- Amended Annual Report (10-K/A)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____

Commission File No. 001-33902

Circle Entertainment Inc.

(Exact name of Registrant as specified in its charter)

Delaware		36-4612924
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

650 Madison Avenue

New York, New York 10022

(Address of Principal Executive Offices and Zip Code)

Registrant’s Telephone Number, Including Area Code: (212) 838-3100

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2009, based on the closing price of such stock on the Pink Sheets on such date, was $649,723.

As of April 9, 2010, there were 65,403,876 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference: None.

Explanatory Note

This Amendment No. 1 to the Annual Report on Form 10-K of Circle Entertainment Inc. (formerly known as FX Real Estate and Entertainment Inc. through January 11, 2011) for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on April 14, 2010, is being filed for purposes of amending and restating Item 9A(T). Controls and Procedures, including certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 that conform with the exact wording as provided in Item 601(b)(31) of Regulation S-K and having our principal financial officer and principal accounting officer sign the Annual Report on Form 10-K.

This Amendment No. 1 also includes our audited consolidated financial statements (as previously filed with the original Annual Report on Form 10-K), an updated signature page and currently dated certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002. The remainder of the Company’s original Annual Report on Form 10-K is unchanged. This Amendment No. 1 does not reflect events occurring after the filing of the original Annual Report on Form 10-K or modify or update those disclosures affected by subsequent events and should be read in conjunction with the original Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents to Financial Statements

	Page

FX Real Estate and Entertainment Inc.

Reports of Independent Registered Public Accounting Firms		3-5

Consolidated Balance Sheets as of December 31, 2009 and 2008		6

Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 and for the period from May 11, 2007 through December 31, 2007, and Combined Statements of Operations (Predecessor) for the period from January 1, 2007 through May 10, 2007		7

Consolidated Statement of Cash Flows for the year ended December 31, 2009 and 2008 and for the period from May 11, 2007 through December 31, 2007, and Combined Statements of Cash Flows (Predecessor) for the period from January 1, 2007 through May 10, 2007		8

Consolidated Statement of Stockholders’ Equity /(Deficit) for the year ended December 31, 2009 and 2008 and for the period from May 11, 2007 to December 31, 2007 and Combined Statement of Members’ Equity (Predecessor) for the period from January 1, 2007 through May 10, 2007		9

Notes to Consolidated/Combined Financial Statements		10

FX Real Estate and Entertainment Inc.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of FX Real Estate and Entertainment Inc.:

We have audited the accompanying consolidated balance sheets of FX Real Estate and Entertainment Inc. (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FX Real Estate and Entertainment Inc. at December 31, 2009, and the consolidated results of its operations and cash flows for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming FX Real Estate and Entertainment Inc. will continue as a going concern. As more fully discussed in Note 3 to the consolidated financial statements, the Company is in default under the mortgage loan, has limited available cash, has a working capital deficiency and will need to secure new financing or additional capital in order to pay its obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan as to these matters is also described in Note 3. These financial statements do not include adjustments that might result from the outcome of this uncertainty.

/s/ LL Bradford

Las Vegas, Nevada

April 14, 2010

FX Real Estate and Entertainment Inc.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of FX Real Estate and Entertainment Inc.:

We have audited the accompanying consolidated balance sheets of FX Real Estate and Entertainment Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year ended December 31, 2008 and for the period from May 11, 2007 to December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FX Real Estate and Entertainment Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and cash flows for the year ended December 31, 2008 and the period from May 11, 2007 to December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 4 to the consolidated financial statements, as of January 1, 2009, the Company retrospectively adopted new accounting guidance for noncontrolling interests in consolidated financial statements.

/s/ Ernst & Young LLP

New York, New York

March 30, 2009 except for Note 4, for which the date is

April 14, 2010

Report of Independent Registered Public Accounting Firm

To the Members of Metroflag BP, LLC, Metroflag Polo, LLC, Metroflag Cable, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC, and Metroflag Management, LLC:

We have audited the accompanying combined statements of operations, members’ equity, and cash flows for the period from January 1, 2007 through May 10, 2007 of Metroflag BP, LLC, Metroflag Polo, LLC, Metroflag Cable, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC, and Metroflag Management, LLC (collectively, “Metroflag”). These financial statements are the responsibility of Metroflag’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of Metroflag’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Metroflag’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations, members’ equity and cash flows of Metroflag BP, LLC, Metroflag Polo, LLC, Metroflag Cable, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC, and Metroflag Management, LLC for the period from January 1, 2007 through May 10, 2007 in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Las Vegas, Nevada

August 23, 2007

FX Real Estate and Entertainment Inc.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share data)

	December 31,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	343		$	2,659
Restricted cash		172			29,814
Marketable securities		—			4,231
Rent and other receivables, net of allowance for doubtful accounts of $162 at December 31, 2009 and $17 at December 31, 2008		379			79
Deferred financing costs, net		—			54
Prepaid expenses and other current assets		1,450			1,325

Total current assets		2,344			38,162
Investment in real estate:
Land		133,537			212,624
Building and improvements		32,859			32,816
Furniture, fixtures and equipment		690			730
Less: accumulated depreciation		(29,385	)		(27,370	)

Net investment in real estate		137,700			218,800
Acquired lease intangible assets, net		1,000			1,063

Total assets	$	141,044		$	258,025

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	38,489		$	10,321
Accrued license fees		—			10,000
Debt in default — note 5		454,000			475,000
Notes payable		—			391
Due to related parties		1,180			1,373
Other current liabilities		21			532
Unearned rent and related revenue		478			36

Total current liabilities		494,168			497,653
Related party debt		—			—
Other long-term liabilities		—			309

Total liabilities		494,168			497,962
Contingently redeemable stockholders’ equity		—			—
Stockholders’ equity (deficit):
Preferred stock, $0.01 par value: authorized 75,000,000 shares, 1 share issued and outstanding at December 31, 2009 and December 31, 2008, respectively		—			—
Common stock, $0.01 par value: authorized 300,000,000 shares, 63,841,377 and 51,992,417 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively		638			520
Additional paid-in-capital		300,480			299,142
Subscription receivable		(4	)		—
Accumulated deficit		(654,238	)		(539,554	)
Non-controlling interest		—			(45	)
Accumulated other comprehensive loss		—			—

Total stockholders’ equity (deficit)		(353,124	)		(239,937	)

Total liabilities and stockholders’ equity (deficit)	$	141,044		$	258,025

See accompanying notes to consolidated and combined financial statements

FX Real Estate and Entertainment Inc.

STATEMENTS OF OPERATIONS

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

							Consolidated			Combined
							Period from			Period from
	Consolidated			Consolidated			May 11, 2007			January 1, 2007
	Year Ended			Year Ended			Through			Through
	December 31,			December 31,			December 31,			May 10,
	2009			2008			2007			2007
Revenue	$	18,852		$	6,009		$	3,070		$	2,079

Operating expenses:
License fees		(10,000	)		10,000			10,000			—
Selling, general and administrative expenses		9,349			15,158			6,874			421
Depreciation and amortization expense		2,026			513			116			128
Operating and maintenance		4,768			2,592			276			265
Debt restructuring expense		4,290			—			—			—
Real estate taxes		1,886			615			194			153
Impairment of land		79,087			325,080			—			—
Impairment of capitalized development costs		—			10,683			12,672			—

Total operating expenses		91,406			364,641			30,132			967

Income (loss) from operations		(72,554	)		(358,632	)		(27,062	)		1,112

Interest income		18			386			814			113
Interest expense		(41,631	)		(49,040	)		(31,471	)		(14,557	)
Other income (expense)		(217	)		(41,670	)		(6,358	)		—
Loss from retirement of debt					—			—			(3,507	)
Equity in earnings (losses) of affiliate		—			—			(4,969	)		—
Income tax expense		(300	)		—			—			—
Loss from incidental operations		—			(12,881	)		(9,373	)		(7,790	)

Net loss	$	(114,684	)		(461,837	)		(78,419	)		(24,629	)
Less: Net loss attributable to non-controlling interest		—			22			680			—

Net loss attributable to FX Real Estate and Entertainment Inc.	$	(114,684	)	$	(461,815	)	$	(77,739	)	$	(24,629	)

Basic and diluted loss per share	$	(2.16	)	$	(9.67	)	$	(1.98	)

Basis and diluted average number of common shares outstanding		53,118,438			47,773,323			39,290,247

See accompanying notes to consolidated and combined financial statements

FX Real Estate and Entertainment Inc.

