UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section
13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7265
AMBASE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2962743
(State of incorporation) (I.R.S. Employer Identification No.)
100 PUTNAM GREEN, 3RD FLOOR
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
(203) 532-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- ------
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
------- ------- -------
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------- -------------
At October 31, 2006, there were 45,118,519 shares outstanding of the
registrant's common stock, $0.01 par value per share.
AmBase Corporation
Quarterly Report on Form 10-Q
September 30, 2006
TABLE OF CONTENTS Page
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).....................................................................1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................21
Item 4. Controls and Procedures.............................................................................21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................22
Item 1A. Risk Factors........................................................................................22
Item 2. Exhibits............................................................................................23
Item 3. Submission of Matters to a Vote of Security Holders.................................................23
Signatures ....................................................................................................23
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands, except for share and per share amounts)
September 30, December 31,
2006 2005
======== =========
Assets:
Cash and cash equivalents......................................................... $ 1,376 $ 2,852
Investment securities:
Held to maturity (market value $36,231 and $39,034, respectively)............. 36,225 39,031
Available for sale, carried at fair value .................................... 1,736 1,729
-------- --------
Total investment securities....................................................... 37,961 40,760
-------- --------
Real estate owned:
Land............................................................................ 554 554
Buildings and improvements...................................................... 1,900 1,900
-------- --------
2,454 2,454
Less: accumulated depreciation................................................. (270) (232)
-------- --------
Real estate owned, net............................................................ 2,184 2,222
Other assets...................................................................... 739 49
-------- --------
Total assets...................................................................... $ 42,260 $ 45,883
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued liabilities.......................................... $ 2,121 $ 1,568
Supplemental retirement plan...................................................... 16,050 14,595
Other liabilities................................................................. 31 38
-------- --------
Total liabilities................................................................. 18,202 16,201
-------- --------
Commitments and contingencies (Note 3)............................................
Stockholders' equity:
Common stock ($0.01 par value, 200,000,000 authorized, 46,410,007 issued and
outstanding)................................................................... 464 464
Paid-in capital................................................................... 548,022 547,956
Accumulated other comprehensive loss.............................................. (820) (1,395)
Accumulated deficit............................................................... (522,291) (516,658)
Treasury stock, at cost - 1,291,488 and 176,488 shares, respectively.............. (1,317) (685)
-------- --------
Total stockholders' equity........................................................ 24,058 29,682
-------- --------
Total liabilities and stockholders' equity........................................ $ 42,260 $ 45,883
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Third Quarter and Nine Months Ended September 30
(Unaudited)
(in thousands, except per share data)
Third Quarter Nine Months
2006 2005 2006 2005
Revenues: ==== ==== ==== ====
Rental income.................................... $ 2 $ 41 $ 92 $ 127
Operating expenses:
Compensation and benefits........................ 1,058 1,098 3,742 3,373
Professional and outside services................ 553 423 2,274 1,537
Property operating and maintenance............... 28 29 89 99
Depreciation ................................... 13 13 38 38
Insurance........................................ 17 17 62 61
Other operating.................................. 55 41 161 127
---------- --------- --------- --------
1,724 1,621 6,366 5,235
---------- --------- --------- --------
Operating loss................................... (1,722) (1,580) (6,274) (5,108)
---------- --------- --------- --------
Interest income.................................. 491 333 1,368 604
Other expense, claims settlement................. (1,100) - (1,100) -
Other income, insurance recovery................. 400 - 400 -
Other income..................................... - - 72 -
Realized gains on sales of investment securities. - - - 20
---------- --------- --------- --------
Loss from continuing operations before
income taxes................................ (1,931) (1,247) (5,534) (4,484)
Income tax expense............................... (33) (180) (99) (240)
--------- --------- --------- --------
Loss from continuing operations.................. (1,964) (1,427) (5,633) (4,724)
--------- --------- --------- --------
Income from discontinued property................ - 63 - 749
Gain on disposition.............................. - 10,298 - 10,298
--------- --------- --------- --------
Income from discontinued operations.............. - 10,361 - 11,047
--------- --------- --------- --------
Net income (loss)................................ $(1,964) $8,934 $(5,633) $ 6,323
Per share data: ========= ========= ========= ========
Basic:
Loss from continuing operations.................. $ (0.04) $(0.03) $ (0.12) $ (0.10)
Income from discontinued operations.............. - 0.22 - 0.24
--------- --------- --------- --------
Net income (loss) to common stockholders......... $ (0.04) $ 0.19 $ (0.12) $ 0.14
Assuming dilution: ========= ========= ========= ========
Loss from continuing operations.................. $ (0.04) $(0.03) $ (0.12) $ (0.10)
Income from discontinued operations.............. - 0.22 - 0.24
--------- --------- --------- --------
Net income (loss) to common stockholders......... $ (0.04) $ 0.19 $ (0.12) $ 0.14
========= ========= ======== ========
Weighted average common shares outstanding:
Basic............................................ 45,168 46,234 45,419 46,234
========= ========= ======== ========
Diluted.......................................... 45,168 46,234 45,419 46,234
========= ========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Third Quarter and Nine Months Ended September 30
(Unaudited)
(in thousands)
Third Quarter Nine Months
2006 2005 2006 2005
====== ===== ===== =====
Net income (loss)................................................... $(1,964) $8,934 $ (5,633) $ 6,323
Amortization of minimum pension liability adjustment................ 284 - 568 -
Unrealized holding gains on investment securities
available for sale............................................. 90 81 7 12
------- ------ -------- -------
Comprehensive income (loss)......................................... $(1,590) $9,015 $ (5,058) $ 6,335
======= ====== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30
(Unaudited)
(in thousands)
2006 2005
Cash flows from operating activities: ======== ========
Loss from continuing operations....................................................... $(5,633) $(4,724)
Adjustments to reconcile loss from continuing operations to net cash used by
continuing operations:
Depreciation and amortization..................................................... 38 38
Accretion of discount - investment securities..................................... (31) (326)
Realized gains on investment securities available for sale....................... - (20)
Stock-based compensation expense.................................................. 66 -
Amortization of minimum pension liability adjustment.............................. 568 -
Changes in other assets and liabilities:
Accrued interest receivable....................................................... (270) -
Accounts receivable............................................................... - 1
Other assets...................................................................... (420) 402
Accounts payable and accrued liabilities.......................................... 553 (201)
Supplemental retirement plan and other liabilities................................ 1,448 (287)
Other, net........................................................................ 1 3
-------- --------
Net cash used by continuing operating activities...................................... (3,680) (5,114)
-------- --------
Income from discontinuing operations.................................................. - 11,047
Adjustments to reconcile income from discontinued operations to net cash
provided by discontinued operations:
Gain from sale of discontinued operations......................................... - (10,298)
Depreciation and amortization related to discontinued operations.................. - 140
Changes in other assets and liabilities related to discontinued operations:
Consolidated other assets & other liabilities..................................... - (305)
-------- --------
Net cash provided by discontinued operations.......................................... - 584
-------- --------
Net cash used by operating activities................................................. (3,680) (4,530)
-------- --------
Cash flows from investing activities:
Maturities of investment securities - held to maturity................................ 86,576 61,466
Purchases of investment securities - held to maturity................................. (83,740) (85,795)
Purchases of investment securities - available for sale............................... - (252)
Sales of investment securities - available for sale................................... - 548
Proceeds from sale of real estate owned............................................... - 27,442
------- --------
Net cash provided by investing activities............................................. 2,836 3,409
------- --------
Cash flows from financing activities:
Common stock repurchased.............................................................. (632) -
------- --------
Net cash used by financing activities................................................. (632) -
------- --------
Net decrease in cash and cash equivalents............................................. (1,476) (1,121)
Cash and cash equivalents at beginning of period...................................... 2,852 10,124
------- --------
Cash and cash equivalents at end of period............................................ $ 1,376 $ 9,003
======= ========
Supplemental cash flow disclosures:
Income taxes paid..................................................................... $ 537 $ 107
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization
The accompanying consolidated financial statements of AmBase Corporation
and its wholly-owned subsidiaries (the "Company") are unaudited and subject to
year-end adjustments. All material intercompany transactions and balances have
been eliminated. In the opinion of management, the interim financial statements
reflect all adjustments, consisting only of normal recurring adjustments unless
otherwise disclosed, necessary for a fair statement of the Company's financial
position and results of operations. Results for interim periods are not
necessarily indicative of results for the full year. Certain reclassifications
have been made to the prior year consolidated financial statements to conform
with the current year presentation. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions, that it deems reasonable, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from such estimates and assumptions. The unaudited interim financial statements
presented herein should be read in conjunction with the Company's consolidated
financial statements filed in its Annual Report on Form 10-K for the year ended
December 31, 2005.
