UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010ORo

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  þ


(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ





As of August 13, 2010, there were 65,403,876 shares of the registrant’s common stock outstanding.














TABLE OF CONTENTS





PART I. FINANCIAL INFORMATIONExplanatory Note


3Item 1.
Financial Statements


4Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009


4Consolidated Statements of Operations for the three months ended June 30, 2010 and 2009 (Unaudited)


5Consolidated Statements of Operations for the six months ended June 30, 2010 and 2009 (Unaudited)


6Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (Unaudited)


7Notes to Unaudited Consolidated Financial Statements


9Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations


17Item 3.
Quantitative and Qualitative Disclosures About Market Risk


23Item 4T.
Controls and Procedures


23PART II. OTHER INFORMATIONItem 1.
Legal Proceedings


24Item 3.
Defaults Upon Senior Securities


24Item 6.
Exhibits


24


EXPLANATORY NOTE





As has been disclosed previously, FX Real Estate and Entertainment Inc. (the “Company”) is in severe financial distress and may not be able to continue as a going concern. The Company has no current cash flow and cash on hand as of August 13, 2010 is not sufficient to fund its short-term liquidity requirements, including its ordinary course obligations as they come due. As has been disclosed previously, on April 21, 2010, the Company’s remaining Las Vegas subsidiary, namely FX Luxury Las Vegas I, LLC (the “Las Vegas Subsidiary”), filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Nevada (Case No. 10-17015) (the “Chapter 11 Bankruptcy Proceeding”), pursuant to which the Las Vegas Subsidiary presented its pre-packaged plan in accordance with a lock-up agreement (the “Effective 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 (this Effective Lock Up Agreement is referred to as the “Old Lock-Up Agreement” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as  filed on April 14, 2010 with the Securities and Exchange Commission).





As has been disclosed previously, on June 2, 2010, the Effective Lock Up Agreement terminated in accordance with its terms and is of no further force or effect (except for certain provisions thereof that survived in accordance with their terms and otherwise for purposes of determining the amount of any applicable adequate protection payments authorized by the Bankruptcy Court in the Chapter 11 Bankruptcy Proceeding).  Nevertheless, the Las Vegas Subsidiary is still a debtor in possession in the Chapter 11 Bankruptcy Proceeding.  The parties to the Effective Lock Up Agreement acknowledged that the Effective Lock Up Agreement terminated in accordance with its terms because the Las Vegas Subsidiary sought Bankruptcy Court approval of revised bidding procedures for sale of the Las Vegas Property (approximately 17.72 contiguous acres of real property located at the southeast corner of Las Vegas Boulevard and Harmon Avenue in Las Vegas, Nevada) and a modified cash collateral order. As a result of termination of the Effective Lock Up Agreement, the prearranged sale of the Las Vegas Property to the Newco Entities is of no further force or effect. Because the Effective Lock Up Agreement’s termination was not a "fault-based" termination, the Newco Entities received a full refund of their $2.2 million deposit for the prearranged sale.





The Bankruptcy Court terminated the Las Vegas Subsidiary’s exclusivity to present a plan in the Chapter 11 Bankruptcy Proceeding and is allowing interested parties to present competing plans of  to the Bankruptcy Court. Thus far, certain of the second lien lenders have presented a preliminary competing plan of reorganization and another party has presented a letter of intent for a sale of the Las Vegas Subsidiary’s assets.  No plan may be implemented without approval of the Bankruptcy Court.  The first lien lenders are not permitted to proceed with their pending trustee’s sale of the Las Vegas Property so long as the Bankruptcy Court stay remains in effect.  The first lien lenders recently moved to have the stay lifted, but the Bankruptcy Court continued the first lien lenders’ motion to August  27, 2010 and reaffirmed the stay.





Invariably, the Las Vegas Property will either be liquidated in the Chapter 11 Bankruptcy Proceeding under a Bankruptcy Court-approved plan of liquidation or the Las Vegas Subsidiary will be reorganized with the Company’s equity interests being cancelled. In this report, we refer to the ultimate Court-approved plan of liquidation or reorganization under which the Las Vegas Property will be liquidated as the “Liquidation Plan.”  Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.





The loss of the Las Vegas Property, which is substantially the entire business of the Company, will 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.





As has been previously disclosed, the Company has been evaluating a new line of business to develop a certain amusement ride since the end of the first quarter of 2010.  The Company is in late stage negotiations with a private company and its principal to obtain from them a world-wide exclusive license to use the technology and intellectual property to develop this amusement ride.  There is no assurance that the Company’s late stage negotiations with these counterparties will result in any formal arrangement between them or, if such formal arrangement is achieved, that the Company will be able to obtain the necessary financing to implement this new line of business.


