UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 001-33902
FX Real Estate and
Entertainment Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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36-4612924
(I.R.S. Employer
Identification Number)
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650
Madison Avenue
New York, New York 10022
(Address
of Principal Executive Offices and Zip Code)
Registrants 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 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):
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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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 November 10, 2008, there were 51,992,417 shares
of the registrants common stock outstanding.
TABLE OF
CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Consolidated Balance Sheets as of
September 30, 2008 (Unaudited) and December 31,
2007
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3
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Consolidated Statements of Operations for the
three months ended September 30, 2008 and 2007
(Unaudited)
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4
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Consolidated Statements of Operations for the
nine months ended September 30, 2008 (Unaudited) and for
the period from May 11, 2007 through September 30,
2007 (Unaudited) and Combined Statement of Operations for the
period from January 1, 2007 through May 10, 2007
(Predecessor)
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5
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Consolidated Statements of Cash Flows for the
nine months ended September 30, 2008 (Unaudited) and for
the period from May 11, 2007 through September 30,
2007 (Unaudited) and Combined Statement of Cash Flows for the
period from January 1, 2007 through May 10, 2007
(Predecessor)
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6
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Notes to Consolidated and Combined Financial
Statements (Unaudited)
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7
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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25
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Quantitative and Qualitative Disclosures About
Market Risk
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36
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Controls and Procedures
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37
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Legal Proceedings
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37
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Risk Factors
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37
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Defaults Upon Senior Securities
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39
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Submission of Matters to a Vote of Security
Holders
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39
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Exhibits
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40
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EX-31.1: CERTIFICATION
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EX-31.2: CERTIFICATION
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EX-32.1: CERTIFICATION
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EX-32.2: CERTIFICATION
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2
FX Real
Estate and Entertainment Inc.
(amounts
in thousands, except share data)
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September 30,
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December 31,
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2008
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2007
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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9,483
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$
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2,559
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Restricted cash
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37,229
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60,350
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Marketable securities
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10,366
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43,439
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Rent and other receivables, net of allowance for doubtful
accounts of $110 at September 30, 2008 and $368 at
December 31, 2007
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448
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1,016
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Deferred financing costs, net
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889
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6,714
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Prepaid expenses and other current assets
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1,366
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1,031
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Total current assets
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59,781
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115,109
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Investment in real estate, at cost:
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Land
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537,719
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533,336
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Building and improvements
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32,710
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32,710
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Furniture, fixtures and equipment
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682
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565
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Capitalized development costs
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6,026
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Less: accumulated depreciation
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(26,877
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)
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(10,984
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)
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Net investment in real estate
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544,234
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561,653
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Acquired lease intangible assets, net
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1,103
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1,222
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Total assets
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$
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605,118
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$
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677,984
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable and accrued expenses
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$
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7,177
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$
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10,809
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Accrued license fees
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7,500
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10,000
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Debt
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475,000
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475,000
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Notes payable
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4,605
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30,674
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Due to related parties
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1,415
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3,022
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Related party debt
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1,020
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Other current liabilities
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817
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1,075
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Acquired lease intangible liabilities, net
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19
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39
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Unearned rent and related revenue
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66
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Total current liabilities
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496,599
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531,639
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Related party debt
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6,000
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Other long-term liabilities
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10
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191
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Total liabilities
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496,609
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537,830
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Contingently redeemable stockholders equity
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180
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Stockholders equity:
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Preferred stock, $0.01 par value: authorized
75,000,000 shares, 1 share issued and outstanding at
September 30, 2008 and none issued and outstanding at
December 31, 2007
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Common stock, $0.01 par value: authorized
300,000,000 shares, 51,929,696 and 39,290,247 shares
issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
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519
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393
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Additional
paid-in-capital
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298,419
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219,781
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Accumulated deficit
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(190,429
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)
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(77,739
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Accumulated other comprehensive loss
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(2,461
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Total stockholders equity
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108,509
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139,974
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Total liabilities and stockholders equity
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$
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605,118
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$
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677,984
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See accompanying notes to consolidated and combined financial
statements.
3
FX Real
Estate and Entertainment Inc.
(amounts
in thousands, except share and per share data)
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Three Months
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Three Months
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Ended
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Ended
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September 30, 2008
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September 30, 2007
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Revenue
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$
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482
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$
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1,346
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Operating expenses:
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License fees
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2,500
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4,285
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Selling, general and administrative expenses
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3,560
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3,278
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Depreciation and amortization expense
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7
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86
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Operating and maintenance
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6
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145
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Real estate taxes
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58
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116
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Impairment of capitalized development costs
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10,667
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Total operating expenses
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16,798
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7,910
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Loss from operations
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(16,316
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)
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(6,564
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)
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Interest income
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84
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187
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Interest expense
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(9,665
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)
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(15,707
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)
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Other expense
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(3,950
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)
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(5,981
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)
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Loss before equity in loss of an unconsolidated affiliate,
minority interest and incidental operations
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(29,847
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)
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(28,065
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Equity in loss of an unconsolidated affiliate
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(514
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)
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Minority interest
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335
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Loss from incidental operations
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(3,860
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)
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(5,113
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)
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Net loss
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$
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(33,707
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)
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$
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(33,357
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)
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Basic and diluted loss per share
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$
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(0.65
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)
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Basic and diluted average number of common shares outstanding
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51,503,841
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See accompanying notes to consolidated and combined financial
statements.
4
FX Real
Estate and Entertainment Inc.
(amounts
in thousands, except share and per share data)
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Predecessor
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Consolidated
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Combined
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Consolidated
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Period from
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Period from
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Nine Months
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May 11, 2007
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January 1, 2007
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Ended
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Through
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Through
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September 30, 2008
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September 30, 2007
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May 10, 2007
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(Unaudited)
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(Unaudited)
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Revenue
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$
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1,453
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$
|
1,346
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|
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$
|
2,079
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Operating expenses:
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|
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|
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License fees
|
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7,500
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5,714
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Selling, general and administrative expenses
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11,504
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3,687
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|
421
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Depreciation and amortization expense
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|
20
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|
86
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|
128
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Operating and maintenance
|
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23
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|
145
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265
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Real estate taxes
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|
167
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|
116
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|
153
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Impairment of capitalized development costs
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10,667
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Total operating expenses
|
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29,881
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|
|
|
9,748
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|
967
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Income (loss) from operations
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(28,428
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)
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|
(8,402
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)
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|
1,112
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|
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Interest income
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|
325
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|
|
|
613
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|
|
113
|
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Interest expense
|
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|
(36,183
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)
|
|
|
(15,944
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)
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|
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|
(14,557
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)
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Other expense
|
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|
(35,535
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)
|
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|
(6,358
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)
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|
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|
|
|
|
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Loss before equity in loss of an unconsolidated affiliate,
minority interest, early retirement of debt and incidental
operations
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|
(99,821
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)
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(30,091
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)
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|
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(13,332
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)
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Equity in loss of an unconsolidated affiliate
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|
|
|
|
|
|
(4,969
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)
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Minority interest
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|
12
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|
|
|
579
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|
|
|
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Loss from early retirement of debt
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|
|
|
|
|
|
|
|
|
|
(3,507
|
)
|
Loss from incidental operations
|
|
|
(12,881
|
)
|
|
|
(5,113
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)
|
|
|
|
(7,790
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(112,690
|
)
|
|
$
|
(39,594
|
)
|
|
|
$
|
(24,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(2.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted average number of common shares outstanding
|
|
|
46,356,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated and combined financial
statements.
5
FX Real
Estate and Entertainment Inc.
STATEMENTS
OF CASH FLOWS
(amounts
in thousands)
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Combined
|
|
|
|
Consolidated
|
|
|
Period from
|
|
|
|
Period from
|
|
|
|
Nine Months
|
|
|
May 11, 2007
|
|
|
|
January 1, 2007
|
|
|
|
Ended
|
|
|
through
|
|
|
|
Through
|
|
|
|
September 30, 2008
|
|
|
September, 30 2007
|
|
|
|
May 10, 2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(112,690
|
)
|
|
$
|
(39,594
|
)
|
|
|
$
|
(24,629
|
)
|
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on exercise of derivative
|
|
|
|
|
|
|
6,358
|
|
|
|
|
|
|
Impairment of available-for-sale securities
|
|
|
35,535
|
|
|
|
|
|
|
|
|
|
|
Impairment of capitalized development costs
|
|
|
10,667
|
|
|
|
|
|
|
|
|
|
|
Equity in loss of an unconsolidated affiliate
|
|
|
|
|
|
|
4,969
|
|
|
|
|
36
|
|
Depreciation and amortization
|
|
|
15,892
|
|
|
|
5,449
|
|
|
|
|
8,472
|
|
Deferred financing cost amortization
|
|
|
7,493
|
|
|
|
3,631
|
|
|
|
|
41
|
|
Share-based payments
|
|
|
2,448
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
(12
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
Provision for accounts receivable allowance
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
475
|
|
|
|
|
|
|
|
|
(171
|
)
|
Other current and non-current assets
|
|
|
(533
|
)
|
|
|
(1,318
|
)
|
|
|
|
(933
|
)
|
Accounts payable and accrued expenses
|
|
|
(3,571
|
)
|
|
|
3,324
|
|
|
|
|
(2,486
|
)
|
Accrued license fees
|
|
|
(2,500
|
)
|
|
|
5,714
|
|
|
|
|
|
|
Due to related parties
|
|
|
(1,607
|
)
|
|
|
1,053
|
|
|
|
|
22
|
|
Unearned revenue
|
|
|
66
|
|
|
|
|
|
|
|
|
991
|
|
Other
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(48,861
|
)
|
|
|
(10,993
|
)
|
|
|
|
(18,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
37,979
|
|
|
|
(10,443
|
)
|
|
|
|
11,541
|
|
Purchase of additional interest in Metroflag
|
|
|
|
|
|
|
(172,500
|
)
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
Capitalized development costs
|
|
|
(9,034
|
)
|
|
|
|
|
|
|
|
(45
|
)
|
Purchase of Riviera interests
|
|
|
|
|
|
|
(21,842
|
)
|
|
|
|
|
|
Purchase of shares in Riviera
|
|
|
|
|
|
|
(13,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
28,828
|
|
|
|
(217,982
|
)
|
|
|
|
11,496
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from private placement of units
|
|
|
7,925
|
|
|
|
|
|
|
|
|
|
|
Payment of mortgage loan extension costs
|
|
|
(14,988
|
)
|
|
|
|
|
|
|
|
|
|
Repayment of related party debt
|
|
|
(7,054
|
)
|
|
|
|
|
|
|
|
|
|
Repayment of notes
|
|
|
(26,069
|
)
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
2,570
|
|
|
|
2,000
|
|
|
|
|
|
|
Proceeds from rights offering and investment agreements, net
|
|
|
96,613
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution to related party
|
|
|
(31,039
|
)
|
|
|
|
|
|
|
|
|
|
Deferred financing and leasing costs
|
|
|
(1,669
|
)
|
|
|
(3,737
|
)
|
|
|
|
(10,536
|
)
|
Contribution from minority interest
|
|
|
668
|
|
|
|
466
|
|
|
|
|
|
|
Proceeds from members loans
|
|
|
|
|
|
|
|
|
|
|
|
5,972
|
|
Members capital contributions
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
Repayment of members loans
|
|
|
|
|
|
|
(7,605
|
)
|
|
|
|
|
|
Borrowings under loan agreement and notes payable
|
|
|
|
|
|
|
141,674
|
|
|
|
|
306,543
|
|
Retirement of mortgage loans
|
|
|
|
|
|
|
|
|
|
|
|
(295,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
26,957
|
|
|
|
232,798
|
|
|
|
|
6,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents
|
|
|
6,924
|
|
|
|
3,823
|
|
|
|
|
(155
|
)
|
Cash and cash equivalents beginning of period
|
|
|
2,559
|
|
|
|
|
|
|
|
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
9,483
|
|
|
$
|
3,823
|
|
|
|
$
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
30,189
|
|
|
$
|
12,772
|
|
|
|
$
|
17,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions of assets for membership interests
|
|
$
|
|
|
|
$
|
103,421
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated and combined financial
statements.
6
FX Real
Estate and Entertainment Inc.
General
The consolidated financial statements as of and for the three
and nine months ended September 30, 2008, the period from
May 11, 2007 through September 30, 2007 and as of
December 31, 2007 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 Realty, LLC,
which changed its name to FX Luxury, LLC in August 2008
(FXLR), and the combined financial statements for
the period from January 1, 2007 through May 10, 2007
reflect the results of operations of Metroflag (as defined
below), the Companys predecessor. The financial
information in this report for the three and nine months ended
September 30, 2008 and for the period from May 11,
2007 through September 30, 2007 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 nine
months ended September 30, 2008 and all 2007 periods 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 Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007 (the
Form 10-K).
Certain prior period amounts presented have been reclassified to
conform to the current period presentation.
Prior to May 11, 2007, the Company did not have any
operations. As a result, Metroflag (as defined below) is
considered to be the predecessor company
(Predecessor). Accordingly, relevant financial
information regarding the Predecessor has been presented herein.
On September 26, 2007, holders of common membership
interests in FXLR exchanged all of their common membership
interests for shares of common stock of FXRE. Following this
reorganization, FXRE owns 100% of the common membership
interests of FXLR.
As a result of this reorganization, all references to FXRE or
the Company for the periods prior to the date of the
reorganization shall refer to FXLR and its consolidated
subsidiaries. For all periods as of and subsequent to the date
of the reorganization, all references to FXRE or the Company
shall refer to FXRE and its consolidated subsidiaries, including
FXLR.
BP Parent, LLC, Metroflag BP, LLC (BP), Metroflag
Polo, LLC (Polo), Metroflag Cable, LLC
(Cable), CAP/TOR, LLC (CAP/TOR),
Metroflag SW, LLC (SW), Metroflag HD, LLC,
(HD), and Metroflag Management, LLC (MM)
(collectively, Metroflag or the Metroflag
entities) are engaged in the business of leasing real
properties located along Las Vegas Boulevard between Harmon and
Tropicana Avenue in Las Vegas, Nevada.
On May 9, 2007, Polo, Cable, CAP/TOR, SW and HD were merged
with and into either Cable or BP, with Cable and BP continuing
as the surviving companies. In August 2008, BP changed its name
to FX Luxury Las Vegas I, LLC and Cable changed its name to
FX Luxury Las Vegas II, LLC (together the Park Central
subsidiaries).
On May 11, 2007, Flag Luxury BP, LLC, Flag Luxury Polo,
LLC, Flag Luxury SW, LLC, Flag Luxury Cable, LLC, Metroflag CC,
LLC, Metro One, LLC, Metro Two, LLC, Metro Three, LLC, Metro
Five, LLC, merged into FXLR, which effectively became a 50%
owner of Metroflag.
From May 11, 2007 to July 5, 2007, the Company
accounted for its interest in Metroflag under the equity method
of accounting because it did not have control with its then 50%
ownership interest.
Effective July 6, 2007, with its purchase of the 50% of
Metroflag that it did not already own, the Company consolidated
the results of Metroflag.
7
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Principles
of Consolidation
The consolidated financial statements of FXRE include the
accounts of all its subsidiaries. All intercompany accounts and
transactions have been eliminated. The accompanying combined
financial statements for Metroflag consist of BP, Polo, Cable,
CAP/TOR, SW, HD, and MM before the merger on May 10, 2007
and BP, Cable and MM after the merger. Significant intercompany
accounts and transactions between the entities have been
eliminated in the accompanying combined financial statements.
The financial statements have been combined because the entities
were all part of a transaction such that FXLR owns 100% of
Metroflag under common ownership and subject to mortgage loans
secured by the properties owned by the combined entities.
Significant
Accounting Policies
During the nine months ended September 30, 2008, there has
been no significant change in the Companys significant
accounting policies and estimates as disclosed in the
Form 10-K.
