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 1934For
      the fiscal year ended December 31, 2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      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 filero
            Accelerated
      filero
            Non-accelerated
      filero
            Smaller
      reporting companyþ(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


PagePART IItem 1.
            Business
            
            
            3Item 1A.
            Risk Factors
            
            
            20Item 1B.
            Unresolved Staff Comments
            
            
            24Item 2.
            Properties
            
            
            24Item 3.
            Legal Proceedings
            
            
            24Item 4.
            RESERVED
            
            
            25PART IIItem 5.
            Market for Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
            
            
            25Item 6.
            Selected Financial Data
            
            
            27Item 7.
            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            
            
            29Item 7A.
            Quantitative and Qualitative Disclosures About
      Market Risk
            
            
            42Item 8.
            Financial Statements and Supplementary
      Data
            
            
            43Item 9.
            Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            
            
            75Item 9A(T).
            Controls and Procedures
            
            
            76Item 9B.
            Other Information
            
            
            77PART IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            
            
            77Item 11.
            Executive Compensation
            
            
            80Item 12.
            Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
            
            
            83Item 13.
            Certain Relationships and Related Transactions,
      and Director Independence
            
            
            87Item 14.
            Principal Accountant Fees and
      Services
            
            
            91PART IVItem 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 coverdebt
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 LeasedLas
      Vegas, NV
            
            Corporate
      Offices
            
            Office
      Operations
            
            1,700 sq. ft.
            
            Lease
      expires in 2010Las
      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





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





2008High
            
            
            LowDecember 31,
      2008
            
            $
            1.03
            
            
            $
            0.13September 30,
      2008
            
            $
            2.02
            
            
            $
            1.04June 30,
      2008
            
            $
            6.07
            
            
            $
            1.75March 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
            
            
            
            377,206Equity
      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, IncJanuary 1,
      2007 —
                
                
                May
      11, 2007 —
                
                
                Year
      Ended
                
                
                Year
      EndedMay 10,
                
                
                December 31,
                
                
                December 31,
                
                
                December 31,2007
                
                
                2007 (a)
                
                
                2008
                
                
                2009Statement
      of Operations Data:Revenue
                
                $
                2,079
                
                
                $
                3,070
                
                
                $
                6,009
                
                
                $
                18,852Operating
      expenses (excluding depreciation and amortization and impairment of land)
      (b)
                
                
                839
                
                
                
                30,016
                
                
                
                39,048
                
                
                
                10,293Depreciation
      and amortization
                
                
                128
                
                
                
                116
                
                
                
                513
                
                
                
                2,026Impairment
      of land (c)
                
                
                —
                
                
                
                —
                
                
                
                325,080
                
                
                
                79,087Operating
      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
            
            
            2009Balance
      Sheet Data:Cash
      and cash equivalents
            
            $
            2,559
            
            
            $
            2,659
            
            
            $
            343Other
      current assets
            
            
            112,550
            
            
            
            35,548
            
            
            
            3,001Investment
      in real estate
            
            
            561,653
            
            
            
            218,800
            
            
            
            137,700Total
      assets
            
            
            677,984
            
            
            
            258,070
            
            
            
            141,044Current
      liabilities (excluding current portion of debt)
            
            
            24,945
            
            
            
            22,262
            
            
            
            40,168Debt
            
            
            512,694
            
            
            
            475,391
            
            
            
            454,000Total
      liabilities
            
            
            537,830
            
            
            
            497,962
            
            
            
            494,168Members’
      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
              
              
              VarianceRevenue
              
              $
              18,852
              
              
              $
              6,009
              
              
              $
              12,843Operating
      expenses (excluding depreciation and amortization and impairment of
      land)
              
              
              (10,293
              )
              
              
              (18,509
              )
              
              
              8,216Impairment
      of land
              
              
              (79,087
              )
              
              
              (325,080
              )
              
              
              245,993Depreciation
      and amortization
              
              
              (2,026
              )
              
              
              (513
              )
              
              
              (1,513
              )Income
      (loss) from operations
              
              
              (72,554
              )
              
              
              (338,093
              )
              
              
              265,539Interest
      expense, net and other
              
              
              (42,130
              )
              
              
              (47,599
              )
              
              
              5,469Loss
      from early retirement of debt
              
              
              —
              
              
              
              —
              
              
              
              —Loss
      from incidental operations
              
              
              —
              
              
              
              (12,881
              )
              
              
              12,881Net
      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
              
              
              VarianceRevenue
              
              $
              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
              )
              
              
              4,139Loss
      from early retirement of debt
              
              
              —
              
              
              
              (3,507
              )
              
              
              —
              
              
              
              (3,507
              )
              
              
              3,507Loss
      from incidental operations
              
              
              (12,881
              )
              
              
              (7,790
              )
              
              
              (12,371
              )
              
              
              (20,161
              )
              
              
              7,280Net
      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
$0.9million 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
            
            
            TotalDebt
      (including interest) (a)
            
            $
            489,939
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            489,939Non-cancelable
      operating leases
            
            
            500
            
            
            
            514
            
            
            
            520
            
            
            
            219
            
            
            
            219
            
            
            
            —
            
            
            
            1,972Total
            
            $
            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


PageFX Real Estate and Entertainment
      Inc.Reports of Independent Registered Public
      Accounting Firms
            
            
            44-46Consolidated Balance Sheets as of
      December 31, 2009 and 2008
            
            
            47Consolidated 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
            
            
            48Consolidated 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
            
            
            49Consolidated 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
            
            
            51Notes 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.
     /s/  
      Ernst &
      Young LLP





New York,
New York
 March 30,
2009 except for Note 4, for which the date isApril 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
                
                
                2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                343
                
                
                $
                2,659Restricted
      cash
                
                
                172
                
                
                
                29,814Marketable
      securities
                
                
                —
                
                
                
                4,231Rent
      and other receivables, net of allowance for doubtful accounts of $162 at
      December 31, 2009  and $17 at December 31, 2008
                
                
                379
                
                
                
                79Deferred
      financing costs, net
                
                
                —
                
                
                
                54Prepaid
      expenses and other current assets
                
                
                1,450
                
                
                
                1,325Total
      current assets
                
                
                2,344
                
                
                
                38,162Investment
      in real estate:Land
                
                
                133,537
                
                
                
                212,624Building
      and improvements
                
                
                32,859
                
                
                
                32,816Furniture,
      fixtures and equipment
                
                
                690
                
                
                
                730Less:
      accumulated depreciation
                
                
                (29,385
                )
                
                
                (27,370
                )Net
      investment in real estate
                
                
                137,700
                
                
                
                218,800Acquired
      lease intangible assets, net
                
                
                1,000
                
                
                
                1,063Total
      assets
                
                $
                141,044
                
                
                $
                258,025LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable and accrued expenses
                
                $
                38,489
                
                
                $
                10,321Accrued
      license fees
                
                
                —
                
                
                
                10,000Debt
      in default — note 5
                
                
                454,000
                
                
                
                475,000Notes
      payable
                
                
                —
                
                
                
                391Due
      to related parties
                
                
                1,180
                
                
                
                1,373Other
      current liabilities
                
                
                21
                
                
                
                532Unearned
      rent and related revenue
                
                
                478
                
                
                
                36Total
      current liabilities
                
                
                494,168
                
                
                
                497,653Related
      party debt
                
                
                —
                
                
                
                —Other
      long-term liabilities
                
                
                —
                
                
                
                309Total
      liabilities
                
                
                494,168
                
                
                
                497,962Contingently
      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
                
                
                
                520Additional
      paid-in-capital
                
                
                300,480
                
                
                
                299,142Subscription
      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
            
            
            CombinedPeriod
      from
            
            
            Period
      fromConsolidated
            
            
            Consolidated
            
            
            May
      11, 2007
            
            
            January
      1,Year
      Ended
            
            
            Year
      Ended
            
            
            Through
            
            
            2007December
      31,
            
            
            December
      31,
            
            
            December
      31,
            
            
            Through2009
            
            
            2008
            
            
            2007
            
            
            May
      10, 2007Revenue
            
            $
            18,852
            
            
            $
            6,009
            
            
            $
            3,070
            
            
            $
            2,079Operating
      expenses:License
      fees
            
            
            (10,000
            )
            
            
            10,000
            
            
            
            10,000
            
            
            
            —Selling,
      general and administrative expenses
            
            
            9,349
            
            
            
            15,158
            
            
            
            6,874
            
            
            
            421Depreciation
      and amortization expense
            
            
            2,026
            
            
            
            513
            
            
            
            116
            
            
            
            128Operating
      and maintenance
            
            
            4,768
            
            
            
            2,592
            
            
            
            276
            
            
            
            265Debt
      restructuring expense
            
            
            4,290
            
            
            
            —
            
            
            
            —
            
            
            
            —Real
      estate taxes
            
            
            1,886
            
            
            
            615
            
            
            
            194
            
            
            
            153Impairment
      of land
            
            
            79,087
            
            
            
            325,080
            
            
            
            —
            
            
            
            —Impairment
      of capitalized development costs
            
            
            —
            
            
            
            10,683
            
            
            
            12,672
            
            
            
            —Total
      operating expenses
            
            
            91,406
            
            
            
            364,641
            
            
            
            30,132
            
            
            
            967Income
      (loss) from operations
            
            
            (72,554
            )
            
            
            (358,632
            )
            
            
            (27,062
            )
            
            
            1,112Interest
      income
            
            
            18
            
            
            
            386
            
            
            
            814
            
            
            
            113Interest
      expense
            
            
            (41,631
            )
            
            
            (49,040
            )
            
            
            (31,471
            )
            
            
            (14,557
            )Other
      income (expense)
            
            
            (217
            )
            
            
            (41,670
            )
            
            
            (6,358
            )
            
            
            —Loss
      from retirement of debt
            
            
            
            
            
            
            —
            
            
            
            —
            
            
            
            (3,507
            )Equity
      in earnings (losses) of affiliate
            
            
            —
            
            
            
            —
            
            
            
            (4,969
            )
            
            
            —Income
      tax expense
            
            
            (300
            )
            
            
            —
            
            
            
            —
            
            
            
            —Loss
      from incidental operations
            
            
            —
            
            
            
            (12,881
            )
            
            
            (9,373
            )
            
            
            (7,790
            )Net
      loss
            
            $
            (114,684
            )
            
            
            (461,837
            )
            
            
            (78,419
            )
            
            
            (24,629
            )Less:
      Net loss attributable to non-controlling interest
            
            
            —
            
            
            
            22
            
            
            
            680
            
            
            
            —Net
      loss attributable to FX Real Estate and Entertainment Inc.
            
            $
            (114,684
            )
            
            $
            (461,815
            )
            
            $
            (77,739
            )
            
            $
            (24,629
            )Basic
      and diluted loss per share
            
            $
            (2.16
            )
            
            $
            (9.67
            )
            
            $
            (1.98
            )Basis
      and diluted average number of common shares outstanding
            
            
            53,118,438
            
            
            
            47,773,323
            
            
            
            39,290,247





See
accompanying notes to consolidated and combined financial
statements


48


FX
Real Estate and Entertainment Inc.
 STATEMENTS
OF CASH FLOWS
 (amounts
in thousands)


Consolidated
              
              
              CombinedPeriod
      from
              
              
              Period
      fromConsolidated
              
              
              Consolidated
              
              
              May
      11, 2007
              
              
              January
      1,Year
      Ended
              
              
              Year
      Ended
              
              
              Through
              
              
              2007December
      31,
              
              
              December
      31,
              
              
              December
      31,
              
              
              Through2009
              
              
              2008
              
              
              2007
              
              
              May
      10, 2007Cash
      flows from operating activities:Net
      loss
              
              $
              (114,684
              )
              
              $
              (461,837
              )
              
              $
              (78,419
              )
              
              $
              (24,629
              )Adjustments
      to reconcile net loss to cash used by operating
activities:Reversal
      of licensing fee due to termination of agreement
              
              
              (10,000
              )
              
              
              —
              
              
              
              —
              
              
              
              —Depreciation
      and amortization
              
              
              2,026
              
              
              
              16,386
              
              
              
              10,983
              
              
              
              8,472Deferred
      financing cost amortization
              
              
              54
              
              
              
              8,328
              
              
              
              6,760
              
              
              
              41Gain
      on sale of marketable securities
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Loss
      on disposal of assets
              
              
              91
              
              
              
              —
              
              
              
              —
              
              
              
              —Share-based
      payments
              
              
              582
              
              
              
              3,172
              
              
              
              —
              
              
              
              —Loss
      on exercise of derivative
              
              
              —
              
              
              
              —
              
              
              
              6,358
              
              
              
              —Impairment
      of available-for-sale securities
              
              
              126
              
              
              
              41,670
              
              
              
              —
              
              
              
              —Impairment
      of land
              
              
              79,088
              
              
              
              325,080
              
              
              
              —
              
              
              
              —Impairment
      of capitalized development costs
              
              
              
              
              
              
              10,683
              
              
              
              12,672
              
              
              
              —Equity
      in loss of an unconsolidated affiliate
              
              
              —
              
              
              
              —
              
              
              
              4,969
              
              
              
              36Provision
      for accounts receivable allowance
              
              
              145
              
              
              
              (351
              )
              
              
              —
              
              
              
              —Changes
      in operating assets and liabilities:Receivables
              
              
              (445
              )
              
              
              575
              
              
              
              120
              
              
              
              (171
              )Other
      current and non-current assets
              
              
              (215
              )
              
              
              (135
              )
              
              
              (573
              )
              
              
              (933
              )Accounts
      payable and accrued expenses
              
              
              28,518
              
              
              
              (427
              )
              
              
              2,985
              
              
              
              (2,486
              )Accrued
      license fees
              
              
              —
              
              
              
              —
              
              
              
              10,000
              
              
              
              —Due
      to related parties
              
              
              (193
              )
              
              
              (1,650
              )
              
              
              1,188
              
              
              
              22Unearned
      revenue
              
              
              442
              
              
              
              36
              
              
              
              (767
              )
              
              
              991Other
              
              
              (820
              )
              
              
              (260
              )
              
              
              770
              
              
              
              27Net
      cash used in operating activities
              
              
              (15,285
              )
              
              
              (58,730
              )
              
              
              (22,954
              )
              
              
              (18,630
              )Cash
      flows provided by (used in) investing activities:Restricted
      cash
              
              
              29,642
              
              
              
              45,394
              
              
              
              934
              
              
              
              11,541Capitalized
      development costs
              
              
              
              
              
              
              (9,024
              )
              
              
              (1,233
              )
              
              
              —Development
      of real estate including land acquired
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (45
              )Acquisitions
      of real estate
              
              
              (47
              )
              
              
              (271
              )
              
              
              —
              
              
              
              —Proceeds
      from sale of marketable securities
              
              
              4,105
              
              
              
              —
              
              
              
              —
              
              
              
              —Purchase
      of Riviera interests
              
              
              —
              
              
              
              —
              
              
              
              (21,842
              )
              
              
              —Purchase
      of shares in Riviera
              
              
              —
              
              
              
              —
              
              
              
              (13,197
              )
              
              
              —Purchase
      of additional interest in Metroflag
              
              
              —
              
              
              
              —
              
              
              
              (172,500
              )
              
              
              —Net
      cash provided by (used in) investing activities
              
              
              33,700
              
              
              
              36,099
              
              
              
              (207,838
              )
              
              
              11,496Cash
      flows provided by (used in) financing activities:Proceeds
      from private placement of units
              
              
              870
              
              
              
              7,925
              
              
              
              —
              
              
              
              —Payment
      of mortgage loan extension costs
              
              
              
              
              
              
              (14,988
              )
              
              
              —
              
              
              
              —Repayment
      of related party debt
              
              
              
              
              
              
              (7,054
              )
              
              
              —
              
              
              
              —Proceeds
      from sale of Marquis Jet cards
              
              
              95
              
              
              
              —
              
              
              
              —
              
              
              
              —Repayment
      of notes
              
              
              
              
              
              
              (30,284
              )
              
              
              —
              
              
              
              —Proceeds
      from rights offering and investment agreements, net
              
              
              
              
              
              
              96,613
              
              
              
              —
              
              
              
              —Preferred
      distribution to related party
              
              
              
              
              
              
              (31,039
              )
              
              
              —
              
              
              
              —Members’
      capital contributions
              
              
              —
              
              
              
              —
              
              
              
              100,000
              
              
              
              —Issuance
      of common stock
              
              
              
              
              
              
              2,570
              
              
              
              2,000
              
              
              
              —Repayment
      of Margin loan plus interest
              
              
              (741
              )
              
              
              —
              
              
              
              —
              
              
              
              —Deferred
      financing costs
              
              
              
              
              
              
              (1,669
              )
              
              
              (3,738
              )
              
              
              (10,536
              )Borrowings
      under loan agreements and notes payable
              
              
              
              
              
              
              —
              
              
              
              142,694
              
              
              
              306,543Retirement/repayment
      of mortgage loans
              
              
              (21,000
              )
              
              
              —
              
              
              
              —
              
              
              
              (295,000
              )Contribution
      from minority interest
              
              
              45
              
              
              
              657
              
              
              
              —
              
              
              
              —(Repayments
      of) proceeds from Members’ loans
              
              
              —
              
              
              
              —
              
              
              
              (7,605
              )
              
              
              5,972Net
      cash provided by (used in) financing activities
              
              
              (20,731
              
              
              
              22,731
              
              
              
              233,351
              
              
              
              6,979Net
      increase/(decrease) in cash and equivalents
              
              
              (2,316
              )
              
              
              100
              
              
              
              2,559
              
              
              
              (155
              )Cash
      and cash equivalents — beginning of period
              
              
              2,659
              
              
              
              2,559
              
              
              
              —
              
              
              
              1,643Cash
      and cash equivalents — end of period
              
              $
              343
              
              
              $
              2,659
              
              
              $
              2,559
              
              
              $
              1,488Supplemental
      cash flow disclosures:Cash
      paid for interest
              
              $
              9,163
              
              
              $
              38,103
              
              
              $
              25,663
              
              
              $
              17,102Cash
      paid for debt restructuring
              
              
              4,290
              
              
              
              —
              
              
              
              —
              
              
              
              —Non-cash
      financing and investing activities:Contributions
      of assets for membership interests
              
              $
              —
              
              
              $
              —
              
              
              $
              103,421
              
              
              
              —







49


FX
Real Estate and Entertainment Inc.





STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)
 (amounts
in thousands, except share data)


Common
      Stock
            
            
            Additional
            
            
            Stock
            
            
            
            
            
            
            
            
            Accumulated
      OtherMembers’Equity
            
            
            Shares
            
            
            Amount
            
            
            Paid-In-Capital
            
            
            Subscription
      Receivable
            
            
            Non-ControllingInterest
            
            
            AccumulatedDeficit
            
            
            ComprehensiveLoss
            
            
            TotalBalance
      at January 1, 2007(Predecessor)
            
            $
            (24,739
            )
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (24,739
            )Net
      loss
            
            
            (24,629
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (24,629
            )Balance
      at May 10, 2007(Predecessor)
            
            $
            (49,368
            )
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (49,368
            )Balance
      at May 11, 2007
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Capital
      contributions
            
            
            —
            
            
            
            202
            
            
            
            —
            
            
            
            219,781
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            219,781Reorganization
      of FXRE
            
            
            —
            
            
            
            39,290,045
            
            
            
            393
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            393Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (680
            )
            
            
            (77,739
            )
            
            
            —
            
            
            
            (78,419
            )Unrealized
      loss on available for sale securities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,461
            )
            
            
            (2,461
            )Balance
      at December 31, 2007
            
            $
            —
            
            
            
            39,290,247
            
            
            $
            393
            
            
            $
            219,781
            
            
            $
            —
            
            
            $
            (680
            )
            
            $
            (77,739
            )
            
            $
            (2,461
            )
            
            $
            139,294Rights
      offering
            
            
            —
            
            
            
            9,871,674
            
            
            
            99
            
            
            
            97,297
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            97,396Termination
      of repurchase agreement
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            180
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            180Private
      placement of units
            
            
            —
            
            
            
            2,264,289
            
            
            
            23
            
            
            
            7,187
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            7,210Stock
      sale
            
            
            —
            
            
            
            500,000
            
            
            
            5
            
            
            
            2,565
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,570Flag
      preferred distribution
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (31,039
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (31,039
            )Shares
      issued to independent directors
            
            
            —
            
            
            
            66,207
            
            
            
            —
            
            
            
            102
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            102Stock
      option expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,069
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,069Cash
      received from non-controlling interest
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            657
            
            
            
            —
            
            
            
            —
            
            
            
            657Unrealized
      loss on available for sale securities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,461
            
            
            
            2,461Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (22
            )
            
            
            (461,815
            )
            
            
            —
            
            
            
            (461,837
            )Balance
      at December 31, 2008
            
            $
            —
            
            
            
            51,992,417
            
            
            $
            520
            
            
            $
            299,142
            
            
            $
            —
            
            
            $
            (45
            )
            
            $
            (539,554
            )
            
            $
            —
            
            
            $
            (239,937
            )Private
      placement of units
            
            
            
            
            
            
            11,848,960
            
            
            
            118
            
            
            
            756
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            874Stock
      subscription receivable
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4
            )Stock
      option expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            582
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            582Cash
      received from non-controlling interest
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            45
            
            
            
            —
            
            
            
            —
            
            
            
            45Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            (114,684
            )
            
            
            —
            
            
            
            (114,684
            )Balance
      at December 31, 2009
            
            $
            —
            
            
            
            63,841,377
            
            
            $
            638
            
            
            $
            300,480
            
            
            $
            (4
            )
            
            $
            0
            
            
            $
            (654,238
            )
            
            $
            —
            
            
            $
            (353,124
            )





See
accompanying notes to consolidated and combined financial
statements


50


FX
Real Estate and Entertainment Inc.
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
  1. 
Basis of Presentation





The
financial information contained in these consolidated and combined financial
statements for the years ended December 31, 2009 and 2008 and for the
period May 11, 2007 to December 31, 2007 reflects the results of
operations of FX Luxury Realty, LLC (“FXLR”) and its consolidated subsidiaries
for the period May 11, 2007 to September 26, 2007 and FX Real Estate
and Entertainment Inc. (“FXRE” or the “Company”), a Delaware corporation, and
its consolidated subsidiaries, including FXLR, for the period September 27,
2007 to December 31, 2007.





The
financial information as of December 31, 2007 and for the period
May 11, 2007 to December 31, 2007 consists of the two aforesaid
periods, May 11, 2007 to September 26, 2007 and September 27,
2007 to December 31, 2007, because of a reorganization of FXLR that was
effectuated on September 26, 2007. On September 26, 2007, holders of
common membership interests in FXLR, exchanged all of their common membership
interests for shares of common stock of FXRE. Following this reorganization,
FXRE owns 100% of the common membership interests of FXLR.





As a
result of this reorganization, all references to FXRE or the Company for the
periods prior to the date of the reorganization shall refer to FXLR and its
consolidated subsidiaries. For all periods as of and subsequent to the date of
the reorganization, all references to FXRE or the Company shall refer to FXRE
and its consolidated subsidiaries, including FXLR.





Metroflag
BP, LLC (“BP”), Metroflag Polo, LLC (“Polo”), Metroflag Cable, LLC (“Cable”),
CAP/TOR, LLC (“CAP/TOR”), Metroflag SW, LLC (“SW”), Metroflag HD, LLC, (“HD”),
and Metroflag Management, LLC (“MM”) are engaged in the business of leasing real
properties located along Las Vegas Boulevard between Harmon and Tropicana Avenue
in Las Vegas, Nevada. Metroflag (as defined below) has been engaged in the
leasing business since 1998 when CAP/TOR acquired certain real properties
situated at the southern tip of Las Vegas Boulevard and has since assembled the
current six parcels of land totaling approximately 17.72 acres and
associated buildings.





On
May 9, 2007, Polo, Cable, CAP/TOR, SW and HD were merged with and into
either Cable or BP, with Cable and BP continuing as the surviving
companies.





On
May 11, 2007, Flag Luxury BP, LLC, Flag Luxury Polo, LLC, Flag Luxury SW,
LLC, Flag Luxury Cable, LLC, Metroflag CC, LLC, Metro One, LLC, Metro Two, LLC,
Metro Three, LLC, Metro Five, LLC, merged into FXLR, which effectively became a
50% owner of the Company.





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. 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. “Las Vegas Subsidiaries” refers to BP Parent, LLC,
Metroflag BP, LLC and Metroflag Cable, LLC, each as renamed as indicated
above.  On November 5, 2009, the Las Vegas Subsidiaries were merged
into FX Luxury Las Vegas I, LLC, which is referred to herein as the “Las Vegas
Subsidiary”.  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.





From
May 11, 2007 to July 5, 2007, the Company accounted for its interest
in Metroflag under the equity method of accounting because it did not have
control with its then 50% ownership interest.





Effective
July 6, 2007, with its purchase of the 50% of Metroflag that it did not
already own, the Company consolidated the results of Metroflag. Therefore, the
financial statements for the period from May 11, 2007 to December 31,
2007 reflect the Company’s 50% ownership interest in Metroflag under the equity
method of accounting from May 11, 2007 through July 5, 2007 and
reflect the consolidation of the financial results for Metroflag from
July 6, 2007 through December 31, 2007.





51





The
consolidated financial statements of FXRE include the accounts of all
subsidiaries and the Company’s share of earnings or losses of joint ventures and
affiliated companies under the equity method of accounting. All intercompany
accounts and transactions have been eliminated. The accompanying combined
financial statements for Metroflag consist of BP, Polo, Cable, CAP/TOR, SW, HD,
and MM. Significant inter-company accounts and transactions between the entities
have been eliminated in the accompanying combined financial statements. The
financial statements have been combined because the entities were all part of a
transaction such that FXLR owns 100% of Metroflag under common ownership, are
part of a single redevelopment plan, and subject to mortgage loans secured by
the properties owned by the combined entities.




2. 
Organization and Background





Business
of the Company





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 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 has defaulted on the $475 million mortgage loan secured by the
Las Vegas Property.  The Company continued commercial leasing
activities until on June 23, 2009, when as a result of the default under the
first mortgage loan, the first lien lenders had a receiver appointed to take
control of the property and, as a consequence, the Las Vegas Subsidiary no
longer manages or operates such property.  As a result of the
abandonment of the previously announced redevelopment plans, the Company
recorded an impairment charge related to a write-off of $10.7 million for
capitalized development costs that were no longer deemed to be recoverable as of
December 31, 2008. As more fully described in note 7 below, 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
had recorded an impairment charge to land of $325.1 million in 2008, which
charge reduced the carrying value of the Las Vegas Property to
$218.8 million.  The Company obtained a preliminary update of the
appraisal as of June 30, 2009 and December 31, 2009 by the same firm and,
as a result, has recorded an additional impairment charge of $79.1 million
to the value of the land.
 
 As a
result of the default on the $475 million 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 described in Item 1., The Company’s Current
Business and its Financial Distress.  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.


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 owns 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 owns 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, the Company owns 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
December 31, 2008. 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.





52




FXRE was
formed under the laws of the state of Delaware on June 15,
2007.





On
September 26, 2007, CKX, Inc. (“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, the Company organized FXL, Inc., as a new wholly-owned
subsidiary to own 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.





Terminated
License Agreements





On
June 1, 2007, the Company entered into a worldwide license agreement with
Elvis Presley Enterprise, Inc., a 85%-owned subsidiary of CKX (“EPE”), granting
the Company the exclusive right to utilize Elvis Presley-related intellectual
property in connection with the development, ownership and operation of Elvis
Presley-themed hotels, casinos and certain other real estate-based projects and
attractions around the world. The Company also entered into a worldwide license
agreement with Muhammad Ali Enterprises LLC, a 80%-owned subsidiary of CKX
(“MAE”), granting the company the right to utilize Muhammad Ali-related
intellectual property in connection with Muhammad Ali-themed hotels and certain
other real estate-based projects and attractions. As more fully described in
Note 8 below, the license agreements have since been
terminated.





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.





On
July 6, 2007, FXLR acquired the remaining 50% of the Metroflag entities,
which collectively own the Las Vegas Property, from an unaffiliated third party.
As a result of this purchase, the Company now 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.





53




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 on
June 1, 2007 (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 will 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 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 are 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.
  54





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.





For more
information about the terms of the special preferred stock, please see the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2008, as filed with the Securities and Exchange Commission on
May 13, 2008.





Conditional
Option Agreement 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.





Because
19X would only own those rights upon consummation of its acquisition of CKX, the
effectiveness of the Option Agreement was conditioned upon the merger between
CKX and 19X. The merger agreement between 19X and CKX was terminated on
November 1, 2008. As a result of the termination of the merger agreement
between 19X and CKX on November 1, 2008, the Option Agreement with 19X was
terminated and thereafter will have no force and effect.





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 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.




55




3. 
Going Concern


The
accompanying consolidated financial statements are prepared assuming that the
Company will continue as a going concern and contemplates the realization of
assets and satisfaction of liabilities in the ordinary course of business. As
discussed in notes 2 and 5, the Las Vegas Subsidiary is in default under
the $475 million mortgage loan secured by the Las Vegas Property as a
result of the failure to make repayment at the maturity date on January 6,
2009. 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 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 described in Item 1, “Old Lock Up
Agreement”) or the New Lock Up Agreement (as described in Item 1, “New Lock Up
Agreement”), pursuant to which the debtor 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 in Item 1.
 
 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 herein in order to better understand the financial
condition of, and risks of investing in, the Company.





The
accompanying consolidated financial statements do not include any additional
adjustments that might result from the liquidation of the Las Vegas
Property.




4. 
Summary of Significant Accounting Policies


Cash
and Cash Equivalents





All
highly liquid investments with original maturities of three months or less are
classified as cash and cash equivalents. The fair value of cash and cash
equivalents approximates the amounts shown on the financial statements. Cash and
cash equivalents consist of unrestricted cash in accounts maintained with major
financial institutions.





Restricted
Cash





Restricted
cash primarily consists of cash deposits and impound accounts for interest,
property taxes, insurance, rents and development costs as required under the
terms of the Company’s loan agreements.





Marketable
Securities





Marketable
securities at December 31, 2008 and 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 losses of $0.2 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.


56


Fair
Value of Financial Instruments





Prior to
exercise, the Riv Option was classified as a derivative. This security was
categorized as a derivative in accordance with the provisions of Financial
Accounting Standards concerning  Accounting for Derivative
Instruments and Hedging Activities  and accordingly was carried
at fair value with the gain or loss reported as other income (expense). The fair
value for the Riv Option approximated the value of the option using an option
pricing model and assuming the option was extended through its maximum term. The
assumptions reflected in the valuation were a risk free rate of 5% and a
volatility factor of 48.5%. The change in fair value during the period prior to
exercise was recorded as other expense in the accompanying consolidated
statement of operations.





The
Company has a policy and also is required by its lenders to use derivatives to
partially offset the market exposure to fluctuations in interest rates. In
accordance with accounting standards the Company recognizes these derivatives on
the balance sheet at fair value and adjusts 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 the Company’s accounts payable and accrued liabilities
approximates fair value due to the short-term maturities of these instruments.
The carrying value of the Company’s 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.





Rental
Revenue





The
Company leases space to tenants under agreements with varying terms. Leases are
accounted for as operating leases with minimum rent recognized on a
straight-line basis over the term of the lease regardless of when payments are
due. Amounts expected to be received in later years are included in deferred
rent, amounts received and to be recognized as revenues in later years are
included in unearned rent and related revenues.





Some of
the lease agreements contain provisions that grant additional rents based on
tenants’ sales volume (contingent or percentage rent) and reimbursement of the
tenants’ share of real estate taxes, insurance and common area maintenance
(“CAM”) costs. Percentage rents are recognized when the tenants achieve the
specified targets as defined in their lease agreements. Recovery of real estate
taxes, insurance and CAM costs are recognized as the respective costs are
incurred in accordance with the lease agreements.





Real
Estate Investments





Land,
buildings and improvements are recorded at cost. All specifically identifiable
costs related to development activities were historically capitalized as
capitalized development costs on the consolidated balance sheet. The capitalized
costs represented 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. The Company assesses capitalized development costs for
recoverability periodically and when changes in 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 not be recoverable based on changes made to the Company’s development
plans. 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.





Maintenance
and repairs that do not improve or extend the useful lives of the respective
assets are reflected in operating and maintenance expense.





As a
result of the Company’s determination not to proceed with the originally
proposed plan for the redevelopment of the Las Vegas Property, beginning on
October 1, 2008, the Company is depreciating the buildings and improvements
in the original development plan using the straight-line method over the
estimated remaining life of 3 years. Depreciation is computed over an
estimated useful life of 39.5 years for buildings and improvements not in
the original development plan and 3 to 7 years for furniture, fixtures and
equipment.





The
Company follows the provisions of Financial Accounting Standards concerning
Business Combinations .
The accounting standard provides guidance on allocating a portion of the
purchase price of a property to intangibles. The Company’s methodology for this
allocation includes estimating an “as-if vacant” fair value of the physical
property, which is allocated to land, building and improvements. The difference
between the purchase price and the “as-if vacant” fair value is allocated to
intangible assets. There are two categories of intangibles to be considered:
(i) value of in-place leases and (ii) above and below-market value of
in-place leases.
  57





The value
of in-place leases is estimated based on the value associated with the costs
avoided in originating leases compared to the acquired in-place leases as well
as the value associated with lost rental and recovery revenue during the assumed
lease-up period. The value of in-place leases is amortized to expense over the
remaining initial term of the respective leases. Above-market and below-market
in-place lease values for acquired properties are recorded based on the present
value of the difference between (i) the contractual amounts to be paid
pursuant to the in-place leases and (ii) management’s estimate of fair
market lease rates for the comparable in-place leases, measured over a period
equal to the remaining noncancelable term of the lease.





The value
of above-market leases is amortized as a reduction of base rental revenue over
the remaining terms of the respective leases. The value of below-market leases
is accreted as an increase to base rental revenue over the remaining terms of
the respective leases.


The
Company follows the provisions of Financial Accounting Standards concerning
Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance
with the accounting standards, the Company reviews their 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. The Company determines 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, the
Company will write down the asset to fair value. As a result of an impairment
test in 2008, the Company recorded an impairment charge of $325.1 million.
The Company obtained a preliminary update of the appraisal as of June 30,
2009 and December 31, 2009 by the same firm and, as a result, has recorded an
additional impairment charge of $79.1 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.


Loss
Per Share/Common Shares Outstanding





Earnings
(loss) per share is computed in accordance with Financial Accounting Standards
concerning Earnings Per
Share . Basic earnings (loss) per share is calculated by dividing net
income (loss) applicable to common stockholders by the weighted-average number
of shares outstanding during the period. The Company used its shares outstanding
as of December 31, 2007 as the number of weighted average share for the
period May 11, 2007 to December 31, 2007, which results in a more
meaningful measure of earnings per share because the Company became a
C-corporation in June 2007 and the membership interests in FXLR were contributed
in September 2007. Diluted earnings (loss) per share includes the determinants
of basic earnings (loss) per share and, in addition, gives effect to potentially
dilutive common shares. The diluted earnings (loss) per share calculations
exclude the impact of all share-based stock plan awards because the effect would
be anti-dilutive. For the years ended December 31, 2009, December 31, 2008
and for the period May 11, 2007 to December 31, 2007, 10,962,794,
11,812,794 and 3,050,000 shares, respectively, were excluded from the
calculation of diluted earnings per share because their inclusion would have
been anti-dilutive.





Incidental
Operations





The
Company follows the provisions of Financial Accounting Standards concerning
Accounting for Costs and
Initial Operations of Real Estate Projects  to account for
certain operations of Metroflag. In accordance with 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.





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. As a result, effective
October 1, 2008, the Company will no longer classify these operations of
Metroflag as incidental operations. Therefore, all operations will be included
as part of income (loss) from operations.





The
following table summarizes the results from the incidental operations for the
year ended December 31, 2008 and for the period May 11, 2007 through
December 31, 2007, and the period January 1, 2007 through May 10,
2007:


58




PredecessorYear
      Ended
            
            
            May 11-
            
            
            January 1-(amounts
      in thousands)
            
            December 31,
            
            
            December 31,
            
            
            May 10,2008
            
            
            2007
            
            
            2007Revenues
            
            $
            13,474
            
            
            $
            7,854
            
            
            $
            5,326Depreciation
            
            
            (15,873
            )
            
            
            (10,867
            )
            
            
            (8,343
            )Operating &
      other
            
            
            (10,482
            )
            
            
            (6,360
            )
            
            
            (4,773
            )Net
      loss
            
            $
            (12,881
            )
            
            $
            (9,373
            )
            
            $
            (7,790
            )





Deferred
Financing Costs





Financing
costs are capitalized and amortized to interest expense over the life of the
loan as an adjustment to the yield.





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 the Company’s industry.





Income
Taxes





In
calculating the provision for income taxes on an interim basis, the Company uses
an estimate of the annual effective tax rate based upon the facts and
circumstances known at the time. The Company’s effective tax rate is based on
expected income, statutory rates and permanent differences applicable to the
Company in the various jurisdictions in which the Company operates.
  For the
years ended December 31, 2008 and 2007, 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.  For the year ended December 31, 2009, 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.
  The
Company does not have any uncertain tax positions and does not expect any
reasonably possible material changes to the estimated amount of liability
associated with its uncertain tax positions through December 31,
2009.





There are
no income tax audits currently in process with any taxing
jurisdictions.