The Company's assets currently consist primarily of cash and cash
equivalents, investment securities, and real estate owned. The Company earns
non-operating revenue principally consisting of investment earnings on
investment securities and cash equivalents. The Company continues to evaluate a
number of possible acquisitions, and is engaged in the management of its assets
and liabilities, including the contingent assets, as described in Part II - Item
1. From time to time, the Company and its subsidiaries may be named as a
defendant in various lawsuits or proceedings. The Company intends to
aggressively contest all litigation and contingencies, as well as pursue all
sources for contributions to settlements.
In July 2005, the Company completed the sale of its 38,000 square foot
office building at Two Soundview Drive in Greenwich, Connecticut ("Two
Soundview"). Accordingly, the results of operations of Two Soundview for the
periods ended prior to the July 2005 sale have been retroactively reclassified
as discontinued operations in the accompanying Consolidated Statement of
Operations in accordance with Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). See Note 7 herein for further
information.
The Company's management expects that operating cash needs for the
remainder of 2006 will be met principally by the receipt of non-operating
revenue consisting of investment earnings on investment securities and cash
equivalents, and the Company's current financial resources.
Note 2 - Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") released
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement 109" ("FIN 48"), which clarifies the accounting
for uncertainty in income taxes recognized in companies' financial statements in
accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The evaluation of a tax position will be sustained upon
examination. The second step is measurement whereby a tax position that meets
the more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. FIN 48 also provides
guidance on derecognition threshold of recognized tax benefits, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company will adopt the new requirements in the first quarter of 2007
and is currently evaluating the impact that the adoption of FIN 48 will have on
its consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment," ("SFAS 123R"), using the modified prospective
approach and therefore has not restated results for prior periods. Under this
method, stock-based compensation expense for the three months ended March 31,
2006, includes compensation expense for all stock-based compensation awards
granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS123"). Stock-based compensation expense for all stock-based
compensation awards granted after January 1, 2006, for which vesting is based
solely on employment service, will be based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R. The Company recognizes
these compensation costs for only those shares expected to vest on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting term of two years. Prior to the adoption of SFAS
123R, the Company recognized stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). In March 2005, the Securities and Exchange Commission
(the "SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the
SEC's interpretation of SFAS 123R and the valuation of share-based payments for
public companies. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R. See Note 10 herein for a further discussion of
stock-based compensation.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans, an Amendment of SFAS No. 87, 88, 106 and 132R" ("SFAS
158"). SFAS 158 requires an employer to (i) recognize in its statement of
financial position an asset for a plan's over funded status or a liability for a
plan's under funded status; (ii) measure a plan's assets and its obligations
that determine its funded status as of the end of the employer's fiscal year
(with limited exceptions); and (iii) recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the changes occur.
Those changes will be reported in comprehensive income of a business entity. The
requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective as of the end of the fiscal year ending after
December 15, 2006, for entities with publicly traded equity securities, and at
the end of the fiscal year ending after June 15, 2007, for all other entities.
The requirement to measure plan assets and benefit obligations as of the date of
the employer's fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. We do not believe that the adoption
of SFAS 158 will have a material effect on the Company's consolidated financial
statements as the Company intends to terminate its Supplemental Retirement Plan
(the "Supplemental Plan") on or about May 31, 2007, as further discussed in Note
11 herein. The Company will continue to recognize an expense through to the date
on which the Supplemental Plan will terminate. The ultimate liability related to
the final termination of the Supplemental Plan is not reflected as all
conditions for the final termination of the Supplemental Plan have not yet been
met.
Note 3 - Legal Proceedings
The information contained in Item 8 - Note 10 in AmBase's Annual Report on
Form 10-K for the year ended December 31, 2005, is incorporated by reference
herein and the defined terms set forth below have the same meaning ascribed to
them in that report. There have been no material developments in such legal
proceedings, except as set forth below.
The Company is or has been a party in a number of lawsuits or proceedings,
including the following:
Supervisory Goodwill Litigation. The Company filed its Statement of Issues
relating to the size of the receivership deficit in June 2006. In May of 2006,
the Company served on the Government an expert report in support of some of the
arguments the Company made regarding the size of the receivership deficit. The
Company's expert was deposed in July 2006. In early August 2006, the Government
submitted its own expert report on receivership deficit issues, and in October
2006, the Company deposed the Government's expert. In late August 2006, the
Government filed a response to the Company's Statement of Issues, and in
September 2006, the FDIC filed its own response to the Statement of Issues. The
Company filed its reply in support of its Statement of Issues in October 2006. A
status conference to discuss further proceedings has been scheduled for November
2006. No assurance can be given regarding the ultimate outcome of the
litigation.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Both the Court of Federal Claims and the Court of appeals for the Federal
Circuit have issued numerous decisions in cases that involve claims against the
United States based upon its breach of its contracts with savings and loan
institutions through its 1989 enactment of FIRREA. In particular, the Federal
Circuit has issued decisions rejecting Takings Clause claims advanced by
shareholders of failed thrifts. Castle v. United States, 301F.3d 1328 (Fed. Cir.
2002; Bailey v. United States, 341F.3d 1342 (Fed. Cir. 2003) petition for
certiorari which was filed January 26, 2004. In April 2004, the Company filed an
amicus brief in support of the petition for certiorari filed by Bailey. In June
2004, the United States Supreme Court denied the petition for certiorari filed
by Bailey. The Court of Claims decision in the Company's case, as well as other
decisions in Winstar-related cases, are publicly available and may be relevant
to the Supervisory Goodwill Company's claims, but are not necessarily indicative
of the ultimate outcome of the Company's actions.
Delaware Court of Chancery Section 220 Books and Records Action: Two
Stockholders who owned approximately 14.4% of the Company's outstanding common
stock (the "Stockholders") had previously made demand in January 2004 to inspect
certain Company books and records pursuant to Section 220 of the Delaware
General Corporation Law. The Company opposed the request on various grounds, and
the Stockholders brought suit in March 2004 to compel inspection of certain
Company books and records. In August 2005, the Court of Chancery issued a
Memorandum Opinion finding that the Stockholders had met the technical
requirements of Section 220 and had stated a proper purpose under Section 220,
and were legally entitled to inspect specified books and records, but declined
to find the Company liable for the Stockholders' attorneys' fees.
In October 2006, in order to eliminate continued involvement in the above
referenced action or potential future actions, and the resultant time, expense
and potential adverse impact on the Company's current operations and litigation
claims, the Company, its Chief Executive Officer and principal stockholder, and
the Company's Directors entered into an agreement with the Stockholders who had
initiated the action to obtain Company books and records. Pursuant to the
agreement: (i) the Company's Chief Executive Officer agreed to purchase
6,615,531 shares of Company common stock (representing approximately 14.4% of
the Company's outstanding common stock and all of the Company stock beneficially
owned by the Stockholders), for a cash purchase price of $0.55 per share
($3,638,542 in the aggregate for all of the shares); (ii) the Stockholders
agreed to dismiss the books and records action and release any additional claims
the Stockholders might have, including claims the stockholder said they had been
considering litigating against the Company, its Directors and its Chief
Executive Officer; (iii) the Stockholders entered into a standstill and other
agreements which will preclude them from taking a position in the Company for a
period of time; and (iv) the Company agreed to pay the Stockholders $1.1
million. No portion of the purchase price for the shares acquired by the
Company's Chief Executive Officer was provided by or financed by the Company.
