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, 2003
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 06830-6027
(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, 2003, there were 46,158,519 shares outstanding of the
registrant's common stock, $0.01 par value per share.
AmBase Corporation
Quarterly Report on Form 10-Q
September 30, 2003
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.........11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..13
Item 4. Controls and Procedures.....................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................15
Item 6. Exhibits and Reports on Form 8-K............................16
Signatures...............................................................17
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except for share amounts)
(unaudited)
September 30, December 31,
2003 2002
========= =========
Assets:
Cash and cash equivalents......................................................... $ 2,806 $ 4,918
Investment securities:
Held to maturity (market value $18,387 and $18,260, respectively)............... 18,385 18,259
Available for sale, carried at fair value ....................................... 732 621
-------- --------
Total investment securities....................................................... 19,117 18,880
-------- --------
Accounts receivable............................................................... 2 109
Real estate owned:
Land............................................................................ 6,954 6,954
Buildings and improvements...................................................... 12,809 12,772
-------- --------
19,763 19,726
Less: accumulated depreciation................................................. (350) (104)
-------- --------
Real estate owned, net............................................................ 19,413 19,622
Other assets...................................................................... 293 127
-------- --------
Total assets...................................................................... $ 41,631 $ 43,656
===== =====
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued liabilities.......................................... $ 1,156 $ 1,563
Supplemental retirement plan...................................................... 8,861 7,608
Other liabilities................................................................. 251 293
Litigation reserves............................................................... 1,250 1,290
-------- --------
Total liabilities................................................................. 11,518 10,754
-------- --------
Commitments and contingencies..................................................... - -
-------- --------
Stockholders' equity:
Common stock ($0.01 par value, 200,000,000 authorized,
46,335,007 issued).............................................................. 463 463
Paid-in capital................................................................... 547,940 547,940
Accumulated other comprehensive income............................................ 35 22
Accumulated deficit............................................................... (517,640) (514,876)
Treasury stock, at cost - 176,488 and 126,488 shares, respectively................ (685) (647)
-------- --------
Total stockholders' equity........................................................ 30,113 32,902
-------- --------
Total liabilities and stockholders' equity........................................ $ 41,631 $ 43,656
===== =====
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
2003 2002 2003 2002
==== ==== ==== ====
Revenues:
Rental income....................................... $ 615 $ 83 $ 1,846 $ 228
Operating expenses:
Compensation and benefits........................ 982 872 3,036 2,670
Professional and outside services............... 270 431 912 861
Property operating and maintenance............ 158 33 397 74
Depreciation........................................ 83 16 246 47
Insurance............................................. 37 15 79 60
Other operating.................................... 30 31 111 93
-------- ------- -------- -------
1,560 1,398 4,781 3,805
-------- ------- -------- --------
Operating loss....................................... (945) (1,315) (2,935) (3,577)
-------- ------- --------- --------
Interest income....................................... 71 189 242 570
Realized gains on investment
securities available for sale...................... 12 - 64 -
Other income........................................... - - - 205
Write down of investments........................ - (1,600) - (1,600)
-------- -------- -------- -------
Loss before income taxes................................. (862) (2,726) (2,629) (4,402)
Income tax expense................................. (45) (44) (135) (134)
-------- --------- --------- -------
Net loss..............................................$ ( 907) $ (2,770) $ (2,764) $(4,536)
===== ====== ===== =====
Net loss per common share:
Net loss - basic......................................$ (0.02) $ (0.06) $ (0.06) $ (0.10)
Net loss - assuming dilution........................ (0.02) (0.06) (0.06) (0.10)
===== ===== ===== =====
Weighted average common shares outstanding:
Basic...................................................46,159 46,209 46,190 46,209
===== ===== ===== =====
Diluted................................................ 46,159 46,209 46,190 46,209
===== ===== ===== =====
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
2003 2002 2003 2002
====== ====== ====== ======
Net loss........................................................... $ ( 907) $ (2,770) $ (2,764) $ (4,536)
Unrealized holding gains on investment securities
available for sale, net of tax effect of $0................... 73 (29) 64 (2)
-------- -------- -------- ---------
Comprehensive loss................................................. $ ( 834) $ (2,799) $ (2,700) $ (4,538)
========= ======== ======== ========
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)
2003 2002
==== ====
Cash flows from operating activities:
Net loss.......................................................................... $ (2,764) $(4,536)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation and amortization................................................. 246 47
Accretion of discount - investment securities................................. (149) (528)
Realized gains on investment securities available for sale................... (64) -
Changes in other assets and liabilities:
Write down of investments..................................................... - 1,600
Accounts receivable........................................................... 107 4
Other assets.................................................................. (166) (11)
