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 March 31, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7265
AMBASE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2962743
(State of incorporation) (I.R.S. Employer Identification No.)
100 PUTNAM GREEN, 3RD FLOOR
GREENWICH, CONNECTICUT 06830
(Address of principal executive offices) (Zip Code)
(203) 532-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ________
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES ________ NO X
At May 11, 2006, there were 45,263,519 shares outstanding of the
registrant's common stock, $0.01 par value per share.
AmBase Corporation
Quarterly Report on Form 10-Q
March 31, 2006
TABLE OF CONTENTS Page
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).....................................................................1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................20
Item 4. Controls and Procedures.............................................................................21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................21
Item 1A. Risk Factors........................................................................................22
Item 2. Exhibits............................................................................................22
Signatures ....................................................................................................22
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(in thousands, except for share and per share amounts)
March 31, December 31,
2006 2005
======== =========
Assets:
Cash and cash equivalents......................................................... $ 1,665 $ 2,852
Investment securities:
Held to maturity (market value $37,912 and $39,034, respectively)............. 37,904 39,031
Available for sale, carried at fair value .................................... 1,640 1,729
-------- --------
Total investment securities....................................................... 39,544 40,760
-------- --------
Real estate owned:
Land............................................................................ 554 554
Buildings and improvements...................................................... 1,900 1,900
-------- --------
2,454 2,454
Less: accumulated depreciation................................................. (245) (232)
-------- --------
Real estate owned, net............................................................ 2,209 2,222
Other assets...................................................................... 37 49
-------- --------
Total assets...................................................................... $ 43,455 $ 45,883
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued liabilities.......................................... $ 793 $ 1,568
Supplemental retirement plan...................................................... 15,059 14,595
Other liabilities................................................................. 36 38
-------- --------
Total liabilities................................................................. 15,888 16,201
-------- --------
Commitments and contingencies (Note 3)............................................
Stockholders' equity:
Common stock ($0.01 par value, 200,000,000 authorized, 46,410,007 issued and,
outstanding) ............................. 464 464
Paid-in capital................................................................... 547,978 547,956
Accumulated other comprehensive income............................................ (1,484) (1,395)
Accumulated deficit............................................................... (518,143) (516,658)
Treasury stock, at cost - 1,146,488 and 176,488 shares, respectively.............. (1,248) (685)
-------- --------
Total stockholders' equity........................................................ 27,567 29,682
-------- --------
Total liabilities and stockholders' equity........................................ $ 43,455 $ 45,883
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended March 31
(Unaudited)
(in thousands, except per share data)
Three Months
2006 2005
Revenues: ==== ====
Rental income..................................................................... $ 41 $ 43
Operating expenses:
Compensation and benefits......................................................... 1,088 1,170
Professional and outside services................................................. 718 546
Property operating and maintenance................................................ 31 28
Depreciation...................................................................... 13 13
Insurance......................................................................... 17 16
Other operating................................................................... 46 50
---------- ----------
1,913 1,823
---------- ----------
Operating loss.................................................................... (1,872) (1,780)
---------- ----------
Interest income................................................................... 420 125
Realized gains on sales of investment securities.................................. - 20
---------- ----------
Loss from continuing operations before
income taxes................................................................. (1,452) (1,635)
Income tax expense................................................................ (33) (30)
---------- ----------
Loss from continuing operations................................................... (1,485) (1,665)
---------- ----------
Income from operation of discontinued property.................................... - 341
---------- ----------
Income from discontinued operations............................................... - 341
---------- ----------
Net loss.......................................................................... $ (1,485) $(1,324)
========== ==========
Per share data:
Basic:
Loss from continuing operations................................................... $ (0.03) $ (0.04)
Income from discontinued operations............................................... - 0.01
---------- ----------
Net loss attributable to common
Stockholders................................................................. $ (0.03) $ (0.03)
============ ==========
Assuming dilution:
Loss from continuing operations................................................... $ (0.03) $ (0.04)
Income from discontinued operations............................................... - 0.01
---------- ----------
Net loss attributable to common
Stockholders................................................................. $ (0.03) $ (0.03)
========== ==========
Weighted average common shares outstanding:
Basic............................................................................. 45,829 46,234
========== ==========
Diluted........................................................................... 45,829 46,234
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31
(Unaudited)
(in thousands)
Three Months
2006 2005
===== =====
Net loss.......................................................................... $(1,485) $(1,324)
Unrealized holding losses on investment securities
available for sale........................................................... (89) (182)
------- -------
Comprehensive loss................................................................... $(1,574) $(1,506)
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31
(Unaudited)
(in thousands)
2006 2005
==== ====
Cash flows from operating activities:
Loss from continuing operations....................................................... $(1,485) $(1,665)
Adjustments to reconcile loss from continuing to net cash used by continuing operations:
Depreciation and amortization..................................................... 13 13
Accretion of discount - investment securities..................................... - (43)
Realized gains on investment securities available for sale....................... - (20)
Stock-based compensation expense.................................................. 22 -
Changes in other assets and liabilities:
Accrued interest receivable....................................................... 5 -
Other assets...................................................................... 12 379
Accounts payable and accrued liabilities.......................................... (775) (771)
Suuplemental retirement plan and other liabilities................................ 462 (1,326)
Other, net........................................................................ 2 2
-------- ----------
Net cash used by continuing operating activities...................................... (1,744) (3,431)
-------- ----------
Income from discontinuing operations.................................................. - 341
Adjustments to reconcile income from discontinued operations to net cash
provided by discontinued operations:
Depreciation and amortization related to discontinued operations.................. - 70
Changes in other assets and liabilities related to discontinued operations:
Consolidated other assets & other liabilities..................................... - 50
-------- ----------
Net cash provided by discontinued operations.......................................... - 461
-------- ----------
Net cash used by operating activities................................................. (1,744) (2,970)
-------- ----------
Cash flows from investing activities:
Maturities of investment securities - held to maturity................................ 28,098 8,615
Purchases of investment securities - held to maturity................................. (26,978) (8,615)
Purchases of investment securities - available for sale............................... - 548
Sales of investment securities - available for sale................................... - (252)
-------- ----------
Net cash provided by investing activities............................................. 1,120 296
-------- ----------
Cash flows from financing activities:
Common stock repurchased.............................................................. (563) -
-------- ----------
Net cash used by financing activities................................................. (563) -
-------- ----------
Net decrease in cash and cash equivalents............................................. (1,187) (2,674)
Cash and cash equivalents at beginning of period...................................... 2,852 10,124
-------- ----------
Cash and cash equivalents at end of period............................................ $ 1,665 $ 7,450
======== ==========
Supplemental cash flow disclosures:
Income taxes paid..................................................................... $ 427 $ 38
======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization
The accompanying consolidated financial statements of AmBase Corporation
and its wholly-owned subsidiaries (the "Company") are unaudited and subject to
year-end adjustments. All material intercompany transactions and balances have
been eliminated. In the opinion of management, the interim financial statements
reflect all adjustments, consisting only of normal recurring adjustments unless
otherwise disclosed, necessary for a fair statement of the Company's financial
position and results of operations. Results for interim periods are not
necessarily indicative of results for the full year. Certain reclassifications
have been made to the prior year consolidated financial statements to conform
with the current year presentation. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions, that it deems reasonable, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from such estimates and assumptions. The unaudited interim financial statements
presented herein should be read in conjunction with the Company's consolidated
financial statements filed in its Annual Report on Form 10-K for the year ended
December 31, 2005.