3


PART I. FINANCIAL INFORMATION


ITEM 1.
FINANCIAL STATEMENTS





FX Real Estate and Entertainment Inc.


CONSOLIDATED BALANCE SHEETS


(amounts in thousands, except share data)




June 30, 2010


December 31,Unaudited


2009ASSETSCurrent assets:Cash and cash equivalents

$
1,112


$
343Restricted cash


1,752



172Marketable securities


---



---Rent and other receivables, net of allowance for doubtful accounts of $469 at June 30, 2010 and $162 at December 31, 2009


94



379Prepaid expenses and other current assets


1,172



1,450Total current assets


4,130



2,344Investment in real estate:Land


133,537



133,537Building and improvements


32,890



32,859Furniture, fixtures and equipment


710



690Less: accumulated depreciation


(30,410
)


(29,385
)Net investment in real estate


136,727



137,700Acquired lease intangible assets, net


972



1,000Total assets

$
141,829


$
141,044LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses

$
59,388


$
38,489Debt in default (see note 8)


454,000



454,000Due to related parties


1,180



1,180Other current liabilities


13



14Acquired lease intangible liabilities, net


5



7Unearned rent and related revenue


514



478Total current liabilities


515,100



494,168Other long-term liabilities


---



---Total liabilities


515,100



494,168Stockholders’ deficit:Preferred stock, $0.01 par value: authorized 75,000,000 shares, 1 share of Non-Voting Designated Preferred Stock and 1,398 shares of Series A Convertible Preferred Stock issued and outstanding at June 30, 2010 and at December 31, 2009


—



—Common stock, $0.01 par value: authorized 300,000,000 shares, 65,403,876 shares and 63,841,377 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively


654



638Additional paid-in-capital


302,549



300,480Subscription receivable


---



(4
)Accumulated deficit


(676,474
)


(654,238
)Total stockholders’ deficit


(373,271
)


(353,124
)Total liabilities and stockholders’ deficit

$
141,829


$
141,044





See accompanying notes to consolidated financial statements.


4


FX Real Estate and Entertainment Inc.


CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(amounts in thousands, except share and per share data)





Three Months


Three MonthsEnded


EndedJune 30, 2010


June 30, 2009Revenue

$
4,206


$
4,767Operating expenses:Selling, general and administrative expenses


2,412



2,449Depreciation and amortization


514



506Operating and maintenance


1,096



1,057Debt restructuring costs


669



1,136Real estate taxes


483



471Impairment of land (see note 2)


--



76,970Impairment of capitalized development costsTotal operating expenses


5,174



82,589Loss from operations


(968
)


(77,822
)Interest income


(1
)


2Interest expense


(10,341
)


(10,342
)Other expense


--



(79
)Loss from incidental operationsNet loss


(11,310
)


(88,241
)Basic and diluted loss per share

$
(0.17
)

$
(1.70
)Basic and diluted average number of common shares outstanding


64,917,765



51,992,417





See accompanying notes to consolidated financial statements.  5
 FX Real Estate and Entertainment Inc.


CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(amounts in thousands, except share and per share data)





Six Months


Six MonthsEnded


EndedJune 30, 2010


June 30, 2009Revenue

$
8,467


$
9,382Operating expenses:License fees (see note 9)


--



(10,000
)Selling, general and administrative expenses


4,103



6,505Depreciation and amortization


1,025



1,013Operating and maintenance


2,309



2,188Debt restructuring costs


1,729



1,991Real estate taxes


967



919Impairment of land (see note 2)


--



76,970Impairment of capitalized development costsTotal operating expenses


10,133



79,586Loss from operations


(1,666
)


(70,204
)Interest income


(2
)


20Interest expense


(20,569
)


(20,721
)Other expense


--



(217
)Loss from incidental operationsNet loss


(22,237
)


(91,122
)Basic and diluted loss per share

$
(0.34
)

$
(1.75
)Basic and diluted average number of common shares outstanding


65,162,163



51,992,592





See accompanying notes to consolidated financial statements.