Risks
and Uncertainties





The
Company’s principal investments are in entities that own Las Vegas, Nevada-based
real estate development projects which are aimed at tourists. Accordingly, the
Company is subject to the economic risks of the region, including changes in the
level of tourism.





Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.


59


Impact
of Recently Issued Accounting Standards





The
Company adopted Financial Accounting Standards concerning 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 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, 2008 and changes in
the period ended December 31, 2008 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.




The
Company adopted 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
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 Company adopted 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.





In April
2008, the Company adopted a staff position 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.




60





In April
2009, the Company adopted a staff position concerning “Interim Disclosures about
Fair Value of Financial Instruments”. The staff position and bulletin 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 staff position and bulletin 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.




In April
2009, the Company adopted staff positions 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 staff positions do not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. The staff positions are effective for interim and annual reporting
periods ending after June 15, 2009. The Company adopted the staff positions as
of September 30, 2009, as required. The adoption of the staff positions did not
have a material impact on the Company’s consolidated financial
statements.




In April
2009, the Company adopted a staff position 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
staff position 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 staff position also includes guidance on identifying
circumstances that indicate a transaction is not orderly. The staff position is
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively. The Company adopted the staff position as of
September 30, 2009, as required. The adoption of the staff position did not have
a material impact on the Company’s consolidated financial
statements.




In April
2009, the Company adopted a staff position 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.





In May
2009, the Company adopted 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 Financial Accounting Standards Board (“FASB”) issued 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.




61


Reclassifications





Certain
prior period amounts have been reclassified to conform with current year
presentation.
 
 5. Debt
and Notes Payable





The
Company’s debt as of December 31, 2009 includes a mortgage loan on the Las
Vegas Property in the principal amount of $475 million (the “Mortgage
Loan”). Prior to January 30, 2009, the Company used escrow accounts to fund
future pre-development and other spending and interest on the Mortgage Loan. The
balance in such escrow accounts as of December 31, 2008 was
$29.8 million. On May 7, 2008, we delivered a notice to the lenders
exercising our conditional right to extend the Mortgage Loan’s maturity date and
effective July 6, 2008, we made an additional deposit of approximately
$14.9 million into reserve accounts and extended the Mortgage Loan’s
maturity date by six months to January 6, 2009. The Mortgage Loan includes
certain financial and other maintenance covenants on the Las Vegas Property site
including limitations on indebtedness, liens, restricted payments, loan to value
ratio, asset sales and related party transactions. The Company had purchased a
cap to protect the one-month LIBOR rate at a maximum of 5.5%, which expired on
July 23, 2008. Effective July 23, 2008, the Company purchased another
cap to protect the one-month LIBOR rate at a maximum of 3.5% in conjunction with
extending the Mortgage Loan’s maturity date to January 6, 2009 (as
described below).





The
Mortgage Loan is not guaranteed by FX Real Estate and Entertainment nor has FX
Real Estate and Entertainment pledged any assets to secure the Mortgage Loan.
The Mortgage Loan is secured only by first lien and second lien security
interests in substantially all of the assets of the Metroflag entities,
including the Las Vegas Property. FXLR has provided a guarantee to the lenders
only for losses caused under limited circumstances such as fraud or willful
misconduct.





Mortgage Loan Default — The
Mortgage Loan contains covenants that regulate our incurrence of debt,
disposition of property and capital expenditures. As of December 31, 2008,
the Las Vegas Subsidiary was in default under the $475 million mortgage
loan secured by the Las Vegas Property by reason of being out of compliance with
the loan-to-value value ratio covenants prescribed by the governing amended and
restated credit agreements. On November 25, 2008, the Las Vegas
Subsidiaries obtained from their lenders a temporary waiver of noncompliance
with the loan-to-value value ratio covenants set forth in the Amended and
Restated Credit Agreements governing the outstanding $475 million mortgage
loan. Under the terms of the waiver, the Las Vegas Subsidiaries agreed to the
first lien lenders (i) assuming control over the ability of the borrowers
to convert between a Base Rate Loan and a Eurodollar Rate Loan, and
(ii) obtaining sole and absolute discretion over the approval or
disapproval of items submitted for reimbursement from borrowers’ Predevelopment
Expense Reserve Account. In addition the borrowers agreed to pay an aggregate
waiver fee to the first lien lenders of $580,519 and to pay all legal fees and
expenses incurred by them in connection with the waiver. Because the Borrower
Subsidiaries did not regain compliance with the loan-to-value value ratio
covenants prior to expiration of the temporary waiver, an event of default
occurred On January 5, 2009, the second lien lenders under the loan
delivered a written demand for repayment of all of the obligations owed to them
under the Loan, including the second lien principal amount of $195 million.
The second lien lenders’ written demand, which was delivered prior to the Loan
maturity date, cited the continuing covenant default referenced
above.





On
January 6, 2009, following the Las Vegas Subsidiaries’ failure to repay the
Loan at maturity, the first lien lenders under the Mortgage Loan delivered their
demand for repayment of all of the obligations owed to them under the loan,
including the first lien principal amount of $280 million. On
January 30, 2009, the first lien lenders seized the cash collateral reserve
accounts established under the Loan from which the Las Vegas Subsidiaries had
been drawing working capital funds to meet ordinary expenses, including
operating the Las Vegas Property, and applied $21 million of that amount to
the outstanding principal under the first lien loan.  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 Company applied for disbursements to pay for expenses incurred in
connection with property operations.  After that date, the receiver
was in charge of operating, leasing, and managing the property, and the Company
was no longer involved in such activities.  For the period in which
the receiver was in charge, the Company’s results are reported in reliance on
the financial records maintained by the receiver.
  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.


62
 
 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, and April 22, 2010, and shall remain adjourned as long as either the
Old Lock Up Agreement or New Lock Up Agreement remains
effective.


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 Las
Vegas Subsidiary has agreed to file a chapter 11 bankruptcy proceeding under
either the Old Lock Up Agreement for the New Lock Up Agreement, pursuant to
which the debtor 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 in the applicable sections of Item 1., The Company’s
Current Business and its Financial Distress.
 
 At
December 31, 2009, interest rates on the Mortgage Loan were at one-month
LIBOR plus applicable margins of 50 basis points on the $250 million
tranche; 300 basis points on the $30 million tranche; and
800 basis points on the $195 million tranche; the effective interest
rates on each tranche at December 31, 2008 were 5.75%, 8.25% and 13.25%,
respectively, including 2% default rate on each of the tranches which was
effective since the Mortgage Loan went into default.





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 and
December 31, 2009 by the same firm and, as a result, had recorded an additional
impairment charge of $79.1 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.





Bear Stearns Loan — On
September 26, 2007, the Company obtained a $7.7 million margin loan
from Bear Stearns, which, along with the CKX loan (see note 5), was used to
fund the exercise of the Riv 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 common stock are 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 31, 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, the Company sold 268,136 Riviera common shares and repaid all amounts
outstanding under the margin loan. As of March 27, 2009, the Company had
sold all but 115,558 of our Riviera shares.





63







Predecessor





On
May 11, 2007, Metroflag refinanced substantially all of their mortgage
notes with Barclay’s Capital Real Estate, Inc., including a $285 million
floating rate mortgage loan and a $10 million floating rate mortgage loan,
and other long-term obligations with two notes totaling $370 million from
Credit Suisse Securities USA, LLC. The maturity date of these notes were
May 11, 2008, with two six-month extension options subject to payment of a
fee and the Company’s compliance with the terms of an extension outlines in the
loan documents. The loans required that the Company establish and maintain
certain reserves including a reserve for payment of fixed expenses, a reserve
for interest, a reserve for “predevelopment costs” as defined and budgeted for
in the loan documents, a reserve for litigation and a reserve for “working
capital.”





As a
result of these repayments, the Company recorded a loss on early retirement of
debt of approximately $3.5 million for the period from January 1, 2007
through May 10, 2007 to reflect the prepayment penalties and
fees.





6. 
Related Party Debt





On
June 1, 2007, the Company signed a promissory note with Flag for
$7.5 million which was to reimburse Flag for a non-refundable deposit made
by Flag in May 2007 as part of the agreement to purchase the 50% interest in
Metroflag that it did not already own. The note was scheduled to mature on
March 31, 2008 and accrued interest at the rate of 12% per annum payable at
maturity. This note was repaid on July 9, 2007.





On
June 1, 2007, the Company signed a promissory note with Flag for
$1.0 million, representing amounts owed to Flag related to funding for the
purchase of the shares of Flag Luxury Riv. The note accrued interest at 5% per
annum through December 31, 2007 and 10% from January 1, 2008 through
March 31, 2008, the maturity date of the note. The Company discounted the
note to fair value and recorded interest expense accordingly. On April 17,
2008, this note was repaid in full and retired with proceeds from the rights
offering.





On
September 26, 2007, the Company entered into a Line of Credit Agreement
with CKX pursuant to which CKX agreed to loan up to $7.0 million to the
Company, $6.0 million of which was drawn down on September 26, 2007
and was evidenced by a promissory note dated September 26, 2007. The
proceeds of the loan were used by FXRE, together with proceeds from additional
borrowings, to fund the exercise of the Riv Option. The loan bore interest at
LIBOR plus 600 basis points and was payable upon the earlier of
(i) two years and (ii) the consummation by FXRE of an equity raise at
or above $90.0 million. Messrs. Sillerman, Kanavos and Torino,
severally but not jointly, have secured the loan by pledging, pro rata, an
aggregate of 972,762 shares of the Company’s common stock. On
April 17, 2008, the CKX loan was repaid in full and the line of credit was
retired with proceeds from the rights offering and all of the shares pledged by
Messrs. Sillerman, Kanavos and Torino to secure the loan were released and
returned to them.





7. 
Impairment of Land





The
Company follows the provisions of Financial Accounting Standards concerning
Accounting for the Impairment
or Disposal of Long-Lived Assets. In accordance with the accounting
standard, the Company reviews their 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.





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 and
December 31, 2009 by the same firm and, as a result, had recorded an additional
impairment charge of $79.1 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.
  64





8.
Terminated License Agreements with Related Parties





On
June 1, 2007, the Company entered into license agreements with Elvis
Presley Enterprises, Inc., an 85%-owned subsidiary of CKX, Inc. [NASDAQ: CKXE],
and Muhammad Ali Enterprises LLC, an 80%-owned subsidiary of CKX, 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 payment (for 2007) under the license
agreement, as amended, was paid on April 1, 2008, with proceeds from the
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.





Accounting
for Minimum Guaranteed License Payments





FXRE
accounted for the 2008 minimum guaranteed license payments under the EPE and MAE
license agreements ratably over the period of the benefit. Accordingly, FXRE
included license fee expense in the accompanying consolidated statement of
operations of $10 million for the year ended December 31, 2008 and for
the period from May 11, 2007 through December 31,
2007.





9. 
Acquired Lease Intangibles





The
Company’s acquired intangible assets are related to above-market leases and
in-place leases under which the Company is the lessor. The intangible assets
related to above-market leases and in-place leases have a remaining weighted
average amortization period of approximately 23.0 years and
23.4 years, respectively. The amortization of the above-market leases and
in-place leases, which represents a reduction of rent revenues for the year
ended December 31, 2009 and 2008 and for the period from May 11, 2007
through December 31, 2007 and the period from January 1, 2007 through
May 10, 2007 (Predecessor) was $0.1 million, $0.2 million,
$0.1 million, and $0.1 million, respectively. Acquired lease
intangibles liabilities, included in the accompanying balance sheets in other
current liabilities, are related to below-market leases under which the Company
is the lessor. The remaining weighted-average amortization period is
approximately 4.6 years.


65


Acquired
lease intangibles consist of the following (in thousands):





December 31,
              2009
            
            
            December 31,
              2008
            
            
            December 31,
              2007AssetsAbove-market
      leases
            
            $
            582
            
            
            $
            582
            
            
            $
            582In-place
      leases
            
            
            1,320
            
            
            
            1,320
            
            
            
            1,320Accumulated
      amortization
            
            
            (902
            )
            
            
            (839
            )
            
            
            (680
            )Net
            
            $
            1,000
            
            
            $
            1,063
            
            
            $
            1,222LiabilitiesBelow-market
      leases
            
            $
            111
            
            
            $
            111
            
            
            $
            111Accumulated
      accretion
            
            
            (104
            )
            
            
            (98
            )
            
            
            (72
            )Net
            
            $
            7
            
            
            $
            13
            
            
            $
            39





The
estimated aggregate amortization and accretion amounts from acquired lease
intangibles for each of the next five years are as follows:





Amortization
            
            
            MinimumExpense
            
            
            Rent(in
      thousands)Years
      Ending December 31,2010
            
            $
            57
            
            
            $
            52011
            
            
            52
            
            
            
            22012
            
            
            50
            
            
            
            –2013
            
            
            50
            
            
            
            –2014
            
            
            25
            
            
            
            –





10.
Derivative Financial Instruments





Pursuant
to the terms specified in the Credit Suisse Notes (as described in note 5),
the Company entered into interest rate cap agreements (the “Cap Agreements”)
with Credit Suisse with notional amounts totaling $475 million. The Cap
Agreements are tied to the Credit Suisse Notes and converts a portion of the
Company’s floating-rate debt to a fixed-rate for the benefit of the lender to
protect the lender against the fluctuating market interest rate. The Cap
Agreements were not designated as cash flow hedges under Accountinhg
Standards and as such the change in fair value is recorded as adjustments
to interest expense. The Cap Agreement expired on July 23, 2008. In
connection with the extension of the Mortgage Loan, the Company entered into an
interest rate cap agreement with similar terms that expires on January 6,
2009. The changes in fair value of the Cap Agreements for the year ended
December 31, 2009 and 2008 and for the periods from May 11, 2007
through December 31, 2007 and January 1, 2007 through May 10,
2007 (Predecessor) were decreases of approximately $0.1 million,
$0.1 million, $0.4 million and $0.3 million,
respectively.





66


11.
Commitments
 
 Total
rent expense for the Company under operating leases for the years ended
December 31, 2009 and 2008 and for the period from May 11, 2007
through December 31, 2007, and the period from January 1, 2007 through
May 10, 2007 (Predecessor) was $0.6 million, $0.4 million,
$0.1 million, and $0.1 million, respectively. The Company’s future
minimum rental commitments under noncancelable operating leases are as
follows:


(in
      thousands)Years
      Ending December 31,2010
            
            $
            5002011
            
            
            5142012
            
            
            5202013
            
            
            2192014
            
            
            219Thereafter
            
            
            —Total
            
            $
            1,972





The
Company has entered into employment contracts with certain key executives and
employees, which include provisions for severance payments in the event of
specified terminations of employment. Expected payments under employment
contracts are as follows:





(in
      thousands)Year
      Ending December 31,2010
            
            $
            02011
            
            
            02012
            
            
            02013
            
            
            02014
            
            
            0Thereafter
            
            
            —Total
            
            $
            0





12.
Stockholders’ Equity





As of
December 31, 2009, 2008 and 2007, there were 63,841,377, 51,992,417 and
39,290,247 shares of common stock issued and outstanding, respectively.
Except as otherwise provided by Delaware law, the holders of our common stock
are entitled to one vote per share on all matters to be voted upon by the
stockholders.





As of
December 31, 2009, 2008 and 2007, there were one, one and no shares of
preferred stock issued and outstanding, respectively. The Company’s Board of
Directors has the authority, without action by the stockholders, to designate
and issue preferred stock in one or more series and to designate the rights,
preferences and privileges of each series, which may be greater than the rights
of the common stock.
  13. Share-Based
Payments





Equity
Incentive Plan





Our 2007
Long-Term Incentive Compensation Plan (the “2007 Plan”) was adopted by the Board
of Directors in December 2007 and approved by the Company’s stockholders at the
2008 annual meeting of stockholders, which was held in September 2008. Under the
2007 Plan, the maximum number of shares of common stock that may be subject to
stock options, stock awards, deferred shares or performance shares is 3,000,000.
No one participant may receive awards for more than 1,000,000 shares of
common stock under the plan.
  67




Executive
Equity Incentive Plan





In
December 2007, the Company’s 2007 Executive Equity Incentive Plan (the “2007
Executive Plan”) was adopted by the Board of Directors and approved by the
Company’s stockholders at the 2008 annual meeting of stockholders, which was
held in September 2008. Under the 2007 Executive Plan, the maximum number of
shares of common stock that may be subject to stock options, stock awards,
deferred shares or performance shares is 12,500,000.





Stock
Option Grants





On
January 10, 2008, 6,400,000 stock options were issued to two
executive-designees under the terms of the Company’s 2007 Executive Equity
Incentive Plan. The options were issued with a strike price of $20.00 per share
and vest 20% on each anniversary from the date of grant. On May 19, 2008,
1,415,000 stock options were issued to executive-designees and other
non-employees of the Company under the terms of the 2007 Plan and the 2007
Executive Plan. Half of the options granted on May 19, 2008 were issued
with a strike price of $5.00 per share and vest 40% on the first anniversary
from the date of grant; 40% on the second anniversary from the date of the
grant; and 20% on the third anniversary from the date of grant. The remaining
half of the options were issued with a strike price of $6.00 per share and vest
20% on the third anniversary from the date of grant; 40% on the fourth
anniversary from the date of grant; and 40% on the fifth anniversary from the
date of grant. The term of the options granted is 10 years. For options
granted to executive-designees and other non-employees, the Company has
accounted for the grants in accordance with Financial Accounting Standards
concerning Share-Based
Payment and Emerging Issues Task Force Issue concerning Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services , which require that the options be recorded
at their fair value on the measurement date and that the fair value of the
options be adjusted periodically over the vesting periods until such point as
the executive-designees and other non-employees become employees or the service
period has been completed.





The
weighted average fair value of the options granted on January 10, 2008 and
May 19, 2008 to executive-designees and other non-employees was $0.00 per
option at December 31, 2009. Fair value at December 31, 2009 was
estimated using the Black-Scholes option pricing model based on the weighted
average assumptions of:





Risk-free
      rate
            
            
            1.62%Volatility
            
            
            68.0%Weighted
      average expected life remaining at December 31, 2009
            
            5.52 yearsDividend
      yield
            
            
            0.0%





On
May 19, 2008, 850,000 stock options were issued to employees of the
Company. Half of the options were issued with a strike price of $5.00 per share
and vest 40% on the first anniversary from the date of grant; 40% on the second
anniversary from the date of the grant; and 20% on the third anniversary from
the date of grant. The remaining half of the options were issued with a strike
price of $6.00 per share and vest 20% on the third anniversary from the date of
grant; 40% on the fourth anniversary from the date of grant; and 40% on the
fifth anniversary from the date of grant. The term of the options granted is
10 years.


