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
March 31, 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)
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 May 12, 2008, there were 44,692,809 shares of
the registrants common stock outstanding.
FX Real
Estate and Entertainment Inc.
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March 31,
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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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(Amounts in thousands,
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except share data)
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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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10,454
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$
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2,559
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Restricted cash
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48,006
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60,350
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Marketable securities
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29,068
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43,439
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Rent and other receivables, net of allowance for doubtful
accounts of $674 at March 31, 2008 and $368 at
December 31, 2007
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574
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1,016
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Deferred financing costs, net
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3,453
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6,714
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Prepaid expenses and other current assets
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1,538
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1,031
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Total current assets
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93,093
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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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533,336
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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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607
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565
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Capitalized development costs
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8,149
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6,026
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Less: accumulated depreciation
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(16,387
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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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558,415
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561,653
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Acquired lease intangible assets, net
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1,182
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1,222
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Total assets
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$
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652,690
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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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11,681
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$
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10,809
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Accrued license fees
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12,500
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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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7,674
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30,674
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Due to related parties
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3,993
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3,022
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Related party debt
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7,054
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1,020
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Other current liabilities
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1,118
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1,114
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Unearned rent and related revenue
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65
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Total current liabilities
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519,085
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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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519,095
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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, none issued and outstanding at
March 31, 2008 and December 31, 2007
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Common stock, $0.01 par value: authorized
300,000,000 shares, 42,827,623 and 39,290,247 shares
issued and outstanding at March 31, 2008 and
December 31, 2007, respectively
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428
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393
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Additional
paid-in-capital
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252,772
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219,781
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Accumulated deficit
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(102,772
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(77,739
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Accumulated other comprehensive loss
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(16,833
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(2,461
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Total stockholders equity
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133,595
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139,974
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Total liabilities and stockholders equity
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$
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652,690
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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.
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Predecessor
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Consolidated
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Combined
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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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March 31, 2008
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March 31, 2007
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(Amounts in thousands, except
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share and per share data)
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Revenue
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$
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485
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$
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1,348
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Operating expenses:
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License fees
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2,500
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Selling, general and administrative expenses
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4,675
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292
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Depreciation and amortization expense
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6
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89
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Operating and maintenance
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11
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188
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Real estate taxes
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54
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106
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Total operating expenses
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7,246
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675
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Income (loss) from operations
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(6,761
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673
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Interest income
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106
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73
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Interest expense
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(14,327
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(10,985
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Minority interest
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2
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Loss from incidental operations
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(4,053
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(4,420
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Net loss
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$
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(25,033
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$
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(14,659
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Basic and diluted loss per share
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$
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(0.62
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Basis and diluted average number of common shares outstanding
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40,323,586
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See accompanying notes to consolidated and combined financial
statements.
4
FX Real
Estate and Entertainment Inc.
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Predecessor
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Consolidated
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Combined
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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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March 31, 2008
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March 31, 2007
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(Amounts in thousands)
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Cash flows from operating activities:
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Net loss
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$
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(25,033
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$
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(14,659
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Adjustments to reconcile net loss to cash used in operating
activities:
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Depreciation and amortization
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5,403
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5,842
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Deferred financing cost amortization
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3,261
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29
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Share-based payments
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941
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Minority interest
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(2
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Provision for accounts receivable allowance
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323
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5
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Changes in operating assets and liabilities:
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Receivables
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(230
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248
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Other current and non-current assets
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(467
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140
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Accounts payable and accrued expenses
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(125
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(1,427
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Accrued license fees
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2,500
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Due to related parties
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824
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22
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Unearned revenue
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65
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116
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Other
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(36
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)
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31
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Net cash used in operating activities
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(12,576
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(9,653
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Cash flows from investing activities:
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Restricted cash
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12,344
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3,596
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Purchase of property and equipment
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(42
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Capitalized development costs
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(2,123
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Development of real estate including land acquired
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(2
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Net cash provided by investing activities
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10,179
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3,594
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Cash flows from financing activities:
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Proceeds from sale of common stock
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2,570
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Proceeds from rights offering
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30,373
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Repayment of notes
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(23,000
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)
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Contribution from minority interest
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349
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Proceeds from Members loans
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5,972
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Net cash provided by financing activities
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10,292
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5,972
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Net increase (decrease) in cash and equivalents
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7,895
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(87
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Cash and cash equivalents beginning of period
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2,559
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1,643
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Cash and cash equivalents end of period
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$
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10,454
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$
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1,556
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Supplemental cash flow data:
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Cash paid for interest
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$
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11,219
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$
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9,878
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Supplemental Cash Flow Information:
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The Company had the following non-cash financing activity in the
three months ended March 31, 2008 (in thousands):
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Accrued but unpaid stock issuance costs
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$
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997
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See accompanying notes to consolidated and combined financial
statements.
5
FX Real
Estate and Entertainment Inc.
General
The consolidated financial statements as of and for the three
months ended March 31, 2008 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
(FXLR) and the combined financial statements for the
three months ended March 31, 2007 reflect the results of
operations of Metroflag (as defined below), the Companys
predecessor. The financial information in this report for the
three months ended March 31, 2008 and 2007 has 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 months ended March 31, 2008 and 2007 are not
necessarily indicative of the results to be expected 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).
The results of operations for the three months ended
March 31, 2008 are not necessarily indicative of the
operating results for a full year. 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. Metroflag has been
engaged in the leasing business since 1998 when CAP/TOR acquired
certain real properties situated at the southern tip of Las
Vegas Boulevard and has since assembled the current six parcels
of land totaling approximately 17.72 acres and associated
buildings.
On May 9, 2007, Polo, Cable, CAP/TOR, SW and HD were merged
with and into either Cable or BP, with Cable and BP continuing
as the surviving companies (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 the Company.
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.
6
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. 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, are part of a single redevelopment plan, and
subject to mortgage loans secured by the properties owned by the
combined entities.
Significant
Accounting Policies
During the three months ended March 31, 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 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,
Investment in Riviera
). 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 for other
identical market transactions from readily available pricing
sources. The Company does not have any level two or level three
financial assets or liabilities that require significant other
observable or unobservable inputs in order to calculate fair
value.