Although the shares were not offered to the Company for purchase, the Company's
Board of Directors declined to purchase the shares at the price they were
offered to the Company's Chief Executive Officer. As the parties were
negotiating a settlement of this matter prior to September 30, 2006, the
settlement charge of $1,100,000 and related insurance recovery of $400,000 were
considered to be probable and estimable and have been reflected in the third
quarter and nine month periods ended September 30, 2006. The net cost to the
Company of the settlement was approximately $700,000.
Note 4 - Cash and Cash Equivalents
Highly liquid investments, consisting principally of funds held in
short-term money market accounts with original maturities of less than three
months, are classified as cash equivalents.
Note 5 - Investment Securities
Investment securities - held to maturity consist of U.S. Treasury Bills and
a U.S. Treasury Note with original maturities of one year or less and are
carried at amortized cost based upon the Company's intent and ability to hold
these investments to maturity.
Investment securities - available for sale, consist of investments in
equity securities held for an indefinite period and are carried at fair value
with net unrealized gains and losses recorded directly in a separate component
of stockholders' equity.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investment securities consist of the following:
September 30, 2006
December 31, 2005
==========================================================
Cost or Cost or
Carrying Amortized Fair Carrying Amortized Fair
(in thousands) Value Cost Value Value Cost Value
====== ========== ======= ======== ========= ======
Held to Maturity:
U.S. Treasury Bills........ $ 19,811 $ 19,811 $ 19,823 $ 39,031 $ 39,031 $ 39,034
U.S. Treasury Note......... 16,414 16,414 16,408 - - -
----------- ----------- ---------- ----------- ---------- ------------
36,225 36,225 36,231 39,031 39,031 39,034
----------- ----------- ---------- ----------- ---------- ------------
Available for Sale:
Equity Securities.......... 1,736 1,798 1,736 1,729 1,798 1,729
----------- ----------- ---------- ----------- ---------- ------------
$ 37,961 $ 38,023 $37,967 $ 40,760 $ 40,829 $ 40,763
=========== =========== ========== =========== ========== ============
The gross unrealized gains (losses) on investment securities, at September
30, 2006 and December 31, 2005 consist of the following:
(in thousands) 2006 2005
======= ======
Held to Maturity:
Gross unrealized gains.................................................................. $ 12 $ 3
======== =======
Gross unrealized losses................................................................. $ (6) $ -
======= =======
Available for Sale:
Gross unrealized gains.................................................................. $ 21 $ -
======== =======
Gross unrealized losses................................................................. $ (83) $ (69)
======== =======
The realized gain on the sales of investment securities available for sale
for the nine months ended September 30, 2005 was as follows:
Nine Months
(in thousands) 2005
======
Net sale proceeds....................................................................... $ 548
Cost basis.............................................................................. (528)
-----------
Realized gains.......................................................................... $ 20
===========
No investment securities were sold during the third quarter or nine month
periods ended September 30, 2006 or during the third quarter period ended
September 30, 2005.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Property Owned
As of September 30, 2006, the Company owns one commercial office building
in Greenwich, Connecticut that contains approximately 14,500 square feet. The
Company utilizes a small portion of the office space for its executive offices,
with the remaining square footage available for lease to unaffiliated third
parties.
Depreciation expense is recorded on a straight-line basis over 39 years.
The building and improvements are carried at cost, net of accumulated
depreciation of $270,000 and $232,000, at September 30, 2006 and December 31,
2005, respectively.
The Company earns rental income under operating leases with tenants.
Minimum lease rentals are recognized on a straight-line basis over the terms of
the leases. The cumulative difference between lease revenue recognized under
this method and the contractual lease payment terms, if any, is recorded as
deferred rent receivable, and the balance of $5,000 as of December 31, 2005, is
included in other assets on the Consolidated Balance Sheet. Revenue from tenant
reimbursement of common area maintenance, utilities and other operating expenses
are recognized pursuant to the tenant's lease when earned and due from tenants.
Included in property operating and maintenance are expenses for common area
maintenance, utilities, real estate taxes and other reimbursable operating
expenses, which have not been reduced by amounts reimbursable by tenants
pursuant to applicable lease agreements.
See Note 7 herein for information regarding the Company's sale of Two
Soundview in July 2005.
Note 7 - Discontinued Operations
In May 2005, the Company entered into an agreement to sell Two Soundview,
originally purchased in December 2002, to Ceruzzi Holdings, LLC, an unaffiliated
third party. In July 2005, the Company completed the sale of Two Soundview. The
sale price was $28,000,000 less normal real estate closing costs and
adjustments. As a result of the sale of Two Soundview, the results of operations
of Two Soundview have been designated as discontinued operations, and the
Consolidated Statements of Operations for the periods ended prior to the July
2005 sale have been retroactively reclassified to report the income from
discontinued operations separately from the results of continuing operations by
excluding the operating revenues and expenses of discontinued operations from
the respective statement captions, in accordance with SFAS 144. A gain from the
sale, of $10,298,000, was reflected in the Company's financial statements for
the year ended December 31, 2005.
Income from discontinued operations, as summarized below, for the third
quarter and nine months periods ended September 30, 2005, reflects the results
of operations of Two Soundview.
Income from discontinued operations is as follows:
Third Quarter
Nine Months
(in thousands) 2005 2006
Revenues: =========== ========
Rental income........................................................................... $ 98 $ 1,158
Operating expenses:
Professional and outside services....................................................... 2 25
Property operating and maintenance...................................................... 30 231
Depreciation............................................................................ - 140
Insurance............................................................................... 2 11
Other operating......................................................................... 1 2
----------- --------
35 409
----------- --------
Income from operation of discontinued operations........................................ 63 749
Gain on disposition..................................................................... 10,298 10,298
----------- --------
Income from discontinued operations..................................................... $ 10,361 $ 11,047
=========== ========
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company utilized net operating loss ("NOL") carryforwards and
alternative minimum tax NOL carryforwards as available to offset taxable income
generated from the sale of Two Soundview. However, due to limitations on the
amount of NOL carryforwards that could be utilized against taxable income, an
income tax provision of $400,000 for discontinued operations, attributable to a
provision for federal alternative minimum tax of $150,000 and a provision of
$250,000 for Connecticut state taxes was recorded in the fourth quarter ended
December 31, 2005.
Note 8 - Income Taxes
The Company and its 100% owned domestic subsidiaries file a consolidated
federal income tax return. The Company recognizes both the current and deferred
tax consequences of all transactions that have been recognized in the financial
statements, calculated based on the provisions of enacted tax laws, including
the tax rates in effect for current and future years. Net deferred tax assets
are recognized immediately when a more likely than not criterion is met; that
is, greater than 50% probability exists that the tax benefits will actually be
realized sometime in the future. The Company has calculated a net deferred tax
asset of $31 million and $32 million as of September 30, 2006 and December 31,
2005, respectively, arising primarily from net operating loss ("NOL")
carryforwards, alternative minimum tax ("AMT") credits (not including the
anticipated tax effects of NOL's expected to be generated from the Company's tax
basis in Carteret Savings Bank, F.A. and subsidiaries ("Carteret"), resulting
from the election decision, as more fully described below). A valuation
allowance has been established for the entire net deferred tax asset as
management, at the current time, has no basis to conclude that realization is
more likely than not.
As a result of the Office of Thrift Supervision's December 4, 1992
placement of Carteret in receivership, under the management of the Resolution
Trust Corporation ("RTC")/Federal Deposit Insurance Corporation ("FDIC"), and
then proposed Treasury Reg. ss.1.597-4(g), the Company had previously filed its
1992 and subsequent federal income tax returns with Carteret disaffiliated from
the Company's consolidated federal income tax return. Based upon the impact of
Treasury Reg. ss.1.597-4(g), which was issued in final form on December 20,
1995, a continuing review of the Company's tax basis in Carteret, and the impact
of prior year tax return adjustments on the Company's 1992 federal income tax
return as filed, the Company decided not to make an election pursuant to final
Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's
consolidated federal income tax return effective as of December 4, 1992 (the
"Election Decision").
The Company has made numerous requests to the RTC/FDIC for tax information
pertaining to Carteret and the resulting successor institution, Carteret Federal
Savings Bank ("Carteret FSB"); however, all of the information still has not
been received. Based on the Company's Election Decision, as described above, and
the receipt of some of the requested information from the RTC/FDIC, the Company
has amended its 1992 consolidated federal income tax return to include the
federal income tax effects of Carteret and Carteret FSB (the "1992 Amended
Return"). The Company is still in the process of amending its consolidated
federal income tax returns for 1993 and subsequent years.