The Company's assets currently consist primarily of cash and cash
equivalents, investment securities, and real estate owned. The Company'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. From time to time, the Company and its subsidiaries may be
named as a defendant in various lawsuits or proceedings. The Company intends to
aggressively contest all litigation and contingencies, as well as pursue all
sources for contributions to settlements.
In July 2005, the Company completed the sale of its 38,000 square foot
office building at Two Soundview Drive in Greenwich, Connecticut ("Two
Soundview"). Accordingly, the results of operations of Two Soundview for the
periods ended prior to the July 2005 sale have been retroactively reclassified
as discontinued operations in the accompanying Consolidated Statement of
Operations in accordance with Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). See Note 7 herein for further
information.
The Company's management expects that operating cash needs for the
remainder of 2006 will be met principally by the receipt of non-operating
revenue consisting of investment earnings on investment securities and cash
equivalents, rental income received, and the Company's current financial
resources.
Note 2 - Recent Accounting Pronouncements
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment," ("SFAS 123R"), using the modified prospective
approach and therefore has not restated results for prior periods. Under this
method, stock-based compensation expense for all stock-based compensation awards
ended March 31, 2006, includes compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Stock-based compensation expense for
all stock-based compensation awards granted after January 1, 2006,for which
vesting is based solely on employment service, will be based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R. The Company
recognizes these compensation costs for only those shares expected to vest on a
straight-line basis over the requisite service period of the award, which is
generally the option vesting term of two years. Prior to the adoption of SFAS
123R, the Company recognized stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). In March 2005, the Securities and Exchange Commission
(the "SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the
SEC's interpretation of SFAS 123R and the valuation of share-based payments for
public companies. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R. See Note 10 to the Company's consolidated financial
statements for a further discussion of stock-based compensation.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 3 - Legal Proceedings
The information contained in Item 8 - Note 10 in AmBase's Annual Report on
Form 10-K for the year ended December 31, 2005, is incorporated by reference
herein and the defined terms set forth below have the same meaning ascribed to
them in that report. There have been no material developments in such legal
proceedings, except as set forth below.
The Company is or has been a party in a number of lawsuits or proceedings,
including the following:
Supervisory Goodwill Litigation. On April 11, 2006, Judge Smith held a
status conference. The Court confirmed that the Company's statement of issues
relating to the size of the receivership deficit will be due in June 2006. The
Government's brief will be due in July 2006, and AmBase's reply will be due in
August 2006. A status conference to discuss further proceedings in this matter
will be held in September 2006. No assurance can be given regarding the ultimate
outcome of the litigation.
Both the Court of Federal Claims and the Court of appeals for the Federal
Circuit have issued numerous decisions in cases that involve claims against the
United States based upon its breach of its contracts with savings and loan
institutions through its 1989 enactment of FIRREA. In particular, the Federal
Circuit has issued decisions rejecting Takings Clause claims advanced by
shareholders of failed thrifts. Castle v. United States, 301F.3d 1328 (Fed. Cir.
2002; Bailey v. United States, 341F.3d 1342 (Fed. Cir. 2003) petition for
certiorari which was filed January 26, 2004. In April 2004, the Company filed an
amicus brief in support of the petition for certiorari filed by Bailey. In June
2004, the United States Supreme Court denied the petition for certiorari filed
by Bailey. The Court of Claims decision in the Company's case, as well as other
decisions in Winstar-related cases, are publicly available and may be relevant
to the Supervisory Goodwill Company's claims, but are not necessarily indicative
of the ultimate outcome of the Company's actions.
Litigation with SDG, Inc. On March 31, 2006, the parties filed a
stipulation with the Court withdrawing the appeal. The Appeals Court ordered the
case withdrawn on April 5, 2006. The Company remains a shareholder in SDG and
AMDG and will continue to monitor the status of SDG and its subsidiary, AMDG,
Inc.
Note 4 - Cash and Cash Equivalents
Highly liquid investments, consisting principally of funds held in
short-term money market accounts with original maturities of less than three
months, are classified as cash equivalents.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Investment Securities
Investment securities - held to maturity consist of U.S. Treasury Bills
with original maturities 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:
March 31, 2006 December 31, 2005
====================================== ======================================
Cost or Cost or
Carrying Amortized Fair Carrying Amortized Fair
(in thousands) Value Cost Value Value Cost Value
====== ========== ======= ======== ========== ======
Held to Maturity:
U.S. Treasury Bills...... $ 37,904 $ 37,904 $ 37,912 $ 39,031 $ 39,031 $ 39,034
Available for Sale:
Equity Securities......... 1,640 1,798 1,640 1,729 1,798 1,729
--------- --------- -------- -------- -------- ---------
$ 39,544 $ 39,702 $ 39,552 $ 40,760 $ 40,829 $ 40,763
========= ========= ======== ======== ======== =========
The gross unrealized gains (losses) on investment securities, at March 31,
2006 and December 31, 2005 consist of the following:
(in thousands) 2006 2005
======= ======
Held to Maturity:
Gross unrealized gain ............................................................ $ 8 $ 3
======= ======
Available for Sale:
Gross unrealized gains............................................................ $ 20 $ -
======= ======
Gross unrealized losses........................................................... $ (178) $ (69)
======== ======
The realized gain on the sales of investment securities available for sale
for the three months ended March 31, 2005 was as follows:
Three Months
(in thousands) 2005
============
Net sale proceeds................................................................. $ 548
Cost basis........................................................................ (528)
----------
Realized gains.................................................................... $ 20
==========
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 6 - Property Owned
As of March 31, 2006, the Company owns one commercial office building in
Greenwich, Connecticut that contains approximately 14,500 square feet. The
Company utilizes a small portion of the office space for its executive offices,
with the remaining square footage available for lease to unaffiliated third
parties.
