FXRE FX Real Est And Ent (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K/A

Amendment No. 1

 

 

Commission File No. 001-33902

 

FX Real Estate and Entertainment Inc.

(Exact name of Registrant as specified in its charter)

 

 

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:

 

 

* On April 24, 2009, the Registrant filed a Form 25 with the Securities and Exchange Commission to voluntarily delist its common stock from the above Exchange, which delisting will become effective on May 4, 2009. The Registrant will seek to have its common stock quoted on the Over-The-Counter Bulletin Board shortly after the delisting becomes effective, though it cannot provide any assurances in this regard.

 

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

 

None

 

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 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 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 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.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

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):

 

 

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, 2008, based on the closing price of such stock on The NASDAQ Global Market on such date, was $22,017,039.

 

As of April 29, 2009, there were 51,992,417 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

FX Real Estate and Entertainment Inc.

 

EXPLANATORY NOTE

 

FX Real Estate and Entertainment Inc. is filing this Amendment No. 1 (the “Amended Report”) to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as originally filed with the Securities and Exchange Commission on March 31, 2009 (the “Original Report”), solely to amend and restate Items 10, 11, 12, 13 and 14 of Part III and Item 15 of Part IV of the Original Report. This Amended Report does not affect any other items in our Original Report. Filed as exhibits to this Amended Report are the certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Because no financial statements are contained in this Amended Report, certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are omitted.

 

Except as otherwise expressly stated in the items contained in this Amended Report, this Amended Report continues to speak as of the date of the Original Report and we have not updated the disclosure contained herein to reflect events that have occurred since the filing of the Original Report. Accordingly, this Amended Report should be read in conjunction with our Original Report and our other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Report. The filing of this Amended Report shall not be deemed an admission that the Original Report when filed included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement therein not misleading.

 

In this Amended Report unless the context requires otherwise, the words “we,” “us,” “our,” “FXRE,” and the “Company” collectively refer to FX Real Estate and Entertainment Inc., and its consolidated subsidiaries, FX Luxury Realty, LLC, BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC. In August 2008, FX Luxury Realty, LLC changed its name to FX Luxury, LLC, BP Parent, LLC changed its name to FX Luxury Las Vegas Parent, LLC, Metroflag BP, LLC changed its name to FX Luxury Las Vegas I, LLC and Metroflag Cable, LLC changed its name to FX Luxury Las Vegas II, LLC. The words “Metroflag” or “Metroflag entities” refer to FX Luxury Realty and its predecessors, including BP Parent, LLC, Metroflag BP, LLC, Metroflag Cable, LLC, Metroflag Polo, LLC, CAP/TOR, LLC, Metroflag SW, LLC, Metroflag HD, LLC and Metroflag Management, LLC, the predecessor entities through which our historical business was conducted prior to September 27, 2007. “Las Vegas subsidiaries” refers to BP Parent, LLC, Metroflag BP, LLC and Metroflag Cable, LLC, each as renamed as indicated above.”

 

As has been disclosed previously, the Company is in severe financial distress and may not be able to continue as a going concern. Our current cash flow from operations and cash on hand as of March 31, 2009 are not sufficient to fund our short-term liquidity requirements, including our ordinary course obligations as they come due. The Company’s Las Vegas subsidiaries are currently in default under the $475 million mortgage loan secured by their Las Vegas property, which is substantially our entire business, and neither we nor our subsidiaries are able to repay the obligations with respect thereto. As a result of our Las Vegas subsidiaries continuing to be in default under the $475 million mortgage loan secured by their Las Vegas property, on April 9, 2009, the first lien lenders sent a Notice of Breach and Election to Sell, which initiates the trustee sale procedure against the Las Vegas property to satisfy the principal amount of $259 million and other obligations owed to them under the mortgage loan and secured by the property. Under Nevada law, the Las Vegas subsidiaries have the legal right to cure the default during a 35-day redemption period that expires on May 18, 2009 or else the Las Vegas property may be sold thereafter in accordance with Nevada law (the process takes approximately 120 days) in a trustee sale to satisfy the first lien lenders’ obligations secured by the property. Neither we nor our subsidiaries are able to cure the default. Consequently, we and our Las Vegas subsidiaries are considering all possible legal options, including bankruptcy proceedings. We cannot guarantee to what extent, if any, such actions may be viable or effective.

 

As has also been disclosed previously, on April 30, 2009, the Company entered into employment separation agreements and releases with Barry A. Shier, a director and the Chief Operating Officer of the Company and the Chief Executive Officer of the Company’s Las Vegas subsidiaries, and Brett Torino, the Chairman of the Company’s Las Vegas Division, each of which agreements shall become effective on May 8, 2009 (the “effective date”), unless rescinded before then by the applicable executive. At the effective date of these agreements, Messrs. Shier and Torino shall resign from all positions with the Company and its subsidiaries and their employment agreements with the Company shall terminate. The Company entered into these agreements with Messrs. Shier and Torino because of its inability to continue to pay salary and other compensation to Messrs. Shier and Torino under their employment agreements with the Company due to the Company’s current financial condition as described above. These employment separation agreements and releases with Messrs. Shier and Torino are described elsewhere in this Amended Report. In this Amended Report, Messrs. Shier and Torino are sometimes referred to individually as a “resigning named executive officer” and collectively as the “resigning named executive officers.”

 

Form 10-K/A

 

TABLE OF CONTENTS

 

 

 

Executive Officers and Directors of FX Real Estate and Entertainment Inc.

 

The following table lists the names, ages and positions of the persons who are our continuing directors and executive officers as of April 29, 2009:

 

 

Robert F.X. Sillerman has served as Chairman of the board of directors and Chief Executive Officer since January 10, 2008. Mr. Sillerman has served as the Chief Executive Officer and Chairman of CKX since February 2005. Prior to that, Mr. Sillerman was Chairman of FXM, Inc., a private investment firm, from August 2000 through February 2005. Mr. Sillerman is a director, executive officer and controlling stockholder of Atlas Real Estate Funds, Inc., a greater than 5% stockholder of our company (“Atlas”). Mr. Sillerman is the founder and has served as managing member of FXM Asset Management LLC, the managing member of MJX Asset Management, a company principally engaged in the management of collateralized loan obligation funds, from November 2003 through the present. Prior to that, Mr. Sillerman served as the Executive Chairman, a Member of the Office of the Chairman and a director of SFX Entertainment, Inc. from its formation in December 1997 through its sale to Clear Channel Communications in August 2000.

 

Paul C. Kanavos was elected a Director and appointed President on August 20, 2007. Mr. Kanavos is the Founder, Chairman and Chief Executive Officer of Flag Luxury Properties, LLC. Prior to founding Flag Luxury Properties, he worked for over 20 years at the head of Flag Management. Most recently he has developed Ritz-Carltons in South Beach, Coconut Grove and Jupiter and is developing Temenos Anguilla. Mr. Kanavos is a director, executive officer and controlling stockholder of Atlas. Mr. Kanavos’ early career experience includes a position at Chase Manhattan Bank, where he negotiated, structured and closed over $1 billion in loans.

 

Stephen A. Jarvis has served as Principal Accounting Officer since March 2009. Mr. Jarvis has served as the Senior Vice President and Chief Financial Officer of FX Luxury, LLC, our principal operating subsidiary, since July 2008. Prior to that, Mr. Jarvis held various senior management positions in the residential and commercial construction industries and was a manager in the Assurance and Advisory Group at Ernst & Young LLP where he obtained his CPA license.