The
weighted average fair value of the options issued on May 19, 2008 to
employees was $1.64 per option. Fair value at the grant date was estimated using
the Black-Scholes option pricing model based on the weighted average assumptions
of:





Risk-free
      rate
            
            
            3.28%Volatility
            
            
            40.0%Weighted
      average expected life
            
            6.25 yearsDividend
      yield
            
            
            0.0%





The
Company estimated the original weighted average 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 was
used because the Company does not have sufficient historical exercise data to
provide a reasonable basis upon which to estimate expected term. The expected
volatility is based on an analysis of comparable public companies operating in
the Company’s industry.





As of
December 31, 2009 and 2008, the Company has a total of 10,962,794 and
11,812,794 options outstanding, respectively, to employees, directors,
executive-designees and other non-employees, including 3,050,000 stock options
granted to employees on December 31, 2007. Compensation expense for stock
option grants included in the accompanying statements of operations in selling,
general and administrative expenses and loss from incidental operations is being
recognized ratably over the vesting periods of the grants and was $0.6 million
and $3.1 million for the years ended December 31, 2009 and 2008,
respectively.
  68





14. 
Income Taxes





The
provision for income taxes consists of the following:





December
      31,
              2009
            
            
            December
      31,
              2008
            
            
            December
      31,
              2007(in
      thousands)
            
            
            (in
      thousands)
            
            
            (in
      thousands)Current
      provision (benefit)
            
            
            300Federal
            
            $
            —
            
            
            $
            —
            
            
            $
            —State
            
            
            —
            
            
            
            —
            
            
            
            —Deferred
      provision (benefit)Federal
            
            
            —
            
            
            
            —
            
            
            
            —State
            
            
            —
            
            
            
            —
            
            
            
            ——
            
            
            
            —
            
            
            
            —Total
      income tax expense
            
            $
            300
            
            
            $
            —
            
            
            $
            —





Income
tax expense as reported is different than income tax expense computed by
applying the statutory federal rate of 35% for the tax years ended
December 31, 2009 and 2008 and for the period from May 11, 2007
through December 31, 2007. The specific differences are as
follows:





Period
      fromMay 11,
      2007throughDecember
      31,
              2009
            
            December 31,
              2008
            
            December 31,
              2007(in
      thousands)
            
            (in
      thousands)
            
            (in
      thousands)Expense
      (benefit) at statutory federal rate
            
            $
            (39,818
            ))
            
            $
            (161,643
            )
            
            $
            (27,209
            )Non-consolidated
      subsidiaries
            
            
            —
            
            
            
            67
            
            
            
            2,609Income/loss
      taxed directly to FXLR LLC’s historical partners
            
            
            —
            
            
            
            —
            
            
            
            10,165Valuation
      allowance
            
            
            39,818
            
            
            
            161,576
            
            
            
            14,435Income
      tax expense
            
            $
            —
            
            
            $
            —
            
            
            $
            —





69


Significant
components of the Company’s net deferred tax assets (liabilities) are as
follows:





December
      31,
              2009
            
            
            December 31,
              2008
            
            
            December 31,
              2007(in
      thousands)
            
            
            (in
      thousands)
            
            
            (in
      thousands)Deferred
      income tax assets:Land
            
            $
            112,472
            
            
            $
            90,328
            
            
            $
            1,400Fixed
      assets
            
            
            27,613
            
            
            
            22,077
            
            
            
            (7,700
            )Deferred
      revenue
            
            
            313
            
            
            
            121
            
            
            
            288Bad
      debt
            
            
            57
            
            
            
            6
            
            
            
            129Net
      operating loss carryforwards
            
            
            52,194
            
            
            
            39,944
            
            
            
            13,303Marketable
      securities
            
            
            —
            
            
            
            14,668
            
            
            
            861Other
            
            
            195
            
            
            
            1,139
            
            
            
            —Total
      deferred income tax assets, gross
            
            
            192,844
            
            
            
            168,283
            
            
            
            8,281Less:
      valuation allowance
            
            
            (192,494
            )
            
            
            (167,911
            )
            
            
            (7,854
            )Total
      deferred income tax assets, net
            
            
            350
            
            
            
            372
            
            
            
            427Deferred
      tax liabilities:Acquired
      lease intangibles
            
            
            (350
            )
            
            
            (372
            )
            
            
            (427
            )Total
      deferred income tax liabilities
            
            
            (350
            )
            
            
            (372
            )
            
            
            (427
            )Total
      deferred income tax assets (liabilities), net
            
            $
            —
            
            
            $
            —
            
            
            $
            —





The
deferred tax assets at December 31, 2009, 2008 and 2007 were reduced by a
valuation allowance of $192.5, $167.9 and $7.9 million, respectively. This
valuation allowance was established since the Company has no history of earnings
and anticipates incurring additional taxable losses until it completes one or
more of its development projects.





The
Company has $114.1 million of net operating losses which start expiring in
2027.





The
Company adopted the provisions of Financial Accounting Standards concerning
Accounting for Uncertainty in
Income Taxes an interpretation of previous Financial Accounting Standards
upon the formation of FXRE on June 15, 2007. As a result of the
implementation of the accounting standards, the Company reviewed its uncertain
tax positions in accordance with the recognition of the standards. As a result
of this review, the Company concluded that it has no uncertain tax positions.
Any potential uncertain tax positions relating to the partnerships that it
acquired would accrue to the partnerships’ historic partners and not to FXRE.
The Company does not expect any reasonably possible material changes to the
estimated amount of liability associated with its uncertain tax positions
through December 31, 2009.





The
Company will recognize interest and penalties related to any uncertain tax
positions through income tax expense.





There are
no income tax audits currently in process with any taxing
jurisdictions.
  15. 
Litigation





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.





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 Subsidiary, other than the collateral
proceeds held by the first lien lenders (collectively, the “Receivership
Property”).




70





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 Subsidiary was 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 subsidiaries that
own 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 as 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.


16. 
Related Party Transactions


In March
2008, the Company made a payment in the amount of $51,000 on behalf of 19X,
Inc., a company that is owned and controlled, in part, by Robert F.X. Sillerman.
The Company made the payment for administrative convenience, concurrent with its
own payment for travel expenses incurred in connection with a trip taken for a
shared business opportunity. As of April 9, 2010, the full amount of the payment
remains outstanding. The Company intends to continue to pursue payment of the
full amount.





Shared
Services Agreements





The
Company entered into a shared services agreement with CKX in 2007, pursuant to
which employees of CKX, including members of senior management, provide services
for the Company, and certain of our employees, including members of senior
management, are expected to provide services for CKX. The services being
provided pursuant to the shared services agreement include management, legal,
accounting and administrative.





Charges
under the agreement are made on a quarterly basis and will be determined taking
into account a number of factors, including but not limited to, the overall type
and volume of services provided, the individuals involved, the amount of time
spent by such individuals and their current compensation rate with the company
with which they are employed. Each quarter, representatives of the parties will
meet to (i) determine the net payment due from one party to the other for
provided services performed by the parties during the prior calendar quarter,
and (ii) prepare a report in reasonable detail with respect to the provided
services so performed, including the value of such services and the net payment
due. The parties are obligated to use their reasonable, good-faith efforts to
determine the net payments due in accordance with the factors described
above.





71


Each
party shall promptly present the report prepared as described above to the
independent members of its Board of Directors or a duly authorized committee of
independent directors for their review as promptly as practicable. If the
independent directors or committee for either party raise questions or issues
with respect to the report, the parties shall cause their duly authorized
representatives to meet promptly to address such questions or issues in good
faith and, if appropriate, prepare a revised report.





The
agreement was terminated on June 30, 2009.  For the period ended June
30, 2009, CKX incurred and billed FXRE $0.05 million.  For the year
ended December 31, 2008, CKX incurred and billed FXRE $1.6 million for
professional services, consisting primarily of accounting and legal services.
For the period May 11, 2007 through December 31, 2007, CKX billed FXRE
$1.0 million for professional services, consisting primarily of accounting
and legal services.  In each case, the services provided were approved
by the audit committee and the related fees were paid.





Certain
employees of Flag, from time to time, provide services for the Company. The
Company is required to reimburse Flag for these services provided by such
employees and other overhead costs in an amount equal to the fair value of the
services as agreed between the parties and approved by the audit committee. For
the year ended December 31, 2009, Flag incurred and billed FXRE
$0.1 million. The services provided for the year ended December 31,
2009 were approved by the audit committee and the related fees were paid
subsequent to December 31, 2009. Flag billed FXRE $0.9 million for the
period May 11, 2007 through December 31, 2007, and $0.3 million and
$0.2 million for the years ended December 31, 2008 and 2009,
respectively,  for professional services, consisting primarily of
accounting and legal services incurred, provided by Flag on behalf of
FXRE.





Paul
Kanavos, the Company’s President, (i) is the Chairman and Chief Executive
Officer of Flag, (ii) owns approximately 30.5% of the outstanding equity of
Flag, and (iii) is permitted under the terms of his employment agreement
with the Company to devote up to one-third of his time on matters pertaining to
Flag. To the extent Mr. Kanavos devotes more than one-third of his time to
Flag matters, Flag will be required to reimburse the Company for the fair value
of the excess services. Since becoming the President of the Company
Mr. Kanavos has devoted less than one-third of his time to Flag
matters.


Preferred
Priority Distribution





In
connection with CKX’s $100 million investment in FXLR on June 1, 2007,
Flag retained a $45 million preferred priority distribution right in FXLR,
which amount was payable upon the consummation of certain predefined capital
transactions, including the payment of $30 million from the proceeds of the
rights offering and sales under the related investment agreements described in
note 2. From and after November 1, 2007, Flag is entitled to receive
an annual return on the preferred priority distribution equal to the Citibank
N.A. prime rate as reported from time to time in the Wall Street Journal.
Mr. Sillerman, Mr. Kanavos and Brett Torino, the then Chairman of the
Company’s Las Vegas Division, are entitled to receive their pro rata
participation of the $45 million preferred priority distribution right held
by Flag, when paid by FXLR, based on their ownership interest in
Flag.





On
May 13, 2008, under their investment agreements with the Company,
Mr. Sillerman and Huff purchased an aggregate of 4,969,112 shares not
sold in the rights offering. As a result of these purchases and the shares sold
in the rights offering, the Company generated gross proceeds of approximately
$98.7 million from which it paid to Flag $30 million plus return of
approximately $1.0 million through the date of payment as partial
satisfaction of the $45 million preferred priority distribution right. For
a description of the investment agreements with Mr. Sillerman and Huff,
please see “Rights Offering and Related Investment Agreements” in note 2
above.





As of
December 31, 2009, $15 million of the preferred priority distribution
right in FXLR remains to be paid to Flag, plus, as of December 31, 2009, the
accrued priority return was $0.9 million. In connection
with the private placement of units by the Company in July 2008 as described in
note 2, Flag agreed to defer its right to receive additional payments
towards satisfaction of the preferred priority distribution right from the
proceeds of this private placement.
 
 On
December 24, 2009, the Company’s interest in FXLR was transferred to its
wholly-owned subsidiary, FXL, Inc., and Flag’s interest was transferred to FXL
Priority. Inc.
 
 For a
description of the Company’s private placements of common stock units with
certain of the Company’s directors and greater than 10% stockholders and their
affiliates, reference is made to Note 2 above.
  72





17.
Quarterly Financial Information (unaudited)





In the
opinion of the Company’s management, all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation have been
included on a quarterly basis.


For
The Year Ended December 31, 2009





Quarter
      Ended
            
            
            Quarter
      Ended
            
            
            Quarter
      Ended
            
            
            Quarter
      EndedAmounts
      in thousands, except for share information
            
            March 31,2009
            
            
            June 30,2009
            
            
            September 30,
              2009
            
            
            December 31,
              2009
            
            
            TotalRevenue
            
            $
            4,615
            
            
            $
            4,767
            
            
            $
            4,553
            
            
            $
            4,917
            
            
            $
            18,852Operating
      expenses (excluding depreciation and amortization and impairment of
      land)
            
            
            (3,510
            )
            
            
            5,112
            
            
            
            3,975
            
            
            
            4,716
            
            
            
            10,293Depreciation
      and amortization
            
            
            507
            
            
            
            505
            
            
            
            506
            
            
            
            508
            
            
            
            2,026Impairment
      of land
            
            
            —
            
            
            
            76,970
            
            
            
            —
            
            
            
            2,117
            
            
            
            79,087Operating
      Income/(loss)
            
            
            7,618
            
            
            
            (77,820
            )
            
            
            72
            
            
            
            (2,424
            )
            
            
            (72,554
            )Interest
      income (expense), net
            
            
            (10,362
            )
            
            
            (10,342
            )
            
            
            (10,454
            )
            
            
            (10,455
            )
            
            
            (41,613
            )Other
      expense
            
            
            (138
            )
            
            
            (79
            )
            
            
            —
            
            
            
            (300
            )
            
            
            (517
            )Minority
      interest
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Loss
      from incidental operations
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            (2,882
            )
            
            
            (88,241
            )
            
            
            (10,382
            )
            
            
            (13,181
            )
            
            
            (114,684
            )Basic
      and diluted loss per common share
            
            $
            (0.06
            )
            
            $
            (1.70
            )
            
            $
            (0.20
            )
            
            $
            (0.24
            )
            
            $
            (2.16
            )Average
      number of common shares outstanding(a)
            
            
            51,992,417
            
            
            
            51,992,417
            
            
            
            52,312,930
            
            
            
            53,118,438
            
            
            
            53,118,438





For
The Year Ended December 31, 2008
 Quarter
      EndedMarch 31,2008
                
                
                Quarter
      EndedJune 30,2008
                
                
                Quarter
      EndedSeptember 30,2008
                
                
                Quarter
      EndedDecember 31,2008
                
                
                TotalAmounts
      in thousands, except for share informationRevenue
                
                $
                485
                
                
                $
                486
                
                
                $
                482
                
                
                $
                4,556
                
                
                $
                6,009Operating
      expenses (excluding depreciation and amortization and impairment of
      land)
                
                
                7,240
                
                
                
                5,830
                
                
                
                16,791
                
                
                
                9,187
                
                
                
                39,048Depreciation
      and amortization
                
                
                6
                
                
                
                7
                
                
                
                7
                
                
                
                493
                
                
                
                513Impairment
      of land
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                325,080
                
                
                
                325,080Operating
      loss
                
                
                (6,761
                )
                
                
                (5,351
                )
                
                
                (16,316
                )
                
                
                (330,204
                )
                
                
                (358,632
                )Interest
      income (expense), net
                
                
                (14,221
                )
                
                
                (12,056
                )
                
                
                (9,581
                )
                
                
                (12,796
                )
                
                
                (48,654
                )Other
      expense
                
                
                —
                
                
                
                (31,585
                )
                
                
                (3,950
                )
                
                
                (6,135
                )
                
                
                (41,670
                )Loss
      from incidental operations
                
                
                (4,053
                )
                
                
                (4,968
                )
                
                
                (3,860
                )
                
                
                —
                
                
                
                (12,881
                )Net
      loss
                
                
                (25,035
                )
                
                
                (53,960
                )
                
                
                (33,707
                )
                
                
                (349,135
                )
                
                
                (461,937
                )Less:  net
      loss attributable to non-controlling interest
                
                
                2
                
                
                
                10
                
                
                
                —
                
                
                
                10
                
                
                
                22Net
      loss attributable to FX Real Estate and Entertainment Inc.
                
                
                (25,033)
                
                
                
                (53,950)
                
                
                
                (33,707)
                
                
                
                (349,125)
                
                
                
                (461,815)Basic
      and diluted loss per common share
                
                $
                (0.62
                )
                
                $
                (1.14
                )
                
                $
                (0.65
                )
                
                $
                (6.72
                )
                
                $
                (9.67
                )Average
      number of common shares outstanding(a)
                
                
                40,323,586
                
                
                
                47,186,090
                
                
                
                51,503,841
                
                
                
                51,991,735
                
                
                
                47,773,323


73


For
The Period From May 11, 2007 (inception) through December 31,
2007 May 11,
      2007throughJune 30,2007
                
                
                Quarter
      EndedSeptember 30,2007
                
                
                Quarter
      EndedDecember 31,2007
                
                
                TotalAmounts
      in thousands, except for share informationRevenue
                
                $
                —
                
                
                $
                1,346
                
                
                $
                1,724
                
                
                $
                3,070Operating
      expenses (excluding depreciation and amortization)
                
                
                1,838
                
                
                
                7,824
                
                
                
                20,354
                
                
                
                30,016Depreciation
      and amortization
                
                
                —
                
                
                
                86
                
                
                
                30
                
                
                
                116Operating
      loss
                
                
                (1,838
                )
                
                
                (6,564
                )
                
                
                (18,660
                )
                
                
                (27,062
                )Interest
      income (expense), net
                
                
                189
                
                
                
                (15,520
                )
                
                
                (15,326
                )
                
                
                (30,657
                )Other
      expense
                
                
                (377
                )
                
                
                (5,981
                )
                
                
                —
                
                
                
                (6,358
                )Equity
      in earnings (loss) of affiliate
                
                
                (4,455
                )
                
                
                (514
                )
                
                
                —
                
                
                
                (4,969
                )Loss
      from incidental operations
                
                
                —
                
                
                
                (5,113
                )
                
                
                (4,260
                )
                
                
                (9,373
                )Net
      loss
                
                
                (6,481
                )
                
                
                (33,692
                )
                
                
                (38,246
                )
                
                
                (78,419
                )Less:  net
      loss attributable to non-controlling interest
                
                
                244
                
                
                
                335
                
                
                
                101
                
                
                
                680Net
      loss attributable to FX Real Estate and Entertainment Inc.
                
                
                (6,237)
                
                
                
                (33,357)
                
                
                
                (38,145)
                
                
                
                (77,739)Basic
      and diluted loss per common share
                
                $
                (0.16
                )
                
                $
                (0.85
                )
                
                $
                (0.97
                )
                
                $
                (1.98
                )Average
      number of common shares outstanding(a)
                
                
                39,290,247
                
                
                
                39,290,247
                
                
                
                39,290,247
                
                
                
                39,290,247


(a)
            
            Average
      number of common shares outstanding for the interim periods reflects the
      actual shares outstanding at December 31, 2007 and reflects the
      reclassification of the Company’s common stock on November 29,
      2007.





18. 
Subsequent Events (unaudited)




Private
Placement of Common Stock


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.
 
 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.
  74
  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 .
  ITEM 9.CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





On
November 2, 2009, the Company’s Audit Committee dismissed Ernst & Young LLP
("E&Y") as the Company’s independent registered public accounting firm. On
the same date, the Audit Committee engaged L.L. Bradford & Company, LLC
("Bradford") as the Company’s new independent registered public accounting firm
for the year ending December 31, 2009.




E&Y’s
reports on the Company’s consolidated balance sheets as of December 31, 2008 and
2007 and the related consolidated statements of operations, stockholders’ equity
(deficit), cash flows and related financial statement schedule of the Company
for the year ended December 31, 2008 and for the period from May 11, 2007 to
December 31, 2007 (collectively, the "Consolidated Financial Statements") did
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles,
except that E&Y’s reports on the Consolidated Financial Statements did
contain a modification paragraph that expressed substantial doubt about the
Company’s ability to continue as a going concern.