STATEMENTS OF CASH FLOWS

(amounts in thousands)

							Consolidated			Combined
							Period from			Period from
	Consolidated			Consolidated			May 11, 2007			January 1,
	Year Ended			Year Ended			Through			2007
	December 31,			December 31,			December 31,			Through
	2009			2008			2007			May 10, 2007
Cash flows from operating activities:
Net loss	$	(114,684	)	$	(461,837	)	$	(78,419	)	$	(24,629	)
Adjustments to reconcile net loss to cash used by operating activities:
Reversal of licensing fee due to termination of agreement		(10,000	)		—			—			—
Depreciation and amortization		2,026			16,386			10,983			8,472
Deferred financing cost amortization		54			8,328			6,760			41
Gain on sale of marketable securities		—			—			—			—
Loss on disposal of assets		91			—			—			—
Share-based payments		582			3,172			—			—
Loss on exercise of derivative		—			—			6,358			—
Impairment of available-for-sale securities		126			41,670			—			—
Impairment of land		79,088			325,080			—			—
Impairment of capitalized development costs					10,683			12,672			—
Equity in loss of an unconsolidated affiliate		—			—			4,969			36
Provision for accounts receivable allowance		145			(351	)		—			—
Changes in operating assets and liabilities:
Receivables		(445	)		575			120			(171	)
Other current and non-current assets		(215	)		(135	)		(573	)		(933	)
Accounts payable and accrued expenses		28,518			(427	)		2,985			(2,486	)
Accrued license fees		—			—			10,000			—
Due to related parties		(193	)		(1,650	)		1,188			22
Unearned revenue		442			36			(767	)		991
Other		(820	)		(260	)		770			27

Net cash used in operating activities		(15,285	)		(58,730	)		(22,954	)		(18,630	)

Cash flows provided by (used in) investing activities:
Restricted cash		29,642			45,394			934			11,541
Capitalized development costs					(9,024	)		(1,233	)		—
Development of real estate including land acquired		—			—			—			(45	)
Acquisitions of real estate		(47	)		(271	)		—			—
Proceeds from sale of marketable securities		4,105			—			—			—
Purchase of Riviera interests		—			—			(21,842	)		—
Purchase of shares in Riviera		—			—			(13,197	)		—
Purchase of additional interest in Metroflag		—			—			(172,500	)		—

Net cash provided by (used in) investing activities		33,700			36,099			(207,838	)		11,496

Cash flows provided by (used in) financing activities:
Proceeds from private placement of units		870			7,925			—			—
Payment of mortgage loan extension costs					(14,988	)		—			—
Repayment of related party debt					(7,054	)		—			—
Proceeds from sale of Marquis Jet cards		95			—			—			—
Repayment of notes					(30,284	)		—			—
Proceeds from rights offering and investment agreements, net					96,613			—			—
Preferred distribution to related party					(31,039	)		—			—
Members’ capital contributions		—			—			100,000			—
Issuance of common stock					2,570			2,000			—
Repayment of Margin loan plus interest		(741	)		—			—			—
Deferred financing costs					(1,669	)		(3,738	)		(10,536	)
Borrowings under loan agreements and notes payable					—			142,694			306,543
Retirement/repayment of mortgage loans		(21,000	)		—			—			(295,000	)
Contribution from minority interest		45			657			—			—
(Repayments of) proceeds from Members’ loans		—			—			(7,605	)		5,972

Net cash provided by (used in) financing activities		(20,731	)		22,731			233,351			6,979

Net increase/(decrease) in cash and equivalents		(2,316	)		100			2,559			(155	)
Cash and cash equivalents — beginning of period		2,659			2,559			—			1,643

Cash and cash equivalents — end of period	$	343		$	2,659		$	2,559		$	1,488

Supplemental cash flow disclosures:
Cash paid for interest	$	9,163		$	38,103		$	25,663		$	17,102
Cash paid for debt restructuring		4,290			—			—			—
Non-cash financing and investing activities:
Contributions of assets for membership interests	$	—		$	—		$	103,421			—

See accompanying notes to consolidated and combined financial statements

FX Real Estate and Entertainment Inc.

STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(amounts in thousands, except share data)

	Members’			Common Stock				Additional			Stock Subscription			Non-Controlling			Accumulated			Accumulated Other Comprehensive
	Equity			Shares		Amount		Paid-In-Capital			Receivable			Interest			Deficit			Loss			Total
Balance at January 1, 2007 (Predecessor)	$	(24,739	)		—	$	—	$	—		$	—		$	—		$	—		$	—		$	(24,739	)
Net loss		(24,629	)		—		—		—			—			—			—			—			(24,629	)

Balance at May 10, 2007 (Predecessor)	$	(49,368	)		—	$	—	$	—		$	—			—		$	—		$	—		$	(49,368	)

Balance at May 11, 2007	$	—			—	$	—	$	—		$	—		$	—		$	—		$	—		$	—
Capital contributions		—			202		—		219,781			—			—			—			—			219,781
Reorganization of FXRE		—			39,290,045		393		—			—			—			—			—			393
Net loss		—			—		—		—			—			(680	)		(77,739	)		—			(78,419	)
Unrealized loss on available for sale securities		—			—		—		—			—			—			—			(2,461	)		(2,461	)

Balance at December 31, 2007	$	—			39,290,247	$	393	$	219,781		$	—		$	(680	)	$	(77,739	)	$	(2,461	)	$	139,294
Rights offering		—			9,871,674		99		97,297			—			—			—						97,396
Termination of repurchase agreement		—			—		—		180			—			—			—			—			180
Private placement of units		—			2,264,289		23		7,187			—			—			—			—			7,210
Stock sale		—			500,000		5		2,565			—			—			—			—			2,570
Flag preferred distribution		—			—		—		(31,039	)		—			—			—			—			(31,039	)
Shares issued to independent directors		—			66,207		—		102			—			—			—			—			102
Stock option expense		—			—		—		3,069			—			—			—			—			3,069
Cash received from non-controlling interest		—			—		—		—			—			657			—			—			657
Unrealized loss on available for sale securities		—			—		—		—			—			—			—			2,461			2,461
Net loss		—			—		—		—			—			(22	)		(461,815	)		—			(461,837	)

Balance at December 31, 2008	$	—			51,992,417	$	520	$	299,142		$	—		$	(45	)	$	(539,554	)	$	—		$	(239,937	)
Private placement of units					11,848,960		118		756			—			—			—			—			874
Stock subscription receivable		—			—		—		—			(4	)		—			—			—			(4	)
Stock option expense		—			—		—		582			—			—			—			—			582
Cash received from non-controlling interest		—			—		—		—			—			45			—			—			45
Net loss		—			—		—		—			—						(114,684	)		—			(114,684	)
Balance at December 31, 2009	$	—			63,841,377	$	638	$	300,480		$	(4	)	$	0		$	(654,238	)	$	—		$	(353,124	)

See accompanying notes to consolidated and combined financial statements

FX Real Estate and Entertainment Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

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

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

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

In August 2008, FX Luxury Realty, LLC changed its name to FX Luxury, LLC, BP Parent, LLC changed its name to FX Luxury Las Vegas Parent, LLC, Metroflag BP, LLC changed its name to FX Luxury Las Vegas I, LLC and Metroflag Cable, LLC changed its name to FX Luxury Las Vegas II, LLC. The words “Metroflag” or “Metroflag entities” refer to FX Luxury Realty and its predecessors, including BP Parent, LLC, Metroflag BP, LLC, Metroflag Cable, LLC, Metroflag Polo, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC and Metroflag Management, LLC, the predecessor entities through which our historical business was conducted prior to September 27, 2007. “Las Vegas Subsidiaries” refers to BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC, each as renamed as indicated above. On November 5, 2009, the Las Vegas Subsidiaries were merged into FX Luxury Las Vegas I, LLC, which is referred to herein as the “Las Vegas Subsidiary”. Prior to November 5, 2009, “Las Vegas Subsidiaries” refers to BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC, each as renamed as indicated above. After November 5, 2009, “Las Vegas Subsidiaries” or “Las Vegas Subsidiary” refers to FX Luxury Las Vegas I, LLC, successor by merger to FX Luxury Las Vegas Parent, LLC and FX Luxury Las Vegas II, LLC.

