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, 2007
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 November 2, 2007, there were 44,464,864 shares outstanding of the
registrant's common stock, $0.01 par value per share.
AmBase Corporation
Quarterly Report on Form 10-Q
September 30, 2007
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.................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................19
Item 4T. Controls and Procedures.............................................................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................21
Item 1A. Risk Factors........................................................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........................................21
Item 3. Defaults Upon Senior Securities.....................................................................21
Item 4. Submission of Matters to a Vote of Security Holders.................................................22
Item 5. Other Information...................................................................................22
Item 6. Exhibits............................................................................................22
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,
2007 2006
======== =========
Assets:
Cash and cash equivalents......................................................... $ 3,204 $ 2,601
Investment securities:
Held to maturity (market value $17,057 and $34,625, respectively)............. 17,041 34,623
Available for sale, carried at fair value .................................... - 1,417
-------- --------
Total investment securities....................................................... 17,041 36,040
-------- --------
Real estate owned:
Land............................................................................ 554 554
Buildings and improvements...................................................... 1,900 1,900
-------- --------
2,454 2,454
Accumulated depreciation.......................................................... (321) (283)
-------- --------
Real estate owned, net............................................................ 2,133 2,171
Other assets...................................................................... 68 1,336
-------- --------
Total assets...................................................................... $ 22,446 $ 42,148
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued liabilities.......................................... $ 896 $ 1,171
Supplemental retirement plan...................................................... - 16,282
Other liabilities................................................................. 21 28
-------- --------
Total liabilities................................................................. 917 17,481
-------- --------
Commitments and contingencies (Note 3)............................................
Stockholders' equity:
Common stock ($0.01 par value, 200,000,000 authorized, 46,410,007 issued and
44,679,373 outstanding in 2007 and 44,968,519 outstanding in 2006)............. 464 464
Paid-in capital................................................................... 548,044 548,044
Accumulated other comprehensive income (loss)..................................... - (336)
Accumulated deficit............................................................... (525,457) (522,121)
Treasury stock, at cost - 1,730,634 and 1,441,488 shares, respectively............ (1,522) (1,384)
-------- --------
Total stockholders' equity........................................................ 21,529 24,667
-------- --------
Total liabilities and stockholders' equity........................................ $ 22,446 $ 42,148
======== ========
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
2007 2006 2007 2006
Revenues: ==== ==== ==== ====
Rental income..................................................... $ - $ 2 $ - $ 92
Operating expenses:
Compensation and benefits......................................... 535 1,058 2,783 3,742
Professional and outside services................................. 244 553 1,617 2,274
Property operating and maintenance................................ 35 28 87 89
Depreciation .................................................... 12 13 38 38
Insurance......................................................... 17 17 61 62
Other operating................................................... 15 55 113 161
-------- --------- ---------- ---------
858 1,724 4,699 6,366
-------- --------- ---------- ---------
Operating loss.................................................... (858) (1,722) (4,699) (6,274)
-------- --------- ---------- ---------
Interest income................................................... 244 491 1,103 1,368
Realized gains on sales of investment securities.................. 26 - 310 -
Other expense, claims settlement.................................. - (1,100) - (1,100)
Other income, insurance recovery.................................. - 400 - 400
Other income...................................................... - - - 72
-------- --------- ---------- ---------
Loss before income taxes.......................................... (588) (1,931) (3,286) (5,534)
Income tax expense................................................ - (33) (50) (99)
-------- --------- ---------- ---------
Net loss.......................................................... $ (588) $ (1,964) $ (3,336) $ (5,633)
======== ========= ========== =========
Net loss per common share:
Net loss - basic.................................................. $ (0.01) $ (0.04) $ (0.07) $ (0.12)
======== ========= ========== =========
Net loss - assuming dilution...................................... $ (0.01) $ (0.04) $ (0.07) $ (0.12)
======== ========= ========== =========
Weighted average common shares outstanding:
Basic............................................................. 44,703 45,168 44,845 45,419
======== ========= ========== =========