Accounts payable and accrued liabilities...................................... (407) (2,095)
Litigation and contingency reserves uses...................................... (40) (118)
Other liabilities............................................................. 1,211 589
Other, net........................................................................ - 8
-------- --------
Net cash used by operating activities............................................. (2,026) (5,040)
-------- --------
Cash flows from investing activities:
Maturities of investment securities - held to maturity............................ 36,654 88,800
Purchases of investment securities - held to maturity............................. (36,631) (87,881)
Purchases of investment securities - available for sale........................... (674) (400)
Building improvements............................................................. (38) -
Sales of investment securities - available for sale............................... 641 8
-------- --------
Net cash (used) provided by investing activities.................................. (48) 527
-------- --------
Cash flows from financing activities:
Common stock repurchase........................................................... (38) -
-------- --------
Net cash used by financing activities............................................. (38) -
-------- --------
Net decrease in cash and cash equivalents......................................... (2,112) (4,513)
Cash and cash equivalents at beginning of period.................................. 4,918 6,130
-------- --------
Cash and cash equivalents at end of period........................................ $ 2,806 $1,617
===== =====
Supplemental cash flow disclosures:
Income taxes paid................................................................. $ 155 $ 157
===== =====
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, 2002.
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 interest
earned 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 and alleged
litigation liabilities, as described in Part II - Item 1. The Company intends to
aggressively contest all pending and threatened 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 2003 will be met principally by rental income received, the receipt
of non-operating revenue consisting of interest income on investment securities
and cash equivalents, and the Company's current financial resources.
Note 2 - Legal Proceedings
The Company has certain alleged liabilities and is a defendant in certain
lawsuits. The accompanying consolidated financial statements do not include
adjustments that might result from an ultimate unfavorable outcome of these
uncertainties. Although the basis for the calculation of the litigation reserves
is regularly reviewed by the Company's management and outside legal counsel, the
assessment of these reserves includes an exercise of judgment and is a matter of
opinion. At September 30, 2003, the litigation reserves were $1,250,000. See
Part II - Item 1 - Legal Proceedings, for a discussion of the Company's legal
proceedings including a discussion of the Supervisory Goodwill litigation.
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, 2003 December 31, 2002
====================================== ======================================
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.................. $ 18,385 $ 18,385 $ 18,387 $ 18,259 $ 18,259 $ 18,260
Available for Sale:
Equity Securities......... 732 697 732 621 599 621
---------- --------- -------- --------- --------- ---------
$ 19,117 $ 19,082 $ 19,119 $ 18,880 $ 18,858 $ 18,881
============ ========== ========= ========= ========= ========
The gross unrealized gains on investment securities, at September 30, 2003
and December 31, 2002 consist of the following:
(in thousands) 2003 2002
======= ======
Held to Maturity:.
Gross unrealized gains............................................................ $ 2 $ 1
======= ======
Available for Sale:
Gross unrealized gains............................................................. $ 35 $ 22
======= ======
The realized gain on the sale of investment securities available for sale
for the third quarter and nine months ended September 30, 2003, is as follows:
Third Nine
(in thousands) Quarter Months
========= =======
Net sale proceeds........................................... $ 311 $ 641
Cost basis.................................................. (299) (577)
------------ -----------
Realized gain............................................... $ 12 $ 64
============ =============
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 $33 million and $31 million as of September 30, 2003 and December 31,
2002, 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 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. The Carryback
Claims and the 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 is currently
awaiting review of an IRS appeals officer. 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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Based upon the Company's federal income tax returns as filed from 1993 to
2002 (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, 2003, the Company has NOL carryforwards, aggregating
approximately $33.8 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.
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, 2003 September 30,2003
======================== ======================
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 income..... (20) (20) (35) (35)
Change during the period........... (9) (9) 48 48
-------- -------- ---------- ---------
Balance end of period.............. $ 35 $ 35 $ 35 $ 35
======== =========== ============ =============
(in thousands) Third Quarter Ended Nine Months Ended
September 30, 2002 September 30, 2002
======================= =========================
Unrealized Accumulated Unrealized Accumulated
Gains (Losses) Other Gains (Losses) Other
on Investment Comprehensive on Investment Comprehensive
Securities Income Securities Income
============== ============= ============= =============
Balance beginning of period........ $ 27 $ 27 $ - $ -
Change during the period........... (29) (29) (2) (2)
-------- . -------- -------- --------
Balance end of period.............. $ (2) $ (2) $ (2) $ (2)
========= ======== ======== ========
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Property Owned
The Company owns two office buildings in Greenwich, Connecticut. The first
building is approximately 14,500 square feet, is substantially leased to
unaffiliated third parties with a small amount utilized by the Company for its
executive offices. The second building, purchased in December 2002, is
approximately 38,000 square feet and is fully leased to unaffiliated third
parties.