 

Mitchell J. Nelson has served as Executive Vice President and General Counsel since December 31, 2007. Mr. Nelson has served as Senior Vice President of Corporate Affairs for Flag Luxury Properties, LLC since February, 2003. He is a minority stockholder of Atlas, and served as its President until December 2008. He has served as counsel to various law firms since 1994. Prior to that, he was a senior real estate partner at the law firm of Wien, Malkin & Bettex, with supervisory responsibility for various commercial properties. Mr. Nelson was a director of The Merchants Bank of New York and its holding company until its merger with, and remains on the Advisory Board of, Valley National Bank. Additionally, he has served on the boards of various not-for-profit organizations, including as a director of the 92nd Street YMHA and a trustee of Collegiate School, both in New York City.

David M. Ledy was elected a director of the Company in October 2007. Since June 30, 2004, he has served as the Chief Operating Officer of U.S. Realty Advisors, LLC, or USRA. USRA is an equity investor in corporate real estate and provides real estate advisory services to a diverse base of clients, including public companies, financial institutions as well as major private developers and investors. Prior to that, Mr. Ledy served as Executive Vice President of USRA from April 15, 1991 to June 30, 2004. Prior to joining USRA in 1991, Mr. Ledy was a partner in the New York law firm of Shea & Gould where he was a member of the real estate department and chairman of the real estate workout group. Mr. Ledy was admitted in 1975 to the United States District Court for the Southern District of New York and the Courts of the State of New York.

 

Harvey Silverman was elected a director of the Company in October 2007. Mr. Silverman was a principal of Spear, Leeds & Kellogg, a major specialist firm on the New York Stock Exchange, for 39 years until its acquisition by Goldman Sachs & Co. in October of 2000. Since then, Mr. Silverman has been a private investor.

 

Michael J. Meyer was elected a director of the Company in May 2008. Mr. Meyer is the founding partner of 17 Broad LLC, a diversified investment vehicle and securities consulting firm. Prior to founding 17 Broad, from 2002 to 2007, Mr. Meyer served as Managing Director and Head of Credit Sales and Trading for Bank of America. Prior to that, Mr. Meyer spent four years as the Head of High Grade Credit Sales and Trading for UBS.

 

Bryan E. Bloom was elected a director of the Company in May 2008. Mr. Bloom has served as counsel of W.R. Huff Asset Management Co., L.L.C. and its affiliates for the past fourteen years. Prior to being employed by Huff, he was a tax partner at the law firm of Shanley & Fisher, P.C. Mr. Bloom is a Trustee of the Adelphia Recovery Trust, and has served on the Board of Impsat Communications and numerous privately held companies. He has been an adjunct professor at the graduate tax program at the Fairleigh Dickenson University and authored and lectured for the American Institute of Certified Public Accountants.

 

John D. Miller has served as a Director since January 9, 2009. Mr. Miller is the Chief Investment Officer of W.P. Carey & Co. LLC, a net lease real estate company. Mr. Miller is also a founder and Non-Managing Member of StarVest Partners, L.P., a $150 million venture capital investment fund formed in 1998. Mr. Miller is a minority stockholder of Atlas. From 1995 to 1998, Mr. Miller was President of Rothschild Ventures Inc., the private investments unit of Rothschild North America, a subsidiary of the worldwide Rothschild Group. He was also President and CEO of Equitable Capital Management Corporation, an investment advisory subsidiary of The Equitable where he worked for 24 years beginning in 1969. From February 2005 through January 2009, when he resigned, Mr. Miller served as a director of CKX, Inc.

 

Robert Sudack has served as a Director since January 9, 2009. Mr. Sudack is the President and owner of Posterloid Corporation, the world’s leading menu board manufacturing company with over $20 million of sales per year, headquartered in Long Island City. Mr. Sudack has also been a private investor in and advisor to various companies for many years.

 

Non-Voting Designated Preferred Stock Director

 

Under the terms of the Non-Voting Designated Preferred Stock, the holder of the Non-Voting Designated Preferred Stock is entitled to appoint a member our Board so long as it continues to beneficially own at least 20% of the 6,611,998 shares of our common stock that it acquired through (1) the distribution of our common stock by CKX, Inc. to its stockholders, (2) the exercise of rights in our rights offering completed in 2008, and (3) the purchase of shares that were not subscribed for in the rights offering pursuant to its investment agreement with us. Under the terms of the Non-Voting Designated Preferred Stock as specified in the Certificate of Designation, on May 14, 2008, the holder of the Non-Voting Designated Preferred Stock selected Bryan Bloom as its designee to serve on the Company’s Board. At the written request of the holder of the Non-Voting Designated Preferred Stock, its director designee shall be appointed by the Board to serve on each committee of the Board to the extent permissible under the applicable rules and regulations of the Securities and Exchange Commission or The NASDAQ Global Market, or applicable law. In accordance with the terms of the Non-Voting Designated Preferred Stock, Mr. Bloom (or any successor designated by the holder) has the right, subject to any restrictions of The NASDAQ Global Market or the Securities and Exchange Commission, or applicable law, to be a member of, and the chairman of, any committee of the Board formed for the purpose of reviewing any “related party transaction” that is required to be disclosed pursuant to Section 404 of the Sarbanes Oxley Act of 2002 or any successor rule or regulation or any transaction,

contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any of the Company’s directors, officers or affiliates, including any such committee that may be formed pursuant to the applicable rules and regulations of the Securities and Exchange Commission or The NASDAQ Global Market. However, if Mr. Bloom (or any successor designated by the holder) would not be deemed independent or disinterested with respect to a related party transaction and therefore would not satisfy The NASDAQ Global Market or other applicable requirements for serving on the special committee formed with respect thereto, Mr. Bloom (or any successor designated by the holder) will not serve on the relevant special committee but will have the right to attend meetings of such special committee as an observer, subject to any restrictions of The NASDAQ Global Market or applicable law. Furthermore, in the event that the attendance at any meetings of any such special committee would raise confidentiality issues as between the parties to the transaction that, in the reasonable opinion of counsel to the relevant special committee, cannot be resolved by a confidentiality agreement, Mr. Bloom (or any successor designated by the holder) shall be required to recuse himself from such meetings.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and officers, and persons who own more than 10% of our outstanding Common Stock to file with the SEC initial reports of ownership and changes in ownership of our Common Stock. Such individuals are also required to furnish us with copies of all such ownership reports they file.

 

To our knowledge, based solely on information furnished to us and contained in Section 16 reports filed with the Securities and Exchange Commission, as well as any written representations that no other reports were required, we believe that during 2008, all required Section 16 reports of our directors and executive officers and persons who own more than 10% of our outstanding common stock were timely filed.

 

Code of Business Conduct and Ethics

 

The Company has adopted a Code of Business Conduct and Ethics, which is applicable to all our employees and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code is posted on our website located at www.fxree.com.

 

We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on our website at www.fxree.com.

 

Corporate Governance Guidelines

 

The Company has Corporate Governance Guidelines which provide, among other things, that a majority of the Company’s board of directors must meet the criteria for independence required by The NASDAQ Stock Market ^® and that the Company shall at all times have a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, which committees will be made up entirely of independent directors. The Corporate Governance Guidelines also outline director responsibilities, provide that the board of directors shall have full and free access to officers and employees of the Company and require the board of directors to conduct an annual self-evaluation to determine whether it and its committees are functioning effectively. The Corporate Governance Guidelines and the charters for these committees can be found on the Company’s website at ir.fxree.com .