Diluted........................................................... 44,703 45,168 44,845 45,419
======== ========= ========== =========
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
2007 2006 2007 2006
===== ===== ===== =====
Net loss............................................................ $ (588) $ (1,964) $ (3,336) $ (5,633)
Amortization of minimum pension liability adjustment................ - 284 474 568
Reclassification adjustment for gains realized in net loss.......... (27) - (138) -
Unrealized holding gains (losses) on investment securities
available for sale............................................. - 90 - 7
--------- -------- ---------- --------
Comprehensive loss................................................... $ (615) $ (1,590) $ (3,000) $ (5,058)
========= ======== ========== ========
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)
2007 2006
Cash flows from operating activities: ========== ===========
Net loss........................................................................ $ (3,336) $ (5,633)
Adjustments to reconcile net loss to net cash used by
operations:
Depreciation and amortization............................................... 38 38
Accretion of discount - investment securities............................... (34) (31)
Realized gains on sales of investment securities........................... (310) -
Stock-based compensation expense............................................ - 66
Amortization of minimum pension liability adjustment........................ 474 568
Changes in other assets and liabilities:
Accrued interest receivable................................................. 57 (270)
Other assets................................................................ 1,178 (420)
Accounts payable and accrued liabilities.................................... (275) 553
Supplemental retirement plan and other liabilities.......................... 387 1,448
Payment of Supplemental Plan lump-sum benefit............................... (16,676) -
Other, net.................................................................. (2) 1
--------- -----------
Net cash used by operating activities........................................... (18,499) (3,680)
--------- -----------
Cash flows from investing activities:
Maturities of investment securities - held to maturity.......................... 49,433 86,576
Purchases of investment securities - held to maturity........................... (31,782) (83,740)
Sales of investment securities - available for sale............................. 1,620 -
Purchases of investment securities - available for sale......................... (31) -
--------- -----------
Net cash provided by investing activities....................................... 19,240 2,836
--------- -----------
Cash flows from financing activities:
Common stock repurchased........................................................ (138) (632)
--------- -----------
Net cash used by financing activities........................................... (138) (632)
--------- -----------
Net increase (decrease) in cash and cash equivalents............................ 603 (1,476)
Cash and cash equivalents at beginning of period................................ 2,601 2,852
--------- -----------
Cash and cash equivalents at end of period...................................... $ 3,204 $ 1,376
========= ===========
Supplemental cash flow disclosures:
Income taxes paid............................................................... $ 83 $ 537
========= ==========
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
consolidated financial statements. Results for interim periods are not
necessarily indicative of results for the full year. 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, 2006.
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 associated with its legal
claims, 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.
The Company's management believes that operating cash needs for the next
twelve months will be met principally by the receipt of investment earnings on
investment securities and cash equivalents, and the Company's current financial
resources.
See Note 10 herein for information regarding the Company's Supplemental
Retirement Plan (the "Supplemental Plan") lump-sum benefit payment and
Supplemental Plan termination. In accordance with an amendment to the
Supplemental Plan, as previously adopted in March 2006, the liability for the
Supplemental Plan was fully satisfied on May 31, 2007, by the lump-sum benefit
payment of $16,676,115 (to Mr. Bianco, the Company's Chairman, President and
Chief Executive Officer), and immediately thereafter, the Supplemental Plan
automatically terminated. The lump-sum Supplemental Plan benefit payment to Mr.
Bianco was paid from the Company's available financial resources. As of June 1,
2007, no further Supplemental Plan expense will be recognized by the Company,
which was previously included as a component of compensation and benefits
expense.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS157"). SFAS No. 157 defines fair
values, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS No. 157 is effective for the Company in
2008. The Company is currently evaluating the potential impact of adopting SFAS
No. 157.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an Amendment of FASB
Statement No. 115" ("SFAS159"). SFAS No. 159 permits entities to measure
eligible financial assets, financial liabilities and certain other assets and
liabilities at fair value on an instrument-by-instrument basis. The fair value
measurement election is irrevocable once made and subsequent changes in fair
value must be recorded in earnings. The effect of adoption will be reported as a
cumulative-effect adjustment to beginning retained earnings. The Company will
adopt SFAS No. 159 in 2008 and is currently evaluating if it will elect the fair
value option for any of its eligible financial instruments and other items.
