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, 2004
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 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------- -------------
At September 30, 2004, there were 46,233,519 shares outstanding of the
registrant's common stock, $0.01 par value per share.
AmBase Corporation
Quarterly Report on Form 10-Q
September 30, 2004
TABLE OF CONTENTS Page
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................................................1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................15
Item 4. Controls and Procedures.............................................................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.................................................17
Item 6. Exhibits and Reports on Form 8-K....................................................................18
Signatures ....................................................................................................19
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share amounts)
September 30, December 31,
2004 2003
(unaudited)
======== =========
Assets:
Cash and cash equivalents......................................................... $ 9,523 $ 2,785
Investment securities:
Held to maturity (market value $8,544 and $17,331, respectively).............. 8,552 17,329
Available for sale, carried at fair value .................................... 3,228 1,774
-------- --------
Total investment securities....................................................... 11,780 19,103
-------- --------
Accounts receivable............................................................... 1 21
Real estate owned:
Land............................................................................ 6,954 6,954
Buildings and improvements...................................................... 12,810 12,810
-------- --------
19,764 19,764
Less: accumulated depreciation................................................. (681) (433)
-------- --------
Real estate owned, net............................................................ 19,083 19,331
Other assets...................................................................... 573 428
-------- --------
Total assets...................................................................... $ 40,960 $ 41,668
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued liabilities.......................................... $1,269 $ 1,376
Supplemental retirement plan...................................................... 10,616 9,292
Other liabilities................................................................. 1,577 1,633
-------- --------
Total liabilities................................................................. 13,462 12,301
-------- --------
Commitments and contingencies..................................................... - -
-------- --------
Stockholders' equity:
Common stock ($0.01 par value, 200,000,000 authorized, 46,410,007 and
46,335,007 issued, respectively)................................................ 464 463
Paid-in capital................................................................... 547,956 547,940
Accumulated other comprehensive income............................................ 236 84
Accumulated deficit............................................................... (520,473) (518,435)
Treasury stock, at cost - 176,488 shares.......................................... (685) (685)
-------- --------
Total stockholders' equity........................................................ 27,498 29,367
-------- --------
Total liabilities and stockholders' equity........................................ $ 40,960 $ 41,668
======== ========
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
2004 2003 2004 2003
==== ==== ==== ====
Revenues:
Rental income..........................................$ 561 $ 615 $ 1,652 $ 1,846
Operating expenses:
Compensation and benefits.............................. 1,021 982 3,130 3,036
Professional and outside services...................... 213 270 505 912
Property operating and maintenance .................... 117 158 344 397
Depreciation ......................................... 83 83 248 246
Insurance.............................................. 21 37 83 79
Other operating ....................................... 35 43 129 152
---------- ---------- ---------- ----------
1,490 1,573 4,439 4,822
---------- ---------- ---------- ----------
Operating loss ........................................ (929) (958) (2,787) (2,976)
---------- ---------- ---------- ----------
Interest income........................................ 142 71 380 242
Realized gains on sales of investment securities ...... 123 12 459 64
---------- ---------- ---------- ----------
Loss before income taxes............................... (664) (875) (1,948) (2,670)
Income tax expense..................................... (30) (32) (90) (94)
--------- ---------- ---------- ----------
Net loss...............................................$ (694) $(907) $ (2,038) $(2,764)
========= ========== ========== ==========
Net loss per common share:
Net loss - basic.......................................$(0.01) $(0.02) $ (0.04) $ (0.06)
Net loss - assuming dilution........................... (0.01) (0.02) (0.04) (0.06)
========= ========== ========== ==========
Weighted average common shares outstanding:
Basic..................................................46,234 46,159 46,222 46,190
============ ========== ========== ==========
Diluted................................................46,234 46,159 46,222 46,190
============ ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Comprehensive Income (Loss)
Third Quarter and Nine Months Ended September 30
(Unaudited)
(in thousands)
Third Quarter Nine Months
2004 2003 2004 2003
====== ===== ===== =====
Net loss.............................................................. $ (694) $ (907) $(2,038) $(2,764)
Unrealized holding gains on investment securities
available for sale, net of tax effect of $0...................... 90 (29) 157 13