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

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

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

2. Organization and Background

Business of the Company

The Company’s business consists of owning and operating 17.72 contiguous acres of land located at the southeast corner of Las Vegas Boulevard and Harmon Avenue in Las Vegas, Nevada. The property is currently occupied by a motel and several commercial and retail tenants with a mix of short and long-term leases. The Company had commenced design and planning for a redevelopment plan for the Las Vegas Property that included a hotel, casino, entertainment, retail, commercial and residential development project. As a result of the disruption in the capital markets and the economic downturn in the United States in general, and Las Vegas in particular, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Las Vegas Property and intended to consider alternative plans with respect to the development of the property. Since then, however, as more fully described below, the Las Vegas Subsidiary has defaulted on the $475 million mortgage loan secured by the Las Vegas Property. The Company continued commercial leasing activities until on June 23, 2009, when as a result of the default under the first mortgage loan, the first lien lenders had a receiver appointed to take control of the property and, as a consequence, the Las Vegas Subsidiary no longer manages or operates such property. As a result of the abandonment of the previously announced redevelopment plans, the Company recorded an impairment charge related to a write-off of $10.7 million for capitalized development costs that were no longer deemed to be recoverable as of December 31, 2008. As more fully described in note 7 below, as a result of the current global recession and financial crisis and based upon a valuation report obtained for the Las Vegas Property from an independent appraisal firm combined with certain assumptions made by management, the Company had recorded an impairment charge to land of $325.1 million in 2008, which charge reduced the carrying value of the Las Vegas Property to $218.8 million. The Company obtained a preliminary update of the appraisal as of June 30, 2009 and December 31, 2009 by the same firm and, as a result, has recorded an additional impairment charge of $79.1 million to the value of the land.

As a result of the default on the $475 million mortgage loan secured by the Las Vegas Property, the Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement, as described in Item 1., The Company’s Current Business and its Financial Distress. In either event, it is extremely unlikely the Company will receive any benefit as a consequence of the foregoing. The loss of the Las Vegas Property, which is substantially the entire business of the Company, would have a material adverse effect on the Company’s business, financial condition, prospects, and ability to continue as a going concern. If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.

Formation of the Company

FXLR was formed under the laws of the state of Delaware on April 13, 2007. The Company was inactive from inception through May 10, 2007.

On May 11, 2007, Flag Luxury Properties, LLC (“Flag”), a real estate development company in which Robert F.X. Sillerman and Paul C. Kanavos each owned an approximate 29% interest, contributed to the Company its 50% ownership interest in the Metroflag entities for all of the membership interests in the Company. The sale of assets by Flag was accounted for at historical cost as FXLR and Flag were entities under common control.

On June 1, 2007, Flag Leisure Group, LLC, a company in which Robert F.X. Sillerman and Paul C. Kanavos each beneficially own an approximate 33% interest and which is the managing member of Flag, sold to the Company all of its membership interests in RH1, LLC (“RH1”), which owns an aggregate of 418,294 shares of Riviera Holdings Corporation and 28.5% of the outstanding shares of common stock of Riv Acquisition Holdings, Inc. On such date, Flag also sold to the Company all of its membership interests in Flag Luxury Riv, LLC, which owns an additional 418,294 shares of Riviera Holdings Corporation and 28.5% of the outstanding shares of common stock of Riv Acquisition Holdings. With the purchase of these membership interests, FXLR acquired, through its interests in Riv Acquisitions Holdings, a 50% beneficial ownership interest in an option to acquire an additional 1,147,550 shares of Riviera Holdings Corporation at $23 per share. These options were exercised in September 2007. The total consideration for these transactions was $21.8 million paid in cash, a note for $1.0 million and additional contributed equity of $15.9 million for a total of $38.7 million. As a result of these transactions, the Company owns 1,410,363 shares of common stock (161,758 of which were put into trust for the benefit of the Company in October 2008) of Riviera Holdings Corporation (the “Riv Shares”) as of December 31, 2008. The sale of assets by Flag Leisure Group, LLC and Flag was accounted for at historical cost as the Company, Flag Leisure Group, LLC and Flag were entities under common control at the time of the transactions. Historical cost for these acquired interests equals fair values because the assets acquired comprised available for sale securities and a derivative instrument that are required to be reported at fair value in accordance with generally accepted accounting principles.

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

On September 26, 2007, CKX, Inc. (“CKX”) together with other holders of common membership interests in FXLR contributed all of their common membership interests in FXLR to FXRE in exchange for shares of common stock of FXRE.

This exchange is sometimes referred to herein as the “reorganization.” As a result of the reorganization, FXRE holds 100% of the outstanding common membership interests of FXLR.

On November 29, 2007, the Company reclassified its common stock on a basis of 194,515.758 shares of common stock for each share of common stock then outstanding.

On January 10, 2008, the Company became a publicly traded company as a result of the completion of the distribution of 19,743,349 shares of common stock to CKX’s stockholders of record as of December 31, 2007. This distribution is referred to herein as the “CKX Distribution.”

On December 24, 2009, the Company organized FXL, Inc., as a new wholly-owned subsidiary to own the Company’s interest in FXLR.

CKX Investment

On June 1, 2007, CKX contributed $100 million in cash to the Company in exchange for 50% of the common membership interests in the Company (the “CKX Investment”). CKX also agreed to permit Flag to retain a $45 million preferred priority distribution right which amount will be payable upon certain defined capital events.

As a result of the CKX investment on June 1, 2007 and the determination that Flag and CKX constituted a collaborative group representing 100% of FXLR’s ownership interests, the Company recorded its assets and liabilities at the combined accounting bases of the respective investors. FXLR’s net asset base represents a combination of 50% of the assets and liabilities at historical cost, representing Flag’s predecessor ownership interest, and 50% of the assets and liabilities at fair value, representing CKX’s ownership interest, for which it contributed cash on June 1, 2007. Along with the accounting for the subsequent acquisition of the remaining 50% interest in Metroflag (see below) at fair value, the assets and liabilities were ultimately adjusted to reflect an aggregate 75% fair value.

On September 26, 2007, CKX acquired an additional 0.742% of the outstanding capital stock of the Company for a price of $1.5 million. The proceeds of this investment, together with an additional $0.5 million that was invested by Flag, were used by the Company for working capital and general corporate purposes.

Terminated License Agreements

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

Metroflag Acquisition

On May 30, 2007, the Company entered into an agreement to acquire the remaining 50% ownership interest in the Metroflag entities that it did not already own.

On July 6, 2007, FXLR acquired the remaining 50% of the Metroflag entities, which collectively own the Las Vegas Property, from an unaffiliated third party. As a result of this purchase, the Company now owns 100% of Metroflag, and therefore the Las Vegas Property. The total consideration paid by FXLR for the remaining 50% interest in Metroflag was $180 million, $172.5 million of which was paid in cash at closing and $7.5 million of which was an advance payment made in May 2007 (funded by a $7.5 million loan from Flag). The cash payment at closing was funded from $92.5 million of cash on hand and $105 million in additional borrowings, which was reduced by $21.3 million deposited into a restricted cash account to cover debt service commitments and $3.7 million in debt issuance costs. The $7.5 million loan from Flag was repaid on July 9, 2007.

The Repurchase Agreement and Contingently Redeemable Stock

In connection with the CKX Investment, CKX, FXRE, FXLR, Flag, Robert F.X. Sillerman, Paul Kanavos and Brett Torino entered into a Repurchase Agreement dated June 1, 2007, as amended on June 18, 2007 and September 27, 2007. The purpose of the Repurchase Agreement was to provide a measure of valuation protection for the 50%-interest in the Company acquired by CKX on June 1, 2007 (the “Purchased Securities”) for $100 million, under certain limited circumstances. Specifically, if no “Termination Event” was to occur prior to the second anniversary of the CKX Distribution, which were events designed to indicate that the value of the CKX Investment had been confirmed, each of Messrs. Sillerman, Kanavos and Torino would be required to sell back such number of their shares of the Company’s common stock to the Company at a price of $.01 per share as will result in the shares that were received by the CKX stockholders in the CKX Distribution having a value of at least $100 million.