The Company anticipates that, as a result of filing a consolidated federal
income tax return with Carteret FSB, a total of approximately $170 million of
tax NOL carryforwards will be generated from the Company's tax basis in
Carteret/Carteret FSB as tax losses are incurred by Carteret FSB of which $158
million are still available for future use. Based on the Company's filing of the
1992 Amended Return, approximately $56 million of NOL carryforwards are
generated for tax year 1992 which expire in 2007, with the remaining
approximately $102 million of NOL carryforwards to be generated, expiring no
earlier than 2008. These NOL carryforwards would be available to offset future
taxable income, in addition to the NOL carryforwards as further detailed below.
The Company can give no assurances with regard to the 1992 Amended Return, or
amended returns for subsequent years, or the final amount or expiration of NOL
carryforwards ultimately generated from the Company's tax basis in Carteret.
In March 2000, the Company filed several carryback claims and amendments to
previously filed carryback claims with the IRS (the "Carryback Claims") seeking
refunds from the IRS of alternative minimum tax and other federal income taxes
paid by the Company in prior years plus applicable IRS interest, based on the
filing of the 1992 Amended Return. In April 2003, IRS examiners issued a letter
to the Company proposing to disallow the Carryback Claims. The Company sought
administrative review of the letter by protesting to the Appeals Division of the
IRS. In February 2005, IRS Appeals officials completed their review of the
Carryback Claims, and disallowed them. The Company is currently considering
whether to file suit for the tax refunds it seeks, plus interest, with respect
to the Carryback Claims. Even if the Company files suit, the Company can give no
assurances as to the final amounts of refunds, if any, or when they might be
received.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Based upon the Company's federal income tax returns as filed from 1993 to
2005 (subject to IRS audit adjustments), excluding the NOL carryforwards
utilized in 2005, and excluding the NOL carryforwards generated from the
Company's tax basis in Carteret/Carteret FSB, as noted above at September 30,
2006, the Company has NOL carryforwards aggregating approximately $30 million,
available to reduce future federal taxable income which expire if unused
beginning in 2009. The Company's federal income tax returns for years subsequent
to 1992 have not been reviewed by the IRS.
The utilization of certain carryforwards is subject to limitations under
U.S. federal income tax laws. In addition, the Company has approximately $21
million of AMT credit carryforwards ("AMT Credits"), which are not subject to
expiration. Based on the filing of the Carryback Claims, as further discussed
above, the Company is seeking to realize approximately $8 million of the $21
million of AMT Credits.
Note 9 - Comprehensive Income (Loss)
Comprehensive income (loss) is composed of net income (loss) and other
comprehensive income (loss) which includes the change in unrealized gains
(losses) on investment securities available for sale and recognition of
additional minimum pension liability, as follows:
Third Quarter Ended Nine Months Ended
(in thousands) September 30, 2006 September 30, 2006
========================================== ========================================
Unrealized Minimum Accumulated Unrealized Minimum Accumulated
Gains (Losses) Pension Other Gains (Losses) Pension Other
on Investment Liability Comprehensive on Investment Liability Comprehensive
Securities Adjustment Income (Loss) Securities Adjustment Income (Loss)
============= ========== ============= ============ ========== =============
Balance beginning of period.. $ (152) $ (1,042) $ (1,194) $ (69) $ (1,326) $ (1,395)
Change during the period..... 90 284 374 7 568 575
------------- ---------- ------------- ------------ ---------- --------------
Balance end of period........ $ (62) $ (758) $ (820) $ (62) $ (758) $ (820)
============= ========== ============= ============ ========== ==============
Third Quarter Ended Nine Months Ended
(in thousands) September 30, 2005 September 30, 2005
========================================== ========================================
Unrealized Minimum Accumulated Unrealized Minimum Accumulated
Gains (Losses) Pension Other Gains (Losses) Pension Other
on Investment Liability Comprehensive on Investment Liability Comprehensive
Securities Adjustment Income (Loss) Securities Adjustment Income (Loss)
============= ========== ============= ============ ========== ==============
Balance beginning of period.. $ (37) $ (412) $ (449) $ 37 $ (412) $ (375)
Reclassification adjustment for
gains realized in net loss. - - - (5) - (5)
Change during the period..... 81 - 81 12 - 12
------------- ---------- ------------- ------------ ---------- -------------
Balance end of period........ $ 44 $ (412) $ (368) $ 44 $ (412) $ (368)
============= ========== ============= ============ ========== =============
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Stock-Based Compensation
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the
Company may grant to officers and employees of the Company and its subsidiaries,
stock options ("Options"), stock appreciation rights ("SARs"), restricted stock
awards ("Restricted Stock"), merit awards ("Merit Awards") and performance share
awards ("Performance Shares"), through May 28, 2008. An aggregate of 5,000,000
shares of the Company's Common Stock are reserved for issuance under the 1993
Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of
Restricted Stock and Performance Shares); however, of such shares, only
2,500,000 shares in the aggregate shall be available for issuance for Restricted
Stock Awards and Merit Awards. Such shares shall be authorized but unissued
shares of Common Stock. As of March 31, 2006, there were 3,760,000 shares
available for future stock option grants. Options may be granted as incentive
stock options ("ISOs") intended to qualify for favorable tax treatment under
Federal tax law or as nonqualified stock options ("NQSOs"). SARs may be granted
with respect to any Options granted under the 1993 Plan and may be exercised
only when the underlying Option is exercisable. The 1993 Plan requires that the
exercise price of all Options and SARs be equal to or greater than the fair
market value of the Company's Common Stock on the date of grant of that Option.
The term of any ISO or related SAR cannot exceed ten years from the date of
grant, and the term of any NQSO cannot exceed ten years and one month from the
date of grant. Subject to the terms of the 1993 Plan and any additional
restrictions imposed at the time of grant, Options and any related SARs
ordinarily will become exercisable commencing one year after the date of grant.
Options granted generally have a ten year contractual life and generally have
vesting terms of two years from the date of grant. In the case of a "Change of
Control" of the Company (as defined in the 1993 Plan), Options granted pursuant
to the 1993 Plan may become fully exercisable as to all optioned shares from and
after the date of such Change in Control in the discretion of the Committee or
as may otherwise be provided in the grantee's Option agreement. Death,
retirement, or absence for disability will not result in the cancellation of any
Options.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, using the modified prospective application method and
therefore has not restated results for prior periods. Under this method,
stock-based compensation expense for the nine months ended September 30, 2006,
includes compensation expense for all stock-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123.
Stock-based compensation expense for all stock-based compensation awards granted
after January 1, 2006, for which vesting is based solely on employment service,
will be based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R. The Company recognizes these compensation costs for
only those shares expected to vest, on a straight-line basis over the requisite
service period of the award, which is generally the option vesting term of two
years.
During the third quarter and nine months ended September 30, 2006, the
Company recorded compensation expense of $22,000 and $66,000, respectively,
relating to unvested stock options. Compensation expense relating to stock
options is recorded as a reduction to additional paid in capital in the
statement of stockholders' equity. Prior to 2006, as permitted by SFAS 123, the
Company accounted for share-based payments to employees using APB 25's intrinsic
value method and recognized no compensation cost for employee stock options in
prior years. Had the Company adopted SFAS 123R in the prior period, the impact
of that standard would have approximated the impact of SFAS 123 in the
disclosure of pro-forma net income (loss) and earnings per share described as
follows:
Third Quarter Ended Nine Months Ended
September 30, 2005 September 30,2005
(in thousands, except per share data) ================== =================
Net income:
As reported................................................... $ 8,934 $ 6,323
Deduct: total stock-based employee compensation expense
determined under fair value based methods for all awards..... (31) (94)
------------------ -----------------
Pro forma..................................................... $ 8,903 $ 6,229
================== ==================
Net income per common share:
Basic - as reported........................................... $ 0.19 $ 0.24
Basic - pro forma............................................. 0.19 0.24
Assuming dilution - as reported............................... 0.19 0.24
Assuming dilution - pro forma................................. 0.19 0.24
================== ==================
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of each option award was estimated on the date of grant
using the Black-Scholes-Merton option valuation model ("Black-Scholes") that
uses the assumptions noted in the following table. Expected volatilities are
based on historical volatility of the Company's stock. The Company uses
historical data to estimate option exercises and employee terminations within
the valuation model. The expected term of options granted is estimated based on
the contractual lives of option grants, option vesting period and historical
data and represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate for periods within the contractual life
of the option is based on the U.S. Treasury bond yield in effect at the time of
grant. No adjustments were made in 2006 to the input assumptions for the
calculation of the fair value of stock options granted in 2005 and prior years
from the pro forma amounts previously presented in the Company's prior period
financial statements.