6
 FX Real Estate and Entertainment Inc.


CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(amounts in thousands)





Six Months


Six MonthsEnded


EndedJune 30, 2010


June 30, 2009Cash flows from operating activities:Net loss

$
(22,237
)

$
(91,122
)Adjustments to reconcile net loss to cash used in operating activities:Reversal of license fees






(10,000
)Impairment of land






76,970Impairment of available-for-sale securities






377Impairment of capitalized development costsGain on sales of marketable securities






(251
)Gain on disposal of assets






91Depreciation and amortization


1,025



1,013Deferred financing cost amortization






54Share-based payments


198



382Minority interestProvision for accounts receivable allowance


307



227Changes in operating assets and liabilities:Receivables


(22
)


(338
)Other current and non-current assets


306



525Accounts payable and accrued expenses


20,900



9,429Accrued license fees


--Due to related parties






(92
)Unearned revenue


36



247Other


(3
)


(830
)Net cash (used in) provided by operating activities


510



(13,318
)Cash flows from investing activities:Restricted cash


(1,580
)


29,436Proceeds from sales of marketable securities






4,105Proceeds from sale of assetsPurchase of property and equipment


(52
)


(15
)Capitalized development costsNet cash (used in) provided by investing activities


(1,632
)


33,526Cash flows from financing activities:Principal payment on mortgage loan






(21,000
)Repayment of margin loan






(741
)Proceeds from private placement of stock units


1,891Capital contributions Sternlicht






45Repayment of related party debtRepayment of notesProceeds from sale of  Marquis jet cards






95Preferred distribution to related partyDeferred financing and leasing costsContribution from noncontrolling interestNet cash (used in) provided by financing activities


1,891



(21,601
)Net (decrease) / increase in cash and equivalents


769



(1,393
)Cash and cash equivalents — beginning of period


343



2,659Cash and cash equivalents — end of period

$
1,112


$
1,266Supplemental cash flow data:Cash paid for interest

$
1,242


$
6,993Cash paid for debt restructuring expenses

$
1,729


$
1,991


7
 Supplemental cash flow information:





The Company had the following non-cash investing and financing activities in the six months ended June 30, 2010 (in thousands):





Six Months


Six MonthsEnded


EndedJune 30, 2010


June 30, 2009Share-Based Payments (unpaid)

$
0


$
0





See accompanying notes to consolidated financial statements.


8
 FX Real Estate and Entertainment Inc.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.
Basis of Presentation





General





The consolidated financial statements as of June 30, 2010 and December 31, 2009 and for the three and  six months ended June 30, 2010 and 2009 reflect the results of operations of FX Real Estate and Entertainment Inc. (“FXRE” or the “Company”), a Delaware corporation, and its consolidated subsidiaries, including FX Luxury, LLC (“FXLR”). The financial information in this report for the three and six months ended June 30, 2010 and 2009 have not been audited, but in the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation have been made. The operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results for the full year.





The financial statements included herein should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Certain prior period amounts presented have been reclassified to conform to the current period presentation.





2.
Organization and Background





Business of the Company





The Company’s business consists of owning and operating the Las Vegas Property (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, 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 described in the Explanatory Note on page 3 of this report, the Las Vegas Subsidiary has been a debtor in possession in the Chapter 11 Bankruptcy Proceeding since April 21, 2010 and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.  The loss of the Las Vegas Property, which is substantially the entire business of the Company, will 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.   As has been previously disclosed, the Company has been evaluating a new line of business to develop a certain amusement ride since the end of the first quarter of 2010.  The Company is in late stage negotiations with a private company and its principal to obtain from them a world-wide exclusive license to use the technology and intellectual property to develop this amusement ride.  There is no assurance that the Company’s late stage negotiations with these counterparties will result in any formal arrangement between them or, if such formal arrangement is achieved, that the Company will be able to obtain the necessary financing to implement this new line of business.





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 its 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 abandonment of its redevelopment plan for the Las Vegas Property, 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, 2009. As more fully described in note 8 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 an update of the appraisal as of 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.





9




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 described in the Explanatory Note on page 3 of this report, the Las Vegas Subsidiary has been a debtor in possession in the Chapter 11 Bankruptcy Proceeding since April 21, 2010 and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.





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 disposition of the Las Vegas Property under the Liquidation Plan.





4.
Accounting Policies





Impact of Recently Issued Accounting Standards





In January 2010, the Financial Accounting Standard Board (FASB) issued ASU No. 2010-06, which requires new fair value disclosures pertaining to significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and activity. For Level 3 fair value measurements, purchases, sales, issuances and settlements must be reported on a gross basis. Further, additional disclosures are required by class of assets or liabilities, as well as inputs used to measure fair value and valuation techniques. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010. The Company’s adoption of this guidance is not expected to have a material impact on its consolidated financial statements.





In February 2010, the FASB issued ASU No. 2010-09, which amends subsequent event disclosure requirements for SEC filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This ASU was effective upon issuance and adoption of this ASU did not result in a material impact to the Company’s  consolidated financial statements.





Reclassifications




Certain prior period amounts have been reclassified to conform with current year presentation.