-------- ------- -------- ---------
Comprehensive loss.................................................... $ (604) $ (936) $(1,881) $(2,751)
======== ======= ======== =========
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)
2004 2003
==== ====
Cash flows from operating activities:
Net loss...................................................................... $(2,038) $(2,764)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization............................................. 248 246
Accretion of discount - investment securities............................. (77) (149)
Realized gains on investment securities available for sale............... (459) (64)
Changes in other assets and liabilities:
Accounts receivable....................................................... 20 107
Other assets.............................................................. (145) (166)
Accounts payable and accrued liabilities.................................. (107) (407)
Other liabilities......................................................... 1,268 1,171
-------- --------
Net cash used by operating activities......................................... (1,290) (2,026)
-------- --------
Cash flows from investing activities:
Maturities of investment securities - held to maturity........................ 25,894 36,654
Purchases of investment securities - held to maturity......................... (17,040) (36,631)
Purchases of investment securities - available for sale....................... (17,426) (674)
Sales of investment securities - available for sale........................... 16,583 641
Building improvements......................................................... - (38)
-------- --------
Net cash provided (used) by investing activities.............................. 8,011 (48)
-------- --------
Cash flows from financing activities:
Stock options exercised....................................................... 17 -
Common stock repurchase....................................................... - (38)
--------- --------
Net cash provided (used) by financing activities.............................. 17 (38)
--------- --------
Net increase (decrease) in cash and cash equivalents.......................... 6,738 (2,112)
Cash and cash equivalents at beginning of period.............................. 2,785 4,918
--------- --------
Cash and cash equivalents at end of period.................................... $9,523 $2,806
========= ========
Supplemental cash flow disclosures:
Income taxes paid............................................................. $121 $ 124
========= ========
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 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"). The preparation of financial statements in
conformity with GAAP requires management to make certain 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, 2003.
The Company's assets currently consist primarily of cash and cash
equivalents, investment securities, and real estate owned. The Company's main
source of operating revenue is rental income earned on real estate owned. The
Company also 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. The Company intends to aggressively contest all litigation and
contingencies, as well as pursue all sources for contributions to settlements.
The Company's management expects that operating cash needs for the
remainder of 2004 will be met principally by rental income received, 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 - Legal Proceedings
For a discussion of the Company's legal proceedings, including a discussion
of the Company's Supervisory Goodwill litigation, see Part II - Item 1 - Legal
Proceedings.
Note 3 - Cash and Cash Equivalents
Highly liquid investments, consisting principally of funds held in
short-term money market accounts, are classified as cash equivalents.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 4 - Investment Securities
Investment securities - held to maturity consist of U.S. Treasury Bills
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.
Investment securities consist of the following:
September 30, 2004 December 31, 2003
============================================ =========================================
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 maturing within
one year ............... $ 8,552 $ 8,552 $ 8,544 $ 17,329 $ 17,329 $17,331
Available for Sale:
Equity Securities......... 3,228 2,992 3,228 1,774 1,690 1,774
----------- ----------- --------- ---------- ----------- ---------
$ 11,780 $ 11,544 $11,772 $ 19,103 $ 19,019 $19,105
=========== ============ ========= ========== ============ =========
The gross unrealized gains (losses) on investment securities, at September
30, 2004 and December 31, 2003 consist of the following:
(in thousands) 2004 2003
======= =======
Held to Maturity:.
Gross unrealized gains (losses).................................................. $ (8) $ 2
======= =======
Available for Sale:
Gross unrealized gains........................................................... $ 285 $ 84
======= =======
Gross unrealized losses.......................................................... $ (49) $ -
======= =======
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The realized gain on the sales of investment securities available for sale
for the third quarter and nine months ended September 30, 2004, are as follows:
Third Quarter Nine Months
(in thousands) 2004 2003 2004 2003
====== ====== ====== ======
Net sale proceeds................................................... $ 8,310 $ 311 $ 16,583 $ 641
Cost basis.......................................................... (8,187) (299) (16,124) (577)
------- ------ -------- -------
Realized gains...................................................... $ 123 $ 12 $ 459 $ 64
======= ====== ======== =======
During the nine months ended September 30, 2004 the Company purchased and
sold a $7 million U.S. Treasury Note resulting in a gain of $89,000 which is
included in realized gains on investment securities in the Consolidated
Statement of Operations.