Impact
of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157
, Fair Value
Measurements
(SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements.
The provisions of SFAS 157 are effective for the Company
beginning January 1, 2008 for financial assets and
liabilities and January 1, 2009 for non-financial assets
and liabilities. The Company has adopted SFAS 157 for its
marketable securities (see note 2,
Formation of the
Company
). The Companys marketable securities qualify
as level one financial assets in accordance with SFAS 157
as they are traded on an active exchange market and are fair
valued by obtaining quoted prices. The Company does not have any
level two financial assets or liabilities that require
significant other observable or unobservable inputs in order to
calculate fair value. The Companys interest rate cap
agreement (see note 11) qualifies as a level three
financial asset in accordance with SFAS 157 as of
September 30, 2008; however, the balance as of
September 30, 2008 and changes in the period ended
September 30, 2008 did not have a material effect on the
Companys financial position or operations. The Company
does not have any other level three financial assets or
liabilities.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), providing companies with an
option to report selected financial assets and liabilities at
fair value. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. Effective January 1, 2008 the Company elected not to
report any additional assets and liabilities at fair value.
On December 4, 2007, the FASB issued
SFAS No. 141(R),
Business Combinations
(SFAS 141(R)) and Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements
,
an amendment of ARB No. 51
(SFAS 160). These new standards will
significantly change the accounting for and reporting of
business combination transactions and noncontrolling (minority)
interests in consolidated financial statements. SFAS 141(R)
and SFAS 160 are required to be adopted simultaneously and
are effective for the first annual reporting period beginning on
or after December 15, 2008. Earlier adoption is prohibited.
The adoption of SFAS 141(R) will change the Companys
accounting treatment for business combinations on a prospective
basis beginning January 1, 2009. The Company has completed
its assessment of the impact of SFAS 160 on its
consolidated financial statements and has concluded that the
statement will not have a significant impact on the
Companys consolidated financial statements.
On June 5, 2008, the FASB released a Proposed Statement of
Financial Accounting Standards,
Disclosure of Certain Loss
Contingencies, an amendment of FASB Statements No. 5 and
141(R)
(the proposed Statement), for a comment
period ending August 8, 2008. The proposed Statement would
(a) expand the population of loss contingencies that is
required to be disclosed, (b) require disclosure of
specific quantitative and qualitative
8
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
information about those loss contingencies, (c) require a
tabular reconciliation of recognized loss contingencies and
(d) provide an exemption from disclosing certain required
information if disclosing that information would be prejudicial
to an entitys position in a dispute. The FASB has
indicated that the earliest effective date of the proposed
Statement for the Company would be no sooner than the fiscal
year ending December 15, 2009. The adoption of this
standard will change the Companys disclosure of contingent
liabilities upon effectiveness of the proposed Statement.
|
|
2.
|
Organization
and Background
|
Business
of the Company
The Company owns 17.72 contiguous acres of land located at the
southeast corner of Las Vegas Boulevard and Harmon Avenue in Las
Vegas, Nevada (the Park Central site). The property
is currently occupied by a motel and several commercial and
retail tenants with a mix of short and long-term leases. As
previously disclosed, the Company had commenced design and
planning for a redevelopment plan for the Park Central site 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 has
determined not to proceed with its originally proposed plan for
the redevelopment of the Park Central site. The Company intends
to consider alternative plans with respect to the redevelopment
of the site. Until such time as an alternative development plan,
if any, is adopted, the Company intends to continue the
propertys current commercial leasing activities. As a
result of this decision, 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 September 30, 2008.
As discussed in note 7, the Park Central subsidiaries are
in default under the $475 million mortgage loan secured by
the Park Central site by reason of being out of compliance with
the debt-to-loan value ratio covenants prescribed by the
governing amended and restated credit agreements. In order to
cure the default, the Company is seeking from the lenders a
waiver of noncompliance with, or modifications of, these
financial covenants. Unless and until the Company can obtain
such a waiver or modifications, the lenders may exercise their
remedies under the credit agreements, which include accelerating
repayment of the loan and foreclosing on the Park Central site.
There is no assurance that the Company will be able to obtain
such a waiver or modification before the lenders exercise any of
their remedies. Neither the Company nor its Park Central
subsidiaries have adequate capital to repay the mortgage loan if
accelerated and there can be no assurance that the mortgage loan
can be refinanced in a timely manner and on commercially
reasonable terms or at all.
On June 1, 2007, the Company entered into license
agreements with Elvis Presley Enterprises, Inc.
(EPE), an 85%-owned subsidiary of CKX, Inc.
(CKX) [NASDAQ: CKXE], and Muhammad Ali Enterprises
LLC (MAE), an 80%-owned subsidiary of CKX, which
allows it to use the intellectual property and certain other
assets associated with Elvis Presley and Muhammad Ali in the
development of its real estate and other entertainment
attraction-based projects. The Companys license agreement
with Elvis Presley Enterprises grants the Company, among other
rights, the right to develop, and it currently intends to pursue
the development of, one or more hotels as part of the master
plan of Elvis Presley Enterprises, Inc. to redevelop the
Graceland property and surrounding areas in Memphis, Tennessee.
The Companys ability to pursue the development of the
Graceland-based hotel(s) as well as additional real estate and
entertainment attraction-based projects is dependent upon, among
other things, its ability to raise the financing necessary to
pay (i) the annual minimum license fees and certain other
funding obligations under the EPE and MAE license agreements
(see note 9) and (ii) the costs of developing
such projects. The failure to pay the annual minimum license
fees and to satisfy its other funding obligations could result
in the termination of the license agreements by EPE and MAE and
the loss of all rights with respect to the Muhammad Ali and
Elvis Presley intellectual property assets. There can be no
assurance that such financing will be available on terms
acceptable to the Company, if at all.
9
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
In addition to its ownership of plans to develop one or more
Graceland-based hotel(s) and its intention to pursue additional
real estate and entertainment-based developments using the Elvis
Presley and Muhammad Ali intellectual property, the Company, as
of September 30, 2008, through direct and indirect wholly
owned subsidiaries, owned 1,410,363 shares of common stock
of Riviera Holdings Corporation [AMEX:RIV], a company that owns
and operates the Riviera Hotel & Casino in Las Vegas,
Nevada and the Blackhawk Casino in Blackhawk, Colorado. While
the Company had been exploring an acquisition of Riviera
Holdings Corporation, such exploration has been deferred as a
result of prevailing capital market conditions and the
Companys financial condition.
As referenced in note 7 below, 992,069 of the
Companys shares of Riviera Holdings Corporation common
stock are pledged as collateral for a margin loan with Bear
Stearns. On September 30, 2008, the effective interest rate
on this loan was 3.5% and the amount outstanding, including
accrued interest of $0.3 million, was $4.9 million. On
November 11, 2008, the lender notified the Company that the
closing price of Riviera Holdings Corporation common stock fell
below $3.00 per share, resulting in the requirement that the
Company repay all amounts outstanding under the loan. The
failure to repay the remaining outstanding amount under the loan
when demanded by the lender could result in the lender
exercising its remedies under the margin loan agreement, which
could include selling the shares and retaining the proceeds as
repayment of some or all of the loan. If the lender was to sell
the shares and receive proceeds insufficient to repay all
amounts outstanding under the loan, the Company would be
required to pay the deficiency.
Formation
of the Company
FXLR was formed under the laws of the state of Delaware on
April 13, 2007. The Company was inactive from inception
through May 10, 2007.
On May 11, 2007, Flag Luxury Properties, LLC
(Flag), a real estate development company in which
Robert F.X. Sillerman and Paul C. Kanavos each owned an
approximate 29% interest, contributed to the Company its 50%
ownership interest in the Metroflag entities for all of the
membership interests in the Company. The sale of assets by Flag
was accounted for at historical cost as FXLR and Flag were
entities under common control.
On June 1, 2007, Flag Leisure Group, LLC, a company in
which Robert F.X. Sillerman and Paul C. Kanavos each
beneficially own an approximate 33% interest and which is the
managing member of Flag, sold to the Company all of its
membership interests in RH1, LLC (RH1), which owns
an aggregate of 418,294 shares of Riviera Holdings
Corporation and 28.5% of the outstanding shares of common stock
of Riv Acquisition Holdings, Inc. On such date, Flag also
sold to the Company all of its membership interests in Flag
Luxury Riv, LLC, which owns an additional 418,294 shares of
Riviera Holdings Corporation and 28.5% of the outstanding shares
of common stock of Riv Acquisition Holdings. With the purchase
of these membership interests, FXLR acquired, through its
interests in Riv Acquisitions Holdings, a 50% beneficial
ownership interest in an option to acquire an additional
1,147,550 shares of Riviera Holdings Corporation at $23 per
share. These options were exercised in September 2007. The total
consideration for these transactions was $21.8 million paid
in cash, a note for $1.0 million and additional contributed
equity of $15.9 million for a total of $38.7 million.
As a result of these transactions, the Company owns
1,410,363 shares of common stock (161,758 of which were put
into trust for the benefit of the Company in October
2008) of Riviera Holdings Corporation (the Riv
Shares) as of September 30, 2008. The sale of assets
by Flag Leisure Group, LLC and Flag was accounted for at
historical cost as the Company, Flag Leisure Group, LLC and Flag
were entities under common control at the time of the
transactions. Historical cost for these acquired interests
equals fair values because the assets acquired comprised
available for sale securities and a derivative instrument that
are required to be reported at fair value in accordance with
generally accepted accounting principles.
FXRE was formed under the laws of the state of Delaware on
June 15, 2007.
On September 26, 2007, CKX, together with other holders of
common membership interests in FXLR contributed all of their
common membership interests in FXLR to FXRE in exchange for
shares of common stock of FXRE.
10
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
This exchange is sometimes referred to herein as the
reorganization. As a result of the reorganization,
FXRE holds 100% of the outstanding common membership interests
of FXLR.
On November 29, 2007, the Company reclassified its common
stock on a basis of 194,515.758 shares of common stock for
each share of common stock then outstanding.
On January 10, 2008, the Company became a publicly traded
company as a result of the completion of the distribution of
19,743,349 shares of common stock to CKXs
stockholders of record as of December 31, 2007. This
distribution is referred to herein as the CKX
Distribution.
CKX
Investment
On June 1, 2007, CKX contributed $100 million in cash
to the Company in exchange for 50% of the common membership
interests in the Company (the CKX Investment). CKX
also agreed to permit Flag to retain a $45 million
preferred priority distribution right which amount will be
payable upon certain defined capital events.
As a result of the CKX investment on June 1, 2007 and the
determination that Flag and CKX constituted a collaborative
group representing 100% of FXLRs ownership interests, the
Company recorded its assets and liabilities at the combined
accounting bases of the respective investors. FXLRs net
asset base represents a combination of 50% of the assets and
liabilities at historical cost, representing Flags
predecessor ownership interest, and 50% of the assets and
liabilities at fair value, representing CKXs ownership
interest, for which it contributed cash on June 1, 2007.
Along with the accounting for the subsequent acquisition of the
remaining 50% interest in Metroflag (see below) at fair
value, the assets and liabilities were ultimately adjusted to
reflect an aggregate 75% fair value.
On September 26, 2007, CKX acquired an additional 0.742% of
the outstanding capital stock of the Company for a price of
$1.5 million. The proceeds of this investment, together
with an additional $0.5 million that was invested by Flag,
were used by the Company for working capital and general
corporate purposes.
License
Agreements
On June 1, 2007, the Company entered into a worldwide
license agreement with Elvis Presley Enterprises, Inc., a
85%-owned subsidiary of CKX (EPE), granting the
Company the exclusive right to utilize Elvis Presley-related
intellectual property in connection with the development,
ownership and operation of Elvis Presley-themed hotels, casinos
and certain other real estate-based projects and attractions
around the world. The Company also entered into a worldwide
license agreement with Muhammad Ali Enterprises LLC, a 80%-owned
subsidiary of CKX (MAE), granting the company the
right to utilize Muhammad Ali-related intellectual property in
connection with Muhammad Ali-themed hotels and certain other
real estate-based projects and attractions. Please see
note 9 for a more detailed description of the license
agreements.
Metroflag
Acquisition
On May 30, 2007, the Company entered into an agreement to
acquire the remaining 50% ownership interest in the Metroflag
entities that it did not already own.
On July 6, 2007, FXLR acquired the remaining 50% of the
Metroflag entities, which collectively own the Park Central
site, from an unaffiliated third party. As a result of this
purchase, the Company now owns 100% of Metroflag, and therefore
the Park Central site. The total consideration paid by FXLR for
the remaining 50% interest in Metroflag was $180 million,
$172.5 million of which was paid in cash at closing and
$7.5 million of which was an advance payment made in May
2007 (funded by a $7.5 million loan from Flag). The cash
payment at closing was funded from $92.5 million of cash on
hand and $105 million in additional borrowings, which was
reduced by $21.3 million deposited into a restricted cash
account to cover debt service commitments and $3.7 million
in debt issuance costs. The $7.5 million loan from Flag was
repaid on July 9, 2007.
11
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The
Repurchase Agreement and Contingently Redeemable
Stock
In connection with the CKX Investment, CKX, FXRE, FXLR, Flag,
Robert F.X. Sillerman, Paul Kanavos and Brett Torino entered
into a Repurchase Agreement dated June 1, 2007, as amended
on June 18, 2007 and September 27, 2007. The purpose
of the Repurchase Agreement was to ensure that the value of the
50%-interest in the Company acquired by CKX (and the
corresponding shares of common stock of FXRE received for such
interests in the reorganization) (the Purchased
Securities) was equal to no less than the
$100 million purchase price paid by CKX, under certain
limited circumstances. Specifically, if no Termination
Event was to occur prior to the second anniversary of the
CKX Distribution, which were events designed to indicate that
the value of the CKX Investment had been confirmed, each of
Messrs. Sillerman, Kanavos and Torino would be required to
sell back such number of their shares of the Companys
common stock to the Company at a price of $.01 per share as will
result in the shares that were received by the CKX stockholders
in the CKX Distribution having a value of at least
$100 million.
The interests subject to the Repurchase Agreement were recorded
as contingently redeemable members interest in accordance
with FASB Emerging Issues Task Force Topic D-98: Classification
and Measurement of Redeemable Securities. This statement
requires the issuer to estimate and record value for securities
that are mandatorily redeemable when that redemption is not in
the control of the issuer. The value for this instrument has
been determined based upon the redemption price of par value for
the expected 18 million shares of common stock of FXRE
subject to the Repurchase Agreement. At December 31, 2007,
the value of the interest subject to redemption was recorded at
the maximum redemption value of $180,000.
In the first quarter of 2008, a termination event as defined in
the Repurchase Agreement was deemed to have occurred as the
average closing price of the common stock of FXRE for the
consecutive
30-day
period following the date of the CKX Distribution
(January 10, 2008) exceeded a price per share that
attributes an aggregate value to the Purchased Securities of
greater than $100 million. As a result of the termination
event and resulting termination of the Repurchase Agreement, the
shares are no longer redeemable. As of September 30, 2008,
the Company has reclassified to stockholders equity the
contingently redeemable stockholders equity included on
the consolidated balance sheet as of December 31, 2007.
Rights
Offering and Related Investment Agreements
On March 11, 2008, the Company commenced a registered
rights offering pursuant to which it distributed to certain of
its stockholders, at no charge, transferable subscription rights
to purchase one share of its common stock for every two shares
of common stock owned as of March 6, 2008, the record date
for the rights offering, at a cash subscription price of $10.00
per share. As of the commencement of the offering, the Company
had 39,790,247 shares of common stock outstanding. As part
of the transaction that created the Company in June 2007,
the Company agreed to undertake the rights offering, and certain
stockholders who own, in the aggregate, 20,046,898 shares
of common stock, waived their rights to participate in the
rights offering. As a result, the rights offering was made only
to stockholders who owned, in the aggregate,
19,743,349 shares of common stock as of the record date,
resulting in the distribution of rights to purchase up to
9,871,674 shares of common stock in the rights offering.