Board Committees

 

The following chart sets forth the current membership of each board committee during 2008. The board of directors reviews and determines the membership of the committees at least annually.

 

 

Audit Committee

 

The Audit Committee is comprised of Messrs. Ledy, Meyer and Silverman. Mr. Ledy is the Chairman of the Audit Committee. The Audit Committee assists our board of directors in fulfilling its responsibility to oversee management’s conduct of our financial reporting process, including the selection of our outside auditors, review of the financial reports and other financial information we provide to the public, our systems of internal accounting, financial and disclosure controls and the annual independent audit of our financial statements.

 

All members of the Audit Committee are independent within the meaning of the rules and regulations of the SEC, the requirements of The NASDAQ Stock Market ^® and our Corporate Governance Guidelines. In addition, Mr. Ledy is qualified as an audit committee financial expert under the regulations of the SEC and has the accounting and related financial management expertise required by The NASDAQ Stock Market ^® .

 

 

Compensation Discussion and Analysis

 

Compensation Committee

 

The Compensation Committee of the board of directors has responsibility for overseeing all aspects of the compensation program for the Chief Executive Officer and the other named executive officers of the Company. In addition, the Committee reviews and approves the annual compensation packages, including incentive compensation programs, for the members of senior management of each of the Company’s subsidiaries and divisions. The Compensation Committee also administers the Company’s 2007 Executive Equity Incentive Plan and the 2007 Long-Term Incentive Compensation Plan. The Compensation Committee members are David Ledy (Chairman), Michael Meyer and Harvey Silverman, all of whom have been deemed by the board of directors to be independent within the meaning of the rules and regulations of the SEC, our Company’s Corporate Governance Guidelines, the regulations of The NASDAQ Stock Market ^® and Section 162(m) of the Internal Revenue Code.

 

Overview of Compensation Program

 

Our philosophy on senior executive compensation is to ensure that all elements of the Company’s compensation program work together to attract, motivate and retain the executive, managerial and professional talent needed to achieve the Company’s strategy, goals and objectives. The Compensation Committee and the Company are also committed to the principles inherent in paying for performance and structure the compensation program to deliver rewards for exemplary performance and to withhold rewards and impose other consequences in the absence of such performance.

 

The specific objectives of the compensation program are to:

 

 

 

The Company’s current financial condition as described above in the “ Explanatory Note ” on page 2 of this Amended Report drives, in large part, consideration of all compensation matters by the compensation committee.

 

Components of Compensation for Named Executive Officers

 

The key elements of annual executive compensation are base salary, other than with respect to Mr. Sillerman, annual performance incentive awards and long-term incentive awards. In considering appropriate levels of annual and long-term incentive compensation, we take into account the extent to which existing incentives, including each executive’s existing stock ownership in us and the existence or lack of any vesting provisions or restrictions on resale with respect thereto, provide a sufficient degree of economic incentive to continue our success.

 

Base Salary

 

The Compensation Committee annually reviews the base salaries of the chief executive officer and other continuing named executive officers of our company. As described further below, Mr. Sillerman does not receive any base salary under his employment agreement. The agreement by Mr. Sillerman to request no salary is based on his, and the company’s, belief that, based on his involvement in the formation of the company and his interest in maximizing stockholder value, his compensation should be tied to generating stockholder returns through growth in value of our common stock. As disclosed in the “Summary Compensation Table” on page 15 of this Amended Report, we reimburse CKX under the shared services agreement described elsewhere herein for a pro rata share of Mr. Sillerman’s salary at CKX based on the amount of time Mr. Sillerman devotes to our company. The salaries of the named executive officers, other than Mr. Sillerman, were set to reflect the nature and responsibility of each of their respective positions and to retain a management group with a proven track record. We believe that entering into employment agreements with our most senior executives helps ensure that our core group of managers will be available to us and our stockholders on a long-term basis. The employment agreements of our continuing named executive officers, Messrs. Kanavos and Nelson, provide for a base salary that escalates annually by an amount not less than the greater of five percent or the rate of inflation. Due to our current financial condition as described above, we did not increase these continuing named executive officers’ base salaries for the fiscal year ending December 31, 2009. The resigning named executive officers received a base salary increase of 5% effective January 1, 2009, in accordance with the terms of their employment agreements. The base salary for each of our continuing named executive officers may be raised in excess of this amount upon the recommendation and approval of the Compensation Committee. None of these continuing named executive officers are guaranteed a bonus payment under the terms of his employment agreement. For a detailed description of the employment agreements see “—  Employment Contracts ” below.

 

Annual Incentives

 

While we believe that annual incentive compensation motivates executives to achieve exemplary results, no formal annual incentive compensation plan for our named executive officers has been adopted to date. The decision not to adopt an annual incentive plan or to make any incentive payments in respect of 2008 were driven, in large part, by (i) the Company’s current financial situation, and (ii) the view, jointly held by management and the members of the Compensation Committee, that during the formative phase in our development, we should approach compensation cautiously.

 

Executive Equity Incentive Plan

 

The Company maintains the 2007 Executive Equity Incentive Plan which was adopted by our board of directors in December 2007 and approved by our stockholders at our 2008 annual meeting of stockholders.

 

Administration.  Administration of the Executive Equity Plan is carried out by the Compensation Committee of the board of directors.

Maximum Shares and Award Limits.  Under the Executive Equity Plan, the maximum number of shares of common stock that may be subject to stock options, stock awards, deferred shares or performance shares is 12.5 million. These limitations, and the terms of outstanding awards, will be adjusted without the approval of our stockholders as the Compensation Committee determines is appropriate in the event of a stock dividend, stock split, reclassification of stock or similar events.

 

Eligibility.  Our officers and employees, directors and other persons that provide consulting services to us and our subsidiaries are eligible to participate in the Executive Equity Plan.

 

Stock Options.  The Executive Equity Plan provides for the grant of options that are not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. An option’s exercise price cannot be less than the common stock’s fair market value on the date the option is granted, and in the event a participant is deemed to be a 10% owner of our company or one of our subsidiaries, the exercise price of an incentive stock option cannot be less than 110% of the common stock’s fair market value on the date the option is granted. The Executive Equity Plan prohibits repricing of an outstanding option, and therefore, the Compensation Committee may not, without the consent of the stockholders, lower the exercise price of an outstanding option, except in the case of adjustments resulting from stock dividends, stock splits, reclassifications of stock or similar events. The maximum period in which an option may be exercised will be fixed by the Compensation Committee but cannot exceed ten years, and in the event a participant is deemed to be a 10% owner of our company or one of our corporate subsidiaries, the maximum period for an incentive stock option granted to such participant cannot exceed five years. Options generally will be nontransferable except in the event of the participant’s death but the Compensation Committee may allow the transfer of non-qualified stock options through a gift or domestic relations order to the participant’s family members.

 

Unless provided otherwise in a participant’s stock option agreement and subject to the maximum exercise period for the option, an option generally will cease to be exercisable upon the earlier of three months following the participant’s termination of service with us or certain of our affiliates or the expiration date under the terms of the participant’s stock option agreement, provided, however that the right to exercise an option will expire immediately upon termination for “cause” or a voluntary termination any time after an event that would be grounds for termination for cause. Upon death or disability, the option exercise period is extended to the earlier of one year from the participant’s termination of service or the expiration date under the terms of the participant’s stock option agreement.

