10-Q 1 fr10q305.txt FORM 10-Q 3-31-05 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, 2005 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-7265 AMBASE CORPORATION Exact name of registrant as specified in its charter) Delaware 95-2962743 (State of incorporation) (I.R.S. Employer Identification No.) 100 PUTNAM GREEN, 3RD FLOOR GREENWICH, CONNECTICUT 06830 (Address of principal executive offices) Zip Code) (203) 532-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ______ ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X ------- ------------- At March 31, 2005, there were 46,233,519 shares outstanding of the registrant's common stock, $0.01 par value per share. AmBase Corporation Quarterly Report on Form 10-Q March 31, 2005
TABLE OF CONTENTS Page ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements.............................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............13 Item 3. Quantitative and Qualitative Disclosures About Market Risk......15 Item 4. Controls and Procedures.........................................16 PART II - OTHER INFORMATION Item 1. Legal Proceedings...............................................17 Item 4. Submission of Matters to a Vote of Security Holders.............17 Item 6. Exhibits........................................................18 Signatures ................................................................19
- 1 - PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS AMBASE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except for share amounts)
March 31, December 31, 2005 2004 (unaudited) ======== ========= Assets: Cash and cash equivalents......................................................... $ 7,450 $10,124 Investment securities: Held to maturity (market value $8,633 and $8,586, respectively)............... 8,633 8,590 Available for sale, carried at fair value .................................... 1,652 2,112 -------- -------- Total investment securities....................................................... 10,285 10,702 -------- -------- Accounts receivable............................................................... - 1 Real estate owned: Land............................................................................ 6,954 6,954 Buildings and improvements...................................................... 12,810 12,810 -------- -------- 19,764 19,764 Less: accumulated depreciation................................................. (846) (763) -------- -------- Real estate owned, net............................................................ 18,918 19,001 Other assets...................................................................... 604 1,032 -------- -------- Total assets...................................................................... $ 37,257 $ 40,860 ===== ===== Liabilities and Stockholders' Equity: Liabilities: Accounts payable and accrued liabilities.......................................... $ 724 $ 1,495 Supplemental retirement plan...................................................... 12,115 11,594 Other liabilities................................................................. 350 2,197 -------- -------- Total liabilities................................................................. 13,189 15,286 -------- -------- Commitments and contingencies..................................................... - - -------- -------- Stockholders' equity: Common stock ($0.01 par value, 200,000,000 authorized, 46,410,007 issued)...... 464 464 Paid-in capital................................................................... 547,956 547,956 Accumulated other comprehensive income............................................ (557) (375) Accumulated deficit............................................................... (523,110) (521,786) Treasury stock, at cost - 176,488 shares.......................................... (685) (685) -------- -------- Total stockholders' equity........................................................ 24,068 25,574 -------- -------- Total liabilities and stockholders' equity........................................ $ 37,257 $ 40,860 ===== =====
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 2005 2004 ==== ==== Revenues: Rental income................................................................................. $ 573 $ 535 Operating expenses: Compensation and benefits..................................................................... 1,170 1,083 Professional and outside services.................... ........................................ 557 108 Property operating and maintenance .......................................................... 131 113 Depreciation ................................................................................ 83 83 Insurance..................................................................................... 20 23 Other operating .............................................................................. 51 47 ---------- ---------- 2,012 1,457 ---------- ---------- Operating loss ............................................................................... (1,439) (922) ---------- ---------- Interest income............................................................................... 125 115 Realized gains on sales of investment securities ............................................ 20 107 ---------- ---------- Loss before income taxes...................................................................... (1,294) (700) Income tax expense.............................................................................. (30) (30) -------- ------- Net loss....................................................................................... $(1,324) $(730) ====== ====== Net loss per common share: Net loss - basic............................................................................... $ (0.03) $ (0.02) Net loss - assuming dilution................................................................... (0.03) (0.02) ====== ====== Weighted average common shares outstanding: Basic.......................................................................................... 46,234 46,200 ======= ===== Diluted........................................................................................ 46,234 46,200 ====== ======
