 22, 2010 (unless extended by agreement) if on or before such date the parties thereto have not agreed upon the definitive forms of the key transaction documents required by the New Lock Up Agreement to implement the prepackaged chapter 11 bankruptcy case’s plan of reorganization. The date on which the parties agree upon such key transaction documents is referred to herein as the "Document Finalization Date."
 
 
6

 
 
Upon the occurrence of the Document Finalization Date, the Las Vegas Subsidiary (hereinafter referred to as the "Debtor") is required to use its commercially reasonable best efforts to take the following actions within the time periods specified below for the purpose of initiating the prepackaged chapter 11 bankruptcy case contemplated by the New Lock Up Agreement:
 
(a)           Within four business days of the Document Finalization Date, commence the distribution of the bankruptcy disclosure statement and ballots to the first lien lenders and the second lien lenders (i.e., the Participating Second Lien Lenders and the other second lien lenders as a class) for the purpose of soliciting their votes to approve or reject the prepackaged bankruptcy plan of reorganization (the "Solicitation");
 
(b)           Conclude the Solicitation within twenty business days of commencing it (provided that each first lien lender and Participating Second Lien Lender has delivered a ballot in favor of the prepackaged plan of reorganization (the "Vote Condition")); and
 
(c)           Assuming the Vote Condition has been satisfied, (w) file the chapter 11 bankruptcy petition with the United States Bankruptcy Court for the District of Nevada (the date of such filing being the "Petition Date") not later than four business days after the conclusion of the solicitation, (x) cause the interim cash collateral order for the prepackaged chapter 11 bankruptcy case to be entered within ten days of the Petition Date, (y) cause the final cash collateral order for the prepackaged chapter 11 bankruptcy case to be entered within twenty five days of the Petition Date and (z) cause the confirmation order for the prepackaged chapter 11 bankruptcy case to be entered within sixty days of the Petition Date (each of the foregoing dates in this and the preceding bullets is a "Threshold Date").
 
So long as the first lien lenders are not in breach of the New Lock Up Agreement, the New Lock Up Agreement will automatically terminate upon the occurrence of certain events, including, without limitation: (1) if any Threshold Date is not timely satisfied; or (2) upon the occurrence of a termination event in either the interim cash collateral order or in the final cash collateral order for the bankruptcy case; or (3) if the plan of reorganization’s effective date does not occur on or before to May 15, 2010; or (4) in case of either (i) a filing or commencement by any FX Entity (i.e., the Company, the Company’s subsidiary FX Luxury, LLC (hereinafter referred to as "FX LLC") or the Debtor) or Related Equity Sponsor (i.e., each Equity Sponsor or any entity that is controlled by an Equity Sponsor and that owns shares or interests in or controls any FX Entity) of (x) any motion, application, adversary proceeding or cause of action challenging the validity, enforceability, perfection or priority of or seeking avoidance of the liens securing the "first lien secured claims" (as defined in the New Lock Up Agreement) or (y) any other motion, application, adversary proceeding or cause of action against and/or with respect to the first lien secured claims that seeks to challenge the validity, enforceability, perfection or priority of or seeking avoidance of the first lien secured claims, or against and/or with respect to the first lien agent or any first lien lender (or if the Debtor supports any such motion, application or adversary proceeding commenced by any third party or consent to the standing of any such third party), or (ii) a filing or commencement by any Participating Second Lien Lender of (x) any motion, application, adversary proceeding or cause of action challenging the validity, enforceability, perfection or priority of or seeking avoidance of the liens securing the first lien secured claims or (y) any other motion, application, adversary proceeding or cause of action against and/or with respect to the first lien secured claims that seeks to challenge the validity, enforceability, perfection or priority of or seeking avoidance of the first lien secured claims, or against and/or with respect to the first lien agent or any first lien lender (or if the Debtor supports any such motion, application or adversary proceeding commenced by any third party or consent to the standing of any such third party), or (iii) the entry of an order of the bankruptcy court providing relief against the interests of any first lien lender with respect to any of the foregoing causes of action or proceeding; or (5) if (i) any FX Entity or any Related Equity Sponsor files any motion, application or adversary proceeding seeking to invalidate or disallow in any respect the claims in respect of the first lien loan (except in limited circumstances), the reasonableness of fees and expenses of the first lien agent and the first lien lenders or (ii) any Participating Second Lien Lender files any motion, application or adversary proceeding seeking to invalidate or disallow in any respect the claims in respect of the first lien loan (except in limited circumstances); or (6) if either the Debtor or any Participating Second Lien Lender, as the case may be, without the consent of the first lien agent, (i) withdraws from or takes any action materially inconsistent with the New Lock Up Agreement’s plan of reorganization or the related transactions (which withdrawal or action, if capable of being reversed, has not been reversed within fifteen (15) days of the giving of written notice by the first lien agent to the Debtor, Equity Parent, the second lien agent and the Participating Second Lien Lenders), (ii) without the consent of the first lien agent, supports any plan of reorganization or any plan of liquidation other than the New Lock Up Agreement’s plan of reorganization or supports any sale process with respect to the Las Vegas Property, (iii) moves to dismiss the prepackaged chapter 11 case, (iv) moves for conversion of the prepackaged chapter 11 case to a case under chapter 7 of the Bankruptcy Code or (v) moves or otherwise seeks to reject or otherwise invalidate, in whole or in part, the New Lock Up Agreement or any related transaction document; or (7) if FX LLC or the Company or any Related Equity Sponsor (i) objects to, challenges or otherwise commences or supports any proceeding opposing the transactions or any transaction document required by the New Lock Up Agreement, or takes any other action that is inconsistent with, or that would delay or obstruct, the solicitation, confirmation or consummation of the transactions or any transaction document required by the New Lock Up Agreement, (ii) directly or indirectly seeks, solicits, supports, formulates, or prosecutes any plan, sale, proposal or offer of dissolution, winding up, liquidation, reorganization, merger or restructuring of the Debtor that could reasonably be expected to prevent, delay or impede the consummation of the transactions or any transaction document required by the New Lock Up Agreement or (iii) directs or supports in any way any person to take (or who may take) any action that is inconsistent with its obligations under the New Lock Up Agreement, or that could impede or delay the implementation or consummation of the transactions contemplated thereby.
 
 
7

 
 
The first lien agent, on behalf of the first lien lenders, may, in its sole and absolute discretion, waive (either conditionally or otherwise and without prejudice to the rights of the first lien agent to make any such waiver temporary or contingent) the automatic termination of the New Lock Up Agreement within three (3) business days of notice of the occurrence of any event described above, by delivery of notice of such waiver to each of the parties to the New Lock Up Agreement.So long as the Participating Second Lien Lenders are not in breach of the New Lock Up Agreement, the New Lock Up Agreement will automatically terminate upon the occurrence of certain events, including, without limitation: (1) any of the events specified in clauses (1), (2), (3) and (7) of the above paragraph describing the first lien lenders’ termination rights; or (2) in case of either (i) a filing or commencement by any FX Entity or Related Equity Sponsor of (x) any motion, application, adversary proceeding or cause of action challenging the validity, enforceability, perfection or priority of or seeking avoidance of the liens securing the "second lien secured claims" (as defined in the New Lock Up Agreement) or (y) any other motion, application, adversary proceeding or cause of action against and/or with respect to the second lien secured claims that seeks to challenge the validity, enforceability, perfection or priority of or seeking avoidance of the second lien secured claims, or against and/or with respect to the second lien agent or any second lien lender (or if the Debtor supports any such motion, application or adversary proceeding commenced by any third party or consent to the standing of any such third party), or (ii) a filing or commencement by any first lien lender of (x) any motion, application, adversary proceeding or cause of action challenging the validity, enforceability, perfection or priority of or seeking avoidance of the liens securing the second lien secured claims or (y) any other motion, application, adversary proceeding or cause of action against and/or with respect to the second lien secured claims that seeks to challenge the validity, enforceability, perfection or priority of or seeking avoidance of the second lien secured claims, or against and/or with respect to the second lien agent or any second lien lender (or if any first lien lender and the first lien agent support any such motion, application or adversary proceeding commenced by any third party or consent to the standing of any such third party); or (3) if (i) any FX Entity or any Related Equity Sponsor files any motion, application or adversary proceeding seeking to invalidate or disallow in any respect the claims in respect of the second lien loan (except in limited circumstances) or (ii) any first lien lender files any motion, application or adversary proceeding seeking to invalidate or disallow in any respect the claims in respect of the second lien loan (except in limited circumstances); or (4) if either the Debtor or any first lien lender, as the case may be, without the consent of the second lien agent and the Participating Second Lien Lenders, (i) withdraws from or takes any action materially inconsistent with the New Lock Up Agreement’s plan of reorganization or the related transactions (which withdrawal or action, if capable of being reversed, has not been reversed within fifteen (15) days of the giving of written notice by the second lien agent and the Participating Second Lien Lenders to the Debtor, Equity Parent and the First Lien Agent), (ii) supports any plan of reorganization or any plan of liquidation other than the New Lock Up Agreement’s plan of reorganization or supports any sale process with respect to the Las Vegas Property, (iii) moves to dismiss the prepackaged chapter 11 case, (iv) moves for conversion of the prepackaged chapter 11 case to a case under chapter 7 of the Bankruptcy Code or (v) moves or otherwise seeks to reject or otherwise invalidate, in whole or in part, the New Lock Up Agreement or any related transaction document.
 
The second lien agent and the Participating Second Lien Lenders may, in their sole and absolute discretion, waive (either conditionally or otherwise and without prejudice to the rights of the second lien agent or any of Participating Second Lien Lenders to make any such waiver temporary or contingent) the automatic termination of the New Lock Up Agreement within three (3) business days of notice of the occurrence of any event described above, by delivery of notice of such waiver to each of the parties to the New Lock Up Agreement.
 
So long as the Debtor and the Equity Parent are not in breach of the New Lock Up Agreement, the Debtor or Equity Parent may terminate the New Lock Up Agreement if any of the first lien agent or first lien lenders, the second lien agent, or any of the Participating Second Lien Lenders breaches any of its obligations under the New Lock Up Agreement, which breach (if capable of being cured) has not been cured within fifteen (15) days after the giving of written notice by the Debtor or the Equity Parent to the first lien agent and second lien agent and the Participating Second Lien Lenders of such breach.
 
Also, the Debtor or the Equity Parent may terminate the New Lock Up Agreement if the final order has not been entered confirming the plan of liquidation and allowing the effective date for the plan of liquidation to occur on or before May 15, 2010 upon giving notice to the first lien agent, the Debtor, the Equity Parent and the second lien agent and the Participating Second Lien Lenders.
 
Under the New Lock Up Agreement, the first lien lenders have agreed to adjourn the pending trustee’s sale of the Las Vegas Property so long as the Lock Up Agreement is in full force and effect and irrevocably terminate such trustee’s sale upon confirmation of the bankruptcy case’s plan of liquidation. Upon commencing the prepackaged chapter 11 bankruptcy proceeding, the court-appointed receiver that has been overseeing the Las Vegas Property since June 23, 2009, at the request of the first lien lenders, shall be discharged and the receivership of the Las Vegas Property shall terminate. During the prepackaged chapter 11 bankruptcy proceeding, subject to the Bankruptcy Court entering the interim and final cash collateral orders contemplated by the New Lock Up Agreement, most of the Debtor’s expenses will be funded from cash flows generated by the Las Vegas Property’s real estate activities.

 
8

 
 
 
Upon entry into the New Lock Up Agreement, the Participating Second Lien Lenders agreed to dismiss without prejudice their pending litigation against the first lien lenders, the Company, the Las Vegas Subsidiary (and its predecessor entities) and others contesting the validity of the Old Lock Up Agreement. The Participating Second Lien Lenders have agreed to grant the named parties to such pending litigation a release therefrom upon confirmation of the prepackaged chapter 11 bankruptcy case’s plan of liquidation.
 
If the Las Vegas Property is sold under the New Lock Up Agreement pursuant to the prearranged sale to the New Property Owner, FX LLC will be released from its "bad boy" guarantees in favor of the first and second lien lenders guaranteeing repayment of all obligations outstanding and owing under the $475 million mortgage loans. The Company may not otherwise receive any benefit from this prearranged sale.
 
Under the New Lock Up Agreement, the parties to the Old Lock Up Agreement have agreed to terminate the Old Lock Up Agreement after satisfaction of the Vote Condition. Prior to satisfaction of the Vote Condition, such parties have agreed to not pursue the transactions contemplated under the Old Lock Up Agreement.
 
As described below under the "Standstill Agreement", the parties to the Old Lock Up Agreement have entered into a standstill agreement whereby they have agreed to implement the Old Lock Up Agreement and the transactions contemplated thereby in the event the New Lock Up Agreement is validly terminated.
 
Because the New Lock Up Agreement and the transactions contemplated thereby involve the Equity Sponsors, who are directors, executive officers and/or greater than 10% stockholders of the Company, a committee of the Company’s board of directors comprised solely of independent directors authorized the Debtor to enter into the New Lock Up Agreement and consummate the transactions contemplated thereby.
 
On January 22, 2010, the parties to the New Lock Up Agreement amended the New Lock Up Agreement by entering into the First Amendment to the Lock Up and Plan Support Agreement (the "First Amendment"). Under the First Amendment, the parties extended the date until which they have to agree upon the definitive forms of the key transaction documents required to implement the prepackaged chapter 11 bankruptcy case’s plan of reorganization from January 22, 2010 to February 3, 2010 (or such earlier date upon which the parties agree that the key transaction documents are in definitive form). Exhibits C and D to the New Lock Up Agreement were amended and restated in their entirety by the First Amendment.
 
The terms of the New Lock Up Agreement, as amended by the First Amendment, provided for the New Lock Up Agreement to automatically terminate and be of no further force and effect on February 3, 2010 (unless extended by agreement) if on or before such date the parties thereto have not agreed upon the definitive forms of such key transaction documents.
 
On February 3, 2010, the parties to the New Lock Up Agreement, as amended by the First Amendment, further amended the New Lock Up Agreement by entering into the Second Amendment to the Lock Up and Plan Support Agreement (the "Second Amendment"). Under the Second Amendment, the parties further extended the date until which they have to agree upon the definitive forms of the key transaction documents required to implement the prepackaged chapter 11 bankruptcy case’s plan of reorganization from February 3, 2010 to February 12, 2010 (or such earlier date upon which the parties agree that the key transaction documents are in definitive form).
 
The terms of the New Lock Up Agreement, as amended by the Second Amendment, provided for the New Lock Up Agreement to automatically terminate and be of no further force and effect on February 12, 2010 (unless extended by agreement) if on or before such date the parties thereto have not agreed upon the definitive forms of such key transaction documents.
 
On February 12, 2010, the Las Vegas Subsidiary’s New Lock Up Agreement, as amended by the First Amendment thereto dated as of January 22, 2010 and the Second Amendment thereto dated as of February 3, 2010 terminated automatically in accordance with its terms and is of no force and effect because the parties thereto failed to agree by February 12, 2010 upon the definitive forms of the key transaction documents required to implement the plan of reorganization.  Because the termination of the New Lock Up Agreement was not due to the fault of any party thereto (a "non-fault based termination"), all of the parties thereto were released from their obligations thereunder without any liability to the other parties.
 
Negotiations with the first lien lenders and the second lien lenders were discontinued March 18, 2010.  Such agreement remains terminated and the Old Lock Up Agreement is in the process of being reinstated.
 
 
9

 
 
Standstill Agreement
 
On December 23, 2009, the parties to the Old Lock Up Agreement entered into a standstill agreement (the "Standstill Agreement") for the purpose of deferring and staying activity required to be undertaken under the Old Lock Up Agreement until such time as the New Lock Up Agreement is validly terminated.  If the New Lock Up Agreement is validly terminated and neither the Las Vegas Subsidiary nor the Equity Parent is in default thereunder, the Standstill Agreement shall terminate and be of no further force and effect and the parties to the Old Lock Up Agreement shall take such actions specified in the Standstill Agreement in order to proceed with implementation of the transactions contemplated by the Old Lock Up Agreement. If either (a) the New Lock Up Agreement is terminated because of a "debtor fault-based termination" (as defined in the New Lock Agreement) or (b) any of the Las Vegas Subsidiary, the Company, the Company’s subsidiary FX Luxury, LLC or the New Entities takes any action that is not in support of the prepackaged chapter 11 case and the other transactions contemplated by the Old Lock Up Agreement (except as may be contemplated by, required pursuant to, or in furtherance of, the terms of the New Lock Up Agreement), the first lien agent may upon written notice to the parties named in foregoing clause (b) terminate the Standstill Agreement and the Old Lock Up Agreement whereupon the Old Lock Up Agreement shall be deemed to have been terminated by reason of a "fault-based termination" (as defined in the Old Lock Up Agreement) and the first lien lenders and the first lien agent shall be entitled to all rights and remedies available under the Old Lock Up Agreement as a result thereof. Notwithstanding the foregoing, the Standstill Agreement and the Old Lock Up Agreement (including related existing agreements) shall terminate and be of no further force and effect should the first lien lenders and the Participating Second Lien Lenders deliver a sufficient number of votes to approve the prepackaged chapter 11 case contemplated by the New Lock Up Agreement.
 