 

Amendment and Termination.  No awards may be granted under the Executive Equity Plan after the tenth anniversary of its adoption by our stockholders. The board of directors may amend or terminate the Executive Equity Plan at any time, but no amendment will become effective without the approval of our stockholders if it increases the aggregate number of shares of common stock that may be issued under the Executive Equity Plan, changes the class of employees eligible to receive incentive stock options or stockholder approval is required by any applicable law, regulation or rule, including any rule of any applicable securities exchange or quotation system. No amendment or termination of the Executive Equity Plan will affect a participant’s rights under outstanding awards without the participant’s consent.

 

In accordance with the terms of their employment agreements, in 2007 we issued to Messrs. Sillerman, Kanavos, Benson (a former named executive officer), Torino (a resigning named executive officer) and Nelson, 6,000,000, 750,000, 400,000, 400,000 and 400,000 stock options, respectively. Under the terms of the employment agreements with Messrs. Kanavos, Torino and Nelson, these stock options vest ratably over a five year period commencing with effectiveness of the relevant employment agreement, and have a strike price of $20.00 per share. Mr. Torino will retain the 80,000 of such 400,000 options that are vested at the effective date of his employment separation agreement and release. Mr. Torino will forfeit the remaining 320,000 of such 400,000 options that are not vested at the effective date of his employment separation agreement and release. Under the terms of the employment agreements with Messrs. Sillerman and Benson, as amended, these stock options vest ratably over a five year period commencing upon acceptance of their positions as executive officers of the Company, which occurred in January 2008. The options granted to Mr. Benson were cancelled upon his resignation in February 2009. In accordance with the terms of Mr. Shier’s employment agreement, a resigning named executive officer, in 2007 we issued to him 1,500,000 stock options at a strike price of $10.00 per share. The options vest ratably over a two year

period, with all such options becoming exercisable at the end of two years. Mr. Shier will retain the 750,000 of such 1,500,000 options that are vested at the effective date of his employment separation agreement and release. Mr. Shier will forfeit the remaining 750,000 of such 1,500,000 options that are not vested at the effective date of his employment separation agreement and release. As described elsewhere herein, under the terms of Mr. Shier’s employment separation agreement and release, we will grant him 1,000,000 stock options on the effective date of such agreement.

 

In May 2008, we issued options to Messrs. Sillerman, Kanavos, Benson and Nelson in the amounts of 500,000, 250,000, 200,000 and 200,000, respectively. One half of the options have an exercise price of $5.00 per share and the other half have an exercise price of $6.00 per share. The options vest over a five year period, with 40% of the $5.00 options vesting after one year, 40% of the $5.00 options vesting after year two, 20% of the $5.00 and 20% of the $6.00 options vesting after year three, 40% of the $6.00 options vesting after year four and 40% of the $6.00 options vesting after year five. The options granted to Mr. Benson were cancelled upon his resignation in February 2009.

 

Equity Incentive Plan

 

The Company maintains the 2007 Long-Term Incentive Compensation Plan which was adopted by our board of directors in December 2007 and was approved by our stockholders at our 2008 annual meeting of stockholders.

 

Administration.  Administration of the 2007 Plan is carried out by the Compensation Committee of the board of directors.

 

Maximum Shares and Award Limits.  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 million. No one participant may receive awards for more than 1 million shares of common stock under the plan. These limitations, and the terms of outstanding awards, will be adjusted without the approval of our stockholders as the Compensation Committee determines is appropriate in the event of a stock dividend, stock split, reclassification of stock or similar events.

 

Eligibility.  Our officers and employees, directors and other persons that provide consulting services to us and our subsidiaries are eligible to participate in the 2007 Plan.

 

Stock Options.  The 2007 Plan provides for the grant of both options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and options that are not intended to so qualify. Options intended to qualify as incentive stock options may be granted only to persons who are our employees or are employees of our subsidiaries which are treated as corporations for federal income tax purposes. No participant may be granted incentive stock options that are exercisable for the first time in any calendar year for common stock having a total fair market value (determined as of the option grant) in excess of $100,000. An option’s exercise price cannot be less than the common stock’s fair market value on the date the option is granted, and in the event a participant is deemed to be a 10% owner of our company or one of our subsidiaries, the exercise price of an incentive stock option cannot be less than 110% of the common stock’s fair market value on the date the option is granted. The 2007 Plan prohibits repricing of an outstanding option, and therefore, the Compensation Committee may not, without the consent of the stockholders, lower the exercise price of an outstanding option, except in the case of adjustments resulting from stock dividends, stock splits, reclassifications of stock or similar events. The maximum period in which an option may be exercised will be fixed by the Compensation Committee but cannot exceed ten years, and in the event a participant is deemed to be a 10% owner of our company or one of our corporate subsidiaries, the maximum period for an incentive stock option granted to such participant cannot exceed five years. Options generally will be nontransferable except in the event of the participant’s death but the Compensation Committee may allow the transfer of non-qualified stock options through a gift or domestic relations order to the participant’s family members.

 

Unless provided otherwise in a participant’s stock option agreement and subject to the maximum exercise period for the option, an option generally will cease to be exercisable upon the earlier of three months following the participant’s termination of service with us or certain of our affiliates or the expiration date under the terms of the participant’s stock option agreement, provided, however that the right to exercise an option will expire immediately upon termination for “cause” or a voluntary termination any time after an event that would be grounds for termination for cause. Upon death or disability, the option exercise period is extended to the earlier of one year from

the participant’s termination of service or the expiration date under the terms of the participant’s stock option agreement.

 

Stock Awards and Performance Based Compensation.  The Compensation Committee also will select the participants who are granted restricted common stock awards and, consistent with the terms of the 2007 Plan, will establish the terms of each stock award. A restricted common stock award may be subject to payment by the participant of a purchase price for shares of common stock subject to the award, and a stock award may be subject to vesting requirements, performance objectives or transfer restrictions, if so provided by the Compensation Committee. In the case of a performance objective for an award intended to qualify as “performance based compensation” under Section 162(m) of the Internal Revenue Code, the objectives are limited to specified levels of and increases in our or a business unit’s return on equity; total earnings; earnings per share; earnings growth; return on capital; return on assets; economic value added; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; sales growth; gross margin return on investment; increase in the fair market value of the shares; share price (including but not limited to growth measures and total stockholder return); net operating profit; cash flow (including, but not limited to, operating cash flow and free cash flow); cash flow return on investments (which equals net cash flow divided by total capital); funds from operations; internal rate of return; increase in net present value or expense targets. Transfer of the shares of common stock subject to a stock award normally will be restricted prior to vesting.

 

Deferred Shares.  The 2007 Plan also authorizes the grant of deferred shares, i.e., the right to receive a future delivery of shares of common stock, if certain conditions are met. The Compensation Committee will select the participants who are granted awards of deferred shares and will establish the terms of each grant. The conditions established for earning the grant of deferred shares may include, for example, a requirement that certain performance objectives, such as those described above, be achieved.