The buildings and improvements are carried at cost, net of accumulated
depreciation of $268,000 and $104,000 at September 30, 2003 and December 31,
2002, respectively. Depreciation expense is recorded on a straight-line basis
over 39 years. Tenant security deposits of $191,000 at September 30, 2003 and
$226,000 at December 31, 2002, are included in other liabilities.
Minimum rental revenue attributable to operating leases is recognized when
earned and due from tenants. Revenue from tenant reimbursement of common area
maintenance, utilities and other operating expenses are recognized pursuant to
the tenant's lease. The effects of scheduled rent increases and rent
concessions, if any, are presented on a straight line basis over the term of the
lease.
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 adopted the disclosure requirements of Financial Accounting
Standards Board, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123") and 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 substantial 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) 2003 2002 2003 2002
=========== ============= ============= =============
Net loss:
As reported.................................... $ ( 907) $ (2,770) $ (2,764) $ (4,536)
Deduct: pro forma stock based compensation expense for
stock options pursuant to Statement 123.... (26) (54) (78) (162)
------------ ------------- ------------- --------------
Pro forma $ ( 933) $ (2,824) $ (2,842) $ (4,698)
============ ============= ============= ==============
Net loss per common share:
Basic - as reported............................ $ (0.02) $ (0.06) $ (0.06) $ (0.10)
Basic - pro forma.............................. (0.02) (0.06) (0.06) (0.10)
Assuming dilution - pro forma ................. (0.02) (0.06) (0.06) (0.10)
Assuming dilution - pro forma ................. (0.02) (0.06) (0.06) (0.10)
============ ============= ============= ============
Options to purchase 1,125,000 shares of common stock for the third quarter
and nine months ended September 30, 2003, and 1,170,000 shares of common stock
for the third quarter and nine months ended September 30, 2002, were excluded
from the computation of diluted earnings per share because these options were
antidilutive.
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, 2003 aggregated $41,631,000
consisting principally of cash and cash equivalents of $2,806,000, investment
securities of $19,117,000 and real estate owned of $19,413,000. At September 30,
2003, the Company's liabilities, including reserves for litigation liabilities,
described in Part II - Item 1, aggregated $11,518,000. Total stockholders equity
was $30,113,000.
The liability for the supplemental retirement plan (the "Supplemental
Plan"), which is accrued but not funded, increased to $8,861,000 at September
30, 2003 from $7,608,000 at December 31, 2002. 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, 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 rental income and interest income.
The cash needs of the Company for the first nine months of 2003 were satisfied
by the receipt of rental income, interest income received on investment
securities and cash equivalents, and the Company's current financial resources.
Management believes that the Company's cash resources are sufficient to continue
operations for 2003.
For the nine months ended September 30, 2002, cash of $5,040,000 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 remaining assets and liabilities, including the
contingent assets and alleged litigation liabilities. Extensive discussions and
negotiations are ongoing with respect to certain of these matters. The Company
intends to aggressively contest all pending and threatened litigation and
contingencies, as well as pursue all sources for contributions to settlements.
Management of the Company in consultation with outside legal counsel,
continually reviews the likelihood of liability and associated costs of pending
and threatened litigation. At September 30, 2003, the litigation reserves were
$1,250,000. For a discussion of alleged liabilities, lawsuits and proceedings,
including the Supervisory Goodwill litigation see Part II - Item 1 - Legal
Proceedings.
The Company has certain alleged liabilities and is a defendant in certain
lawsuits. Based upon an assessment of these proceedings the Company believes the
ultimate outcome of the proceedings will not have a material adverse effect on
its financial condition and results of operations. The accompanying consolidated
financial statements do not include adjustments that might result from an
ultimate unfavorable outcome of these uncertainties. Although the basis for the
calculation of the litigation reserves are regularly reviewed by the Company's
management and outside legal counsel, the assessment of these reserves includes
an exercise of judgment, and is a matter of opinion.