Depreciation expense is recorded on a straight-line basis over 39 years.
The building and improvements are carried at cost, net of accumulated
depreciation of $245,000 and $232,000, at March 31, 2006 and December 31, 2005,
respectively.
The Company earns rental income under operating leases with tenants.
Minimum lease rentals are recognized on a straight-line basis over the terms of
the leases. The cumulative difference between lease revenue recognized under
this method and the contractual lease payment terms is recorded as deferred rent
receivable and the balances of $2,000 and $5,000 as of March 31, 2006 and
December 31, 2005, respectively are 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.
See Note 7 herein for information regarding the Company's sale of Two
Soundview in July 2005.
Note 7 - Discontinued Operations
In May 2005, the Company entered into an agreement to sell Two Soundview,
originally purchased in December 2002, to Ceruzzi Holdings, LLC, an unaffiliated
third party. In July 2005, the Company completed the sale of Two Soundview. The
sale price was $28,000,000 less normal real estate closing costs and
adjustments. As a result of the sale of Two Soundview, the results of operations
of Two Soundview have been designated as discontinued operations, and the
Consolidated Statements of Operations for the periods ended prior to the July
2005 sale have been retroactively reclassified to report the income from
discontinued operations separately from the results of continuing operations by
excluding the operating revenues and expenses of discontinued operations from
the respective statement captions, in accordance with SFAS 144. A gain from the
sale, of $10,298,000, was reflected in the Company's financial statements for
the year ending December 31, 2005.
Income from discontinued operations, as summarized below, for the three
month period ended March 31, 2005, reflects the results of operations of Two
Soundview.
Income from discontinued operations is as follows:
Three Months
(in thousands) 2005
Revenues: ============
Rental income................................................................................. $ 530
Operating expenses:
Professional and outside services............................................................. 11
Property operating and maintenance............................................................ 103
Depreciation.................................................................................. 70
Insurance..................................................................................... 4
Other operating............................................................................... 1
------------
189
------------
Income from operation of discontinued property................................................ $ 341
============
No adjustment for income taxes has been reflected in the income from
discontinued operations presented above as the Company has sufficient regular
net operating loss ("NOL") carryforwards and alternative minimum tax
carryforwards to offset the income.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Income Taxes
The Company and its 100% owned domestic subsidiaries file a consolidated
federal income tax return. The Company recognizes both the current and deferred
tax consequences of all transactions that have been recognized in the financial
statements, calculated based on the provisions of enacted tax laws, including
the tax rates in effect for current and future years. Net deferred tax assets
are recognized immediately when a more likely than not criterion is met; that
is, greater than 50% probability exists that the tax benefits will actually be
realized sometime in the future. The Company has calculated a net deferred tax
asset of $32 million as of March 31, 2006 and December 31, 2005, arising
primarily from net operating loss ("NOL") carryforwards, alternative minimum tax
("AMT") credits (not including the anticipated tax effects of NOL's expected to
be generated from the Company's tax basis in Carteret Savings Bank, F.A. and
subsidiaries ("Carteret"), resulting from the election decision, as more fully
described below). A valuation allowance has been established for the entire net
deferred tax asset as management, at the current time, has no basis to conclude
that realization is more likely than not.
As a result of the Office of Thrift Supervision's December 4, 1992
placement of Carteret in receivership, under the management of the Resolution
Trust Corporation ("RTC")/Federal Deposit Insurance Corporation ("FDIC"), and
then proposed Treasury Reg. ss.1.597-4(g), the Company had previously filed its
1992 and subsequent federal income tax returns with Carteret disaffiliated from
the Company's consolidated federal income tax return. Based upon the impact of
Treasury Reg. ss.1.597-4(g), which was issued in final form on December 20,
1995, a continuing review of the Company's tax basis in Carteret, and the impact
of prior year tax return adjustments on the Company's 1992 federal income tax
return as filed, the Company decided not to make an election pursuant to final
Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's
consolidated federal income tax return effective as of December 4, 1992 (the
"Election Decision").
The Company has made numerous requests to the RTC/FDIC for tax information
pertaining to Carteret and the resulting successor institution, Carteret Federal
Savings Bank ("Carteret FSB"); however, all of the information still has not
been received. Based on the Company's Election Decision, as described above, and
the receipt of some of the requested information from the RTC/FDIC, the Company
has amended its 1992 consolidated federal income tax return to include the
federal income tax effects of Carteret and Carteret FSB (the "1992 Amended
Return"). The Company is still in the process of amending its consolidated
federal income tax returns for 1993 and subsequent years.
The Company anticipates that, as a result of filing a consolidated federal
income tax return with Carteret FSB, a total of approximately $170 million of
tax NOL carryforwards will be generated from the Company's tax basis in
Carteret/Carteret FSB as tax losses are incurred by Carteret FSB of which $158
million are still available for future use. Based on the Company's filing of the
1992 Amended Return, approximately $56 million of NOL carryforwards are
generated for tax year 1992 which expire in 2007, with the remaining
approximately $102 million of NOL carryforwards to be generated, expiring no
earlier than 2008. These NOL carryforwards would be available to offset future
taxable income, in addition to the NOL carryforwards as further detailed below.
The Company can give no assurances with regard to the 1992 Amended Return, or
amended returns for subsequent years, or the final amount or expiration of NOL
carryforwards ultimately generated from the Company's tax basis in Carteret.
In March 2000, the Company filed several carryback claims and amendments to
previously filed carryback claims with the IRS (the "Carryback Claims") seeking
refunds from the IRS of alternative minimum tax and other federal income taxes
paid by the Company in prior years plus applicable IRS interest, based on the
filing of the 1992 Amended Return. In April 2003, IRS examiners issued a letter
to the Company proposing to disallow the Carryback Claims. The Company sought
administrative review of the letter by protesting to the Appeals Division of the
IRS. In February 2005, IRS Appeals officials completed their review of the
Carryback Claims, and disallowed them. The Company is currently considering
whether to file suit for the tax refunds it seeks, plus interest, with respect
to the Carryback Claims. Even if the Company files suit, the Company can give no
assurances as to the final amounts of refunds, if any, or when they might be
received.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Based upon the Company's federal income tax returns as filed from 1993 to
2004 (subject to IRS audit adjustments), excluding the NOL carryforwards
expected to be utilized in 2005, and excluding the NOL carryforwards generated
from the Company's tax basis in Carteret/Carteret FSB, as noted above at March
31, 2006, the Company has NOL carryforwards aggregating approximately $31
million, available to reduce future federal taxable income which expire if
unused beginning in 2009. The Company's federal income tax returns for years
subsequent to 1992 have not been reviewed by the IRS.