 

Performance Shares and Performance Units.  The 2007 Plan also permits the grant of performance shares and performance units to participants selected by the Compensation Committee. A performance share is an award designated in a specified number of shares of common stock that is payable in whole or in part, if and to the extent certain performance objectives are achieved. The performance objectives will be prescribed by the Compensation Committee for grants intended to qualify as “performance based compensation” under Section 162(m) and will be stated with reference to the performance objectives described above.

 

Amendment and Termination.  No awards may be granted under the 2007 Plan after the tenth anniversary of its adoption by our stockholders. The board of directors may amend or terminate the 2007 Plan at any time, but no amendment will become effective without the approval of our stockholders if it increases the aggregate number of shares of common stock that may be issued under the 2007 Plan, changes the class of employees eligible to receive incentive stock options or stockholder approval is required by any applicable law, regulation or rule, including any rule of any applicable securities exchange or quotation system. No amendment or termination of the 2007 Plan will affect a participant’s rights under outstanding awards without the participant’s consent.

 

In May 2008, we issued 915,000 stock options to a total of 11 employees and/or consultants. One half of the options have an exercise price of $5.00 per share and the other half have an exercise price of $6.00 per share. The options vest over a five year period, with 40% of the $5.00 options vesting after one year, 40% of the $5.00 options vesting after year two, 20% of the $5.00 and 20% of the $6.00 options vesting after year three, 40% of the $6.00 options vesting after year four and 40% of the $6.00 options vesting after year five.

 

Employment Contracts

 

Commencing in 2008, we entered into employment agreements with Messrs. Sillerman, Kanavos, Shier, Benson, Torino and Nelson. While Messrs’ Benson’s, Shier’s and Torino’s employment agreements are described below, Mr. Benson resigned prior to his agreement becoming effective in February 2009 and Messrs’ Shier’s and Torino’s employment agreements shall terminate effective as of May 8, 2009 in accordance with the terms of their employment separation agreements and releases described under “—  Employment Separation Agreements and Releases with Messrs. Shier and Torino. ” Therefore, when reviewing the description of Messrs. Shier’s and Torino’s employment agreements below, please bear in mind that Messrs. Shier’s and Torino’s employment agreements will no longer be in effect when their employment separation agreements and releases become effective.

Our Compensation Committee retained an independent compensation consultant to provide independent review and analysis of all senior executive compensation packages and plans prior to approving the proposed employment agreements. We entered into these agreements in recognition of the need to provide certainty to both us and the individuals with respect to their continued and active participation in our growth. The employment agreement for each of Messrs. Sillerman, Kanavos, Shier, Benson, Torino and Nelson is for a term of five years. The provisions governing the commencement of the employment term for Mr. Sillerman is described below. The employment agreements include a non-competition agreement between the executive officer and us which will be operative during the term, except that Mr. Shier’s non-competition agreement also continues for a period of one year after the term. Upon a “change in control,” the executive officer will be able to terminate his employment and, upon doing so, will no longer be subject to the non-competition provisions.

 

Mr. Sillerman has elected not to receive an annual base salary under the terms of his employment agreement. The decision by Mr. Sillerman to request no salary was based on his, and the company’s, belief that, based on his involvement in the formation of the company and his interest in maximizing stockholder value, his compensation should be tied to generating stockholder returns through growth in value of our common stock. As disclosed in the “Summary Compensation Table” on page 15 of this Amended Report, we reimburse CKX under the shared services agreement described elsewhere herein, for a pro rata share of Mr. Sillerman’s salary at CKX based on the amount of time Mr. Sillerman devotes to our company. In 2008, we reimbursed CKX in the amount of $260,189 for Mr. Sillerman’s services. The employment agreements for Messrs. Kanavos, Shier, Torino and Nelson provide for initial annual base salaries of $600,000 for Mr. Kanavos, $2,000,000 for Mr. Shier, , $450,000 for Mr. Torino and $525,000 for Mr. Nelson, increasing annually by the greater of five percent or the rate of inflation. The employment agreement for Mr. Benson provided for an initial annual base salary of $525,000. However, because Mr. Benson resigned as Chief Financial Officer prior to his employment agreement becoming effective, the Company did not pay any base salary to Mr. Benson in 2008. As disclosed in the “Summary Compensation Table” on page 15 of this Amended Report, prior to his resignation, we reimbursed CKX under the shared services agreement described elsewhere herein, for a pro rata share of Mr. Benson’s salary at CKX based on the amount of time Mr. Benson devoted to our company. In 2008, we reimbursed CKX in the amount of $121,365 for Mr. Benson’s services.

 

Under the terms of Mr. Shier’s employment agreement, Mr. Shier purchased 500,000 shares of our common stock at a price of $5.14 per share on January 3, 2008 for an aggregate purchase price of $2,570,000. Mr. Shier is not able to sell or otherwise transfer these shares until the second anniversary of the date of purchase, except for estate planning purposes subject to our advance written consent. On the second anniversary of the date of purchase or as soon thereafter as we are eligible to use a short-form registration statement on Form S-3, we will register these shares for resale with the Securities and Exchange Commission.

 

Each of our executive officers received an initial grant of stock options as more fully described above under “ — Executive Equity Incentive Plan .” In addition, Mr. Shier’s employment agreement also entitles Mr. Shier to receive options to purchase 200,000 shares per year over the next five years, in each case with strike prices equal to the fair market value when the grants occur. Such options vest on the date of grant.

 

Mr. Sillerman’s employment agreement provides that if Mr. Sillerman’s employment is terminated by us without “cause,” or if there is a “constructive termination without cause,” as such terms are defined in the employment agreements, his non-compete shall cease to be effective on the later of such termination or three years from the effective date of the agreement. Mr. Sillerman’s employment agreement specifies that he is required to commit not less than 50% of his business time to our company, with the balance of his business time to be governed by his employment agreement with CKX.

 

Mr. Sillerman’s employment agreement with us became effective on November 1, 2008, the date on which the merger agreement between CKX and 19X was terminated. Mr. Sillerman continues to be subject to an employment agreement with CKX, Inc.

 

Mr. Kanavos’ employment agreement permits him to spend up to one-third of his work time on matters pertaining to Flag Luxury Properties.

 

Mr. Torino’s employment agreement permits him to spend up to one-third of his work time on matters unrelated to our company, provided such matters are not competitive with our business or are otherwise approved by our board.

Mr. Nelson’s employment agreement permits him to spend up to one-third of his work time on matters pertaining to Flag Luxury Properties.

 

Employment Separation Agreements and Releases with Messrs. Shier and Torino

 

Under the terms of Mr. Shier’s employment separation and release agreement, effective as of the effective date (May 8, 2009), Mr. Shier has resigned from all positions with the Company and its subsidiaries and his employment agreement with the Company dated as of December 31, 2007 has terminated. Under the terms of Mr. Shier’s employment separation and release agreement, Mr. Shier is entitled to the following severance payments and benefits as of the effective date:

 

 

Under the terms of Mr. Shier’s employment separation agreement and release, Mr. Shier has been released from his one year post-employment non-competition covenant contained in his employment agreement, and he has agreed, upon reasonable advance notice from the Company, to provide consulting services to the Company and its subsidiaries at an hourly rate of $750 and upon such other terms and conditions as may be mutually agreed upon by the parties.

 

Mr. Shier’s employment separation agreement and release contains customary mutual releases, cooperation and non-disparagement provisions.