5.
Marketable Securities





Marketable securities at March 31, 2009 consisted of the shares of common stock of the Riviera Holdings Corporation [AMEX: RIV] (“Riv Shares”), a company that owns and operates the Riviera Hotel & casino in Las Vegas, Nevada and the Blackhawk Casino in Blackhawk, Colorado. 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 March 31, 2009 and December 31, 2008.  During the six months ended June 30, 2009, the Company sold all of its Riviera shares (1,410,363 shares) for net proceeds of $4.1 million and recorded a charge of $0.1 million in its consolidated statement of operations for such period.





6.
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.  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 six months ended June 30, 2010 and 2009, 12,793,350 and 10,892,794 shares, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.


10


7.
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 no longer classifies these operations of Metroflag as incidental operations. Therefore, all operations will be included as part of income (loss) from operations for the six months ended June 30, 2010.





8.
Debt and Notes Payable





Debt in Default





The Company’s consolidated debt as of June 30, 2010 included mortgage loans on the Las Vegas Property in the aggregate principal amount of $475 million (collectively the “Mortgage Loan”).





The Mortgage Loan is not guaranteed by the Company nor has the Company 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 Las Vegas Subsidiary, including the Las Vegas Property. The Company’s subsidiary FX Luxury, LLC (“FXLR”) has provided a guarantee to the lenders only for losses caused under limited circumstances such as fraud or willful misconduct.





On January 6, 2009, following the Las Vegas Subsidiary’s (including its predecessors’) failure to repay the Mortgage 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 Mortgage Loan, including the first lien principal amount of $280 million.  On January 5, 2009 (a day before the second lien lenders’ portion of the Mortgage Loan matured), the second lien lenders under the Mortgage Loan delivered a written demand for repayment of all of the obligations owed to them under the Mortgage Loan, including the second lien principal amount of $195 million. The second lien lenders’ written demand, which was delivered prior to the Mortgage Loan maturity date, cited the covenant defaults. On January 30, 2009, the first lien lenders seized the cash collateral reserve accounts established under the Loan from which the Las Vegas Subsidiary (including its predecessors) 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 Subsidiary (including its predecessors)  until June 23, 2009, when a receiver was appointed as a result of the first lien lenders exercising remedies under the loan default.  After the Las Vegas Subsidiary’s (including its predecessors’) 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 and until April 21, 2010, when the Las Vegas Subsidiary filed the Chapter 11 Bankruptcy Proceeding and became debtor-in-possession, 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.





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, April 22, 2010, and to August 31, 2010.  However, the first lien lenders are not permitted to proceed with their pending trustee’s sale of the Las Vegas Property so long as the Bankruptcy Court stay remains in effect during the Chapter 11 Bankruptcy Proceeding.  The first lien lenders recently moved to have the stay lifted, but the Bankruptcy Court continued the first lien lenders’ motion to August 27, 2010 and reaffirmed the stay.





11





At June 30, 2010, 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, 2009 were 5.75%, 8.25% and 13.25%, respectively, including a 2% default rate on each of the tranches which was effective since the Mortgage Loan went into default.





As described in the Explanatory Note on page 3 of this report, the Las Vegas Subsidiary has been a debtor in possession in the Chapter 11 Bankruptcy Proceeding since April 21, 2010 and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas 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 of 2009, 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.  The Company obtained an update of the appraisal as of 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.





Notes Payable





Bear Stearns Loan — On September 26, 2007, the Company obtained a $7.7 million margin loan from Bear Stearns, which, along with the loan from CKX, Inc. (“CKX”), was used to fund the exercise of an option to acquire an additional 573,775 shares of Riviera Holdings Corporation’s common stock at a price of $23 per share. The Company’s shares of Riviera common stock were pledged as collateral for the margin loan with Bear Stearns. 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; the remaining $0.4 million plus interest of $0.3 million was repaid in January 2009 with a portion of the proceeds from the sale of Riviera shares.  During the six months ended June 30, 2009, the Company sold all of its Riviera shares (1,410,363 shares) for net proceeds of $4.1 million and recorded a charge of $0.1 million in its consolidated statement of operations for such period.





9.
Terminated License Agreements with Related Parties





On June 1, 2007, the Company entered into license agreements with Elvis Presley Enterprises, Inc. (“EPE”), an 85%-owned subsidiary of CKX, and Muhammad Ali Enterprises LLC (“MAE”), 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.





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 EPE and MAE 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 nine months thereafter, provided that the amount paid under clauses (i) and (ii) shall not exceed $10 million.





Accounting for Minimum Guaranteed License Payments





The Company accounted for the 2008 minimum guaranteed license payments under the EPE and MAE license agreements ratably over the period of the benefit. Accordingly, the Company included license fee expense of $10 million in its consolidated statement of operations for the year ended December 31, 2008. In the first quarter of 2009, the Company reversed the $10 million of license fee expense recorded in the year ended December 31, 2008 due to the termination of the license agreement.