The Company owns two office buildings in Greenwich, Connecticut. The first
building is approximately 14,500 square feet, is substantially leased to
unaffiliated third parties with a small amount utilized by the Company for its
executive offices. The second building, purchased in December 2002, is
approximately 38,000 square feet and is fully leased to unaffiliated third
parties.
During June 2003, the Company repurchased 50,000 shares of common stock at
a purchase price of $0.75 per share, pursuant to its common stock repurchase
plan. There are no material commitments for capital expenditures as of September
30, 2003. 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, 2003 vs. the Third Quarter and Nine Months Ended September 30, 2002
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 interest income earned on investment securities and cash
equivalents. The Company's management expects that operating cash needs for the
remainder of 2003 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 $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, 2002 the Company
recorded a net loss of $2,770,000 or $0.06 per share and $4,536,000 or $0.10 per
share, respectively. The third quarter and nine months periods ended September
30, 2002, include a charge of $1,600,000 to reflect a write down of the
Company's investments in AMDG and SDG, as further described below.
For the third quarter and nine months ended September 30, 2003 the Company
earned rental income from real estate owned of $615,000 and $1,846,000
respectively, as compared to $83,000 and $228,000 for the third quarter and nine
months ended September 30, 2002, respectively. The increase in the 2003 periods
reflects increased rental income as a result of the ownership of a 38,000 square
foot office building purchased in December 2002.
Compensation and benefits increased to $982,000 in the third quarter and
$3,036,000 in the nine months ended September 30, 2003, respectively, compared
with $872,000 and $2,670,000 in the respective 2002 periods. The increases were
principally the result of a higher level of benefit accruals.
Professional and outside services decreased to $270,000 in the third
quarter ended September 30, 2003, compared to $431,000 for the third quarter
ended September 30, 2002. The decrease in the third quarter period is due
primarily to legal fees incurred in the 2002 period for an arbitration
proceeding. For the nine month period ended September 30, 2003, professional and
outside services increased to $912,000 from $861,000 in the respective 2002
period. The increase in the 2003 nine month period is due to increases in legal
fees principally relating to the SDG litigation proceeding.
Property operating and maintenance expenses were $158,000 and $397,000 for
the third quarter and nine months ended September 30, 2003, respectively,
compared to $33,000 and $74,000 in the respective 2002 periods. The 2003 third
quarter and nine month periods includes expenses relating to a 38,000 square
foot building purchased in 2002. The lower expenses in 2002 compared to 2003 are
due to the respective 2002 periods reflecting property ownership expenses for
the 14,500 square foot building only. Property operating and maintenance
expenses have not been reduced by tenant reimbursements.
Depreciation increased in the third quarter and nine months ended September
30, 2003, to $83,000 and $246,000, respectively, from $16,000 and $47,000 in the
third quarter and nine months ended September 30, 2002, as a result of
depreciation expense for the building purchased in December 2002.
Interest income in the third quarter and nine months ended September 30,
2003, decreased to $71,000 and $242,000 respectively from $189,000 and $570,000,
in the respective 2002 periods. The decreases are principally due to a lower
level of investments held during the 2003 period as a result of the real estate
investment in December 2002. The decrease to a lesser extent is also
attributable to continued decrease in the yield on investments in 2003 as
compared to the comparable 2002 periods.
Other income of $205,000 for the nine months ended September 30, 2002 is
attributable to the collection of an investment previously written off.
Write down of investments in the third quarter and nine month periods ended
September 30, 2002, reflects the Company's write down of its investments in SDG
and AMDG of $1,250,000 and $350,000, respectively. The Company recorded the
write down in September 2002, in connection with the ongoing evaluation of its
investments, and the determination that the value of its investments in SDG and
AMDG had been other than temporarily impaired. See Part II - Item 1 - Legal
Proceedings, for further information with regard to the legal proceedings
relating to SDG and AMDG. The Company will continue to monitor the status of its
SDG and AMDG investments and vigorously pursue recovery of its legal claims.
However, there can be no assurance that the Company will be able to recover all
of any part of its investment in these companies.
The income tax provisions of $45,000 and $135,000 for the third quarter and
nine months ended September 30, 2003, and $44,000 and $134,000 for the third
quarter and nine months ended September 2002, respectively, are primarily
attributable to provisions for state taxes. Income taxes applicable to operating
income (loss) are generally determined by applying the estimated effective
annual income tax rates to pretax income (loss) for the year-to-date interim
period. Income taxes applicable to unusual or infrequently occurring items are
provided in the period in which such items occur.