The accompanying notes are an integral part of these consolidated financial statements. AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statement of Comprehensive Income (Loss) Three Months Ended March 31 (Unaudited) (in thousands)
Three Months 2005 2004 ===== ===== Net loss.......................................................................................... $(1,324) $(730) Unrealized holding gains on investment securities available for sale, net of tax effect of $0.................................................. (182) 54 ---------- --------- Comprehensive loss................................................................................ $(1,506) $(676) ====== =====
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)
2005 2004 ==== ==== Cash flows from operating activities: Net loss......................................................................... $(1,324) $(730) Adjustments to reconcile net loss to net cash used by operations: Depreciation and amortization............................................... 83 82 Accretion of discount - investment securities............................... (43) (31) Realized gains on investment securities available for sale................. (20) (18) Changes in other assets and liabilities: Accounts receivable......................................................... 1 21 Other assets 428 (35) Accounts payable and accrued liabilities.................................... (771) (775) Other liabilities........................................................... (1,326) 409 Other, net...................................................................... 2 (1) -------- -------- Net cash used by operating activities........................................... (2,970) (1,078) -------- ------- Cash flows from investing activities: Maturities of investment securities - held to maturity.......................... 8,615 17,353 Purchases of investment securities - held to maturity........................... (8,615) (8,499) Purchases of investment securities - available for sale......................... (252) (1,830) Sales of investment securities - available for sale............................. 548 367 -------- --------- Net cash provided by investing activities....................................... 296 7,391 -------- ------- Cash flows from financing activities: Stock options exercised......................................................... - 17 --------- ------ Net cash provided by financing activities....................................... - 17 --------- ------- Net increase (decrease) in cash and cash equivalents............................ (2,674) 6,330 Cash and cash equivalents at beginning of period................................ 10,124 2,785 ---------- ------ Cash and cash equivalents at end of period...................................... $7,450 $9,115 ====== ===== Supplemental cash flow disclosures: Income taxes paid............................................................... $ 38 $ 35 ====== =====
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, 2004. The Company's assets currently consist primarily of cash and cash equivalents, investment securities, and real estate owned. The Company's main source of operating revenue is rental income earned on real estate owned. The Company also earns non-operating revenue principally consisting of investment earnings on investment securities and cash equivalents. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its assets and liabilities, including the contingent assets, as described in Part II - Item 1. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements. The Company's management expects that operating cash needs for the remainder of 2005 will be met principally by rental income received, the receipt of non-operating revenue consisting of investment earnings on investment securities and cash equivalents, and the Company's current financial resources. Note 2 - Legal Proceedings For a discussion of the Company's legal proceedings, including a discussion of the Company's Supervisory Goodwill litigation, see Part II - Item 1 - Legal Proceedings. Note 3 - Cash and Cash Equivalents Highly liquid investments, consisting principally of funds held in short-term money market accounts with original maturities of less than three months, 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:
March 31, 2005 December 31, 2004 =================================== ======================= 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...... $ 8,633 $ 8,633 $ 8,633 $ 8,590 $ 8,590 $ 8,586 Available for Sale: Equity Securities....... 1,652 1,797 1,652 2,112 2,075 2,112 ----------- ----------- --------- ----------- ---------- -------- $ 10,285 $ 10,430 $10,285 $ 10,702 $ 10,665 $ 10,698 ====== ======= ====== ======= ======= ======
The gross unrealized gains (losses) on investment securities, at March 31, 2005 and December 31, 2004 consist of the following: (in thousands)
2005 2004 ======= ====== Held to Maturity: Gross unrealized gains (losses)........................................................... $ - $ (4) ======= ====== Available for Sale: Gross unrealized gains..................................................................... $ 3 $ 41 ======= ====== Gross unrealized losses................................................................... $ (148) $ (4) ======= ======
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The realized gain on the sales of investment securities available for sale for the three months ended March 31, 2005 and March 31, 2004, are as follows:
Three Months (in thousands) 2005 2004 ====== ====== Net sale proceeds....................... ........ $ 548 $7,437 Cost basis....................................... (528) (7,330) --------- ------- Realized gain.................................... $20 $107 ====== =====