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 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.
|
|
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. The
Company has commenced design and planning for a redevelopment
plan for the Park Central site that includes a hotel, casino,
entertainment, retail, commercial and residential development
project.
7
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
On June 1, 2007, the Company entered into license
agreements with Elvis Presley Enterprises, Inc., an
85%-owned
subsidiary of CKX, Inc. [NASDAQ: CKXE], and Muhammad Ali
Enterprises LLC, an 80%- owned subsidiary of CKX, which 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 Company currently anticipates
that the development of the Park Central site will involve
multiple elements that incorporate the Elvis Presley assets and
theming. In addition, the license agreement with Elvis Presley
Enterprises grants the Company 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.
In addition to its ownership of plans for the redevelopment of
the Park Central site, its plan 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,
through direct and indirect wholly owned subsidiaries, owns
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 does
not currently have any definitive plans or agreements with
Riviera Holdings Corporation related to the acquisition of
Riviera, it continues to explore an acquisition of such company.
Formation
of the Company
FLXR 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 own 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 Luxury Properties, sold to the Company
all of its membership interests in RH1, LLC, 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. 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.
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.
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.
8
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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.
From May 11, 2007 to July 5, 2007, the Company
accounted for its Metroflag investment under the equity method
of accounting because it did not have control with its then 50%
ownership interest. As a result of the
9
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
purchase transaction on July 6, 2007, Metroflag was owned
100% by FXLR and therefore was consolidated commencing
July 6, 2007.
After this transaction, the Metroflag entities have
$475 million in first and second tier term loans secured by
the Park Central site and are required to hold funds in escrow
to fund debt service commitments, predevelopment expenses and
operating expenses.
Investment
in Riviera
The Company owns 1,410,363 shares of common stock of
Riviera Holdings Corporation (the Riv Shares), which
are recorded as marketable securities on the accompanying
consolidated balance sheets.
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
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 our common stock to us
at a price of $.01 per share as will result in the shares that
were received by the CKX stockholders in the 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 Financial Accounting Standards Board (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. Thus, the Repurchase Agreement
has terminated and is no further force and effect. As a result
of this termination, as of March 31, 2008, the Company has
reclassified to stockholders equity the contingently
redeemable stockholders equity included on the
consolidated balance sheet as of December 31, 2007.
Rights
Offering and Related Investment Agreements
On March 11, 2008, the Company commenced a registered
rights offering pursuant to which it distributed to certain of
its stockholders, at no charge, transferable subscription rights
to purchase one share of its common stock for every two shares
of common stock owned as of March 6, 2008, the record date
for the rights offering, at a cash subscription price of $10.00
per share. As of the commencement of the offering, the Company
had 39,790,247 shares of common stock outstanding. As part
of the transaction that created the Company in June 2007, the
Company agreed to undertake the rights offering, and certain
stockholders who own, in the aggregate, 20,046,898 shares
of common stock, waived their rights to participate in the
rights offering. As a result, the rights offering was made only
to stockholders who owned, in the aggregate,
19,743,349 shares of common stock as of the record date,
resulting in the distribution of rights to purchase up to
9,871,674 shares of common stock in the rights offering.
The rights offering expired on April 18, 2008, one week
later than its initially scheduled expiration date as a result
of being extended on April 9, 2008.
10
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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. (Huff) 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 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 special
preferred stock for a purchase price of $1.00. On May 7,
2008, the Company created this one special share of preferred
stock by filing a Certificate of Designation with the Secretary
of State of Delaware. For more information regarding the rights
and privileges associated with the share of preferred stock
purchased by Huff and other matters relating to Huffs
purchase of shares under the investment agreement, please see
Part IIOther InformationItem 5. Other
Information below.
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
annual option payments as described below, the Company will have
the right to acquire an 85% interest in the Elvis Presley
business currently owned and operated by CKX, Inc. through its
EPE subsidiaries at an escalating price over time as set forth
below. Because 19X will only own those rights upon consummation
of its pending acquisition of CKX, the effectiveness of the
Option Agreement is conditioned upon the closing of 19Xs
acquisition of CKX. In the event that the merger agreement
between 19X and CKX is terminated without consummation or the
merger fails to close for any reason, the proposed Option
Agreement with 19X will also terminate and thereafter have no
force and effect.
Upon effectiveness of the proposed Option Agreement, and in
consideration for annual option payments described below, we
would have the right (but not the obligation) to acquire the
85%-interest in the Elvis Presley business (the Presley
Interests), structured as follows:
|
|
|
|
|
Beginning on the date of the closing of 19Xs acquisition
of CKX and for the ensuing 48 months, the Company will have
the right to acquire the Presley Interests for $650 million.
|
|
|
|
Beginning 48 months following the date of the closing of
19Xs acquisition of CKX and for the ensuing six month
period, the Company will have the right to acquire the Presley
Interests for $700 million.
|
|
|
|
Beginning 54 months following the date of the closing of
19Xs acquisition of CKX and for the ensuing six month
period, the Company will have the right to acquire the Presley
Interests for $750 million.
|
11
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Beginning 60 months following the date of the closing of
19Xs acquisition of CKX and for the ensuing six month
period, the Company will have the right to acquire the Presley
Interests for $800 million.
|
|
|
|
Beginning 66 months following the date of the closing of
19Xs acquisition of CKX and for the ensuing six month
period, the Company will have the right to acquire the Presley
Interests for $850 million.
|
If, as of the calendar month immediately preceding the sixth
anniversary of the date of the closing of 19Xs acquisition
of CKX, EPE has not achieved certain financial thresholds, the
Company will have the right to extend the deadline to exercise
its right to acquire the Presley Interests by twelve
(12) months. If, as of the calendar month immediately
preceding the seventh anniversary of the date of closing of
19Xs acquisition of CKX, EPE has still not achieved the
financial thresholds, the Company will have the right to extend
the deadline to exercise its right to acquire the Presley
Interests for an additional six (6) months.
If, at the end of such six month extension period, EPE has still
not achieved the financial thresholds, the Company will have the
right to either (i) reduce the purchase price for the
acquisition by $50 million and proceed with the
acquisition, or (ii) elect not to proceed with the
acquisition.