The rights offering expired on April 18, 2008.
The rights offering was made to fund certain obligations,
including short-term obligations described elsewhere herein. On
January 9, 2008, Robert F.X. Sillerman, the Companys
Chairman and Chief Executive Officer, and The Huff Alternative
Fund, L.P. and The Huff Alternative Parallel Fund, L.P.
(collectively, Huff), one of the Companys
principal stockholders, entered into investment agreements with
the Company, pursuant to which they agreed to purchase shares
that were not otherwise subscribed for in the rights offering,
if any, at the same $10.00 per share subscription price. In
particular, under Huffs investment agreement with the
Company, as amended, Huff agreed to purchase the first
$15 million of shares (1.5 million shares at $10 per
share) that were not subscribed for in the rights offering, if
any, and 50% of any other unsubscribed shares, up to a total
investment of $40 million; provided, however, that the
first $15 million was reduced by $11.5 million,
representing the aggregate value of the 1,150,000 shares
acquired by Huff upon the exercise on April 1, 2008 of its
own subscription rights in the offering; and provided further
12
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
that Huff was not obligated to purchase any shares beyond its
initial $15 million investment in the event that
Mr. Sillerman did not purchase an equal number of shares at
the $10 price per share pursuant to the terms of his investment
agreement with the Company. Under his investment agreement with
the Company, Mr. Sillerman agreed to subscribe for his full
pro rata amount of shares in the rights offering (representing
3,037,265 shares), and agreed to purchase up to 50% of the
shares that were not sold in the rights offering after
Huffs initial $15 million investment at the same
subscription price per share offered in the offering.
On March 12, 2008, Mr. Sillerman subscribed for his
full pro rata amount of shares resulting in his purchase of
3,037,265 shares. On May 13, 2008, pursuant to and in
accordance with the terms of the investment agreements described
above, Mr. Sillerman and Huff purchased an aggregate of
4,969,112 shares that were not otherwise sold in the
offering. The Company generated aggregate gross proceeds of
approximately $98.7 million from the rights offering and
from sales under the related investment agreements described
above. In conjunction with the shares purchased by Huff pursuant
to its investment agreement with the Company, Huff purchased one
share of the Companys Non-Voting Designated Preferred
Stock (referred to hereafter as the special preferred
stock) for a purchase price of $1.00.
Under the terms of the special preferred stock, Huff is entitled
to appoint a member to the Companys Board of Directors so
long as it continues to beneficially own at least 20% of the
6,611,998 shares of the Companys common stock it
received
and/or
acquired from the Company, consisting of
(i) 2,802,442 shares received by Huff in the CKX
Distribution, (ii) 1,150,000 shares acquired by Huff
in the rights offering, and (iii) 2,659,556 shares
acquired by Huff under the investment agreement described above.
Huff appointed Bryan Bloom as a member of the Companys
Board of Directors effective May 13, 2008.
In connection with Huffs purchase of the shares of common
stock and the special preferred stock in the second quarter of
2008, the Company paid Huff a commitment fee of $715,000, and
the parties entered into a registration rights agreement.
For more information about the terms of the special preferred
stock, please see the Companys Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2008, as filed
with the Securities and Exchange Commission on May 13, 2008.
Conditional
Option Agreement with 19X
On February 28, 2008, the Company entered into an Option
Agreement with 19X, Inc. pursuant to which, in consideration for
aggregate annual payments totaling $105 million payable
over five years in four equal cash installments per year, the
Company would have the right (but not the obligation) to acquire
an 85% interest in the Elvis Presley business currently owned
and operated by CKX through EPE at an escalating price ranging
from $650 million to $850 million over the period
beginning on the date of the closing of 19Xs acquisition
of CKX through 72 months following such date, subject to
extension under certain circumstances as described below.
Because 19X would only own those rights upon consummation of its
acquisition of CKX, the effectiveness of the Option Agreement
was conditioned upon the merger between CKX and 19X. As a result
of the termination of the merger agreement between 19X and CKX
on November 1, 2008, the Option Agreement with 19X was
terminated and thereafter will have no force and effect.
Private
Placement of Units
Between July 15, 2008 and July 18, 2008, the Company
sold in a private placement to Paul C. Kanavos, the
Companys President, Barry A. Shier, the Companys
Chief Operating Officer, an affiliate of Brett Torino, the
Companys Chairman of the Las Vegas Division, Mitchell J.
Nelson, the Companys Executive Vice President and General
Counsel, and an affiliate of Harvey Silverman, a director of the
Company, an aggregate of 2,264,289 units at a purchase
price of $3.50 per unit. Each unit consisted of one share of the
Companys common stock, a warrant to purchase one share of
the Companys common stock at an exercise price of $4.50
per share and a warrant to
13
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
purchase one share of the Companys common stock at an
exercise price of $5.50 per share. The warrants to purchase
shares of the Companys common stock for $4.50 per share
are exercisable for a period of seven years and the warrants to
purchase shares of the Companys common stock for $5.50 per
share are exercisable for a period of ten years. The Company
generated aggregate proceeds from the sale of the units of
approximately $7.9 million.
The Companys independent registered public accounting firm
issued an audit report dated March 3, 2008 pertaining to
the Companys consolidated financial statements for the
year ended December 31, 2007 included in the
Form 10-K
that contains an explanatory paragraph expressing substantial
doubt as to the Companys ability to continue as a going
concern due to the need to secure additional capital in order to
pay obligations as they become due. The accompanying
consolidated financial statements are prepared assuming that the
Company will continue as a going concern and contemplates the
realization of assets and satisfaction of liabilities in the
ordinary course of business. As discussed in note 7, the
Park Central subsidiaries are in default under the
$475 million mortgage loan secured by the Park Central site
by reason of being out of compliance with the debt-to-loan value
ratio covenants prescribed by the governing amended and restated
credit agreements. In order to cure the default, the Company is
seeking from the lenders a waiver of noncompliance with, or
modifications of, these financial covenants. Unless and until
the Company can obtain such a waiver or modifications, the
lenders may exercise their remedies under the credit agreements,
which include accelerating repayment of the loan and foreclosing
on the Park Central site. There is no assurance that the Company
will be able to obtain such a waiver or modification before the
lenders exercise any of their remedies. Neither the Company nor
its Park Central subsidiaries have adequate capital to repay the
mortgage loan if accelerated and there can be no assurance that
the mortgage loan can be refinanced in a timely manner and on
commercially reasonable terms or at all. Even if the default is
cured by a waiver or otherwise, the loan becomes due and payable
on January 6, 2009, subject to the Companys
conditional right to extend the maturity date for one six
(6) month period. The Company has approximately
$5.0 million and $33.7 million of cash and cash
equivalents and restricted cash on hand, respectively, as of
October 31, 2008. Therefore, aside from curing the
above-referenced default, the Companys ability to extend
or refinance the mortgage loan on or before January 6, 2009
is subject to its ability to raise substantial additional cash
prior to January 6, 2009. The Companys ability to
extend or refinance the mortgage loan could also be affected by
its decision not to proceed with its originally proposed plan
for the redevelopment of the Park Central site and to continue
the sites commercial leasing activities until such time as
an alternative redevelopment plan, if any, is adopted.
As described in note 9, the Company does not currently have
the capital necessary to pay the required annual fees and to
satisfy other funding obligations under the EPE and MAE license
agreements. Therefore, the Companys ability to pay future
royalties to EPE and MAE and to satisfy other funding
obligations under the EPE and MAE license agreements is
dependent on the Company successfully raising capital in the
future. There can be no assurance that the Company will be able
to complete a financing on terms that are favorable to its
business or at all. The failure to pay future royalties or
satisfy other funding obligations could result in the
termination of the EPE and MAE license agreements and the loss
of all rights with respect to the Elvis Presley and Muhammad Ali
intellectual property assets.
The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of
these uncertainties.
Marketable securities at September 30, 2008 and
December 31, 2007 consist of the Riv Shares owned by FXRE.
These securities are classified as available for sale in
accordance with the provision of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
and accordingly are carried at fair value with
the unrealized gain or loss reported as other expense on the
consolidated statement of operations. Based on the
Companys evaluation of the underlying reasons for the
decline in value associated with the Riv Shares, including
14
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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 September 30, 2008
and recognized impairment losses of $4.0 million and
$35.5 million that are included in other expense in the
accompanying statements of operations for the three and nine
months ended September 30, 2008, respectively. Prior to
June 30, 2008, the Company did not consider the losses to
be other than temporary and reported unrealized gains and losses
in other comprehensive income as a separate component of
stockholders equity.
|
|
5.
|
Loss Per
Share/Common Shares Outstanding
|
Loss per share is computed in accordance with
SFAS No. 128,
Earnings Per Share
. Basic loss
per share is calculated by dividing net loss applicable to
common stockholders by the weighted-average number of shares
outstanding during the period. Diluted loss per share includes
the determinants of basic loss per share and, in addition, gives
effect to potentially dilutive common shares. The diluted loss
per share calculations exclude the impact of all share-based
stock awards because the effect would be anti-dilutive. For the
three and nine months ended September 30, 2008,
16,243,578 shares were excluded from the calculation of
diluted earnings per share because their inclusion would have
been anti-dilutive.
The Company follows the provisions of Statement of Financial
Accounting Standards No. 67,
Accounting for Costs and
Initial Operations of Real Estate Projects
(SFAS 67) to account for certain operations
of Metroflag. In accordance with SFAS 67, these operations
are considered incidental, and as such, for each
entity, incremental costs in excess of incremental revenue have
been charged to expense as incurred.
In late September 2008, the Company determined not to proceed
with its originally proposed plan for the redevelopment of the
Park Central site and to continue the sites current
commercial leasing activities until such time as an alternative
development plan, if any, is adopted. As a result, effective
October 2008, the Company will no longer classify these
operations of Metroflag as incidental operations. Therefore, all
operations will be included as part of income (loss) from
operations.
The following table summarizes the results from the incidental
operations of the Company for the three months ended
September 30, 2008 and 2007 and the nine months ended
September 30, 2008, the period from May 11, 2007
through September 30, 2007 and January 1, 2007 through
May 10, 2007 (Predecessor):
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|
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|
|
|
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|
|
|
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|
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Predecessor
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Period from
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|
Period from
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Three Months
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|
Three Months
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Nine Months
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May 11, 2007
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January 1, 2007
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Ended
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Ended
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Ended
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Through
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Through
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|
September 30, 2008
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September 30, 2007
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September 30, 2008
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September 30, 2007
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May 10, 2007
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(Amounts in thousands)
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Revenue
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$
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4,445
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$
|
3,395
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$
|
13,474
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$
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3,395
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$
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5,326
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|
Depreciation
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|
(5,076
|
)
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|
(5,365
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)
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(15,873
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)
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|
(5,365
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)
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(8,343
|
)
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Operating & other expenses
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(3,229
|
)
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(3,143
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)
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|
(10,482
|
)
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|
|
(3,143
|
)
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|
|
(4,773
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)
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Loss from incidental operations
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$
|
(3,860
|
)
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$
|
(5,113
|
)
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|
$
|
(12,881
|
)
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|
$
|
(5,113
|
)
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|
$
|
(7,790
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)
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7.
|
Debt and
Notes Payable
|
The Companys debt as of September 30, 2008 includes
mortgage notes to Credit Suisse in the principal amount of
$475 million (the Mortgage Loan). The Company
uses escrow accounts to fund future pre-development and other
spending and interest on the Mortgage Loan. The balance in such
escrow accounts as of September 30, 2008 was
15
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
$37.2 million. Effective July 6, 2008, the Company
made an additional deposit of approximately $14.9 million
into reserve accounts and extended the Mortgage Loans
maturity date by six months to January 6, 2009. The Company
may extend the Mortgage Loans maturity date an additional
six months until July 6, 2009 by, among other requirements,
depositing additional amounts into pre-development, operating
and interest reserve accounts on or prior to January 6,
2009. The Company will need to seek additional debt
and/or
equity financing prior to January 6, 2009 in order to
exercise this additional six month extension of the Mortgage
Loans maturity date. There is no assurance that the
Company will be able to secure such financing on terms that are
favorable to the Company or at all. Interest rates on the
Mortgage Loan are at one-month LIBOR plus applicable margins
ranging from 150 basis points on the $250 million
tranche; 400 basis points on the $30 million tranche;
and 900 basis points on the $195 million tranche; the
effective interest rates on each tranche at September 30,
2008 were 4.9%, 7.4% and 12.4%, respectively. The Mortgage Loan
is not guaranteed by FX Real Estate and Entertainment nor has FX
Real Estate and Entertainment pledged any assets to secure the
Mortgage Loan. The Mortgage Loan is secured only by first lien
and second lien security interests in substantially all of the
assets of the Metroflag entities, including the Park Central
site. FXLR has provided a guarantee to the lenders only for
losses caused under limited circumstances such as fraud or
willful misconduct.
The Mortgage Loan contains certain financial and other
covenants. The Park Central subsidiaries are in default under
the Mortgage Loan by reason of being out of compliance with the
debt-to-loan value ratio covenants prescribed by the governing
amended and restated credit agreements. The Mortgage Loans
financial covenants prescribe that as of the last day of each
fiscal quarter, the Park Central subsidiaries must have
(x) a ratio of (i) total consolidated indebtedness to
(ii) the appraised value of the Park Central site of less
than 66.5% and (y) a ratio of (i) the aggregate
principal amount of the Mortgage Loan then outstanding to
(ii) the appraised value of the Park Central site of
less than 39.0%. In order to establish the value of the Park
Central site for purposes of confirming compliance with the
aforementioned covenants, the lenders obtain a quarterly
appraisal from a real estate appraisal firm. The Park Central
subsidiaries were advised by the agent for the lenders that, as
of September 30, 2008, the appraised value of the
properties resulted in debt-to-loan value ratios in excess of
what is permitted by the terms of the Mortgage Loan, resulting
in a breach of the aforementioned covenants. The Company is
seeking to obtain from the lenders a waiver of noncompliance
with, or modifications of, these covenants which, if obtained,
would allow the Park Central subsidiaries to cure the default on
the Mortgage Loan. There is no assurance that the Company will
be able to obtain such a waiver or modifications before the
lenders exercise any of their remedies under the credit
agreements, which could include accelerating repayment of the
Mortgage Loan and foreclosing on the Park Central site. Neither
the Company nor the Park Central subsidiaries have adequate
capital to repay the Mortgage Loan if accelerated and there can
be no assurance that the Mortgage Loan can be refinanced in a
timely manner and on commercially reasonable terms or at all.
The loss of the Park Central site would have a material adverse
effect on the Companys business, financial condition,
results of operations, prospects and ability to continue as a
going concern. Under the terms of the Mortgage Loan, upon the
default, the loans converted from Eurodollar to base rate
(prime) on October 27, 2008, the next payment cycle after
the date of default, and are subject to the prime rate plus
100 basis points less than the applicable margins already
in place plus default interest of 200 basis points
effective September 30, 2008. In the event the Park Central
subsidiaries are able to cure the default by waiver or
otherwise, there is a five day period to convert the loans back
to Eurodollar. As of September 30, 2008, no adjustments
have been made to the accompanying consolidated financial
statements based upon a potential inability to cure the default.
On June 1, 2007, the Company obtained a $23 million
loan from an affiliate of Credit Suisse (the Riv
Loan), the proceeds of which were used to fund the Riviera
transactions. The Riv Loan was repaid in full on March 15,
2008 with proceeds from the rights offering.