During the third quarter ended September 30, 2004, the Company purchased
and sold an $8.0 million U.S. Treasury Note, resulting in a gain of $24,000
which is included in realized gains on investment securities in the Consolidated
Statement of Operations for the third quarter and nine months ended September
30, 2004.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - 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 $35 million and $34 million as of September 30, 2004 and December 31,
2003, 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 IRS is currently reviewing the Company's 1992 Amended Return in connection
with several carryback claims filed by the Company, as further described 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 or 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. The Carryback Claims and 1992 Amended Return
are currently being reviewed by the IRS. In April 2003, IRS examiners issued a
letter to the Company proposing to disallow the Carryback Claims. The Company
has sought administrative review of the letter by protesting to the Appeals
Division of the IRS. The Company has met with IRS Appeals Officials to discuss
the Carryback Claims and the appeals process is ongoing. The Company can give no
assurances that the Carryback Claims will be ultimately allowed by the IRS, the
final amount of the refunds, if any, or when they might be received.
Based upon the Company's federal income tax returns as filed from 1993 to
2003 (subject to IRS audit adjustments), and excluding the NOL carryforwards
generated from the Company's tax basis in Carteret/Carteret FSB, as noted above,
at September 30, 2004, the Company has NOL carryforwards, aggregating
approximately $35.6 million, available to reduce future federal taxable income
which expire if unused beginning in 2008. The Company's federal income tax
returns for years subsequent to 1992 have not been reviewed by the IRS.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 6 - 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, as follows:
(in thousands) Third Quarter Ended Nine Months Ended
September 30, 2004 September 30, 2004
=========================== ============================
Unrealized Accumulated Unrealized Accumulated
Gains (Losses) Other Gains(Losses) Other
on Investment Comprehensive on Investment Comprehensive
Securities Income Securities Income
============= ============= ============= =============
Balance beginning of period................... $ 146 $ 146 $ 84 $ 84
Reclassification adjustment for gains
realized in net loss.................. (91) (91) (43) (43)
Change during the period...................... 181 181 195 195
------------- -------------- ------------- -------------
Balance end of period......................... $ 236 $ 236 $ 236 $ 236
============= ============== ============= =============
(in thousands) Third Quarter Ended Nine Months Ended
September 30, 2004 September 30, 2004
=========================== ============================
Unrealized Accumulated Unrealized Accumulated
Gains (Losses) Other Gains(Losses) Other
on Investment Comprehensive on Investment Comprehensive
Securities Income Securities Income
============= ============= ============= =============
Balance beginning of period................... $ 64 $ 64 $ 22 $ 22
Reclassification adjustment for gains
realized in net loss.................. (20) (20) (35) (35)
Change during the period...................... (9) (9) 48 48
------------- -------------- ------------- -------------
Balance end of period......................... $ 35 $ 35 $ 35 $ 35
============= ============== ============= =============
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Property Owned
The Company owns two commercial office buildings in Greenwich, Connecticut
that contain 14,500 and 38,000 square feet, respectively. The Company utilizes a
small portion of the office space in the first building for its executive
offices and leases the remaining square footage to unaffiliated third parties.
The buildings and improvements are carried at cost, net of accumulated
depreciation of $681,000 and $433,000 at September 30, 2004 and December 31,
2003, respectively. Depreciation expense is recorded on a straight-line basis
over 39 years. Tenant security deposits of $260,000 and $308,000 at September
30, 2004 and December 31, 2003, respectively, are included in other liabilities.
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 is recorded as deferred rent
receivable and is included in other assets on the Consolidated Balance Sheets.
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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Stock Based Compensation
The Company has adopted the disclosure requirements of Financial Accounting
Standards Board, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), but continues to
account for stock compensation using APB Opinion 25, "Accounting for Stock
Issued to Employees" ("APB 25"), making pro forma disclosures of net income
(loss) and earnings per share as if the fair value based method had been
applied. No compensation expense, attributable to stock incentive plans, has
been charged to earnings.
The Black-Scholes option pricing model was used to estimate the fair value
of the options at date of grant based on various factors including dividend
yield, stock price volatility, interest rates, and expected life of options.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, and
given the changes in the price per share of the Company's Common Stock, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. If the Company
had elected to recognize compensation cost for stock options based on the fair
value at date of grant for stock options, consistent with the method prescribed
by Statement 123, net loss and net loss per share would have been changed to the
pro forma amounts indicated below.