12




10.
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 amortization of the above-market leases and in-place leases, which represents a reduction of rent revenues, was less than $0.1 million for the three and six months ended June 30, 2010, and $0.1 million for the three and six months ended June 30, 2009. Acquired lease intangibles liabilities are related to below-market leases under which the Company is the lessor. The weighted-average amortization period of acquired lease intangible liabilities is approximately 4.6 years.




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


June 30,

2010


December 31,

2009AssetsAbove-market leases

$
582


$
582In-place leases


1,320



1,320Accumulated amortization


(930
)


(902
)Net

$
972


$
1,000LiabilitiesBelow-market leases

$
111


$
111Accumulated accretion


(106
)


(104
)Net

$
5


$
7





11.
Derivative Financial Instruments





Pursuant to the terms specified in the Las Vegas Subsidiary’s Mortgage Loan (as described in note 8), 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 Mortgage Loan 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 Accounting 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 expired on January 6, 2009. There were no changes in fair value of the Cap Agreements for the three and six months ended June 30, 2009.





12.
Share-Based Payments





Compensation expense for stock option grants included in the accompanying consolidated statements of operations in selling, general and administrative expenses is being recognized ratably over the vesting periods of the grants and was $0.1million and $0.2 million for the three and six months ended June 30, 2010, respectively, and $0.8 million and $0.4 million for the three and six months ended June 30, 2009, respectively.





Share-based payments of stock option grants were executed during the six months ended June 30, 2010.  The payments were made to directors to satisfy a liability accrued during 2009 of approximately $0.3 million.





13.
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 three and six months ended June 30, 2010 and 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 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 June 30, 2010.





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





13
 
 14.
Litigation
 
 Las Vegas Subsidiary Bankruptcy Filing
 
 As described in the Explanatory Note on page 3 of this report, the Las Vegas Subsidiary has been a debtor in possession in the Chapter 11 Bankruptcy Proceeding since April 21, 2010 and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.


Stockholder Derivative Lawsuit





As has previously been disclosed, on April 29, 2010, the Company was notified that it has been named as a nominal defendant in a derivative lawsuit filed on April 28, 2010 by stockholders The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P. (collectively, “Huff”) on behalf of the Company in the New York Supreme Court in Manhattan, New York (Index No. 650338-10) against the Company’s directors Harvey Silverman, Michael J. Meyer, John D. Miller, Robert Sudack, Paul C. Kanavos and Robert F.X. Sillerman, and Brett Torino, a stockholder and former officer of the Company.  The filing of the lawsuit was precipitated by the Las Vegas Subsidiary’s filing of the Chapter 11 Bankruptcy Proceeding.   In its lawsuit, Huff alleges that such director defendants and stockholder defendant, as a former officer of the Company, breached their fiduciary duties of care and loyalty to the Company, its creditors and its non defendant stockholders by, among other things, (i) committing or permitting acts of misconduct such as self-dealing and disloyalty, without  justifiable excuse, (ii) causing the Company to be contractually bound to transfer the Las Vegas Property to the Newco Entities and (iii) usurping various corporate opportunities with respect to the Las Vegas Property for which Huff is seeking on behalf of the Company damages of not less than $100 million, plus punitive damages.  In addition, Huff alleges substantially the same claims against defendants Messrs. Kanavos and Torino for which Huff is seeking on behalf of the Company damages of not less than $50 million, plus punitive damages.   The Company was formally served with the lawsuit on May 5, 2010 and filed a motion to dismiss the lawsuit on July 16, 2010. The Company believes the lawsuit is without merit and intends to vigorously defend against it.  Shortly after filing the lawsuit, Huff filed a motion in the Las Vegas Subsidiary’s Chapter 11 Bankruptcy Proceeding to have a chapter 11 trustee appointed in the proceeding to preempt implementation of the Liquidation Plan as contemplated by the since terminated Effective Lock-Up Agreement citing substantially the same claims alleged in Huff’s foregoing lawsuit, which motion has been voluntarily adjourned by Huff until September 27, 2010.





The Company is 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 the Company’s consolidated financial position, results of operations or cash flows.





15.
Related Party Transactions





Shared Services Agreement and Arrangement


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.




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.




For the three and six months ended June 30, 2009, CKX incurred and billed FXRE $0.1 million and $0.2 million, respectively, for professional services, consisting primarily of accounting and legal services.  The agreement was terminated on June 30, 2009.