The utilization of certain carryforwards is subject to limitations under
U.S. federal income tax laws. In addition, the Company has approximately $21
million of AMT credit carryforwards ("AMT Credits"), which are not subject to
expiration. Based on the filing of the Carryback Claims, as further discussed
above, the Company is seeking to realize approximately $8 million of the $21
million of AMT Credits.
Note 9 - Comprehensive Income (Loss)
Comprehensive income (loss) is composed of net income (loss) and other
comprehensive income (loss) which includes the change in unrealized gains
(losses) on investment securities available for sale and recognition of
additional minimum pension liability, as follows:
Three Months Ended
(in thousands) March 31, 2006
=======================================
Unrealized Minimum Accumulated
Gains on Pension Other
Investment Liability Comprehensive
Securities Adjustment Income
========== ========== =============
Balance beginning of period................................................. $ (69) $ (1,326) $ (1,395)
Reclassification adjustment for
gains realized in net loss................................................ - - -
Change during the period.................................................... (89) - (89)
---------- ---------- ------------
Balance end of period....................................................... $ (158) $ (1,326) $ (1,484)
========== ========== ============
Three Months Ended
(in thousands) March 31, 2006
=======================================
Unrealized Minimum Accumulated
Gains on Pension Other
Investment Liability Comprehensive
Securities Adjustment Income
========== ========== =============
Balance beginning of period................................................. $ 37 $ (412) $ (375)
Reclassification adjustment for gains
realized in net loss................................................ (5) - (5)
Change during the period.................................................... (177) - (177)
---------- ---------- -------------
Balance end of period....................................................... $ (145) $ (412) $ (557)
========== ========== =============
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Stock-Based Compensation
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the
Company may grant to officers and employees of the Company and its subsidiaries,
stock options ("Options"), stock appreciation rights ("SARs"), restricted stock
awards ("Restricted Stock"), merit awards ("Merit Awards") and performance share
awards ("Performance Shares"), through May 28, 2008. An aggregate of 5,000,000
shares of the Company's Common Stock are reserved for issuance under the 1993
Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of
Restricted Stock and Performance Shares); however, of such shares, only
2,500,000 shares in the aggregate shall be available for issuance for Restricted
Stock Awards and Merit Awards. Such shares shall be authorized but unissued
shares of Common Stock. As of March 31, 2006, there were 3,760,000 shares
available for future stock option grants. Options may be granted as incentive
stock options ("ISOs") intended to qualify for favorable tax treatment under
Federal tax law or as nonqualified stock options ("NQSOs"). SARs may be granted
with respect to any Options granted under the 1993 Plan and may be exercised
only when the underlying Option is exercisable. The 1993 Plan requires that the
exercise price of all Options and SARs be equal to or greater than the fair
market value of the Company's Common Stock on the date of grant of that Option.
The term of any ISO or related SAR cannot exceed ten years from the date of
grant, and the term of any NQSO cannot exceed ten years and one month from the
date of grant. Subject to the terms of the 1993 Plan and any additional
restrictions imposed at the time of grant, Options and any related SARs
ordinarily will become exercisable commencing one year after the date of grant.
Options granted generally have a ten year contractual life and generally have
vesting terms of two years from the date of grant. In the case of a "Change of
Control" of the Company (as defined in the 1993 Plan), Options granted pursuant
to the 1993 Plan may become fully exercisable as to all optioned shares from and
after the date of such Change in Control in the discretion of the Committee or
as may otherwise be provided in the grantee's Option agreement. Death,
retirement, or absence for disability will not result in the cancellation of any
Options.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, using the modified prospective application method and
therefore has not restated results for prior periods. Under this method,
stock-based compensation expense for the three months ended March 31, 2006,
includes compensation expense for all stock-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS 123.
Stock-based compensation expense for all stock-based compensation awards granted
after January 1, 2006, for which vesting is based solely on employment service,
will be based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R. The Company recognizes these compensation costs for
only those shares expected to vest, on a straight-line basis over the requisite
service period of the awards, which is generally the option vesting term of two
years.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the three months ended March 31, 2006, the Company recorded
compensation expense of $22,000 relating to unvested stock options. Compensation
expense relating to stock options is recorded as a reduction to additional paid
in capital in the statement of stockholders' equity. Prior to 2006, as permitted
by SFAS 123, the Company accounted for share-based payments to employees using
APB 25's intrinsic value method and recognized no compensation cost for employee
stock options in prior years. Had the Company adopted SFAS 123R in the prior
period, the impact of that standard would have approximated the impact of SFAS
123 in the disclosure of pro-forma net income (loss) and earnings per share
described as follows:
March 31, March 31,
(in thousands, except per share data) 2006 2005
Net loss: ===== =======
As reported............................................................... $ (1,485) $ (1,324)
Add: stock-based employee compensation expense included in
reported net loss... ................................................. 22 -
Deduct: total stock-based employee compensation expense
determined under fair value based methods for all awards.............. (22) (31)
-------- ----------
Pro forma................................................................. $ (1,485) $ (1,355)
======== ==========
Net loss per common share:
Basic - as reported....................................................... $ (0.03) $ (0.03)
Basic - pro forma......................................................... (0.03) (0.03)
Assuming dilution - as reported........................................... (0.03) (0.03)
Assuming dilution - pro forma ............................................ (0.03) (0.03)
======== ==========
The fair value of each option award was estimated on the date of grant
using the Black-Scholes-Merton option valuation model ("Black-Scholes") that
uses the assumptions noted in the following table. Expected volatilities are
based on historical volatility of the Company's stock. The Company uses
historical data to estimate option exercises and employee terminations within
the valuation model. The expected term of options granted is estimated based on
the contractual lives of option grants, option vesting period and historical
data and represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate for periods within the contractual life
of the option is based on the U.S. Treasury bond yield in effect at the time of
grant. No adjustments were made in 2006 to the input assumptions for the
calculation of the fair value of stock options granted in 2005 and prior years
from the pro forma amounts previously presented in the Company's prior period
financial statements.
The Black-Scholes option valuation model requires the input of
highly subjective assumptions, including the expected life of the stock-based
award and price volatility. The assumptions noted herein represent management's
best estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been
used, our recorded and pro forma stock-based compensation expense could have
been materially different from that depicted herein. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, the share-based compensation expense could be
materially different.