The total amount of the option payment shall be
$105 million payable over five years, with each annual
payment set forth below payable in four equal cash installments
(except as described below) per year:
|
|
|
|
|
Year one annual payment $15 million
|
|
|
|
Year two annual payment $15 million
|
|
|
|
Year three annual payment $20 million
|
|
|
|
Year four annual payment $25 million
|
|
|
|
Year five annual payment $30 million
|
The first installment for year ones annual payment will
become due and payable on the later of (i) the closing of
19Xs acquisition of CKX, and (ii) August 15,
2008. The date on which such first installment is paid is
referred to as the Initial Installment Date. The
three remaining installments for year ones annual payment
will be due on the 90th, 180th and 270th day after the
Initial Installment Date. For each subsequent annual payment for
years two through five, the first installment will be due on the
ensuing anniversary date of the Initial Installment Date and the
three remaining installments will be due on the 90th,
180th and 270th day thereafter.
Notwithstanding the foregoing, during each of the first two
years, the Company can pay up to two installment payments in any
twelve month period by delivery of an unsecured promissory note
(rather than cash) which shall become due and payable on the
earlier of (i) the closing of the acquisition of the
Presley Interests, and (ii) the termination of the Option
Agreement. The promissory notes shall bear interest at the rate
of 10.5% per annum.
The Option Agreement also provides that the Company undertake an
expanded role in the overall development of EPEs Graceland
master plan. The parties have agreed to reasonably cooperate
with one another in good faith to prepare a master plan for the
development of the Graceland site, with each party bearing 50%
of the costs associated with preparation of the master plan
provided, that 19X shall be reimbursed costs in excess of
$2.5 million by the Company at the first to occur of
(i) the Company terminates its involvement in the master
plan process, (ii) the Company exercises the right to
acquire the Presley Interests, or (iii) the Company
terminates the Option Agreement as a result of certain actions
by 19X. In the event the parties cannot agree on the design for
the master plan, then 19X shall have the right to complete the
development in its sole discretion, subject to the
Companys rights under its license agreement with EPE,
provided, however, that the Company shall have the right to
provide input into the development and be reasonably informed as
to the status thereof, although all final decisions in respect
thereof shall be made by 19X in its sole discretion.
12
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The following table is a reconciliation of the Companys
net loss to comprehensive loss for the three months ended
March 31, 2008:
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|
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|
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|
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Three Months
|
|
|
|
Ended,
|
|
|
|
March 31, 2008
|
|
|
|
(Amounts in thousands)
|
|
|
Net loss
|
|
$
|
(25,033
|
)
|
Other comprehensive loss:
|
|
|
|
|
Unrealized loss on marketable securities
|
|
|
(14,372
|
)
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(39,405
|
)
|
|
|
|
|
|
Marketable securities at March 31, 2008 and
December 31, 2007 consist only 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 in the other comprehensive
income as a separate component of stockholders equity.
Based on the Companys evaluation of the underlying reasons
for the unrealized losses associated with the Riv Shares and its
ability and intent to hold the securities for a reasonable
amount of time sufficient for an expected recovery of fair
value, the Company does not consider the losses to be other than
temporary as of March 31, 2008. If a decline in fair value
is determined to be other than temporary, an impairment loss
would be recognized and a new cost basis in the investment would
be established. Fair value is determined by currently available
market prices.
Our 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
Metroflag entities have $475 million in loans secured by
the Park Central site that become due and payable on
July 6, 2008, subject to the Companys conditional
right to extend the maturity date for up to two six
(6) month extensions. The Company intends to extend the
existing mortgage loan on July 6, 2008 for an additional
six month period and to subsequently refinance this loan in
connection with the redevelopment plan for the Park Central
site. The Companys ability to extend the loan is subject
to its ability to raise additional cash above and beyond the
proceeds from the rights offering prior to July 6, 2008.
The Companys ability to refinance the loan and the
valuation of the property could be affected by the ability to
effectively execute the Park Central site redevelopment plan.
The Company also has an obligation to pay license fees in
accordance with the license agreements described in note 9.
If these payments are not made, the Company could lose its
rights under these agreements. The accompanying consolidated
financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
|
|
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 months ended
13
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
March 31, 2008, 9,450,000 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.
The following table summarizes the results from the incidental
operations for the three months ended March 31, 2008 and
the three months ended March 31, 2007 (Predecessor):
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|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended,
|
|
|
Ended,
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
(Amounts in thousands)
|
|
|
Revenue
|
|
$
|
4,569
|
|
|
$
|
3,551
|
|
Depreciation
|
|
|
(5,396
|
)
|
|
|
(5,752
|
)
|
Operating & other expenses
|
|
|
(3,226
|
)
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
Loss from incidental operations
|
|
$
|
(4,053
|
)
|
|
$
|
(4,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Debt and
Notes Payable
|
The Companys debt as of March 31, 2008 includes
mortgage notes to Credit Suisse in the principal amount of
$475 million (the Credit Suisse Notes). The
Company uses escrow accounts to fund future pre-development and
other spending and interest on the Credit Suisse Notes. The
balance in such escrow accounts as of March 31, 2008 was
$47.4 million. The Credit Suisse Notes, which is comprised
of three separate tranches, expires on July 6, 2008, but
can be extended for up to two six month periods. The Credit
Suisse Notes are classified as a current liability because the
Company is uncertain if it will have sufficient financial
resources to extend the loan because the extensions require that
the Company deposit additional amounts into predevelopment,
operating and interest reserve accounts. On May 7, 2008,
the Company delivered a notice to the lenders exercising its
conditional right to extend the loan for the initial six month
period. The Company anticipates that this initial six month
extension will require a deposit of approximately
$50 million into reserve accounts on or prior to
July 6, 2008, which amount will need to be obtained through
additional debt or equity financing. The second six month
extension will likely require the Company to obtain additional
debt or equity financing. Interest rates on the Credit Suisse
Notes are at 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 March 31, 2008
were 4.1%, 6.6% and 11.6%, respectively. The Credit Suisse Notes
are secured by a first and second lien security interest in the
assets of the Park Central subsidiaries. The Credit Suisse Notes
contain certain financial and other covenants. The Company was
in compliance with all covenants as of March 31, 2008.