The interests subject to the Repurchase Agreement were recorded as contingently redeemable members’ interest in accordance with FASB Emerging Issues Task Force Topic D-98: Classification and Measurement of Redeemable Securities. This statement requires the issuer to estimate and record value for securities that are mandatorily redeemable when that redemption is not in the control of the issuer. The value for this instrument has been determined based upon the redemption price of par value for the expected 18 million shares of common stock of FXRE subject to the Repurchase Agreement. At December 31, 2007, the value of the interest subject to redemption was recorded at the maximum redemption value of $180,000.

In the first quarter of 2008, a termination event as defined in the Repurchase Agreement was deemed to have occurred as the average closing price of the common stock of FXRE for the consecutive 30-day period following the date of the CKX Distribution (January 10, 2008) exceeded a price per share that attributed an aggregate value to the Purchased Securities of greater than $100 million. As a result of the termination event and resulting termination of the Repurchase Agreement, the shares are no longer redeemable. As of December 31, 2008, the Company has reclassified to stockholders’ equity the contingently redeemable stockholders’ equity included on the consolidated balance sheet as of December 31, 2007.

Rights Offering and Related Investment Agreements

On March 11, 2008, the Company commenced a registered rights offering pursuant to which it distributed to certain of its stockholders, at no charge, transferable subscription rights to purchase one share of its common stock for every two shares of common stock owned as of March 6, 2008, the record date for the rights offering, at a cash subscription price of $10.00 per share. As of the commencement of the offering, the Company had 39,790,247 shares of common stock outstanding. As part of the transaction that created the Company in June 2007, the Company agreed to undertake the rights offering, and certain stockholders who own, in the aggregate, 20,046,898 shares of common stock, waived their rights to participate in the rights offering. As a result, the rights offering was made only to stockholders who owned, in the aggregate, 19,743,349 shares of common stock as of the record date, resulting in the distribution of rights to purchase up to 9,871,674 shares of common stock in the rights offering. The rights offering expired on April 18, 2008.

The rights offering was made to fund certain obligations, including short-term obligations described elsewhere herein. On January 9, 2008, Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, and The Huff Alternative Fund, L.P. and The Huff Alternative Parallel Fund, L.P. (collectively, “Huff”), one of the Company’s principal stockholders, entered into investment agreements with the Company, pursuant to which they agreed to purchase shares that were not otherwise subscribed for in the rights offering, if any, at the same $10.00 per share subscription price. In particular, under Huff’s investment agreement with the Company, as amended, Huff agreed to purchase the first $15 million of shares (1.5 million shares at $10 per share) that were not subscribed for in the rights offering, if any, and 50% of any other unsubscribed shares, up to a total investment of $40 million; provided, however, that the first $15 million was reduced by $11.5 million, representing the aggregate value of the 1,150,000 shares acquired by Huff upon the exercise on April 1, 2008 of its own subscription rights in the offering; and provided further that Huff was not obligated to purchase any shares beyond its initial $15 million investment in the event that Mr. Sillerman did not purchase an equal number of shares at the $10 price per share pursuant to the terms of his investment agreement with the Company. Under his investment agreement with the Company, Mr. Sillerman agreed to subscribe for his full pro rata amount of shares in the rights offering (representing 3,037,265 shares), and agreed to purchase up to 50% of the shares that were not sold in the rights offering after Huff’s initial $15 million investment at the same subscription price per share offered in the offering.

On March 12, 2008, Mr. Sillerman subscribed for his full pro rata amount of shares resulting in his purchase of 3,037,265 shares. On May 13, 2008, pursuant to and in accordance with the terms of the investment agreements described above, Mr. Sillerman and Huff purchased an aggregate of 4,969,112 shares that were not otherwise sold in the offering. The Company generated aggregate gross proceeds of approximately $98.7 million from the rights offering and from sales under the related investment agreements described above. In conjunction with the shares purchased by Huff pursuant to its investment agreement with the Company, Huff purchased one share of the Company’s Non-Voting Designated Preferred Stock (referred to hereafter as the “special preferred stock”) for a purchase price of $1.00.

Under the terms of the special preferred stock, Huff is entitled to appoint a member to the Company’s Board of Directors so long as it continues to beneficially own at least 20% of the 6,611,998 shares of the Company’s common stock it received and/or acquired from the Company, consisting of (i) 2,802,442 shares received by Huff in the CKX Distribution, (ii) 1,150,000 shares acquired by Huff in the rights offering, and (iii) 2,659,556 shares acquired by Huff under the investment agreement described above. Huff appointed Bryan Bloom as a member of the Company’s Board of Directors effective May 13, 2008. Mr. Bloom’s designation as director was withdrawn on April 8, 2010 and no replacement has been named.

In connection with Huff’s purchase of the shares of common stock and the special preferred stock in the second quarter of 2008, the Company paid Huff a commitment fee of $715,000, and the parties entered into a registration rights agreement.

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

Conditional Option Agreement with 19X

On February 28, 2008, the Company entered into an Option Agreement with 19X, Inc. pursuant to which, in consideration for aggregate annual payments totaling $105 million payable over five years in four equal cash installments per year, the Company would have the right (but not the obligation) to acquire an 85% interest in the Elvis Presley business currently owned and operated by CKX through EPE at an escalating price ranging from $650 million to $850 million over the period beginning on the date of the closing of 19X’s acquisition of CKX through 72 months following such date, subject to extension under certain circumstances as described below.

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

Private Placement of Common Stock Units and Common Stock

In September 2009, the Company entered into subscription agreements to raise $250,000 from Robert F.X. Sillerman, Paul Kanavos, and/or greater than 10% stockholders. They purchased an aggregate of 4,166,668 shares at a purchase price of $0.06 per unit (such purchase price representing the average trading price per share of the Company’s common stock as reported on the Pink Sheets over the 30 day period immediately preceding the date of the subscription agreements). Each unit consists of (x) one share of the Company’s common stock, (y) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.07 per share and (z) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.08 per share. The warrants are exercisable for a period of seven years and are identical in all respects except for their exercise prices.

On November 5, 2009, the Company entered into subscription agreements with Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President and a director, and his spouse, Dayssi Olarte de Kanavos, and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, pursuant to which such parties agreed to purchase an aggregate of 4,166,667 units at a purchase price of $0.09 per unit (such purchase price representing the average trading price per share of the Company’s common stock as reported on the Pink Sheets over the 30-day period immediately preceding the date of the subscription agreements). Each unit consists of (x) one share of the Company’s common stock, (y) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.10 per share and (z) a warrant to purchase one share of the Company’s common stock at an exercise price of $0.11 per share. The warrants are exercisable for a period of seven years and are identical in all respects except for their exercise prices. The aggregate proceeds to the Company from the sale of the units pursuant to the subscription agreements were $375,000. The funding of each purchase occurred on November 6, 2009.

On December 24, 2009, the Company sold an aggregate of 3,515,625 shares of its common stock to Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President, and his spouse Dayssi Olarte de Kanavos and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, upon their exercise of a like number of Company warrants. The Company received aggregate proceeds of $250,000 from the exercise of the warrants. Mrs. Sillerman, Mr. Kanavos and his spouse and TTERB Living Trust each purchased 1,171,875 shares of common stock upon the exercise of a like number of warrants for an aggregate exercise price of $83,333.33. The exercise price of the warrants for 1,041,667 shares was $0.07 per share, while the exercise price of the warrants for the remaining 130,208 shares was $0.08 per share.

Because the foregoing private placements of common stock units involved certain of the Company’s directors and greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors. The Company used the proceeds from all of the private placements to fund working capital requirements and for general corporate purposes.

3. Going Concern

The accompanying consolidated financial statements are prepared assuming that the Company will continue as a going concern and contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. As discussed in notes 2 and 5, the Las Vegas Subsidiary is in default under the $475 million mortgage loan secured by the Las Vegas Property as a result of the failure to make repayment at the maturity date on January 6, 2009. The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement, as described below. In either event, it is extremely unlikely the Company will receive any benefit as a consequence of the foregoing. The loss of the Las Vegas Property, which is substantially the entire business of the Company, would have a material adverse effect on the Company's business, financial condition, prospects, and ability to continue as a going concern. If the Company is to continue, then a new or different business will need to be developed and there is no assurance that such a business could or would be possible or that the Company could obtain the necessary financing to allow implementation of such business.