The Company believes that the use of the Black-Scholes model meets the fair
value measurement objectives of SFAS 123R and reflects all substantive
characteristics of the instruments being valued. No stock options were granted
during the period ending March 31, 2006. The per share grant date weighted
average estimated values of employee stock option grants under the 1993 Plan, as
well as the assumptions used to calculate such values granted during the period
ended March 31, 2005, are as follows:
March 31,
2005
-------------
Weighted average fair value at grant date........................... $0.39
Expected dividend yield............................................. 0%
Risk-free interest rate............................................. 4.24%
Expected volatility................................................. 0.44
Expected life in years.............................................. 6
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table reports stock option activity during the three month
period ended March 31, 2006:
Weighted
Weighted Average
Average Remaining
of Exercise
Number Exercise Contractual
Shares Price Life (in years)
------------ --------- --------------
Outstanding at January 1, 2006......... 1,440,000 $0.96
Expired................................ (200,000) 0.66
----------- -------
Outstanding at March 31, 2006......... 1,240,000 $1.01 5.16
=========== ======= ====
Exercisable at March 31, 2006......... 1,036,000 $1.02 5.09
=========== ======= ====
At March 31, 2006, the exercise price of stock options outstanding was
greater than the market price of the Company's stock; therefore, no intrinsic
value for stock options is reflected above.
The following table presents information regarding non-vested share activity
during the three month period ended March 31, 2006:
Weighted
Average
Number of Grant-Date
Shares Fair Value
--------- ----------
Non-vested at January 1, 2006............ 528,000 $0.44
Vested during period..................... (324,000) $0.41
--------- ------
Non-vested at March 31, 2006............ 204,000 $0.47
========= ======
The total fair value of shares vested during the three month period ended
March 31, 2006 and 2005, was $134,000 and $88,000, respectively. As of March 31,
2006, there was $66,000 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements related to stock options
granted under the 1993 Plan. That cost is expected to be recognized over a
weighted-average period of 0.75 years.
Options to purchase 1,240,000 shares of common stock for the three months
ended March 31, 2006, and 1,440,000 shares of common stock for the three months
ended March 31, 2005, 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 11 - Pension and Savings Plans
The Company sponsors a non tax-qualified supplemental retirement plan,
initially adopted by the Company in 1985, and as amended and restated (the
"Supplemental Plan"), under which only one current executive officer of the
Company is currently the sole participant. The cost of the Supplemental Plan is
actuarially determined and is accrued but not funded.
Pension expense for the Supplemental Plan was as follows:
Three Months Ended
-------------------------
March 31, March 31,
(in thousands) 2006 2005
========== ==========
Service cost of current period................................................... $ 263 $ 257
Interest cost on projected benefit obligation.................................... 201 192
Amortization of unrecognized losses.............................................. - 72
---------- -----------
$ 464 $ 521
========== ===========
The liability for the Supplemental Plan, which is accrued but not funded,
increased to $15,059,000 at March 31, 2006 from $14,595,000 at December 31,
2005. The Supplemental Plan liability reflects the actuarially determined
accrued pension costs calculated in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). The increased
liability is the result of additional accrued service and interest cost on the
liability. The Supplemental Plan liability can be further affected by changes in
discount rates, mortality, and experience which could be different from those
assumed.
The Personnel Committee of the Board of Directors of the Company (the
"Personnel Committee") had been reviewing the Supplemental Plan and the
Company's related liability, including the desirability of continuing to
maintain and administer the Supplemental Plan, the untying of Mr. Bianco's
future employment with the Company from the timing of his Supplemental Plan
benefit payment(s), the Company's overall financial position, and the
desirability of continued accruals under the Supplemental Plan after Mr.
Bianco's current employment contract expires on May 31, 2007. In connection with
this review, the Personnel Committee had been considering various options,
including whether or not to terminate and/or curtail the Supplemental Plan. Mr.
Bianco (the Company's Chairman, President and Chief Executive Officer, and the
former President and Chief Executive Officer of Carteret Savings Bank, FA), is
the only current employee of the Company who participates in the Supplemental
Plan and his Supplemental Plan benefit is fully vested. For purposes of
computing his accrued benefit under the Supplemental Plan, Mr. Bianco had 14.92
years of credited service as of March 31, 2006, and assuming continued
employment with the Company, will have 16.08 years of credited service upon the
expiration of his current employment contract with the Company on May 31, 2007.
His accrual percentage under the Supplemental Plan is 4%, in effect from the
time of his initial employment with the Company, and in accordance with the
Supplemental Plan, he has had the entitlement to receive his Supplemental Plan
benefit in either a lump-sum or an annuity upon termination of his employment
with the Company.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During March 2006, the Company entered into a new employment agreement with
Mr. Bianco to extend his employment with the Company for an additional five (5)
years beyond May 31, 2007, until May 31, 2012 (the "2007 Employment Agreement").
As part of the 2007 Employment Agreement terms (i) Mr. Bianco's annual rate of
base salary will not increase from his current rate of base salary during the
first three years of the 2007 Employment Agreement; (ii) Mr. Bianco's service
accruals under the Supplemental Plan will cease as of May 31, 2007; (iii) Mr.
Bianco's Final Average Earnings (as defined in the Supplemental Plan) for
Supplemental Plan benefit calculation purposes, are capped as of December 31,
2004; and (iv) Mr. Bianco's bonus will no longer be linked to recovery efforts
in connection with the Company's Supervisory Goodwill litigation. Instead, on or
about May 31, 2007, Mr. Bianco will receive a lump-sum payment of his
Supplemental Plan benefit of $16,676,115, which amount was calculated on the
basis of a 5.75% discount rate, a "RP-2000" projected to 2004, mortality table;
and 16.08 years of credited service, and the Company and Mr. Bianco have agreed
to a long term incentive bonus formula, at varying percentages ranging from 5%
to 10%, or more, based upon recoveries received by the Company for its
investment in Carteret Savings Bank, through litigation or otherwise (including
the Company's Supervisory Goodwill litigation). The lump-sum Supplemental Plan
benefit payment to Mr. Bianco will be paid to him from the Company's available
financial resources.
The Supplemental Plan has been amended to provide for its automatic
termination immediately following the payment to Mr. Bianco of his Supplemental
Plan lump-sum benefit on or about May 31, 2007. In accordance with the
accounting for the Supplemental Plan's scheduled termination on or about May 31,
2007, in accordance with GAAP, the ultimate liability relating to the
anticipated termination of the Supplemental Plan is not reflected in the
financial statements presented herein, as all conditions for the final
termination of the Supplemental Plan have not yet been met. Based on the
actuarially determined accrued pension costs calculated in accordance with GAAP,
the Company will continue to recognize an expense for the Supplemental Plan and
the Supplemental Plan liability will increase through the date on which the
Supplemental Plan is terminated.