As a result of such non-fault based termination of the New Lock Up Agreement, the Las Vegas Subsidiary’s Standstill Agreement terminated and is of no force and effect.  The purpose of the Standstill Agreement (which had been entered into simultaneously with the New Lock Up Agreement) was to defer and stay activity required under the Old Lock Up Agreement.   As described below, the Old Lock Up Agreement will be reinstated because of such non-fault based termination of the New Lock Up Agreement. The Old Lock Up Agreement contemplates the Las Vegas Subsidiary filing a prepackaged chapter 11 bankruptcy case with the United States Bankruptcy Court for the District of Nevada for the purpose of disposing of the Las Vegas Property for the benefit of the Las Vegas Subsidiary’s (and its predecessor entities’) creditors either pursuant to an auction sale for at least $256 million or, if the auction sale is not completed, pursuant to a prearranged sale to LIRA under the terms of the prepackaged chapter 11 bankruptcy proceeding’s plan of liquidation.
 
Under the Standstill Agreement, as a result of its termination by reason of such non-fault based termination of the New Lock Up Agreement, the parties thereto, as also being parties to the Old Lock Up Agreement, are required to take the following actions in order to proceed with implementation of the transactions contemplated by the Old Lock Up Agreement:
 
(a)              to reinstate on or before February 27, 2010 that certain escrow agreement delivered pursuant to the Old Lockup Agreement under substantially the same terms and conditions thereof;
 
(b)              to amend the Old Lock Up Agreement to specify the recalculated outside date on which the plan of liquidation can be confirmed (currently May 18, 2010, which under the terms of the Standstill Agreement is to be extended by the number of days from December 4, 2009 (with December 5, 2009 being the first day) through and including the date of reinstatement of such escrow agreement);
 
(c)              to agree upon new "target dates" under the Old Lock Up Agreement for the taking of specified actions necessary to initiate the prepackaged chapter 11 filing; and
 
(d)              update, if necessary, the form of orders or documents previously agreed to pursuant to the Old Lockup Agreement and related documents for ministerial changes to reflect the passage of time and changing circumstances caused by the delay in filing of the prepackaged chapter 11 bankruptcy case under the Old Lock-Up Agreement.
 
In either case, under the Old Lock Up Agreement or the New Lock Up Agreement, the Company would no longer have an interest in the Las Vegas Property.  Each Lock Up Agreement provides that, so long as there has been no termination or default, the Trustee’s Sale would be adjourned from time to time to allow completion of the prepackaged bankruptcy.
 
The foregoing description of the Old Lock Up Agreement, the New Lock Up Agreement (as amended by the First Amendment and the Second Amendment) and the Standstill Agreement and the transactions contemplated thereby is not complete and is qualified in its entirety by reference to the text of each such agreement, copies of which are listed as and incorporated by reference herewith as Exhibits 10.58, 10.59, 10.60, 10.62, and 10.63, and are incorporated herein by reference.
 
 
10

 
 
The Las Vegas Property
 
The Las Vegas Property is made up of six contiguous parcels aggregating 17.72 acres of land located on the southeast corner of Las Vegas Boulevard and Harmon Avenue in Las Vegas, Nevada. The property enjoys strong visibility with 1,175 feet of frontage on Las Vegas Boulevard, known as “the Strip”, and 600 feet of frontage on Harmon Avenue. The entire 17.72 acre parcel is zoned H-1, Limited Resort and Apartment District, and allows for casino gaming through its designation as a Gaming Enterprise District, or GED, and can support a variety of development alternatives, including hotels/resorts, entertainment venue(s), a casino, condominiums, hotel-condominiums, residences and retail establishments. The Las Vegas Property is currently occupied by a motel and several commercial and retail tenants with a mix of short and long-term leases.

Set forth below is a summary of the parcels, including a description of the land, the current tenant(s) and the current term(s) of the existing lease(s).
 
Parcel 1.  Parcel 1 consists of 0.996 acres of land with 115 linear feet of frontage on Las Vegas Boulevard and 150 linear feet of frontage on Harmon Avenue. One tenant currently occupies Parcel 1. The lease for the property is terminable at any time by either party upon 120 days’ prior written notice and without the payment of a termination fee.
 
Parcel 2.  Parcel 2 consists of 5.135 acres of land with 210 linear feet of frontage on Las Vegas Boulevard and 450 linear feet of frontage on Harmon Avenue. The property is currently occupied by a Travelodge motel which we own in fee, as well as several retail, billboard and parking lot tenants. The Travelodge motel is being operated by WW Lodging Limited LLC pursuant to a management agreement. The management agreement is terminable upon 30 days’ prior notice and a payment of a termination fee equal to 4% of the trailing 12 months room revenue multiplied by 200%. The property’s retail, billboard and parking lot leases are month-to-month.
 
Parcel 3.  Parcel 3 consists of 2.356 acres of land, with 275 linear feet of frontage on Las Vegas Boulevard. The property currently hosts the Hawaiian Marketplace, which consists of multiple retail tenants. All but six of the leases on this property are terminable at any time upon 30 days’ (in one instant upon 180 days’) advance written notice and without payment of a termination fee. All six leases not terminable with notice are terminable by us at any time upon the exercise of options to either repurchase, recapture or relocate the premises.
 
  Parcel 4.  Parcel 4 consists of 4.49 acres of land with 270 linear feet of frontage on Las Vegas Boulevard. The property is currently occupied by several tenants. The current leases are month-to-month, except for a lease with a single tenant. Such tenant’s lease term expires in May 2014.
 
Parcel 5.  Parcel 5 consists of 3.008 acres of land, with 180 linear feet of frontage on Las Vegas Boulevard. The property accommodates 51,414 square feet of retail space and is currently occupied by several restaurant and retail tenants. One lease term expires in January 2012, but is terminable earlier upon 120 days’ advance written notice and, if terminated after February 2010, payment of a termination fee of $200,000. Another lease term expires in August 2012, with the tenant holding an option to extend the lease for an additional five years. A third lease term expires in May 2059.
 
Parcel 6.  Parcel 6 consists of 1.765 acres of land, with 125 linear feet of frontage on Las Vegas Boulevard. The property accommodates 2,094 square feet of retail space and is currently occupied by a restaurant and several retail tenants. One lease term expires in December 2013, another lease term expires in April 2011 and a third lease term expires in February 2014, with the tenant holding an option to extend the lease term for an additional five years. A fourth lease term expires in May 2045.
 
Impairment of Land
 
In accordance with accounting standards concerning Accounting for the Impairment or Disposal of Long-Lived Assets, a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. As a result of the global recession and financial crisis and based upon a valuation report obtained for the Las Vegas Property from an independent appraisal firm combined with certain assumptions made by management, the Company recorded an impairment charge to land of $325.1 million as of December 31, 2008. This charge reduced the carrying value of the Las Vegas Property to its then estimated fair value of $218.8 million. The global financial crisis has had a particularly negative impact on the Las Vegas real estate market, including a significant reduction in the number of visitors and per visitor spending, the abandonment of and/or loan defaults related to several major new hotel and casino development projects as well as publicly expressed concerns regarding the financial viability of several of the largest hotel and casino operators in the Las Vegas market. These factors combined with the lack of availability of financing for development has resulted in a near cessation of land sales on the Las Vegas strip. Despite early signs of stabilization in the first quarter, the economy continued to deteriorate in the Las Vegas market due to high unemployment and foreclosure rates and a decrease in visitation volume and less spend per visitor, and as a result, management believes there are new indicators that the recoverable amount of the Las Vegas Property may not exceed its carrying value warranting further impairment of the Las Vegas Property. The Company obtained a preliminary update of the appraisal as of June 30, 2009 by the same firm and, as a result, had recorded an additional impairment charge of $77.0 million to the value of the land. The Company obtained an update of the appraisal by the same firm as of February 16, 2010, and, as a result, has recorded an additional impairment charge of $2.1 million to the value of the land.  The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement.  As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustee’s sale or a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement.  The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1., The Company’s Current Business and its Financial Distress.
 
 
11

 
 
The accompanying consolidated financial statements do not include any additional adjustments that might result from the liquidation of the Las Vegas Property.
 
Terminated License Agreements
 
On June 1, 2007, the Company entered into license agreements with Elvis Presley Enterprises, Inc., an 85%-owned subsidiary of CKX, Inc. (“EPE”) [NASDAQ: CKXE], and Muhammad Ali Enterprises LLC, an 80%-owned subsidiary of CKX (“MAE”), which allowed the Company to use the intellectual property and certain other assets associated with Elvis Presley and Muhammad Ali in the development of its real estate and other entertainment attraction-based projects. The Company’s license agreement with Elvis Presley Enterprises granted the Company, among other rights, the right to develop one or more hotels as part of the master plan of Elvis Presley Enterprises, Inc. to redevelop the Graceland property and surrounding areas in Memphis, Tennessee.
 
Under the terms of the license agreements, we were required to pay EPE and MAE a specified percentage of the gross revenue generated at the properties that incorporate the Elvis Presley and Muhammad Ali intellectual property. In addition, the Company was required to pay a guaranteed annual minimum royalty payment (against royalties payable for the year in question) of $10 million in each of 2007, 2008, and 2009, $20 million in each of 2010, 2011, and 2012, $25 million in each of 2013, 2014, 2015 and 2016, and increasing by 5% for each year thereafter. The initial payments (for 2007) under the license agreements, as amended, were paid on April 1, 2008, with proceeds from our March 2008 rights offering. The guaranteed annual minimum royalty payments for 2008 in the aggregate amount of $10 million were due on January 30, 2009.
 
On March 9, 2009, following the Company’s failure to make the $10 million annual guaranteed minimum royalty payments for 2008, the Company entered into a Termination, Settlement and Release agreement with EPE and MAE, pursuant to which the parties agreed to terminate the Elvis Presley and Muhammad Ali license agreements and to release each other from all claims related to or arising from such agreements. In consideration for releasing the Company from any claims related to the license agreements, EPE and MAE will receive 10% of any future net proceeds or fees received by the Company from the sale and/or development of the Las Vegas Property, up to a maximum of $10 million. The Company has the right to buy-out this participation right at any time prior to April 9, 2014 for a payment equal to (i) $3.3 million plus interest at 7% per annum, calculated from year 3 until repaid, plus (ii) 10% of any net proceeds received from the sale of some or all of the Las Vegas Property during such buy-out period and for six months thereafter, provided that the amount paid under clauses (i) and (ii) shall not exceed $10 million.
 
Formation of the Company
 
FXLR was formed under the laws of the state of Delaware on April 13, 2007. The Company was inactive from inception through May 10, 2007.
 
On May 11, 2007, Flag Luxury Properties, LLC (“Flag”), a real estate development company in which Robert F.X. Sillerman and Paul C. Kanavos each owned an approximate 29% interest, contributed to the Company its 50% ownership interest in the Metroflag entities for all of the membership interests in the Company. The sale of assets by Flag was accounted for at historical cost as FXLR and Flag were entities under common control.
 
On June 1, 2007, Flag Leisure Group, LLC, a company in which Robert F.X. Sillerman and Paul C. Kanavos each beneficially own an approximate 33% interest and which is the managing member of Flag, sold to the Company all of its membership interests in RH1, LLC (“RH1”), which owned an aggregate of 418,294 shares of Riviera Holdings Corporation and 28.5% of the outstanding shares of common stock of Riv Acquisition Holdings, Inc. On such date, Flag also sold to the Company all of its membership interests in Flag Luxury Riv, LLC, which owned an additional 418,294 shares of Riviera Holdings Corporation and 28.5% of the outstanding shares of common stock of Riv Acquisition Holdings. With the purchase of these membership interests, FXLR acquired, through its interests in Riv Acquisitions Holdings, a 50% beneficial ownership interest in an option to acquire an additional 1,147,550 shares of Riviera Holdings Corporation at $23 per share. These options were exercised in September 2007. The total consideration for these transactions was $21.8 million paid in cash, a note for $1.0 million and additional contributed equity of $15.9 million for a total of $38.7 million. As a result of these transactions, as of December 31, 2008, the Company owned 1,410,363 shares of common stock (161,758 of which were put into trust for the benefit of the Company in October 2008) of Riviera Holdings Corporation (the “Riv Shares”).
 
As of April 17, 2009, the Company had sold all of the RIV Shares. The sale of assets by Flag Leisure Group, LLC and Flag was accounted for at historical cost as the Company, Flag Leisure Group, LLC and Flag were entities under common control at the time of the transactions. Historical cost for these acquired interests equals fair values because the assets acquired comprised available for sale securities and a derivative instrument that are required to be reported at fair value in accordance with generally accepted accounting principles.
 
 
12

 
 
FXRE was formed under the laws of the state of Delaware on June 15, 2007.
 
On September 26, 2007, CKX, together with other holders of common membership interests in FXLR contributed all of their common membership interests in FXLR to FXRE in exchange for shares of common stock of FXRE.
 
This exchange is sometimes referred to herein as the “reorganization.” As a result of the reorganization, FXRE holds 100% of the outstanding common membership interests of FXLR.
 
On November 29, 2007, the Company reclassified its common stock on a basis of 194,515.758 shares of common stock for each share of common stock then outstanding.
 
On January 10, 2008, the Company became a publicly traded company as a result of the completion of the distribution of 19,743,349 shares of common stock to CKX’s stockholders of record as of December 31, 2007. This distribution is referred to herein as the “CKX Distribution.”

On December 24, 2009, FXL, Inc., a new wholly-owned subsidiary of the Company, succeeded to the Company’s interest in FXLR.
 
CKX Investment
 
On June 1, 2007, CKX contributed $100 million in cash to the Company in exchange for 50% of the common membership interests in the Company (the “CKX Investment”). CKX also agreed to permit Flag to retain a $45 million preferred priority distribution right which amount will be payable upon certain defined capital events.
 
As a result of the CKX investment on June 1, 2007 and the determination that Flag and CKX constituted a collaborative group representing 100% of FXLR’s ownership interests, the Company recorded its assets and liabilities at the combined accounting bases of the respective investors. FXLR’s net asset base represents a combination of 50% of the assets and liabilities at historical cost, representing Flag’s predecessor ownership interest, and 50% of the assets and liabilities at fair value, representing CKX’s ownership interest, for which it contributed cash on June 1, 2007. Along with the accounting for the subsequent acquisition of the remaining 50% interest in Metroflag (see below) at fair value, the assets and liabilities were ultimately adjusted to reflect an aggregate 75% fair value.
 
On September 26, 2007, CKX acquired an additional 0.742% of the outstanding capital stock of the Company for a price of $1.5 million. The proceeds of this investment, together with an additional $0.5 million that was invested by Flag, were used by the Company for working capital and general corporate purposes.
 
CKX subsequently distributed 100% of its interest in the Company to CKX’s stockholders through the consummation of the CKX Distribution.
 
Metroflag Acquisition
 
On May 30, 2007, the Company entered into an agreement to acquire the remaining 50% ownership interest in the Metroflag entities that it did not already own. This purchase was completed on July 6, 2007. As a result of this purchase, the Company owns 100% of Metroflag, and therefore the Las Vegas Property. The total consideration paid by FXLR for the remaining 50% interest in Metroflag was $180 million, $172.5 million of which was paid in cash at closing and $7.5 million of which was an advance payment made in May 2007 (funded by a $7.5 million loan from Flag). The cash payment at closing was funded from $92.5 million of cash on hand and $105 million in additional borrowings, which was reduced by $21.3 million deposited into a restricted cash account to cover debt service commitments and $3.7 million in debt issuance costs. The $7.5 million loan from Flag was repaid on July 9, 2007.
 