During
the Company’s past two fiscal years and the interim period through November 2,
2009 (the date of dismissal), (i) the Company had no disagreements with E&Y
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to E&Y’s satisfaction, would have caused E&Y to make reference to the
subject matter of the disagreement in connection with its reports and (ii) there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K,
except that E&Y advised the Company of the existence of material weaknesses
in the Company’s internal control over financial reporting as disclosed in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007
and in its Quarterly Reports on Form 10-Q for the first three quarterly periods
of the year ended December 31, 2008, which material weaknesses were remediated
as of December 31, 2008, and E&Y advised the Company of the existence of new
material weaknesses in the Company’s internal control over financial reporting
as disclosed in the Company’s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2009, which new material weaknesses are still present. For
further discussion of the material weaknesses identified, refer to Item 9A(T) of
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2007, Item 4T of the Company’s Quarterly Reports on Form 10-Q for the first
three quarterly periods of the year ended December 31, 2008 and Item 4T of the
Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2009. The Audit Committee has authorized E&Y to respond fully to the
inquiries of Bradford concerning the subject matter of these material
weaknesses.




75





The
Company provided E&Y with a copy of the disclosures with respect to E&Y
set forth herein in response to Item 304(a) of Regulation S-K prior to filing
its related Current Report on Form 8-K dated November 2, 2009, as filed with the
Securities and Exchange Commission on November 6, 2009, and requested that
E&Y furnish it with a letter addressed to the Commission stating whether it
agreed with such disclosures and, if not, stating the respects in which it did
not agree. E&Y’s letter, dated November 5, 2009, is filed as Exhibit 16.1 to
such Current Report on Form 8-K.




During
the Company’s past two fiscal years and the interim period through November 2,
2009, the Company has not consulted with Bradford regarding either: (a) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company’s financial statements, and neither a written report was provided to
the Company or oral advice was provided that Bradford concluded was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue; or (b) any matter that was either the
subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K) or a reportable
event (as defined in Item 304(a)(1)(v) of Regulation S-K).





ITEM 9A(T). 
CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Management,
with the participation of the Company’s chief executive officer, Robert F.X.
Sillerman, and its principal accounting officer, Gary McHenry, has evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of
December 31, 2009.  Based on this evaluation, the chief executive
officer and principal accounting officer have concluded that, as of that date,
disclosure controls and procedures required by paragraph (b) of Exchange
Act Rules 13a-15 or 15d-15, were effective.





Management’s
Annual Report on Internal Control Over Financial Reporting





Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404) and as defined in Rules 13a-15(f) under the
U.S. Securities Exchange Act of 1934, management is required to provide the
following report on the Company’s internal control over financial
reporting:





1. The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company.





2. The
Company’s management has evaluated the system of internal control using the
Committee of Sponsoring Organizations of the Treadway Commission (COSO)
framework. Management has selected the COSO framework for its evaluation as it
is a control framework recognized by the SEC and the Public Company Accounting
Oversight Board that is free from bias, permits reasonably consistent
qualitative and quantitative measurement of the Company’s internal controls, is
sufficiently complete so that relevant controls are not omitted and is relevant
to an evaluation of internal controls over financial
reporting.





3. Based
on management’s evaluation under this framework, the Company determined that
there are material weaknesses in its internal control over financial reporting
as of December 31, 2009.
  4. This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





Changes
in Internal Control over Financial Reporting





The
recent 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 control over
financial reporting in these areas, significant adjustments were necessary to
present the financial statements in accordance with generally accepted
accounting principles. As a result, we have determined there to be material
weaknesses in internal controls over financial reporting. 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.




76








As of
December 31, 2009, the Company was unable to remediate these material
weaknesses because of its limited financial and human
resources.





ITEM 9B.
OTHER INFORMATION





None.
 PART III
  ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  Executive
Officers and Directors of FX Real Estate and Entertainment Inc.
 The
following table lists the names, ages and positions of our directors and
executive officers as of April 9, 2010:
 
 Name
                
                Age
                
                PositionRobert
      F.X. Sillerman
                
                62
                
                Chairman
      and Chief Executive OfficerPaul
      C. Kanavos
                
                51
                
                Director,
      PresidentGary
      McHenry
                
                59
                
                Principal
      Accounting OfficerMitchell
      Nelson
                
                62
                
                Executive
      Vice President, General Counsel, SecretaryHarvey
      Silverman
                
                67
                
                DirectorMichael
      J. Meyer
                
                44
                
                DirectorJohn
      D. Miller
                
                66
                
                DirectorRobert
      Sudack
                
                69
                
                Director
 
 Robert F.X. Sillerman has
served as Chairman of the board of directors and Chief Executive Officer since
January 10, 2008. Mr. Sillerman has served as the Chief Executive
Officer and Chairman of CKX since February 2005. Prior to that,
Mr. Sillerman was Chairman of FXM, Inc., a private investment firm, from
August 2000 through February 2005. Mr. Sillerman is a director, executive
officer and controlling stockholder of Atlas Real Estate Funds, Inc., a greater
than 5% stockholder of our company (“Atlas”). Mr. Sillerman is the founder
and has served as managing member of FXM Asset Management LLC, the managing
member of MJX Asset Management, a company principally engaged in the management
of collateralized loan obligation funds, from November 2003 through the present.
Prior to that, Mr. Sillerman served as the Executive Chairman, a Member of
the Office of the Chairman and a director of SFX Entertainment, Inc. from its
formation in December 1997 through its sale to Clear Channel Communications in
August 2000.  The Board of Directors selected Mr. Sillerman to serve
as a director because it believes he possesses significant entertainment and
financial expertise, which will benefit the Company.
 
 Paul C. Kanavos was elected a
Director and appointed President on August 20, 2007. Mr. Kanavos is
the Founder, Chairman and Chief Executive Officer of Flag Luxury Properties,
LLC. Prior to founding Flag Luxury Properties, he worked for over 20 years
at the head of Flag Management. Most recently he has developed Ritz-Carltons in
South Beach, Coconut Grove and Jupiter and was involved in developing
Temenos Anguilla. Mr. Kanavos is a director, executive officer and
controlling stockholder of Atlas. Mr. Kanavos’ early career experience
includes a position at Chase Manhattan Bank, where he negotiated, structured and
closed over $1 billion in loans.  The Board of Directors selected
Mr. Kanavos to serve as a director because it believes his real estate
development expertise will benefit the Company.
 
 Gary A. McHenry has served as
Principal Accounting Officer since July 2009. Mr. McHenry served as the
Company’s Las Vegas Subsidiary’s (and its predecessors’) Controller since 2007.
Mr. McHenry is a CPA and has over 10 years’ financial experience in the real
estate, manufacturing and communications industries.
 
 Mitchell J. Nelson has served
as Executive Vice President, General Counsel and Secretary since
December 31, 2007. Mr. Nelson has served as Senior Vice President of
Corporate Affairs for Flag Luxury Properties, LLC since February, 2003. He is a
minority stockholder of Atlas, and served as its President until December 2008.
He has served as counsel to various law firms since 1994. Prior to that, he was
a senior real estate partner at the law firm of Wien, Malkin & Bettex,
with supervisory responsibility for various commercial properties.
Mr. Nelson was a director of The Merchants Bank of New York and its holding
company until its merger with, and remains on the Advisory Board of, Valley
National Bank. Additionally, he has served on the boards of various
not-for-profit organizations, including as a director of the 92nd Street
YMHA and a trustee of Collegiate School, both in New York City.
  77
 Harvey Silverman was elected
a director of the Company in October 2007. Mr. Silverman was a principal of
Spear, Leeds & Kellogg, a major specialist firm on the New York Stock
Exchange, for 39 years until its acquisition by Goldman Sachs &
Co. in October of 2000. Since then, Mr. Silverman has been a private
investor.  Mr. Silverman was selected to serve as a director because
the Board of Directors believes his experience in capital markets will benefit
the Company.
 
 Michael J. Meyer was elected
a director of the Company in May 2008. Mr. Meyer is the founding partner of
17 Broad LLC, a diversified investment vehicle and securities consulting
firm. Prior to founding 17 Broad, from 2002 to 2007, Mr. Meyer served as
Managing Director and Head of Credit Sales and Trading for Bank of America.
Prior to that, Mr. Meyer spent four years as the Head of High Grade Credit
Sales and Trading for UBS.  The Board of Directors selected Mr. Meyer
to serve as a director because the Board of Directors believes his experience in
financial planning and debt issues will benefit the Company.
 
 John D. Miller has served as
a Director since January 9, 2009. Mr. Miller is the Chief Investment
Officer of W.P. Carey & Co. LLC, a net lease real estate company.
Mr. Miller is also a founder and Non-Managing Member of StarVest Partners,
L.P., a $150 million venture capital investment fund formed in 1998.
Mr. Miller is a minority stockholder of Atlas. From 1995 to 1998,
Mr. Miller was President of Rothschild Ventures Inc., the private
investments unit of Rothschild North America, a subsidiary of the worldwide
Rothschild Group. He was also President and CEO of Equitable Capital Management
Corporation, an investment advisory subsidiary of The Equitable where he worked
for 24 years beginning in 1969. From February 2005 through January 2009,
when he resigned, Mr. Miller served as a director of CKX,
Inc.  Mr. Miller was selected by the Board of Directors because it
believes his experience as Chief Investment Officer of a major real estate
company brings depth and sophistication to the Board, as does his venture
capital industry experience, both of which will benefit the
Company.
 
 Robert Sudack has served as a
Director since January 9, 2009. Mr. Sudack is the President and owner
of Posterloid Corporation, the world’s leading menu board manufacturing company
with over $20 million of sales per year, headquartered in Long Island City.
Mr. Sudack has also been a private investor in and advisor to various
companies for many years.  Mr. Sudack was selected to the Board of
Directors because it believes his operational experience as principal of a
successful manufacturing company will benefit the Company.
 
 Non-Voting
Designated Preferred Stock Director
 
 Under the
terms of the Non-Voting Designated Preferred Stock, the holder of the Non-Voting
Designated Preferred Stock is entitled to appoint a member our Board so long as
it continues to beneficially own at least 20% of the 6,611,998 shares of
our common stock that it acquired through (1) the distribution of our
common stock by CKX, Inc. to its stockholders, (2) the exercise of rights
in our rights offering completed in 2008, and (3) the purchase of shares
that were not subscribed for in the rights offering pursuant to its investment
agreement with us. Under the terms of the Non-Voting Designated Preferred Stock
as specified in the Certificate of Designation, on May 14, 2008, the holder
of the Non-Voting Designated Preferred Stock selected Bryan Bloom as its
designee to serve on the Company’s Board. At the written request of the holder
of the Non-Voting Designated Preferred Stock, its director designee shall be
appointed by the Board to serve on each committee of the Board to the extent
permissible under the applicable rules and regulations of the Securities and
Exchange Commission or The NASDAQ Global Market, or applicable law. In
accordance with the terms of the Non-Voting Designated Preferred Stock,
Mr. Bloom (or any successor designated by the holder) has the right,
subject to any restrictions of The NASDAQ Global Market or the Securities and
Exchange Commission, or applicable law, to be a member of, and the chairman of,
any committee of the Board formed for the purpose of reviewing any “related
party transaction” that is required to be disclosed pursuant to Section 404
of the Sarbanes Oxley Act of 2002 or any successor rule or regulation or any
transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any of
the Company’s directors, officers or affiliates, including any such committee
that may be formed pursuant to the applicable rules and regulations of the
Securities and Exchange Commission or The NASDAQ Global Market. However, if
Mr. Bloom (or any successor designated by the holder) would not be deemed
independent or disinterested with respect to a related party transaction and
therefore would not satisfy The NASDAQ Global Market or other applicable
requirements for serving on the special committee formed with respect thereto,
Mr. Bloom (or any successor designated by the holder) will not serve on the
relevant special committee but will have the right to attend meetings of such
special committee as an observer, subject to any restrictions of The NASDAQ
Global Market or applicable law. Furthermore, in the event that the attendance
at any meetings of any such special committee would raise confidentiality issues
as between the parties to the transaction that, in the reasonable opinion of
counsel to the relevant special committee, cannot be resolved by a
confidentiality agreement, Mr. Bloom (or any successor designated by the
holder) shall be required to recuse himself from such meetings.  Mr.
Bloom’s designation as director was withdrawn on April 8, 2010, and no
replacement has been named.
  78
 Voting
Class A Preferred Stock Director
 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, a majority of 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.  The
holders of the Class A Convertible Preferred Shares also vote on an as-converted
basis into common stock with the holders of the Common Stock as a single class
for the election of directors.
 Section 16(a)
Beneficial Ownership Reporting Compliance
 
 Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors and
officers, and persons who own more than 10% of our outstanding Common Stock to
file with the SEC initial reports of ownership and changes in ownership of our
Common Stock. Such individuals are also required to furnish us with copies of
all such ownership reports they file.
 
 To our
knowledge, based solely on information furnished to us and contained in
Section 16 reports filed with the Securities and Exchange Commission, as
well as any written representations that no other reports were required, we
believe that during 2009, all required Section 16 reports of our directors
and executive officers and persons who own more than 10% of our outstanding
common stock were timely filed, except Mr. McHenry, our principal accounting
officer, who filed his initial Form 3 after the required filing
date.
 
 Code
of Business Conduct and Ethics
 
 The
Company has adopted a Code of Business Conduct and Ethics, which is applicable
to all our employees and directors, including our principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions. The Code is posted on our website located
at www.fxree.com.
 
 We intend
to satisfy the disclosure requirements under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of our Code of Business
Conduct and Ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions by posting such information on our website at
www.fxree.com.
 
 Corporate
Governance Guidelines
 
 The
Company has Corporate Governance Guidelines which provide, among other things,
that a majority of the Company’s board of directors must meet the criteria for
independence required by The NASDAQ Stock Market ® (even though the Company’s
stock is no longer traded on such market) and that the Company shall at all
times have a standing Audit Committee, Compensation Committee and Nominating and
Corporate Governance Committee, which committees will be made up entirely of
independent directors. The Corporate Governance Guidelines also outline director
responsibilities, provide that the board of directors shall have full and free
access to officers and employees of the Company and require the board of
directors to conduct an annual self-evaluation to determine whether it and its
committees are functioning effectively. The Corporate Governance Guidelines and
the charters for these committees can be found on the Company’s website at ir.fxree.com.
  79
 Board
Committees
 
 The
following chart sets forth the membership of each board committee as of April 9,
2009.
 
 Committee
                
                MembersAudit
      Committee
                
                Michael
      Meyer (Chairman)
                  John
      D. Miller
                  Harvey
      SilvermanCompensation
      Committee
                
                Michael
      Meyer
                  Harvey
      SilvermanNominating
      and Corporate Governance Committee
                
                Harvey
      Silverman (Chairman)
                  Michael
      Meyer
 
 Audit
Committee
 
 The Audit
Committee is comprised of Messrs. Meyer, Miller, and Silverman. Mr. Meyer
is the Chairman of the Audit Committee. The Audit Committee assists our board of
directors in fulfilling its responsibility to oversee management’s conduct of
our financial reporting process, including the selection of our outside
auditors, review of the financial reports and other financial information we
provide to the public, our systems of internal accounting, financial and
disclosure controls and the annual independent audit of our financial
statements.
 
 All
members of the Audit Committee are independent within the meaning of the rules
and regulations of the SEC, and our Corporate Governance Guidelines. In
addition, Mr. Meyer is qualified as an audit committee financial expert
under the regulations of the SEC and has the accounting and related financial
management expertise required thereby.
 
 ITEM 11.  EXECUTIVE COMPENSATION
 
 2009 Summary Compensation
Table
 
 The table
below summarizes the compensation earned for services rendered to the Company
for the fiscal years ended December 31, 2009 and December 31, 2008 by our
Chief Executive Officer and the two other most highly compensated executive
officers of the Company (the “named executive officers”) who served in such
capacities at the end of the fiscal year ended December 31, 2009. Except as
provided below, none of our named executive officers received any other
compensation required to be disclosed by law or in excess of $10,000
annually.
 Name

                  and
      Principal Position
                
                Fiscal
      Year
                
                Salary
                  ($)
                
                
                Bonus
                  ($)
                
                
                Option Awards ($)
      (1)
                
                
                All
      Other
                  Compensation
                
                
                TotalRobert
      F.X. Sillerman
                
                2009
                
                
                ---
                (3)
                
                
                ----
                
                
                
                ---
                
                
                $
                ---
                
                
                $
                ---Chairman
      and Chief Executive Officer
                
                2008
                
                
                ---
                (3)
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Paul
      Kanavos
                
                2009
                
                $
                452,207
                
                
                $
                150,000
                (4)
                
                $
                ---
                
                
                $
                9,800
                
                
                $
                612,007President
                
                2008
                
                
                600,000
                
                
                
                ---
                
                
                
                410,700
                
                
                
                12,559
                
                
                
                1,023,259Mitchell
      Nelson
                
                2009
                
                $
                393,750
                
                
                $
                131,250
                (4)
                
                $
                ---
                
                
                $
                33,043
                
                
                $
                558,043General
      Counsel
                
                2008
                
                
                525,000
                
                
                
                ---
                
                
                
                328,560
                
                
                
                26,084
                
                
                
                879,644
 
 (1)
                The
      amounts in this column for the fiscal year 2008 represent the aggregate
      grant date fair value of stock options computed in accordance with
      Financial Accounting Standards Board (FASB) Accounting Standards
      Codification (ASC) Topic 718 "Compensation-Stock Compensation" (“FASB ASC
      Topic 718”).  The value ultimately realized by the named
      executive officers upon the actual exercise of the stock options may or
      may not be equal to the FASB ASC Topic 718 computed value.  The
      discussion of the assumptions used for purposes of the valuation of the
      stock options appears in Note 13 (Share-Based Payments) of our
      consolidated financial statements for the fiscal year ended December 31,
      2009 included elsewhere herein.  There were no stock option awards in
      fiscal year 2009.  80
  (2)
                Includes
      401K matching and health benefits to the extent the named executive
      received such benefits during 2009 and 2008.(3)
                Mr. Sillerman
      does not receive a base salary under the terms of his employment
      agreement. Mr. Sillerman provided his services pursuant to and in
      accordance with the Shared Services Agreement by and between the Company
      and CKX, Inc. until the termination of the Shared Services Agreement on
      June 30, 2009.  The Company reimbursed CKX Inc. for a pro rata
      portion of Mr. Sillerman’s salary based on the amount of
      Mr. Sillerman’s business time spent on Company
      matters.  After June 30, 2009, Mr. Sillerman’s services were
      provided without reimbursement.  For the years ended
      December 31, 2009 and 2008, the Company reimbursed CKX in the amount
      of $45,618 and $260,189, respectively, for services provided by
      Mr. Sillerman.(4)
                Mr.
      Kanavos and Mr. Nelson received retention bonuses in connection with the
      modification of their employment agreements in June 2009.  Mr.
      Kanavos received payment of $150,000 and Mr. Nelson received
      $131,250.  The modification of Mr. Kanavos’ employment agreement
      provided for an additional retention bonus of $95,000, which has not been
      paid as of April 9, 2010.(5)
                Under
      the terms of his employment agreement with the Company, Mr. Nelson is
      permitted to devote up to one-third of his business time to providing
      services for or on behalf of Mr. Sillerman, or Flag Luxury
      Properties, LLC (“Flag”), provided that Mr. Sillerman and/or Flag, as
      the case may be, will reimburse the Company for the fair market value of
      the services provided for him or it by Mr. Nelson. For the years
      ended December 31, 2009 and 2008, Flag reimbursed the Company for
      $42,608 and $100,000, respectively, of Mr. Nelson’s base salary as
      result of services provided for it by Mr. Nelson.
 