The Las Vegas Subsidiary has agreed to file a chapter 11 bankruptcy proceeding under either the Old Lock Up Agreement (as described in Item 1, “Old Lock Up Agreement”) or the New Lock Up Agreement (as described in Item 1, “New Lock Up Agreement”), pursuant to which the debtor would be liquidated and the Company will no longer have an interest in the Las Vegas Property, which constitutes substantially all of the Company’s business. As of the date hereof, the New Lock Up Agreement has been terminated and the parties under the Old Lock Up Agreement are pursuing the chapter 11 prepackaged bankruptcy in accordance with its terms. The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in Item 1.

We have received opinions from our auditors expressing substantial doubt as to our ability to continue as a going concern. Investors are encouraged to read the information set forth herein in order to better understand the financial condition of, and risks of investing in, the Company.

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

4. Summary of Significant Accounting Policies

Cash and Cash Equivalents

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

Restricted Cash

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

Marketable Securities

Marketable securities at December 31, 2008 and 2007 consist of the Riv Shares owned by FXRE. These securities are classified as available for sale in accordance with the provision of Financial Accounting standards concerning Accounting for Certain Investments in Debt and Equity Securities and accordingly are carried at fair value. Based on the Company’s evaluation of the underlying reasons for the decline in value associated with the Riv Shares, including weakening conditions in the Las Vegas market where Riviera Holdings Corporation operates, and its uncertain ability to hold the securities for a reasonable amount of time sufficient for an expected recovery of fair value, the Company determined that the losses were other-than-temporary as of December 31, 2009 and 2008 and recognized impairment losses of $0.2 million and $41.7 million, respectively, that is included in other expense in the accompanying statements of operations for the years ended December 31, 2009 and 2008. Prior to June 30, 2008, the Company did not consider the losses to be other-than-temporary and reported unrealized gains and losses in other comprehensive income as a separate component of stockholders’ equity.

Fair Value of Financial Instruments

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

The Company has a policy and also is required by its lenders to use derivatives to partially offset the market exposure to fluctuations in interest rates. In accordance with accounting standards the Company recognizes these derivatives on the balance sheet at fair value and adjusts them on a quarterly basis. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company does not enter into derivatives for speculative or trading purposes.

The carrying value of the Company’s accounts payable and accrued liabilities approximates fair value due to the short-term maturities of these instruments. The carrying value of the Company’s variable-rate note payable is considered to be at fair value since the interest rate on such instrument re-prices monthly based on current market conditions.

Rental Revenue

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

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

Real Estate Investments

Land, buildings and improvements are recorded at cost. All specifically identifiable costs related to development activities were historically capitalized as capitalized development costs on the consolidated balance sheet. The capitalized costs represented pre-development costs essential to the development of the property and include designing, engineering, legal, consulting, obtaining permits, construction, financing, and travel costs incurred during the period of development. The Company assesses capitalized development costs for recoverability periodically and when changes in development plans occur. In the fourth quarter of 2007, the Company recorded an impairment charge related to a write-off of approximately $12.7 million for capitalized costs that were deemed to not be recoverable based on changes made to the Company’s development plans. The year ended December 31, 2008 also included an impairment charge of $10.7 million related to the write-off of capitalized development costs as a result of the Company’s determination in the third quarter of 2008 not to proceed with our originally proposed plan for the redevelopment plan of the Las Vegas Property.

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

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

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

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

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

The Company follows the provisions of Financial Accounting Standards concerning Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance with the accounting standards, the Company reviews their real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based upon expected undiscounted cash flows from the property. The Company determines impairment by comparing the property’s carrying value to an estimate of fair value. In the event that the carrying amount of a property is not recoverable and exceeds its fair value, the Company will write down the asset to fair value. As a result of an impairment test in 2008, the Company recorded an impairment charge of $325.1 million. The Company obtained a preliminary update of the appraisal as of June 30, 2009 and December 31, 2009 by the same firm and, as a result, has recorded an additional impairment charge of $79.1 million to the value of the land. The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement. As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustee’s sale or a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement. The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1., The Company’s Current Business and its Financial Distress.

Loss Per Share/Common Shares Outstanding

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

Incidental Operations

The Company follows the provisions of Financial Accounting Standards concerning Accounting for Costs and Initial Operations of Real Estate Projects to account for certain operations of Metroflag. In accordance with accounting standards, these operations are considered “incidental,” and as such, for each entity, when the incremental revenues exceed the incremental costs, such excess is accounted for as a reduction of capitalized costs of the redevelopment project.

In late September 2008, the Company determined not to proceed with its originally proposed plan for the redevelopment of the Las Vegas Property and to continue the site’s current commercial leasing activities. As a result, effective October 1, 2008, the Company will no longer classify these operations of Metroflag as incidental operations. Therefore, all operations will be included as part of income (loss) from operations.

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

							Predecessor
	Year Ended			May 11-			January 1-
(amounts in thousands)	December 31,			December 31,			May 10,
	2008			2007			2007
Revenues	$	13,474		$	7,854		$	5,326
Depreciation		(15,873	)		(10,867	)		(8,343	)
Operating & other		(10,482	)		(6,360	)		(4,773	)

Net loss	$	(12,881	)	$	(9,373	)	$	(7,790	)

Deferred Financing Costs

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

Share-Based Payments

In accordance with Financial Accounting Standards concerning Share-Based Payment , the fair value of stock options is estimated as of the grant date based on a Black-Scholes option pricing model. Judgment is required in determining certain of the inputs to the model, specifically the expected life of options and volatility. As a result of the Company’s short operating history, no reliable historical data is available for expected lives and forfeitures. The Company estimates the expected life of its stock option grants at the midpoint between the vesting dates and the end of the contractual term. This methodology is known as the simplified method and is used because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. We estimated forfeitures based on management’s experience. The expected volatility is based on an analysis of comparable public companies operating in the Company’s industry.

Income Taxes

In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at the time. The Company’s effective tax rate is based on expected income, statutory rates and permanent differences applicable to the Company in the various jurisdictions in which the Company operates.

For the years ended December 31, 2008 and 2007, the Company did not record a provision for income taxes because the Company has incurred taxable losses since its formation in 2007. As it has no history of generating taxable income, the Company reduces any deferred tax assets by a full valuation allowance. For the year ended December 31, 2009, the Company did record income tax expense due to an estimated gain on a partnership transfer with negative basis from FXLR LLC to FXL LLC resulting in an estimated alternative minimum taxable income of $1.5 million. The alternative minimum tax would be estimated at $0.3 million at the applicable tax rate.

The Company does not have any uncertain tax positions and does not expect any reasonably possible material changes to the estimated amount of liability associated with its uncertain tax positions through December 31, 2009.

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

Risks and Uncertainties

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

Use of Estimates

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

Impact of Recently Issued Accounting Standards

The Company adopted Financial Accounting Standards concerning Fair Value Measurements . The accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of the accounting standard are effective for the Company beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The Company has adopted the accounting standard for its marketable securities (see note 2, Formation of the Company ). The Company’s marketable securities qualify as level one financial assets in accordance with accounting standards as they are traded on an active exchange market and are fair valued by obtaining quoted prices. The Company does not have any level two financial assets or liabilities that require significant other observable or unobservable inputs in order to calculate fair value. The Company’s interest rate cap agreement (see note 9) qualifies as a level three financial asset in accordance with accounting standards as of December 31, 2009; however, the balance as of December 31, 2008 and changes in the period ended December 31, 2008 did not have a material effect on the Company’s financial position or operations. The Company does not have any other level three financial assets or liabilities.

The Company adopted Financial Accounting Standards concerning The Fair Value Option for Financial Assets and Financial Liabilities , providing companies with an option to report selected financial assets and liabilities at fair value. The accounting standard also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The accounting standard is effective for fiscal years beginning after November 15, 2007. Effective January 1, 2008 the Company elected not to report any additional assets and liabilities at fair value.