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 bore interest at a rate of LIBOR plus
250 basis points. The Riv Loan was repaid in full and
retired on its maturity date of 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. The Bear Stearns
14
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
margin loan requires maintenance margin equity of 40% of the
shares market value and bears interest at LIBOR plus
100 basis points. The effective interest rate on the margin
loan at March 31, 2008 was 4.1%.
Please see note 8 for a description of the CKX loan and
other related party debt.
Predecessor
Metroflags (as Predecessor) outstanding debt at
March 31, 2007 included a $285 million floating rate
mortgage loan to Barclays Capital Real Estate, Inc. The
loan had a maximum principal amount of up to $300 million
at 3.85% above LIBOR, payable in monthly installments for
interest only until the original maturity date of
January 9, 2007. Metroflag also had a $10 million
floating rate mortgage loan to Barclays Capital Real Estate,
Inc. The loan had a maximum principal of up to $10 million
at 3.85% above LIBOR, payable in monthly installments for
interest only until the original maturity date of
January 9, 2007. The Barclays notes were secured by a first
lien security interest in substantially all of Metroflags
assets, including the Park Central site.
On May 11, 2007, Metroflag refinanced substantially all of
their mortgage notes and other long-term obligations with two
notes totaling $370 million from Credit Suisse Securities
USA, LLC. The maturity date of these notes were May 11,
2008, with two six-month extension options subject to payment of
a fee and the Companys compliance with the terms of an
extension outlines in the loan documents. The loans required
that the Company establish and maintain certain reserves
including a reserve for payment of fixed expenses, a reserve for
interest, a reserve for predevelopment costs as
defined and budgeted for in the loan documents, a reserve for
litigation and a reserve for working capital. This
loan was repaid with proceeds from the Credit Suisse Notes on
July 6, 2007.
On June 1, 2007, the Company signed a promissory note with
Flag for $1.0 million, representing amounts owed to Flag
related to funding for the purchase of the shares of Flag Luxury
Riv. The note bears 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 records interest expense
accordingly. The note is included in related party debt in the
accompanying balance sheets. 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 is 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 bears interest at LIBOR plus 600 basis points and
is 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 our
common stock. The interest rate on the loan at March 31,
2008 was 8.7%. On April 17, 2008, the 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
15
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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.
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.
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, which
has been included in accounts payable and accrued expenses on
the accompanying consolidated balance sheet. 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 shall only become effective upon the
closing of 19Xs acquisition of CKX.
16
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
If and when effective, the amendment to the license agreement
will provide that, if, by the date that is
7
1
/
2
years
following the closing of 19Xs acquisition of CKX, EPE has
not achieved certain financial projections, the Company shall be
entitled to a reduction of $50 million against 85% of the
payment amounts due under the License Agreement, with such
reduction to occur ratably over the ensuing three year period
provided, however, that if the Company has failed in its
obligations to build any hotel to which it had previously
committed under the definitive Graceland master redevelopment
plan, then this reduction shall not apply.
The amendment to the license agreement also provides that the
Company may lose its right to construct hotel(s) as part of the
Graceland master redevelopment plan (i) in the event the
Company approves a master plan (as contemplated under the Option
Agreement with 19X) but subsequently fails to deliver a notice
within ten (10) days of such approval of its intent to
proceed with the hotels contemplated in the master plan or,
(ii) in the alternative, if the Company fails to deliver
its notice of intent to proceed in accordance with the
definitive master plan within ninety (90) days of
presentation of a master plan that 19X has agreed to undertake
but which the Company has not approved.
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, which has been included in
accounts payable and accrued expenses on the accompanying
consolidated balance sheet. 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
17
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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
$2.5 million of license fee expense in the accompanying
consolidated statement of operations for the three months ended
March 31, 2008.
|
|
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 three months ended March 31, 2008 and
March 31, 2007 (Predecessor) was less than
$0.1 million for both periods. Acquired lease intangibles
liabilities, included in the accompanying balance sheets in
other current liabilities, are related to below-market leases
under which the Company is the lessor. The remaining
weighted-average amortization period is approximately
4.6 years.
Acquired lease intangibles consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Above-market leases
|
|
$
|
582
|
|
|
$
|
582
|
|
In-place leases
|
|
|
1,320
|
|
|
|
1,320
|
|
Accumulated amortization
|
|
|
(720
|
)
|
|
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
1,182
|
|
|
$
|
1,222
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Below-market leases
|
|
$
|
111
|
|
|
$
|
111
|
|
Accumulated accretion
|
|
|
(79
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
32
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Derivative
Financial Instruments
|
Pursuant to the terms specified in the Credit Suisse Notes (as
described in note 7), the Company entered into interest
rate cap agreements (the Cap Agreements) with Credit
Suisse with notional amounts totaling $475 million. The Cap
Agreements are tied to the Credit Suisse Notes and convert 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 Agreements were not
designated as cash flow hedges under SFAS No. 133 and
as such the change in fair value is recorded as adjustments to
interest expense. The change in fair value of the Cap Agreements
for the three months ended March 31, 2008 was a decrease of
less than $0.1 million. Metroflag had similar agreements in
place in 2007. The change in fair value of those agreements was
a decrease of $0.3 million for the three months ended
March 31, 2007. The Cap Agreements expire on July 6,
2008.
18
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
12.
|
Commitments
and Contingencies
|
Operating
Leases
The Companys properties are leased to tenants under
operating leases with expiration dates extending to the year
2045. As of March 31, 2008, all but one of the
Companys properties are classified as incidental
operations and the Company is depreciating these properties
through the end of 2008. The Company expects to incur additional
costs related to lease buyouts in conjunction with the
redevelopment plan for the Park Central site.
As of March 31, 2008 and December 31, 2007, there were
42,827,623 and 39,290,247 shares of common stock issued and
outstanding, respectively. Except as otherwise provided by
Delaware law, the holders of the Companys common stock are
entitled to one vote per share on all matters to be voted upon
by the stockholders.
As of March 31, 2008 and December 31, 2007, there were
no shares of preferred stock issued and outstanding. The
Companys Board of Directors has the authority, without
action by the stockholders, to designate and issue preferred
stock in one or more series and to designate the rights,
preferences and privileges of each series, which may be greater
than the rights of the common stock.