Effective January 1, 2007, the Company adopted the Financial Accounting
Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes," an interpretation of FASB Statement 109, "Accounting for Income
Taxes" ("FIN 48"). FIN 48 applies to all "tax positions" accounted for under
FASB Statement No. 109. FIN 48 refers to "tax positions" as positions taken in a
previously filed tax return or positions expected to be taken in a future tax
return that are reflected in measuring current or deferred income tax assets and
liabilities reported in the financial statements. FIN 48 clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The adoption of FIN 48 had no effect on the Company's
consolidated financial statements.
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. In accordance with the Supplemental
Plan Amendment, as previously adopted, the liability for the Supplemental Plan
was fully satisfied on May 31, 2007, by the lump-sum benefit payment of
$16,676,115 (to Mr. Bianco, the Company's Chairman, President and Chief
Executive Officer), and immediately thereafter, the Supplemental Plan
automatically terminated. The lump-sum Supplemental Plan benefit payment to Mr.
Bianco was paid from the Company's available financial resources. After May 31,
2007, no further Supplemental Plan expense was required to be recognized by the
Company. Accordingly, because of the termination of the Supplemental Plan we do
not believe the adoption of SFAS 158 will have a material effect on the
Company's consolidated financial statements. See Note 10 herein for further
information.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2006, 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. On April 13, 2007, Senior Judge Smith
("Judge Smith") of the United States Court of Federal Claims (the "Court of
Federal Claims" or the "Court") issued an order scheduling pre-trial, and trial
deadlines and dates, including scheduling a trial to commence on February 11,
2008.
In accordance with the Court's scheduling in May 2007, the Company
submitted its expert report. The Government deposed the Company's expert in June
2007. In July 2007, the Government identified its damages experts, and submitted
its expert reports in September 2007. The Company deposed the Government's
experts in October 2007.
The Court order stated that pursuant to the status conference held on April
12, 2007, the Court scheduled oral argument for November 2007 at the U.S. Court
of Federal Claims, to decide whether the trial schedule below can be avoided by
summary judgment. The parties submitted their respective positions with regard
to summary judgment, in writing, on November 7, 2007.
The Court scheduled pre-trial and trial deadlines and dates according to
the following schedule: December 7, 2007 - Parties exchange exhibit and witness
lists; December 21, 2007 - Plaintiffs and FDIC-R file Appendix A submissions;
January 21, 2008 - Defendant files Appendix A submissions; February 11, 2008 -
Trial to commence.
The Court further scheduled a pretrial conference to be held on January 30,
2008, in U.S. Court of Federal Claims.
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). In June 2004, the
United States Supreme Court denied the petition for certiorari filed by Bailey.
The Court of Federal Claims opinions in the Company's case, as well as other
decisions in Winstar-related cases are publicly available on the Court of
Federal Claims web site at www.uscfc.uscourts.gov. Decisions in other
Winstar-related cases may be relevant to the Company's Supervisory Goodwill
claims, but are not necessarily indicative of the ultimate outcome of the
Company's actions. The Company can give no assurances regarding the commencement
date of a trial or the ultimate outcome of the litigation.
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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Investment Securities
Investment securities - held to maturity, consist of U.S. Treasury Bills
with original maturities over three months 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 at December 31, 2006, consisted
of investments in equity securities held for an indefinite period and were
carried at fair value with net unrealized gains and losses recorded directly in
a separate component of stockholders' equity.
Investment securities consist of the following:
September 30, 2007 December 31, 2006
====================================== =======================================
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........ $ 17,041 $ 17,041 $ 17,057 $ 18,187 $ 18,187 $ 18,196
U.S. Treasury Note......... - - - 16,436 16,436 16,429
--------- -------- --------- --------- -------- ---------
17,041 17,041 17,057 34,623 34,623 34,625
--------- -------- --------- --------- -------- ---------
Available for Sale:
Equity Securities.......... - - - 1,417 1,279 1,417
--------- -------- --------- --------- -------- ----------
$ 17,041 $ 17,041 $ 17,057 $ 36,040 $ 35,902 $ 36,042
========= ========= ========= ========= ======== ==========
The gross unrealized gains (losses) on investment securities, at the dates
indicated below consist of the following:
September 30, December 31,
(in thousands) 2007 2006
============ ============
Held to Maturity:.