On September 26, 2007, the Company obtained a
$7.7 million margin loan from Bear Stearns, which, along
with the CKX loan (see note 8), was used to fund the
exercise of the Riv Option to acquire an additional
573,775 shares of Riviera Holdings Corporations
common stock at a price of $23 per share. In total, 992,069 of
the Companys shares of Riviera common stock are pledged as
collateral for the margin loan with Bear Stearns. The loan
originally required maintenance margin equity of 40% of the
shares market value and bears interest at LIBOR
16
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
plus 100 basis points. As of September 30, 2008, the
Company made payments of approximately $3.1 million to pay
down the margin loan in conjunction with these loan
requirements. On September 30, 2008, the effective interest
rate on this loan was 3.5% and the amount outstanding, including
accrued interest of $0.3 million, was $4.9 million.
Subsequent to September 30, 2008, the Company made
additional payments of $3.7 million to further pay down the
margin loan. On November 3, 2008, the Company was advised
that the margin requirement was raised to 50% and would be
further raised to 75% on November 17, 2008, provided that
if the price of a share of Riviera Holdings Corporation common
stock fell below $3.00, the loan would need to be repaid. On
November 11, 2008, the closing price of Riviera Holdings
Corporations common stock fell below $3.00 per share,
resulting in the requirement that the Company repay all amounts
outstanding under the loan. The failure to repay the remaining
outstanding amount under the loan when demanded by the lender
could result in the lender exercising its remedies under the
margin loan agreement, which could include selling the shares
and retaining the proceeds as repayment of some or all of the
loan. If the lender was to sell the shares and receive proceeds
insufficient to repay all amounts outstanding under the loan,
the Company would be required to pay the deficiency.
Please see note 8 for a description of the CKX loan and
other related party debt.
On June 1, 2007, the Company signed a promissory note with
Flag for $1.0 million, representing amounts owed to Flag
related to funding for the purchase of the shares of Flag Luxury
Riv. The note accrued interest at 5% per annum through
December 31, 2007 and 10% from January 1, 2008 through
March 31, 2008, the maturity date of the note. The Company
discounted the note to fair value and recorded interest expense
accordingly. On April 17, 2008, this note was repaid in
full and retired with proceeds from the rights offering.
On September 26, 2007, the Company entered into a Line of
Credit Agreement with CKX pursuant to which CKX agreed to loan
up to $7.0 million to the Company, $6.0 million of
which was drawn down on September 26, 2007 and was
evidenced by a promissory note dated September 26, 2007.
The proceeds of the loan were used by FXRE, together with
proceeds from additional borrowings, to fund the exercise of the
Riv Option. The loan bore interest at LIBOR plus 600 basis
points and was payable upon the earlier of (i) two years
and (ii) the consummation by FXRE of an equity raise at or
above $90.0 million. Messrs. Sillerman, Kanavos and
Torino, severally but not jointly, have secured the loan by
pledging, pro rata, an aggregate of 972,762 shares of the
Companys common stock. On April 17, 2008, the CKX
loan was repaid in full and the line of credit was retired with
proceeds from the rights offering and all of the shares pledged
by Messrs. Sillerman, Kanavos and Torino to secure the loan
were released and returned to them.
|
|
9.
|
License
Agreements with Related Parties
|
Elvis
Presley License Agreement
Grant of
Rights
Simultaneous with CKXs investment in FXLR, EPE entered
into a worldwide exclusive license agreement with FXLR granting
FXLR the right to use Elvis Presley-related intellectual
property in connection with designing, constructing, operating
and promoting Elvis Presley-themed real estate and
attraction-based properties, including Elvis Presley-themed
hotels, casinos, theme parks, lounges and clubs (subject to
certain restrictions). The license also grants FXLR the
non-exclusive right to use Elvis Presley-related intellectual
property in connection with designing, constructing, operating
and promoting Elvis Presley-themed restaurants. Under the terms
of the license agreement, FXLR has the right to manufacture and
sell merchandise on location at each Elvis Presley property, but
EPE will have final approval over all types and categories of
merchandise that may be sold by FXLR. If FXLR has not opened an
Elvis Presley-themed restaurant, theme park
and/or
lounge within 10 years, then the rights for the category
not exploited by FXLR revert to EPE. The effective date of the
license agreement is June 1, 2007.
17
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Hotel at
Graceland
Under the terms of the license agreement, FXLR is given the
option to construct and operate one or more of the hotels to be
developed as part of EPEs plan to grow the Graceland
experience in Memphis, Tennessee, which plans include building
an expanded visitors center, developing new attractions and
merchandising shops and building a new boutique convention
hotel. On November 21, 2007, FXLR delivered written notice
to Elvis Presley Enterprises exercising its right to develop the
first hotel as part of the Graceland redevelopment plan,
however, no definitive plans have been prepared and FXLR has yet
to finalize a development budget for the project.
Royalty
Payments and Minimum Guarantees
FXLR will pay to EPE an amount equal to 3% of gross revenues
generated at any Elvis Presley property (as defined in the
license agreement) and 10% of gross revenues with respect to the
sale of merchandise. In addition, FXLR will pay EPE a set dollar
amount per square foot of casino floor space at each Elvis
Presley property where percentage royalties are not paid on
gambling revenues.
Under the terms of the license agreement with EPE, FXLR is
required to pay a guaranteed annual minimum royalty payment
(against royalties payable for the year in question) of
$9 million in each of 2007, 2008, and 2009,
$18 million in each of 2010, 2011, and 2012,
$22 million in each of 2013, 2014, 2015 and 2016, and
increasing by 5% for each year thereafter. The initial payment
(for 2007) under the license agreement, as amended, was
paid on April 1, 2008, with proceeds from the rights
offering. The payment included interest for the period from
December 1, 2007 to March 31, 2008 of $315,000. The
guaranteed annual minimum royalty payment for 2008 is due no
later than January 30, 2009.
Any time prior to the eighth anniversary of the opening of the
first Elvis Presley themed hotel, FXLR has the right to buy out
all remaining royalty payment obligations due to EPE under the
license agreement by paying $450 million to EPE. FXLR would
be required to buy out royalty payments due to MAE under its
license agreement with MAE at the same time that it exercises
its buyout right under the EPE license agreement.
Termination
Rights
Unless FXLR exercises its buy-out right, either FXLR or EPE will
have the right to terminate the license upon the date that is
the later of (i) June 1, 2017, or (ii) the date
on which FXLRs buyout right expires, which is the
eighth anniversary of the opening of the first Elvis
Presley-themed hotel. Thereafter, either FXLR or EPE will again
have the right to terminate the license on each tenth
anniversary of such date. In the event that FXLR exercises its
termination right, then (a) the license agreement between
FXLR and MAE will also terminate and (b) FXLR will pay to
EPE a termination fee of $45 million. Upon any termination,
the rights granted to FXLR (and the rights granted to any
project company to develop an Elvis Presley-themed real estate
property) will remain in effect with respect to all Elvis
Presley-related real estate properties that are open or under
construction at the time of such termination, provided that
royalties, but no minimum guarantees, continue to be paid to EPE.
Conditional
Amendment to Elvis Presley Enterprises License
Agreement
On February 28, 2008, the Company entered into an agreement
with 19X to amend the license agreement between the Company and
EPE, which amendment would only become effective upon the
closing of 19Xs acquisition of CKX. As a result of the
termination of the merger agreement between 19X and CKX on
November 1, 2008, the Conditional Amendment to the Elvis
Presley Enterprises was terminated and is of no further force
and effect.
18
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Muhammad
Ali License Agreement
Grant of
Rights
Simultaneous with the FXLR Investment, MAE entered into a
worldwide exclusive license agreement with FXLR, granting MAE
the right to use Muhammad Ali-related intellectual property in
connection with designing, constructing, operating, and
promoting Muhammad Ali-themed real estate and attractions based
properties, including Muhammad Ali-themed hotels and retreat
centers (subject to certain restrictions). Under the terms of
the license agreement, FXLR has the right to manufacture and
sell merchandise on location at each Muhammad Ali property, but
MAE will have the final approval over all types and categories
of merchandise that may be sold by FXLR. The effective date of
the license agreement is June 1, 2007.
Royalty
Payments and Minimum Guarantees
FXLR will pay to MAE an amount equal to 3% of gross revenues
generated at any Muhammad Ali property (as defined in the
license agreement) and 10% of gross revenues with respect to the
sale of merchandise.
Under the terms of the license agreement with MAE, FXLR is
required to pay a guaranteed annual minimum royalty payment
(against royalties payable for the year in question) of
$1 million in each of 2007, 2008, and 2009, $2 million
in each of 2010, 2011, and 2012, $3 million in each of
2013, 2014, 2015 and 2016 and increasing by 5% for each year
thereafter. The initial payment (for 2007) under the
license agreement, as amended, was paid on April 1, 2008,
with proceeds from the rights offering. The payment included
interest for the period from December 1, 2007 to
March 31, 2008 of $35,000. The guaranteed annual minimum
royalty payment for 2008 is due no later than January 30,
2009.
Any time prior to the eighth anniversary of the opening of the
first Elvis Presley themed hotel, FXLR has the right to buy-out
all remaining royalty payment obligations due to MAE under the
license agreement by paying MAE $50 million. FXLR would be
required to buy-out royalty payments due to EPE under its
license agreement with EPE at the same time that it exercises
its buy-out right under the MAE license agreement.
Termination
Rights
Unless FXLR exercise its buy-out right, either FXLR or MAE will
have the right to terminate the license upon the date that is
the later of (i) 10 years after the effective date of
the license, or (ii) the date on which FXLRs buy-out
right expires. If such right is not exercised, either FLXR or
MAE will again have the right to so terminate the license on
each 10th anniversary of such date. In the event that FXLR
exercises its termination right, then (x) the agreement
between FXLR and EPE will also terminate and (y) FXLR will
pay to MAE a termination fee of $5 million. Upon any
termination, the rights granted to FXLR (including the rights
granted by FXLR to any project company to develop a Muhammad
Ali-themed real estate property) will remain in effect with
respect to all Muhammad Ali-related real estate properties that
are open or under construction at the time of such termination,
provided that royalties continue to be paid to MAE.
Accounting
for Minimum Guaranteed License Payments
FXRE is accounting for the 2008 minimum guaranteed license
payments under the EPE and MAE license agreements ratably over
the period of the benefit. Accordingly, FXRE included license
fee expense in the accompanying consolidated statement of
operations of $2.5 million and $7.5 million for the
three and nine months ended September 30, 2008. For
the period from May 11, 2007 through September 30,
2007 the license fee expense was $5.7 million.
19
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Impact
of Financial Condition on License Agreements
The Company does not currently have the capital necessary to pay
the required annual fees and to satisfy other funding
obligations under the EPE and MAE license agreements. Therefore,
the Companys ability to pay future royalties to EPE and
MAE and to satisfy other funding obligations under the EPE and
MAE license agreements is dependent on the Company successfully
raising capital in the future. The Company is highly leveraged
and its ability to raise capital in the future will be dependent
upon a number of factors including, among others, prevailing
market conditions. There can be no assurance that the Company
will be able to complete a financing on terms that are favorable
to its business or at all. The failure to pay future royalties
or satisfy other funding obligations could result in the
termination of the EPE and MAE license agreements and the loss
of all rights with respect to the Elvis Presley and Muhammad Ali
intellectual property assets.
|
|
10.
|
Acquired
Lease Intangibles
|
The Companys acquired intangible assets are related to
above-market leases and in-place leases under which the Company
is the lessor. The intangible assets related to above-market
leases and in-place leases have a weighted average amortization
period of approximately 23.0 years and 23.4 years,
respectively. The amortization of the above-market leases and
in-place leases, which represents a reduction of rent revenues,
for the nine months ended September 30, 2008 was
$0.1 million. For the three months ended September 30,
2008, the period from May 11, 2007 through
September 30, 2007 and the period from January 1, 2007
through May 10, 2007 (Predecessor), the amortization of the
above-market leases and in-place leases was less than
$0.1 million for all periods. 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):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Above-market leases
|
|
$
|
582
|
|
|
$
|
582
|
|
In-place leases
|
|
|
1,320
|
|
|
|
1,320
|
|
Accumulated amortization
|
|
|
(799
|
)
|
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
1,103
|
|
|
$
|
1,222
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Below-market leases
|
|
$
|
111
|
|
|
$
|
111
|
|
Accumulated accretion
|
|
|
(92
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
19
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Derivative
Financial Instruments
|
Pursuant to the terms specified in the Mortgage Loan (as
described in note 7), the Company entered into interest
rate cap agreements (the Cap Agreement) with Credit
Suisse with notional amount of $475 million. The Cap
Agreement is tied to the Mortgage Loan and converts a portion of
the Companys 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 Agreement was not
designated as a cash flow hedge under SFAS No. 133 and
as such the change in fair value is recorded as an adjustment to
interest expense. The Cap Agreement expired on July 23,
2008. In connection with the extension of the Mortgage Loan, the
Company entered into an interest rate cap agreement with similar
terms that expires on January 6, 2009. The change in fair
value of the Cap Agreement for the three and nine months ended
September 30, 2008 was an increase of $0.2 million.
Metroflag had a similar agreement in place with a notional
amount of $300 million through May 10, 2007. The
change in fair value of the agreement for the periods from
January 1, 2007
20
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
through May 10, 2007 (Predecessor), April 1, 2007
though May 10, 2007 (Predecessor) and May 11, 2007
though September 30, 2007 was a decrease of
$0.3 million, $0.2 million and $0.1 million,
respectively.
|
|
12.
|
Commitments
and Contingencies
|
Operating
Leases
The Companys properties on the Park Central site are
leased to tenants under operating leases with expiration dates
extending to the year 2045. As of September 30, 2008, all
but one of the Companys properties on the
Park Central site are classified as incidental operations
and the Company is depreciating these properties through the end
of 2008. In late September 2008, the Company determined not to
proceed with its originally proposed plan for the redevelopment
of the Park Central site and to continue the sites current
commercial leasing activities until such time as an alternative
development plan, if any, is adopted. As a result, effective
October 2008, the Company will no longer classify these
operations of Metroflag as incidental operations. Therefore, all
operations will be included as part of income (loss) from
operations.
Stock
Option Grants
On January 10, 2008, 6,400,000 stock options were issued to
two executive-designees under the terms of the Companys
2007 Executive Equity Incentive Plan. The options were issued
with a strike price of $20.00 per share and vest 20% on each
anniversary from the date of grant. On May 19, 2008,
1,415,000 stock options were issued to executive-designees and
other non-employees of the Company under the terms of the
Companys 2007 Long-Term Incentive Compensation Plan and
2007 Executive Equity Incentive Plan. Half of the options
granted on May 19, 2008 were issued with a strike price of
$5.00 per share and vest 40% on the first anniversary from the
date of grant; 40% on the second anniversary from the date of
the grant; and 20% on the third anniversary from the date of
grant. The remaining half of the options were issued with a
strike price of $6.00 per share and vest 20% on the third
anniversary from the date of grant; 40% on the fourth
anniversary from the date of grant; and 40% on the fifth
anniversary from the date of grant. The term of the options
granted is 10 years. For options granted to
executive-designees and other non-employees, the Company has
accounted for the grants in accordance with SFAS 123(R),
Share-Based Payment
and Emerging Issues Task Force Issue
No. 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
, which require that the options be
recorded at their fair value on the measurement date and that
the fair value of the options be adjusted periodically over the
vesting periods until such point as the executive-designees and
other non-employees become employees or the service period has
been completed.
The weighted average fair value of the options granted on
January 10, 2008 and May 19, 2008 to
executive-designees and other non-employees was $0.04 per option
at September 30, 2008. Fair value at September 30,
2008 was estimated using the Black-Scholes option pricing model
based on the weighted average assumptions of:
|
|
|
|
|
Risk-free rate
|
|
|
3.16%
|
|
Volatility
|
|
|
52.0%
|
|
Weighted average expected life remaining at September 30,
2008
|
|
|
5.77 years
|
|
Dividend yield
|
|
|
0.0%
|
|
On May 19, 2008, 850,000 stock options were issued to
employees of the Company. Half of the options were issued with a
strike price of $5.00 per share and vest 40% on the first
anniversary from the date of grant; 40% on the second
anniversary from the date of the grant; and 20% on the third
anniversary from the date of grant. The remaining half of the
options were issued with a strike price of $6.00 per share and
vest 20% on the third anniversary from the date of grant; 40% on
the fourth anniversary from the date of grant; and 40% on the
fifth anniversary from the date of grant. The term of the
options granted is 10 years.