The Company adopted the provisions of Financial Accounting Standards concerning Fair Value Measurements on January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The accounting standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company’s marketable securities qualified as level one financial assets in accordance with accounting standards as they were traded on an active exchange market and were fair valued by obtaining quoted prices. The Company does not have any level two financial assets or liabilities that require significant other observable or unobservable inputs in order to calculate fair value. The Company does not have any other level three financial assets or liabilities. The adoption of the accounting standards did not affect the Company’s historical consolidated financial statements.

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

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

The Company adopted accounting standards concerning, Business Combinations and accounting standards concerning Noncontrolling Interests in Consolidated Financial Statements , on January 1, 2009. These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. The adoption of accounting standards concerning business combinations will change the Company’s accounting treatment for business combinations on a prospective basis. The Company has completed its assessment of the impact of the accounting standard on its consolidated financial statements and has concluded that the statement has not had a significant impact on the Company’s consolidated financial statements. The Company’s adoption of accounting standards concerning noncontrolling interests has no significant impact for its existing noncontrolling interest because the impact is limited to presentation and disclosure in the Company’s financial statements. The prior period has been restated to conform to the 2009 presentation as accounting standards require retrospective application of the presentation and disclosure requirements to all periods presented. A prospective change is that future changes in noncontrolling interests are accounted for as equity transactions, unless the change results in a loss of control.

In April 2009, the Company adopted a staff position concerning “Interim Disclosures about Fair Value of Financial Instruments”. The staff position and bulletin amend previous standards concerning “Disclosures about Fair Value of Financial Instruments,” to require disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The staff position and bulletin are effective for interim reporting periods ending after June 15, 2009. The Company adopted the staff position and bulletin as of September 30, 2009, as required. The adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the Company adopted staff positions concerning “Recognition and Presentation of Other-Than-Temporary Impairments”, which amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The staff positions do not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The staff positions are effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the staff positions as of September 30, 2009, as required. The adoption of the staff positions did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the Company adopted a staff position concerning “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. The staff position provides additional guidance for estimating fair value in accordance with accounting standards concerning “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. The staff position also includes guidance on identifying circumstances that indicate a transaction is not orderly. The staff position is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the staff position as of September 30, 2009, as required. The adoption of the staff position did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the Company adopted a staff position concerning “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, which amends and clarifies prior accounting standards, “Business Combinations”, to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The staff position is effective for all assets acquired or liabilities assumed arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company expects that the adoption of the staff position will have an impact on its consolidated financial statements, if the Company acquires companies in the future.

In May 2009, the Company adopted accounting standards concerning “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, under the new accounting standard, an entity is required to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The accounting standard does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. The new accounting standard is effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively. The Company adopted the accounting standard as of September 30, 2009, as required. The adoption of the accounting standard did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued accounting standards concerning “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of prior FASB Statements, which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). The accounting standard establishes the FASB Accounting Standards Codification TM as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The accounting standard is effective for most financial statements issued for interim and annual periods ending after September 15, 2009. The accounting standard primarily is a codification of existing generally accepted accounting principles, the Company does not believe the standard will have an effect on the Company’s financial position or statement of operations.

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

Reclassifications

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

5. Debt and Notes Payable

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

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

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

On January 6, 2009, following the Las Vegas Subsidiaries’ failure to repay the Loan at maturity, the first lien lenders under the Mortgage Loan delivered their demand for repayment of all of the obligations owed to them under the loan, including the first lien principal amount of $280 million. On January 30, 2009, the first lien lenders seized the cash collateral reserve accounts established under the Loan from which the Las Vegas Subsidiaries had been drawing working capital funds to meet ordinary expenses, including operating the Las Vegas Property, and applied $21 million of that amount to the outstanding principal under the first lien loan. The Company operated the Las Vegas Property through its Las Vegas Subsidiaries until June 23, 2009, when a receiver was appointed as a result of the first lien lenders exercising remedies under the loan default (see Item 3, Legal Proceedings for a description of the receiver’s powers pursuant to the court order appointing him). After the Las Vegas Subsidiaries’ default on the mortgage loan on January 6, 2009 and until June 23, 2009, the property revenues were paid into a collateral account maintained under the supervision of the first lien lender and the Company applied for disbursements to pay for expenses incurred in connection with property operations. After that date, the receiver was in charge of operating, leasing, and managing the property, and the Company was no longer involved in such activities. For the period in which the receiver was in charge, the Company’s results are reported in reliance on the financial records maintained by the receiver.

As a result of such default and prior to the receiver’s appointment, on April 9, 2009, the first lien lenders sent a Notice of Breach and Election to Sell, initiating the trustee sale procedure against the Las Vegas Property. Under Nevada law, the Las Vegas Property may be sold in a trustee sale to satisfy the first lien lenders’ obligations secured by the property provided the lenders have satisfied the Nevada procedures and further provided that the sale has not been stayed through bankruptcy or other filings or by a consensual delay by such lenders. Although the second lien portion of the mortgage loans, which portion is $195 million, is also in default, pursuant to the inter-creditor agreement among the first and second lien lenders, the second lien lenders are restricted from exercising their remedies so long as the first lien lenders continue exercising their remedies.

On July 13, 2009, the Las Vegas Subsidiary received a Notice of Trustee’s Sale dated July 7, 2009, pursuant to which the trustee will cause the Las Vegas Property to be sold to the highest bidder for cash so as to satisfy the outstanding obligations to the first lien lenders secured by the property. Such proposed sale was initially scheduled for September 9, 2009 and has since been adjourned multiple times as follows: to October 21, 2009, November 18, 2009, December 22, 2009, February 3, 2010, March 25, 2010, and April 22, 2010, and shall remain adjourned as long as either the Old Lock Up Agreement or New Lock Up Agreement remains effective.

The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to a lock up agreement with the first lien lenders and/or the second lien lenders under the mortgage loan, as described below. In either event, it is extremely unlikely the Company will receive any benefit as a consequence of the foregoing.

The Las Vegas Subsidiary has agreed to file a chapter 11 bankruptcy proceeding under either the Old Lock Up Agreement for the New Lock Up Agreement, pursuant to which the debtor would be liquidated and the Company will no longer have an interest in the Las Vegas Property, which constitutes substantially all of the Company’s business. As of the date hereof, the New Lock Up Agreement has been terminated and the parties under the Old Lock Up Agreement are pursuing the chapter 11 prepackaged bankruptcy in accordance with its terms. The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1., The Company’s Current Business and its Financial Distress.

At December 31, 2009, interest rates on the Mortgage Loan were at one-month LIBOR plus applicable margins of 50 basis points on the $250 million tranche; 300 basis points on the $30 million tranche; and 800 basis points on the $195 million tranche; the effective interest rates on each tranche at December 31, 2008 were 5.75%, 8.25% and 13.25%, respectively, including 2% default rate on each of the tranches which was effective since the Mortgage Loan went into default.

As a result of the global recession and financial crisis and based upon a valuation report obtained for the Las Vegas Property from an independent appraisal firm combined with certain assumptions made by management, the Company recorded an impairment charge to land of $325.1 million as of December 31, 2008. This charge reduced the carrying value of the Las Vegas Property to its then estimated fair value of $218.8 million. The global financial crisis has had a particularly negative impact on the Las Vegas real estate market, including a significant reduction in the number of visitors and per visitor spending, the abandonment of and/or loan defaults related to several major new hotel and casino development projects as well as publicly expressed concerns regarding the financial viability of several of the largest hotel and casino operators in the Las Vegas market. These factors combined with the lack of availability of financing for development has resulted in a near cessation of land sales on the Las Vegas strip. Despite early signs of stabilization in the first quarter, the economy continued to deteriorate in the Las Vegas market due to high unemployment and foreclosure rates and a decrease in visitation volume and less spend per visitor, and as a result, management believes there are new indicators that the recoverable amount of the Las Vegas Property may not exceed its carrying value warranting further impairment of the Las Vegas Property. The Company obtained a preliminary update of the appraisal as of June 30 and December 31, 2009 by the same firm and, as a result, had recorded an additional impairment charge of $79.1 million to the value of the land. The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement. As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustee’s sale or a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement. The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1, The Company’s Current Business and its Financial Distress.