Gross unrealized gains.................................................................. $ 16 $ 9
============ ============
Gross unrealized losses................................................................. $ - $ (7)
============ ============
Available for Sale:
Gross unrealized gains.................................................................. $ - $ 138
============ ============
Gross unrealized losses................................................................. $ - $ -
============ ============
Realized gains on the sales of investment securities available for sale
follow:
Third Quarter Nine Months
(in thousands) 2007 2007
======= =======
Net sale proceeds...................................................................... $ 276 $ 1,620
Less: Cost basis...................................................................... 250 1,310
-------- ---------
Realized gains......................................................................... $ 26 $ 310
======== =========
No investment securities were sold during the third quarter or nine month
periods ended September 30, 2006.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Property Owned
As of September 30, 2007, the Company owns one commercial office building
in Greenwich, Connecticut that contains approximately 14,500 square feet. The
Company utilizes approximately 3,500 square feet for its executive offices; the
remaining space is currently unoccupied and available for lease to unaffiliated
third parties.
Although the portion of the building not being utilized by the Company is
currently unoccupied and available for lease, based on the Company's analysis,
including but not limited to current market rents in the area, leasing values,
and comparable property sales, the Company believes the property's fair market
value exceeds the property's current carrying value; and, therefore the carrying
value of the property as of September 30, 2007, has not been impaired.
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 $321,000 and $283,000, at September 30, 2007 and December 31,
2006, respectively.
Rental income for the nine months ended September 30, 2006, was
attributable to operating leases with tenants. Minimum lease rentals were
recognized on a straight-line basis over the terms of the leases. The cumulative
difference between lease revenue recognized under the straight-line method and
the contractual lease payment terms, if any, was recorded as deferred rent
receivable or payable and was included in other assets or other liabilities on
the Consolidated Balance Sheets, as applicable. Revenue from tenant
reimbursement of common area maintenance, utilities and other operating expenses
were recognized pursuant to the tenant lease agreements when earned and due from
tenants.
Property operating and maintenance expenses for common area maintenance,
utilities, real estate taxes and other reimbursable operating expenses were not
reduced by amounts reimbursable by tenants pursuant to applicable lease
agreements.
Note 7 - 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 $32 million and $31 million as of September 30, 2007 and December 31,
2006, 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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Based upon the Company's federal income tax returns as filed from 1993 to
2006 (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,
2007, the Company has NOL carryforwards aggregating approximately $33 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 $21
million of AMT Credits.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Comprehensive Income (Loss)
Components of other accumulated comprehensive income (loss) follow:
Third Quarter Ended Nine Months Ended
(in thousands) September 30, 2007 September 30, 2007
============================================= =========================================
Minimum Unrealized Accumulated Minimum Unrealized Accumulated
Pension Gains (Losses) Other Pension Gains (Losses) Other
Liability on Investment Comprehensive Liability on Investments Comprehensive
Adjustment Securities Income (Loss) Adjustment Securities Income (Loss)
========== ============ ============= ========== ============= =============
Balance beginning of period....$ - $ 27 $ 27 $ (474) $ 138 $ (336)
Reclassification adjustment for
gains realized in net loss... - (27) (27) - (211) (211)
Change during the period....... - - - 474 73 547
--------- ------------ ------------- ---------- ------------- -------------
Balance end of period..........$ - $ - $ - $ - $ - $ -
========= ============ ============= ========== ============ =============
Third Quarter Ended Nine Months Ended
(in thousands) September 30, 2006 September 30, 2006
============================================= =========================================
Minimum Unrealized Accumulated Minimum Unrealized Accumulated
Pension Gains (Losses) Other Pension Gains (Losses) Other
Liability on Investment Comprehensive Liability on Investment Comprehensive
Adjustment Securities Income (Loss) Adjustment Securities Income (Loss)
========== ============ ============= ========== ============= =============
Balance beginning of period....$ (1,042) $ (152) $ (1,194) $ (1,326) $ (69) $ (1,395)
Change during the period....... 284 90 374 568 7 575
---------- ------------ ------------- ---------- ------------- -------------
Balance end of period..........$ (758) $ (62) $ (820) $ (758) $ (62) $ (820)
========== ============ ============= ========== ============= =============
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 9 - 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 September 30, 2007, there were 4,124,000 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.