 Outstanding Equity Awards at
December 31, 2009
  Option
      AwardsName
                  
                  Number
      of
                    Securities
                    Underlying Unexercised
                    Options (#)
                    Exercisable
                  
                  
                  
                  Number
      of
                    Securities
                    Underlying
                    Unexercised
                    Options
                    (#)
                    Unexercisable
                  
                  
                  Equity
                    Incentive Plan
                    Awards: Number
                    of Securities
      Underlying
      Unexercised
                    Unearned Options
                    ($)
                  
                  
                  Option Exercise
                    Price
                    ($)
                  
                  Option
                    ExpirationRobert
      F.X. Sillerman
                  
                  
                  2,400,000
                  (1
                  )
                  
                  
                  3,600,000
                  
                  
                  
                  —
                  
                  
                  
                  20.00
                  
                  1/10/18100,000
                  (2
                  )
                  
                  
                  150,000
                  
                  
                  
                  
                  
                  
                  
                  5.00
                  
                  5/19/18—
                  (2
                  )
                  
                  
                  250,000
                  
                  
                  
                  
                  
                  
                  
                  6.00
                  
                  5/19/18Paul
      Kanavos
                  
                  
                  300,000
                  (3
                  )
                  
                  
                  450,000
                  
                  
                  
                  —
                  
                  
                  
                  20.00
                  
                  12/31/1740,000
                  (2
                  )
                  
                  
                  60,000
                  
                  
                  
                  
                  
                  
                  
                  5.00
                  
                  5/19/18—
                  (2
                  )
                  
                  
                  100,000
                  
                  
                  
                  
                  
                  
                  
                  6.00
                  
                  5/19/18Mitchell
      Nelson
                  
                  
                  160,000
                  (4
                  )
                  
                  
                  240,000
                  
                  
                  
                  —
                  
                  
                  
                  20.00
                  
                  12/31/1740,000
                  (2
                  )
                  
                  
                  60,000
                  
                  
                  
                  
                  
                  
                  
                  5.00
                  
                  5/19/18—
                  (2
                  )
                  
                  
                  100,000
                  
                  
                  
                  
                  
                  
                  
                  6.00
                  
                  5/19/18
 
 (1)
                
                On
      January 10, 2008, Mr. Sillerman received a grant of options to
      acquire 6,000,000 shares of common stock. The options vest ratably
      over a five year period.(2)
                
                With
      respect to options granted by the Company on May 19, 2008, one half
      of the options have an exercise price of $5.00 per share and the other
      half have an exercise price of $6.00 per share. The options vest over a
      five year period, with 40% of the $5.00 options vesting after one year,
      40% of the $5.00 options vesting after year two, 20% of the $5.00 and 20%
      of the $6.00 options vesting after year three, 40% of the $6.00 options
      vesting after year four and 40% of the $6.00 options vesting after year
      five.  81
  (3)
                
                On
      December 31, 2007, Mr. Kanavos received a grant of options to
      acquire 750,000 shares of common stock. The options vest ratably over
      a five year period.(4)
                
                On
      December 31, 2007, Mr. Nelson received a grant of options to
      acquire 400,000 shares of common stock. The options vest ratably over
      a five year period.
  
 Potential
Payments upon Termination without Cause or Change-in-Control
 
 The
following disclosure is for our named executive officers,
Messrs. Sillerman, Kanavos and Nelson.
 
 Upon a
(i) termination by our Company without “cause,” (ii) a “constructive
termination without cause,” or (iii) a “change in control,” the employment
agreement for Mr. Sillerman provides for the following benefits: (a) a
payment in the amount of $3,000,000, (b) continued eligibility to
participate in any benefit plans of our Company for the lesser of (x) three
years, and (y) the remaining portion of the employment term following
termination, plus (iii) (c) accelerated vesting of any stock options,
restricted stock or other equity based instruments previously issued to the
executive officer. However, in the event that any amount payable to
Mr. Sillerman upon a “change of control” would be nondeductible by the
Company under the rules set forth in Section 280G of the Internal Revenue
Code of 1986, then the amount payable to Mr. Sillerman shall be reduced to
the maximum amount that would be payable but which would remain deductible under
Section 280G of the IRC. If a change of control were to occur as of
December 31, 2009, Mr. Sillerman would receive no
payment.
 Name
                
                Salary
                
                
                Bonus
                
                
                Health/Insurance
      Benefits
                
                
                TotalRobert
      F.X. Sillerman
                
                $
                0
                
                
                $
                3,000,000
                
                
                $
                70,524
                
                
                $
                3,070,524Paul
      Kanavos
                
                $
                150,000
                
                
                $
                0
                
                
                $
                70,524
                
                
                
                220,524Mitchell
      Nelson
                
                $
                131,250
                
                
                $
                0
                
                
                $
                70,348
                
                
                
                201,598
 
 Potential Payments upon Death or
Disability
 The
following disclosure is for our continuing named executive officers,
Messrs. Sillerman, Kanavos and Nelson.
  The
employment agreements of each of Messrs. Kanavos and Nelson provide for the
following benefits in the event of their death: (a) all earned but unpaid Base
Salary at the time of the Executive’s death; the full costs relating to the
continuation of any group health, medical, dental and life insurance program or
plan provided through the Employer for a period of ninety (90) days after the
termination of Employment; and all reimbursable business expenses incurred by
the Executive through time of his death.  The approximate amount that
would be due to the estates of Messrs. Kanavos and Nelson in the event of
their death as of December 31, 2009 would be $220,524 and $201,598,
respectively.
  The
employment agreement for Mr. Sillerman provides for the following benefits
in the event of his death: (a) a payment in the amount of $3,000,000 plus
(b) the full costs of the continuation of any group health, dental and life
insurance program through which coverage was provided to any dependent of the
executive officer prior to his death, for three years following the executive
officer’s death and (c) accelerated vesting of any stock options,
restricted stock or other equity based instruments previously issued to the
executive officer. The approximate amount that would be due to the estate of
Mr. Sillerman in the event of his death as of December 31, 2009 would
be $3,070,524.
 
 Compensation
of Non-Employee Directors
 
 Employee
directors do not receive any separate compensation for their board service.
Non-employee directors receive the compensation described below.
  For 2009,
non-employee directors received an annual fee of $80,000 plus $1,000 for
attendance at each meeting of our board of directors and $750 for attending each
meeting of a committee of which he is a member. The chairperson of the Audit
Committee received an additional annual fee of $20,000 and each of the other
members of the Audit Committee received an additional fee of $10,000 for serving
on the Audit Committee.  The chairpersons of each other committee
received an additional annual fee of $10,000 and each of the other members of
such committees received an additional annual fee of $5,000. All fees described
above are payable half in cash and half in equity awards or options under the
Company’s 2007 Long-Term Incentive Compensation Plan, though each non-employee
director will have the option to elect, on an annual basis, to receive 100% of
his compensation in equity awards or stock options.
  82
 
 The
Company pays non-employee directors on a quarterly basis and prices all grants
of Common Stock at the closing price on the last day of the quarter for which
such fees relate or options therefor on the date granted.  During
2009, fees earned for the first quarter were paid in cash and fees earned for
the remainder of the year were satisfied through stock options.
  The total
compensation received by our non-employee directors during fiscal year 2009 is
shown in the following table (1):
 Fees
      Earned or
                
                
                OptionPaid
      in Cash
                
                
                Awards
                
                
                TotalName
                
                ($)(2)
                
                
                ($)(3)
                
                
                ($)David
      Ledy (4)
                
                $
                31,500
                
                
                $
                31,500
                
                
                $
                63,000Michael
      Meyer
                
                $
                27,750
                
                
                $
                80,750
                
                
                $
                108,500John
      Miller
                
                $
                22,000
                
                
                $
                72,500
                
                
                $
                94,500Harvey
      Silverman
                
                $
                25,750
                
                
                $
                82,000
                
                
                $
                107,750Robert
      Sudack
                
                $
                22,000
                
                
                $
                66,000
                
                
                $
                88,000
 
 (1)
                Represents
      compensation paid with respect to the year ended December 31,
      2009.
 (2)
                Directors
      are paid half in cash and half in equity, unless they elect to receive a
      greater percentage of their compensation in
  equity.
 (3)
                The
      amounts shown represent the aggregate grant date fair value of stock
      options computed in accordance with FASB ASC Topic 718.  The
      value ultimately realized by the director upon the actual exercise of
      the stock options may or may not be equal to the FASB ASC Topic 718
      computed value.  The discussion of the assumptions used for
      purposes of the valuation of the stock options appears in Note 13
      (Share-Based Payments) of our consolidated financial statements for the
      fiscal year ended December 31, 2009 included elsewhere
      herein.
 (4)
                Mr. Ledy
      resigned from the Board in August
2009.
 Compensation
Committee Interlocks and Insider Participation
 
 No member
of our Compensation Committee was at any time during the past fiscal year an
officer or employee of us, was formerly an officer of us or any of our
subsidiaries or has an immediate family member that was an officer or employee
of us or had any relationship requiring disclosure under Item 13. Certain Relationships,
Related Transactions, and Director Independence. ”
 
 During
the last fiscal year, none of our executive officers served as:
 •          a member of the compensation committee
(or other committee of the board of directors performing equivalent functions
or, in the absence of any such committee, the entire board of directors) or
another entity, one of whose executive officers served on our compensation
committee;
 
 •          a director of another entity, one of
whose executive officers served on our compensation
committee; and
 
 •            a
member of the compensation committee (or other committee of the board of
directors performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity, one of whose
executive officers served as a director of us.
  ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Securities
Authorized for Issuance under Equity Compensation Plans
 The table
below shows information with respect to our equity compensation
plans:  our 2007 Executive Equity Incentive Plan and our 2007
Long-Term Incentive Compensation Plan.  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.
  83
  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
                  RemainingAvailable
                  for
      Future
                  Issuance
      Under
                  Equity
      CompensationPlans
                  (Excluding
      Securities
                  Reflected
      in Column (a) )(#)
                
                ($)
                
                (#)Equity
      compensation plans approved by security holders
                
                
                10,962,794
                
                
                $
                1.57
                
                
                377,206Equity
      compensation plans not approved by security holders
                
                
                -
                
                
                
                -
                
                
                -
 
 Security Ownership of Certain
Beneficial Owners and Management
 
 The
following table sets forth certain information regarding the beneficial
ownership of shares of our common stock as of April 9, 2010
by:
 
 •
                each
      person or entity known by us to beneficially own more than 5% of the
      outstanding shares of our common stock,•
                each
      of our named executive officers;•
                each
      of our directors; and•
                all
      of our directors and executive officers, named as a
  group.
 
 Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to the securities. Unless otherwise noted, each beneficial owner has
sole voting and investing power over the shares shown as beneficially owned
except to the extent authority is shared by spouses under applicable law. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, any shares of common stock subject to common stock
purchase warrants or stock options held by that person that are exercisable as
of April 9, 2010 or will become exercisable within 60 days thereafter are
deemed to be outstanding, while such shares are not deemed outstanding for
purposes of computing percentage ownership of any other
person.
  As of April 9, 2010, there
were 65,403,876 shares of the registrant’s common stock
outstanding.
  84
  Name and Address of Beneficial
      Owner(1)
                
                Shares
                  Beneficially
                  Owned
                
                
                Percentage
      of
                  Common
                  StockBeneficial
      Owners of 5% or MoreRobert
      F.X. Sillerman (2)
                
                
                33,562,871
                
                
                
                44.69
                %Paul
      C. Kanavos (4)
                
                
                24,425,634
                
                
                
                33.00
                %Brett
      Torino (3)
                
                
                24,579,948
                
                
                
                33.00
                %The
      Huff Alternative Fund, L.P. (5)
                
                
                9,864,543
                
                
                
                14.62
                %Directors
      and Named Executive Officers (not otherwise included
    above):Michael
      J. Meyer (6)
                
                
                481,306
                
                
                
                *John
      D. Miller (7)
                
                
                384,722
                
                
                
                *Mitchell
      J. Nelson
                
                
                80,000
                
                
                
                *Harvey
      Silverman (8)
                
                
                2,889,717
                
                
                
                4.35
                %Robert
      Sudack (9)
                
                
                485,067
                
                
                
                *All
      directors and executive officers as a group (8 individuals) (10)
                
                
                65,199,034
                
                
                
                72.44
                %
 
 *     Represents
less than 1%.
  (1) Except as
otherwise set forth below, the business address and telephone number of each of
the persons listed above is c/o FX Real Estate and Entertainment Inc., 650
Madison Avenue, New York, New York 10022, telephone
(212) 796-8177.
  (2)  Sillerman beneficially owns
(i) directly 19,572,012 shares of Common Stock (consisting of: (A)
13,271,972 shares of Common Stock owned by Sillerman; (B) 2,400,000 shares
of Common Stock issuable upon the exercise of stock options held by Sillerman
that are presently exercisable at $20.00 per share; (C) 200,000 shares of
Common Stock issuable upon the exercise of stock options held by Sillerman that
are presently exercisable or exercisable within 60 days of April 9, 2010 at
$5.00 per share; (D) 2,055,498 shares of Common Stock issuable upon the
exercise of warrants held by Sillerman and his spouse that are presently
exercisable at $0.2919 per share; and (E) 888,011 shares of Common Stock
issuable upon the exercise of warrants held by Sillerman and his spouse
presently exercisable at $0.3041 per share); and (ii) indirectly 15,156,221
shares of Common Stock (consisting of: (A) 766,917 shares of Common Stock
owned by Holdings, which Sillerman controls through a trust for the benefit of
Sillerman’s descendents; (B) 4,423,264 shares of Common Stock owned of
record by Laura Baudo Sillerman, Sillerman’s spouse; (C) 390,626 shares of
Common Stock issuable upon the exercise of warrants held by Sillerman’s spouse
that are presently exercisable at $0.08 per share; (D) 2,777,778 shares of
Common Stock issuable upon the exercise of warrants held by Sillerman’s spouse,
half of which are presently exercisable at $0.10 per share and the other half of
which are presently exercisable at $0.11 per shares; (E)  362,637 shares of
Common Stock issuable upon the exercise of warrants held by Sillerman’s spouse
that are presently exercisable at $0.273 per share; (F) 618,557 shares of
Common Stock issuable upon the exercise of warrants held by Sillerman’s spouse
that are presently exercisable at $0.291 per share; and (G) 5,407,611
shares of Common Stock owned of record by Atlas). 13,783,250 of the shares of
Common Stock beneficially owned by Sillerman have been pledged to Deutsche Bank
Trust Company Americas, together with certain other collateral, to secure a $50
million personal loan to Sillerman.  The loan matures on August 15,
2011; provided, however that $4 million of the loan becomes payable on each of
October 1, 2010, January 1, 2011, April 1, 2011, and July 1,
2011.  Excludes shares convertible in connection with the Series A
Convertible Preferred Shares, as follows:  (A) 856,531 shares of
Common Stock issuable upon the conversion of Series A Convertible Preferred
Shares held by Sillerman and his spouse, as joint tenants, that are convertible
at $0.2335 per share; (B) 369,913 shares issuable upon the conversion of the
Series A Convertible Preferred Shares held by Sillerman and his spouse that are
convertible at $0.2433 per share; (C) 151,099 shares of Common Stock issuable
upon the conversion of the Series A Convertible Preferred Shares held by
Sillerman’s spouse that are convertible at $0.2184 per share ; and (D) 257,732
shares of Common Stock issuable upon the conversion of Series A Convertible
Preferred Shares held by Sillerman’s spouse that are convertible at $0.2328 per
share.
  (3) Torino
beneficially owns (i) directly 256,238 shares of Common Stock (consisting
of: (A) 176,238 shares of Common Stock owned of record by Torino; and
(B) 80,000 shares of Common Stock issuable upon the exercise of stock
options held by Torino that are presently exercisable at $20.00 per share) and
(ii) indirectly 25,589,072 shares of Common Stock (consisting of:
(A) 5,556,870 shares of Common Stock owned of record by ONIROT;
(B) 4,123,264 shares of Common Stock owned of record by TTERB;
(C) 2,142,858 shares of Common Stock issuable upon the exercise of
presently exercisable warrants held by TTERB, half of which are exercisable at
$4.50 per share and the other half of which are exercisable at $5.50 per share;
(D) 390,626 shares of Common Stock issuable upon the exercise of warrants
held by TTERB that are presently exercisable at $0.08 per share; (E) 2,777,778
shares of Common Stock issuable upon the exercise of warrants held by TTERB,
half of which are presently exercisable at $0.10 per share and the other half of
which are presently exercisable at $0.11 per share; (F) 362,637 shares of
Common Stock issuable upon the exercise of warrants held by TTERB that are
presently exercisable at $0.273 per share; (G) 618,557 shares of Common
Stock issuable upon the exercise of warrants held by TTERB that are presently
exercisable at $0.291 per share; (H) 2,055,498 shares of Common Stock
issuable upon the exercise of the warrants held by TTERB that are presently
exercisable at $0.2919 per share; (I) 888,011 shares of Common Stock issuable
upon the exercise of warrants held by TTERB presently exercisable at $0.3041 per
share; and (J) 5,407,611 shares of Common Stock owned of record by
Atlas).  Excludes shares convertible in connection with the Series A
Convertible Preferred Shares, as follows:  (A) 151,099 shares of
Common Stock issuable upon the conversion of the Series A Convertible
Preferred Shares held by TTERB that are convertible at $0.2184 per share;
(B) 257,732 shares of Common Stock issuable upon the conversion of
Series A Convertible Preferred Shares held by TTERB that are convertible at
$0.2328 per share; (C) 856,531 shares of Common Stock issuable upon the
conversion of Series A Convertible Preferred Shares held by TTERB that are
convertible at $0.2335 per share; and (D) 369,913 shares issuable upon the
conversion of the Series A Convertible Preferred Shares held by
TTERB  that are convertible at $0.2433 per share.
  85
  (4) Kanavos
beneficially owns (i) directly 20,243,385 shares of Common Stock
(consisting of: (A) 354,254 shares of Common Stock owned of record by Kanavos;
(B) 9,547,802 shares of Common Stock owned of record by Kanavos and his
spouse, Dayssi Olarte de Kanavos, as joint tenants; (C) 500,000 shares of
Common Stock owned of record by the Paul C. Kanavos 2008 GRAT;
(D) 1,142,860 shares of Common Stock issuable upon the exercise of
presently exercisable warrants held by Kanavos and his spouse, half of which are
exercisable at $4.50 per share and the other half of which are exercisable at
$5.50 per share; (E) 300,000 shares of Common Stock issuable upon the
exercise of stock options held by Kanavos that are presently exercisable at
$20.00 per share; (F) 80,000 shares of Common Stock issuable upon the
exercise of stock options held by Kanavos that are presently exercisable or
exercisable within 60 days of April 9, 2010 at $5.00 per share; (G) 390,626
shares of Common Stock issuable upon the exercise of warrants held by Kanavos
and his spouse that are presently exercisable at $0.08 per share;
(H) 362,637 shares of Common Stock issuable upon the exercise of warrants
held by Kanavos and his spouse that are presently exercisable at $0.273 per
share; (I) 2,777,778 shares of Common Stock issuable upon the exercise of
warrants held by Kanavos and his spouse, half of which are presently exercisable
at $0.10 per share and the other half of which are presently exercisable at
$0.11 per share; (J) 618,557 shares of Common Stock issuable upon the
exercise of warrants held by Kanavos and his spouse that are presently
exercisable at $0.291 per share; (K) 2,055,498 shares of Common Stock
issuable upon the exercise of warrants held by Kanavos and his spouse that are
presently exercisable at $0.2919 per share); and (L) 888,011 shares of Common
Stock issuable upon the exercise of warrants held by Kanavos and his spouse
presently exercisable at $0.3041 per share; and (ii) indirectly 5,407,611
shares of Common Stock (consisting of the shares of Common Stock owned of record
by Atlas).  Kanavos’ beneficial ownership excludes 500,000 shares of
Common Stock owned of record by his spouse’s GRAT, the Dayssi Olarte de Kanavos
2008 GRAT.  Excludes shares convertible in connection with the Series
A Convertible Preferred Shares, as follows:  (A) 151,099 shares of
Common Stock issuable upon the conversion of the Series A Convertible
Preferred Shares held by Kanavos and his spouse, as joint tenants, that are
convertible at $0.2184 per share; (B) 257,732 shares of Common Stock
issuable upon the conversion of Series A Convertible Preferred Shares held
by Kanavos and his spouse that are convertible at $0.2328 per share; and
(C) 856,531 shares of Common Stock issuable upon the conversion of
Series A Convertible Preferred Shares held by Kanavos and his spouse, as
joint tenants, that are convertible at $0.2335 per share; and (D) 369,913 shares
issuable upon the conversion of the Series A Convertible Preferred Shares held
by Kanavos and his spouse that are convertible at $0.2433 per
share.
  (5) Held of
record by The Huff Alternative Fund, L.P. and one of its affiliated limited
partnerships (together, the “Huff Entities”). William R. Huff possesses the sole
power to vote and dispose of all the shares of common stock held by the Huff
Entities, subject to the internal screening procedures and other securities law
compliance policies that from time to time require Mr. Huff to delegate to
one or more employees of the Huff Entities transaction and/or securities
disposition authority with respect to certain entities, including our company.
All such employees serve under the ultimate direction, control and authority of
Mr. Huff. Thus, Mr. Huff is deemed to beneficially own
6,739,542 shares of common stock. The address of the Huff Entities and
Mr. Huff is 67 Park Place, Morristown, New Jersey
07960.  Includes: (i) 7,781,209 shares of common stock owned of record
by the Huff Entities and (ii) 2,083,334 shares of Common Stock issuable upon the
exercise of warrants held by the Huff Entities, half of which are presently
exercisable at $0.07 per share and the other half of which are presently
exercisable at $0.08 per share.
  (6) Includes:
(i) 32,695 shares of common stock owned of record by Mr. Meyer;
and (ii) 448,611  shares of Common Stock issuable upon the exercise of
stock options held by Mr. Meyer that are presently exercisable at $0.18 per
share.
 