 
13

 
 
The Repurchase Agreement and Contingently Redeemable Stock
 
In connection with the CKX Investment, CKX, FXRE, FXLR, Flag, Robert F.X. Sillerman, Paul Kanavos and Brett Torino entered into a Repurchase Agreement dated June 1, 2007, as amended on June 18, 2007 and September 27, 2007. The purpose of the Repurchase Agreement was to provide a measure of valuation protection for the 50%-interest in the Company acquired by CKX (the “Purchased Securities”) for $100 million, under certain limited circumstances. Specifically, if no “Termination Event” was to occur prior to the second anniversary of the CKX Distribution, which were events designed to indicate that the value of the CKX Investment had been confirmed, each of Messrs. Sillerman, Kanavos and Torino would be required to sell back such number of their shares of the Company’s common stock to the Company at a price of $.01 per share as would result in the shares that were received by the CKX stockholders in the CKX Distribution having a value of at least $100 million.
 
The interests held by Messrs. Sillerman, Kanavos and Torino subject to the Repurchase Agreement were recorded as contingently redeemable members’ interest in accordance with FASB Emerging Issues Task Force Topic D-98: Classification and Measurement of Redeemable Securities . This statement requires the issuer to estimate and record value for securities that are mandatorily redeemable when that redemption is not in the control of the issuer. The value for this instrument has been determined based upon the redemption price of par value for the expected 18 million shares of common stock of FXRE subject to the Repurchase Agreement. At December 31, 2007, the value of the interest subject to redemption was recorded at the maximum redemption value of $180,000.
 
In the first quarter of 2008, a “Termination Event” as defined in the Repurchase Agreement was deemed to have occurred as the average closing price of the common stock of FXRE for the consecutive 30-day period following the date of the CKX Distribution (January 10, 2008) exceeded a price per share that attributed an aggregate value to the Purchased Securities of greater than $100 million. As a result of the termination event and resulting termination of the Repurchase Agreement, the shares previously classified as redeemable were no longer redeemable. As of December 31, 2008, the Company has reclassified to stockholders’ equity the contingently redeemable stockholders’ equity included on the consolidated balance sheet as of December 31, 2007.
 
Rights Offering and Related Investment Agreements
 
On March 11, 2008, the Company commenced a registered rights offering pursuant to which it distributed to certain of its stockholders, at no charge, transferable subscription rights to purchase one share of its common stock for every two shares of common stock owned as of March 6, 2008, the record date for the rights offering, at a cash subscription price of $10.00 per share. As of the commencement of the offering, the Company had 39,790,247 shares of common stock outstanding. As part of the transaction that created the Company in June 2007, the Company agreed to undertake the rights offering, and certain stockholders who own, in the aggregate, 20,046,898 shares of common stock, waived their rights to participate in the rights offering. As a result, the rights offering was made only to stockholders who owned, in the aggregate, 19,743,349 shares of common stock as of the record date, resulting in the distribution of rights to purchase up to 9,871,674 shares of common stock in the rights offering. The rights offering expired on April 18, 2008.
 
The rights offering was made to fund certain obligations, including short-term obligations described elsewhere herein. On January 9, 2008, Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P. (collectively, “Huff”), one of the Company’s principal stockholders, entered into investment agreements with the Company, pursuant to which they agreed to purchase shares that were not otherwise subscribed for in the rights offering, if any, at the same $10.00 per share subscription price. In particular, under Huff’s investment agreement with the Company, as amended, Huff agreed to purchase the first $15 million of shares (1.5 million shares at $10 per share) that were not subscribed for in the rights offering, if any, and 50% of any other unsubscribed shares, up to a total investment of $40 million; provided, however, that the first $15 million was reduced by $11.5 million, representing the aggregate value of the 1,150,000 shares acquired by Huff upon the exercise on April 1, 2008 of its own subscription rights in the offering; and provided further that Huff was not obligated to purchase any shares beyond its initial $15 million investment in the event that Mr. Sillerman did not purchase an equal number of shares at the $10 price per share pursuant to the terms of his investment agreement with the Company. Under his investment agreement with the Company, Mr. Sillerman agreed to subscribe for his full pro rata amount of shares in the rights offering (representing 3,037,265 shares), and agreed to purchase up to 50% of the shares that were not sold in the rights offering after Huff’s initial $15 million investment at the same subscription price per share offered in the offering.
 
On March 12, 2008, Mr. Sillerman subscribed for his full pro rata amount of shares resulting in his purchase of 3,037,265 shares. On May 13, 2008, pursuant to and in accordance with the terms of the investment agreements described above, Mr. Sillerman and Huff purchased an aggregate of 4,969,112 shares that were not otherwise sold in the offering. The Company generated aggregate gross proceeds of approximately $98.7 million from the rights offering and from sales under the related investment agreements described above. In conjunction with the shares purchased by Huff pursuant to its investment agreement with the Company, Huff purchased one share of the Company’s Non-Voting Designated Preferred Stock (referred to hereafter as the “special preferred stock”) for a purchase price of $1.00.
 
Under the terms of the special preferred stock, Huff is entitled to appoint a member to the Company’s Board of Directors so long as it continues to beneficially own at least 20% of the 6,611,998 shares of the Company’s common stock it received and/or acquired from the Company, consisting of (i) 2,802,442 shares received by Huff in the CKX Distribution, (ii) 1,150,000 shares acquired by Huff in the rights offering, and (iii) 2,659,556 shares acquired by Huff under the investment agreement described above. Huff appointed Bryan Bloom as a member of the Company’s Board of Directors effective May 13, 2008.  Mr. Bloom’s designation as director was withdrawn on April 8, 2010 and no replacement has been named.
 
In connection with Huff’s purchase of the shares of common stock and the special preferred stock in the second quarter of 2008, the Company paid Huff a commitment fee of $715,000, and the parties entered into a registration rights agreement.
 
 
14

 
 
Conditional Option Agreement and EPE License Agreement Amendment with 19X
 
On February 28, 2008, the Company entered into an Option Agreement with 19X, Inc. pursuant to which, in consideration for aggregate annual payments totaling $105 million payable over five years in four equal cash installments per year, the Company would have the right (but not the obligation) to acquire an 85% interest in the Elvis Presley business currently owned and operated by CKX through EPE at an escalating price ranging from $650 million to $850 million over the period beginning on the date of the closing of 19X’s acquisition of CKX through 72 months following such date, subject to extension under certain circumstances as described below. The effectiveness of the Option Agreement was conditioned upon the consummation of the then pending merger between 19X and CKX.
 
The Company also entered into an agreement with 19X to amend the EPE license agreement, which was also conditioned upon the closing of 19X’s then pending acquisition of CKX. The amendment to the EPE license agreement provided that, if, by the date that is 7 1/2 years following the closing of 19X’s acquisition of CKX, EPE had not achieved certain financial thresholds, the Company would have been entitled to a reduction of $50 million against 85% of the payment amounts due under the EPE license agreement, with such reduction to occur ratably over the ensuing three year period; provided, however, that if the Company had failed in its obligations to build any hotel to which it had previously committed under the definitive Graceland master redevelopment plan, then this reduction would not have applied.
 
The merger agreement between 19X and CKX was terminated on November 1, 2008. Because 19X would only have owned the EPE business upon consummation of its acquisition of CKX, as a result of the termination of the merger agreement between 19X and CKX, these conditional agreements with 19X were terminated.
 
Private Placements of Common Stock Units and Common Stock
 
Between July 15, 2008 and July 18, 2008, the Company sold in a private placement to Paul C. Kanavos, the Company’s President, Barry A. Shier, the Company’s Chief Operating Officer, an affiliate of Brett Torino, the Company’s Chairman of the Las Vegas Division, Mitchell J. Nelson, the Company’s Executive Vice President and General Counsel, and an affiliate of Harvey Silverman, a director of the Company, an aggregate of 2,264,289 units at a purchase price of $3.50 per unit. Each unit consisted of one share of the Company’s common stock, a warrant to purchase one share of the Company’s common stock at an exercise price of $4.50 per share and a warrant to purchase one share of the Company’s common stock at an exercise price of $5.50 per share. The warrants to purchase shares of the Company’s common stock for $4.50 per share are exercisable for a period of seven years and the warrants to purchase shares of the Company’s common stock for $5.50 per share are exercisable for a period of ten years. The Company generated aggregate proceeds from the sale of the units of approximately $7.9 million.
 
In September 2009, the Company entered into subscription agreements to raise $250,000 from Robert F.X. Sillerman, Paul Kanavos, and/or greater than 10% stockholders. They purchased an aggregate of 4,166,668 shares at a purchase price of $0.06 per unit (such purchase price representing the average trading price per share of the Company’s common stock as reported on the Pink Sheets over the 30 day period immediately preceding the date of the subscription agreements). Each unit consists of (x) one share of the Company’s common stock, (y) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.07 per share and (z) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.08 per share. The warrants are exercisable for a period of seven years and are identical in all respects except for their exercise prices. The funding of each purchase took place before September 10, 2009.
 
On November 5, 2009, the Company entered into subscription agreements with Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President and a director, and his spouse, Dayssi Olarte de Kanavos, and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, pursuant to which such parties agreed to purchase an aggregate of 4,166,667 units at a purchase price of $0.09 per unit (such purchase price representing the average trading price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the date of the subscription agreements). Each unit consists of (x) one share of the Company’s common stock, (y) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.10 per share and (z) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.11 per share. The warrants are exercisable for a period of seven years and are identical in all respects except for their exercise prices.  The aggregate proceeds to the Company from the sale of the units pursuant to the subscription agreements were $375,000. The funding of each purchase occurred on November 6, 2009.
 
 
15

 
 
On December 24, 2009, the Company sold an aggregate of 3,515,625 shares of its common stock to Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President, and his spouse Dayssi Olarte de Kanavos and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, upon their exercise of a like number of Company warrants. The Company received aggregate proceeds of $250,000 from the exercise of the warrants. Mrs. Sillerman, Mr. Kanavos and his spouse and TTERB Living Trust each purchased 1,171,875 shares of common stock upon the exercise of a like number of warrants for an aggregate exercise price of $83,333.33. The exercise price of the warrants for 1,041,667 shares was $0.07 per share, while the exercise price of the warrants for the remaining 130,208 shares was $0.08 per share.
 
On January 28, 2010, the Company sold an aggregate of 1,562,499 shares of its common stock to Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President, and his spouse Dayssi Olarte de Kanavos and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, upon their exercise of a like number of Company warrants. The Company received aggregate proceeds of $125,000 from the exercise of the warrants, which were exercisable at $0.08 per share. Mrs. Sillerman, Mr. Kanavos and his spouse and TTERB Living Trust each purchased 520,833 shares of common stock upon the exercise of a like number of warrants for an aggregate exercise price of $41,666.66.
 
Because the foregoing private placements of the common stock units involved certain of the Company’s directors and greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors. The Company used the proceeds from all of the foregoing private placements to fund working capital requirements and for general corporate purposes.
 
Private Placements of Preferred Stock Units

On February 11, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 99 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly created and issued Series A Convertible Preferred Stock, $0.01 par value per share (the "Series A Convertible Preferred Stock"), and (y) a warrant to purchase up to 10,989 shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.273 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $99,000 from the sale of the units.

On March 5, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 180 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 10,309.278 shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.291 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $180,000 from the sale of the units.

On March 11, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 600 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 10,277.49 shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.2919 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $600,000 from the sale of the units.

On April 5, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 270 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 9,866.79  shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.3041 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $270,000 from the sale of the units.
 
 
16

 
 
The Company created 1,500 shares of Series A Convertible Stock by filing a Certificate of Designation (the "Certificate of Designation") with the Secretary of State of the State of Delaware thereby amending its Amended and Restated Certificate of Incorporation, as amended. The Company issued and sold an aggregate of 1,149 shares of the Series A Convertible Preferred Stock as part of the units and has 351 authorized shares of Series A Convertible Preferred Stock that remain available for future issuance under the Certificate of Designation. The designation, powers, preferences and rights of the shares of Series A Convertible Preferred Stock and the qualifications, limitations and restrictions thereof are contained in the Certificate of Designation and are summarized as follows:
 
(a)              The shares of Series A Convertible Preferred Stock have an initial stated value of $1,000 per share, which is subject to increase periodically to include accrued and unpaid dividends thereon (as increased periodically, the "Stated Value").
 
(b)              The shares of Series A Convertible Preferred Stock are entitled to receive quarterly cumulative cash dividends at a rate equal to 8% per annum of the Stated Value whenever funds are legally available and when and as declared by the Company’s board of directors.
 
(c)              Each share of Series A Convertible Stock are convertible into shares of Company common stock at a conversion prices equal to 120% of the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the applicable date of issuance (the "Conversion Price"). The Conversion Price is subject to adjustment to give effect to dividends, stock splits, recapitalizations and similar events affecting the shares of Company common stock.
 
(d)              The shares of Series A Convertible Preferred Stock are convertible, at the option of the holders, into shares of Company common stock at the Conversion Price if at any time the closing price of the shares of Company common stock is at the Conversion Price for ten (10) consecutive trading days. The shares of Series A Convertible Preferred Stock are convertible each time for a period of 60-days thereafter.
 
(e)              Upon the earlier of: (x) consummation of the Company’s sale (or series of related sales) of its capital stock (or securities convertible into its capital stock) from which the Company generates net proceeds of at least $25 million or (y) the fifth anniversary of the date of their issuance the Series A Convertible Preferred Stock shall automatically convert into the number of shares of Company common stock equal to the then current Stated Value divided by the Conversion Price.
 
(f)              If at any time the closing price of the shares of Company common stock is at least 10 times the applicable weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the applicable date of issuance of a particular share of Series A Convertible Preferred Stock for fifteen (15) consecutive trading days, the Company may redeem such share of Series A Convertible Preferred Stock at the then current Stated Value.  Such shares of Series A Convertible Preferred Stock are redeemable each time in whole or in part for a period of 120-days thereafter.
 
(g)              The shares of Series A Convertible Preferred Stock is senior in liquidation preference to the shares of Company common stock.
 
(h)              The shares of Series A Convertible Preferred Stock vote as a class with the outstanding shares of Company common stock on an as-converted basis (except as otherwise required by the Certificate of Designation or applicable law).
 
(i)              The consent of the holders of 51% of the outstanding shares of Series A Convertible Preferred Stock shall be necessary for the Company to: (i) increase the authorized number of shares of Series A Convertible Preferred Stock or alter, amend or change any of the terms, designations, powers, privileges or rights or restrictions provided for the benefit of the Series A Convertible Preferred Stock; (ii) create or issue any Company capital stock (or any securities convertible into any Company capital stock) having rights, preferences or privileges senior to or on parity with the Series A Convertible Preferred Stock; or (iii) amend the Company’s Amended and Restated Certificate of Incorporation or Bylaws in a manner that is materially adverse to the Series A Convertible Preferred Stock.
 
 
17

 
 
(j)              From the date on which at least 1,000 shares of Series A Convertible Preferred Stock are outstanding (the "Director Commencement Date"), the Company’s board of directors is required (at the request of the holders of a majority of the Series A Convertible Preferred Stock)  to increase its size by one member and cause such resulting vacancy to be filled by a director designated by the holders of a majority of the then outstanding shares of Series A Convertible Preferred Stock (the "Class A Director"). From the Director Commencement Date until the date on which less than 50% of the shares of Series A Convertible Preferred Stock outstanding on the Director Commencement Date are outstanding, the holders of the Series A Convertible Preferred Stock, voting as a separate class, have the right to elect one (1) Class A Director to the Company’s board of directors at each meeting of stockholders or each consent of the Company’s stockholders for the election of directors, and to remove from office such Class A Director and to fill the vacancy caused by the resignation, death or removal of such Class A Director. Each share of Series A Convertible Preferred Stock is entitled to one vote and any election or removal of the Class A Director shall be subject to the affirmative vote of the holders of a majority of the outstanding shares of Series A Convertible Preferred Stock.
 
Because the foregoing private placements of the preferred stock units involved certain of the Company’s directors and greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors.  The Company used the proceeds from these private placements to fund working capital requirements and for general corporate purposes, except that the Company has committed to use the proceeds from the March 11, 2010 private placement to fund expenses associated with evaluating a new line of business in connection with its entry into a letter of intent with a private company and its principal.
 
Under this letter of intent, the Company has been afforded a 90-day exclusivity period through June 10, 2010 for the purposes of evaluating the counterparties’ business and the feasibility of developing amusement rides in, among other venues, Orlando, Florida, as well as negotiating related agreements. In connection therewith, the Company has agreed to incur expenses of approximately $500,000. The Company is in the early stages of such evaluation and there is no assurance such evaluation will be satisfactory to the Company or, if satisfactory, that the parties can negotiate the related agreements.
 