During the first quarter ended March 31, 2004, the Company purchased and sold a $7 million U.S. Treasury Note resulting in a gain of $89,000 which is included in realized gains on investment securities in the Consolidated Statement of Operations. AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 5 - Income Taxes The Company and its 100% owned domestic subsidiaries file a consolidated federal income tax return. The Company recognizes both the current and deferred tax consequences of all transactions that have been recognized in the financial statements, calculated based on the provisions of enacted tax laws, including the tax rates in effect for current and future years. Net deferred tax assets are recognized immediately when a more likely than not criterion is met; that is, greater than 50% probability exists that the tax benefits will actually be realized sometime in the future. The Company has calculated a net deferred tax asset of $35 million and $34 million as of September 30, 2004 and December 31, 2003, respectively, arising primarily from net operating loss ("NOL") carryforwards, alternative minimum tax ("AMT") credits (not including the anticipated tax effects of NOL's expected to be generated from the Company's tax basis in Carteret Savings Bank, F.A. and subsidiaries ("Carteret"), resulting from the election decision, as more fully described below). At the present time, management has no basis to conclude that realization is more likely than not and a valuation allowance has been recorded against net deferred tax assets. 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. Based upon the Company's federal income tax returns as filed from 1993 to 2003 (subject to IRS audit adjustments), and excluding the NOL carryforwards generated from the Company's tax basis in Carteret/Carteret FSB, as noted above, at March 31, 2005, the Company has NOL carryforwards, aggregating approximately $36 million, available to reduce future federal taxable income which expire if unused beginning in 2008. The Company's federal income tax returns for years subsequent to 1992 have not been reviewed by the IRS. AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements The utilization of certain carryforwards is subject to limitations under U.S. federal income tax laws. In addition, the Company has approximately $21 million of AMT credit carryforwards ("AMT Credits"), which are not subject to expiration. Based on the filing of the Carryback Claims, as further discussed above, the Company is seeking to realize approximately $8 million of the $21 million of AMT Credits. Note 6 - Comprehensive Income (Loss) Comprehensive income (loss) is composed of net income (loss) and other comprehensive income (loss) which includes the change in unrealized gains (losses) on investment securities available for sale and recognition of additional minimum pension liability, as follows: (in thousands)
Three Months Ended Three Months Ended March 31, 2005 March 31, 2004 ==================================== ========================== Unrealized Minimum Accumulated Unrealized Accumulated Gains (Losses) Pension Other Gains on Other Investment Liability Comprehensive Investment Comprehensive Securities Adjustment Income Securities Income ========= ========= =========== ========== ========== Balance beginning of period... $ 37 $ (412) $ (375) $ 84 $ 84 Reclassification adjustment for gains realized in net loss.... (5) - (5) (19) (19) Change during the period....... (177) - (177) 73 73 ----------- ------------- ------------- --------------- ------------ Balance end of period.......... $ (145) $ (412) $ (557) $ 138 $ 138 ======== ========= =========== ========= ===========
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 7 - Property Owned The Company owns two commercial office buildings in Greenwich, Connecticut that contain 14,500 and 38,000 square feet, respectively. The Company utilizes a small portion of the office space in the first building for its executive offices and leases the remaining square footage to unaffiliated third parties. The buildings and improvements are carried at cost, net of accumulated depreciation of $846,000 and $763,000 at March 31, 2005 and December 31, 2004, respectively. Depreciation expense is recorded on a straight-line basis over 39 years. Tenant security deposits of $305,000 at March 31, 2005 and December 31, 2004, are included in other liabilities. The Company earns rental income under operating leases with tenants. Minimum lease rentals are recognized on a straight-line basis over the terms of the leases. The cumulative difference between lease revenue recognized under this method and the contractual lease payment terms is recorded as deferred rent receivable and is included in other assets on the Consolidated Balance Sheets. Revenue from tenant reimbursement of common area maintenance, utilities and other operating expenses are recognized pursuant to the tenant's lease when earned and due from tenants. Included in property operating and maintenance are expenses for common area maintenance, utilities, real estate taxes and other reimbursable operating expenses, which have not been reduced by amounts reimbursable by tenants pursuant to applicable lease agreements. AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 8 - Stock Based Compensation The Company has adopted the disclosure requirements of Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"), but continues to account for stock compensation using APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"), making pro forma disclosures of net income (loss) and earnings per share as if the fair value based method had been applied. No compensation expense, attributable to stock incentive plans, has been charged to earnings. The Black-Scholes option pricing model was used to estimate the fair value of the options at date of grant based on various factors including dividend yield, stock price volatility, interest rates, and expected life of options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, and given the changes in the price per share of the Company's Common Stock, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. If the Company had elected to recognize compensation cost for stock options based on the fair value at date of grant for stock options, consistent with the method prescribed by Statement 123, net loss and net loss per share would have been changed to the pro forma amounts indicated below.