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, 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, 2003 and December
31, 2002 with maturity dates of less than one year consist of the following:
2003 2002
==================== =========================
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) -------- ----- -------- ------
U.S. Treasury Bills......................... $ 18,337 $ 18,387 $ 18,259 $ 18,260
========== ========= ======== ========
Weighted average interest rate.............. 1.03% 1.24%
========== ========
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, 2003. 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, 2003.
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, 2002, 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:
(a) Marshall Manley v. AmBase Corporation. In July 2003, the Second Circuit
issued a written decision denying all of Manley's claims in his Notice of
Appeal. On August 19, 2003, the Second Circuit issued its mandate rejecting the
appeal. Manley has neither petitioned the Second Circuit for rehearing nor
petitioned the United State Supreme Court for a Writ of Certiorari to review the
Second Circuit's decision. Manley has until November 19, 2003, to petition for a
Writ of Certiorari. The Company does not expect Manley to file a Certiorari
petition, but intends vigorously to oppose the petition in the event that Manley
does so petition. No assurance can be given regarding whether Manley will file a
petition for a Writ of Certiorari, whether the United State Supreme Court will
grant review of the Second Circuit's decision if Manley does file such a
petition, or the ultimate outcome with regard to this matter should the United
States Supreme Court grant review of the Second Circuit's decision.
(b) Supervisory Goodwill Litigation. On August 25, 2003, the Court of
Federal Claims (the "Court") issued a decision in which it (i) ruled that the
Government had entered into and breached its supervisory goodwill contracts with
the Company's wholly-owned subsidiary, Carteret Savings Bank ("Carteret"); (ii)
rejected the Company's claim that it was entitled to recover damages directly
from the Government under the Takings Clause for the loss of Carteret; and (iii)
rejected the Company's claim that the Government had "illegally exacted" $62.5
million that the Company paid into Carteret subsequent to the Government's
breach of the Goodwill contracts. Specifically, the Court held that the Company
could not recover damages under the Takings Clause because it could be restored
to the position it was in before the breach through Carteret's breach of
contract action.
On September 17, 2003, the Company filed a Motion to Dismiss The FDIC And
To Define The Appropriate Measure of Carteret's Contract Damages. On September
30, 2003, the FDIC, as plaintiff-intervenor in the case, and the United States,
as defendant in the case, each filed a separate response to the Company's
motion. On October 1, 2003, the Court held a telephonic status conference
pursuant to an order set forth in the August 25, 2003 Opinion.
Pursuant to that status conference, the Court ordered that through their
additional briefing on the Company's Motion to Dismiss the FDIC and to Define
the Appropriate Measure of Carteret's Contract Damages (i.e., through the
Company's reply brief and the surreply brief granted to the FDIC and the United
States), the parties should address the following question: "whether this Court
has the power to review the amount of the receivership deficit as administered
by the FDIC." In an Order dated October 16, 2003, the Court modified the
briefing schedule such that the Company filed its reply brief as required on
October 31, 2003, and the surreply brief of the FDIC and the United States is
due November 13, 2003. In addition, the Court ordered oral argument on this
issue for November 20, 2003, at 2 p.m.
Both the Court of Federal Claims and the Court of Appeals for the Federal
Circuit have continued to issue 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. The Trial court and appellate
decision in California Federal as well as other case decisions are publicly
available, may be relevant to the Company's claims, but are not necessarily
indicative of the ultimate outcome of the Company's actions.
No assurance can be given regarding the ultimate outcome of the litigation.
(c) Litigation with SDG, Inc. - A trial in this matter was completed during
May 2003 and both parties submitted post trial briefs during August 2003. The
Court has not yet made a ruling. The Company will continue to monitor the status
of SDG and its subsidiary, AMDG, Inc. ("AMDG"), and vigorously pursue the
matter.
(d) Other.
AmBase Corporation v. City Investing Company Liquidating Trust, et al. -
New York Court Action. On September 10, 2003, the Company petitioned the United
States Supreme Court for a Writ of Certiorari seeking review of the Second
Circuit's decision. On October 15, 2003, the Trust filed its opposition to the
Company's petition. On October 27, 2003, the Company filed it's reply to the
Trust's opposition. No assurance can be given regarding whether the United
States Supreme Court will grant review of the Second Circuit's decision or the
ultimate outcome with regard to this matter.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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) Form 8-K
Registrant filed one Current Report on Form 8-K prior to the filing of this
Form 10-Q for the quarter ended September 30, 2003 as follows:
Date Event Reported
---- --------------
August 26, 2003 U.S. Court of Federal Claims decision in the
Company's Supervisory Goodwill case.
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 12, 2003