The foregoing description of the Series A Convertible Preferred Stock and the Warrants is not complete and is qualified in its entirety by reference to the full text of the Certificate of Designation and the form of Warrant, copies of which are listed and incorporated by reference as Exhibits 3.3 and 10.65, respectively, and are incorporated herein by reference.
 
Intellectual Property
 
We intend to protect any intellectual property rights we may acquire in the future through a combination of patent, trademark, copyright, rights of publicity, and other laws, as well as licensing agreements and third party nondisclosure and assignment agreements.  Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, financial condition and results of operations.
 
Employees
 
On April 30, 2009, the Company entered into employment separation agreements and releases with Barry A. Shier, a director and the Chief Operating Officer of the Company and the Chief Executive Officer of the Company’s Las Vegas Subsidiary, and Brett Torino, the Chairman of the Company’s Las Vegas Division, each of which agreements became effective on May 8, 2009 (the “effective date”). At the effective date of these agreements, Messrs. Shier and Torino resigned from all positions with the Company and its subsidiaries and their employment agreements with the Company terminated. The Company entered into these agreements with Messrs. Shier and Torino because of its inability to continue to pay salary and other compensation to Messrs. Shier and Torino under their employment agreements with the Company.
 
Under Mr. Shier’s employment separation agreement, Mr. Shier is entitled to the following severance payments:
 
(a)        A contingent severance payment in an amount equal to 2% of any future net proceeds or fees received by the company and/or the Company’s subsidiary FX Luxury, LLC (“FX Luxury”) from the sale and/or development of the Las Vegas properties owned by the Company’s Las Vegas Subsidiary, up to a maximum of $600,000, provided that such 2% may be increased (but not the maximum amount of $600,000) in the event the company enters into an equivalent severance arrangement with either its President or Executive Vice President, both of whom are still employed by the Company, that provides for a percentage greater than 2%;
 
(b)        A grant on the effective Date of immediately exercisable incentive stock options to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price equal to the fair market value, as determined under the Company’s 2007 Executive Equity Incentive Plan, of a share of the Company’s common stock on the Effective Date; and the retention of previously granted and vested stock options to purchase up to 750,000 shares of the Company’s common stock at an exercise price of $10.00 per share.
 
 
18

 
 
Under Mr. Torino’s employment separation agreement, Mr. Torino is entitled to the following severance payments:
 
(a)        A contingent severance payment in an amount equal to 2% of any future net proceeds or fees received by the company and/or FX Luxury, from the sale and/or development of the Las Vegas properties owned by the Company’s Las Vegas Subsidiary, up to a maximum of $84,375, provided that such 2% may be increased (but not the maximum amount of $84,375) in the event the company enters into an equivalent severance arrangement with either its President or Executive Vice President, both of whom are still employed by the Company, that provides for a percentage greater than 2%;
 
(b)        The retention of previously granted and vested stock options to purchase up to 80,000 shares of the Company’s common stock at an exercise price of $20.00 per share.
 
On June 23, 2009, the Company entered into letter agreements with Paul C. Kanavos, a director and the President of the Company, and Mitchell J. Nelson, Executive Vice President and General Counsel of the Company, pursuant to which Messrs. Kanavos and Nelson agreed to certain amendments to their respective employment agreements dated as of December 31, 2007 with the Company.
 
Mr. Kanavos’ letter agreement is described below and hereinafter referred to as the "Kanavos Letter Agreement" and Mr. Nelson’s letter agreement is described below and hereinafter referred to as the "Nelson Letter Agreement."
 
The Kanavos Letter Agreement modified Mr. Kanavos’ existing employment agreement with the Company as follows:
 
(a)              The term of employment was reduced to month-to-month, subject to a minimum of two months, from an initial term of 5 years (of which approximately 3.5 years remained);
 
(b)              "Change in Control" and "Constructive Termination" provisions and related termination payments (i.e., salary for 3 years and a cash bonus of $100,000) and benefits (i.e., group health, medical, dental and life insurance for 3 years) were eliminated;
 
(c)              Upon termination of Mr. Kanavos’ employment, he shall be entitled to (x) receive the full costs relating to the continuation of any group health, medical, dental and life insurance program provided through the Company for a period of 90 days after the date of termination of employment and (y) retain only those stock options that are vested on the date of termination of employment;
 
(d)              Mr. Kanavos shall not be subject to a non-competition covenant either during or after the term of his employment with the Company; and
 
(e)              The Company and Mr. Kanavos are required to use reasonable efforts to exchange mutual releases from their obligations under his employment agreement upon termination of Mr. Kanavos’ employment.
 
During the term of Mr. Kanavos’ employment, the Company will continue to pay him a base salary of $50,000 per month.
 
The Nelson Letter Agreement modified Mr. Nelson’s existing employment agreement with the Company as follows:
 
(a)              The term of employment was reduced to month-to-month, subject to a minimum of two months, from an initial term of 5 years (of which approximately 3.5 years remained);
 
(b)              "Change in Control" and "Constructive Termination" provisions and related termination payments (i.e., salary for 3 years and a cash bonus of $100,000) and benefits (i.e., group health, medical, dental and life insurance for 3 years) were eliminated;
 
(c)              Upon termination of Mr. Nelson’s employment, he shall be entitled to (x) receive the full costs relating to the continuation of any group health, medical, dental and life insurance program provided through the Company for a period of 90 days after the date of termination of employment and (y) retain only those stock options that are vested on the date of termination of employment;
 
(d)              Mr. Nelson shall not be subject to a non-competition covenant either during or after the term of his employment with the Company; and
 
(e)              The Company and Mr. Nelson are required to use reasonable efforts to exchange mutual releases from their obligations under his employment agreement upon termination of Mr. Nelson’s employment.
 
During the term of Mr. Nelson’s employment, the Company will continue to pay him a base salary of $43,750 per month.
 
 
19

 
 
In consideration of entering into the Kanavos Letter Agreement, the Company paid Mr. Kanavos a retention bonus of $150,000 and will pay him an amount equal to $95,350, the proceeds from the sale by the Company of its unused private jet hours. As of December 31, 2009, the $95,350 has not been paid.  In consideration of entering into the Nelson Letter Agreement, the Company paid Mr. Nelson a retention bonus of $131,250.
 
Neither Mr. Kanavos nor Mr. Nelson has been paid their salary since October 1, 2009.
 
On July 14, 2009, the Company’s Board of Directors appointed Gary McHenry to serve as the Company’s Principal Accounting Officer effective as of August 1, 2009, replacing Stephen Jarvis. Mr. Jarvis left the Company on August 1, 2009. Mr. McHenry, 59 years old, has served as the Company’s Las Vegas Subsidiary’s Controller, a position he has held since 2007. Mr. McHenry is a CPA and has over 10 years professional experience in the real estate, manufacturing and communications industries.
 
As of December 31, 2009, the Company had a total of 5 full-time employees.  Management considers its relations with its employees to be good.
 
Company Organization
 
The principal executive office of the Company is located at 650 Madison Avenue, New York, New York 10022 and our telephone number is (212) 838-3100.
 
Available Information
 
The Company is subject to the informational requirements of the Securities Exchange Act and electronically files reports and other information with, and electronically furnishes reports and other information to, the Securities and Exchange Commission. Such reports and other information filed or furnished by the Company may be inspected and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The Securities and Exchange Commission also maintains an Internet site that contains reports, proxy statements and other information about issuers, like us, who file electronically with the Securities and Exchange Commission. The address of the Securities and Exchange Commission’s website is http://www.sec.gov.
 
In addition, the Company makes available free of charge through its website, www.fxree.com, its Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission. This reference to our Internet website does not constitute incorporation by reference in this report of the information contained on or hyperlinked from our Internet website and such information should not be considered part of this report.
   
ITEM 1A.  RISK FACTORS
 
The risks and uncertainties described below are those that we currently believe are material to our stockholders.
 
Risks Related to Our Business
 
Our Las Vegas Property is likely to be liquidated for the benefit of the Las Vegas Subsidiary’s creditors.
 
Our Las Vegas Subsidiary is in default under the mortgage loan secured by the Las Vegas Property.  The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement.  As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustee’s sale or a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement.  The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1., The Company’s Current Business and its Financial Distress.  If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.
 
 
20

 
 
The Company has no current cash flow and cash on hand is insufficient to fund our short-term liquidity needs.
 
The Company has no current cash flow and cash on hand is not sufficient to fund our short-term liquidity needs, including the payment of executive salaries of approximately $1.2 million during 2010.
 
Even if we are able to raise additional financing, we might not be able to obtain it on terms that are not unduly expensive or burdensome to us or disadvantageous to our existing stockholders.
 
Even if we are able to raise additional cash or obtain financing through the public or private sale of debt and/or equity securities, funding from joint-venture or strategic partners, debt financing or short-term loans, the terms of such transactions may be unduly expensive or burdensome to us or disadvantageous to our existing stockholders. For example, we may be forced to sell or issue our securities at significant discounts to market, or pursuant to onerous terms and conditions, including the issuance of preferred stock with disadvantageous dividend, voting or veto, board membership, conversion, redemption or liquidation provisions; the issuance of convertible debt with disadvantageous interest rates and conversion features; the issuance of warrants with cashless exercise features; the issuance of securities with anti-dilution provisions; the issuance of high-yield securities and bank debt with restrictive covenants and security packages; and the grant of registration rights with significant penalties for the failure to quickly register. If we are able to raise debt financing, we may be required to secure the financing with all of our future business assets, which could be sold or retained by the creditor should we default in our payment obligations.
 
Our independent registered public accounting firm has rendered a report expressing substantial doubt as to our ability to continue as a going concern.
 
Our independent registered public accounting firm has issued an audit report dated April 12, 2010 in connection with the audit of the consolidated financial statements of FX Real Estate and Entertainment Inc. as of and for the period ending December 31, 2009 that includes an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern due to our need to secure additional capital in order to pay our obligations as they become due. If we are not able to obtain additional debt and/or equity financing, we may not be able to continue as a going concern and you could lose all of the value of our common stock.
 
The concentration of ownership of our capital stock with our affiliates will limit your ability to influence corporate matters.
 
Robert F.X. Sillerman, our Chairman and Chief Executive Officer and Paul C. Kanavos, our President, beneficially own in the aggregate approximately 44.8% of our outstanding common stock, and our executive officers and directors together beneficially own approximately 47.7% of our outstanding common stock. Our executive officers and directors therefore have the ability to influence our management and affairs and the outcome of matters submitted to stockholders for approval, including the election and removal of directors, amendments to our charter, approval of any equity-based employee compensation plan and any stock splits or any merger, consolidation or sale of all or substantially all of our assets. As a result of this concentrated control, unaffiliated stockholders of our company have a limited ability to meaningfully influence corporate matters and, as a result, we may take actions that our unaffiliated stockholders do not view as beneficial. As a result, the value and/or liquidity of our common stock could be adversely affected.
 
There are conflicts of interest in our relationship with Flag Luxury Properties and its affiliates, which could result in decisions that are not in the best interests of our stockholders.
 
There are conflicts of interest in our current and ongoing relationship with Flag Luxury Properties and its affiliates. These conflicts include:
 
 
•  
Certain of our employees, including Mr. Kanavos, our President, are permitted to devote a portion of their time to providing services for or on behalf of Flag Luxury Properties.
   
 
•  
Flag Luxury Properties holds a $15 million priority preferred distribution right in FX Luxury Realty which entitles it to receive an aggregate amount of $15 million (together with an accrued priority return of $0.9 million as of December 31, 2009) prior to any distributions of cash by FX Luxury Realty from the proceeds of certain predefined capital transactions. Until the preferred distribution is paid in full, we are required to use the proceeds of certain predefined capital transactions to pay the amount then owed to Flag Luxury Properties.
 
Because of the leverage that Flag Luxury Properties has in negotiating with us, these agreements may not be as beneficial to our stockholders as they would be if they were negotiated at arms’ length and we cannot guarantee that future arrangements with Flag Luxury Properties will be negotiated at arms’ length. For additional information concerning these agreements, please see generally the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
 
 
21

 
 
We have potential business conflicts with certain of our executive officers because of their relationships with CKX and/or Flag Luxury Properties and their ability to pursue business activities for themselves and others that may compete with our business activities.
 
Potential business conflicts exist between us and certain of our executive officers, including Messrs. Sillerman and Kanavos, in a number of areas relating to our past and ongoing relationships, including:
 
 
•  
Mr. Sillerman’s cross-ownership and dual management responsibilities relating to CKX, Flag Luxury Properties and us;
   
 
•  
Mr. Kanavos’ cross-ownership and dual management responsibilities relating to Flag Luxury Properties and us;
   
 
•  
Employment agreements with certain of our executive officers specifically provide that a certain percentage of their business activities may be devoted to Flag Luxury Properties or CKX; and
   
 
•  
Messrs. Sillerman and Kanavos will be entitled to receive their pro rata participation, based on their ownership in Flag Luxury Properties, of the $15 million priority distribution of cash from the proceeds of certain predefined capital transactions when received by Flag Luxury Properties.
 
We may not be able to resolve any potential conflicts with these executive officers. Even if we do so, however, because of their ownership interest in us, these executive officers will have leverage with negotiations over their performance that may result in a resolution of such conflicts that may be less favorable to us than if we were dealing with another third party.
 
We have entered into a number of related party transactions with CKX and Flag Luxury Properties and their affiliates on terms that some stockholders may consider not to be in their best interests.
 
We were a party to a shared services agreement with CKX until June 23, 2009, pursuant to which employees for each company, including management level employees, provide services for the other company. In addition, certain of our employees, including Mr. Kanavos, our President, and Mitchell J. Nelson, our General Counsel, are permitted to devote a portion of their time providing services for or on behalf of Flag Luxury Properties.
 
CKX, as a company subject to the rules of The NASDAQ Global Market, is subject to certain rules regarding “affiliated” transactions, including the requirement that all affiliated transactions be approved by a majority of the independent members of the board of directors. Based on Mr. Sillerman’s ownership interests in Flag Luxury Properties, the June 2007 transactions between CKX, Flag Luxury Properties and our company were deemed “affiliated” and therefore subject to the procedural requirements related to such transactions. Because we were a private company at the time we entered into these transactions, and Flag Luxury Properties remains a private company, and not subject to affiliated and related party transaction restrictions, neither Flag Luxury Properties nor our company was represented by a special committee or any independent financial advisor in the negotiation and review of the transactions with CKX. As such, the fairness of the transactions between CKX, Flag Luxury Properties and FX Luxury Realty, from the point of view of Flag Luxury Properties and our company, was determined by management of Flag Luxury Properties, including Messrs. Sillerman and Kanavos, each of whom has numerous conflicting interests relating to their cross-ownership and managerial roles in the various entities. Based on these conflicting interests, some stockholders may not consider these transactions to have been in the best interest of our stockholders.

We may lose the services of our key personnel, including certain senior executives, if we are not able to satisfy our payment obligations under their agreements.
 
Our performance is dependent on the continued efforts of our executive officers with whom we have employment agreements. Due to our current financial situation, there can be no guarantee that we will be able to continue to make required payments under the executive employment agreements, which amounts total $1.2 million for 2010. A failure to make a payment under an executive employment agreement when due could result in a Termination without Cause under such agreement, which could lead to the departure of the executive in question as well as the acceleration of the obligation to make significant additional payments to the executive in question. The loss of the services of any of our executive officers or other key employees could adversely affect our business.  Such payments have not been made since October 1, 2009.
 
 
22

 
 
We continue to need to enhance our internal controls and financial reporting systems to comply with the Sarbanes-Oxley Act of 2002.
 
We are subject to reporting and other obligations under the Securities and Exchange Act of 1934, as amended, and Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires us to assess and attest to the effectiveness of our internal control over financial reporting.  The loss of certain key accounting and finance personnel and termination of the Shared Services Agreement with CKX, coupled with our limited financial and human resources has materially affected our internal controls over financial reporting, including internal controls over accounting for stock based compensation, accounting for long-lived assets and the financial statement close process.  Due to the impact of these events on our internal controls over financial reporting in these areas, significant adjustments were necessary to present the financial statements in accordance with generally accepted accounting principles.  The Company currently does not have, nor does it expect to have in the future, the capacity to devise and implement a plan to remediate these material weaknesses.

As of December 31, 2009, the Company was unable to remediate these material weaknesses because of its limited financial and human resources.
 
Risks Related to Our Common Stock
 
Substantial amounts of our common stock and other equity securities could be sold in the near future, which could depress our stock price.
 
We cannot predict the effect, if any, that market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price of our common stock prevailing from time to time.
 