Third Quarter Ended Nine Months Ended
------------------------------------ ---------------------------------
September 30, September 30, September 30, September 30,
(in thousands, except per share data) 2004 2003 2004 2003
====== ====== ======= =======
Net loss:
As reported....................................... $ (694) $ (907) $ (2,038) $ (2,764)
Deduct: pro forma stock based compensation expense for
stock options pursuant to Statement 123....... (19) (26) (59) (78)
---------- ---------- ----------- ---------
Pro forma......................................... $ (713) $ (933) $ (2,097) $ (2,842)
========== ========== =========== =========
Net loss per common share:
Basic - as reported............................... $ (0.01) $ (0.02) $ (0.04) $ (0.06)
Basic - pro forma................................. (0.01) (0.02) (0.04) (0.06)
Assuming dilution - as reported................... (0.01) (0.02) (0.04) (0.06)
Assuming dilution - pro forma..................... (0.01) (0.02) (0.04) (0.06)
=========== =========== ============ ==========
Options to purchase 1,290,000 shares of common stock for the third quarter
and nine months ended September 30, 2004, and 1,125,000 shares of common stock
for the third quarter and nine months ended September 30, 2003, 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 9 - Pension and Savings Plans
The Company sponsors a non-qualified supplemental retirement plan
("Supplemental Plan") under which only one current executive officer of the
Company is a participant. The cost of the Supplemental Plan is actuarially
determined and is accrued but not funded.
Pension expense for the Supplemental Plan was as follows:
Third Quarter Ended Nine Months
Ended --------------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
(in thousands) 2004 2003 2004 2003
=========== ============= ============= =============
Service cost of current period................................ $ 230 $ 218 $ 690 $ 654
Interest cost on projected benefit obligation................. 172 161 516 483
Amortization of unrecognized losses........................... 39 51 117 153
----------- ------------- -------------- -----------
$ 441 $ 430 $ 1,323 $ 1,290
=========== ============= ============== ===========
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 salary, which are matched by the Company at a
percentage determined annually. The employer match is currently 100% of the
employee's salary eligible for deferral. 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 salary
reduction contributions. The Company's matching contributions to the Savings
Plan, charged to expense, were $2,000 and $45,000 for the third quarter and nine
months ended September 30, 2004 respectively and $0 and $36,000 for the third
quarter and nine months ended September 30, 2003 respectively. All contributions
are subject to maximum limitations contained in the Code.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 I,
herein.
FINANCIAL CONDITION
The Company's assets at September 30, 2004, aggregated $40,960,000
consisting principally of cash and cash equivalents of $9,523,000 investment
securities of $11,780,000 and real estate owned of $19,083,000. At September 30,
2004, the Company's liabilities aggregated $13,462,000. Total stockholders
equity was $27,498,000.
The liability for the supplemental retirement plan (the "Supplemental
Plan"), which is accrued but not funded, increased to $10,616,000 at September
30, 2004 from $9,292,000 at December 31, 2003. The Supplemental Plan liability
reflects the actuarially determined accrued pension costs in accordance with
GAAP. The increased liability is the result of additional accrued service
vesting and interest cost on the liability. The Supplemental Plan liability is
further affected by changes in discount rates and experience which could be
different from that assumed.
For the nine months ended September 30, 2004, cash of $1,290,000 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 cash needs of the Company for the first nine months of
2004 were satisfied by the receipt of rental income, interest income received on
investment securities and cash equivalents, and to a lesser extent the Company's
current financial resources. Management believes that the Company's cash
resources are sufficient to continue operations for 2004.
A sale of investment securities took place at the end of the quarter ending
September 30, 2004. The proceeds from the sale were not reinvested prior to
September 30, 2004 and are included in cash and cash equivalents at September
30, 2004.
For the nine months ended September 30, 2003, cash of $2,026,000 was used
by operations, including the payment of prior year accruals and operating
expenses partially offset by the receipt of interest and rental income.
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 II - Item 1 - Legal Proceedings.
The Company owns two commercial office buildings in Greenwich, Connecticut.
One building is approximately 14,500 square feet and is leased to unaffiliated
third parties with approximately 3,500 square feet utilized by the Company for
its executive offices. The second building is approximately 38,000 square feet
and is leased to unaffiliated third parties.
The Company made no purchases of common stock pursuant to its common stock
repurchase plan during the first nine months of 2004. There are no material
commitments for capital expenditures as of September 30, 2004. Inflation has had
no material impact on the business and operations of the Company.
Results of Operations for the Third Quarter and Nine Months ended September
30, 2004 vs. the Third Quarter and Nine Months Ended September 30, 2003
The Company's main source of operating revenue is 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 2004 will be met principally by rental income and the receipt of
non-operating revenue consisting of interest income earned on investment
securities and cash equivalents, and the Company's current financial resources.