21
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The weighted average fair value of the options issued on
May 19, 2008 to employees was $1.64 per option. Fair value
at the grant date was estimated using the Black-Scholes option
pricing model based on the weighted average assumptions of:
|
|
|
|
|
Risk-free rate
|
|
|
3.28%
|
|
Volatility
|
|
|
40.0%
|
|
Weighted average expected life
|
|
|
6.25 years
|
|
Dividend yield
|
|
|
0.0%
|
|
The Company estimated the original weighted average expected
life of its stock option grants at the midpoint between the
vesting dates and the end of the contractual term. This
methodology is known as the simplified method and was used
because the Company does not have sufficient historical exercise
data to provide a reasonable basis upon which to estimate
expected term.
The expected volatility is based on an analysis of comparable
public companies operating in the Companys industry.
As of September 30, 2008, the Company has a total of
11,715,000 options outstanding. Compensation expense for stock
option grants included in the accompanying statements of
operations in selling, general and administrative expenses and
loss from incidental operations is being recognized ratably over
the vesting periods of the grants and was $0.7 million and
$2.2 million for the three and nine months ended
September 30, 2008.
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 Companys 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 nine months ended September 30, 2008, 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 September 30, 2009.
There are no income tax audits currently in process with any
taxing jurisdictions.
The Company is involved in litigation on a number of matters and
is subject to certain claims which arose in the normal course of
business, none of which, in the opinion of management, is
expected to have a material effect on the Companys
consolidated financial position, results of operations or
liquidity.
A dispute is pending with an adjacent property owner, Hard
Carbon, LLC, an affiliate of Marriott International Inc.
Hard Carbon, the owner of the Grand Chateau parcel adjacent to
the Park Central site on Harmon Avenue was required to construct
a parking garage in several phases. BP was required to pay for
the construction of up to 202 parking spaces for use by another
unrelated property owner and thereafter not have any
responsibility for the spaces. Hard Carbon submitted contractor
bids to Metroflag BP which were not approved by BP, pursuant to
a reciprocal easement agreement encumbering the property.
Instead of invoking the arbitration provisions of the reciprocal
easement agreement, Hard Carbon constructed the garage without
getting the required Metroflag approval. Marriott, on behalf of
Hard Carbon, is seeking reimbursement of approximately
$7 million. In a related matter, Hard Carbon has asserted
that the Company is responsible for sharing the costs of certain
road widening work performed by Marriott off of Harmon Avenue,
which work Marriott undertook without seeking Metroflags
approval as required under the reciprocal easement agreement.
22
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Settlement discussions between the parties on both matters have
resulted in a tentative settlement agreement which would require
the Company to make an aggregate payment of $4.3 million,
which is accrued as of September 30, 2008 and
December 31, 2007. $4.0 million has been placed in a
segregated account for this purpose and is included in
restricted cash on the accompanying consolidated balance sheets
as of September 30, 2008 and December 31, 2007. In
July 2008, an additional $0.3 million was placed into the
segregated account in conjunction with the Companys
extension of the Mortgage Loans maturity date.
|
|
16.
|
Related
Party Transactions
|
Shared
Services Agreement and Arrangements
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.
The term of the agreement runs until December 31, 2010,
provided, however, that the term may be extended or earlier
terminated by the mutual written agreement of the parties, or
may be earlier terminated upon 90 days written notice by
either party in the event that a majority of the independent
members of such partys Board of Directors determine that
the terms
and/or
provisions of this agreement are not in all material respects
fair and consistent with the standards reasonably expected to
apply in arms-length agreements between affiliated parties;
provided further, however, that in any event either party may
terminate the agreement in its sole discretion upon
180 days prior written notice to the other party.
For the three and nine months ended September 30, 2008, CKX
incurred and billed FXRE $0.3 million and
$1.3 million, respectively, for professional services,
consisting primarily of accounting and legal services. The
services provided for the three months ended September 30,
2008 were approved by the audit committee and the related fees
were paid subsequent to September 30, 2008.
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 nine months ended September 30, 2008,
Flag incurred and billed FXRE $0.1 million and
$0.2 million, respectively. The services provided for the
three months ended September 30, 2008 were approved by the
audit committee and the related fees were paid subsequent to
September 30, 2008.
23
FX Real
Estate and Entertainment Inc.
NOTES TO
UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Paul Kanavos, the Companys 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.
Under the terms of his employment agreement with the Company,
Mitchell Nelson, the Companys General Counsel, is
permitted to devote up to one-third of his business time to
providing services for or on behalf of Robert F.X. Sillerman,
the Companys Chairman and Chief Executive Officer, or
Flag, provided that Mr. Sillerman
and/or
Flag,
as the case may be, will reimburse the Company for the fair
market value of the services provided for him or it by
Mr. Nelson. These services were less than $0.1 million
for the three months ended September 30, 2008 and
$0.1 million for the nine months ended September 30,
2008.
Preferred
Priority Distribution
In connection with CKXs $100 million investment in
FXLR on June 1, 2007, Flag retained a $45 million
preferred priority distribution right in FXLR, which amount was
payable upon the consummation of certain predefined capital
transactions, including the payment of $30 million from the
proceeds of the rights offering and sales under the related
investment agreements described in note 2. From and after
November 1, 2007, Flag is entitled to receive an annual
return on the preferred priority distribution equal to the
Citibank N.A. prime rate as reported from time to time in the
Wall Street Journal. Mr. Sillerman, Mr. Kanavos and
Brett Torino, the Chairman of the Companys Las Vegas
Division, are entitled to receive their pro rata participation
of the $45 million preferred priority distribution right
held by Flag, when paid by FXLR, based on their ownership
interest in Flag.
On May 13, 2008, under their investment agreements with the
Company, Mr. Sillerman and Huff purchased an aggregate of
4,969,112 shares not sold in the rights offering. As a
result of these purchases and the shares sold in the rights
offering, the Company generated gross proceeds of approximately
$98.7 million from which it paid to Flag $30 million
plus return of approximately $1.0 million through the date
of payment as partial satisfaction of the $45 million
preferred priority distribution right. For a description of the
investment agreements with Mr. Sillerman and Huff, please
see Rights Offering and Related Investment
Agreements under note 2 above.
As of September 30, 2008, $15 million of the preferred
priority distribution right in FXLR remains to be paid to Flag.
In connection with the private placement of units by the Company
in July 2008 as described in note 2, Flag agreed to defer
its right to receive additional payments towards satisfaction of
the preferred priority distribution right from the proceeds of
this private placement.
See note 2 for information regarding the termination of the
Conditional Option Agreement with 19X, Inc.
See note 7 for information regarding the Bear Stearns
margin loan on our shares of Riviera Holdings Corporation common
stock.
See note 9 for information regarding the termination of the
Conditional Amendment to the License Agreement with Elvis
Presley Enterprises.
***********************
24
|
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
In this Managements Discussion and Analysis of
Financial Condition and Results of Operations, the words
we, us, our,
FXRE, and the Company collectively refer
to FX Real Estate and Entertainment Inc., and its consolidated
subsidiaries, FX Luxury Realty, LLC, BP Parent, LLC, Metroflag
BP, LLC and Metroflag Cable, LLC. In August 2008, FX Luxury
Realty, LLC changed its name to FX Luxury, LLC, BP Parent, LLC
changed its name to FX Luxury Las Vegas Parent, LLC, Metroflag
BP, LLC changed its name to FX Luxury Las Vegas I, LLC and
Metroflag Cable, LLC changed its name to FX Luxury Las Vegas II,
LLC. The words Metroflag or Metroflag
entities refer to FX Luxury Realty and its predecessors,
including BP Parent, LLC, Metroflag BP, LLC, Metroflag Cable,
LLC, Metroflag Polo, LLC, CAP/TOR, LLC, Metroflag SW, LLC,
Metroflag HD, LLC and Metroflag Management, LLC, the predecessor
entities through which our historical business was conducted
prior to September 27, 2007. The word Park Central
subsidiaries refer to Metroflag BP, LLC and Metroflag
Cable, LLC, each as renamed as indicated above. The word
Park Central site refers to the 17.72 contiguous
acres of land located at the southeast corner of Las Vegas
Boulevard and Harmon Avenue in Las Vegas, Nevada and owned by us
through the Park Central subsidiaries. The word CKX
Distribution refers to the distribution of
19,743,349 shares of our common stock to CKX, Inc.s
stockholders of record as of December 31, 2007 as a result
of which we became a publicly traded company on January 10,
2008.
This Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with the historical financial statements and notes
thereto and financial information of the Company and Metroflag,
as predecessor, included in the Companys Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007. However,
this Managements Discussion and Analysis of Financial
Condition and Results of Operations and such historical
financial statements and information should not be relied upon
by you to evaluate our business and financial condition going
forward because they are not representative of our planned
business going forward or indicative of our future operating and
financial results. For example, as described below and in the
historical financial statements, our predecessor Metroflag
derived revenue primarily from commercial leasing activities on
the properties comprising the Park Central site. As a result of
the disruption in the capital markets and the economic downturn
in the United States, and Las Vegas in particular, we have
determined not to proceed with our originally proposed plan for
the redevelopment plan of the Park Central site. We intend to
consider alternative plans with respect to the redevelopment of
the site. Until such time as an alternative development plan, if
any, is adopted, we intend to continue the sites current
commercial leasing activities.
FX Real Estate and Entertainment Inc. was organized as a
Delaware corporation in preparation for the CKX Distribution. On
September 26, 2007, holders of common membership interests
in FX Luxury Realty, LLC, a Delaware limited liability company,
exchanged all of their common membership interests for shares of
our common stock. Following this reorganization, FX Real Estate
and Entertainment owns 100% of the outstanding common membership
interests of FX Luxury Realty. We hold our assets and conduct
our operations through our subsidiary FX Luxury Realty and its
subsidiaries. All references to FX Real Estate and Entertainment
for the periods prior to the date of the reorganization shall
refer to FX Luxury Realty and its consolidated subsidiaries. For
all periods as of and subsequent to the date of the
reorganization, all references to FX Real Estate and
Entertainment shall refer to FX Real Estate and Entertainment
and its consolidated subsidiaries, including FX Luxury Realty.
FX Luxury Realty was formed on April 13, 2007. On
May 11, 2007, Flag Luxury Properties, a privately owned
real estate development company, contributed to FX Luxury Realty
its 50% ownership interest in the Metroflag entities in exchange
for all of the membership interests of FX Luxury Realty. On
June 1, 2007, FX Luxury Realty acquired 100% of the
outstanding membership interests of RH1, LLC and Flag Luxury
Riv, LLC, which together own shares of common stock of Riviera
Holdings Corporation, a publicly traded company which owns and
operates the Riviera Hotel and Casino in Las Vegas, Nevada, and
the Blackhawk Casino in Blackhawk, Colorado. On June 1,
2007, CKX contributed $100 million in cash to FX Luxury
Realty in exchange for a 50% common membership interest therein.
As a result of CKXs contribution, each of CKX and Flag
Luxury Properties owned 50% of the common membership interests
in FX Luxury Realty, while Flag Luxury Properties retained a
$45 million preferred priority distribution in FX Luxury
Realty.
25
On May 30, 2007, FX Luxury Realty entered into an agreement
to acquire the remaining 50% ownership interest in the Metroflag
entities from an unaffiliated third party for total
consideration of $180 million in cash, $172.5 million
of which was paid in cash at closing and $7.5 million of
which was an advance payment made in May 2007 (funded by a
$7.5 million loan from Flag Luxury Properties). The cash
payment at closing on July 6, 2007 was funded from
$92.5 million cash on hand and $105.0 million in
additional borrowings under the Mortgage Loan, which amount was
reduced by $21.3 million deposited into a restricted cash
account to cover debt service commitments and $3.7 million
in debt issuance costs. The $7.5 million loan from Flag
Luxury Properties was repaid on July 9, 2007. As a result
of this purchase, FX Luxury Realty owns 100% of Metroflag, and
therefore has consolidated the operations of Metroflag since
July 6, 2007.
The following managements discussion and analysis of
financial condition and results of operations is based on the
historical financial condition and results of operations of
Metroflag, as predecessor, rather than those of FX Luxury
Realty, for the three and nine months ended September 30,
2008.
FX Real
Estate and Entertainment Consolidated Operating
Results
Our results for the three and nine months ended
September 30, 2008 reflected revenue of $0.5 million
and $1.5 million, respectively, and operating expenses of
$16.8 million and $29.9 million, respectively.
Included in operating expenses are license fees for the three
and nine months ended September 30, 2008 of
$2.5 million and $7.5 million, respectively,
representing the guaranteed annual minimum royalty payments
under the license agreements with Elvis Presley Enterprises and
Muhammad Ali Enterprises. The Company incurred corporate
overhead expenses of $2.1 million and $7.9 million for
the three and nine months ended September 30, 2008,
respectively.. Included in corporate overhead expenses for the
three months ended September 30, 2008 are $0.7 million
in non-cash compensation and $0.4 million in shared
services charges provided by CKX pursuant to the shared services
agreement and Flag pursuant to its arrangement with the Company.
Included in corporate overhead expenses for the nine months
ended September 30, 2008 are $2.0 million in non-cash
compensation, $1.5 million in shared services charges and
professional fees, including legal and accounting costs. Our
operating expenses for the three and nine months ended
September 30, 2008 also included an impairment charge of
$10.7 million related to the write-off of capitalized
development costs as a result of the Companys
determination not to proceed with our originally proposed plan
for the redevelopment plan of the Park Central site 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. We intend to consider alternative plans with respect
to the redevelopment of the site. Until such time as an
alternative development plan, if any, is adopted, we intend to
continue the sites current commercial leasing activities.
The Company owns 1,410,363 shares of common stock of
Riviera Holdings Corporation (the Riv Shares),
161,758 of which were put into trust for the benefit of the
Company in October 2008. For the three and nine months ended
September 30, 2008, the Company recorded to other expense
other than temporary impairments of $4.0 million and
$35.5 million, respectively, related to the Riv Shares due
to the decline in the stock price of Riviera Holdings
Corporation. The Company has determined that the losses are
other than temporary due to the Companys evaluation of the
underlying reasons for the decline in stock price, including
weakening conditions in the Las Vegas market where Riviera
Holdings Corporation operates, and the Companys uncertain
ability to hold the Riv Shares for a reasonable amount of time
sufficient for an expected recovery of fair value. Prior to the
impairment recorded as of June 30, 2008, the Company did
not consider the losses to be other than temporary and reported
unrealized gains and losses in other comprehensive income as a
separate component of stockholders equity.
For the three and nine months ended September 30, 2008, we
had net interest expense of $9.6 million and
$35.9 million, respectively.
For the three and nine months ended September 30, 2008, 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.
Our results for the period from inception (May 11,
2007) to September 30, 2007 reflects our accounting
for our investment in Metroflag as an equity method investment
from May 11, 2007 through July 5, 2007 because we did
not maintain control, and on a consolidated basis from
July 6, 2007 through September 30, 2007 due to the
acquisition of the remaining 50% of Metroflag that we did not
already own on July 6, 2007.
26
On September 26, 2007, we exercised the Riviera option,
acquiring 573,775 shares in Riviera for $13.2 million.
We recorded a $6.4 million loss on the exercise, reflecting
a decline in the price of Riviera Holding Corporations
common stock from the date the option was acquired. The loss was
recorded in other expense in the consolidated statements of
operations.