The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"),
which is a "Section 401(k) Plan" within the meaning of the Internal Revenue Code
of 1986, as amended (the "Code"). The Savings Plan permits eligible employees to
make contributions of up to 15% of compensation, which are matched by the
Company at a percentage determined annually. The employer match is currently
100% of the employee's compensation 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 compensation reduction contributions. The Company's
matching contributions to the Savings Plan, charged to expense, were $52,000 for
the three months ended March 31, 2006, and $45,000 for the three months ended
March 31, 2005. All contributions are subject to maximum limitations contained
in the Code.
Note 12 - Common Stock Repurchase Plan
In January 2002, the Company announced a common stock repurchase plan (the
"Repurchase Plan") which allows for the repurchase by the Company for up to 10
million shares of its common stock in the open market.
The Repurchase Plan is conditioned upon favorable business conditions and
acceptable prices for the common stock. Purchases under the Repurchase Plan may
be made, from time to time, in the open market, through block trades or
otherwise. Depending on market conditions and other factors, purchases may be
commenced or suspended any time or from time to time without prior notice.
(a) Total (b) (c) Total Number
Number of Average Shares Purchased (d) Maximum Number
Shares Price Paid as Part of Publicly Shares that may yet be
Purchased per Share Announced Plans Purchased under the Plan
--------------- ------------------------------------ ---------------------------------
January 1, 2006 - January 31, 2006..... - - 50,000 9,950,000
February 1, 2006 - February 28, 2006... 970,000 $ 0.58 1,020,000 8,980,000
March 1, 2006 - March 31, 2006......... - - 1,020,000 8,980,000
-------------
970,000
========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report may contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or make oral statements that constitute forward-looking
statements. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
or quantified. The forward-looking statements may relate to such matters as
anticipated financial performance, future revenues or earnings, business
prospects, projected ventures, anticipated market performance, anticipated
litigation results or the timing of pending litigation, and similar matters.
When used in this Annual Report, the words "estimates," "expects,"
"anticipates," "believes," "plans," "intends" and variations of such words and
similar expressions are intended to identify forward-looking statements that
involve risks and uncertainties. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company cautions readers that a variety
of factors could cause the Company's actual results to differ materially from
the anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, include, but are not limited to: (i) transaction
volume in the securities markets; (ii) the volatility of the securities markets;
(iii) fluctuations in interest rates; (iv) risks inherent in the real estate
business, including, but not limited to tenant defaults, changes in occupancy
rates or real estate values; (v) changes in regulatory requirements which could
affect the cost of doing business; (vi) general economic conditions; (vii)
changes in the rate of inflation and the related impact on the securities
markets; (viii) changes in federal and state tax laws; and (ix) risks arising
from unfavorable decisions in our current material litigation matters, or
unfavorable decisions in other supervisory goodwill cases. These are not the
only risks that we face. There may be additional risks that we do not presently
know of or that we currently believe are immaterial which could also impair our
business and financial position.
Undue reliance should not be placed on these forward-looking statements,
which are applicable only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after the date of this quarterly report or to
reflect the occurrence of unanticipated events. Accordingly, there is no
assurance that the Company's expectations will be realized.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which follows, should be read in conjunction with the consolidated
financial statements and related notes, which are contained in Part I - Item 1,
herein and the Company's Annual Report on Form 10-K for the year ended December
31, 2005. As a result of the sale of the Company's 38,000 square foot office
building at Two Soundview Drive in Greenwich, CT ("Two Soundview") in July 2005,
the results of operations of Two Soundview have been designated as discontinued
operations, and the Consolidated Statements of Operations for the periods
presented herein have been retroactively reclassified to report the income from
discontinued operations separately from the results of continuing operations by
excluding the operating revenues and expenses of discontinued operations from
the respective statement captions. See Part I - Item 1 - Note 7 for additional
information concerning the sale of Two Soundview in July 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets at March 31, 2006, aggregated $43,455,000 consisting
principally of cash and cash equivalents of $1,665,000, investment securities of
$39,544,000 and real estate owned of $2,209,000. At March 31, 2006, the
Company's liabilities aggregated $15,888,000. Total stockholders equity was
$27,567,000.
The liability for the Company's non tax-qualified supplemental retirement
plan, initially adopted by the Company in 1985, and as amended and restated (the
"Supplemental Plan"), which is accrued but not funded, increased to $15,059,000
at March 31, 2006 from $14,595,000 at December 31, 2005. The Supplemental Plan
liability reflects the actuarially determined accrued pension costs calculated
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). The increased liability is the result of additional accrued
service and interest cost on the liability. The Supplemental Plan liability can
be further affected by changes in discount rates, mortality, and experience
which could be different from those assumed.
The Personnel Committee of the Board of Directors of the Company (the
"Personnel Committee") had been reviewing the Supplemental Plan and the
Company's related liability, including the desirability of continuing to
maintain and administer the Supplemental Plan, the untying of Mr. Bianco's
future employment with the Company from the timing of his Supplemental Plan
benefit payment(s), the Company's overall financial position, and the
desirability of future accruals under the Supplemental Plan after Mr. Bianco's
current employment contract expires on May 31, 2007. In connection with this
review, the Personnel Committee had been considering various options, including
whether or not to terminate and/or curtail the Supplemental Plan. Mr. Bianco
(the Company's Chairman, President and Chief Executive Officer, and the former
President and Chief Executive Officer of Carteret Savings Bank, FA), is the only
current employee of the Company who participates in the Supplemental Plan and
his Supplemental Plan benefit is fully vested. For purposes of computing his
accrued benefit under the Supplemental Plan, Mr. Bianco had 14.92 years of
credited service as of March 31, 2006, and, assuming continued employment with
the Company, will have 16.08 years of credited service upon the expiration of
his current employment contract with the Company on May 31, 2007. His accrual
percentage under the Supplemental Plan is 4%, in effect from the time of his
initial employment with the Company, and in accordance with the Supplemental
Plan, he has had the entitlement to receive his Supplemental Plan benefit in
either a lump-sum or an annuity upon termination of his employment with the
Company.
During March 2006, the Company entered into a new employment agreement with
Mr. Bianco to extend his employment with the Company for an additional five (5)
years beyond May 31, 2007, until May 31, 2012 (the "2007 Employment Agreement").