Stock
Option Grants
On January 10, 2008, 6,400,000 stock options were issued to
two executive-designees under the terms of the 2007 Executive
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.
The term of the options granted is 10 years. As the
executive-designees were not employees as of the date of grant
or on March 31, 2008, the Company has accounted for the
grants in accordance with SFAS 123R,
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
become employees.
The fair value of the options granted was $0.70 per option at
March 31, 2008. Fair value at March 31, 2008 was
estimated using the Black-Scholes option pricing model based on
the weighted average assumptions of:
|
|
|
|
|
Risk-free rate
|
|
|
3.74%
|
|
Volatility
|
|
|
39.0%
|
|
Weighted average expected life remaining at March 31, 2008
|
|
|
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 our industry.
As of March 31, 2008, the Company has a total of 9,450,000
options outstanding. Compensation expense for stock option
grants is being recognized ratably over the vesting periods of
the grants and was $0.9 million for the three months ended
March 31, 2008.
19
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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 months ended March 31, 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 March 31, 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.
In an action in New York state court, two investors in The
Robinson Group, LLC sued the Companys subsidiary,
Metroflag BP and Paul Kanavos, the Companys President,
individually, alleging fraudulent inducement for them to invest
in the Robinson Group, a former tenant at the Hawaiian
Marketplace, and seeking damages. In its initial decision, the
New York state court dismissed all claims except for a claim
based on a theory of negligent misrepresentation. On appeal by
the Company, the surviving claim was dismissed by the New York
State Supreme Court, Appellate Division on May 1, 2008. The
time for plaintiffs to make a motion to reargue or appeal this
decision has not yet expired.
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. Metroflag 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 Metroflag 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. 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
March 31, 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 March 31,
2008 and December 31, 2007.
|
|
17.
|
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 us, 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.
20
FX Real
Estate and Entertainment Inc.
NOTES TO UNAUDITED CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
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 in 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. If the report is
approved by the independent directors or committee of each
party, then the net payment due as shown in the report shall be
promptly paid.
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 months ended March 31, 2008, CKX incurred and
billed FXRE $0.5 million for professional services,
consisting primarily of accounting and legal services.
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 our audit and
compensation committees. For the three months ended
March 31, 2008, Flag incurred and billed FXRE
$0.1 million.
Paul Kanavos, the Companys President, (i) is the
Chairman and Chief Executive Officer of Flag Luxury Properties,
(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.
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, our 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 March 31, 2008.
Preferred
Priority Distribution
As of March 31, 2008, 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 is entitled to receive
his pro rata participation of the $45 million preferred
priority distribution right held by Flag, when paid by FXLR,
based on his ownership interest in Flag.
21
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 accrued 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.
***********************
FORWARD
LOOKING STATEMENTS
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. 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 the Risk Factors section
of and elsewhere in our Annual Report on
Form 10-K,
as amended, for the year ended December 31, 2007 and in our
subsequent filings with the Securities and Exchange Commission,
and include, among others, the following:
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Our current cash flow is not sufficient to meet our current
obligations and we will need to obtain additional debt
and/or
equity financing.
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|
We will need to raise substantial additional debt
and/or
equity financing to implement our business plans.
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We are highly leveraged and we may have difficulty obtaining
additional financing.
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We have no operating history with respect to our proposed
business and we may not be able to successfully implement our
business strategy.
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Our business plan is not expected to generate meaningful revenue
for the foreseeable future.
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The audit opinion from our independent registered public
accounting firm dated March 3, 2008 included in the
Form 10-K
includes an explanatory paragraph expressing substantial doubt
about our ability to continue as a going concern due to our need
to secure additional financing to implement our proposed
development projects.
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We have entered into a number of related party transactions with
CKX, Inc., 19X, Inc. and Flag Luxury Properties, LLC and their
affiliates and may do so in the future, on terms that some
stockholders may consider not to be in their best interests.
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Our hotel development, including our proposed Park Central site
redevelopment and the Graceland hotel(s), are subject to timing,
budgeting and other risks which could materially adversely
affect our business.
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22
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ITEM 2.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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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. 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 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. 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. We intend to
cease engaging in these commercial leasing activities as we
implement our redevelopment of the Park Central site.
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.
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 Park Central 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
23
on July 9, 2007. As a result of this purchase, FX Luxury
Realty now owns 100% of Metroflag, and therefore consolidates
the operations of Metroflag beginning on 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 months ended March 31, 2008.
FX Real
Estate and Entertainment Operating Results
Our results for the three months ended March 31, 2008
reflected $0.5 million in revenue and $7.2 million in
operating expenses. Included in operating expenses is
$2.5 million in license fees, representing the first
quarter guaranteed annual minimum royalty payments under the
license agreements with Elvis Presley Enterprises and Muhammad
Ali Enterprises and $3.6 million in corporate expenses,
including professional fees related to the CKX Distribution and
the Option Agreement, $0.9 million in non-cash compensation
related to the issuance of stock options and $0.6 million
in shared services charges provided by CKX and Flag pursuant to
the shared services agreement.
For the three months ended March 31, 2008, we had
$14.2 million in net interest expense.
For the three months ended March 31, 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 owns 1,410,363 shares of common stock of
Riviera Holdings Corporation (the Riv Shares). As of
March 31, 2008, all unrealized losses associated with the
Riv Shares are due to the recent decline in the stock price of
Riviera Holdings Corporation and have been recorded in other
comprehensive income as a separate component of
stockholders equity as the Company does not consider the
losses to be other than temporary. The unrealized losses are
considered other than temporary due to our evaluation of the
underlying reasons for the decline in stock price, including
weakening conditions in the market that Riviera Holdings
Corporation operates, and our ability and intent to hold the Riv
Shares for a reasonable amount of time sufficient for an
expected recovery of fair value. If in the future we determine
that the decline in the stock price is determined to be other
than temporary, an impairment loss would be recognized and a new
cost basis in the Riv Shares would be established.
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.
We are in the conceptual design stage of developing a hotel,
casino, entertainment, retail, commercial and residential
development project on the Park Central site.
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.
Given the significance of the Metroflag 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 months ended March 31, 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.