Our results for the period from May 11, 2007 to
September 30, 2007 reflected $1.3 million in revenue
and $9.7 million in operating expenses. Included in
operating expenses was $5.7 million in license fees,
representing four months (June-September) of the 2007 guaranteed
annual minimum royalty payments under the license agreements
with Elvis Presley Enterprises and Muhammad Ali Enterprises.
For the period from May 11, 2007 to September 30,
2007, we had $15.3 million in net interest expense,
including $15.1 million for Metroflag which was included in
our consolidated results commencing July 6, 2007.
Metroflag
Operating Results
The Park Central site is occupied by a motel and several retail
and commercial tenants with a mix of short and long-term leases.
The historical business of Metroflag was to acquire the parcels
and to engage in commercial leasing activities. All revenues are
derived from these commercial leasing activities and include
minimum rentals and percentage rentals on the retail space.
In 2007, we adopted formal redevelopment plans covering certain
of the parcels comprising the Park Central site which resulted
in the operations related to these properties being reclassified
as incidental operations in accordance with
SFAS No. 67. In late September 2008, the Company
determined not to proceed with its originally proposed plan for
the redevelopment of the Park Central site and to continue the
sites current commercial leasing activities until such
time as an alternative development plan, if any, is adopted. As
a result, effective October 2008, the Company will no longer
classify these operations of Metroflag as incidental operations.
Therefore, all operations will be included as part of income
(loss) from operations.
Given the significance of the Metroflags operations to our
current and future results of operations and financial
condition, we believe that an understanding of Metroflags
reported results, trends and performance is enhanced by
presenting its results of operations on a stand-alone basis for
the three and nine months ended September 30, 2008 and 2007
(Predecessor). This stand-alone financial information is
presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if
the acquisition had taken place as of January 1, 2007.
Metroflag
Results for the Three Months Ended September 30, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
Variance
|
|
|
|
(Amounts in thousands)
|
|
|
Revenue
|
|
$
|
482
|
|
|
$
|
1,440
|
|
|
$
|
(958
|
)
|
Operating expenses
|
|
|
(11,470
|
)
|
|
|
(489
|
)
|
|
|
(10,981
|
)
|
Depreciation and amortization
|
|
|
(7
|
)
|
|
|
(92
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(10,995
|
)
|
|
|
859
|
|
|
|
(11,854
|
)
|
Interest expense, net
|
|
|
(9,541
|
)
|
|
|
(15,854
|
)
|
|
|
6,313
|
|
Loss from incidental operations
|
|
|
(3,860
|
)
|
|
|
(5,418
|
)
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(24,396
|
)
|
|
$
|
(20,413
|
)
|
|
$
|
(3,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue decreased $1.0 million, or 66.5%, in the third
quarter of 2008 as compared to the third quarter of 2007 due
primarily to the classification of the operations of an
additional property as incidental operations.
27
Operating
Expenses
Operating expenses increased in the third quarter of 2008
primarily due to an impairment charge of $10.7 million
related to the write-off of capitalized development costs as a
result of the Companys determination not to continue the
redevelopment plan for the Park Central site as originally
proposed.
Depreciation
and Amortization Expense
Depreciation and amortization expense decreased
$0.1 million, or 92.4%, in the third quarter of 2008 as
compared to the third quarter of 2007 due primarily to the
operations of an additional property being classified as
incidental operations in the fourth quarter of 2007.
Interest
Income/Expense
Interest expense, net, decreased $6.3 million, or 39.8%, in
the third quarter of 2008 as compared to the third quarter of
2007 due to a decrease in amortization related to deferred
financing costs and lower interest rates in the 2008 period.
Loss
from Incidental Operations
Loss from incidental operations decreased $1.6 million, or
28.8%, in the third quarter of 2008 as compared to the third
quarter of 2007 primarily due to a decrease in depreciation and
amortization of $0.7 million in 2008 as a result of a
change in the estimated remaining lives of the properties
classified as incidental operations due to the projected timing
of the Companys redevelopment plans. Additionally, higher
revenue of $0.8 million and lower operating expenses of
$0.1 million are included in the results from incidental
operations in the third quarter of 2008 primarily as the result
of an additional property being classified as incidental
operations in the 2008 period and additional professional fees
incurred in the 2007 period.
Metroflag
Results for the Nine Months Ended September 30, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2007
|
|
|
Period from
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Through
|
|
|
May 11, 2007
|
|
|
|
Ended
|
|
|
|
|
|
|
Ended
|
|
|
|
May 10,
|
|
|
Through
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
2007
|
|
|
September 30, 2007
|
|
|
|
2007
|
|
|
Variance
|
|
|
|
(Amounts in thousands)
|
|
Revenue
|
|
$
|
1,453
|
|
|
|
$
|
2,079
|
|
|
$
|
2,287
|
|
|
|
$
|
4,366
|
|
|
$
|
(2,913
|
)
|
Operating expenses
|
|
|
(13,619
|
)
|
|
|
|
(839
|
)
|
|
|
(677
|
)
|
|
|
|
(1,516
|
)
|
|
|
(12,103
|
)
|
Depreciation and amortization
|
|
|
(20
|
)
|
|
|
|
(128
|
)
|
|
|
(140
|
)
|
|
|
|
(268
|
)
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(12,186
|
)
|
|
|
|
1,112
|
|
|
|
1,470
|
|
|
|
|
2,582
|
|
|
|
(14,768
|
)
|
Interest expense, net
|
|
|
(34,817
|
)
|
|
|
|
(14,444
|
)
|
|
|
(22,680
|
)
|
|
|
|
(37,124
|
)
|
|
|
2,307
|
|
Loss from early retirement of debt
|
|
|
|
|
|
|
|
(3,507
|
)
|
|
|
|
|
|
|
|
(3,507
|
)
|
|
|
3,507
|
|
Loss from incidental operations
|
|
|
(12,881
|
)
|
|
|
|
(7,790
|
)
|
|
|
(8,112
|
)
|
|
|
|
(15,902
|
)
|
|
|
3,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(59,884
|
)
|
|
|
$
|
(24,629
|
)
|
|
$
|
(29,322
|
)
|
|
|
$
|
(53,951
|
)
|
|
$
|
(5,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Revenue decreased $2.9 million, or 66.7%, in the nine
months ended September 30, 2008 as compared to nine months
ended September 30, 2007 due primarily to the
classification of the operations of an additional property as
incidental operations.
Operating
Expenses
Operating expenses increased $12.1 million, or 798%, in the
nine months ended September 30, 2008 as compared to the
nine months ended September 30, 2007 due primarily to an
impairment charge of $10.7 million
28
related to the write-off of capitalized development costs as a
result of the Companys determination not to continue the
redevelopment plan for the Park Central site as originally
proposed.
Depreciation
and Amortization Expense
Depreciation and amortization expense decreased
$0.2 million, or 92.5%, in the nine months ended
September 30, 2008 as compared to the nine months ended
September 30, 2007 due primarily to the operations of an
additional property being classified as incidental operations in
the fourth quarter of 2007.
Interest
Income/Expense
Interest expense, net, decreased $2.3 million, or 6.2%, in
the nine months ended September 30, 2008 as compared to the
nine months ended September 30, 2007 due to lower interest
rates in 2008.
Loss
from Early Retirement of Debt
Loss from early retirement of debt of approximately
$3.5 million was recorded for the nine months ended
September 30, 2007 to reflect the prepayment of penalties
and fees as a result of the refinancing of all the mortgage
notes and other long-term obligation with two notes totaling
$370 million from Credit Suisse.
Loss
from Incidental Operations
Loss from incidental operations decreased $3.0 million, or
19.0%, in the nine months ended September 30, 2008 as
compared to the nine months ended September 30, 2007
primarily due to a decrease in depreciation and amortization of
$1.4 million in 2008 as a result of a change in the
estimated remaining lives of the properties classified as
incidental operations due to the projected timing of the
Companys redevelopment plans. Additionally, higher revenue
of $2.3 million and higher operating expenses of
$0.7 million are included in the results from incidental
operations in the nine months ended September 30, 2008
primarily as the result of an additional property being
classified as incidental operations in the 2008 period and
certain non-recurring costs incurred in the 2007 period.
Liquidity
and Capital Resources
Introduction
The historical financial
statements and financial information of our predecessor, the
Metroflag entities, included in this quarterly report are not
representative of our planned business going forward or
indicative of our future operating and financial results. We
have substantial leverage and limited liquidity. Our current
cash flow and cash on hand of $9.5 million at
September 30, 2008 are not sufficient to fund our current
operations or to pay obligations scheduled to come due over the
ensuing three months as described below.
In response to the ongoing difficulties in the
U.S. financial markets and the economic downturn in Las
Vegas, we have reviewed our previously adopted redevelopment
plan for the Park Central site. The Company has determined not
to continue with the program originally proposed. As a result of
this decision, the Company recorded an impairment charge related
to the write-off of $10.7 million for capitalized
development costs that were deemed not to be recoverable. The
Company intends to consider alternative plans with respect to
the redevelopment of the site. Until such time as an alternative
development plan, if any, is adopted, the Company intends to
continue the sites current commercial leasing activities.
As of September 30, 2008, the Park Central subsidiaries
were in default under the Mortgage Loan secured by the Park
Central site by reason of being out of compliance with the
debt-to-loan value ratio covenant set forth in the Mortgage Loan
prescribed by the governing amended and restated credit
agreements. In order to cure the default, we are seeking from
the lenders a waiver of noncompliance with, or modifications of,
these financial covenants. Unless and until we can obtain such a
waiver or modifications, the lenders may exercise their remedies
under the credit agreements, which could include accelerating
repayment of the Mortgage Loan and foreclosing on the Park
Central site. There is no assurance that we will be able to
obtain such a waiver or modification before the lenders exercise
any of their remedies. Neither we nor our Park Central
subsidiaries have adequate capital to repay the Mortgage Loan if
accelerated and we cannot assure you that we can refinance the
Mortgage Loan in a timely
29
manner and on commercially reasonable terms or at all. Even if a
cure or waiver can be obtained, the Mortgage Loan becomes due
and payable on January 6, 2009, subject to the
Companys conditional right to extend the maturity date for
one six (6) month period. Therefore, aside from curing the
above-referenced default, the Companys ability to extend
or refinance the Mortgage Loan and fund other working capital
needs on or before January 6, 2009 is subject to its
ability to raise substantial additional cash prior to
January 6, 2009. The Companys ability to extend or
refinance the Mortgage Loan and the valuation of the property
could also be affected by its determination not to continue with
the Park Central site redevelopment plan as originally proposed
and to continue the sites commercial leasing activities
until an alternative redevelopment plan, if any, is adopted. The
Company also has an obligation to pay license fees and satisfy
certain funding obligations in accordance with the EPE and MAE
license agreements. The failure to pay future royalties or
satisfy other funding obligations could result in the
termination of the EPE and MAE license agreements and the loss
of all rights with respect to the Elvis Presley and Muhammad Ali
intellectual property assets.
Our independent registered public accounting firms report
dated March 3, 2008 to our consolidated financial
statements for the year ended December 31, 2007 includes an
explanatory paragraph indicating substantial doubt as to our
ability to continue as a going concern.
Rights Offering
We generated aggregate gross
proceeds of approximately $98.7 million from the rights
offering and from sales under the related investment agreements,
as amended, between us and Robert F.X. Sillerman, our Chairman
and Chief Executive Officer, and The Huff Alternative Fund, L.P.
and The Huff Alternative Parallel Fund, L.P. (collectively
Huff). On March 13, 2008, we used
$23 million of the proceeds from the rights offering to
repay our $23 million Riv loan (as more fully described
below). On April 1, 2008, we paid the guaranteed annual
minimum royalty payments of $10 million (plus accrued
interest of $0.35 million) for 2007 under the license
agreements, as amended, with Elvis Presley Enterprises, Inc. and
Muhammad Ali Enterprises, LLC, out of proceeds from the rights
offering. On April 17, 2008, we used $7 million of the
proceeds from the rights offering to repay in full and retire
the Flag promissory note for $1.0 million principal amount
and the CKX loan for $6.0 million principal amount (as more
fully described below). On May 13, 2008, we used
approximately $31 million of proceeds from sales under the
investment agreements referenced above to pay Flag
$30 million plus accrued return of approximately
$1.0 million through the date of payment as partial
satisfaction of its $45 million preferred priority
distribution right (as described below). We used the remainder
of the proceeds from the rights offering and the sales under the
related investment agreements to satisfy certain capital
requirements associated with extending the Mortgage Loan on
July 6, 2008.
Shier Stock Purchase
In connection with and
pursuant to the terms of his employment agreement, on
January 3, 2008, Barry Shier, our Chief Operating Officer,
purchased 500,000 shares of common stock at a price of
$5.14 per share, for aggregate consideration of
$2.57 million.
Private Placement of Units
Between
July 15, 2008 and July 18, 2008, we sold in a private
placement to Paul C. Kanavos, our President, Barry A.
Shier, our Chief Operating Officer, an affiliate of Brett
Torino, our Chairman of the Las Vegas Division, Mitchell J.
Nelson, our Executive Vice President and General Counsel, and an
affiliate of Harvey Silverman, a director of our company, an
aggregate of 2,264,289 units at a purchase price of $3.50
per unit. Each unit consisted of one share of our common stock,
a warrant to purchase one share of our common stock at an
exercise price of $4.50 per share and a warrant to purchase one
share of our common stock at an exercise price of $5.50 per
share. The warrants to purchase shares of our common stock for
$4.50 per share are exercisable for a period of seven years, and
the warrants to purchase shares of our common stock for $5.50
per share are exercisable for a period of ten years. The Company
generated aggregate proceeds from the sale of the units of
approximately $7.9 million
Riv Loan
On June 1, 2007, FX Luxury
Realty entered into a $23 million loan with an affiliate of
Credit Suisse. Proceeds from this loan were used for:
(i) the purchase of the membership interests in RH1, LLC
for $12.5 million from an affiliate of Flag Luxury
Properties; (ii) payment of $8.1 million of the
purchase price for the membership interests in Flag Luxury Riv,
LLC; and (iii) repayment of $1.2 million to Flag
Luxury Properties for funds advanced for the purchase of the 50%
economic interest in the option to purchase an additional
1,147,550 shares of Riviera Holdings Corporation at a price
of $23 per share. The Riv loan was personally guaranteed by
Robert F.X. Sillerman. The Riv loan, as amended on
September 24, 2007, December 6, 2007 and
30
February 27, 2008, was due and payable on March 15,
2008. We were also required to make mandatory pre-payments under
the Riv loan out of certain proceeds from equity transactions as
defined in the loan documents. The Riv loan bore interest at a
rate of LIBOR plus 250 basis points. The interest rate on
the Riv loan at March 13, 2008, the date of repayment, was
5.4%. Pursuant to the terms of the Riv loan, FX Luxury Realty
was required to establish a segregated interest reserve account
at closing. At March 13, 2008, the date of repayment, FX
Luxury Realty had $0.1 million on deposit in this interest
reserve fund which had been classified as restricted cash on the
accompanying consolidated balance sheet as of December 31,
2007. As described above, on March 13, 2008, we repaid in
full and retired the Riv loan with proceeds from the rights
offering.
CKX Line of Credit
On September 26,
2007, CKX entered into a Line of Credit Agreement with us
pursuant to which CKX agreed to loan up to $7.0 million to
us, $6.0 million of which was drawn down on
September 26, 2007 and was evidenced by a promissory note
dated September 26, 2007. We used $5.5 million of the
proceeds of the loan, together with proceeds from additional
borrowings, to exercise our option to acquire an additional
573,775 shares of Riviera Holdings Corporations
common stock at a price of $23 per share. The loan bore interest
at LIBOR plus 600 basis points and was payable upon the
earlier of (i) two years and (ii) our consummation of
an equity raise at or above $90.0 million. As described
above, on April 17, 2008, we repaid this loan in full and
retired the line of credit with proceeds from the rights
offering.