 

Under the terms of Mr. Torino’s employment separation agreement and release, effective as of the effective date (May 8, 2009), Mr. Torino has resigned from all positions with the Company and its subsidiaries and his employment agreement with the Company dated as of December 31, 2007 has terminated. Under the terms of Mr. Torino’s employment separation agreement and release, Mr. Torino is entitled to the following severance payments and benefits as of the effective date:

 

 

 

Under the terms of Mr. Torino’s employment separation agreement and release, Mr. Torino has agreed, upon reasonable advance notice from the Company, to provide consulting services to the Company and its subsidiaries upon such terms and conditions as may be mutually agreed upon by the parties.

 

Mr. Torino’s employment separation agreement and release contains customary mutual releases, cooperation and non-disparagement provisions.

 

The foregoing descriptions of Messrs. Shier’s and Torino’s employment separation agreements and releases are not complete and are qualified in their entireties by reference to the complete text of these agreements, copies of which are filed as Exhibits 10.1 and 10.2 to the Company’s Current Report on Form 8-K dated April 30, 2009 and incorporated herein by reference.

 

Shared Services Agreement

 

In addition to entering into the employment agreements described above, we are party to a shared services agreement with CKX, pursuant to which employees of CKX, including members of senior management, provide services for us, and certain of our employees, including members of senior management, provide services for CKX. The services provided pursuant to the shared services agreement include management, legal, accounting and administrative. For more detailed information about the terms of the shared services agreement, please see “ Item 13 Certain Relationships, Related Transactions and Director Independence— Shared Services Agreement ”.

 

Compensation Committee Interlocks and Insider Participation

 

No member of our Compensation Committee was at any time during the past fiscal year an officer or employee of us, was formerly an officer of us or any of our subsidiaries or has an immediate family member that was an officer or employee of us or had any relationship requiring disclosure under Item 13. Certain Relationships, Related Transactions, and Director Independence. ”

 

During the last fiscal year, none of our executive officers served as:

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” set forth elsewhere in this Amended Report. Based on such review, the related discussions and such other matters deemed relevant and appropriate by the Compensation Committee, the Compensation Committee has recommended to the board of directors that the “Compensation Discussion and Analysis” be included in this Amended Report. This report is provided by the following independent directors, who comprise the Committee:

 

David M. Ledy (chairman)
Michael Meyer
Harvey Silverman

 

2008 Summary Compensation Table

 

The table below summarizes the compensation earned for services rendered to the Company for the fiscal year ended December 31, 2008 by our Chief Executive Officer and the five other most highly compensated executive officers of the Company (the “named executive officers”) who served in such capacities at the end of the fiscal year ended December 31, 2008. Except as provided below, none of our named executive officers received any other compensation required to be disclosed by law or in excess of $10,000 annually.

 

 

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Options Granted in Fiscal Year 2008

 

We granted a total of 8,450,000 options during the fiscal year ended December 31, 2008, of which 7,500,000 were granted to named executive officers.

 

Outstanding Equity Awards at December 31, 2008

 

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2008 Fiscal Year Option Exercises and Stock Vested

 

During the year ended December 31, 2008, there were no stock options exercised and no shares of restricted stock that vested.

 

Pension Benefits

 

None of our named executive officers is covered by a Company sponsored pension plan or other similar benefit plan that provides for payments or other benefits at, following or in connection with retirement.

 

Nonqualified Deferred Compensation

 

None of our named executive officers are covered by a defined contribution or other plan that provides for the deferral of compensation on a basis that is not-tax-qualified.

 

Potential Payments upon Termination without Cause or Change-in-Control

 

The following disclosure is for our continuing named executive officers, Messrs. Sillerman, Kanavos and Nelson.

 

If (i) an executive officer is terminated by our Company without “cause,” (ii) there is a “constructive termination without cause,” or (iii) there is a “change in control,” the employment agreements of Messrs. Kanavos and Nelson provide for the following benefits: (a) base salary for the lesser of (x) three years of the base salary in effect at the time of termination, and (y) the remaining portion of the employment term following termination, plus (b) a bonus for each partial or full year in the unexpired term in an amount equal to the average of all annual bonuses paid during the term of the agreement prior to termination (but in the event, no bonus has been paid, an amount of $100,000), (c) continued eligibility to participate in any benefit plans of our Company for the lesser of (x) three years, and (y) the remaining portion of the employment term following termination plus (iv) accelerated vesting of any stock options, restricted stock or other equity based instruments previously issued to the executive officer. However, in the event that any amount payable to each executive upon a “change of control” would be nondeductible

by the Company under the rules set forth in Section 280G of the Internal Revenue Code of 1986, then the amount payable to such executive shall be reduced to the maximum amount that would be payable but which would remain deductible under Section 280G of the IRC. If a change of control were to occur as of December 31, 2008, the maximum amounts payable to each of Messrs. Kanavos and Nelson, respectively, would be 1,794,000 and 1,569,750, respectively.

 

Upon a (i) termination by our Company without “cause,” (ii) a “constructive termination without cause,” or (iii) a “change in control,” the employment agreement for Mr. Sillerman provides for the following benefits: (a) a payment in the amount of $3,000,000, (b) continued eligibility to participate in any benefit plans of our Company for the lesser of (x) three years, and (y) the remaining portion of the employment term following termination, plus (iii) (c) accelerated vesting of any stock options, restricted stock or other equity based instruments previously issued to the executive officer. However, in the event that any amount payable to Mr. Sillerman upon a “change of control” would be nondeductible by the Company under the rules set forth in Section 280G of the Internal Revenue Code of 1986, then the amount payable to Mr. Sillerman shall be reduced to the maximum amount that would be payable but which would remain deductible under Section 280G of the IRC. If a change of control were to occur as of December 31, 2008, Mr. Sillerman would receive no payment.

 

The amount of compensation payable to each named executive officer as described above is listed in the table below assuming the termination occurred on December 31, 2008.

 

 

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Potential Payments upon Death or Disability

 

The following disclosure is for our continuing named executive officers, Messrs. Sillerman, Kanavos and Nelson.

 

The employment agreements of each of Messrs. Kanavos and Nelson provide for the following benefits in the event of their death: (a) a payment in an amount equal to three times base salary in effect at the time of the executive officer’s death plus (b) the full costs of the continuation of any group health, dental and life insurance program through which coverage was provided to any dependent of the executive officer prior to his death, for three years following the executive officer’s death and (c) accelerated vesting of any stock options, restricted stock or other equity based instruments previously issued to the executive officer. The approximate amount that would be due to the estates of Messrs. Kanavos and Nelson in the event of their death as of December 31, 2008 would be $1,870,524 and $1,645,524, respectively.

 

The employment agreement for Mr. Sillerman provides for the following benefits in the event of his death: (a) a payment in the amount of $3,000,000 plus (b) the full costs of the continuation of any group health, dental and life insurance program through which coverage was provided to any dependent of the executive officer prior to his death, for three years following the executive officer’s death and (c) accelerated vesting of any stock options, restricted stock or other equity based instruments previously issued to the executive officer. The approximate amount that would be due to the estate of Mr. Sillerman in the event of his death as of December 31, 2008 would be $3,000,000.