 (7) Includes:
384,722 shares of Common Stock issuable upon the exercise of stock options held
by Mr. Miller that are presently exercisable at $0.18 per share.
  (8) Includes:
(i) 1,384,119 shares of common stock owned of record by
Mr. Silverman; (ii) 478,612 shares of common stock owned of
record by Silverman Partners, L.P., of which Mr. Silverman is the sole
general partner; (iii) 571,430 shares of common stock underlying
presently exercisable warrants owned of record by Silverman Partners, L.P (these
warrants are exercisable at prices of $4.50 per share for 285,715 of the
underlying shares and $5.50 per share for 285,715 of the underlying shares); and
(iv) 455,556 shares of Common Stock issuable upon the exercise of stock options
held by Silverman that are presently exercisable at $0.18 per
share.
  86
  (9) Includes:
(i) 118,400 shares of common stock owned of record by Mr. Sudack;
and (ii) 366,667 shares of Common Stock issuable upon the exercise of stock
options held by Mr. Sudack that are presently exercisable at $0.18 per
share.
  (10)         
Includes an aggregate of 64,836,397shares of common stock
underlying presently exercisable warrants and options described above in
notes 2, 3, 4, 6, 7, 8, and 9.
 ITEM 13 CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 There are
a number of conflicts of interest of which stockholders should be aware
regarding our ownership and operations. Set forth below a list of related
parties with whom we have engaged in one or more transactions as well as a
summary of each transaction involving such related parties.
 
 Related
Parties
 
 •
                Robert
      F.X. Sillerman, our Chairman and Chief Executive Officer, (i) is the
      Chairman and Chief Executive Officer of CKX, Inc., (ii) owns
      approximately 20.6% of the outstanding common stock of CKX, and
      (iii) owns approximately 29.3% of the outstanding equity of Flag
      Luxury Properties.•
                Paul
      Kanavos, our President, (i) is the Chairman and Chief Executive
      Officer of Flag Luxury Properties, and (ii) owns approximately 29.3%
      of the outstanding equity of Flag Luxury Properties.•
                Flag
      Luxury Properties holds a $15 million priority preferred distribution
      as more fully described below.
 
 Priority
Preferred Distribution
 
 Flag
Luxury Properties holds a $15 million priority preferred distribution right
in FX Luxury Realty. This right entitles Flag Luxury Properties to receive an
aggregate amount of $15 million 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 from certain predefined capital transactions to pay the amount then
owed to Flag Luxury Properties under such priority preferred distribution right.
This right carries no voting or other rights, other than the right to receive
the priority preferred distribution. Robert F.X. Sillerman and Paul Kanavos each
own, directly and indirectly, an approximate 29.3% interest in Flag Luxury
Properties and each will be entitled to receive his pro rata participation of
the priority distribution when paid by FX Luxury Realty.
 
 Terminated
License Agreements
 
 On
June 1, 2007, the Company entered into a worldwide license agreement with
Elvis Presley Enterprises, Inc., a 85%-owned subsidiary of CKX (“EPE”), granting
the Company the exclusive right to utilize Elvis Presley-related intellectual
property in connection with the development, ownership and operation of Elvis
Presley-themed hotels, casinos and certain other real estate-based projects and
attractions around the world. The Company also entered into a worldwide license
agreement with Muhammad Ali Enterprises LLC, a 80%-owned subsidiary of CKX
(“MAE”), granting the company the right to utilize Muhammad Ali-related
intellectual property in connection with Muhammad Ali-themed hotels and certain
other real estate-based projects and attractions.
 
 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.
  87
 
 Flag
Shared Services Arrangement
 
 We are
also party to a shared services arrangement with Flag Luxury Properties, a
company owned and controlled by Robert F.X Sillerman, Paul Kanavos and Brett
Torino, pursuant to which Flag reimburses the Company for the services of
Mitchell J. Nelson and certain administrative employees, based on an allocation
of time spent on Flag matters and the Company reimburses Flag for an allocation
of rent and related overhead for the offices occupied by Paul Kanavos, Mitchell
J. Nelson, and certain administrative personnel (see below under 650 Madison
Avenue Office Space), based on an allocation of their time spent with respect to
Company matters. The shared services arrangement is at will and may be
terminated at any time by either party.
 
 Payments
under the agreements are made on a quarterly basis and are determined taking
into account a number of factors, including but not limited to, the overall type
and volume of services provided, the individuals involved, the amount of time
spent by such individuals and their current compensation rate with the company
with which they are employed. Each quarter, representatives determine the net
payment due from one party to the other for provided services performed by the
parties during the prior calendar quarter, and prepare a report in reasonable
detail with respect to the provided services so performed, including the value
of such services and the net payment due.
 
 The
Company presents the report prepared as described above to the Audit Committee.
Because the shared services arrangement with Flag constitutes an agreement with
a related party, the allocation and reimbursements are reviewed and approved by
the Audit Committee of the board of directors of the Company, which consists
entirely of independent members of the board of directors. If the Audit
Committee raises any questions or issues with respect to the report, the parties
cause their duly authorized representatives to meet promptly to address such
questions or issues in good faith and, if appropriate, prepare a revised report.
If the report is approved by Audit Committee, then the net payment due as shown
in the report is promptly paid.
 
 Stockholder
Lock-Ups
 
 Certain
of our affiliates, including Robert F.X. Sillerman, Brett Torino and Paul C.
Kanavos, have entered into lock-up agreements which prevent them from selling
their shares of our common stock until the expiration of three years from the
time of the reorganization transactions. Messrs. Sillerman, Kanavos and
Torino have agreed not to sell any of the shares they received in connection
with the distribution from Flag Luxury Properties to its members and certain of
its employees for a period of three (3) years. Once the three year lock-up
agreements for Messrs. Sillerman, Kanavos and Torino expire, we expect that
26,470,845 shares of our common stock will be eligible for sale pursuant to
Rule 144.
 
 19X
Payment
 
 In March
2008, the Company made a payment in the amount of $51,000 on behalf of 19X,
Inc., a company that is owned and controlled, in part, by Robert F.X. Sillerman.
The Company made the payment for administrative convenience, concurrent with its
own payment for travel expenses incurred in connection with a trip taken for a
shared business opportunity. As of April 9, 2010, the full amount of the payment
remains outstanding. The Company intends to continue to pursue payment of the
full amount.
 
 650
Madison Avenue Office Space
 
 Since
April 1, 2009, the Company has sublicensed certain space from CKX,
Inc.  The terms of the agreement runs concurrent with the term of
CKX’s sublease for the space (expiring in 2013). CKX is responsible for payment
of the full rental amount each month to the sublandlord, and the Company will
pay its pro rata share of the rent for the space it occupies to CKX, with such
payments to be made on the first day of every month during the term. The
agreement is terminable at the Company’s option on 90 days written notice,
and is terminable at the option of CKX upon the failure of the Company to make a
single rental payment when due, subject to a five (5) day cure
period.
 
 For the
period from April 1, 2009 until December 31, 2009, rent payments to CKX totaled
$107,092.  For the three months ended March 31, 2010, rent
payments to CKX totaled $36,232.
  88
 LIRA
Property Owner, LLC and LIRA, LLC (Lock-Up Agreements)
 
 Robert
F.X. Sillerman, Paul C. Kanavos, and Brett Torino are principals in LIRA
Property Owner, LLC and LIRA, LLC, which, pursuant to the Old Lock Up Agreement
or, if applicable, the New Lock Up Agreement, may acquire the Las Vegas Property
in the event of a liquidation of the Las Vegas Subsidiary in accordance with the
provisions of such agreement (see Part I, “Old Lock Up Agreement” and “New Lock
Up Agreement”).
 
 Private
Placements of Units
 
 Private
Placements 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. 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.
  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.
  89
 
 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.
 
 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.
 Board
Decisions and Certain Conflicts of Interest
 
 Past and
future decisions by our board regarding our future growth, operations and major
corporate decisions will be subject to certain possible conflicts of interest.
These conflicts may have caused, and in the future may cause, our business to be
adversely affected. Nevertheless, our board will be responsible for making
decisions on our behalf. In appropriate circumstances, we expect to submit
transactions with any related party for approval or negotiation by our
independent directors or a special committee thereof.
 
 Independent
Directors
 
 The
Company has Corporate Governance Guidelines which provide, among other things,
that a majority of the Company’s Board must meet the criteria for independence
required by The NASDAQ Global Market and that the Company shall at all times
have an Audit Committee, Compensation Committee and Nominating and Corporate
Governance Committee, which committees will be made up entirely of independent
directors.  Although the Company is no longer listed on The NASDAQ
Global Market, the Company continues to comply with these
criteria.  Rules 4200 and 4350 of The NASDAQ Global Market
require that a majority of our Board qualify as “independent”.
  Messrs. 
Meyer, Miller, Silverman and Sudack, whose biographical information is included
below under the heading “Executive Officers and Directors of FX Real Estate and
Entertainment Inc.,” have been appointed to our Board as independent directors
and qualify as such under the applicable rules of The NASDAQ Global
Market.
  90
  ITEM 14.PRINCIPAL
ACCOUNTANT FEES AND SERVICES
  Services
Provided by the Independent Registered Public Accounting Firm and Fees
Paid
 
 The
following table sets forth the aggregate fees for services provided by
Ernst & Young LLP to the Company and its subsidiaries with respect to
the years ended December 31, 2009 and 2008:
 2009
                  
                  
                  2008Audit
      Fees(1)
                  
                  $
                  160,000
                  
                  
                  $
                  1,050,900Audit-Related
      Fees
                  
                  
                  5,000Tax
      Fees(2)
                  
                  
                  
                  
                  
                  
                  265,300All
      Other FeesTotal
                  
                  $
                  165,000
                  
                  
                  $
                  1,316,200
 
 (1)        For
2008,audit fees were
for audit services, including (i) the annual audit (including required
quarterly reviews) and other procedures required to be performed by the
independent auditors to be able to form an opinion on the Company’s consolidated
financial statements, (ii) consultation with management as to the
accounting or disclosure treatment of transactions or events, and
(iii) services associated with SEC registration statements.
 
 For 2009,
audit fees were for the quarterly reviews relating to the Company’s Form 10-Q
quarterly reports for the quarter ended March 31 and June 2009 and for services
in connection with the transition to the new accounting firm.
 
 (2)        Tax Fees for 2008 were for services
related to (i) tax compliance and (ii) tax planning and tax
advice.
  The following table sets
forth the aggregate fees for services provided by LL Bradford to the
Company and its subsidiaries with respect to the year ended December 31,
2009:
 
 2009Audit
      Fees(1)
                
                $
                155,000Audit-Related
      Fees
                
                
                —Tax
      Fees
                
                
                —All
      Other Fees
                
                
                —Total
                
                $
                155,000
 
 (1)        For
2009, audit fees were for the quarterly review for the Form 10-Q for the third
quarter ending September 30, 2009, for transition services and for audit
services, including (i) the annual audit (including required quarterly
reviews) and other procedures required to be performed by the independent
auditors to be able to form an opinion on the Company’s consolidated financial
statements, and (ii) consultation with management as to the accounting or
disclosure treatment of transactions or events.
 
 91
  Audit
Committee Pre-Approval of Services Provided by the Independent Registered Public
Accounting Firm
 
 The Audit
Committee of the board of directors maintains a pre-approval policy with respect
to material audit and non-audit services to be performed by the Company’s
independent registered public accounting firm in order to assure that the
provision of such services does not impair the accountant’s independence. Before
engaging the independent registered public accounting firm to render a service,
the engagement must be either specifically approved by the Audit Committee, or
entered into pursuant to the pre-approval policy. Pre-approval authority may be
delegated to one or more members of the Audit Committee.
 
 PART IV
 ITEM 15.
EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
 
 (a) List
of Documents filed as part of this Report:
 
 (1) Financial
Statements
 
 See Table
of Contents to Financial Statements at page 34.
 
 (2) Financial
Statement Schedule
 
 Schedule II—Valuation
and Qualifying Accounts for the year ended December 31, 2008 and for the
period from May 11, 2007 through December 31, 2007.
  92
 Financial
Statement Schedule
 
 SCHEDULE II
 
 FX
Real Estate and Entertainment Inc.
 