Under this method, stock-based compensation expense for the nine months ended
September 30, 2007 and 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.
No stock based compensation expense was recorded in the nine months ended
September 30, 2007, as all previously granted outstanding options vested as of
January 2, 2007. No stock option awards have been granted since January 2005.
The Company recorded stock based compensation expense of $22,000 and $66,000 in
the third quarter and nine months ended September 30, 2006, 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.
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 table that follows below. 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 2007 or 2006 to the
input assumptions for the calculation of the fair value of stock options granted
in prior years.
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, recorded stock-based compensation expense could have been materially
different from the recorded amounts. In addition, the Company is required to
estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. If the actual forfeiture rate is materially different
from the previous estimate, the share-based compensation expense could be
materially different.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, 2007 or September 30, 2006.
The following table reports stock option activity during the nine month
period ended September 30, 2007:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual
Shares Price Life (in years)
--------- -------- ---------------
Outstanding at January 1, 2007...... 1,240,000 $1.01
Expired............................. (364,000) 1.19
--------- ====
Outstanding at September 30, 2007... 876,000 $0.93 5.73
========= ===== ====
Exercisable at September 30, 2007... 876,000 $0.93 5.73
========= ===== ====
At September 30, 2007, 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.
The following table presents information regarding non-vested share
activity during the nine month period ended September 30, 2007:
Weighted
Average
Number of Grant-Date
Shares Fair Value
--------- -------------
Non-vested at January 1, 2007....... 204,000 $0.47
Vested during period................ (204,000) 0.47
--------- =============
Non-vested at September 30, 2007.... - -
========= =============
The total fair value of shares vested during the nine month period ended
September 30, 2007 and September 30, 2006, was $96,000 and $133,000,
respectively. As of September 30, 2007, there was no unrecognized compensation
costs relating to non-vested share-based compensation arrangements for stock
options granted under the 1993 Plan.
Options to purchase 876,000 shares of common stock for the nine months
ended September 30, 2007, and 1,240,000 shares of common stock for the nine
months ended September 30, 2006, were excluded from the computation of diluted
earnings per share because these options were antidilutive.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Pension and Savings Plans
The Company previously sponsored 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 was the sole participant. The cost of the Supplemental
Plan was accrued but not funded.
In accordance with an amendment to the Supplemental Plan, as previously
adopted in March 2006, the liability for the Supplemental Plan was fully
satisfied on May 31, 2007, by the lump-sum benefit payment of $16,676,115 (to
Mr. Bianco, the Company's Chairman, President and Chief Executive Officer), and
immediately thereafter, the Supplemental Plan automatically terminated. The
lump-sum Supplemental Plan benefit payment to Mr. Bianco was paid from the
Company's available financial resources. After May 31, 2007, no further
Supplemental Plan expense was required to be recognized by the Company. The
Supplemental Plan liability was $16,282,000 at December 31, 2006.
The Personnel Committee of the Board of Directors of the Company (the
"Personnel Committee") had 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 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 prior employment contract
expiration 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), was the only current employee
of the Company who participated in the Supplemental Plan and his Supplemental
Plan benefit was fully vested. For purposes of computing his accrued benefit
under the Supplemental Plan, Mr. Bianco had 14.67 years of credited services as
of December 31, 2005 and 16.08 years of credited service as of May 31, 2007. His
accrual percentage under the Supplemental Plan was 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.
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, was 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
May 31, 2007, Mr. Bianco received 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 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).
Based on the 2007 Employment Agreement and the amendment of the
Supplemental Plan as previously adopted in March 2006, 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. The Supplemental Plan liability was increased by an expense of
$394,000 in the five month period ended May 31, 2007, to reflect the May 31,
2007 lump-sum payment amount of $16,676,115, utilizing the 5.75% discount rate
factor.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
An additional Supplemental Plan expense of $474,000 was recorded in the
nine month period ended September 30, 2007, to amortize the Supplemental Plan
minimum pension liability adjustment. The minimum pension liability adjustment,
which was 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 was 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 $868,000 for the nine month period ended September 30, 2007. The
amortization of the additional minimum pension liability in the 2007 and 2006
periods, although recorded as a component of compensation expense in the
Company's consolidated statement of operations, did not result in a decrease in
total stockholders' equity, as its recognition resulted in an increase in one
component and a corresponding decrease in another component of stockholders'
equity. See Part I - Item 1 - Note 8, herein for further information.