On June 1, 2007, FX Luxury Realty signed a promissory note
with Flag Luxury Properties for $1.0 million, representing
amounts owed to Flag Luxury Properties related to funding for
the purchase of the shares of Flag Luxury Riv. The note,
included in related party debt on the accompanying audited
consolidated balance sheet, accrued interest at 5% per annum
through December 31, 2007 and 10% from January 1, 2008
through maturity. The Company discounted the note to fair value
and recorded interest expense accordingly. As described above,
on April 17, 2008, we repaid in full and retired this note
with proceeds from the rights offering.
Most of our assets are encumbered by our debt obligations as
described below.
Mortgage Loan
On May 11, 2007, an
affiliate of Credit Suisse entered into a $370 million
senior secured credit term loan facility relating to the Park
Central site, the proceeds of which were used to repay the
then-existing mortgages on the Park Central site. The borrowers
were BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC,
subsidiaries of FX Luxury Realty. The loan was structured as a
$250 million senior secured loan and a $120 million
senior secured second lien loan. On July 6, 2007,
simultaneously with FX Luxury Realtys acquisition of the
remaining 50% ownership interest in Metroflag, we amended the
senior secured credit term loan facility, increasing the total
amounts outstanding under the senior secured loan, referred to
herein as the Park Central Senior Loan, and senior secured
second lien loan, referred to herein as the Park Central Second
Lien Loan, to $280 million and $195 million,
respectively. The two loans are referred to collectively herein
as the Mortgage Loan. The Park Central Senior Loan is
divided into a $250 million senior tranche, or
Tranche A, and a $30 million junior tranche, or
Tranche B. Interest is payable on the Park Central Senior
Loan Tranche A and Tranche B and Park Central Second
Lien Loan based on one-month LIBOR plus 150 basis points,
plus 400 basis points and plus 900 basis points,
respectively. On December 31, 2007, the applicable LIBOR
rate was 5.03%. The interest rates on the Park Central Senior
Loan Tranche A and Tranche B and Park Central Second
Lien Loan on September 30, 2008 were 4.9%, 7.4% and 12.4%,
respectively. We also purchased a cap to protect the one-month
LIBOR rate at a maximum of 5.5%, which expired on July 23,
2008. Effective July 23, 2008, we purchased another cap to
protect the one-month LIBOR rate at a maximum of 3.5% in
conjunction with extending the Mortgage Loans maturity
date to January 6, 2009 (as described below). Pursuant to
the terms of the Mortgage Loan, we had funded segregated reserve
accounts of $84.7 million on July 6, 2007 for the
payment of future interest payable on the loan and to cover
expected carrying costs, operating expenses and pre-development
costs for the Park Central site which are expected to be
incurred during the initial term of the loan. The loan agreement
provides for all collections to be deposited in a lock box and
disbursed in accordance with the loan agreement. To the extent
there is excess cash flow, it is to be placed in the
pre-development reserve loan account. We had approximately
$37.2 million on deposit in these accounts as of
September 30, 2008. On May 7, 2008, we delivered a
notice to the lenders exercising our conditional right to extend
the Mortgage Loans maturity date for the initial six month
period. Effective July 6, 2008, we made an additional
deposit of approximately $14.9 million into reserve
accounts and extended the Mortgage Loans maturity date by
six months to January 6, 2009. In order to exercise the
second six month extension of the Mortgage Loans maturity
date, on or prior to January 6, 2009 we will need to
fulfill certain requirements, including depositing
31
additional amounts into pre-development, operating and interest
reserve accounts. We will need to seek additional debt
and/or
equity financing on or prior to January 6, 2009 in order to
exercise this additional six month extension of the Mortgage
Loans maturity date. There is no guarantee that we will be
able to obtain such financing on terms favorable to our business
or at all. The Mortgage Loan is not guaranteed by FX Real Estate
and Entertainment nor has FX Real Estate and Entertainment
pledged any assets to secure the Mortgage Loan. The Mortgage
Loan is secured only by first lien and second lien security
interests in substantially all of the assets of the Metroflag
entities, including the Park Central site. FXLR has provided a
guarantee to the lenders only for losses caused under limited
circumstances such as fraud or willful misconduct. The Mortgage
Loan includes certain financial and other maintenance covenants
on the Park Central site including limitations on indebtedness,
liens, restricted payments, loan to value ratio, asset sales and
related party transactions.
Mortgage Loan Default
As described above, the
Mortgage Loan contains covenants that regulate our incurrence of
debt, disposition of property and capital expenditures. As of
September 30, 2008, the Park Central subsidiaries were in
default under the Mortgage Loan by reason of being out of
compliance with the debt-to-loan value ratio covenant set forth
in the Mortgage Loan. The Mortgage Loans financial
covenants prescribe that as of the last day of each fiscal
quarter, the Park Central subsidiaries must have (x) a
ratio of (i) total consolidated indebtedness to
(ii) the appraised value of the Park Central site of less
than 66.5% and (y) a ratio of (i) the aggregate
principal amount of the Mortgage Loan then outstanding to
(ii) the appraised value of the Park Central site of less
than 39.0%. In order to establish the value of the Park Central
site for purposes of confirming compliance with the
aforementioned covenants, the lenders obtain a quarterly
appraisal from a real estate appraisal firm. The
Park Central subsidiaries were advised by the agent for the
lenders that, as of September 30, 2008, the appraised value
of the properties resulted in debt-to-loan value ratios in
excess of what is permitted by the terms of the Mortgage Loan,
resulting in a breach of the aforementioned covenants. In order
to cure the default, the Company is seeking from the lenders a
waiver of noncompliance with, or modifications of, these
financial covenants. The lenders may exercise their remedies
under the Mortgage Loan during the existence of this default,
which include accelerating repayment of the Mortgage Loan and
foreclosing on the Park Central site. Neither we nor our Park
Central subsidiaries have adequate capital to repay the Mortgage
Loan if accelerated and we cannot assure you that the Mortgage
Loan can be refinanced in a timely manner and on commercially
reasonable terms or at all. Under the terms of the Mortgage
Loan, upon the default, the loans converted from Eurodollar
loans to base rate (prime) loans on October 27, 2008, the
next payment cycle after the date of default, and are subject to
the prime rate plus 100 basis points less than the
applicable margins already in place plus default interest of
200 basis points effective September 30, 2008. In the
event the default is cured by a waiver or otherwise, there is a
five day period to convert the loans back to Eurodollar.
Bear Stearns Margin Loan
On
September 26, 2007, we entered into a $7.7 million
margin loan from Bear Stearns. We used the proceeds of the loan,
together with the proceeds from the CKX line of credit, to
exercise the option to acquire an additional 573,775 shares
of Riviera Holdings Corporations common stock at a price
of $23 per share. In total, 992,069 of the Companys shares
of Riviera Holdings Corporation common stock are pledged as
collateral for the margin loan with Bear Stearns. The loan
originally required maintenance margin equity of 40% of the
shares market value and bears interest at LIBOR plus
100 basis points. As of September 30, 2008, the
Company made payments of approximately $3.1 million to pay
down the margin loan in conjunction with these loan
requirements. On September 30, 2008, the effective interest
rate on this loan was 3.5% and the amount outstanding, including
accrued interest of $0.3 million, was $4.9 million.
Subsequent to September 30, 2008, the Company made
additional payments of $3.7 million to further pay down the
margin loan. On November 3, 2008, the Company was advised
that the margin requirement was raised to 50% and would be
further raised to 75% on November 17, 2008, provided that
if the price of a share of Riviera Holdings Corporation common
stock fell below $3.00, the loan would need to be repaid. On
November 11, 2008, the closing price of Riviera Holdings
Corporations common stock fell below $3.00 per share,
resulting in the requirement that the Company repay all amounts
outstanding under the loan. The failure to repay the remaining
outstanding amount under the loan when demanded by the lender
could result in the lender exercising its remedies under the
margin loan agreement, which could include selling the shares
and retaining the proceeds as repayment of some or all of the
loan. If the lender was to sell the shares and receive proceeds
insufficient to repay all amounts outstanding under the loan, we
would be required to pay the deficiency.
32
Preferred Priority Distribution
In connection
with CKXs $100 million investment in FXLR on
June 1, 2007, CKX agreed to permit Flag Luxury Properties
to retain a $45 million preferred priority distribution
right which amount will be payable from the proceeds of certain
pre-defined capital transactions, including the payment of
$30 million from the proceeds of the rights offering and
sales under the related investment agreements described
elsewhere herein. From and after November 1, 2007, Flag
Luxury Properties is entitled to 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.
Robert F.X. Sillerman, our Chairman and Chief Executive Officer,
Paul Kanavos, our President, and Brett Torino, Chairman of
our Las Vegas Division, each own directly and indirectly an
approximate 30.5% interest in Flag Luxury Properties and each
will receive his pro rata share of the priority distribution. As
described above, on May 13, 2008, we paid to Flag with
proceeds from sales under the related investment agreements
$30 million plus return of approximately $1.0 million
through the date of payment as partial satisfaction of its
$45 million preferred priority distribution right. As of
September 30, 2008, $15 million of the preferred
priority distribution right in FLXR remains to be paid to Flag.
In connection with the private placement of units by the Company
in July 2008, as described above, Flag agreed to defer its right
to receive additional payments towards satisfaction of the
preferred priority distribution right from the proceeds of this
private placement of units.
Cash Flow
for the Nine Months Ended September 30, 2008
Operating
Activities
Cash used in operating activities of $48.9 million for the
nine months ended September 30, 2008 consisted primarily of
the net loss for the period of $112.7 million, which
includes the non-cash impairment of available-for-sale
securities of $35.5 million, depreciation and amortization
costs of $15.9 million, deferred financing cost
amortization of $7.5 million, the impairment of capitalized
development costs of $10.7 million and share-based payments
of $2.4 million. There were changes in working capital
levels during the period of $7.9 million, which includes a
decrease in the accrual for the Elvis Presley Enterprises and
Muhammad Ali Enterprises license agreements of $2.5 million
for the nine months ended September 30, 2008.
Investing
Activities
Cash provided by investing activities of $28.8 million for
the nine months ended September 30, 2008 reflects
$9.0 million of development costs capitalized during the
period, offset by $38.0 million of restricted cash used.
Financing
Activities
Cash provided by financing activities of $27.0 million for
the nine months ended September 30, 2008 reflects net
proceeds from the rights offering and the related investment
agreements of $96.6 million, other issuances of stock of
$2.6 million and the private placement of units of
$7.9 million, offset by the preferred distribution to Flag
of $31.0 million, Mortgage Loan extension costs of
$15.0 million, repayment of notes of $26.1 million,
and repayment of the Flag promissory note of $1.0 million
principal amount and the CKX line of credit of $6.0 million
principal amount.
Cash Flow
for the Period from May 11, 2007 to September 30,
2007
Cash used in operating activities of $11.0 million from
May 11, 2007 through September 30, 2007 consisted
primarily of the net loss for the period of $39.6 million
which includes depreciation and amortization costs of
$5.4 million, deferred financing cost amortization of
$3.6 million, the loss on the exercise of the Riviera
option of $6.4 million, equity in loss of Metroflag for the
period May 11, 2007 to July 5, 2007 of
$5.0 million and changes in working capital levels of
$8.1 million, which was primarily $5.7 million accrued
for the Elvis Presley Enterprises and Muhammad Ali Enterprises
license agreements.
Investing
Activities
Cash used in investing activities during the period of
$218.0 million, reflects cash used in the purchase of the
additional 50% interest in Metroflag of $172.5 million, the
cash used for the exercise of the Riv option of
33
$13.2 million, cash used to purchase the Riviera interests
of $21.8 million and $10.4 million of deposits into
restricted cash accounts.
Financing
Activities
Cash provided by financing activities during the period of
$232.8 million reflects the $100.0 million investment
from CKX, $105.0 million of additional borrowings under the
loan on the Park Central site, $23.0 million of proceeds
from the Riv loan, the $6.0 million loan from CKX and
$7.7 million margin loan from Bear Stearns used to fund the
exercise of the Riv option and the $2.0 million of
additional equity sold to CKX and Flag, partially offset by the
repayment of members loans of $7.6 million and debt
issuance costs paid of $3.7 million.
Metroflag
Historical Cash Flow for the Period from January 1, 2007
through May 10, 2007
Operating
Activities
Net cash used in operating activities of $18.6 million for
the period from January 1, 2007 through May 10, 2007
consisted primarily of the net loss for the period of
$24.6 million, which includes depreciation and amortization
costs of $8.5 million, and changes in working capital
levels of $2.6 million.
Investing
Activities
Cash used in investing activities of $11.5 million for the
period from January 1, 2007 through May 10, 2007
consisted primarily of net deposits into restricted cash
accounts required under various lending agreements of
$11.5 million.
Financing
Activities
Net cash provided by financing activities of $7.0 million
for the period from January 1, 2007 through May 10,
2007 reflects proceeds from refinanced mortgage loans of
$306.5 million were used to extinguish prior debt
obligation of $295 million and to fund the redevelopment.
The proceeds from members loans of $6.0 million were
used to fund redevelopment working capital and to pay off loan
extension fees. Deferred financing costs paid were
$10.5 million.
Uses of
Capital
At September 30 2008, we had $479.6 million of debt
outstanding and $9.5 million in cash and cash equivalents.
Our current cash on hand is not sufficient to fund our current
operations including payments of interest and principal due on
our outstanding debt. Most of our assets are encumbered by our
debt obligations. In total, we generated aggregate gross
proceeds of approximately $98.7 million from the rights
offering and from sales under the related investment agreements.
The aggregate proceeds from the sale of 2,264,289 units
pursuant to the subscription agreements entered into on
July 15, 2008 were approximately $7.9 million. The
Company utilized the proceeds to fund working capital
requirements and for general corporate purposes. However, we
still need to seek additional financing prior to January 6,
2009 in order to obtain an extension of the Mortgage Loan and
satisfy other obligations and working capital requirements,
including the guaranteed annual minimum royalty payments under
our license agreements with Elvis Presley Enterprises, Inc. and
Muhammad Ali Enterprises, LLC for 2008, which are due no later
than January 30, 2009. We have no current plans with
respect to securing any such financing and there can be no
guarantee that we will be able to secure such financing on terms
that are favorable to our business or at all.
Our long-term business plan is to develop and manage hotels and
attractions worldwide including the redevelopment of our Park
Central site in Las Vegas, the development of one or more
hotel(s) at or near Graceland and the development of Elvis
Presley and Muhammad Ali-themed hotels and attractions
worldwide. In order to fund these projects we will need to raise
significant funds, likely through the issuance of debt
and/or
equity securities. Our ability to raise such financing will be
dependent upon a number of factors including future conditions
in the financial markets.
34
Capital
Expenditures
Our business plan is to develop one or more hotel(s) at or near
Graceland and the development of Elvis Presley and Muhammad
Ali-themed hotels and attractions worldwide. As a result of the
disruption of the capital markets and the economic downturn in
the United States in general, and Las Vegas in particular, the
Company has determined not to proceed with its originally
proposed redevelopment plan of the Park Central site. The
Company intends to consider alternative plans with respect to
the redevelopment of the site. Until such time as an alternative
development plan, if any, is adopted, the Company intends to
continue the sites current commercial leasing activities.
Although we expect that development of and construction of the
Graceland hotel(s) will require very substantial expenditures
over a period of several years, it is too early in the planning
stages of such project to accurately estimate the potential
costs of such project.
In connection with and as a condition to the Mortgage Loan, we
have funded a segregated escrow account for the purpose of
funding pre-development costs in connection with redevelopment
of the Park Central site. The balance in the pre-development
escrow account at September 30, 2008 and December 31,
2007 was $18.4 million and $25.9 million,
respectively, which is included in restricted cash on our
balance sheet.
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 and is expected to continue to do so in the future
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 nine months ended September 30, 2008, there have
been no significant changes related to the Companys
critical accounting policies and estimates as disclosed in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations set forth in
the Companys
Form 10-K,
as amended, for the year ended December 31, 2007.