Pursuant to the employment agreements for Messrs Kanavos and Nelson, in the event of a disability continuing for a period in excess of six continuous months, such named executive officer shall be entitled to his full salary for the first six months of his disability (the last day of such 6-month period is referred to as the disability date), and, thereafter, each such named executive officer would be entitled to an accelerated payment equal to 75% of his salary for the remainder of the term of his employment agreement. Assuming a disability date of December 31, 2008, the approximate amount that would be due to each of Messrs. Kanavos and Nelson would be 1,875,000 and 1,640,625, respectively. Such amounts would be reduced by any benefits payable to the named executive officer under any insurance plan for which the Company paid the premiums.

 

Compensation of Non-Employee Directors

 

Employee directors do not receive any separate compensation for their board service. Non-employee directors receive the compensation described below.

 

For 2008, non-employee directors received an annual fee of $80,000, paid half in cash and half in shares of restricted Common Stock, or at their election all in shares of restricted Common Stock (see below), plus $1,000 for attendance at each meeting of our board of directors and $750 for attending each meeting of a committee of which he is a member. The chairperson of the Audit Committee received an additional annual fee of $20,000 and each of the other members of the Audit Committee received an additional fee of $10,000 for serving on the Audit Committee.

 

The chairpersons of each other committee received an additional annual fee of $10,000 and each of the other members of such committees received an additional annual fee of $5,000. All fees described above will be payable half in cash and half in equity awards under the Company’s 2007 Long-Term Incentive Compensation Plan, though each non-employee director will have the option to elect, on an annual basis, to receive 100% of his compensation in equity awards

 

The Company pays non-employee directors on a quarterly basis and prices all grants of Common Stock at the closing price on the last day of the quarter for which such fees relate

 

The total compensation received by our non-employee directors during fiscal year 2008 is shown in the following table (1):

 

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

The table below shows information with respect to our equity compensation plans and individual compensation arrangements as of December 31, 2008. For a description of our 2007 Executive Equity Incentive Plan and our 2007 Long-Term Incentive Compensation Plan, see “ Item 11. Executive Compensation — Components of Compensation for Named Executive Officers ”.

 

 

For a description of our 2007 Executive Equity Incentive Plan and 2007 Long-Term Incentive Compensation Plan, see Note 13 to our audited Consolidated Financial Statements included in the Original Report.

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information regarding the beneficial ownership of shares of our common stock as of April 29, 2009 by:

 

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the securities. Unless otherwise noted, each beneficial owner has sole voting and investing power over the shares shown as beneficially owned except to the extent authority is shared by spouses under applicable law. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, any shares of common stock subject to common stock purchase warrants held by that person that are exercisable as of the Record Date or will become exercisable within 60 days thereafter are deemed to be outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person.

 

As of April 29, 2009, we had outstanding 51,992,417 shares of our common stock.

 

 

 

 

 

There are a number of conflicts of interest of which stockholders should be aware regarding our ownership and operations. Set forth below a list of related parties with whom we have engaged in one or more transactions as well as a summary of each transaction involving such related parties.

 

Related Parties

 

 

Priority Preferred Distribution

 

Flag Luxury Properties holds a $15 million priority preferred distribution right in FX Luxury Realty. This right entitles Flag Luxury Properties to receive an aggregate amount of $15 million prior to any distributions of cash by FX Luxury Realty from the proceeds of certain predefined capital transactions. Until the preferred distribution is paid in full, we are required to use the proceeds from certain predefined capital transactions to pay the amount then owed to Flag Luxury Properties under such priority preferred distribution right. This right carries no voting or other rights, other than the right to receive the priority preferred distribution. Robert F.X. Sillerman and Paul Kanavos each own, directly and indirectly, an approximate 29.3% interest in Flag Luxury Properties and each will be entitled to receive his pro rata participation of the $45 million priority distribution when paid by FX Luxury Realty.

 

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.

 

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.

 

Terminated License Agreements

 

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

 

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

 

On March 9, 2009, following the Company’s failure to make the $10 million annual guaranteed minimum royalty payments for 2008, the Company entered into a Termination, Settlement and Release agreement with EPE and MAE, pursuant to which the parties agreed to terminate the Elvis Presley and Muhammad Ali license agreements and to release each other from all claims related to or arising from such agreements. In consideration for releasing

the Company from any claims related to the license agreements, EPE and MAE will receive 10% of any future net proceeds or fees received by the Company from the sale and/or development of the Las Vegas property, up to a maximum of $10 million. The Company has the right to buy-out this participation right at any time prior to April 9, 2014 for a payment equal to (i) $3.3 million plus interest at 7% per annum, calculated from year 3 until repaid, plus (ii) 10% of any net proceeds received from the sale of some or all of the Las Vegas property during such buy-out period and for six months thereafter, provided that the amount paid under clauses (i) and (ii) shall not exceed $10 million.

 

Conditional Option Agreement and EPE License Agreement Amendment with 19X

 

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

 

The Company also entered into an agreement with 19X to amend the EPE license agreement, which was also conditioned upon the closing of 19X’s then pending acquisition of CKX. The amendment to the EPE license agreement provided that, if, by the date that is 7 1 / 2  years following the closing of 19X’s acquisition of CKX, EPE had not achieved certain financial thresholds, the Company would have been entitled to a reduction of $50 million against 85% of the payment amounts due under the EPE license agreement, with such reduction to occur ratably over the ensuing three year period; provided, however, that if the Company had failed in its obligations to build any hotel to which it had previously committed under the definitive Graceland master redevelopment plan, then this reduction would not have applied.

 

The merger agreement between 19X and CKX was terminated on November 1, 2008. Because 19X would only have owned the EPE business upon consummation of its acquisition of CKX, as a result of the termination of the merger agreement between 19X and CKX, these conditional agreements with 19X were terminated.

 

Shared Services Agreement

 

We are party to a shared services agreement with CKX, pursuant to which employees of CKX, including members of senior management, provide services for us, and certain of our employees, including members of senior management, provide services for CKX. The services to be provided pursuant to the shared services agreement are expected to include management, legal, accounting and administrative.

 

Payments under the agreements 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 shall use their reasonable, good-faith efforts to determine the net payments due in accordance with the factors described in above.

 

Each party shall promptly present the report prepared as described above to the independent members of its board of directors or a duly authorized committee of independent directors for their review as promptly as practicable. If the independent directors or committee for either party raise questions or issues with respect to the report, the parties shall cause their duly authorized representatives to meet promptly to address such questions or issues in good faith and, if appropriate, prepare a revised report. If the report is approved by the independent directors or committee of each party, then the net payment due as shown in the report shall be promptly paid.

The term of the agreement runs until December 31, 2010, provided, however , that the term may be extended or earlier terminated by the mutual written agreement of the parties, or may be earlier terminated upon 90 days written notice by either party in the event that a majority of the independent members of such party’s board of directors determine that the terms and/or provisions of this agreement are not in all material respects fair and consistent with the standards reasonably expected to apply in arms-length agreements between affiliated parties; provided further, however , that in any event either party may terminate the agreement in its sole discretion upon 180 days prior written notice to the other party.

 

Because the shared services agreement with CKX constitutes an agreement with a related party, the agreement was reviewed and approved by the independent members of our board of directors. In addition, the agreement was reviewed and approved by a special committee of independent members of the board of directors of CKX formed to evaluate and approve certain related party transactions.