In connection with the Supplemental Plan lump-sum benefit payment, the
Company paid approximately $242,000 of employer Medicare taxes, which are
included as a component of compensation and benefits expense in the Company's
Consolidated Statement of Operations for the third quarter and nine month period
ended September 30, 2007.
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 $4,000 and $57,000 for the third
quarter and nine months ended September 30, 2007, respectively and $0 and
$55,000 for the third quarter and nine months ended September 30, 2006,
respectively. All contributions are subject to maximum limitations contained in
the Code.
Note 11 - 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 summary of the shares repurchased pursuant to the Repurchase Plan is as
follows:
Average
Price Paid
Total per Share Total Number
Number of (including Shares Purchased Maximum Number
Shares broker as Part of Publicly Shares that may yet be
Purchased commission) Announced Plans Purchased under the Plan
--------------- ------------- ----------------------- ---------------------------------
Beginning balance January 1, 2007......... 1,315,000 8,685,000
January 1, 2007 - January 31, 2007........ - - 1,315,000 8,685,000
February 1, 2007 - February 28, 2007...... - - 1,315,000 8,685,000
March 1, 2007 - March 31, 2007............ - - 1,315,000 8,685,000
April 1, 2007 - April 30, 2007............ 110,000 $0.48 1,425,000 8,575,000
May 1, 2007 - May 31, 2007................ - - 1,425,000 8,575,000
June 1, 2007 - June 30, 2007.............. 100,000 $0.48 1,525,000 8,475,000
July 1, 2007 - July 31, 2007.............. 50,000 $0.47 1,575,000 8,425,000
August 1, 2007 - August 31, 2007.......... 26,844 $0.44 1,601,844 8,398,156
September 1, 2007 - September 30, 2007.... 2,302 $0.47 1,604,146 8,395,854
--------
Total Jan. 1, 2007 - Sept. 30, 2007...... 289,146
========
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. AmBase Corporation ("AmBase" or 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, 2006.
BUSINESS OVERVIEW
AmBase is a holding company which, through a wholly-owned subsidiary, owns
a commercial office building in Greenwich, Connecticut. The Company previously
owned an insurance company and a savings bank.
In February 1991, the Company sold its ownership interest in The Home
Insurance Company and its subsidiaries. On December 4, 1992, Carteret Savings
Bank, FA ("Carteret") was placed in receivership by the Office of Thrift
Supervision ("OTS").
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 associated with its legal
claims, as described in Part I - 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets at September 30, 2007, aggregated $22,446,000
consisting principally of cash and cash equivalents of $3,204,000, investment
securities of $17,041,000 and real estate owned of $2,133,000. At September 30,
2007, the Company's liabilities aggregated $917,000. Total stockholders equity
was $21,529,000.
The Company previously sponsored 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 was the sole participant. The cost of the Supplemental
Plan was previously accrued but not funded.
In accordance with an amendment to the Supplemental Plan, as previously
adopted in March 2006, the liability for the Supplemental Plan was fully
satisfied on May 31, 2007, by the lump-sum benefit payment of $16,676,115 (to
Mr. Bianco, the Company's Chairman, President and Chief Executive Officer), and
immediately thereafter, the Supplemental Plan automatically terminated. The
lump-sum Supplemental Plan benefit payment to Mr. Bianco was paid from the
Company's available financial resources. After May 31, 2007, no further
Supplemental Plan expense was required to be recognized by the Company. See
Results of Operations below for further information regarding the Supplemental
Plan expense. For a further discussion of the Supplemental Plan termination and
Mr. Bianco's 2007 Employment Agreement, see Part I - Item 1 - Note 10 to the
Company's consolidated financial statements.