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 three and six months ended June 30, 2010, Flag incurred and billed FXRE $0.1 million and $0.1 million, respectively. For the three and six months ended June 30, 2009, Flag incurred and billed FXRE $0.1 million and $0.2 million, respectively.  The services provided for the three and six months ended June 30, 2010 and 2009 were approved by the Company’s audit committee. The fees for the three and six months ended June 30, 2010 have not been paid, while the fees for the three and six months ended June 30, 2009 have been paid.   All of these fees were for professional services, consisting primarily of accounting and legal services incurred, provided by Flag on behalf of FXRE.





14
 
 
 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, 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.





As of June 30, 2010, $15 million of the preferred priority distribution right in FXLR remains to be paid to Flag, plus, as of June 30, 2010, the accrued priority return was $ 1.1 million.





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.





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.





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.





15





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.





On May 3, 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 150 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 11,448.19 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 $0.2621 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 $150,000 from the sale of the units.





On June 4, 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 issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 12,484.39 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 $0.2403 per share (such exercise price representing 150% of the closing price referenced 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.





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.





Under this letter of intent, the Company had been afforded a 90-day exclusivity period through June 10, 2010 for the purposes of evaluating the counterparties’ business and the feasibility of developing an amusement ride 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 late stage negotiations with the private company and its principal to obtain from them a world-wide exclusive license to use the technology and intellectual property to develop this amusement ride.  There is no assurance that the Company’s late stage negotiations with these counterparties will result in any formal arrangement between them or, if such formal arrangement is achieved, that the Company will be able to obtain the necessary financing to implement this new line of business.





650 Madison Avenue Office Space





Since April 1, 2009, the Company has sublicensed certain space from CKX.  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 six  months ended June 30, 2010, rent payments to CKX totaled $73,858.





16.
Subsequent Events





Private Placement of Preferred Stock Units





On July 7, 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 102 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 14,869.88 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 $0.2018 per share (such exercise price representing 150% of the closing price referred to in the preceding clause (i)). The warrants are exercisable for a period of 5 years. The Company generated aggregate proceeds of $102,000 from the sale of the units. The Company intends to use the proceeds to fund working capital requirements and for general corporate purposes.





After giving effect to the sale of shares of Series A Convertible Preferred Stock on July 7, 2010, the Company has issued and sold all 1,500 authorized shares of Series A Convertible Stock.





16
 FORWARD LOOKING STATEMENTS





In addition to historical information, this Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and 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 Quarterly 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. Our forward-looking statements are based on the information currently available to us and speak only as of the date on which this Quarterly Report was filed with the Securities and Exchange Commission (“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.





ITEM 2.
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 should be read in conjunction with the historical audited consolidated financial statements and footnotes of the Company included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Our future results of operations may change materially from the historical results of operations reflected in our historical financial statements.





The Company’s business consists of owning and operating the Las Vegas Property (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 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 redevelopment plan, 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, 2009. As described 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 an update of the appraisal as of 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.





As described in the Explanatory Note on page 3 of this report, on June 2, 2010, the Effective Lock Up Agreement terminated in accordance with its terms and is of no further force or effect (except for certain provisions thereof that survived in accordance with their terms and otherwise for purposes of determining the amount of any applicable adequate protection payments authorized by the Bankruptcy Court in the Chapter 11 Bankruptcy Proceeding).  Nevertheless, the Las Vegas Subsidiary is still a debtor in possession in the Chapter 11 Bankruptcy Proceeding and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.





The loss of the Las Vegas Property, which is substantially the entire business of the Company, will 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.





As has been previously disclosed, the Company has been evaluating a new line of business to develop a certain amusement ride since the end of the first quarter of 2010.  The Company is in late stage negotiations with a private company and its principal to obtain from them a world-wide exclusive license to use the technology and intellectual property to develop this amusement ride.  There is no assurance that the Company’s late stage negotiations with these counterparties will result in any formal arrangement between them or, if such formal arrangement is achieved, that the Company will be able to obtain the necessary financing to implement this new line of business.





17


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 its 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 of 2009, 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.  The Company obtained an update of the appraisal as of 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.





Consolidated Operating Results Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009





Revenue for the three months ended June 30, 2010 was $4.2 million.  Operating expenses were $1.1 million, which includes no land impairment charge.





The historical business of the Company was to engage in commercial leasing activities. All revenue is derived from these commercial leasing activities and includes minimum rentals and percentage rentals on the retail space. In late September 2008, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Las Vegas property site 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 2008, the Company no longer classifies any operations as incidental operations and all operations are included as part of income (loss) from operations.





Revenue





Revenue decreased $0.6 million in the second quarter of 2010 as compared to the second quarter of 2009 due primarily to the expiration of some long-term tenant leases which reduced monthly revenues.  All operations are included as part of income from operations for the three months ended June 30, 2010.