The Black-Scholes option valuation model requires the input of highly
subjective assumptions, including the expected life of the stock-based award and
stock price volatility. The assumptions noted herein represent management's best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been
used, our recorded and pro forma stock-based compensation expense could have
been materially different from that depicted herein. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, the share-based compensation expense could be
materially different
The Company believes that the use of the Black-Scholes model meets the fair
value measurement objectives of SFAS 123R and reflects all substantive
characteristics of the instruments being valued. No stock options were granted
during the year to date period ending September 30, 2006. The per share grant
date weighted average estimated values of employee stock option grants under the
1993 Plan, as well as the assumptions used to calculate such values granted
during the period ended September 30, 2005, are as follows:
September 30,
2005
----------------
Weighted average fair value at grant date.............................. $0.39
Expected dividend yield................................................ 0%
Risk-free interest rate................................................ 4.24%
Expected volatility.................................................... 0.44
Expected life in years................................................. 6
The following table reports stock option activity during the nine month
period ended September 30, 2006:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual
Shares Price Life (in years)
---------- ----------- ---------------
Outstanding at January 1, 2006...... 1,440,000 $0.96
Expired............................. (200,000) 0.66
--------- =====
Outstanding at September 30, 2006... 1,240,000 $1.01 4.65
========= ===== ====
Exercisable at September 30, 2006... 1,036,000 $1.02 4.59
========= ===== ====
At September 30, 2006, the exercise price of stock options outstanding and
exercisable was greater than the market price of the Company's stock; therefore,
no intrinsic value for stock options is reflected above.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents information regarding non-vested share
activity during the nine month period ended September 30, 2006:
Weighted
Average
Number of Grant-Date
Shares Fair Value
---------- ------------
Non-vested at January 1, 2006....... 528,000 $0.44
Vested during period................ (324,000) 0.41
---------- =====
Non-vested at September 30, 2006.... 204,000 $0.47
========== =====
The total fair value of shares vested during the nine month periods ended
September 30, 2006 and September 30, 2005, was $133,000 and $88,000,
respectively. As of September 30, 2006, there was $22,000 of total unrecognized
compensation cost related to non-vested share-based compensation arrangements
related to stock options granted under the 1993 Plan. That cost is expected to
be recognized over a weighted-average vesting period of 0.25 years.
Options to purchase 1,240,000 shares of common stock for the nine months
ended September 30, 2006, and 1,440,000 shares of common stock for the nine
months ended September 30, 2005, were excluded from the computation of diluted
earnings per share because these options were antidilutive.
Note 11 - Pension and Savings Plans
The Company sponsors a non tax-qualified supplemental retirement plan,
initially adopted by the Company in 1985, and as amended and restated (the
"Supplemental Plan"), under which only one current executive officer of the
Company is currently the sole participant. The cost of the Supplemental Plan is
accrued but not funded.
The liability for the Supplemental Plan, which is accrued but not funded,
increased to $16,050,000 at September 30, 2006 from $14,595,000 at December 31,
2005. The Supplemental Plan liability reflects the September 30, 2006 present
value of the anticipated May 31, 2007 lump-sum payment amount of $16,676,115,
utilizing a 5.75% discount rate factor. The Supplemental Plan liability can be
further affected by changes in discount rates, mortality, and experience which
could be different from those assumed.
The Personnel Committee of the Board of Directors of the Company (the
"Personnel Committee") reviewed the Supplemental Plan and the Company's related
liability, including the desirability of continuing to maintain and administer
the Supplemental Plan, the untying of Mr. Bianco's future employment with the
Company from the timing of his Supplemental Plan benefit payment(s), the
Company's overall financial position, and the desirability of continued accruals
under the Supplemental Plan after Mr. Bianco's current employment contract
expires on May 31, 2007. In connection with this review, the Personnel Committee
considered various options, including whether or not to terminate and/or curtail
the Supplemental Plan. Mr. Bianco (the Company's Chairman, President and Chief
Executive Officer, and the former President and Chief Executive Officer of
Carteret Savings Bank, FA), is the only current employee of the Company who
participates in the Supplemental Plan and his Supplemental Plan benefit is fully
vested. For purposes of computing his accrued benefit under the Supplemental
Plan, Mr. Bianco had 14.67 years of credited service as of December 31, 2005,
and assuming continued employment with the Company, will have 16.08 years of
credited service upon the expiration of his current employment contract with the
Company on May 31, 2007. His accrual percentage under the Supplemental Plan is
4%, in effect from the time of his initial employment with the Company, and in
accordance with the Supplemental Plan (prior to the amendment described below),
he had the entitlement to receive his Supplemental Plan benefit in either a
lump-sum or an annuity upon termination of his employment with the Company.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During March 2006, the Company entered into a new employment agreement with
Mr. Bianco to extend his employment with the Company for an additional five (5)
years beyond May 31, 2007, until May 31, 2012 (the "2007 Employment Agreement").
As part of the 2007 Employment Agreement terms (i) Mr. Bianco's annual rate of
base salary will not increase from his current rate of base salary during the
first three years of the 2007 Employment Agreement (the amount of Mr. Bianco's
base salary for the fourth and fifth years of the 2007 Employment Agreement term
to be determined by the Personnel Committee, in its sole discretion, although in
no event less than $625,000 per annum); (ii) Mr. Bianco's service accruals under
the Supplemental Plan will cease as of May 31, 2007; (iii) Mr. Bianco's Final
Average Earnings (as defined in the Supplemental Plan) for Supplemental Plan
benefit calculation purposes, are capped as of December 31, 2004; and (iv) Mr.
Bianco's annual bonus opportunity will no longer be linked to recovery efforts
in connection with the Company's Supervisory Goodwill litigation. Instead, on or
about May 31, 2007, Mr. Bianco will receive a lump-sum payment of his
Supplemental Plan benefit of $16,676,115, which amount was calculated on the
basis of a 5.75% discount rate, a "RP-2000" projected to 2004 mortality table,
and 16.08 years of credited service, and the Company and Mr. Bianco have agreed
to a long term incentive bonus formula, at varying percentages ranging from 5%
to 10%, or more, based upon recoveries received by the Company for its
investment in Carteret Savings Bank, through litigation or otherwise (including
the Company's Supervisory Goodwill litigation). The anticipated lump-sum
Supplemental Plan benefit payment to Mr. Bianco is expected to be paid to him
from the Company's available financial resources.
The Supplemental Plan has been amended to provide for its automatic
termination immediately following the payment to Mr. Bianco of his Supplemental
Plan lump-sum benefit on or about May 31, 2007. In accordance with the
accounting for the Supplemental Plan's scheduled termination on or about May 31,
2007, in accordance with GAAP, the ultimate liability relating to the
anticipated termination of the Supplemental Plan is not reflected in the
financial statements presented herein, as all conditions for the final
termination of the Supplemental Plan have not yet been met. The Company will
continue to recognize an expense for the Supplemental Plan and the Supplemental
Plan liability will increase through the date on which the Supplemental Plan is
terminated.
Based on the 2007 Employment Agreement and the amendment of the
Supplemental Plan, each as described above, the Company revised the calculation
of the Supplemental Plan liability to reflect a 5.75% discount rate as of April
1, 2006, as set forth in the agreements, as compared to the 5.50% discount rate
utilized as of December 31, 2005. The Supplemental Plan liability was increased
by an expense of $229,000 in the third quarter ended September 30, 2006, to
reflect the September 30, 2006 present value of the anticipated May 31, 2007
lump-sum payment amount of $16,676,115, utilizing the 5.75% discount rate
factor.