 VALUATION
AND QUALIFYING ACCOUNTS
 
 FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008 AND FOR
 THE
PERIOD FROM MAY 11, 2007 THROUGH DECEMBER 31, 2007
 
 (DOLLARS
IN THOUSANDS)
 Balance
      at
                
                
                Additions
      ChargedBeginning
      of
                
                
                (Credited)
      to Costs
                
                
                Additions
      Charged
                
                
                
                
                
                Balance
      atDescription
                
                Period
                
                
                And
      Expenses
                
                
                to
      Other Accounts
                
                
                Deductions
                
                
                End
      of PeriodFor
      The Year Ended December 31, 2009Allowance
      for doubtful accounts
                
                $
                17
                
                
                $
                145
                
                
                $
                —
                
                
                $
                —
                
                
                $
                162Deferred
      taxes valuation allowance
                
                
                167,911
                
                
                
                39,818
                
                
                
                (15,020
                )
                
                
                —
                
                
                
                192,709Total
                
                $
                167,928
                
                
                $
                39,963
                
                
                $
                (15,020
                )
                
                $
                —
                
                
                $
                192,871For
      The Year Ended December 31, 2008Allowance
      for doubtful accounts
                
                $
                368
                
                
                $
                (351
                )
                
                $
                —
                
                
                $
                —
                
                
                $
                17Deferred
      taxes valuation allowance
                
                
                7,854
                
                
                
                161,576
                
                
                
                (1,519
                )
                
                
                —
                
                
                
                167,911Total
                
                $
                8,222
                
                
                $
                161,225
                
                
                $
                (1,519
                )
                
                $
                —
                
                
                $
                167,928For
      The Period From May 11, 2007 Through December 31,
      2007Allowance
      for doubtful accounts
                
                $
                —
                
                
                $
                387
                
                
                $
                61
                
                
                $
                (80
                )
                
                $
                368Deferred
      taxes valuation allowance
                
                
                —
                
                
                
                14,435
                
                
                
                (6,581
                )
                
                
                —
                
                
                
                7,854Total
                
                $
                —
                
                
                $
                14,822
                
                
                $
                (6,520
                )
                
                $
                (80
                )
                
                $
                8,222
 93
  Exhibits
 
 The
documents set forth below are filed herewith or incorporated herein by reference
to the location indicated.
 ExhibitNumber
                
                Description3.1
                
                Amended
      and Restated Certificate of Incorporation of the
      registrant (1)3.2
                
                Certificate
      of Designation of Non-Voting Preferred Stock of the
      registrant (9)3.3
                
                Certificate
      of Designation of Series A Convertible Preferred Stock of the registrant
      (23)3.4
                
                Amended
      and Restated By-Laws of the registrant (8)4.1
                
                Certificate
      of Designation of Non-Voting Preferred Stock of the
      registrant (9)4.2
                
                Certificate
      of Designation of Series A Convertible Preferred Stock of the registrant
      (23)10.1
                
                Membership
      Interest Purchase Agreement, dated as of June 1, 2007, by and among
      FX Luxury Realty, LLC, CKX, Inc. and Flag Luxury Properties,
      LLC (2)10.2
                
                Amendment
      No. 1 to Membership Interest Purchase Agreement, dated as of
      June 18, 2007, by and among FX Luxury Realty, LLC, CKX, Inc. and Flag
      Luxury Properties, LLC (2)10.3
                
                Repurchase
      Agreement, dated as of June 1, 2007, by and among FX Luxury Realty,
      LLC, CKX, Inc., Flag Luxury Properties, LLC, Robert F.X. Sillerman, Brett
      Torino and Paul C. Kanavos (2)10.4
                
                Amendment
      to Repurchase Agreement, dated as of June 18, 2007, by and among FX
      Luxury Realty, LLC, CKX, Inc., Flag Luxury Properties, LLC, Robert F.X.
      Sillerman, Brett Torino and Paul C. Kanavos (2)10.5
                
                Fourth
      Amended and Restated Limited Liability Company Operating Agreement of FX
      Luxury Realty, LLC, dated as of March 3, 2008(7)10.6
                
                Amended
      and Restated Credit Agreement, Senior Secured Term Loan Facility (First
      Lien), dated as of July 6, 2007, among BP Parent, LLC, Metroflag BP,
      LLC, Metroflag Cable, LLC, Credit Suisse, Cayman Islands Branch and Credit
      Suisse Securities (USA) LLC (2)10.7
                
                Amended
      and Restated Credit Agreement, Senior Secured Term Loan Facility (Second
      Lien), dated as of July 6, 2007, among BP Parent, LLC, Metroflag BP,
      LLC, Metroflag Cable, LLC, Credit Suisse, Cayman Islands Branch and Credit
      Suisse Securities (USA) LLC (2)10.8
                
                License
      Agreement, dated as of June 1, 2007, between Elvis Presley
      Enterprises, Inc. and FX Luxury Realty, LLC (2)10.9
                
                License
      Agreement, dated as of June 1, 2007, between Muhammad Ali Enterprises LLC
      and FX Luxury Realty, LLC (2)10.10
                
                Promissory
      Note, dated June 1, 2007, between FX Luxury Realty, LLC, as Payor, and
      Column Financial, Inc., as Payee (2)10.11
                
                Guaranty,
      dated as of June 1, 2007, by Robert F.X. Sillerman for the benefit of
      Column Financial, Inc.(2)10.12
                
                Employment
      Agreement between the registrant and Mitchell J. Nelson, dated as of
      December 31, 2007 (6)10.13
                
                Employment
      Agreement between the registrant and Paul C. Kanavos, dated as of December
      31, 2007 (6)10.14
                
                Employment
      Agreement between the registrant and Thomas P. Benson, dated as of January
      10, 2008 (6)10.15
                
                Employment
      Agreement between the registrant and Brett Torino, dated as of December
      31, 2007 (6)
  94
  Exhibit
                  Number
                
                Description10.16
                
                Form
      of Waiver of Rights, dated June 1, 2007 (2)10.17
                
                Form
      of Lock-Up Agreement, dated June 1, 2007 (2)10.18
                
                Promissory
      Note, dated June 1, 2007, between FX Luxury Realty, as Payor, and Flag
      Luxury Properties, as Payee (3)10.19
                
                Contribution
      and Exchange Agreement, dated as of September 26, 2007, between FX Real
      Estate and Entertainment Inc., CKX, Inc., Flag Luxury Properties, LLC,
      Richard G. Cushing, as Trustee of CKX FXLR Stockholder Distribution Trust
      I and CKX FXLR Stockholder Distribution Trust II, and FX Luxury Realty,
      LLC (2)10.20
                
                Stock
      Purchase Agreement, dated as of September 26, 2007, by and among FX Real
      Estate and Entertainment Inc., CKX, Inc. and Flag Luxury Properties,
      LLC (2)10.21
                
                Amendment
      No. 2 to Membership Interest Purchase Agreement, dated as of September 27,
      2007, by and among FX Luxury Realty, LLC, CKX, Inc., Flag Luxury
      Properties, LLC and FX Real Estate and Entertainment
    Inc.(2)10.22
                
                Amendment
      No. 2 to Repurchase Agreement, dated as of September 27, 2007, by and
      among FX Luxury Realty, LLC, CKX, Inc., Flag Luxury Properties, LLC and FX
      Real Estate and Entertainment Inc.(2)10.23
                
                Line
      of Credit Agreement, dated as of September 26, 2007, between CKX, Inc. and
      FX Real Estate and Entertainment Inc.(2)10.24
                
                Pledge
      Agreement, dated as of September 26, 2007, by and among CKX, Inc., Flag
      Luxury Properties, LLC and FX Real Estate and Entertainment
      Inc.(2)10.25
                
                Promissory
      Note, dated September 26, 2007, between CKX, Inc. and FX Real Estate and
      Entertainment Inc.(2)10.26
                
                CKX
      FXLR Stockholder Distribution Trust I Agreement, by and between CKX, Inc.
      and Richard G. Cushing, as Trustee acting on behalf and for the benefit of
      certain future CKX Beneficiaries, dated as of June 18,
      2007 (3)10.27
                
                CKX
      FXLR Stockholder Distribution Trust II Agreement, by and between CKX,
      Inc. and Richard G. Cushing, as Trustee acting on behalf and for the
      benefit of certain future CKX Stockholders, dated as of June 18,
      2007 (3)10.28
                
                CKX
      FXLR Stockholder Distribution Trust III Agreement, by and between
      CKX, Inc. and Richard G. Cushing, as Trustee acting on behalf and for the
      benefit of certain future CKX Stockholders, dated as of September 27,
      2007 (3)10.29
                
                Promissory
      Note, dated June 1, 2007, between FX Luxury Realty, as Payor, and Flag
      Luxury Properties, as Payee (3)10.30
                
                Employment
      Agreement between the registrant and Barry Shier, dated as of December 31,
      2007 (4)10.31
                
                Stock
      Purchase Agreement by and between FX Real Estate and Entertainment Inc.
      and Barry A. Shier, dated as of January 3,
2008 (4)10.32
                
                Employment
      Agreement by and between the registrant and Robert F.X. Sillerman, dated
      as of January 7, 2008 (4)10.33
                
                Shared
      Services Agreement by and between CKX, Inc. and the
      registrant (1)10.34
                
                Investment
      Agreement by and between the registrant and The Huff Alternative Fund,
      L.P. and The Huff Alternative Parallel Fund, L.P., dated as of January 9,
      2008 (5)10.35
                
                Investment
      Agreement by and between the registrant and Robert F.X. Sillerman, dated
      as of January 9, 2008.(5)10.36
                
                2007
      Long-Term Incentive Compensation Plan(8)10.37
                
                2007
      Executive Equity Incentive Plan (8)10.38
                
                Call
      Agreement, dated as of March 3, 2008, by and between 19X, Inc. and
      the registrant (7)
  95
  Exhibit
                  Number
                
                Description10.39
                
                Letter
      Agreement, dated March 3, 2008, by and between 19X, Inc. and the
      registrant and Form of Amendment No. 2 to License Agreement by and
      between Elvis Presley Enterprises, Inc. and FX Luxury Realty,
      LLC (7)10.40
                
                Amendment
      No. 1 to License Agreement, dated as of November 16, 2007,
      between Elvis Presley Enterprises, Inc. and FX Luxury Realty,
      LLC (8)10.41
                
                Amendment
      No. 1 to License Agreement, dated as of November 16, 2007,
      between Muhammad Ali Enterprises LLC and FX Luxury Realty,
      LLC (8)10.42
                
                First
      Amendment dated as of March 31, 2008 to Investment Agreement by and
      between FX Real Estate and Entertainment Inc. and The Huff Alternative
      Fund, L.P. and The Huff Alternative Parallel Fund, L.P., dated as of
      January 9, 2008 (9)10.43
                
                First
      Amendment dated as of March 31, 2008 to Investment Agreement by and
      between FX Real Estate and Entertainment Inc. and Robert F.X. Sillerman,
      dated as of January 9, 2008 (10)10.44
                
                Second
      Amendment, dated as of May 13, 2008, to Investment Agreement by and
      between FX Real Estate and Entertainment Inc. and The Huff Alternative
      Fund, L.P. and The Huff Alternative Parallel Fund, L.P., dated as of
      January 9, 2008 (11)10.45
                
                Registration
      Rights Agreement, dated as of May 13, 2008, by and between FX Real
      Estate and Entertainment Inc. and The Huff Alternative Fund, L.P. and The
      Huff Alternative Parallel Fund, L.P. (11)10.46
                
                Form
      of Subscription Agreement (12)10.47
                
                Form
      of $4.50 Warrant(12)10.48
                
                Form
      of $5.50 Warrant(12)10.49
                
                Form
      of Option Agreement for FX Real Estate and Entertainment Inc. 2007
      Long-Term Incentive Compensation Plan (13)10.50
                
                Form
      of Option Agreement for FX Real Estate and Entertainment Inc. 2007
      Executive Equity Incentive Plan (13)10.51
                
                Termination,
      Settlement and Release Agreement entered into March 9, 2009 by and
      among FX Luxury Realty, LLC, FX Real Estate and Entertainment Inc., Elvis
      Presley Enterprises, Inc. and Muhammad Ali Enterprises,
      LLC (14)10.52
                
                Employment
      Separation Agreement and Release entered into April 30, 2009 by and
      between FX Real Estate and Entertainment Inc. and Barry A. Shier
      (15)10.53
                
                Employment
      Separation Agreement and Release entered into April 30, 2009 by and
      between FX Real Estate and Entertainment Inc. and Brett Torino
      (15)10.54
                
                Letter
      Agreement entered into June 23, 2009 by and between FX Real Estate
      and Entertainment Inc. and Paul C. Kanavos (16)10.55
                
                Letter
      Agreement entered into June 23, 2009 by and between FX Real Estate
      and Entertainment Inc. and Mitchell J. Nelson (16)10.56
                
                Form
      of Subscription Agreement (17)10.57
                
                Form
      of Warrant (17)10.58
                
                Lock
      Up and Plan Support Agreement dated as of October 27, 2009 by and among
      Ladesbank Baden-Württemberg, Münchener Hypothekenbank EG, Deutsche
      Hypothekenbank (Actien-Gesellschaft), Great Lakes Reinsurance (UK) PLC, FX
      Luxury Las Vegas I, LLC, FX Luxury Las Vegas II, LLC, LIRA Property
      Owner, LLC and LIRA LLC (18)10.59
                
                Lock
      Up and Plan Support Agreement dated as of December 18, 2009 by and among
      Ladesbank Baden-Württemberg, Münchener Hypothekenbank EG, Deutsche
      Hypothekenbank (Actien-Gesellschaft), Great Lakes Reinsurance (UK) PLC,
      Five Mile Capital Pooling International LLC, Spectrum Investment Partners
      LP, Transamerica Life Insurance Company, NexBank, SSB, FX Luxury Las Vegas
      I, LLC and LIRA LLC (19)
  96
  ExhibitNumber
                
                Description10.60
                
                Standstill
      Agreement dated as of December 18, 2009 by and among Ladesbank
      Baden-Württemberg, Münchener Hypothekenbank EG, Deutsche Hypothekenbank
      (Actien-Gesellschaft), Great Lakes Reinsurance (UK) PLC, FX Luxury Las
      Vegas I, LLC, LIRA Property Owner, LLC and LIRA LLC
(19)10.61†
                
                First
      Amendment to the Fourth Amended and Restated Limited Liability Company
      Operating Agreement, dated as of March 3, 2008, of FX Luxury Realty, LLC,
      effective as of December 24, 2009, by and among FX Luxury, LLC, Flag
      Luxury Properties, LLC, FX Real Estate and Entertainment Inc. and FXL,
      Inc. and FXL Priority Corp.10.62
                
                First
      Amendment to Lock Up and Plan Support Agreement dated as of January 22,
      2010 by and among Ladesbank Baden-Württemberg, Münchener Hypothekenbank
      EG, Deutsche Hypothekenbank (Actien-Gesellschaft), Great Lakes Reinsurance
      (UK) PLC, Five Mile Capital Pooling International LLC, Spectrum Investment
      Partners LP, Transamerica Life Insurance Company, NexBank, SSB, FX Luxury
      Las Vegas I, LLC and LIRA LLC (20)10.63
                
                Second
      Amendment to Lock Up and Plan Support Agreement dated as of February 3,
      2010 by and among Ladesbank Baden-Württemberg, Münchener Hypothekenbank
      EG, Deutsche Hypothekenbank (Actien-Gesellschaft), Great Lakes Reinsurance
      (UK) PLC, Five Mile Capital Pooling International LLC, Spectrum Investment
      Partners LP, Transamerica Life Insurance Company, NexBank, SSB, FX Luxury
      Las Vegas I, LLC and LIRA LLC (21)10.64
                
                Form
      of Subscription Agreement (22)10.65
                
                Form
      of Warrant (22)14.1
                
                Code
      of Ethics (8)21.1†
                
                List
      of Subsidiaries23.1†
                
                Consent
      of L.L. Bradford & Company, LLC relating to the registrant’s
      Registration Statement on Form S-8 (Registration
      No. 333-150936)23.2†
                
                Consent
      of Ernst & Young LLP relating to the registrant’s Registration
      Statement on Form S-8 (Registration
    No. 333-150936)23.3†
                
                Consent
      of Ernst & Young LLP relating to the registrant’s Registration
      Statement on Form S-8 (Registration No. 333-150936)31.1†
                
                Certification
      of Principal Executive Officer.31.2†
                
                Certification
      of Principal Accounting Officer32.1†
                
                Section 1350
      Certification of Principal Executive Officer32.2†
                
                Section 1350
      Certification of Principal Accounting
Officer
  †
                Filed
      herewith
  (1)
                Incorporated
      by reference to Amendment No. 4 to the registrant’s Registration
      Statement on Form S-1 (Registration No. 333-145672), filed with
      the Commission on December 6, 2007.(2)
                Incorporated
      by reference to Amendment No. 1 to the registrant’s Registration
      Statement on Form S-1 (Registration No. 333-145672), filed with
      the Commission on October 9, 2007.(3)
                Incorporated
      by reference to Amendment No. 2 to the registrant’s Registration
      Statement on Form S-1 (Registration No. 333-145672), filed with
      the Commission on November 13, 2007.(4)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      January 9, 2008.(5)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      January 10, 2008
  97
  (6)
                Incorporated
      by reference from the registrant’s Registration Statement on Form S-1
      (Registration No. 333-149032), filed with the Commission on
      February 4, 2008(7)
                Incorporated
      by reference to Amendment No. 1 to the registrant’s Registration
      Statement on Form S-1 (Registration No. 333-149032), filed with
      the Commission on March 3, 2008(8)
                Incorporated
      by reference from the registrant’s Annual Report on Form 10-K for the
      fiscal year ended December 31, 2007(9)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      March 31, 2008(10)
                Incorporated
      by reference from the registrant’s Quarterly Report on Form 10-Q for the
      quarterly period ended March 31, 2008(11)
                Incorporated
      by reference from the registrant’s Quarterly Report on Form 10-Q for the
      quarterly period ended June 30, 2008(12)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      July 17, 2008(13)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      September 29, 2008(14)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      March 9, 2009
 (15)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      April 30, 2009(16)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      June 23, 2009(17)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      September 9, 2009(18)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      October 30, 2009(19)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      December 23, 2009(20)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      January 22, 2010(21)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      February 3, 2010(22)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      February 11, 2010(23)
                Incorporated
      by reference from the registrant’s Current Report on Form 8-K dated
      March 5, 2010
 Each
management contract or compensation plan or arrangement required to be filed as
an exhibit to this Annual Report on Form 10-K pursuant to Item 15 is
listed in exhibits 10.12, 10.13. 10.14, 10.15, 10.30, 10.32, 10.36, 10.37,
10.49, 10.50, 10.52. 10.53, 10.54 and 10.55.
  98
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf of the undersigned thereunto duly authorized.
 
 FX
Real Estate and Entertainment Inc.
 
 By:
                
                /s/  
      ROBERT F.X.
      SILLERMAN
                
                April
      14, 2010Robert
      F.X. Sillerman
                  Chief
      Executive Officer and Chairman of the BoardBy:
                
                /s/  
      GARY
      McHENRY
                
                April
      14, 2010Principal
      Accounting Officer
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 By:
                
                /s/  
      ROBERT F.X.
      SILLERMAN
                
                April
      14, 2010Robert F.X. Sillerman,
      Chairman of the BoardBy:
                
                /s/  
      PAUL C.
      KANAVOS
                
                April
      14, 2010Paul C. Kanavos,
      DirectorBy:
                
                /s/  
      MICHAEL
      MEYER
                
                April
      14, 2010Michael Meyer,
      DirectorBy:
                
                /s/  
      HARVEY
      SILVERMAN
                
                April
      14, 2010Harvey Silverman,
      DirectorBy:
                
                /s/  
      ROBERT
      SUDACK
                
                April
      14, 2010Robert Sudack,
      DirectorBy:
                
                /s/  
      JOHN
      MILLER
                
                April
      14, 2010John Miller,
      Director
 99
  INDEX TO
EXHIBITS
 
 The
documents set forth below are filed herewith.
 
 ExhibitNumber
                
                Description10
                .61
                
                First
      Amendment to the Fourth Amended and Restated Limited Liability Company
      Operating Agreement, dated as of March 3, 2008, of FX Luxury Realty, LLC,
      effective as of December 24, 2009, by and among FX Luxury, LLC, Flag
      Luxury Properties, LLC, FX Real Estate and Entertainment Inc. and FXL
      Inc., and FXL Priority Corp.21
                .1
                
                List
      of Subsidiaries23
                .1
                
                Consent
      of L.L. Bradford relating to the registrant’s Registration Statement on
      Form S-8 (Registration No. 333-150936).23
                .2
                
                Consent
      of Ernst & Young LLP relating to the registrant’s Registration
      Statement on Form S-8 (Registration
    No. 333-150936)23
                .3
                
                Consent
      of Ernst & Young LLP relating to the registrant’s Registration
      Statement on Form S-8 (Registration No. 333-150936)31
                .1
                
                Certification
      of Principal Executive Officer.31
                .2
                
                Certification
      of Principal Accounting Officer32
                .1
                
                Section 1350
      Certification of Principal Executive Officer32
                .2
                
                Section 1350
      Certification of Principal Accounting
Officer
 100