All of the outstanding shares of common stock belonging to officers, directors and other affiliates are currently “restricted securities” under the Securities Act. Approximately 55 million shares of these restricted securities are eligible for sale in the public market at prescribed times pursuant to Rule 144 under the Securities Act, or otherwise. Sales of a significant number of these shares of common stock in the public market or the appearance of such sales could reduce the market price of our common stock and could negatively impact our ability to sell equity in the market to fund our business plans. In addition, we expect that we will be required to issue a large amount of additional common stock and other equity securities as part of our efforts to raise capital to fund our development plans. The issuance of these securities could negatively effect the value of our stock.
 
We do not anticipate paying cash dividends on our common stock in the foreseeable future, and the lack of dividends may have a negative effect on our stock price.
 
We currently intend to retain any future earnings to support operations and to finance expansion and therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our credit facilities prohibit, and the terms of any future debt agreements we may enter into are likely to prohibit or restrict, the payment of cash dividends on our common stock.
 
Our issuance of additional shares of our preferred stock, common stock, or options or warrants to purchase those shares, would dilute proportionate ownership and voting rights.
 
Our issuance of shares of preferred stock, common stock, or options or warrants to purchase those shares, could negatively impact the value of a stockholder’s shares of common stock as the result of preferential voting rights or veto powers, dividend rights, disproportionate rights to appoint directors to our board, conversion rights, redemption rights and liquidation provisions granted to preferred stockholders, including the grant of rights that could discourage or prevent the distribution of dividends to stockholders, or prevent the sale of our assets or a potential takeover of our company that might otherwise result in stockholders receiving a distribution or a premium over the market price for their common stock.
 
We are entitled, under our certificate of incorporation to issue up to 300 million common and 75 million “blank check” preferred shares. After taking into consideration our outstanding common and preferred shares as of April 9, 2010, we will be entitled to issue up to 234,596,219 additional common shares and 74,998,850 preferred shares. Our board may generally issue those common and preferred shares, or options or warrants to purchase those shares, without further approval by our stockholders based upon such factors as our board of directors may deem relevant at that time. Any preferred shares we may issue shall have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.
 
We cannot give you any assurance that we will not issue additional common or preferred shares, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.
 
 
23

 
 
Certain provisions of Delaware law and our charter documents could discourage a takeover that stockholders may consider favorable.
 
Certain provisions of Delaware law and our certificate of incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
 
 
•  
Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, subject to the right of the stockholders to elect a successor at the next annual or special meeting of stockholders, which limits the ability of stockholders to fill vacancies on our board of directors.
   
 
•  
Our stockholders may not call a special meeting of stockholders, which would limit their ability to call a meeting for the purpose of, among other things, voting on acquisition proposals.
   
 
•  
Our by-laws may be amended by our board of directors without stockholder approval, provided that stockholders may repeal or amend any such amended by-law at a special or annual meeting of stockholders.
   
 
•  
Our by-laws also provide that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may not be taken by written action in lieu of a meeting.
   
 
•  
Our certificate of incorporation does not provide for cumulative voting in the election of directors, which could limit the ability of minority stockholders to elect director candidates.
   
 
•  
Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company.
   
 
•  
Our board of directors may authorize and issue, without stockholder approval, shares of preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire our company.
 
As a Delaware corporation, by an express provision in our certificate of incorporation, we have elected to “opt out” of the restrictions under Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
The following table sets forth certain information with respect to the Company’s principal locations as of December 31, 2009. These properties were leased or owned by the Company for use in its operations. We believe that our facilities will be suitable for the purposes for which they are employed, are adequately maintained and will be adequate for current requirements and projected growth.
 
Location
 
Name of Property
 
Type/Use of Property
 
Approximate Size
 
Owned or Leased
Las Vegas, NV
 
Corporate Offices
 
Office Operations
 
1,700 sq. ft.
 
Lease expires in 2010
Las Vegas, NV
 
Commercial Property
 
Land and Building
 
17.72 acres
 
Owned (1)
_____________
 
(1)
 
Our Las Vegas Property is under the control of a court appointed receiver and is likely to be liquidated through a trustee’s sale or a bankruptcy for the benefit of the Las Vegas Subsidiary’s creditors.
 
ITEM 3. LEGAL PROCEEDINGS

On February 3, 2009, the Las Vegas Subsidiary completed the previously announced settlement with Hard Carbon, LLC, an affiliate of Marriott International, Inc. for claims relating to the construction of a parking garage and reimbursement for road widening work performed by Marriott on and adjacent to the Company’s property off of Harmon Avenue in Las Vegas. The Las Vegas Subsidiary paid $4.3 million in full settlement of the claims, which amount was funded from a reserve fund that had been established in that amount and for this purpose with the lenders under the mortgage loan on the Company’s Las Vegas Property
 
 
24

 
 
On June 5, 2009, the first lien lenders filed in the District Court for Clark County, Nevada a complaint for declaratory relief seeking the appointment of a receiver, and a petition for the appointment of a receiver, for the Las Vegas Property as a result of the Company’s default under the $259 million first lien mortgage loan (Case No.: A-09-591831-B, Dept. No.: XIII). On June 19, 2009, the District Court of Clark County, Nevada granted the first lien lenders’ petition for the appointment of a receiver, and on June 23, 2009, the Court entered the order appointing the receiver. Under the order, Larry L. Bertsch, of Larry L. Bertsch, CPA & Associates, was appointed the receiver (the “Receiver”) of the Las Vegas Property and, subject to the loan documents, all personal, tangible and intangible, intellectual and commercial property, business, collateral, rights and obligations located thereon, including but not limited to all of the leasehold interests on the Las Vegas Property as owned and/or controlled by the Las Vegas Subsidiaries, other than the collateral proceeds held by the first lien lenders (collectively, the “Receivership Property”).
 
Under the terms of the Order:
 
 
•  
The Receiver took immediate and exclusive possession of the Receivership Property and is holding, operating, managing and leasing the Receivership Property;
   
 
•  
The Receiver is required to take all commercially reasonable efforts to diligently analyze, evaluate, report with regard to, organize and categorize information relating to the Receivership Property so as to assist in the preparation for sale of the Receivership Property at foreclosure;
   
 
•  
The Receiver is required to preserve the Receivership Property from loss, removal, material injury, destruction, substantial waste and loss of income there from; and
   
 
•  
The Company’s Las Vegas Subsidiaries were relieved of possession of, and any further obligation to administer, the Receivership Property.
 
As the Company continues to hold legal title to the property and further given that the receivership has not legally discharged the liability for debt secured by the Las Vegas Property, the Company continues to consolidate the subsidiary that owns the property.
 
On November 12, 2009, the second lien lenders under the mortgage loans initiated litigation against the Company, the Las Vegas Subsidiary and others contesting the validity of the Old Lock Up Agreement.  Upon entry into the New Lock Up Agreement, the participating second lien lenders agreed to dismiss without prejudice their pending litigation against the first lien lenders, the Company, the Las Vegas Subsidiary (and its predecessor entities) and others contesting the validity of the Old Lock Up Agreement. The participating second lien lenders had agreed to grant the named parties to such pending litigation a release therefrom upon confirmation of the prepackaged chapter 11 bankruptcy case’s plan of liquidation contemplated under the New Lock Up Agreement.

We are also subject to certain claims and litigation in the ordinary course of business. It is the opinion of management that the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
ITEM 4.  RESERVED
 
PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES>
 
Market Information
 
From January 10, 2008 until April 24, 2009, our common stock, par value $.01 per share (the “Common Stock”) was listed and traded on The NASDAQ Global Market (R) under the ticker symbol “FXRE.” Prior to January 10, 2008 there was no established public trading market for our Common Stock. On April 24, 2009, the Company filed a Form 25 with the Securities and Exchange Commission to voluntarily delist its common stock from The NASDAQ Stock Market, which delisting became effective on May 4, 2009. The Company’s common stock is currently quoted on the Pink Sheets under the symbol FXRE.PK.  The following table sets forth the high and low closing sales prices for our Common Stock for the quarterly periods for the years ended December 31, 2009 and 2008. 
 
 
25

 
 
   
2009
 
   
High
   
Low
 
   
December 31, 2009
 
$
0.25
   
$
0.07
 
September 30, 2009
 
$
0.25
   
$
0.03
 
June 30, 2009
 
$
0.26
   
$
0.05
 
March 31, 2009
 
$
0.78
   
$
0.05
 

   
2008
 
   
High
   
Low
 
   
December 31, 2008
 
$
1.03
   
$
0.13
 
September 30, 2008
 
$
2.02
   
$
1.04
 
June 30, 2008
 
$
6.07
   
$
1.75
 
March 31, 2008
 
$
7.88
   
$
4.65
 

As of April 9, 2010, there were 589 holders of record of our Common Stock.
 
Dividend Policy
 
We have not paid and have no present intentions to pay cash dividends on our Common Stock. In addition, the terms of mortgage loan, as described elsewhere herein, and the terms of any future debt agreements we may enter into are likely to prohibit or restrict, the payment of cash dividends on our Common Stock.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The table below shows information with respect to our equity compensation plans and individual compensation arrangements as of December 31, 2009.
 
 
Plan Category
 
(a)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
(b)
Weighted-Average Exercise Price of Outstanding Options Warrants, and Rights
   
(c)
Number of
Securities
Remaining
Available For
Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
 
      (#)  
($)
      (#)  
Equity compensation plans approved by security holders
    10,962,794     $ 1.57       377,206  
                         
Equity compensation plans not approved by security holders
                 
 
For a description of our 2007 Executive Equity Incentive Plan and 2007 Long-Term Incentive Compensation Plan, see Note 13 to our audited Consolidated Financial Statements included in this Annual Report on Form 10-K.
 
 
26

 
ITEM 6. SELECTED FINANCIAL DATA
 
Prior to May 10, 2007, FXRE was a company with no operations. As a result Metroflag is considered to be the predecessor company (the “Predecessor”). To assist in the understanding of the results of operations and balance sheet data of the Company, we have presented the historical results of the Predecessor. The selected consolidated financial data was derived from the audited consolidated financial statements of the Company as of and for the year ended December 31, 2009. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere herein.
 
The selected statement of operations data for the period January 1, 2007—May 10, 2007 represents the pre-acquisition operating results of Metroflag (as Predecessor) in 2007.
 
Our selected statement of operations data for the period from May 11, 2007 through December 31, 2007 includes the results of Metroflag accounted for under the equity method through July 5, 2007 and consolidated thereafter. Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of the conditions that affect the comparability of the information included in the selected historical financial data.

 
(Amounts in thousands, except share information)
                       
   
Metroflag (Predecessor)
     
FX Real Estate and Entertainment, Inc
 
   
January 1, 2007 —
   
May 11, 2007 —
   
Year Ended
   
Year Ended
 
   
May 10,
   
December 31,
   
December 31,
   
December 31,
 
   
2007
   
2007 (a)
   
2008
   
2009
 
Statement of Operations Data:
                               
Revenue
 
$
2,079
   
$
3,070
   
$
6,009
    $
18,852
 
Operating expenses (excluding depreciation and amortization and impairment of land) (b)
   
839
     
30,016
     
39,048
     
10,293
 
Depreciation and amortization
   
128
     
116
     
513
     
2,026
 
Impairment of land (c)
   
     
     
325,080
     
79,087
 
Operating income (loss)
   
1,112
     
(27,062
)
   
(358,632
)
   
(72,554)
 
Interest income (expense), net
   
(14,444
)
   
(30,657
)
   
(48,654
)
   
(41,613)
 
Other income (expense)
   
     
(6,358
)
   
(41,670
)
   
(517)
 
Loss from retirement of debt
   
(3,507
     
     
     
 
Loss before equity in earnings (loss) of affiliate, minority interest and incidental operations
   
(16,839
)
   
(64,077
)
   
(448,956
)
   
(114,684)
 
Equity in earnings (loss) of affiliate
   
     
(4,969
)
   
     
 
Loss from incidental operations
   
(7,790
)
   
(9,373
)
   
(12,881
)
   
 
                                 
Net loss
 
$
 (24,629
)
 
$
(78,419
)
 
$
(461,837
)
   
(114,684
)
                                 
Less:  net loss attributable to non-controlling interest
   
     
680
     
22
     
 
Net loss attributable to FX Real Estate and Entertainment Inc.
   
(24,629)
     
(77,739)
     
(461,815)
     
(144,584)
 
                                 
Basic and diluted loss per common share
         
$
(1.98
)
 
$
(9.67
)
   
(2.16)
 
Average number of common shares outstanding
           
 39,290,247
     
 47,773,323
     
53,118,438
 

(a)
 
For the period May 11, 2007 to July 5, 2007, we accounted for our interest in Metroflag under the equity method of accounting because we did not have control with our then 50% ownership interest. Effective July 6, 2007, with our purchase of the 50% of Metroflag that we did not already own, we consolidated the results of Metroflag.
   
(b)
 
In 2005, Metroflag adopted a formal redevelopment plan covering certain of the properties which resulted in the operations relating to these properties being reclassified as incidental operations in accordance with Statement of Financial Accounting Standards No. 67, Accounting for the Costs and Initial Operations of Real Estate Projects . In the fourth quarter of 2007, the Company recorded a write-off of approximately $12.7 million for capitalized costs that were deemed to be not recoverable based on changes made to the Company’s redevelopment plans for the Las Vegas Property. The year ended December 31, 2008 also included an impairment charge of $10.7 million related to the write-off of capitalized development costs as a result of the Company’s determination in the third quarter of 2008 not to proceed with our originally proposed plan for the redevelopment plan of the Las Vegas Property.
     
(c)
 
As a result of the current global recession and financial crisis and based upon a valuation report obtained for the Las Vegas Property from an independent appraisal firm combined with certain assumptions made by management, the Company recorded an impairment charge to land of $2.1 million at December 2009 and $77  million at June 2009. The charges reduced the carrying value of the Las Vegas Property to its estimated fair value of $137.7 million which management believes to be reasonable.


 
27

 
 
 
   
FX Real Estate and Entertainment, Inc.
 
   
(amounts in thousands)
 
   
As of December 31,
 
   
2007
   
2008
   
2009
 
Balance Sheet Data:
                       
Cash and cash equivalents
 
$
2,559
   
$
2,659
   
$
343
 
Other current assets
   
112,550
     
35,548
     
3,001
 
Investment in real estate
   
561,653
     
218,800
     
137,700
 
Total assets
   
 677,984
     
 258,070
     
141,044
 
Current liabilities (excluding current portion of debt)
   
24,945
     
22,262
     
40,168
 
Debt
   
512,694
     
475,391
     
454,000
 
Total liabilities
   
537,830
     
497,962
     
494,168
 
Members’ equity/Stockholders’ equity
   
139,974
     
(239,892
)
   
(353,124
)
 
FORWARD LOOKING STATEMENTS
 
In addition to historical information, this Annual Report on Form 10-K (this “Annual Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or other similar expressions, although not all forward-looking statements contain these identifying words. All statements in this Annual Report regarding our future strategy, future operations, projected financial position, estimated future revenue, projected costs, future prospects, and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Important risks that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report and in our subsequent filings with the Securities and Exchange Commission (“SEC”). Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Annual Report was filed with the SEC. We expressly disclaim any obligation to issue any updates or revisions to our forward-looking statements, even if subsequent events cause our expectations to change regarding the matters discussed in those statements. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our stockholders.
 
 
28

 
 
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis of financial condition and results of operations of the Company (and its predecessor) should be read in conjunction with the historical audited consolidated financial statements and footnotes of Metroflag and the Company’s historical audited consolidated financial statements and notes thereto included elsewhere in this Annual Report. Our future results of operations may change materially from the historical results of operations reflected in our historical audited consolidated financial statements.
 
FX Real Estate and Entertainment Inc. was organized as a Delaware corporation in preparation for the CKX Distribution. On September 26, 2007, holders of common membership interests in FX Luxury Realty, LLC, a Delaware limited liability company, exchanged all of their common membership interests for shares of our common stock. Following this reorganization, FX Real Estate and Entertainment owns 100% of the outstanding common membership interests of FX Luxury Realty. We have held our assets and conducted our operations through FX Luxury Realty and its subsidiaries. All references to FX Real Estate and Entertainment for the periods prior to the date of the reorganization shall refer to FX Luxury Realty and its consolidated subsidiaries. For all periods as of and subsequent to the date of the reorganization, all references to FX Real Estate and Entertainment shall refer to FX Real Estate and Entertainment and its consolidated subsidiaries, including FX Luxury Realty.
 