The Supplemental Plan lump-sum benefit payment decreased the Company's cash
equivalents and investment securities by approximately $16.7 million as of May
2007, which is expected to result in a significant decrease in the interest
income earned by the Company beginning in June 2007. See Item 3 - Quantitative
and Qualitative Disclosure about Market Risk for information concerning the
Company's weighted average interest rate yield on investment securities.
For the nine months ended September 30, 2007, cash of $18,499,000 was used
by operations, primarily due to the payment of the Supplemental Plan lump-sum
benefit payment of $16,676,115, as further discussed above, and to a lesser
extent the payment of prior year accruals and operating expenses, partially
offset by the receipt of interest income and investment earnings. The cash needs
of the Company for the first nine months of 2007 were satisfied by the Company's
financial resources and the receipt of investment earnings on investment
securities and cash equivalents. Management believes that the Company's capital
resources are sufficient to continue operations for the next twelve months.
For the nine months ended September 30, 2006, cash of $3,680,000 was used
by 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 associated with its legal claims. 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, 2007, 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.
Although the portion of the building not being utilized by the Company is
currently unoccupied and available for lease, based on the Company's analysis
including but not limited to current market rents in the area, leasing values,
and comparable property sales, the Company believes the property's fair market
value exceeds the property's current carrying value; and, therefore the carrying
value of the property as of September 30, 2007, has not been impaired.
There are no material commitments for capital expenditures as of September
30, 2007. Inflation has had no material impact on the business and operations of
the Company.
Pursuant to the Company's common stock repurchase plan (the "Repurchase
Plan"), during nine months ended September 30, 2007, the Company repurchased for
approximately $138,000 an aggregate of 289,146 shares of common stock from
unaffiliated parties at various prices. See Part I - Item 1 - Note 11 for
further details with regard to the Repurchase Plan.
Results of Operations for the Third Quarter and Nine Months ended September
30, 2007 vs. the Third Quarter and Nine Months ended September 30, 2006
The Company currently earns non-operating revenue consisting principally of
investment earnings on investment securities and cash equivalents. The Company's
management believes that operating cash needs for the next twelve months will be
met principally by the receipt of investment earnings on investment securities
and cash equivalents and the Company's current financial resources. The
Company's main source of revenue in 2006 was non-operating revenue consisting of
investment earnings and to a lesser extent rental income earned on real estate
owned.
No rental income from real estate owned was earned for the third quarter
and nine months ended September 30, 2007, as compared to $2,000 and $92,000 for
the third quarter and nine months ended September 30, 2006. The decreased
amounts in the 2007 periods, compared to the 2006 periods, are due to unoccupied
office space currently available for lease, versus partial occupancy in the same
2006 periods.
Compensation and benefits decreased to $535,000 in the third quarter and
$2,783,000 in the nine months ended September 30, 2007, compared with $1,058,000
and $3,742,000 in respective 2006 periods. The decreases are primarily due to a
decrease in the Supplemental Plan expense in the third quarter and nine month
periods ended September 30, 2007, as a result of the Supplemental Plan
termination as of May 31, 2007, versus the same 2006 periods as further
described below.
The Supplemental Plan expense was $0 and $868,000 for the third quarter and
nine months ended September 30, 2007, respectively, compared to $513,000 and
$2,023,000 for the third quarter and nine months ended September 30, 2006,
respectively. As a result of the termination of the Supplemental Plan, as of
June 1, 2007, no further Supplemental Plan expense will be recognized by the
Company.
The Supplemental Plan expense reflects recognition of an expense of $0 and
$394,000 for the third quarter and nine month periods ended September 30, 2007,
respectively recorded to increase the Supplemental Plan liability to the present
value of the 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.
An additional Supplemental Plan expense of $474,000 in the nine months
ended September 30, 2007, and $284,000 and $568,000 for the third quarter and
nine month periods ended September 30, 2006, respectively was recorded to
amortize the Supplemental Plan minimum pension liability adjustment. The minimum
pension liability adjustment, which was 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 was amortized on
a straight line basis over the 14-month period from April 1, 2006, through May
31, 2007, as an additional Supplemental Plan expense of $284,000 per quarter.