Operating Expenses





Actual operating expenses, excluding depreciation, decreased in the second quarter of 2010 by $77.4 million primarily due to a decrease of $77.0 million in land impairment charges recorded in the second quarter of 2009.  This decrease also includes a decrease of $0.5 million in debt restructuring costs including legal and bank fees and other related costs and a decrease of less than $0.1 million in selling, general and administrative expenses due to a reduction in salaries and wages.  Included in corporate overhead expenses for the three months ended June 30, 2010 is a charge of $0.1 million in non-cash compensation and less than $0.1 million in shared services charges provided by Flag pursuant to its arrangement with the Company.





Depreciation and Amortization





Depreciation and amortization was approximately the same in the second quarter of 2010 as compared to the second quarter of 2009 due primarily to the cessation of the development plan and the financial distress of the company.





Interest Income/Expense





Interest expense, net, was approximately the same in the second quarter of 2010 as compared to the second quarter of 2009  as the same  interest rates were in effect for both  periods..


18


Loss from Incidental Operations





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 no longer classifies these operations of the Las Vegas subsidiaries as incidental operations. Therefore, all operations are included as part of income from operations for the three months ended June 30, 2010.





Income Taxes





For the three months ended June 30, 2010 and 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.








Consolidated Operating Results Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009





Revenue for the six months ended June 30, 2010 was $8.5 million.  Operating expenses were $ 2.3 million, which includes no land impairment charge.





The historical business of the Company was to engage in commercial leasing activities. All revenue is derived from these commercial leasing activities and includes minimum rentals and percentage rentals on the retail space. In late September 2008, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Las Vegas property site 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 2008, the Company no longer classifies any operations as incidental operations and all operations are included as part of income (loss) from operations.





Revenue





Revenue decreased $0.9 million in the six months ended June 30, 2010 as compared to same period last year due primarily to the expiration of some long-term tenant leases which reduced monthly revenues.  All operations are included as part of income from operations for the six months ended June 30, 2010.





Operating Expenses





Actual operating expenses, excluding depreciation, decreased in the six months ended June 30, 2010 by $69.5 million primarily due to a decrease of $77.0 million in land impairment charges recorded in the six months ended June 30, 2009.  This decrease also includes a decrease of $0.3 million in debt restructuring costs including legal and bank fees and other related costs and a decrease of $2.4 million in selling, general and administrative expenses due to a reduction in salaries and wages. Included in corporate overhead expenses for the six months ended June  30, 2010 is a charge of $0.1 million in non-cash compensation and less than $ 0.1 million in shared services charges provided by Flag pursuant to its arrangement with the Company.





Depreciation and Amortization





Depreciation and amortization was approximately the same in the six months ended June 30, 2010 as compared to the same period last year due primarily to the cessation of the development plan and the financial distress of the company.


Interest Income/Expense





Interest expense, net, decreased $0.1 million in the six months ended June 30, 2010 as compared to same period last year due to, lower interest rates in the 2009 period and a reduction in outstanding mortgage loans due to a $21 million principal payment made in January 2009, offset by the 2.0% penalty interest charged due to the default of the loan.





Loss from Incidental Operations





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 no longer classifies these operations of the Las Vegas subsidiaries as incidental operations. Therefore, all operations are included as part of income from operations for the six months ended June 30, 2010.


19


Income Taxes





For the six months ended June 30, 2010 and 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.





Liquidity and Capital Resources





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 (including its predecessors) has defaulted on the $475 million mortgage loan on the Las Vegas Property. The Company operated the Las Vegas Property through its Las Vegas Subsidiary (including its predecessors) until June 23, 2009, when a receiver was appointed as a result of the first lien lenders exercising remedies under the loan default.  After the Las Vegas Subsidiary’s (including its predecessors’) default on the mortgage loan on January 6, 2009 and until June 23, 2009, the Las Vegas 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 and until April 21, 2010, when the Las Vegas Subsidiary filed the Chapter 11 Bankruptcy Proceeding and became debtor-in-possession, the receiver was in control of operating, leasing, and managing the property, and the Las Vegas Subsidiary was 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 is in severe financial distress and may not be able to continue as a going concern. The Company has no current cash flow and cash on hand is not sufficient to fund its short-term liquidity requirements, including its ordinary course obligations as they come due. As described in the Explanatory Note on page 3 of this report, the Las Vegas Subsidiary has been a debtor in possession in the Chapter 11 Bankruptcy Proceeding since April 21, 2010 and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.





The loss of the Las Vegas Property, which is substantially the entire business of the Company, will 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.