An additional Supplemental Plan expense of $284,000 and $568,000 was
recorded in the third quarter and nine month period ended September 30, 2006, to
amortize the Supplemental Plan minimum pension liability adjustment. The minimum
pension liability adjustment, which is included as a component of stockholders'
equity within accumulated other comprehensive loss in the Company's consolidated
financial statements, was $1,326,000 as of March 31, 2006, and is being
amortized on a straight line basis over the 14-month period ending May 31, 2007
as an additional Supplemental Plan expense of $284,000 per quarter. This
resulted in an aggregate Supplemental Plan expense of $513,000 for the third
quarter period ended September 30, 2006, as compared to $464,000 for the first
quarter period ended March 31, 2006, and $1,047,000 for the second quarter ended
June 30, 2006. For the nine month period ended September 30, 2006, the
Supplemental Plan expense was $2,023,000. The amortization of the additional
minimum pension liability of $284,000 and $568,000 in the third quarter and nine
month periods ended September 30, 2006, respectively, although recorded as a
component of compensation expense in the Company's consolidated statement of
operations, does not result in a decrease in total stockholders' equity, as its
recognition results in an increase in one component and a corresponding decrease
in another component of stockholders' equity. See Part I - Item 1 - Note 9,
herein for further information.
The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"),
which is a "Section 401(k) Plan" within the meaning of the Internal Revenue Code
of 1986, as amended (the "Code"). The Savings Plan permits eligible employees to
make contributions of up to 15% of compensation, which are matched by the
Company at a percentage determined annually. The employer match is currently
100% of the amount the employee elects to defer. Employee contributions to the
Savings Plan are invested at the employee's discretion, in various investment
funds. The Company's matching contributions are invested in the same manner as
the compensation reduction contributions. The Company's matching contributions
to the Savings Plan, charged to expense, were $0 and $55,000 for the third
quarter and nine months ended September 30, 2006, respectively, and $2,000 and
$50,000 for the third quarter and nine months ended September 30, 2005,
respectively. All contributions are subject to maximum limitations contained in
the Code.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - Common Stock Repurchase Plan
In January 2002, the Company announced a common stock repurchase plan (the
"Repurchase Plan") which allows for the repurchase by the Company for up to 10
million shares of its common stock in the open market.
The Repurchase Plan is conditioned upon favorable business conditions and
acceptable prices for the common stock. Purchases under the Repurchase Plan may
be made, from time to time, in the open market, through block trades or
otherwise. Depending on market conditions and other factors, purchases may be
commenced or suspended any time or from time to time without prior notice.
(a) Total (b) (c) Total Number
Number of Average Shares Purchased (d) Maximum Number
Shares Price Paid as Part of Publicly Shares that may yet be
Purchased per Share Announced Plans Purchased under the Plan
---------- ---------- ------------------- ----------------------------
January 1, 2006 - January 31, 2006........ - 50,000 9,950,000
February 1, 2006 - February 28, 2006...... 970,000 $ 0.58 1,020,000 8,980,000
March 1, 2006 - March 31, 2006............ - - 1,020,000 8,980,000
April 1, 2006 - April 30, 2006............ - - 1,020,000 8,980,000
May 1, 2006 - May 31, 2006................ - - 1,020,000 8,980,000
June 1, 2006 - June 30, 2006.............. 50,000 0.49 1,070,000 8,930,000
July 1, 2006 - July 31, 2006.............. - - 1,070,000 8,930,000
August 1, 2006 - August 31, 2006.......... 95,000 0.47 1,165,000 8,835,000
September 1, 2006 - September 30, 2006.... - - 1,165,000 8,835,000
---------
1,115,000
=========
Note 13 - Subsequent Event
In October 2006, in order to eliminate continued involvement in the
Delaware Court of Chancery, Section 220 Books and Records Action, as further
described in Note 3, or potential future actions, and the resultant time,
expense and potential adverse impact on the Company's current operations and
litigation claims, the Company, its Chief Executive Officer and principal
stockholder, and the Company's Directors entered into an agreement with the
Stockholders who had initiated the action to obtain Company books and records.
Pursuant to the agreement: (i) the Company's Chief Executive Officer agreed to
purchase 6,615,531 shares of Company common stock (representing approximately
14.4% of the Company's outstanding common stock and all of the Company stock
beneficially owned by the Stockholders), for a cash purchase price of $0.55 per
share ($3,638,542 in the aggregate for all of the shares); (ii) the Stockholders
agreed to dismiss the books and records action and release any additional claims
the Stockholders might have, including claims the stockholder said they had been
considering litigating against the Company, its Directors and its Chief
Executive Officer; (iii) the Stockholders entered into a standstill and other
agreements which will preclude them from taking a position in the Company for a
period of time; and (iv) the Company agreed to pay the Stockholders $1.1
million. No portion of the purchase price for the shares acquired by the
Company's Chief Executive Officer was provided by or financed by the Company.
Although the shares were not offered to the Company for purchase, the Company's
Board of Directors declined to purchase the shares at the price they were
offered to the Company's Chief Executive Officer. As the parties were
negotiating a settlement of this matter prior to September 30, 2006, the
settlement charge of $1,100,000 and related insurance recovery of $400,000 were
considered to be probable and estimable and have been reflected in the third
quarter and nine month periods ended September 30, 2006. The net cost to the
Company of the settlement was approximately $700,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or make oral statements that constitute forward-looking
statements. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
or quantified. The forward-looking statements may relate to such matters as
anticipated financial performance, future revenues or earnings, business
prospects, projected ventures, anticipated market performance, anticipated
litigation results or the timing of pending litigation, and similar matters.
When used in this Annual Report, the words "estimates," "expects,"
"anticipates," "believes," "plans," "intends" and variations of such words and
similar expressions are intended to identify forward-looking statements that
involve risks and uncertainties. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company cautions readers that a variety
of factors could cause the Company's actual results to differ materially from
the anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, include, but are not limited to: (i) transaction
volume in the securities markets; (ii) the volatility of the securities markets;
(iii) fluctuations in interest rates; (iv) risks inherent in the real estate
business, including, but not limited to tenant defaults, changes in occupancy
rates or real estate values; (v) changes in regulatory requirements which could
affect the cost of doing business; (vi) general economic conditions; (vii)
changes in the rate of inflation and the related impact on the securities
markets; (viii) changes in federal and state tax laws; and (ix) risks arising
from unfavorable decisions in our current material litigation matters, or
unfavorable decisions in other supervisory goodwill cases. These are not the
only risks that we face. There may be additional risks that we do not presently
know of or that we currently believe are immaterial which could also impair our
business and financial position.
Undue reliance should not be placed on these forward-looking statements,
which are applicable only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after the date of this quarterly report or to
reflect the occurrence of unanticipated events. Accordingly, there is no
assurance that the Company's expectations will be realized.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which follows, should be read in conjunction with the consolidated
financial statements and related notes, which are contained in Part I - Item 1,
herein and the Company's Annual Report on Form 10-K for the year ended December
31, 2005. As a result of the sale of the Company's 38,000 square foot office
building at Two Soundview Drive in Greenwich, CT ("Two Soundview") in July 2005,
the results of operations of Two Soundview have been designated as discontinued
operations, and the Consolidated Statements of Operations for the periods
presented herein have been retroactively reclassified to report the income from
discontinued operations separately from the results of continuing operations by
excluding the operating revenues and expenses of discontinued operations from
the respective statement captions. See Part I - Item 1 - Note 7 for additional
information concerning the sale of Two Soundview in July 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets at September 30, 2006, aggregated $42,260,000
consisting principally of cash and cash equivalents of $1,376,000, investment
securities of $37,962,000 and real estate owned of $2,184,000. At September 30,
2006, the Company's liabilities aggregated $18,202,000. Total stockholders
equity was $24,058,000.