FX Luxury Realty was formed on April 13, 2007. On May 11, 2007, Flag Luxury Properties, a privately owned real estate development company, contributed to FX Luxury Realty its 50% ownership interest in the Metroflag entities in exchange for all of the membership interests of FX Luxury Realty. On June 1, 2007, FX Luxury Realty acquired 100% of the outstanding membership interests of RH1, LLC and Flag Luxury Riv, LLC, which together own shares of common stock of Riviera Holdings Corporation, a publicly traded company which owns and operates the Riviera Hotel and Casino in Las Vegas, Nevada, and the Blackhawk Casino in Blackhawk, Colorado. On June 1, 2007, CKX contributed $100 million in cash to FX Luxury Realty in exchange for a 50% common membership interest therein. As a result of CKX’s contribution, each of CKX and Flag Luxury Properties owned 50% of the common membership interests in FX Luxury Realty, while Flag Luxury Properties retained a $45 million preferred priority distribution in FX Luxury Realty.
 
On May 30, 2007, FX Luxury Realty entered into an agreement to acquire the remaining 50% ownership interest in the Metroflag entities from an unaffiliated third party for total consideration of $180 million in cash, $172.5 million of which was paid in cash at closing and $7.5 million of which was an advance payment made in May 2007 (funded by a $7.5 million loan from Flag Luxury Properties). The cash payment at closing on July 6, 2007 was funded from $92.5 million cash on hand and $105.0 million in additional borrowings under the Mortgage Loan, which amount was reduced by $21.3 million deposited into a restricted cash account to cover debt service commitments and $3.7 million in debt issuance costs. The $7.5 million loan from Flag Luxury Properties was repaid on July 9, 2007. As a result of this purchase, FX Luxury Realty owns 100% of Metroflag, and therefore has consolidated the operations of Metroflag since July 6, 2007.
 
The historical financial statements of Metroflag and related management’s discussion and analysis of financial condition and results of operations reflect Metroflag’s ownership of 100% of the Las Vegas Property. Therefore, these financial statements are not directly comparable to FX Luxury Realty’s financial statements prior to July 6, 2007 which account for FX Luxury Realty’s 50% ownership of Metroflag under the equity method of accounting. As a result of the acquisition of the remaining 50% interest in Metroflag on July 6, 2007, we have made changes to the historical capital and financial structure of our company, which are noted below under “— Liquidity and Capital Resources.”
 
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the historical financial statements and notes thereto for Metroflag and “Selected Historical Financial Information” included elsewhere herein. However, this Management’s Discussion and Analysis of Financial Condition and Results of Operations and such historical financial statements and information should not be relied upon by you to evaluate our business and financial condition going forward because they are not necessarily representative of our planned business going forward or indicative of our future operating and financial results. For example, as described below and in the historical financial statements, our predecessor Metroflag derived revenue primarily from commercial leasing activities on the properties comprising the Las Vegas Property. As a result of the 2008 disruption in the capital markets and the 2008 economic downturn in the United States, and Las Vegas in particular, in the third quarter of 2008, we determined not to proceed with our originally proposed plan for the redevelopment plan of the Las Vegas Property and intended to consider alternative plans with respect to the development of the property. Since then, however, the Las Vegas Subsidiaries have defaulted on the $475 million mortgage loan on the Las Vegas Property.  As a consequence of such default, the first lien lenders have been pursuing their remedies, including taking the steps necessary as a precondition for a trustee’s sale.  The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement.  As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustees’ sale or a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement.  If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.
 
 
29

 

The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1., The Company’s Current Business and its Financial Distress.
 
FX Real Estate and Entertainment Operating Results
 
Our results for the year ended December 31, 2009 reflected revenue of $18.9 million and operating expenses of $91.4 million. The Company incurred corporate overhead expenses of $1.4 million for the year ended December 31, 2009. Included in corporate overhead expenses for the year ended December 31, 2009 are $0.6 million in non-cash compensation and $0.3 million in shared services charges and professional fees, including legal and accounting costs. Our operating expenses for the year ended December 31, 2009 also included an impairment  charge on land of $79.1 million (see below). The Company operated the Las Vegas Property through its Las Vegas Subsidiaries until June 23, 2009, when a receiver was appointed as a result of the first lien lenders exercising remedies under the loan default (see Item 3, Legal Proceedings for a description of the receiver’s powers pursuant to the court order appointing him).  After the Las Vegas Subsidiaries’ default on the mortgage loan on January 6, 2009 and until June 23, 2009, the property revenues were paid into a collateral account maintained under the supervision of the first lien lender and the Las Vegas Subsidiaries applied for disbursements to pay for expenses incurred in connection with property operations.  After that date, the receiver was in control of operating, leasing, and managing the property, and the Las Vegas Subsidiaries were no longer involved in such activities.  For the period in which the receiver was in control, the Company’s results are reported in reliance on the financial records maintained and provided to it by the receiver.

As a result of the current global recession and financial crisis and based upon a valuation report obtained for the Las Vegas Property from an independent appraisal firm combined with certain assumptions made by management, the Company recorded an impairment charge to land of $79.1 million. This charge reduced the carrying value of the Las Vegas Property to its estimated fair value of $137.7 million which management believes to be reasonable. The current global financial crisis has had a particularly negative impact on the Las Vegas real estate market, including a significant reduction in the number of visitors and per visitor spending, the abandonment of, and/or loan defaults related to, several major new hotel and casino development projects as well as publicly expressed concerns regarding the financial viability of several of the largest hotel and casino operators in the Las Vegas market. These factors combined with the lack of availability of financing for development has resulted in a near cessation of land sales on the Las Vegas strip. Though the Company believes the $137.7 million carrying value ascribed to the property is fair and reasonable based on current market conditions, the lack of recent comparable sales and the rapidly changing economic environment means that no assurance can be given that the value ascribed by the Company will prove to be accurate or even within a reasonable range of the actual sales price that would be received in the event the property is sold as a result of the loan default. A sale of the land by the Company or upon foreclosure by the lenders at or near the adjusted carrying value of $137.7 million would be insufficient to fully repay the outstanding mortgage loan and therefore would result in the Company receiving no net cash proceeds.
 
As of December 31, 2008, the Company owned 1,410,363 shares of common stock of Riviera Holdings Corporation (the “Riv Shares”), and 161,758 shares were held in a trust for the benefit of the Company. For the year ended December 31, 2008, the Company recorded to other expense other than temporary impairments of $41.7 million, related to the Riv Shares due to the decline in the stock price of Riviera Holdings Corporation. The Company has determined that the losses are other than temporary due to the Company’s evaluation of the underlying reasons for the decline in stock price, including weakening conditions in the Las Vegas market where Riviera Holdings Corporation operates, and the Company’s uncertain ability to hold the Riv Shares for a reasonable amount of time sufficient for an expected recovery of fair value. Prior to the impairment recorded as of June 30, 2008, the Company did not consider the losses to be other than temporary and reported unrealized gains and losses in other comprehensive income as a separate component of stockholders’ equity. As of April 17, 2009, the Company had sold all of the RIV Shares.
 
For the year ended December 31, 2009, we had net interest expense of $41.6 million.
 
For the year ended December 31, 2009, the Company did not record a provision for income taxes because the Company has incurred taxable losses since its formation in 2007. As it has no history of generating taxable income, the Company reduces any deferred tax assets by a full valuation allowance. The Company did record income tax expense due to an estimated gain on a partnership transfer with negative basis from FXLR LLC to FXL, LLC, resulting in an estimated alternative minimum taxable income of $1.5 million. The alternative minimum tax would be estimated at $0.3 million at the applicable tax rate.
 
Our results for the period from inception (May 11, 2007) to December 31, 2007 reflects our accounting for our investment in Metroflag as an equity method investment from May 11, 2007 through July 5, 2007 because we did not maintain control, and on a consolidated basis from July 6, 2007 through December 31, 2007 due to the acquisition of the remaining 50% of Metroflag that we did not already own on July 6, 2007.
 
 
30

 
 
On September 26, 2007, we exercised the Riviera option, acquiring 573,775 shares in Riviera for $13.2 million. We recorded a $6.4 million loss on the exercise, reflecting a decline in the price of Riviera’s common stock from the date the option was acquired. The loss was recorded in other expense in the consolidated statements of operations.
 
Our results for the period from May 11, 2007 to December 31, 2007 reflected $3.1 million in revenue and $30.1 million in operating expenses. Included in operating expenses is $10.0 million in license fees, representing the 2007 guaranteed annual minimum royalty payments under the license agreements with Elvis Presley Enterprises and Muhammad Ali Enterprises. Our operating expenses in 2007 include an impairment charge related to the write-off of approximately $12.7 million of capitalized development costs as a result of a change in development plans for the Las Vegas Property.
 
For the period from May 11, 2007 to December 31, 2007, we had $30.7 million in net interest expense, including $30.5 million for Metroflag which was included in our consolidated results commencing July 6, 2007.
 
We are subject to federal, state and city income taxation. Our operations predominantly occur in Nevada, and Nevada does not impose a state income tax. As such, we should incur minimal state income taxes.
 
We have calculated our income tax liability based upon a short taxable year as we were initially formed on June 15, 2007. While we are considered the successor of FX Luxury Realty and the Metroflag Entities for purposes of U.S. generally accepted accounting principles (“GAAP”), it should not be considered as a successor for purposes of U.S. income tax. Thus, we should not have inherited any tax obligations or positions from these other entities.
 
We expect to generate net operating losses in the foreseeable future and, therefore, have established a valuation allowance against the deferred tax asset.
 
Metroflag Operating Results
 
The Las Vegas Property is occupied by a motel and several retail and commercial tenants with a mix of short and long-term leases. The historical business of Metroflag was to acquire the parcels and to engage in commercial leasing activities. All revenues are derived from these commercial leasing activities and include minimum rentals, percentage rentals and common area maintenance on the retail space.
 
In 2007, we adopted formal redevelopment plans covering certain of the parcels comprising the Las Vegas Property which resulted in the operations related to these properties being reclassified as incidental operations in accordance with adopted accounting standards. In late September 2008, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Las Vegas Property and to continue the site’s current commercial leasing activities until such time as an alternative development plan, if any, is adopted. As a result, effective October 1, 2008, the Company no longer classifies these operations of Metroflag as incidental operations. Therefore, all operations beginning in the fourth quarter of 2008 are included as part of income (loss) from operations.
 
Given the significance of the Metroflag’s operations to our current and future results of operations and financial condition, we believe that an understanding of Metroflag’s reported results, trends and performance is enhanced by presenting its results of operations on a stand-alone basis for the years ended December 31, 2009 and 2008, also, December 31, 2008 and 2007. This stand-alone financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place as of January 1, 2007.

 
31

 
 
Results for the Year Ended December 31, 2009 and 2008
 
 
(amounts in thousands)
 
Year
Ended
December 31,
2009
   
Year
Ended
December 31,
2008
   
Variance
 
Revenue
  $ 18,852     $ 6,009     $ 12,843  
Operating expenses (excluding depreciation and amortization and impairment of land)
    (10,293 )     (18,509 )     8,216  
Impairment of land
    (79,087 )     (325,080 )     245,993  
Depreciation and amortization
    (2,026 )     (513 )     (1,513 )
 
                       
Income (loss) from operations
    (72,554 )     (338,093 )     265,539  
Interest expense, net and other
    (42,130 )     (47,599 )     5,469  
Loss from early retirement of debt
                 
Loss from incidental operations
          (12,881 )     12,881  
 
                       
Net loss
  $ (114,684 )   $ (398,573 )   $ 283,889  
 
Metroflag Results for the Year Ended December 31, 2008 and 2007
 
   
Year
Ended
December 31,
2008
   
January 1, 2007
Through
May 10,
2007
   
May 11,2007
through
December 31,
2007
   
2007
   
Variance
 
Revenue
  $ 6,009     $ 2,079     $ 4,012     $ 6,091     $ (82 )
Operating expenses (excluding depreciation and amortization and impairment of land)
    (18,509 )     (839 )     (13,712 )     (14,551 )     (3,958 )
Impairment of land
    (325,080 )                       (325,080 )
Depreciation and amortization
    (513 )     (128 )     (171 )     (299 )     (214 )
                                         
Income (loss) from operations
    (338,093 )     1,112       (9,871 )     (8,759 )     (329,334 )
Interest expense, net
    (47,599 )     (14,444 )     (37,294 )     (51,738 )     4,139  
Loss from early retirement of debt
          (3,507 )           (3,507 )     3,507  
Loss from incidental operations
    (12,881 )     (7,790 )     (12,371 )     (20,161 )     7,280  
                                         
Net loss
  $ (398,573 )   $ (24,629 )   $ (59,536 )   $ (84,165 )   $ (314,408 )
 
Revenue
 
Revenue increased $12.8 million, or 214.0% in 2009 as compared to 2008 and decreased $0.1 million, or 1.4%, in 2008 as compared to 2007 due primarily to the elimination of classifying operations to incidental operations for all of 2009 and to the classification of the operations of an additional property as incidental operations for the first nine months of 2008 and a decrease in minimum rent due to various rent concessions and a decrease in tenants, offset by Metroflag reporting all operations as part of income (loss) from operations for the fourth quarter of 2008.
 
 
32

 
 
Operating Expenses

Operating expenses decreased $8.2 million, or 44.4% in 2009 as compared to 2008 and  increased $4.0 million, or 27.2% in 2008 primarily due to the reversal of license fee expense of $10.0 million in 2009 and the determination not to continue the redevelopment plan which included major cost reductions including salaries and wages and due to Metroflag reporting all operations as part of income (loss) from operations for the fourth quarter of 2008 and increased payroll costs, including an allocation of corporate-funded costs of $0.5 million, offset by an impairment charge of $10.7 million related to the write-off of capitalized development costs as a result of the Company’s determination not to continue the redevelopment plan for the Las Vegas Property as originally proposed in 2008, down from a $12.7 million write-off of capitalized development costs in 2007.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expense increased $1.5 million, or 295%, in 2009 as compared to 2008 and $0.2 million, or 71.6%, in 2008 as compared to 2007 due primarily to Metroflag reporting all operations as part of income (loss) from operations for all of 2009 and for the fourth quarter of 2008, offset by a decrease due to the revised longer useful lives used for buildings and improvements for the fourth quarter of 2008.
 
Impairment of Land
 
As noted above, the Company recorded an impairment charge to land of $79.1 million for the year ended December 31, 2009 and of $325.1 million for the year ended December 31, 2008. This charge reduces the carrying value of the Company’s total investment in real estate to $137.7 million. There is no tax benefit recorded associated with this charge because the Company has generated losses since its formation in 2007 and has no history of generating taxable income.
 
Interest Income/Expense
 
Interest expense, net, decreased $7.0 million, or 14.5% in 2009 as compared to 2008 and $4.1 million, or 8.0%, in 2008 as compared to 2007 due to a decrease in amortization related to deferred financing costs and lower interest rates in the 2009 and 2008 periods.
 
Loss from Incidental Operations

Loss from incidental operations decreased $7.3 million, or 36.1%, in 2008 as compared to 2007 primarily due to the Company reporting all operations as part of income (loss) from operations for the fourth quarter of 2008, offset in part by an additional property being classified as incidental operations for the first nine months of 2008 as compared to 2007. Loss from incidental operations was eliminated as the Company reported all operations as part of income (loss) from operations in 2009.
Liquidity and Capital Resources
 
Introduction  — The historical financial statements and financial information of our predecessor, the Metroflag entities, included in this annual report are not necessarily representative of our planned business going forward or indicative of our future operating and financial results.
 
As a result of the 2008 disruption in the capital markets and the 2008 economic downturn in the United States, and Las Vegas in particular, in the third quarter of 2008, we determined not to proceed with our originally proposed plan for the redevelopment plan of the Las Vegas Property and intended to consider alternative plans with respect to the development of the property. Since then, however, as described below, the Las Vegas Subsidiary has defaulted on the $475 million mortgage loan on the Las Vegas Property. The Company operated the Las Vegas Property through its Las Vegas Subsidiaries until June 23, 2009, when a receiver was appointed as a result of the first lien lenders exercising remedies under the loan default (see Item 3, Legal Proceedings for a description of the receiver’s powers pursuant to the court order appointing him).  After the Las Vegas Subsidiaries’ default on the mortgage loan on January 6, 2009 and until June 23, 2009, the Property revenues were paid into a collateral account maintained under the supervision of the first lien lender and the Las Vegas Subsidiaries applied for disbursements to pay for expenses incurred in connection with property operations.  After that date, the receiver was in control of operating, leasing, and managing the property, and the Las Vegas Subsidiaries were no longer involved in such activities.  For the period in which the receiver was in control, the Company’s results are reported in reliance on the financial records maintained and provided to it by the receiver.