24
Metroflag
Results for the three months ended March 31, 2008 and
2007
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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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March 31, 2008
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March 31, 2007
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Variance
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(Amounts in thousands)
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Revenue
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$
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485
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$
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1,348
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$
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(863
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)
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Operating expenses
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(1,036
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)
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(586
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)
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(450
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)
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Depreciation and amortization
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(6
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)
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(89
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)
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83
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Income (loss) from operations
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(557
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)
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673
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(1,230
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)
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Interest expense, net
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(13,288
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)
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(10,912
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)
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(2,376
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)
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Loss from incidental operations
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(4,053
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)
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(4,420
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)
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367
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Net loss
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$
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(17,898
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)
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$
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(14,659
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)
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$
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(3,239
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)
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Revenue
Revenue decreased $0.9 million, or 64%, to
$0.5 million in the first quarter of 2008 as compared to
the first quarter of 2007 due primarily to the classification of
the operations of an additional property as incidental
operations in the fourth quarter of 2007, offset by a
$0.1 million increase in revenue at the property still
included in operations.
Operating
Expenses
Operating expenses increased $0.5 million, or 77%, in the
first quarter of 2008 as compared to the first quarter of 2007
due primarily to higher overhead costs primarily associated with
the redevelopment plan for the Park Central site, including the
hiring of Barry Shier, our Chief Operating Officer, and other
increased headcount.
Depreciation
and Amortization Expense
Depreciation and amortization expense declined by
$0.1 million in the first quarter of 2008 as compared to
the first 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 increased $2.4 million, or 22%, to
$13.3 million in the first quarter of 2008 as compared to
the first quarter of 2007 due to borrowings of $475 million
as of March 31, 2008 compared to $295 million as of
March 31, 2007, offset in part by lower rates in 2008.
Loss
from Incidental Operations
Loss from incidental operations decreased $0.4 million, or
8%, to $4.1 million in the first quarter of 2008 as
compared to the first quarter of 2007 primarily due to a
decrease in depreciation and amortization in 2008 as a result of
a change in the estimated remaining lives of the properties
classified as incidental operations. Higher revenue included in
the results from incidental operations in the first quarter of
2008 was offset by higher operating expenses primarily as the
result of an additional property being classified as incidental
operations in the 2008 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. Our
current cash flow and cash on hand of $10.5 million at
March 31, 2008 are not sufficient to fund our current
operations or to pay obligations scheduled to come due over the
ensuing six months, including our $475 million Park Central
Loan, which matures on July 6, 2008, subject to our
conditional right to extend as described below. We generated
aggregate gross proceeds of approximately $98.7 million
from the
25
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 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
intend to use the remainder of the proceeds from the rights
offering and the sales under the related investment agreements
to satisfy certain other obligations and working capital
requirements. However, we still need to seek additional
financing prior to July 6, 2008 in order to obtain an
extension of the Park Central Loan. 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 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.
Most of our assets are encumbered by our debt obligations as
described below.
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
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.
Park Central 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 Park Central 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
30-day
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 March 31, 2008 were 4.1%,
6.6% and 11.6%, respectively. We also purchased a cap to protect
the
30-day
LIBOR rate at a maximum of 5.5%. Pursuant to
26
the terms of the Park Central Loan, we had funded segregated
reserve accounts of $84.7 million 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 $47.4 million on
deposit in these accounts as of March 31, 2008. The Park
Central Loan is due and payable on July 6, 2008, provided
that if we are not in default under the terms of the loan and
meet certain other requirements, including depositing additional
amounts into the interest reserve, carrying cost reserve,
predevelopment reserve and operating expense reserve accounts,
we may elect to extend the maturity date for up to two
additional six month periods. On May 7, 2008, we delivered
a notice to the lenders exercising our right to extend the loan
for the initial six month period. We anticipate that this
initial six month extension will require us to deposit
approximately $50 million into reserve accounts on or prior
to July 6, 2008, which amount will need to be obtained
through additional debt or equity financing. The second six
month extension will likely require us to obtain additional debt
or equity financing. There is no guarantee that we will be able
to obtain such financing on terms favorable to our business or
at all. The Park Central Loan is secured by first lien and
second lien security interests in substantially all of the
assets of Metroflag, including the Park Central site. The Park
Central Loan is not guaranteed by FX Luxury Realty. The Park
Central 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. The financial
covenants on the $280 million tranche are: (i) the
ratio of total indebtedness to the appraised value of the Park
Central site real property under that loan can not exceed 66.5%;
and (ii) the ratio of the outstanding principal amount of
the Park Central Senior Loan to the total appraised value of the
Park Central site real property can not exceed 39.0%. The
financial covenant on the $195 million tranche is:
(i) the ratio of total indebtedness to total appraised
value of the Park Central site real property under that loan can
not exceed 66.5%. FX Luxury Realty and Flag Luxury Properties
have issued a joint and severable guarantee to the lenders under
the Park Central Loan for any losses they incur solely as a
result of certain limited circumstances including fraud or
intentional misrepresentation by the borrowers, FX Luxury Realty
and Flag Luxury Properties and gross negligence or willful
misconduct by the borrowers. Flag Luxury Properties
guarantee terminated on the date it distributed its shares of
our common stock to its members and certain employees.
Also 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, bears 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 records interest expense accordingly. As described above, on
April 17, 2008, we repaid in full and retired this note
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 is 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 bears
interest at LIBOR plus 600 basis points and is payable upon
the earlier of (i) two years and (ii) our consummation
of an equity raise at or above $90.0 million. On
March 31, 2008 the effective interest rate on this loan was
8.7%. As described below, on April 17, 2008, we repaid this
loan in full and retired the line of credit with proceeds from
the rights offering.
Bear Stearns Margin Loan
Also on
September 26, 2007, we entered into a $7.7 million
margin loan with 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. The margin loan requires a maintenance margin
equity of 40% of the shares market value and bears
interest at LIBOR plus 100 basis points. On March 31,
2008 the effective interest rate on this loan was 4.1%.
Debt Covenants
The Park Central Loan and our
other debt instruments contain covenants that regulate our
incurrence of debt, disposition of property and capital
expenditures. We were in compliance with all loan covenants as
of March 31, 2008.