The amortization of the additional minimum pension liability in the 2007 and
2006 periods, although recorded as a component of compensation expense in the
Company's consolidated statement of operations, did 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. In connection with the Supplemental Plan lump-sum benefit payment, the
Company paid approximately $242,000 of employer Medicare taxes, which are
included as a component of compensation and benefits expense in the Company's
Consolidated Statement of Operations for the nine month period ended September
30, 2007. See Part I - Item 1 - Notes 8 and 10 to the Company's consolidated
financial statements for further information.
No stock based compensation expense was recorded in the nine months ended
September 30, 2007, as all previously granted outstanding options vested as of
January 2, 2007. No stock option awards have been granted since January 2005.
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 SFAS 123R. For further information regarding
the Company's Stock-Based Compensation, see Part I - Item 1 - Note 9 to the
Company's consolidated financial statements.
Professional and outside services decreased to $244,000 and $1,617,000 in
the third quarter and nine months ended September 30, 2007, compared to $553,000
and $2,274,000 in the respective 2006 periods. The decrease in the 2007 third
quarter and nine month periods as compared to the respective 2006 periods is
principally the result of a lower level of legal and professional fees relating
to the Supervisory Goodwill litigation in 2007 versus 2006. The Supervisory
Goodwill litigation expenses for the 2007 periods include expenses relating to
the preparation of the Company's expert report on damages and depositions of the
Company's and the Government's expert witnesses. The Supervisory Goodwill
litigation expenses in the 2006 periods included expenses incurred in connection
with discovery and preparation for the Show Cause hearing.
Interest income in the third quarter and nine months ended September 30,
2007, decreased to $244,000 and $1,103,000, respectively, from $491,000 and
$1,368,000 in the respective 2006 periods. The decrease is principally due to a
lower level of cash equivalents and investments securities as a result of the
Supplemental Plan lump-sum benefit payment to Mr. Bianco. The payment decreased
the Company's cash equivalents and investment securities by approximately $16.7
million, resulting in a decrease in the interest income earned by the Company
beginning in June 2007. See Item 3 - Quantitative and Qualitative Disclosure
about Market Risk for information concerning the Company's weighted average
interest rate yield on investment securities as of September 30, 2007.
For the third quarter and nine months ended September 30, 2007, realized
gains on sales of investment securities available for sale were $26,000 and
$310,000, respectively. No investment securities available for sale were sold in
the third quarter and nine months ended September 30, 2006.
The income tax provisions of $50,000 for the nine months ended September
30, 2007, and $33,000 and $66,000 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. 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.
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, 2007 December 31, 2006
====================== =========================
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) -------- ----- -------- ------
U.S. Treasury Bills and Notes............... $ 17,041 $ 17,057 $ 34,623 $ 34,625
======== ======== ======== ========
Weighted average interest rate.............. 4.77% 4.65%
======== ========
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 at December 31, 2006, had
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 were primarily in the form of preferred stock in utility companies.
The equity securities were held for an indefinite period and were 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,
2007 2006
Equity Securities Available for Sale: ============ ============
Fair value........................................................ - $1,417
============ ============
Hypothetical fair value at a 20% increase in market price......... - $1,700
============ ============
Hypothetical fair value at a 20% decrease in market price......... - $1,134
============ ============
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
(in thousands) Payment Due By Period
===================================================================
Less Than One to Three to More than
Total One Year Three Years Five Years Five Years
----- --------- ----------- ---------- -----------
Operating leases..................... $ 1 $ 1 $ - $ - $ -
-------- --------- ----------- ---------- -----------
Total obligations.................... $ 1 $ 1 $ - $ - $ -
======== ========= =========== ========== ===========
Item 4T. 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, 2007.
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) and 15d-15(e) promulgated under the Exchange Act) are
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 and accumulated and communicated to
management, including the principal executive and principal financial officers,
as appropriate, to allow timely decisions regarding disclosure.
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) and
15d-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
As the Company does not maintain a website, 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
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Accordingly, 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 ("SEC") EDGAR Database available on the SEC's website at www.sec.gov.
Materials filed with the SEC may also be read or copied by visiting the SEC's
Public Reference Room, 100 F Street, NE, 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, 2006
in response to Item 1A to Part I of Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. 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
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 13, 2007