As has been previously disclosed, the Company has been evaluating a new line of business to develop a certain amusement ride since the end of the first quarter of 2010.  The Company is in late stage negotiations with a private company and its principal to obtain from them a world-wide exclusive license to use the technology and intellectual property to develop this amusement ride.  There is no assurance that the Company’s late stage negotiations with these counterparties will result in any formal arrangement between them or, if such formal arrangement is achieved, that the Company will be able to obtain the necessary financing to implement this new line of business.




Our independent registered public accounting firm’s report dated April 14, 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 the six months ended June 30, 2010, we were able fund our business activities and obligations as they became due with the following sources of capital:





20


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.





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.





On May 3, 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 150 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 11,448.19 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 $0.2621 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 $150,000 from the sale of the units.





On June 4, 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 issued Series A Convertible Preferred Stock and (y) a warrant to purchase up to 12,484.39 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 $0.2403 per share (such exercise price representing 150% of the closing price referenced 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.





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 for the development of an amusement ride as noted earlier in this report.


21


Cash Flow for the Six Months Ended June 30, 2010 and 2009





Operating Activities





Cash provided by operating activities of $0.5 million for the six months ended June 30, 2010 consisted primarily of the net loss for the period of $22.2 million, which includes depreciation and amortization costs of $1.0 million and share-based payments of $0.2 million.  There was an increase in working capital levels during the quarter of $11.9 million for the six months ended June 30, 2010.





Investing Activities





Cash used in investing activities of $1.6 million for the six months ended June 30, 2010 primarily reflects restricted cash used.





Financing Activities





Cash provided by financing activities of $1.9 million for the six months ended June 30, 2010 reflects proceeds from private placements of stock.





Uses of Capital





At June 30, 2010, we had $454 million of debt outstanding and $1.1 million in cash and cash equivalents. Our current cash on hand is not sufficient to fund our current needs.  In total, we generated aggregate gross proceeds of approximately $1.9 million from sales under the private placements of  common stock and preferred stock units, 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.  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. 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.





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.





Application of Critical Accounting Policies





During the six months ended June 30, 2010, there have been no significant changes related to the Company’s critical accounting policies and estimates as disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in the Company’s Annual Report on Form 10-K for the year fiscal year ended December 31, 2009.





Off Balance Sheet Arrangements





We do not have any off balance sheet arrangements.





Seasonality





We do not consider our business to be seasonal.





22




ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.





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.





Interest Rate Risk





The $475 million mortgage loan pays interest at variable rates ranging from 5.75% to 13.25% at June 30, 2010. 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.





ITEM 4T.
CONTROLS AND PROCEDURES





Changes in Internal Control over Financial Reporting





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. 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.





As of June 30, 2010, the Company was unable to remediate these material weaknesses because of its limited financial and human resources.





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 June 30, 2010. Based on this evaluation, and in light of the material weaknesses described above under “Changes in Internal Control over Financial Reporting”, 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 not effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in accordance with generally accepted accounting principles. Nevertheless, management believes that the financial statements are fairly stated and that all required disclosures have been made.


23
 PART II — OTHER INFORMATION





ITEM 1.
LEGAL PROCEEDINGS





Reference is made to note 14 to the Company’s Consolidated Financial Statements included elsewhere in this report for the information required by this Item.





ITEM 3.
DEFAULTS UPON SENIOR SECURITIES





As described in the Explanatory Note on page 3 of this report, the Las Vegas Subsidiary has been a debtor in possession in the Chapter 11 Bankruptcy Proceeding since April 21, 2010 and a Liquidation Plan will eventually be implemented to liquidate the Las Vegas Property. Under the Liquidation Plan, it is extremely unlikely the Company will either participate in any material way in or receive any material benefit from such liquidation of the Las Vegas Property.





The loss of the Las Vegas Property, which is substantially the entire business of the Company, will 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.





ITEM 6 .
EXHIBITS





Exhibits





The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.





ExhibitNumber

Description31
.1

Certification of Principal Executive Officer31
.2

Certification of Principal Financial Officer32
.1

Section 1350 Certification of Principal Executive Officer32
.2

Section 1350 Certification of Principal Financial Officer


_________________


24


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. SillermanRobert F.X. Sillerman

Chief Executive Officer and Chairman of the Board








By:
/s/ Gary McHenryGary McHenry

Principal Financial Officer





August 13, 2010


25
 INDEX TO EXHIBITS








The documents set forth below are filed herewith.





ExhibitNumber

Description31.1

Certification of Principal Executive Officer.31.2

Certification of Principal Financial Officer32.1

Section 1350 Certification of Principal Executive Officer32.2

Section 1350 Certification of Principal Financial Officer