27
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 payment of
$30 million from the proceeds of the rights offering and,
if applicable, 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 and Paul Kanavos, our President, 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, when made. As described above, on
May 13, 2008, we paid to Flag with proceeds from sales
under the related investment agreements $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.
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.
Cash Flow
for the three months ended March 31, 2008
Operating
Activities
Cash used in operating activities of $12.6 million for the
three months ended March 31, 2008 consisted primarily of
the net loss for the period of $25.0 million, which
includes depreciation and amortization costs of
$5.4 million, deferred financing cost amortization of
$3.3 million and share-based payments of $0.9 million.
There were changes in working capital levels during the period
of $2.9 million, which includes a $2.5 million accrual
for the Elvis Presley Enterprises and Muhammad Ali Enterprises
license agreements for the first quarter of 2008.
Investing
Activities
Cash provided by investing activities of $10.2 million for
the three months ended March 31, 2008 reflects
$2.1 million of development costs capitalized during the
period, offset by $12.3 million of restricted cash used.
Financing
Activities
Cash provided by financing activities of $10.3 million for
the three months ended March 31, 2008 reflects proceeds
from the rights offering and other issuances of stock of
$32.9 million, offset by repayment of the
$23.0 million Riv loan.
Metroflag
Historical Cash Flow for the three months ended March 31,
2007
Operating
Activities
Net cash used in operating activities of $9.7 million for
the three months ended March 31, 2007 consisted primarily
of the net loss for the period of $14.7 million, which
includes depreciation and amortization costs of
$5.8 million, and changes in working capital levels of
$0.8 million.
Investing
Activities
Cash used in investing activities of $3.6 million for the
three months ended March 31, 2007 consisted primarily of
net deposits into restricted cash accounts required under
various lending agreements of $3.6 million for the three
months ended March 31, 2007.
Financing
Activities
Net cash provided by financing activities of $6.0 million
for the three months ended March 31, 2007 reflects proceeds
from members loans used to fund redevelopment working
capital.
28
Uses of
Capital
At March 31 2008, we had $489.7 million of debt outstanding
and $10.5 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.
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 above). 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
principal amount and the CKX line of credit for
$6.0 million principal amount (as more fully described
above). 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 above). We
intend to use the remainder of the proceeds from the rights
offering and the sales under the related investment agreements
to satisfy certain other obligations and working capital
requirements. However, we still need to seek additional
financing prior to July 6, 2008 in order to obtain an
extension of the Park Central Loan. 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
dependant upon a number of factors including future conditions
in the financial markets.
Capital
Expenditures
Our 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. Our plans regarding the size, scope and phasing of
the redevelopment of the Park Central site may change as we
formulate and finalize our development plans. These changes may
impact the timing and cost of the redevelopment. Based on
preliminary budgets, management estimates total construction
costs of the current plan to be approximately $3.1 billion
(exclusive of land cost and related financing and other
pre-opening costs) and estimates it will capitalize development
costs of approximately $20 million during 2008. 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 Park Central Loan
we have funded a segregated escrow account for the purpose of
funding pre-development costs in connection with re-developing
the property which we expect to incur over the next twelve
months. The balance in the pre-development escrow account at
March 31, 2008 and December 31, 2007 was
$24.8 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.
29
Commitments
and Contingencies
There are various lawsuits and claims pending against us and
which we have initiated against others. We believe that any
ultimate liability resulting from these actions or claims will
not have a material adverse effect on our results of operations,
financial condition or liquidity.
Inflation
Inflation has affected the historical performances of the
business primarily in terms of higher rents we receive from
tenants upon lease renewals and higher operating costs for real
estate taxes, salaries and other administrative expenses.
Although the exact impact of future inflation is indeterminable,
we believe that our future costs to develop hotels and casinos
will be impacted by inflation in construction costs.
Application
of Critical Accounting Policies
During the three months ended March 31, 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 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,
Investment in Riviera
). 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 for other
identical market transactions from readily available pricing
sources. The Company does not have any level two or level three
financial assets or liabilities that require significant other
observable or unobservable inputs in order to calculate fair
value.
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.
Off
Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Seasonality
We do not consider our business to be particularly seasonal.
However, we expect that our future revenue and cash flow may be
slightly reduced during the summer months due to the tendency of
Las Vegas room rates to be lower at that time of the year.
30
|
|
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 $14 million of the debt we had outstanding at
March 31, 2008 pays interest at variable rates.
Accordingly, a 1% increase in interest rates would increase our
annual borrowing costs by $0.1 million.
The $475 million secured by the Park Central site pays
interest at variable rates ranging from 4.1% to 11.6% at
March 31, 2008. We have entered into interest rate
agreements with a major financial institution which cap the
maximum Eurodollar base rate payable under the loan at 5.50%.
The interest rate cap agreements expire on July 6, 2008.
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.
|
|
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. At March 31, 2008, there are material
weaknesses in internal control over financial reporting,
including internal controls over accrual accounting, accounting
for bad debts, leases, acquisitions of intangible assets,
derivative financial instruments and contingencies.
As of December 31, 2008, Section 404 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 March 31, 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
There were no changes in our internal control over financial
reporting identified in connection with the evaluation required
by paragraph (d) of Exchange Act
Rules 13a-15
or
15d-15
that occurred during the three months ended March 31, 2008
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
31
PART II
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
Reference is made to Note 16 to the Companys
Consolidated and Combined Financial Statements included
elsewhere in this report for the information required by this
Item.
|
|
ITEM 5.
|
OTHER
INFORMATION
|
As described in note 2 to the Companys Consolidated
and Combined Financial Statements included elsewhere in this
report, on May 7, 2008, the Company created one special
share of preferred stock by filing a Certificate of Designation
with the Secretary of State of the State of Delaware thereby
amending its Amended and Restated Certificate of Incorporation.
The Company issued this one share of special preferred stock to
Huff on May 13, 2008 in accordance with the parties
investment agreement.
Under the terms of the special preferred stock as specified in
the Certificate of Designation, Huff appointed one member to the
Companys Board of Directors effective May 13, 2008.