As part of the 2007 Employment Agreement terms (i) Mr. Bianco's annual rate of
base salary will not increase from his current rate of base salary during the
first three years of the 2007 Employment Agreement; (ii) Mr. Bianco's service
accruals under the Supplemental Plan will cease as of May 31, 2007; (iii) Mr.
Bianco's Final Average Earnings (as defined in the Supplemental Plan) for
Supplemental Plan benefit calculation purposes, are capped as of December 31,
2004; and (iv) Mr. Bianco's bonus will no longer be linked to recovery efforts
in connection with the Company's Supervisory Goodwill litigation. Instead, on or
about May 31, 2007, Mr. Bianco will receive a lump-sum payment of his
Supplemental Plan benefit of $16,676,115, which amount was calculated on the
basis of a 5.75% discount rate, a "RP-2000" projected to 2004 mortality table;
and 16.08 years of credited service, and the Company and Mr. Bianco have agreed
to a long term incentive bonus formula, at varying percentages ranging from 5%
to 10%, or more, based upon recoveries received by the Company for its
investment in Carteret Savings Bank, through litigation or otherwise (including
the Company's Supervisory Goodwill litigation). The lump-sum Supplemental Plan
benefit payment to Mr. Bianco will be paid to him from the Company's available
financial resources.
The Supplemental Plan has been amended to provide for its automatic
termination immediately following the payment to Mr. Bianco of his Supplemental
Plan lump-sum benefit on or about May 31, 2007. In accordance with the
accounting for the Supplemental Plan's scheduled termination on or about May 31,
2007, in accordance with GAAP, the ultimate liability relating to the
anticipated termination of the Supplemental Plan is not reflected in the
financial statements presented herein, as all conditions for the final
termination of the Supplemental Plan have not yet been met. Based on the
actuarially determined accrued pension costs calculated in accordance with GAAP,
the Company will continue to recognize an expense for the Supplemental Plan and
the Supplemental Plan liability will increase through the date on which the
Supplemental Plan is terminated.
For additional information with regard to the Supplemental Plan, see Part I
- - Item 1 - Note 11 to the Company's consolidated financial statements.
For the three months ended March 31, 2006, cash of $1,744,000 was used by
continuing operations, including the payment of prior year accruals and
operating expenses, partially offset by the receipt of rental income, interest
income and investment earnings. The cash needs of the Company for the first
three months of 2006 were satisfied by the receipt of investment earnings
received on investment securities and cash equivalents, rental income 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
2006.
For the three months ended March 31, 2005, cash of $3,431,000 was used by
continuing operations, including the payment of prior year accruals (including
the legal accrual described below), and operating expenses partially offset by
the receipt of rental income, interest income, and investment earnings.
In March 2005, the Company paid $1,867,000 of previously incurred legal
fees and other expenses relating to the Company's defense of a withholding
obligation issue with the Internal Revenue Service ("IRS") which was
successfully concluded in October 2001. The Company had previously accrued these
costs which were reflected in other liabilities in prior period financial
statements.
The Company continues to evaluate a number of possible acquisitions and is
engaged in the management of its assets and liabilities, including the
contingent assets. Discussions and negotiations are ongoing with respect to
certain of these matters. The Company intends to aggressively contest all
litigation and contingencies, as well as pursue all sources for contributions to
settlements. For a discussion of lawsuits and proceedings, including the
Supervisory Goodwill litigation see Part I - Item 1 - Note 3.
As of March 31, 2006, the Company owns one commercial office buildings in
Greenwich, Connecticut. The building is approximately 14,500 square feet and is
available for lease to unaffiliated third parties with approximately 3,500
square feet utilized by the Company for its executive offices.
See Part I - Item 1 - Note 7 for further information concerning the sale of
the Company's 38,000 square foot building in July 2005. A gain from the sale, of
approximately $10 million, was reflected in the Company's financial statements
for the third quarter and nine month periods ending September 30, 2005.
There are no material commitments for capital expenditures as of March 31,
2006. See Part I - Item 1 - Note 11 to the Company's consolidated financial
statements for information regarding the Supplemental Plan lump-sum benefit
payment of $16,676,115 (to Mr. Bianco, the Company's Chairman, President and
Chief Executive Officer), expected to be paid on or about May 31, 2007.
Inflation has had no material impact on the business and operations of the
Company.
During February 2006, the Company repurchased 970,000 shares of common
stock from an unaffiliated party at a purchase price of $0.58 per share pursuant
to the Company's Repurchase Plan. See Part I - Item 1 - Note 12 for further
information regarding the Company's purchase of common stock pursuant to its
common stock repurchase plan.
In December 2004, the Financial Accounting Standards Board ("FASB")
released SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
is a revision of Statement 123. SFAS 123R supersedes Accounting Principles Board
Option No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. SFAS 123R is effective for fiscal years beginning after December
15, 2005; however, early adoption is permitted. The Company adopted SFAS 123R
effective on January 1, 2006. In accordance with SFAS 123R, the Company has
applied the "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the effective date and (b)
based on the requirements of SFAS 123 for all awards granted to employees prior
to the effective date of SFAS 123R that remain unvested on the effective date.
For further information regarding the Company's adoption of SFAS 123R and its
impact on the Company's financial statements, see Part I - Item 1 - Note 10 to
the Company's consolidated financial statements.
Results of Operations for the Three Months ended March 31, 2006 vs. The
Three Months Ended March 31, 2005
CONTINUING OPERATIONS
The Company's main source of operating revenue has recently been rental
income earned on real estate owned. The Company also earns non-operating revenue
consisting principally of investment earnings on investment securities and cash
equivalents. The Company's management expects that operating cash needs for the
remainder of 2006 will be met principally by the receipt of non-operating
revenue consisting of investment earnings on investment securities and cash
equivalents, the Company's current financial resources, and rental income on
real estate owned.
As indicated herein, as a result of the sale, the operating results of the
Company's Two Soundview property for the periods ended prior to the July 2005
sale have been reclassified to discontinued operations and accordingly, rental
income from real estate owned represents the Company's remaining property and
was $41,000 for the three months ended March 31, 2006 as compared to $43,000 for
the three months ended March 31, 2005. The decreased amount of $41,000 in 2006,
compared to $43,000 in 2005, is principally the result of a slight decrease in
tenant reimbursables in 2006 versus the same 2005 period.
Compensation and benefits expenses decreased to $1,088,000 in the three
months ended March 31, 2006, compared with $1,170,000 in respective 2005 period.