The liability for the Company's non tax-qualified supplemental retirement
plan, initially adopted by the Company in 1985, and as amended and restated (the
"Supplemental Plan"), which is accrued but not funded, increased to $16,050,000
at September 30, 2006 from $14,595,000 at December 31, 2005. The Supplemental
Plan liability reflects the September 30, 2006 present value of the anticipated
May 31, 2007 lump-sum payment amount of $16,676,115, utilizing a 5.75% discount
rate factor. The Supplemental Plan liability can be further affected by changes
in discount rates, mortality, and experience which could be different from those
assumed.
The anticipated May 31, 2007 lump-sum Supplemental Plan benefit payment to
Mr. Bianco is expected to be paid to him from the Company's available financial
resources. The Supplemental Plan has been amended to provide for its automatic
termination immediately following the payment to Mr. Bianco of his Supplemental
Plan lump-sum benefit on or about May 31, 2007. In accordance with the
accounting for the Supplemental Plan's scheduled termination on or about May 31,
2007, in accordance with GAAP, the ultimate liability relating to the
anticipated termination of the Supplemental Plan is not reflected in the
financial statements presented herein, as all conditions for the final
termination of the Supplemental Plan have not yet been met. The Company will
continue to recognize an expense for the Supplemental Plan and the Supplemental
Plan liability will increase through the date on which the Supplemental Plan is
terminated.
For a further discussion of the Supplemental Plan and Mr. Bianco's 2007
Employment Agreement, see Part I - Item 1 - Note 11 to the Company's
consolidated financial statements.
For the nine months ended September 30, 2006, cash of $3,680,000 was used
by continuing operations, including the payment of prior year accruals and
operating expenses, partially offset by the receipt of rental income, interest
income and investment earnings. The cash needs of the Company for the first nine
months of 2006 were satisfied by the receipt of investment earnings received on
investment securities and cash equivalents, rental income and the Company's
current financial resources. Management believes that the Company's capital
resources are sufficient to continue operations for 2006.
For the nine months ended September 30, 2005, cash of $5,114,000 was used
by continuing operations, including the payment of prior year accruals and
operating expenses partially offset by the receipt of rental income, interest
income, and investment earnings.
The Company continues to evaluate a number of possible acquisitions and is
engaged in the management of its assets and liabilities, including the
contingent assets. Discussions and negotiations are ongoing with respect to
certain of these matters. The Company intends to aggressively contest all
litigation and contingencies, as well as pursue all sources for contributions to
settlements. For a discussion of lawsuits and proceedings, including the
Supervisory Goodwill litigation see Part I - Item 1 - Note 3.
As of September 30, 2006, the Company owns one commercial office building
in Greenwich, Connecticut. The building is approximately 14,500 square feet;
approximately 3,500 square feet is utilized by the Company for its executive
offices; the remaining space is currently unoccupied and available for lease.
See Part I - Item 1 - Note 7 for further information concerning the sale of
the Company's 38,000 square foot building in July 2005. A gain from the sale, of
approximately $10 million, was reflected in the Company's financial statements
for the year ending December 31, 2005.
There are no material commitments for capital expenditures as of September
30, 2006. See Part I - Item 1 - Note 11 to the Company's consolidated financial
statements for information regarding the anticipated Supplemental Plan lump-sum
benefit payment of $16,676,115 (to Mr. Bianco, the Company's Chairman, President
and Chief Executive Officer), expected to be paid on or about May 31, 2007.
Inflation has had no material impact on the business and operations of the
Company.
Pursuant to the Company's Repurchase Plan, the Company repurchased, from
unaffiliated parties, an aggregate of 1,115,000 shares of common stock during
the nine month period ended September 30, 2006, at various dates, at market
prices at their time of purchase. See Part I - Item 1 - Note 12 for further
details with regard to the Company's purchases of common stock pursuant to its
common stock repurchase plan.
In December 2004, the Financial Accounting Standards Board ("FASB")
released SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
is a revision of Statement 123. SFAS 123R supersedes Accounting Principles Board
Option No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. SFAS 123R is effective for fiscal years beginning after December
15, 2005; however, early adoption is permitted. The Company adopted SFAS 123R
effective on January 1, 2006. In accordance with SFAS 123R, the Company has
applied the "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123 for all awards granted to employees prior
to the effective date of SFAS 123R that remain unvested on the effective date.
For further information regarding the Company's adoption of SFAS 123R and its
impact on the Company's financial statements, see Part I - Item 1 - Note 10 to
the Company's consolidated financial statements.
Results of Operations for the Third Quarter and Nine Months ended September 30,
2006 vs. the Third Quarter and Nine Months Ended September 30, 2005
CONTINUING OPERATIONS
The Company's main source of operating revenue has recently been rental
income earned on real estate owned. The Company also earns non-operating revenue
consisting principally of investment earnings on investment securities and cash
equivalents. The Company's management expects that operating cash needs for the
remainder of 2006 will be met principally by the receipt of non-operating
revenue consisting of investment earnings on investment securities and cash
equivalents, the Company's current financial resources, and rental income on
real estate owned.
As indicated herein, as a result of the sale, the operating results of the
Company's Two Soundview property for the periods ended prior to the July 2005
sale have been reclassified to discontinued operations and accordingly, rental
income from real estate owned represents the Company's remaining property and
was $2,000 and $92,000 for the third quarter and nine months ended September 30,
2006 as compared to $41,000 and $127,000 for the third quarter and nine months
ended September 30, 2005. The decreased amounts of $2,000 and $92,000 in the
2006 periods, compared to $41,000 and $127,000 in the 2005 periods are due to
unoccupied office space currently available for lease, versus occupancy in the
same 2005 periods.
Compensation and benefits increased to $3,742,000 in the nine months ended
September 30, 2006, compared with $3,373,000 in same 2005 period. The increase
is primarily due to an increased Supplemental Retirement Plan ("Supplemental
Plan") expense in the nine month period ended September 30, 2006 versus the same
2005 period as further described below, offset slightly by a lower level of
incentive compensation accruals in 2006 versus 2005. Compensation and benefits
decreased slightly to $1,058,000 in the third quarter period ended September 30,
2006, versus $1,098,000 in the third quarter period ended September 30, 2005.
The decrease in the quarterly 2006 period versus the quarterly 2005 period is
principally due to a lower level of incentive compensation accruals in 2006
versus 2005.
The Supplemental Plan expense was $513,000 and $2,023,000 for the third
quarter and nine months ended September 30, 2006, respectively, compared to
$522,000 and $1,043,000 for the third quarter and nine months ended September
30, 2005, respectively.
The increased Supplemental Plan expense is due to recognition of an expense
for the nine month period ended September 30, 2006, of $992,000 recorded to
increase the Supplemental Plan liability to reflect the September 30, 2006
present value of the anticipated May 31, 2007 lump-sum payment amount of
$16,676,115, utilizing a 5.75% discount rate factor based on the 2007 Employment
Agreement between the Company and Mr. Bianco and the amendment of the
Supplemental Plan as further described in Part I - Item 1 - Note 11 to the
Company's consolidated financial statements.
An additional a Supplemental Plan expense of $284,000 and $568,000 was
recorded in the third quarter and nine months ended September 30, 2006,
respectively, to amortize the Supplemental Plan minimum pension liability
adjustment. The minimum pension liability adjustment, which is included as a
component of stockholders' equity within accumulated other comprehensive loss in
the Company's consolidated financial statements, was $1,326,000 as of December
31, 2005, and March 31, 2006, and is being amortized on a straight line basis
over the 14-month from April 1, 2006, through May 31, 2007, as an additional
Supplemental Plan expense of $284,000 per quarter. This resulted in an aggregate
Supplemental Plan expense of $513,000 for the third quarter period ended
September 30, 2006, as compared to $464,000 for the first quarter period ended
March 31, 2006 and $1,047,000 for the second quarter ended June 30, 2006. For
the nine month period ended September 30, 2006, the Supplemental Plan expense
was $2,023,000. The amortization of the additional minimum pension liability of
$284,000 and $568,000 in the third quarter and nine month periods ended
September 30, 2006, respectively, although recorded as a component of
compensation expense in the Company's consolidated statement of operations, does
not result in a decrease in total stockholders' equity, as its recognition
results in an increase in one component and a corresponding decrease in another
component of stockholders' equity. See Part I - Item 1 - Notes 9 and 11 to the
Company's consolidated financial statements for further information.