The Company currently has no cash flow and cash on hand is not sufficient to repay the past due amount on the mortgage loan or otherwise fund our short-term liquidity needs, including the payment of executive salaries of approximately $1.2 million during 2010. The financial crisis and global recession has and may continue to adversely affect our ability to fund our short-term liquidity needs. If we are unable to secure additional financing, we may not be able to retain our senior management or satisfy terms of existing employment agreements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
 
 
33

 
 
In addition, as a result of the Company’s Las Vegas Subsidiaries’ default on its $475 million mortgage loan, the Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement.  As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either the trustee’s sale or a bankruptcy filing under the New Lock Up Agreement or the Old Lock Up Agreement.  The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable portions of Section 1., The Company’s Current Business and its Financial Distress.  If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.
 
Our independent registered public accounting firm’s report dated April 12, 2010 to our consolidated financial statements for the year ended December 31, 2009 includes an explanatory paragraph indicating substantial doubt as to our ability to continue as a going concern due to our need to secure additional capital in order to repay the past due amount under the mortgage loan and other obligations as they become due.
 
During 2009, we were able fund our business activities and obligations as they became due with the following sources of capital:
 
Private Placement of Common Stock Units and Common Stock — In September 2009, the Company entered into subscription agreements to raise $250,000 from Robert F.X. Sillerman, Paul Kanavos, and/or greater than 10% stockholders. They purchased an aggregate of 4,166,668 shares at a purchase price of $0.06 per unit (such purchase price representing the average trading price per share of the Company’s common stock as reported on the Pink Sheets over the 30 day period immediately preceding the date of the subscription agreements). Each unit consists of (x) one share of the Company’s common stock, (y) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.07 per share and (z) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.08 per share. The warrants are exercisable for a period of seven years and are identical in all respects except for their exercise prices.
 
On November 5, 2009, the Company entered into subscription agreements with Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President and a director, and his spouse, Dayssi Olarte de Kanavos, and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, pursuant to which such parties agreed to purchase an aggregate of 4,166,667 units at a purchase price of $0.09 per unit (such purchase price representing the average trading price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the date of the subscription agreements). Each unit consists of (x) one share of the Company’s common stock, (y) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.10 per share and (z) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.11 per share. The warrants are exercisable for a period of seven years and are identical in all respects except for their exercise prices.  The aggregate proceeds to the Company from the sale of the units pursuant to the subscription agreements were $375,000. The funding of each purchase occurred on November 6, 2009.
 
On December 24, 2009, the Company sold an aggregate of 3,515,625 shares of its common stock to Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President, and his spouse Dayssi Olarte de Kanavos and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, upon their exercise of a like number of Company warrants. The Company received aggregate proceeds of $250,000 from the exercise of the warrants. Mrs. Sillerman, Mr. Kanavos and his spouse and TTERB Living Trust each purchased 1,171,875 shares of common stock upon the exercise of a like number of warrants for an aggregate exercise price of $83,333.33. The exercise price of the warrants for 1,041,667 shares was $0.07 per share, while the exercise price of the warrants for the remaining 130,208 shares was $0.08 per share.
 
Because the foregoing private placements of the common stock units involved certain of the Company’s directors and greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors.  The Company used the proceeds from all of the private placements to fund working capital requirements and for general corporate purposes.
 
After December 31, 2009, the following sources of capital were used to fund the Company’s business activities and obligations as they become due.
 
Private Placement of Common Stocks — On January 28, 2010, the Company sold an aggregate of 1,562,499 shares of its common stock to Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President, and his spouse Dayssi Olarte de Kanavos and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, upon their exercise of a like number of Company warrants. The Company received aggregate proceeds of $125,000 from the exercise of the warrants, which were exercisable at $0.08 per share. Mrs. Sillerman, Mr. Kanavos and his spouse and TTERB Living Trust each purchased 520,833 shares of common stock upon the exercise of a like number of warrants for an aggregate exercise price of $41,666.66.
 
 
34

 
 
Private Placement of Preferred Stock Units – On February 11, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 99 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly created and issued Series A Convertible Preferred Stock, $0.01 par value per share (the "Series A Convertible Preferred Stock"), and (y) a warrant to purchase up to 10,989 shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.273 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $99,000 from the sale of the units.
 
On March 5, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 180 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 10,309.278 shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.291 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $180,000 from the sale of the units.
 
On March 11, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 600 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 10,277.49 shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.2919 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $600,000 from the sale of the units.
 
On April 5, 2010, the Company entered into subscription agreements with certain of its directors, executive officers and greater than 10% stockholders, pursuant to which the purchasers purchased from the Company an aggregate of 270 units at a purchase price of $1,000 per unit. Each unit consists of (x) one share of the Company’s newly issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 9,866.79  shares of the Company’s common stock (such number of shares being equal to the product of (i) the initial stated value of $1,000 per share of Series A Convertible Preferred Stock divided by the weighted average closing price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the closing date  and (ii) 200% at an exercise price of $0.3041 per share (such exercise price representing 150% of the closing price referred to in preceding clause (i)). The Warrants are exercisable for a period of 5 years.  The Company generated aggregate proceeds of $270,000 from the sale of the units.
 
For a description of the rights, qualifications, limitations and restrictions relating to the Series A Convertible Preferred Stock, see Private Placements of Preferred Stock Units in Item 1 hereof.
 
Because the foregoing private placements involved certain of the Company’s directors and certain greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors, to the extent applicable.  The Company used the aggregate proceeds from these private placements for working capital requirements and for general corporate purposes, except that the Company has committed to use the proceeds from the March 11, 2010 private placement to fund expenses associated with evaluating a new line of business in connection with its entry into a letter of intent with a private company and its principal as described in Private Placements of Preferred Stock Units in Item 1 hereof .
 
 
35

 

Bear Stearns Margin Loan — On September 26, 2007, we entered into a $7.7 million margin loan from Bear Stearns. We used the proceeds of the loan, together with the proceeds from the CKX line of credit, to exercise the option to acquire an additional 573,775 shares of Riviera Holdings Corporation’s common stock at a price of $23 per share. In total, 992,069 of the Company’s shares of Riviera Holdings Corporation common stock were pledged as collateral for the margin loan with Bear Stearns. The loan originally required maintenance margin equity of 40% of the shares’ market value and bears interest at LIBOR plus 100 basis points. As of December 31, 2008, the Company made payments of approximately $7.3 million to pay down the margin loan in conjunction with these loan requirements. On December 30, 2008, the effective interest rate on this loan was 2.33% and the amount outstanding, including accrued interest of $0.3 million, was $0.7 million. On November 3, 2008, the Company was advised that the margin requirement was raised to 50% and would be further raised to 75% on November 17, 2008, provided that if the price of a share of Riviera Holdings Corporation common stock fell below $3.00, the loan would need to be repaid. On November 11, 2008, the closing price of Riviera Holdings Corporation’s common stock fell below $3.00 per share, resulting in the requirement that the Company repay all amounts outstanding under the loan. From January 8, 2009 until January 23, 2009, we sold 268,136 Riviera common shares and repaid all amounts outstanding under the margin loan. As of March 27, 2009, we had sold all but 115,558 of our Riviera shares.

Cash Flow for the Year Ended December 31, 2009
 
Operating Activities
 
Cash used in operating activities of $15.3 million for the year ended December 31, 2009 consisted primarily of the net loss for the period of $114.7 million, which includes the non-cash impairment of available-for-sale securities of $127 million, depreciation and amortization costs of $2.0 million, deferred financing cost amortization of $0.1 million, share-based payments of $0.6 million and the impairment charge to land of $79.1 million for the decline in value of the Las Vegas Property. There were changes in working capital levels during the period of $32.4 million for the year ended December 31, 2009.

Investing Activities

Cash provided by investing activities of $33.7 million for the year ended December 31, 2009 primarily reflects $4.1 million from the sale of marketable securities during the period and $29.6 million of restricted cash used.

Financing Activities

Cash used by financing activities of $20.7 million for the year ended December 31, 2009 reflects proceeds from private placements of stock of $0.9 million, repayment of loan of $21.0 million, and repayment of the Margin loan plus interest of $0.7 million principal amount.

Cash Flow for the Year Ended December 31, 2008

Operating Activities
 
Cash used in operating activities of $58.7 million for the year ended December 31, 2008 consisted primarily of the net loss for the period of $461.8 million, which includes the non-cash impairment of available-for-sale securities of $41.7 million, depreciation and amortization costs of $16.4 million, deferred financing cost amortization of $8.3 million, the impairment of capitalized development costs of $10.7 million, share-based payments of $3.2 million and the impairment charge to land of $325.1 million for the decline in value of the Las Vegas Property. There were changes in working capital levels during the period of $1.9 million for the year ended December 31, 2008.
 
Investing Activities

Cash provided by investing activities of $36.1 million for the year ended December 31, 2008 primarily reflects $9.0 million of development costs capitalized during the period, offset by $45.4 million of restricted cash used.
 
Financing Activities
 
Cash provided by financing activities of $22.7 million for the year ended December 31, 2008 reflects net proceeds from the rights offering and the related investment agreements of $96.6 million, other issuances of stock of $2.6 million and the private placement of units of $7.9 million, offset by the preferred distribution to Flag of $31.0 million, Mortgage Loan extension costs of $15.0 million, repayment of notes of $30.3 million, and repayment of the Flag promissory note of $1.0 million principal amount and the CKX line of credit of $6.0 million principal amount.
 
 
36

 
 
Cash Flows for the period from May 11, 2007 to December 31, 2007
 
Operating Activities
 
Cash used in operating activities of $23.5 million from inception (May 11, 2007) through December 31, 2007 consisted primarily of the net loss for the period of $77.7 million which includes depreciation and amortization costs of $11.0 million, deferred financing cost amortization of $6.8 million, the impairment of capitalized development costs of $12.7 million, the loss on the exercise of the Riviera option of $6.4 million, equity in loss of Metroflag for the period May 11, 2007 to July 5, 2007 of $5.0 million and changes in working capital levels of $13.1 million, which includes $10.0 million accrual for the Elvis Presley Enterprises and Muhammad Ali Enterprises license agreements.
 
Investing Activities
 
Cash used in investing activities during the period of $207.8 million, reflects cash used in the purchase of the additional 50% interest in Metroflag of $172.5 million, the cash used for the exercise of the Riv option of $13.2 million, cash used to purchase the Riviera interests of $21.8 million and $1.2 million of development costs capitalized during the period, offset by $0.9 million of restricted cash used.
 
Financing Activities
 
Cash provided by financing activities during the period of $233.9 million reflects the $100.0 million investment from CKX, $105.0 million of additional borrowings under the mortgage loan, $23.0 million of proceeds from the Riv loan, $1.0 million of borrowings under the Flag loan, the $6.0 million loan from CKX and $7.7 million margin loan from Bear Stearns used to fund the exercise of the Riv option and the $2.0 million of additional equity sold to CKX and Flag, partially offset by the repayment of members’ loans of $7.6 million and debt issuance costs paid of $3.7 million.
 
Uses of Capital
 
At December 31, 2009, we had $454 million of debt outstanding and $0.3 million in cash and cash equivalents. Our current cash on hand is not sufficient to fund our current needs. Most of our assets are encumbered by our debt obligations. In total, we generated aggregate gross proceeds of approximately $0.9 million from sales under the private placements of Common Stock Units and Common Stock, as described earlier.
 
Capital Expenditures
 
In connection with and as a condition to the Mortgage Loan, we had funded a segregated escrow account for the purpose of funding pre-development costs in connection with redevelopment of the Las Vegas Property. The balance in the pre-development escrow account at December 31, 2009, 2008 and 2007 was $0.2 million, $20.1 million and $25.9 million, respectively, which is included in restricted cash on our balance sheet. On January 30, 2009, the first lien lenders seized the amount then remaining in the escrow account and applied it to the principal amount outstanding under the loan.
 
Dividends
 
We have no intention of paying any cash dividends on our common stock for the foreseeable future. In addition, the terms of the mortgage loan restrict, and the terms of any future debt agreements we may enter into are likely to prohibit or restrict, the payment of cash dividends on our common stock.
 
Commitments and Contingencies
 
There are various lawsuits and claims pending against us and which we have initiated against others. We believe that any ultimate liability resulting from these actions or claims will not have a material adverse effect on our results of operations, financial condition or liquidity.

 
37

 

Contractual Obligations
 
The following table summarizes our contractual obligations and commitments as of December 31, 2009:
 
   
Payments Due by Period
 
(amounts in thousands)
 
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
                                                         
Debt (including interest) (a)
 
$
489,939
   
$
   
$
   
$
   
$
   
$
   
$
489,939
 
Non-cancelable operating leases
   
500
     
514
     
520
     
219
     
219
     
     
1,972
 
                                                         
Total
 
$
490,439
   
$
514
   
$
520
   
$
219
   
$
219
   
$
   
$
491,911
 
                                                         
 
(a)
 
Interest on the mortgage loan was included through January 6, 2009, the date the mortgage loan matured.  The Company has not included interest subsequent to January 6, 2009 at the default rate on the mortgage loan.
 
Inflation
 
Inflation has affected the historical performances of the business primarily in terms of higher rents we receive from tenants upon lease renewals and higher operating costs for real estate taxes, salaries and other administrative expenses. Although the exact impact of future inflation is indeterminable, we believe that our future costs to develop hotels and casinos will be impacted by inflation in construction costs.
 
Application of Critical Accounting Policies
 
Marketable Securities
 
Marketable securities at December 31, 2008 and December 31, 2007 consist of the Riv Shares owned by FXRE. These securities are classified as available for sale in accordance with the provision of Financial Accounting Standards concerning Accounting for Certain Investments in Debt and Equity Securities and accordingly are carried at fair value. Based on the Company’s evaluation of the underlying reasons for the decline in value associated with the Riv Shares, including weakening conditions in the Las Vegas market where Riviera Holdings Corporation operates, and its uncertain ability to hold the securities for a reasonable amount of time sufficient for an expected recovery of fair value, the Company determined that the losses were other than temporary as of December 31, 2009 and 2008 and recognized impairment loss of $0.1 million and $41.7 million, respectively, that is included in other expense in the accompanying statements of operations for the years ended December 31, 2009 and 2008. Prior to June 30, 2008, the Company did not consider the losses to be other than temporary and reported unrealized gains and losses in other comprehensive income as a separate component of stockholders’ equity. As of December 31, 2009, the Company had sold all of our Riviera shares.
 
Financial Instruments
 
We have a policy and also are required by our lenders to use derivatives to partially offset the market exposure to fluctuations in interest rates. In accordance with Financial Accounting Standards concerning Accounting for Derivative Instruments and Hedging Activities , we recognize these derivatives on the balance sheet at fair value and adjust them on a quarterly basis. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company does not enter into derivatives for speculative or trading purposes.
 
The carrying value of our accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these instruments. The carrying value of our variable-rate note payable is considered to be at fair value since the interest rate on such instrument re-prices monthly based on current market conditions.
 
Real Estate Investments
 
Land, buildings and improvements are recorded at cost. All specifically identifiable costs related to development activities are capitalized into capitalized development costs on the consolidated balance sheet. The capitalized costs represent pre-development costs essential to the development of the property and include designing, engineering, legal, consulting, obtaining permits, construction, financing, and travel costs incurred during the period of development. We assess capitalized development costs for recoverability periodically and when changes in our development plans occur. In the fourth quarter of 2007, the Company recorded an impairment charge related to a write-off of approximately $12.7 million for capitalized costs that were deemed to be not recoverable based on changes made to the Company’s development plans. In the third quarter of 2008, the Company recorded an impairment charge of $10.7 million related to the write-off of capitalized development costs as a result of the Company’s determination not to proceed with its originally proposed plan for the redevelopment as a result of the disruption in the capital markets and the economic downturn in the United States in general and Las Vegas in particular.
 
 
38

 
 
We follow the provisions of Financial Accounting Standards concerning Accounting for the Impairment or Disposal of Long-Lived Assets . In accordance with the accounting standards, we review our real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon expected undiscounted cash flows from the property. We determine impairment by comparing the property’s carrying value to an estimate of fair value. In the event that the carrying amount of a property is not recoverable and exceeds its fair value, we will write down the asset to fair value. As a result of an impairment tests in 2009 and 2008, the Company recorded impairment charges of $79.1 million and $325.1 million, respectively. The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement.  As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustee’s sale or a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement.  The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1, The Company’s Current Business and its Financial Distress.  If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.