The Company recorded a net loss of $694,000 or $0.01 per share and
$2,038,000 or $0.04 per share for the third quarter and nine months ended
September 30, 2004, respectively compared with a net loss of $907,000 or $0.02
per share and $2,764,000 or $0.06 per share for the third quarter and nine
months ended September 30, 2003, respectively.
For the third quarter and nine months ended September 30, 2004 the Company
earned rental income from real estate owned of $561,000 and $1,652,000
respectively, as compared to $615,000 and $1,846,000 for the third quarter and
nine months ended September 30, 2003, respectively. The decrease in the 2004
period reflects decreased rental income as a result of office vacancies as of
September, 2004.
Compensation and benefits increased to $1,021,000 in the third quarter and
$3,130,000 in the nine months ended September 30, 2004, respectively, compared
with $982,000 and $3,036,000 in respective 2003 periods. The increases were
principally the result of a higher level of benefits costs and accruals.
Included in compensation and benefits is an accrual for the Supplemental
Retirement Plan of $441,000 and $1,323,000 for the third quarter and nine month
period ended September 30, 2004, respectively, compared to $430,000 and
$1,290,000, respectively, for the same 2003 periods.
Professional and outside services decreased to $213,000 and $505,000 in the
third quarter and nine months ended September 30, 2004, compared to $270,000 and
$912,000 in the respective 2003 periods. The decreases in the 2004 third quarter
and nine month periods as compared to the respective 2003 periods is principally
due to legal fees relating to the SDG litigation proceeding during 2003.
Property operating and maintenance expenses were $117,000 and $344,000 for
the third quarter and nine months ended September 30, 2004, respectively,
compared to $158,000 and $397,000 in the respective 2003 periods. The lower
expenses in 2004 compared to 2003 are due to the ongoing cost controls in
building management. Property operating and maintenance expenses have not been
reduced by tenant reimbursements.
Interest income in the third quarter and nine months ended September 30,
2004, increased to $142,000 and $380,000, respectively from $71,000 and
$242,000, in the respective 2003 periods. The increase is principally due to an
increased yield on the investments, classified as investments available for
sale.
The income tax provisions of $30,000 and $90,000 for the third quarter and
nine months ended September 30, 2004, respectively, and $32,000 and $94,000 for
the third quarter and nine months ended September 30, 2003, 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.
From time to time, the Company may publish "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, or
make oral statements that constitute forward-looking statements. The
forward-looking statement may relate to such matters as anticipated financial
performance, future revenues or earnings, business prospects, timing or results
of pending litigation, projected ventures, anticipated market performance, and
similar matters. 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) changes in occupancy rates or real estate
value; (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. The Company does not undertake any obligation to
update or revise any forward-looking statements whether as a result of future
events, new information or otherwise.
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 at September 30, 2004 and December
31, 2003 with maturity dates of less than one year consist of the following:
2004 2003
================= =================
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) -------- ------- -------- -----
U.S. Treasury Bills......................... $ 8,552 $ 8,544 $ 17,329 $17,331
======== ======= ======== =======
Weighted average interest rate.............. 0.97% 0.94%
======== ========
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.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Also, the Company has
investments in certain unconsolidated entities. As the Company does not control
or manage these entities, its controls and procedures with respect to such
entities are necessarily substantially more limited than those it maintains with
respect to its consolidated subsidiaries.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of September 30, 2004. Based on the foregoing, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
There have been no changes in the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect the internal controls over financial reporting during the
quarter ended September 30, 2004.
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
The information contained in Item 8 - Note 10 in AmBase's Annual Report on
Form 10-K for the year ended December 31, 2003, 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 August 31, 2004, the Court denied the
Company's Motion to Dismiss the FDIC, but granted the Company's Motion to Define
the Measure of Carteret's Contract Damages to the extent it requested the Court
to consider the size and value of the FDIC's receivership deficit when
calculating damages. The Court subsequently conducted a status conference on
October 4, 2004, and ordered the Company to submit a proposed litigation
time-line to the Court by October 22, 2004 which was timely submitted. The Court
ordered the United States and the FDIC to respond to the Company's proposed
litigation time-line by November 5, 2004 which was timely submitted, and
scheduled a status conference for November 16, 2004. No assurance can be given
regarding the ultimate outcome of the litigation. 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 Company's Supervisory Goodwill
claims, but are not necessarily indicative of the ultimate outcome of the
Company's actions.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
(b) Reports on Form 8-K
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 10, 2004