Bear Stearns Loan — On September 26, 2007, the Company obtained a $7.7 million margin loan from Bear Stearns, which, along with the CKX loan (see note 5), was used to fund the exercise of the Riv Option to acquire an additional 573,775 shares of Riviera Holdings Corporation’s common stock at a price of $23 per share. In total, 992,069 of the Company’s shares of Riviera common stock are pledged as collateral for the margin loan with Bear Stearns. The loan originally required maintenance margin equity of 40% of the shares’ market value and bears interest at LIBOR plus 100 basis points. As of December 31, 2008, the Company made payments of approximately $7.3 million to pay down the margin loan in conjunction with these loan requirements. On December 31, 2008, the effective interest rate on this loan was 2.33% and the amount outstanding, including accrued interest of $0.3 million, was $0.7 million. On November 3, 2008, the Company was advised that the margin requirement was raised to 50% and would be further raised to 75% on November 17, 2008, provided that if the price of a share of Riviera Holdings Corporation common stock fell below $3.00, the loan would need to be repaid. On November 11, 2008, the closing price of Riviera Holdings Corporation’s common stock fell below $3.00 per share, resulting in the requirement that the Company repay all amounts outstanding under the loan. From January 8, 2009 until January 23 2009, the Company sold 268,136 Riviera common shares and repaid all amounts outstanding under the margin loan. As of March 27, 2009, the Company had sold all but 115,558 of our Riviera shares.

Please see note 6 for a description of the CKX loan and other related party debt.

Predecessor

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

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

6. Related Party Debt

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

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

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

7. Impairment of Land

As a result of the global recession and financial crisis and based upon a valuation report obtained for the Las Vegas Property from an independent appraisal firm combined with certain assumptions made by management, the Company recorded an impairment charge to land of $325.1 million as of December 31, 2008. This charge reduced the carrying value of the Las Vegas Property to its then estimated fair value of $218.8 million. The global financial crisis has had a particularly negative impact on the Las Vegas real estate market, including a significant reduction in the number of visitors and per visitor spending, the abandonment of and/or loan defaults related to several major new hotel and casino development projects as well as publicly expressed concerns regarding the financial viability of several of the largest hotel and casino operators in the Las Vegas market. These factors combined with the lack of availability of financing for development has resulted in a near cessation of land sales on the Las Vegas strip. Despite early signs of stabilization in the first quarter, the economy continued to deteriorate in the Las Vegas market due to high unemployment and foreclosure rates and a decrease in visitation volume and less spend per visitor, and as a result, management believes there are new indicators that the recoverable amount of the Las Vegas Property may not exceed its carrying value warranting further impairment of the Las Vegas Property. The Company obtained a preliminary update of the appraisal as of June 30 and December 31, 2009 by the same firm and, as a result, had recorded an additional impairment charge of $79.1 million to the value of the land. The Company believes that the Las Vegas Property will be liquidated, either through a trustee’s sale in accordance with the procedures under Nevada law or through a bankruptcy filing pursuant to either the New Lock Up Agreement or the Old Lock Up Agreement. As a result, the Company believes it is highly unlikely that the Company will receive any benefit from either a trustee’s sale or a bankruptcy filing pursuant to the New Lock Up Agreement or the Old Lock Up Agreement. The description of the Old Lock Up Agreement, the New Lock Up Agreement, and the Standstill Agreement (pursuant to which the Old Lock Up Agreement was held in abeyance while the parties pursued the New Lock Up Agreement) is set forth in the applicable sections of Item 1., The Company’s Current Business and its Financial Distress.

8. Terminated License Agreements with Related Parties

On June 1, 2007, the Company entered into license agreements with Elvis Presley Enterprises, Inc., an 85%-owned subsidiary of CKX, Inc. [NASDAQ: CKXE], and Muhammad Ali Enterprises LLC, an 80%-owned subsidiary of CKX, which allowed the Company to use the intellectual property and certain other assets associated with Elvis Presley and Muhammad Ali in the development of its real estate and other entertainment attraction-based projects. The Company’s license agreement with Elvis Presley Enterprises granted the Company, among other rights, the right to develop one or more hotels as part of the master plan of Elvis Presley Enterprises, Inc. to redevelop the Graceland property and surrounding areas in Memphis, Tennessee.

Under the terms of the license agreements, we were required to pay EPE and MAE a specified percentage of the gross revenue generated at the properties that incorporate the Elvis Presley and Muhammad Ali intellectual property. In addition, the Company was required to pay a guaranteed annual minimum royalty payment (against royalties payable for the year in question) of $10 million in each of 2007, 2008, and 2009, $20 million in each of 2010, 2011, and 2012, $25 million in each of 2013, 2014, 2015 and 2016, and increasing by 5% for each year thereafter. The initial payment (for 2007) under the license agreement, as amended, was paid on April 1, 2008, with proceeds from the rights offering. The guaranteed annual minimum royalty payments for 2008 in the aggregate amount of $10 million were due on January 30, 2009.

On March 9, 2009, following the Company’s failure to make the $10 million annual guaranteed minimum royalty payments for 2008, the Company entered into a Termination, Settlement and Release agreement with EPE and MAE, pursuant to which the parties agreed to terminate the Elvis Presley and Muhammad Ali license agreements and to release each other from all claims related to or arising from such agreements. In consideration for releasing the Company from any claims related to the license agreements, EPE and MAE will receive 10% of any future net proceeds or fees received by the Company from the sale and/or development of the Las Vegas Property, up to a maximum of $10 million. The Company has the right to buy-out this participation right at any time prior to April 9, 2014 for a payment equal to (i) $3.3 million plus interest at 7% per annum, calculated from year 3 until repaid, plus (ii) 10% of any net proceeds received from the sale of some or all of the Las Vegas Property during such buy-out period and for six months thereafter, provided that the amount paid under clauses (i) and (ii) shall not exceed $10 million.

Accounting for Minimum Guaranteed License Payments

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

9. Acquired Lease Intangibles

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

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

	December 31, 2009			December 31, 2008			December 31, 2007
Assets
Above-market leases	$	582		$	582		$	582
In-place leases		1,320			1,320			1,320
Accumulated amortization		(902	)		(839	)		(680	)

Net	$	1,000		$	1,063		$	1,222

Liabilities
Below-market leases	$	111		$	111		$	111
Accumulated accretion		(104	)		(98	)		(72	)

Net	$	7		$	13		$	39

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

	Amortization		Minimum
	Expense		Rent
	(in thousands)
Years Ending December 31,
2010	$	57	$	5
2011		52		2
2012		50		–
2013		50		–
2014		25		–

10. Derivative Financial Instruments

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

11. Commitments

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

	(in thousands)
Years Ending December 31,
2010	$	500
2011		514
2012		520
2013		219
2014		219
Thereafter		—

Total	$	1,972

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

	(in thousands)
Year Ending December 31,
2010	$	0
2011		0
2012		0
2013		0
2014		0
Thereafter		—

Total	$	0

12. Stockholders’ Equity

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

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

13. Share-Based Payments

Equity Incentive Plan

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

Executive Equity Incentive Plan

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

Stock Option Grants

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

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

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

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

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

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

The Company estimated the original weighted average expected life of its stock option grants at the midpoint between the vesting dates and the end of the contractual term. This methodology is known as the simplified method and was used because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The expected volatility is based on an analysis of comparable public companies operating in the Company’s industry.