Incidental Operations
 
We follow the provisions of Financial Accounting Standards concerning, Accounting for Costs and Initial Operations of Real Estate Projects to account for certain operations. In accordance with the accounting standards, these operations are considered “incidental,” and as such, for each entity, when the incremental revenues exceed the incremental costs, such excess is accounted for as a reduction of capitalized costs of the redevelopment project.
 
The preparation of our financial statements in accordance with US GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Management considers an accounting estimate to be critical if it requires assumptions to be made about matters that were highly uncertain at the time the estimate was made and changes in the estimate or different estimates could have a material effect on the Company’s results of operations. On an ongoing basis, we evaluate our estimates and assumptions, including those related to income taxes and share-based payments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenues and expenses that are not readily available from other sources. Actual results may differ from these estimates under different assumptions. We have discussed the development, selection, and disclosure of our critical accounting policies with the Audit Committee of the Company’s Board of Directors.
 
The Company continuously monitors its estimates and assumptions to ensure any business or economic changes impacting these estimates and assumptions are reflected in the Company’s financial statements on a timely basis, including the sensitivity to change the Company’s critical accounting policies.
 
The following accounting policies require significant management judgments and estimates:
 
Income Taxes
 
We adopted the provisions of Financial Accounting Standards concerning, Accounting for Uncertainty in Income Taxes, and an interpretation of Financial Accounting Standards concerning, Accounting for Income Taxes upon formation of FXRE on June 15, 2007. We have no uncertain tax positions under the adopted accounting standards.
 
We account for income taxes in accordance accounting standards concerning income taxes, which requires that deferred tax assets and liabilities be recognized, using enacted tax rates, for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. The accounting standards also require that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. In determining the need for a valuation allowance, the historical and projected financial performance of the operation that is recording a net deferred tax asset is considered along with any other pertinent information.
 
 
39

 
 
Share-Based Payments
 
In accordance with Financial Accounting Standards concerning Share-Based Payment , the fair value of stock options is estimated as of the grant date based on a Black-Scholes option pricing model. Judgment is required in determining certain of the inputs to the model, specifically the expected life of options and volatility. As a result of the Company’s short operating history, no reliable historical data is available for expected lives and forfeitures. The Company estimates the expected life of its stock option grants at the midpoint between the vesting dates and the end of the contractual term. This methodology is known as the simplified method and is used because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. We estimated forfeitures based on management’s experience. The expected volatility is based on an analysis of comparable public companies operating in our industry.
 
Impact of Recently Issued Accounting Standards
 
The Company adopted the provisions of Financial Accounting Standards Fair Value Measurements. The accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of the accounting standard are effective for the Company beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The Company has adopted the accounting standard for its marketable securities (see note 2, Formation of the Company ). The Company’s marketable securities qualify as level one financial assets in accordance with Financial Accounting Standards as they are traded on an active exchange market and are fair valued by obtaining quoted prices. The Company does not have any level two financial assets or liabilities that require significant other observable or unobservable inputs in order to calculate fair value. The Company’s interest rate cap agreement (see note 9) qualifies as a level three financial asset in accordance with accounting standards as of December 31, 2009; however, the balance as of December 31, 2009 and changes in the period ended December 31, 2009 did not have a material effect on the Company’s financial position or operations. The Company does not have any other level three financial assets or liabilities.
 
In February 2007, the Company adopted the provisions of Financial Accounting Standards concerning The Fair Value Option for Financial Assets and Financial Liabilities, providing companies with an option to report selected financial assets and liabilities at fair value. The accounting standard also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The adopted accounting standard is effective for fiscal years beginning after November 15, 2007. Effective January 1, 2008 the Company elected not to report any additional assets and liabilities at fair value.
 
The Company adopted the provisions of Financial Accounting Standards concerning Fair Value Measurements on January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company’s marketable securities qualified as level one financial assets in accordance with accounting standards as they were traded on an active exchange market and were fair valued by obtaining quoted prices. The Company does not have any level two financial assets or liabilities that require significant other observable or unobservable inputs in order to calculate fair value. The Company does not have any other level three financial assets or liabilities. The adoption of the accounting standards did not affect the Company’s historical consolidated financial statements.

In March 2008, the FASB issued accounting standards concerning “Disclosures about Derivative Instruments and Hedging Activities — an amendment of prior accounting standards”, which requires enhanced disclosures about an entity’s derivative and hedging activities. Specifically, entities are required to provide enhanced disclosures about: a) how and why an entity uses derivative instruments; b) how derivative instruments and related hedged items are accounted for under prior accounting standards, “Accounting for Derivative Instruments and Hedging Activities”, and its related interpretations; and c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The accounting standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The accounting standard encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted the accounting standard as of January 1, 2009, as required. The adoption of the accounting standard did not have a material impact on the Company’s consolidated financial statements.
 
 
40

 

In April 2008, the Financial Accounting Standards were  issued  concerning “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under prior accounting standards concerning “Goodwill and Other Intangible Assets”. The intent of the staff position is to improve the consistency between the useful life of a recognized intangible asset under existing accounting standards and the period of expected cash flows used to measure the fair value of the assets under accounting standards, and other GAAP. The staff position is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption of the standard is prohibited. The Company adopted the staff position as of January 1, 2009, as required. The adoption of the staff position did not have a material impact on the Company’s consolidated financial statements.

The Company adopted accounting standards concerning Business Combinations and accounting standards concerning noncontrolling Interests in Consolidated Financial Statements , on January 1, 2009. These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. The adoption of accounting standards concerning business combinations will change the Company’s accounting treatment for business combinations on a prospective basis. The Company has completed its assessment of the impact of the accounting standard  on its consolidated financial statements and has concluded that the statement has not had a significant impact on the Company’s consolidated financial statements. The Company’s adoption of accounting standards concerning noncontrolling interests has no significant impact for its existing noncontrolling interest because the impact is limited to presentation and disclosure in the Company’s financial statements. The prior period has been restated to conform to the 2009 presentation as accounting standards require retrospective application of the presentation and disclosure requirements to all periods presented. A prospective change is that future changes in noncontrolling interests are accounted for as equity transactions, unless the change results in a loss of control.
 
The Company adopted Financial Accounting Standards concerning “Interim Disclosures about Fair Value of Financial Instruments”. The accounting standards amend previous standards concerning “Disclosures about Fair Value of Financial Instruments,” to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The accounting standards are effective for interim reporting periods ending after June 15, 2009. The Company adopted the staff position and bulletin as of September 30, 2009, as required. The adoption did not have a material impact on the Company’s consolidated financial statements.
 
The Company adopted Financial Accounting Standards concerning “Recognition and Presentation of Other-Than-Temporary Impairments”, which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The accounting standards do not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The accounting standards are effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the accounting standards as of September 30, 2009, as required. The adoption of the accounting standards did not have a material impact on the Company’s consolidated financial statements.
 
The Company adopted Financial Accounting Standards concerning “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. The accounting standard provides additional guidance for estimating fair value in accordance with accounting standards concerning “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. The accounting standard also includes guidance on identifying circumstances that indicate a transaction is not orderly. The accounting standard is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the accounting standard as of September 30, 2009, as required. The adoption of the accounting standard did not have a material impact on the Company’s consolidated financial statements.
 
The Company adopted Financial Accounting Standards concerning “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, which amends and clarifies prior accounting standards, “Business Combinations”, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The staff position is effective for all assets acquired or liabilities assumed arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company expects that the adoption of the staff position will have an impact on its consolidated financial statements, if the Company acquires companies in the future.
 
 
41

 

The Company adopted Financial Accounting Standards concerning “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, under the new accounting standard, an entity is required to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The accounting standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. The new accounting standard is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the accounting standard as of September 30, 2009, as required. The adoption of the accounting standard did not have a material impact on the Company’s consolidated financial statements.
 
In June 2009, the Company adopted Financial Accounting Standards concerning “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of prior FASB Statements, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). The accounting standard establishes the FASB Accounting Standards Codification TM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The accounting standard is effective for most financial statements issued for interim and annual periods ending after September 15, 2009. The accounting standard primarily is a codification of existing generally accepted accounting principles, the Company does not believe the standard will have an effect on the Company’s financial position or statement of operations.

In June 2009, the FASB issued amendments to a previous accounting interpretation concerning variable interest entities. The objective of the accounting standards is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The accounting standard is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company is currently determining the impact of accounting standard on its consolidated financial statements.

Off Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements.
 
Seasonality
 
We do not consider our business to be seasonal.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk arising from changes in market rates and prices, interest rates and the market price of our common stock. To mitigate these risks, we may utilize derivative financial instruments, among other strategies. We do not use derivative financial instruments for speculative purposes.
 
Interest Rate Risk
 
The $475 million mortgage loan pays interest at variable rates ranging from 3.75% to 11.25%% at December 31, 2009. We entered into an interest rate agreement with a major financial institution which capped the maximum Eurodollar base rate payable under the loan at 5.5%. The interest rate cap agreement expired on July 23, 2008. A new rate cap agreement to protect the one-month LIBOR rate at a maximum of 3.5% was purchased in conjunction with the extension of the Mortgage Loan effective July 6, 2008. This rate cap agreement lapsed on January 6, 2009 in conjunction with the maturity of the loan.
 
Foreign Exchange Risk
 
We presently have no operations outside the United States. As a result, we do not believe that our financial results have been or will be materially impacted by changes in foreign currency exchange rates.

 
42

 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
Table of Contents to Financial Statements
 
   
Page
 
         
FX Real Estate and Entertainment Inc.
       
         
Reports of Independent Registered Public Accounting Firms
    44-46  
         
Consolidated Balance Sheets as of December 31, 2009 and 2008
    47  
         
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 and for the period from May 11, 2007 through December 31, 2007, and Combined Statements of Operations (Predecessor) for the period from January 1, 2007 through May 10, 2007
    48  
         
Consolidated Statement of Cash Flows for the year ended December 31, 2009 and 2008 and for the period from May 11, 2007 through December 31, 2007, and Combined Statements of Cash Flows (Predecessor) for the period from January 1, 2007 through May 10, 2007
    49  
         
Consolidated Statement of Stockholders’ Equity /(Deficit) for the year ended December 31, 2009 and 2008 and for the period from May 11, 2007 to December 31, 2007 and Combined Statement of Members’ Equity (Predecessor) for the period from January 1, 2007 through May 10, 2007
    51  
         
Notes to Consolidated/Combined Financial Statements
    52  

 
43

 
 
FX Real Estate and Entertainment Inc.
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of FX Real Estate and Entertainment Inc.:
 
We have audited the accompanying consolidated balance sheets of FX Real Estate and Entertainment Inc. (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FX Real Estate and Entertainment Inc. at December 31, 2009, and the consolidated results of its operations and cash flows for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
The accompanying financial statements have been prepared assuming FX Real Estate and Entertainment Inc. will continue as a going concern. As more fully discussed in Note 3 to the consolidated financial statements, the Company is in default under the mortgage loan, has limited available cash, has a working capital deficiency and will need to secure new financing or additional capital in order to pay its obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan as to these matters is also described in Note 3. These financial statements do not include adjustments that might result from the outcome of this uncertainty.
 
 
   
/s/   LL Bradford
 
 
Las Vegas, Nevada
April 14, 2010

 
44

 
 
FX Real Estate and Entertainment Inc.
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Shareholders of FX Real Estate and Entertainment Inc.:
 
We have audited the accompanying consolidated balance sheets of FX Real Estate and Entertainment Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2008 and for the period from May 11, 2007 to December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FX Real Estate and Entertainment Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and cash flows for the year ended December 31, 2008 and the period from May 11, 2007 to December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
The accompanying financial statements have been prepared assuming FX Real Estate and Entertainment Inc. will continue as a going concern. As more fully discussed in Note 3 to the consolidated financial statements, the Company is in default under the mortgage loan, has limited available cash, has a working capital deficiency and will need to secure new financing or additional capital in order to pay its obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan as to these matters is also described in Note 3. These financial statements do not include adjustments that might result from the outcome of this uncertainty.
 
As discussed in Note 4 to the consolidated financial statements, as of January 1, 2009, the Company retrospectively adopted new accounting guidance for noncontrolling interests in consolidated financial statements.
 
 
 
   
/s/   Ernst & Young LLP
 
 
New York, New York
March 30, 2009 except for Note 4, for which the date is
April 14, 2010

 
45

 

Report of Independent Registered Public Accounting Firm
 
To the Members of Metroflag BP, LLC, Metroflag Polo, LLC, Metroflag Cable, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC, and Metroflag Management, LLC:
 
We have audited the accompanying combined statements of operations, members’ equity, and cash flows for the period from January 1, 2007 through May 10, 2007 of Metroflag BP, LLC, Metroflag Polo, LLC, Metroflag Cable, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC, and Metroflag Management, LLC (collectively, “Metroflag”). These financial statements are the responsibility of Metroflag’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of Metroflag’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Metroflag’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations, members’ equity and cash flows of Metroflag BP, LLC, Metroflag Polo, LLC, Metroflag Cable, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC, and Metroflag Management, LLC for the period from January 1, 2007 through May 10, 2007 in conformity with U.S. generally accepted accounting principles.
 
 
 
/s/   Ernst & Young LLP
 
Las Vegas, Nevada
August 23, 2007

 
46

 
FX Real Estate and Entertainment Inc.
 
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)

 
   
December 31,
   
December 31,
 
   
2009
   
2008
 
ASSETS
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 343     $ 2,659  
Restricted cash
    172       29,814  
Marketable securities
          4,231  
Rent and other receivables, net of allowance for doubtful accounts of $162 at December 31, 2009  and $17 at December 31, 2008
    379       79  
Deferred financing costs, net
          54  
Prepaid expenses and other current assets
    1,450       1,325  
 
               
Total current assets
    2,344       38,162  
Investment in real estate:
               
Land
    133,537       212,624  
Building and improvements
    32,859       32,816  
Furniture, fixtures and equipment
    690       730  
Less: accumulated depreciation
    (29,385 )     (27,370 )
 
               
Net investment in real estate
    137,700       218,800  
Acquired lease intangible assets, net
    1,000       1,063  
 
               
Total assets
  $ 141,044     $ 258,025  
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 38,489     $ 10,321  
Accrued license fees
          10,000  
Debt in default — note 5
    454,000       475,000  
Notes payable
          391  
Due to related parties
    1,180       1,373  
Other current liabilities
    21       532  
Unearned rent and related revenue
    478       36  
 
               
Total current liabilities
    494,168       497,653  
Related party debt
           
Other long-term liabilities
          309  
 
               
Total liabilities
    494,168       497,962  
Contingently redeemable stockholders’ equity
           
Stockholders’ equity (deficit):
               
Preferred stock, $0.01 par value: authorized 75,000,000 shares, 1 share issued and outstanding at December 31, 2009 and December 31, 2008, respectively
           
Common stock, $0.01 par value: authorized 300,000,000 shares, 63,841,377 and 51,992,417 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively
    638       520  
Additional paid-in-capital
    300,480       299,142  
Subscription receivable
    (4 )      
Accumulated deficit
    (654,238 )     (539,554 )
Non-controlling interest           (45
Accumulated other comprehensive loss
           
 
               
Total stockholders’ equity (deficit)
    (353,124 )     (239,937 )
 
               
Total liabilities and stockholders’ equity (deficit)
  $ 141,044     $ 258,025  

See accompanying notes to consolidated and combined financial statements 

 
47

 
 
FX Real Estate and Entertainment Inc.
 
STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
 
               
Consolidated
   
Combined
 
               
Period from
   
Period from
 
   
Consolidated
   
Consolidated
   
May 11, 2007
   
January 1,
 
   
Year Ended
   
Year Ended
   
Through
   
2007
 
   
December 31,
   
December 31,
   
December 31,
   
Through
 
   
2009
   
2008
   
2007
   
May 10, 2007
 
                         
Revenue
  $ 18,852     $ 6,009     $ 3,070     $ 2,079  
 
                               
Operating expenses:
                               
License fees
    (10,000 )     10,000       10,000        
Selling, general and administrative expenses
    9,349       15,158       6,874       421  
Depreciation and amortization expense
    2,026       513       116       128  
Operating and maintenance
    4,768       2,592       276       265  
Debt restructuring expense
    4,290                    
Real estate taxes
    1,886       615       194       153  
Impairment of land
    79,087       325,080              
Impairment of capitalized development costs
          10,683       12,672        
 
                               
Total operating expenses
    91,406       364,641       30,132       967  
 
                               
Income (loss) from operations
    (72,554 )     (358,632 )     (27,062 )