Under the terms of the special preferred stock as specified in
the Certificate of Designation, 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
currently owns. The Huff director designee has the right,
subject to any restrictions of The NASDAQ Global Market or the
Securities and Exchange Commission, or applicable law, to be a
member of, and the chairman of, any committee of the Board of
Directors formed for the purpose of reviewing any related
party transaction that is required to be disclosed
pursuant to Section 404 of the Sarbanes Oxley Act of 2002
or any successor rule or regulation or any transaction,
contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any of the Companys
directors, officers or affiliates, including any such committee
that may be formed pursuant to the applicable rules and
regulations of the Securities and Exchange Commission or The
NASDAQ Global Market. However, if the Huff director designee
would not be deemed independent or disinterested with respect to
a related party transaction and therefore would not satisfy The
NASDAQ Global Market or other applicable requirements for
serving on the special committee formed with respect thereto,
the Huff director designee will not serve on the relevant
special committee but will have the right to attend meetings of
such special committee as an observer, subject to any
restrictions of The NASDAQ Global Market or applicable law.
Furthermore, in the event that the attendance at any meetings of
any such special committee would raise confidentiality issues as
between the parties to the transaction that, in the reasonable
opinion of counsel to the relevant special committee, cannot be
resolved by a confidentiality agreement, the Huff director
designee shall be required to recuse himself from such meetings.
In addition, so long as Huff continues to own more than 15% of
its 6,611,998 shares of common stock, Huff shall be
entitled, at its option, to designate, by written notice to the
Company, one individual as an observer to the Companys
Board of Directors and all committees of the Board of Directors.
Once Huff ceases to beneficially own 15% of these shares, the
Company has the right to convert the special preferred stock
into one share of common stock. The Huff Board observer shall be
entitled to attend all meetings of the Companys Board of
Directors and any committees thereof, to be given advance notice
of all meetings not later than the time notice is given to any
member of the Board of Directors and to receive upon issuance to
the members of the Board of Directors or any committees thereof
any materials prepared for the members of the Board of Directors
or committees thereof (but shall have no right to participate in
such meetings). The Huff Board observer shall be afforded the
same rights and privileges as other members of the
Companys Board of Directors, other than the right to vote
on matters brought before the members, including, without
limitation, rights to indemnification, insurance, notice,
information and the prompt reimbursement of expenses (but not
the payment of director fees). The rights and privileges of the
Huff Board observer, including the right to attend meetings of
the Board of Directors or any committee thereof, are limited to
the extent of any restrictions of The NASDAQ Global Market or
applicable law. Furthermore, the Companys Board of
Directors and each committee thereof has the absolute and
unfettered right, exercisable at its sole and absolute
discretion, to exclude the Huff Board observer from any meeting
thereof.
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
32
rights agreement. Under the registration rights agreement, the
Company is obligated to file a registration statement on
Form S-1
registering such number of Huffs 6,611,998 shares as
Huff shall designate within ninety (90) days after
April 18, 2008. At such time as the Company becomes
eligible to file a registration statement on
Form S-3,
upon request from Huff, the Company is obligated to register the
remaining Huff shares not registered pursuant to the first
registration; provided, however, if the Company is not eligible
to file a registration statement on
Form S-3
by January 9, 2009, the Company is obligated to file a
registration statement on
Form S-1
to register the balance of the shares then held by Huff. Huff is
also entitled to unlimited piggyback rights, subject to certain
pro rata cutbacks in underwritten offerings for the account of
the Company.
The summary of terms of the special preferred stock as described
herein is qualified in its entirety by reference to the text of
the Certificate of Designation, which is filed as
Exhibit 3.1 to this report and incorporated by reference
herein.
As described in note 7 to the Companys Consolidated
and Combined Financial Statements included elsewhere herein, on
May 7, 2008, the Company delivered a notice to the lenders
under its $475 million Park Central loan exercising the
Companys conditional right to extend the maturity of the
loan for a six month period through January 6, 2008.
Exhibits
The documents set forth below are filed herewith or incorporated
herein by reference to the location indicated.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Certificate of Designation of Non-Voting Designated Preferred
Stock of the registrant
|
|
10
|
.1
|
|
Fourth Amended and Restated Limited Liability Company Operating
Agreement of FX Luxury Realty, LLC, dated as of March 3,
2008(1)
|
|
10
|
.2
|
|
Investment Agreement by and between the registrant and The Huff
Alternative Fund, L.P. and The Huff Alternative Parallel Fund,
L.P. dated as of January 9, 2008(2)
|
|
10
|
.3
|
|
Investment Agreement by and between the registrant and Robert
F.X. Sillerman, dated as of January 9, 2008(2)
|
|
10
|
.4
|
|
Call Agreement, dated as of March 3, 2008, by and between
19X, Inc. and the registrant(1)
|
|
10
|
.5
|
|
Letter Agreement, dated March 3, 2008, by and between 19X,
Inc. and the registrant and Form of Amendment No. 2 to
License Agreement by and between Elvis Presley Enterprises, Inc.
and FX Luxury Realty, LLC(1)
|
|
10
|
.6
|
|
First Amendment dated as of March 31, 2008 to Investment
Agreement by and between the registrant and The Huff Alternative
Fund, L.P. and The Huff Alternative Parallel Fund, L.P., dated
as of January 9, 2008(3)
|
|
10
|
.7
|
|
First Amendment dated as of March 31, 2008 to Investment
Agreement by and between the registrant and Robert F.X.
Sillerman, dated as of January 9, 2008
|
|
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
|
|
|
|
|
|
Filed herewith
|
|
(1)
|
|
Incorporated by reference to Amendment No. 1 to the
registrants Registration Statement on
Form S-1
(Registration
No. 333-149032),
filed with the Commission on March 3, 2008.
|
|
(2)
|
|
Incorporated by reference from the registrants Current
Report on Form
8-K
dated
January 9, 2008.
|
|
(3)
|
|
Incorporated by reference from the registrants Current
Report on Form
8-K
dated
March 31, 2008.
|
33
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
May 13, 2008
34
INDEX TO
EXHIBITS
The documents set forth below are filed herewith.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Certificate of Designation of Non-Voting Designated Preferred
Stock of the registrant
|
|
10
|
.7
|
|
First Amendment dated March 31, 2008 to Investment
Agreement by and between the registrant and Robert F.X.
Sillerman, dated as of January 9, 2008.
|
|
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
|
35
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