The decrease was principally the result of a lower level of incentive
compensation and Supplemental Plan benefit accruals, offset slightly by an
increase in other benefit costs. Included in compensation and benefits is an
accrual for the Supplemental Plan of $464,000 for the three months period ended
March 31, 2006, compared to $521,000 for the same 2005 period. As noted above,
the Company adopted Statement 123R effective on January 1, 2006. In accordance
with SFAS 123R, the Company has applied the "modified prospective" method in
which compensation cost for stock options is recognized beginning with the
effective date. During the three months ended March 31, 2006, the Company
recorded $22,000 of compensation expense relating to stock options. In
accordance with the "modified prospective" method, no compensation expense
relating to stock options was recorded for the three months ended March 31,
2005. For further information regarding the Company's adoption of SFAS 123R and
its impact on the Company's financial statements, see Part I - Item 1 - Not 10
to the Company's consolidated financial statements.
Professional and outside services expenses increased to $718,000 in the
three months ended March 31, 2006, compared to $546,000 in the respective 2005
period. The increase in the 2006 three month period, as compared to the
respective 2005 period, is principally the result of a higher level of legal
fees relating to the Supervisory Goodwill litigation as a result of discovery
relating to the Show Cause hearing and, to a lesser extent, other corporate
professional fees.
Property operating and maintenance expenses were $31,000 for the three
months ended March 31, 2006, compared to $28,000 in the respective 2005 period.
The increased expenses in the 2006 three month period, compared to the same 2005
period, is generally due to increased utilities costs and repairs and
maintenance expenses. Property operating and maintenance expenses have not been
reduced by tenant reimbursements.
Interest income for the three months ended March 31, 2006, increased to
$420,000 from $125,000 in the respective 2005 period, is principally due to an
increase in the aggregate amount of cash equivalents and investment securities
invested as a result of the cash proceeds received in connection with the sale
of real estate owned in July 2005, and to a lesser extent, an increased yield on
investments due to rising interest rates, as further discussed in Part I - Item
1 - Note 7.
No investment securities available for sale were sold in the three months
ended March 31, 2006. For the three months ended March 31, 2005, realized gains
on sales of investment securities available for sale were $20,000.
The income tax provisions of $33,000 and $30,000 for the three months ended
March 31, 2006 and March 31, 2005, 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.
DISCONTINUED OPERATIONS
As discussed in Part I - Item 1 - Note 7, in July 2005, the Company
completed the sale of Two Soundview. The sale price was $28,000,000 less normal
real estate closing adjustments. A gain from the sale of $10,298,000 is
reflected in the Company's financial statements for the year ending December 31,
2005.
Income from discontinued operations was $341,000 for the three months ended
March 31, 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds short-term investments as a source of liquidity. The
Company's interest rate sensitive investments with maturity dates of less than
one year consist of the following:
March 31, 2006 December 31, 2005
==================== ======================
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands) -------- ----- -------- -----
U.S. Treasury Bills......................... $ 37,904 $ 37,912 $ 39,031 $ 39,034
======== ======== ======== ========
Weighted average interest rate.............. 4.27% 3.81%
======== ========
The Company's current policy is to minimize the interest rate risk of its
short-term investments by investing in U.S. Treasury Bills with maturities of
less than one year. There were no significant changes in market exposures or the
manner in which interest rate risk is managed during the period.
The Company's portfolio of equity securities has exposure to equity price
risk. Equity price risk is defined as the potential loss in fair value resulting
from an adverse change in prices. The equity securities are primarily in the
form of preferred stock in utility companies. The equity securities are held for
an indefinite period and are carried at fair value with net unrealized gains and
losses recorded directly in a separate component of stockholder's equity.
The table below summarizes the Company's equity price risk and shows the
effect of a hypothetical 20% increase and 20% decrease in market price as of the
dates indicated below. The selected hypothetical changes are for illustrative
purposes only and are not necessarily indicative of the best or worse case
scenarios.
(In thousands) March 31, December 31,
2006 2005
Equity Securities Available for Sale: ========== ==========
Fair value ......................................................... $1,640 $1,729
====== ======
Hypothetical fair value at a 20% increase in market price........... $1,968 $2,075
====== ======
Hypothetical fair value at a 20% decrease in market price........... $1,312 $1,383
====== ======
Item 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures include our controls and other
procedures to ensure that information required to be disclosed in this and other
reports under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer to allow timely decisions
regarding required disclosure and to ensure that such information in recorded,
processed, summarized and reported within the time periods. Our Chief Executive
Officer and Chief Financial Officer have conducted an evaluation of our
disclosure controls and procedures as of March 31, 2006. Based upon this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures (as defined in Rule
13a-15(e) promulgated under the Exchange Act) are sufficiently effective to
ensure that the information required to be disclosed by us in the reports we
file (under the Exchange Act) are sufficiently effective to ensure that the
information required to be disclosed by us in the reports we file under the
Exchange Act is recorded, processed, and summarized and reported with adequate
timeliness.
There have been no changes during the most recent fiscal quarter in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially effect our internal control over financial
reporting.
STOCKHOLDER INQUIRIES
Stockholder inquiries, including requests for the following: (i) change of
address; (ii) replacement of lost stock certificates; (iii) Common Stock name
registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on
Form 10-K; (vi) proxy material; and (vii) information regarding stock holdings,
should be directed to:
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Attention: Shareholder Services
(800) 937-5449 or (718) 921-8200 Ext. 6820
Copies of Quarterly reports on Form 10-Q, Annual Reports on Form 10-K and
Proxy Statements can also be obtained directly from the Company free of charge
by sending a request to the Company by mail as follows:
AmBase Corporation
100 Putnam Green, 3rd Floor
Greenwich, CT 06830
Attn: Shareholder Services
In addition, the Company's public reports, including Quarterly Reports on
Form 10-Q, Annual Reports on Form 10-K and Proxy Statements, can be obtained
through the Securities and Exchange Commission EDGAR Database over the Internet
at www.sec.gov. Materials filed with the SEC may also be read or copied by
visiting the SEC's Public Reference Room, 450 Fifth Street, NW, Washington, DC
20549. Information on the operation of the Public Reference Room may be obtained
by calling 1-800-SEC-0330.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a discussion of the Company's legal proceedings, including a discussion
of the Company's Supervisory Goodwill litigation, see Part I - Item 1 - Note 3 -
Legal Proceedings.
Item 1A. RISK FACTORS
There have been no material changes from risk factors previously disclosed
in the Company's Annual Report on Form 10-K for the year ended December 31, 2005
in response to Item 1A to Part I of Form 10-K.
Item 2. EXHIBITS
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 Section 1350 Certification of Chief Executive Officer
Exhibit 32.2 Section 1350 Certification of Chief Financial Officer
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: May 15, 2006