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

14. Income Taxes

The provision for income taxes consists of the following:

	December 31, 2009		December 31, 2008		December 31, 2007
	(in thousands)		(in thousands)		(in thousands)
Current provision (benefit)		300
Federal	$	—	$	—	$	—
State		—		—		—


Deferred provision (benefit)
Federal		—		—		—
State		—		—		—

		—		—		—

Total income tax expense	$	300	$	—	$	—

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

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

Income tax expense	$	—			$	—			$	—

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

	December 31, 2009			December 31, 2008			December 31, 2007
	(in thousands)			(in thousands)			(in thousands)
Deferred income tax assets:
Land	$	112,472		$	90,328		$	1,400
Fixed assets		27,613			22,077			(7,700	)
Deferred revenue		313			121			288
Bad debt		57			6			129
Net operating loss carryforwards		52,194			39,944			13,303
Marketable securities		—			14,668			861
Other		195			1,139			—

Total deferred income tax assets, gross		192,844			168,283			8,281
Less: valuation allowance		(192,494	)		(167,911	)		(7,854	)

Total deferred income tax assets, net		350			372			427
Deferred tax liabilities:
Acquired lease intangibles		(350	)		(372	)		(427	)

Total deferred income tax liabilities		(350	)		(372	)		(427	)

Total deferred income tax assets (liabilities), net	$	—		$	—		$	—

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

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

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

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

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

15. Litigation

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

On June 5, 2009, the first lien lenders filed in the District Court for Clark County, Nevada a complaint for declaratory relief seeking the appointment of a receiver, and a petition for the appointment of a receiver, for the Las Vegas Property as a result of the Company’s default under the $259 million first lien mortgage loan (Case No.: A-09-591831-B, Dept. No.: XIII). On June 19, 2009, the District Court of Clark County, Nevada granted the first lien lenders’ petition for the appointment of a receiver, and on June 23, 2009, the Court entered the order appointing the receiver. Under the order, Larry L. Bertsch, of Larry L. Bertsch, CPA & Associates, was appointed the receiver (the “Receiver”) of the Las Vegas Property and, subject to the loan documents, all personal, tangible and intangible, intellectual and commercial property, business, collateral, rights and obligations located thereon, including but not limited to all of the leasehold interests on the Las Vegas Property as owned and/or controlled by the Las Vegas Subsidiary, other than the collateral proceeds held by the first lien lenders (collectively, the “Receivership Property”).

Under the terms of the Order:

●	The Receiver took immediate and exclusive possession of the Receivership Property and is holding, operating, managing and leasing the Receivership Property;

●	The Receiver is required to take all commercially reasonable efforts to diligently analyze, evaluate, report with regard to, organize and categorize information relating to the Receivership Property so as to assist in the preparation for sale of the Receivership Property at foreclosure;

●	The Receiver is required to preserve the Receivership Property from loss, removal, material injury, destruction, substantial waste and loss of income there from; and

●	The Company’s Las Vegas Subsidiary was relieved of possession of, and any further obligation to administer, the Receivership Property.

As the Company continues to hold legal title to the property and further given that the receivership has not legally discharged the liability for debt secured by the Las Vegas Property, the Company continues to consolidate the subsidiaries that own the property.

On November 12, 2009, the second lien lenders under the mortgage loans initiated litigation against the Company, the Las Vegas Subsidiary and others contesting the validity of the Old Lock Up Agreement. Upon entry into the New Lock Up Agreement, the participating second lien lenders agreed to dismiss without prejudice their pending litigation against the first lien lenders, the Company, the Las Vegas Subsidiary (and its predecessor entities) and others contesting the validity of the Old Lock Up Agreement. The participating second lien lenders had agreed to grant the named parties to such pending litigation a release therefrom upon confirmation of the prepackaged chapter 11 bankruptcy case’s plan of liquidation as contemplated under the New Lock Up Agreement.

We are also subject to certain claims and litigation in the ordinary course of business. It is the opinion of management that the outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

16. Related Party Transactions

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

Shared Services Agreements

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

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

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

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

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

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

Preferred Priority Distribution

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

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

As of December 31, 2009, $15 million of the preferred priority distribution right in FXLR remains to be paid to Flag, plus, as of December 31, 2009, the accrued priority return was $0.9 million . In connection with the private placement of units by the Company in July 2008 as described in note 2, Flag agreed to defer its right to receive additional payments towards satisfaction of the preferred priority distribution right from the proceeds of this private placement.

On December 24, 2009, the Company’s interest in FXLR was transferred to its wholly-owned subsidiary, FXL, Inc., and Flag’s interest was transferred to FXL Priority. Inc.

For a description of the Company’s private placements of common stock units with certain of the Company’s directors and greater than 10% stockholders and their affiliates, reference is made to Note 2 above.

17. Quarterly Financial Information (unaudited)

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

For The Year Ended December 31, 2009

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

For The Year Ended December 31, 2008

	Quarter Ended March 31, 2008			Quarter Ended June 30, 2008			Quarter Ended September 30, 2008			Quarter Ended December 31, 2008			Total
Amounts in thousands, except for share information

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

For The Period From May 11, 2007 (inception) through December 31, 2007

	May 11, 2007 through June 30, 2007			Quarter Ended September 30, 2007			Quarter Ended December 31, 2007			Total
Amounts in thousands, except for share information

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

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

18. Subsequent Events (unaudited)

Private Placement of Common Stock

On January 28, 2010, the Company sold an aggregate of 1,562,499 shares of its common stock to Laura Baudo Sillerman, the spouse of Robert F.X. Sillerman, the Company’s Chairman and Chief Executive Officer, Paul C. Kanavos, the Company’s President, and his spouse Dayssi Olarte de Kanavos and TTERB Living Trust, an affiliate of Brett Torino, a greater than 10% stockholder of the Company, upon their exercise of a like number of Company warrants. The Company received aggregate proceeds of $125,000 from the exercise of the warrants, which were exercisable at $0.08 per share. Mrs. Sillerman, Mr. Kanavos and his spouse and TTERB Living Trust each purchased 520,833 shares of common stock upon the exercise of a like number of warrants for an aggregate exercise price of $41,666.66.

Private Placements of Preferred Stock Units

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

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

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

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

For a description of the rights, qualifications, limitations and restrictions relating to the Series A Convertible Preferred Stock, see Private Placements of Preferred Stock Units in Item 1 hereof.

Because the foregoing private placements involved certain of the Company’s directors and certain greater than 10% stockholders and their affiliates, such private placements were approved by a majority of the Company’s disinterested directors, to the extent applicable. The Company used the aggregate proceeds from these private placements for working capital requirements and for general corporate purposes, except that the Company has committed to use the proceeds from the March 11, 2010 private placement to fund expenses associated with evaluating a new line of business in connection with its entry into a letter of intent with a private company and its principal as described in Private Placements of Preferred Stock Units in Item 1 hereof.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Company’s chief executive officer, Robert F.X. Sillerman, and its principal financial officer, Gary McHenry, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of December 31, 2009. Based on this evaluation, the chief executive officer and principal 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 not effective.

Management’s Annual Report on Internal Control Over Financial Reporting

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

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

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

3. Based on management’s evaluation under this framework, the Company determined that there are material weaknesses in its internal control over financial reporting as of December 31, 2009, which are discussed below under “Changes in Internal Control over Financial Reporting.” Accordingly, management has concluded that the Company’s internal control over financial reporting as of December 31, 2009 was not effective.

4. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

The recent loss of certain key accounting and finance personnel and termination of the Shared Services Agreement with CKX coupled with our limited financial and human resources has materially affected our internal controls over financial reporting, including internal controls over accounting for stock based compensation, accounting for long-lived assets and the financial statement close process. Due to the impact of these events on our internal control over financial reporting in these areas, significant adjustments were necessary to present the financial statements in accordance with generally accepted accounting principles. As a result, we have determined there to be material weaknesses in internal controls over financial reporting. The Company currently does not have, nor does it expect to have in the future, the capacity to devise and implement a plan to remediate these material weaknesses.

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.

Circle Entertainment Inc.

	By:	/s/ ROBERT F.X. SILLERMAN	January 24, 2011
		Robert F.X. Sillerman
		Chief Executive Officer and Chairman of the Board (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:	/s/ ROBERT F.X. SILLERMAN	January 24, 2011
	Robert F.X. Sillerman, Chairman of the Board


By:	/s/ GARY MCHENRY	January 24, 2011
	Gary McHenry, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

By:	/s/ PAUL C. KANAVOS	January 24, 2011
	Paul C. Kanavos, Director

By:	/s/ MICHAEL MEYER	January 24, 2011
	Michael Meyer, Director

By:
	Harvey Silverman, Director

By:	/s/ ROBERT SUDACK	January 24, 2011
	Robert Sudack, Director

By:	/s/ JOHN MILLER	January 24, 2011
	John Miller, Director

INDEX TO EXHIBITS

The documents set forth below are filed herewith.

Exhibit Number		Description

31.1		Certification of Principal Executive Officer.
31.2		Certification of Principal Accounting Officer
32.1		Section 1350 Certification of Principal Executive Officer
32.2		Section 1350 Certification of Principal Accounting Officer

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