As noted above, the Company adopted Statement 123R effective on January 1,
2006. In accordance with SFAS 123R, the Company has applied the "modified
prospective" method in which compensation cost for stock options is recognized
beginning with the effective date. During the third quarter and nine months
ended September 30, 2006, the Company recorded $22,000 and $66,000,
respectively, of compensation expense relating to stock options. In accordance
with the "modified prospective" method, no compensation expense relating to
stock options was recorded for the third quarter and nine months ended September
30, 2005. For further information regarding the Company's adoption of SFAS 123R
and its impact on the Company's financial statements, see Part I - Item 1 - Note
10 to the Company's consolidated financial statements.
Professional and outside services were $553,000 and $2,274,000 in the third
quarter and nine months ended September 30, 2006, and $423,000 and $1,537,000 in
the respective 2005 periods. The increase in the 2006 nine month period as
compared to the respective 2005 period is principally the result of a higher
level of legal and professional fees relating to the Supervisory Goodwill
litigation as a result of discovery in 2006, relating to the Show Cause hearing
and, to a lesser extent, other corporate professional fees.
Property operating and maintenance expenses were $28,000 and $89,000 for
the third quarter and nine months ended September 30, 2006, respectively,
compared to $29,000 and $99,000 in the respective 2005 periods. The decreased
expenses in 2006 compared to the 2005 periods are due to a decrease in the level
of repairs and maintenance expenses. Property operating and maintenance expenses
have not been reduced by tenant reimbursements.
Interest income in the third quarter and nine months ended September 30,
2006, increased to $491,000 and $1,368,000, respectively, from $333,000 and
$604,000, in the respective 2005 periods. The increase is principally due to an
increase in the aggregate amount of cash equivalents and investment securities
invested as a result of the cash proceeds received in connection with the sale
of real estate owned in July 2005, and to a lesser extent, an increased yield on
investments due to rising interest rates, as further discussed in Part I - Item
1 - Note 7.
Other expense of $1,100,000 in the third quarter and nine months ended
September 30, 2006, reflects an accrual for the settlement of claims which was
paid in October 2006 as more fully described in Note 3 herein. Other income of
$400,000 in the third quarter and nine months ended September 30, 2006, is
attributable to a receivable recorded for the November 2006 receipt of insurance
proceeds received.
Other income of $72,000 in the nine month period ended September 30, 2006,
is attributable to settlement proceeds received from the litigation with SDG,
Inc., received in April 2006. The Company remains a shareholder in SDG and AMDG,
but has no current carrying value for this investment, as the Company's original
cost basis was previously written off.
No investment securities available for sale were sold in the nine months
ended September 30, 2006. For the nine months ended September 30, 2005, realized
gains on sales of investment securities available for sale were $20,000.
The income tax provisions of $33,000 and $99,000 for the third quarter and
nine months ended September 30, 2006, respectively, are primarily attributable
to a provision for a minimum tax on capital to the state of Connecticut. The
income tax provisions of $180,000 and $240,000 for the third quarter and nine
months ended September 30, 2005, respectively, are attributable to a provision
for federal alternative minimum tax of $150,000 for the third quarter and nine
month periods and $30,000 and $90,000, respectively attributable to state taxes.
Income taxes applicable to operating income (loss) are generally determined by
applying the estimated effective annual income tax rates to pretax income (loss)
for the year-to-date interim period. Income taxes applicable to unusual or
infrequently occurring items are provided in the period in which such items
occur.
DISCONTINUED OPERATIONS
As discussed in Part I - Item 1 - Note 7, in July 2005, the Company
completed the sale of Two Soundview. The sale price was $28,000,000 less normal
real estate closing adjustments. A gain from the sale of $10,298,000 is
reflected in the Company's financial statements for the year ending December 31,
2005.
Income from discontinued operations was $63,000 and $749,000 for the third
quarter and nine months ended September 30, 2005, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds short-term investments as a source of liquidity. The
Company's interest rate sensitive investments with maturity dates of less than
one year consist of the following:
September 30, 2006 December 31, 2005
==================== ===================
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) -------- ----- --------- -----
U.S. Treasury Bills and Notes............... $ 36,225 $ 36,231 $ 39,031 $ 39,034
======== ======== ========= ========
Weighted average interest rate.............. 4.65% 3.81%
========= =========
The Company's current policy is to minimize the interest rate risk of its
short-term investments by investing in U.S. Treasury Bills with maturities of
less than one year. There were no significant changes in market exposures or the
manner in which interest rate risk is managed during the period.
The Company's portfolio of equity securities has exposure to equity price
risk. Equity price risk is defined as the potential loss in fair value resulting
from an adverse change in prices. The equity securities are primarily in the
form of preferred stock in utility companies. The equity securities are held for
an indefinite period and are carried at fair value with net unrealized gains and
losses recorded directly in a separate component of stockholder's equity.
The table below summarizes the Company's equity price risk and shows the
effect of a hypothetical 20% increase and 20% decrease in market price as of the
dates indicated below. The selected hypothetical changes are for illustrative
purposes only and are not necessarily indicative of the best or worse case
scenarios.
(In thousands) September 30, December 31,
2006 2005
Equity Securities Available for Sale: ============ ============
Fair value........................................................ $1,736 $1,729
====== ======
Hypothetical fair value at a 20% increase in market price......... $2,083 $2,075
====== ======
Hypothetical fair value at a 20% decrease in market price......... $1,389 $1,383
====== ======
Item 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures include our controls and other
procedures to ensure that information required to be disclosed in this and other
reports under the Securities Exchange Act of 1934, as amended the ("Exchange
Act"), is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer to allow timely decisions
regarding required disclosure and to ensure that such information is recorded,
processed, summarized and reported within the time periods.
Our Chief Executive Officer and Chief Financial Officer have conducted an
evaluation of our disclosure controls and procedures as of September 30, 2006.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rule 13a-15(e) promulgated under the Exchange Act) are sufficiently effective
to ensure that the information required to be disclosed by us in the reports we
file (under the Exchange Act) are sufficiently effective to ensure that the
information required to be disclosed by us in the reports we file under the
Exchange Act is recorded, processed, summarized and reported with adequate
timeliness.
There have been no changes during the most recent fiscal quarter in our
internal control over financial reporting as defined in Rule 13a-15(f) of the
Exchange Act that have materially affected, or are reasonably likely to
materially affect our internal control over financial reporting.
STOCKHOLDER INQUIRIES
Stockholder inquiries, including requests for the following: (i) change of
address; (ii) replacement of lost stock certificates; (iii) Common Stock name
registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on
Form 10-K; (vi) proxy material; and (vii) information regarding stock holdings,
should be directed to:
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Attention: Shareholder Services
(800) 937-5449 or (718) 921-8200 Ext. 6820
Copies of Quarterly reports on Form 10-Q, Annual Reports on Form 10-K and
Proxy Statements can also be obtained directly from the Company free of charge
by sending a request to the Company by mail as follows:
AmBase Corporation
100 Putnam Green, 3rd Floor
Greenwich, CT 06830
Attn: Shareholder Services
In addition, the Company's public reports, including Quarterly Reports on
Form 10-Q, Annual Reports on Form 10-K and Proxy Statements, can be obtained
through the Securities and Exchange Commission EDGAR Database over the Internet
at www.sec.gov. Materials filed with the SEC may also be read or copied by
visiting the SEC's Public Reference Room, 450 Fifth Street, NW, Washington, DC
20549. Information on the operation of the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a discussion of the Company's legal proceedings, including a discussion
of the Company's Supervisory Goodwill litigation, see Part I - Item 1 - Note 3 -
Legal Proceedings.
Item 1A. RISK FACTORS
There have been no material changes from risk factors previously disclosed
in the Company's Annual Report on Form 10-K for the year ended December 31, 2005
in response to Item 1A to Part I of Form 10-K.
Item 2. EXHIBITS
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer
Item 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMBASE CORPORATION
/s/ John P. Ferrara
------------------------------------------------------
By JOHN P. FERRARA
Vice President, Chief Financial Officer and Controller
(Duly Authorized Officer and Principal Financial and
Accounting Officer)
Date: November 14, 2006