 

Flag Shared Services Arrangement

 

We are also party to a shared services arrangement with Flag Luxury Properties, a company owned and controlled by Robert F.X Sillerman, Paul Kanavos and Brett Torino, pursuant to which Flag reimburses the Company for the services of Mitchell J. Nelson and certain administrative employees, based on an allocation of time spent on Flag matters and the Company reimburses Flag for an allocation of rent and related overhead for the offices occupied by Paul Kanavos, Mitchell J. Nelson, and certain administrative personnel (see below under 650 Madison Avenue Office Space), based on an allocation of their time spent with respect to Company matters. The shared services arrangement is at will and may be terminated at any time by either party.

 

Payments under the agreements are made on a quarterly basis and are determined taking into account a number of factors, including but not limited to, the overall type and volume of services provided, the individuals involved, the amount of time spent by such individuals and their current compensation rate with the company with which they are employed. Each quarter, representatives determine the net payment due from one party to the other for provided services performed by the parties during the prior calendar quarter, and prepare a report in reasonable detail with respect to the provided services so performed, including the value of such services and the net payment due.

 

The Company presents the report prepared as described above to the Audit Committee. Because the shared services arrangement with Flag constitutes an agreement with a related party, the allocation and reimbursements are reviewed and approved by the Audit Committee of the board of directors of the Company, which consists entirely of independent members of the board of directors. If the Audit Committee raises any questions or issues with respect to the report, the parties cause their duly authorized representatives to meet promptly to address such questions or issues in good faith and, if appropriate, prepare a revised report. If the report is approved by Audit Committee, then the net payment due as shown in the report is promptly paid.

 

Stockholder Lock-Ups

 

Certain of our affiliates, including Robert F.X. Sillerman, Brett Torino and Paul C. Kanavos, have entered into lock-up agreements which prevent them from selling their shares of our common stock until the expiration of three years from the time of the reorganization transactions. Messrs. Sillerman, Kanavos and Torino have agreed not to sell any of the shares they received in connection with the distribution from Flag Luxury Properties to its members and certain of its employees for a period of three (3) years. Once the three year lock-up agreements for Messrs. Sillerman, Kanavos and Torino expire, we expect that 26,470,845 shares of our common stock will be eligible for sale pursuant to Rule 144.

 

Related Party Indebtedness

 

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.

 

19X Payment

 

In March 2008, the Company made a payment in the amount of $51,000 on behalf of 19X, Inc., a company that is owned and controlled, in part, by Robert F.X. Sillerman. The Company made the payment for administrative convenience, concurrent with its own payment for travel expenses incurred in connection with a trip taken for a shared business opportunity. As of April 30 2009, the full amount of the payment remains outstanding. The Company intends to continue to pursue payment of the full amount.

 

650 Madison Avenue Office Space

 

Since April 1, 2008, the Company has sublicensed certain space from Flag Luxury Properties, which in turn sublicensed the space from Flag Anguilla Management, a company controlled by Robert F.X. Sillerman. The rent for such space is calculated on a quarterly basis and is incorporated into the quarterly shared services calculation between the Company and Flag Luxury Properties described above. For the three months ended March 31, 2009, rental reimbursements to Flag Luxury Properties totaled $35,400.

 

Effective April 1, 2009, CKX reached an agreement with the Company and Flag Anguilla, pursuant to which (i) Flag Anguilla assigned its sublease for the 15th floor to CKX, and (ii) CKX sublicensed a portion of such space to the Company. The terms of the agreement runs concurrent with the term of CKX’s sublease for the space (expiring in 2013). CKX is responsible for payment of the full rental amount each month to the sublandlord, and the Company will pay its pro rata share of the rent for the space it occupies to CKX, with such payments to be made on the first day of every month during the term. The agreement is terminable at the Company’s option on 90 days written notice, and is terminable at the option of CKX upon the failure of the Company to make a single rental payment when due, subject to a five (5) day cure period.

 

Private Placement of Units

 

Between July 15, 2008 and July 18, 2008, the Company sold in a private placement to Paul C. Kanavos, the Company’s President, Barry A. Shier, the Company’s Chief Operating Officer, an affiliate of Brett Torino, the Company’s Chairman of the Las Vegas Division, Mitchell J. Nelson, the Company’s Executive Vice President and General Counsel, and an affiliate of Harvey Silverman, a director of the Company, an aggregate of 2,264,289 units at a purchase price of $3.50 per unit. Each unit consisted of one share of the Company’s common stock, a warrant to purchase one share of the Company’s common stock at an exercise price of $4.50 per share and a warrant to purchase one share of the Company’s common stock at an exercise price of $5.50 per share. The warrants to purchase shares of the Company’s common stock for $4.50 per share are exercisable for a period of seven years and the warrants to purchase shares of the Company’s common stock for $5.50 per share are exercisable for a period of ten years. The Company generated aggregate proceeds from the sale of the units of approximately $7.9 million.

Board Decisions and Certain Conflicts of Interest

 

Past and future decisions by our board regarding our future growth, operations and major corporate decisions will be subject to certain possible conflicts of interest. These conflicts may have caused, and in the future may cause, our business to be adversely affected. Nevertheless, our board will be responsible for making decisions on our behalf. In appropriate circumstances, we expect to submit transactions with any related party for approval or negotiation by our independent directors or a special committee thereof.

 

Independent Directors

 

The Company has Corporate Governance Guidelines which provide, among other things, that a majority of the Company’s Board must meet the criteria for independence required by The NASDAQ Global Market and that the Company shall at all times have an Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, which committees will be made up entirely of independent directors. In particular, Rules 4200 and 4350 of The NASDAQ Global Market require that a majority of our Board qualify as “independent”.

 

Messrs. Ledy, Meyers, Miller, Silverman and Sudack, whose biographical information is included below under the heading “Executive Officers and Directors of FX Real Estate and Entertainment Inc.,” have been appointed to our Board as independent directors and qualify as such under the applicable rules of The NASDAQ Global Market.

 

 

Services Provided by the Independent Registered Public Accounting Firm and Fees Paid

 

The following table sets forth the aggregate fees for services provided by Ernst & Young LLP to the Company and its subsidiaries with respect to the years ended December 31, 2008 and 2007:

 

 

 

 

Audit Committee Pre-Approval of Services Provided by the Independent Registered Public Accounting Firm

 

The Audit Committee of the board of directors maintains a pre-approval policy with respect to material audit and non-audit services to be performed by the Company’s independent registered public accounting firm in order to assure that the provision of such services does not impair the accountant’s independence. Before engaging the independent registered public accounting firm to render a service, the engagement must be either specifically approved by the Audit Committee, or entered into pursuant to the pre-approval policy. Pre-approval authority may be delegated to one or more members of the Audit Committee.

 

 

(a) List of Documents filed as part of this Report:

 

(1) Financial Statements: The following financial statements were previously included in the Original Report:

 

The Consolidated Financial Statements for the year ended December 31, 2007 commence on page 58 of the Original Report.

 

(2) Financial Statement Schedule: The following financial statement schedules were previously included in the Original Report:

 

Schedule II — Valuation and Qualifying Accounts for the period from May 11, 2007 through December 31, 2007.

 

The Financial Statement Schedule commences on page 86 of the Original Report.

 

All other schedules have been omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.

 

(3) Exhibits

 

Part IV of the Original Report is hereby amended to add the exhibits listed below that are required to be filed in connection with this Amended Report. See the separate Exhibit Index attached hereto and incorporated herein.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf of the undersigned thereunto duly authorized.

 

FX Real Estate and Entertainment Inc.

INDEX TO EXHIBITS

 

The documents set forth below are filed herewith.

 

 

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