Impact
of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 157
, Fair Value
Measurements
(SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements.
The provisions of SFAS 157 are effective for the Company
beginning after January 1, 2008 for financial assets and
liabilities and after January 1, 2009 for non-financial
assets and liabilities. The Company has adopted SFAS 157
for its marketable securities (see note 2,
Formation of
the Company
). The Companys marketable securities
qualify as level one financial assets in accordance with
SFAS 157 as they are traded on an active exchange market
and are fair valued by obtaining quoted prices. The Company does
not have any level two financial assets or liabilities that
require significant other observable or unobservable inputs in
order to calculate fair value. The Companys interest rate
cap agreement qualifies as a level three financial asset in
accordance with SFAS 157 as of September 30, 2008;
however, the balance as of September 30, 2008 and changes
in the period ended September 30, 2008 did not have a
material effect on the Companys financial position or
operations. The Company does not have any other level three
assets or liabilities.
35
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), providing companies with an
option to report selected financial assets and liabilities at
fair value. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of asset and liabilities. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. Effective January 1, 2008 the Company elected to not
report any additional assets and liabilities at fair value.
On December 4, 2007, the FASB issued
SFAS No. 141(R),
Business Combinations
(SFAS 141(R)) and Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51
(SFAS 160). These new standards will
significantly change the accounting for and reporting of
business combination transactions and noncontrolling (minority)
interests in consolidated financial statements. SFAS 141(R)
and SFAS 160, respectively, and are expected to be issued
by the IASB early in 2008. SFAS 141(R) and SFAS 160
are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after
December 15, 2008. Earlier adoption is prohibited. The
adoption of SFAS 141(R) will change the Companys
accounting treatment for business combinations on a prospective
basis beginning January 1, 2009. The Company has completed
its assessment of the impact of SFAS 160 on its
consolidated financial statements and has concluded that the
statement will not have a significant impact on the
Companys consolidated financial statements.
On June 5, 2008, the FASB released a Proposed Statement of
Financial Accounting Standards,
Disclosure of Certain Loss
Contingencies, an amendment of FASB Statements No. 5 and
141(R)
(the proposed Statement), for a comment
period ending August 8, 2008. The proposed Statement would
(a) expand the population of loss contingencies that are
required to be disclosed, (b) require disclosure of
specific quantitative and qualitative information about those
loss contingencies, (c) require a tabular reconciliation of
recognized loss contingencies and (d) provide an exemption
from disclosing certain required information if disclosing that
information would be prejudicial to an entitys position in
a dispute. The FASB has indicated that the earliest effective
date of the proposed Statement for the Company would be no
sooner than the fiscal year ending December 15, 2009. The
adoption of this standard will change the Companys
disclosure of contingent liabilities upon effectiveness of the
proposed Statement.
Off
Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Seasonality
We do not consider our business to be particularly seasonal.
|
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ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
We are exposed to market risk arising from changes in market
rates and prices, including movements in foreign currency
exchange rates, interest rates and the market price of our
common stock. To mitigate these risks, we may utilize derivative
financial instruments, among other strategies. We do not use
derivative financial instruments for speculative purposes.
Interest
Rate Risk
Approximately $4.9 million of the debt we had outstanding
at September 30, 2008 pays interest at variable rates.
Accordingly, a 1% increase in interest rates would increase our
annual borrowing costs by less than $0.1 million.
The $475 million of debt secured by the Park Central site
pays interest at variable rates ranging from 4.9% to 12.4% at
September 30, 2008. 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.
36
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.
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ITEM 4T.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Managements
Annual Report on Internal Control Over Financial
Reporting
This Quarterly Report on
Form 10-Q
does not require a report of managements assessment
regarding internal control over financial reporting or an
attestation report of the Companys registered public
accounting firm due to the transition period established by
rules of the Securities and Exchange Commission for newly public
companies.
Although not required, the Company has identified, and
Ernst & Young, our independent registered public
accounting firm, communicated certain material weaknesses in
internal controls as of December 31, 2007. At
September 30, 2008, the Company has updated its internal
control environment over financial reporting, including internal
controls over accrual accounting, accounting for bad debts,
leases, acquisitions of intangible assets, derivative financial
instruments and contingencies and the hiring of additional and
more experienced financial personnel. The Company commenced
testing of the internal control environment as part of
managements assessment regarding internal controls over
financial reporting in the third quarter of 2008.
As of December 31, 2008, Section 404 of the
Sarbanes-Oxley Act will require us to assess and attest to the
effectiveness of our internal control over financial reporting
and will require our independent registered public accounting
firm to attest as to the effectiveness of our internal control
over financial reporting.
Management, with the participation of the Companys chief
executive officer, Robert F.X. Sillerman, and its chief
financial officer, Thomas P. Benson, has evaluated the
effectiveness of the Companys disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e)
or
15d-15(e))
as of September 30, 2008. Based on this evaluation, the
chief executive officer and chief financial officer have
concluded that, as of that date, disclosure controls and
procedures required by paragraph (b) of Exchange Act
Rules 13a-15
or
15d-15,
were effective.
Changes
in Internal Control over Financial Reporting
The Company made changes to enhance its internal controls over
financial reporting during the nine months ended
September 30, 2008 to remediate the material weaknesses in
internal controls at December 31, 2007. In the third
quarter of 2008, the Company commenced testing of the internal
control environment as part of managements assessment
regarding internal controls over financial reporting.
PART II
OTHER INFORMATION
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ITEM 1.
|
LEGAL
PROCEEDINGS
|
Reference is made to Note 15 to the Companys
Consolidated and Combined Financial Statements included
elsewhere in this report for the information required by this
Item.
We believe that it is important to communicate our future
expectations to our security holders and to the public. This
report, therefore, contains statements about future events and
expectations which are forward-looking statements
within the meaning of Sections 27A of the Securities Act of
1933 and 21E of the Securities Exchange Act of 1934, including
the statements about our plans, objectives, expectations and
prospects under this Section 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations. You can expect to identify these statements by
forward-looking words such as may,
might, could, would,
will, anticipate, believe,
plan, estimate, project,
expect, intend, seek and
other similar expressions. Any statement contained in this
report that is not a statement of historical fact may be deemed
to be a forward-looking statement.
37
Although we believe that the plans, objectives, expectations and
prospects reflected in or suggested by our forward-looking
statements are reasonable, those statements involve risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by these forward-looking statements, and we can give
no assurance that our plans, objectives, expectations and
prospects will be achieved.
Important factors that might cause our actual results to differ
materially from the results contemplated by the forward-looking
statements are contained in Item 1A. Risk
Factors set forth in and elsewhere in our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007 (the
Form 10-K)
and in our subsequent filings with the Securities and Exchange
Commission.
The following is an update to Item 1A. Risk
Factors set forth in the
Form 10-K.
Our
Park Central subsidiaries are in default under the
$475 million mortgage loan secured by the Park Central
site.
Our Park Central subsidiaries are in default under the
$475 million mortgage loan secured by the Park Central site
by reason of being out of compliance with the debt-to-loan value
ratio covenants prescribed by the governing amended and restated
credit agreements. In order to cure the default, we are seeking
from the lenders a waiver of noncompliance with, or
modifications of, these financial covenants. Unless and until we
can obtain such a waiver or modifications, the lenders may
exercise their remedies under the credit agreements, which could
include accelerating repayment of the loan and foreclosing on
the Park Central site. There is no assurance that we will be
able to obtain such a waiver or modification before the lenders
exercise any of their remedies. Neither we nor our Park Central
subsidiaries have adequate capital to repay the mortgage loan if
accelerated and we cannot assure you that we can refinance the
mortgage loan in a timely manner and on commercially reasonable
terms or at all. The loss of the Park Central site would have a
material adverse effect on our business, financial condition,
results and operations, prospects and ability to continue as a
going concern.
Because
of the disruptions in the capital markets and the economic
downturn in the U.S. in general and Las Vegas in particular, we
have decided to not continue with the redevelopment plan for the
Park Central site as originally proposed and intend to continue
commercial leasing activities on the Park Central site until
such time as an alternative redevelopment plan, if any, is
adopted.
We have decided to not continue with the redevelopment plan for
the Park Central site as originally proposed because of the
disruptions in the capital markets and the economic downturn in
the U.S. in general and Las Vegas in particular. We intend
to continue commercial leasing activities on the Park Central
site until such time as an alternative redevelopment plan, if
any, is adopted. For the nine months ended September 30,
2008, these commercial leasing activities generated revenue of
approximately $14.9 million. These commercial leasing
activities do not generate sufficient cash flow to fund our
current operations or to pay obligations that mature within the
next 60 to 90 days, including repaying or extending the
$475 million mortgage loan secured by the Park Central site
(assuming cure of the existing default thereunder) and paying
the minimum annual guaranteed license fees of $10 million
for 2008 under our Elvis Presley and Muhammad Ali license
agreements. Therefore, our ability to continue as a going
concern is dependent upon our ability to raise additional
capital through debt
and/or
equity financings.
Disruptions
in the capital markets, as have been experienced during 2008,
could adversely affect our ability to service our financial
obligations and fund our short-term liquidity
needs.
We rely on the capital markets to service our financial
obligations and fund our short-term liquidity needs. Our ability
to pay, extend or refinance obligations that mature within the
next 60 to 90 days, such as the Park Central
subsidiaries $475 million mortgage loan (assuming
cure of the existing default thereunder) and the minimum annual
guaranteed license fees of $10 million for 2008 under our
Elvis Presley and Muhammad Ali license agreements, is dependent
on access to the capital markets. The disruptions in the capital
markets during 2008 are likely to limit our access to capital
and raise our cost of capital to the extent available. Longer
term disruptions in the capital markets could adversely affect
our access to capital required to ultimately redevelop the Park
Central site and otherwise fund our business.
38
|
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
As of September 30, 2008, the Companys Park Central
subsidiaries were in default under the $475 million
mortgage loan secured by the Park Central site by reason of
being out of compliance with the debt-to-loan value ratio
covenants prescribed by the governing amended and restated
credit agreements. In order to cure the default, the Company is
seeking from the lenders a waiver of noncompliance with, or
modifications of, these financial covenants. Unless and until
the Company can obtain such a waiver or modifications, the
lenders may exercise their remedies under the credit agreements,
which include accelerating repayment of the loan and foreclosing
on the Park Central site. There is no assurance that the Company
will able to obtain such a waiver or modifications before the
lenders exercise any of their remedies. Neither the Company nor
its Park Central subsidiaries have adequate capital to repay the
mortgage loan if accelerated and there is no assurance that the
mortgage loan can be refinanced in a timely manner and on
commercially reasonable terms or at all. Reference is made in
note 7 of the Companys Consolidated Financial
Statements included elsewhere in this report for additional
information required by this item.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
The Companys 2008 annual meeting of stockholders was held
at 9:00 a.m., Eastern Daylight Time, on September 24,
2008 at the offices of Greenberg Traurig, LLP, 200 Park Avenue,
New York, New York for the following purposes:
1. To elect seven directors until the next annual meeting
of stockholders and until their respective successors are duly
elected and qualified;
2. To approve the FX Real Estate and Entertainment Inc.
2007 Long-Term Incentive Compensation Plan;
3. To approve the FX Real Estate and Entertainment Inc.
2007 Executive Equity Incentive Plan; and
4. To ratify the appointment of Ernst & Young LLP
to serve as the Companys independent registered public
accounting firm for its fiscal year ending December 31,
2008.
Proxies for the annual meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
as amended, and there was no solicitation in opposition to the
Companys solicitation. The holders of record of an
aggregate of 51,061,986 shares of the Companys common
stock, out of 51,929,696 shares outstanding on the record
date (August 4, 2008) for the annual meeting, were
present either in person or by proxy, and constituted a quorum
for the transaction of business at the annual meeting.
All nominees for director were elected, with voting as detailed
below:
|
|
|
|
|
|
|
|
|
|
|
For
|
|
|
Withheld
|
|
|
Robert F.X. Sillerman
|
|
|
50,733,474
|
|
|
|
328,512
|
|
Paul C. Kanavos
|
|
|
50,326,045
|
|
|
|
735,941
|
|
Barry A. Shier
|
|
|
50,626,045
|
|
|
|
435,941
|
|
Thomas P. Benson
|
|
|
50,626,045
|
|
|
|
435,941
|
|
David M. Ledy
|
|
|
50,802,793
|
|
|
|
259,913
|
|
Harvey Silverman
|
|
|
50,802,793
|
|
|
|
259,913
|
|
Michael J. Meyer
|
|
|
50,802,773
|
|
|
|
259,213
|
|
On the proposal to approve the FX Real Estate and Entertainment
Inc. 2007 Long-Term Incentive Compensation Plan,
45,437,376 shares were voted for the proposal,
1,271,595 shares were voted against the proposal and
5,410 shares abstained from the vote. The affirmative vote
of the holders of a majority of all shares casting votes, either
in person or by proxy, at the annual meeting was required to
approve this proposal. Based on the vote, the proposal was
approved by the stockholders.
On the proposal to approve the FX Real Estate and Entertainment
Inc. 2007 Executive Equity Incentive Plan,
46,228,977 shares were voted for the proposal,
479,916 shares were voted against the proposal and
5,488 shares abstained from the vote. The affirmative vote
of the holders of a majority of all shares casting votes, either
in person
39
or by proxy, at the annual meeting was required to approve this
proposal. Based on the vote, the proposal was approved by the
stockholders.
On the proposal to ratify the appointment of Ernst &
Young LLP to serve as the Companys independent registered
public accounting firm for its fiscal year ending
December 31, 2008, 50,995,785 shares were voted for
the proposal, 7,242 shares were voted against the proposal
and 58,959 shares abstained from the vote. The affirmative
vote of the holders of a majority of all shares casting votes,
either in person or by proxy, at the annual meeting was required
to approve this proposal. Based on the vote, the proposal was
approved by the stockholders.
ITEM 6.
EXHIBITS
Exhibits
The documents set forth below are filed herewith or incorporated
herein by reference to the location indicated.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1
|
|
Form of Subscription Agreement(1)
|
|
10
|
.2
|
|
Form of $4.50 Warrant(1)
|
|
10
|
.3
|
|
Form of $5.50 Warrant(1)
|
|
10
|
.4
|
|
Form of Option Agreement for FX Real Estate and Entertainment
Inc. 2007 Long-Term Incentive Compensation Plan(2)
|
|
10
|
.5
|
|
Form of Option Agreement for FX Real Estate and Entertainment
Inc. 2007 Executive Equity Incentive Plan(2)
|
|
31
|
.1
|
|
Certification of Principal Executive Officer
|
|
31
|
.2
|
|
Certification of Principal Financial Officer
|
|
32
|
.1
|
|
Section 1350 Certification of Principal Executive Officer
|
|
32
|
.2
|
|
Section 1350 Certification of Principal Financial Officer
|
|
|
|
(1)
|
|
Incorporated by reference from the registrants Current
Report on
Form 8-K
dated July 17, 2008.
|
|
(2)
|
|
Incorporated by reference from the registrants Current
Report on
Form 8-K
dated September 29, 2008.
|
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf of the undersigned
thereunto duly authorized.
FX Real Estate and Entertainment Inc.
|
|
|
|
By:
|
/s/ ROBERT
F.X. SILLERMAN
|
Robert F.X. Sillerman
Chief Executive Officer and Chairman of the Board
Thomas P. Benson
Chief Financial Officer, Executive Vice President
and Treasurer
November 13, 2008
41
INDEX TO
EXHIBITS
The documents set forth below are filed herewith.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
31
|
.1
|
|
Certification of Principal Executive Officer.
|
|
31
|
.2
|
|
Certification of Principal Financial Officer
|
|
32
|
.1
|
|
Section 1350 Certification of Principal Executive Officer
|
|
32
|
.2
|
|
Section 1350 Certification of Principal Financial Officer
|
42
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