Three Months Ended ---------------------------- March 31, March 31, (in thousands, except per share data) 2005 2004 ======= ======= Net loss: As reported............................................................................ $ (1,324) $(730) Deduct: pro forma stock based compensation expense for Stock options pursuant to Statement 123............................................. (31) (19) ----------- ---------- Pro forma............................................................................... $(1,355) $ (749) ====== ======= Net loss per common share: Basic - as reported..................................................................... $(0.03) $ (0.02) Basic - pro forma....................................................................... (0.03) (0.02) Assuming dilution - as reported......................................................... (0.03) (0.02) Assuming dilution - pro forma........................................................... (0.03) (0.02) ===== ======
Options to purchase 1,440,000 shares of common stock for the three months ended March 31, 2005, and 1,290,000 shares of common stock for the three months ended March 31, 2004, were excluded from the computation of diluted earnings per share because these options were antidilutive. AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 9 - Pension and Savings Plans The Company sponsors a non-qualified supplemental retirement plan ("Supplemental Plan") under which only one current executive officer of the Company is a participant. The cost of the Supplemental Plan is actuarially determined and is accrued but not funded. Pension expense for the Supplemental Plan was as follows:
Three Months Ended ------------------------------ March 31, March 31, (in thousands) 2005 2004 ======== ====== Service cost of current period........................................................ $ 257 $ 230 Interest cost on projected benefit obligation......................................... 192 172 Amortization of unrecognized losses................................................... 72 39 -------------- ----------- $ 521 $ 441 ======== ======
The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"), which is a "Section 401(k) Plan" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"). The Savings Plan permits eligible employees to make contributions of up to 15% of salary, which are matched by the Company at a percentage determined annually. The employer match is currently 100% of the employee's salary eligible for deferral. Employee contributions to the Savings Plan are invested at the employee's discretion, in various investment funds. The Company's matching contributions are invested in the same manner as the salary reduction contributions. The Company's matching contributions to the Savings Plan, charged to expense, were $45,000 for the three months ended March 31, 2005 and $40,000 for the three months ended March 31, 2004 respectively. All contributions are subject to maximum limitations contained in the Code. New Accounting Pronouncements FASB Statement No. 123 (revised 2004), Share-Based Payment - In December 2004, the Financial Accounting Standards Board ("FASB") released its final revised standard entitled Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), which will significantly change accounting practice with respect to employee stock options for both public and non-public companies. SFAS 123R requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award of the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. A public entity will initially measure the cost of liability based service awards based on its current fair value; the fair value of that award will be re-measured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee stock options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Excess tax benefits will be recognized as an addition to paid-in capital and cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense unless there are excess tax benefits from previous awards remaining in paid-in capital to which it can be offset. The notes to financial statements of public entities will disclose information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements. SFAS 123R is effective for public entities as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 (the "Exchange Act"), 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, anticipated litigation results or the timing of pending litigation, 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. 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. LIQUIDITY AND CAPITAL RESOURCES The Company's assets at March 31, 2005, aggregated $37,257,000 consisting principally of cash and cash equivalents of $7,450,000, investment securities of $10,285,000 and real estate owned of $18,918,000. At March 31, 2005, the Company's liabilities aggregated $13,189,000. Total stockholders equity was $24,068,000. The liability for the supplemental retirement plan (the "Supplemental Plan"), which is accrued but not funded, increased to $12,115,000 at March 31, 2005 from $11,594,000 at December 31, 2004. 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 three months ended March 31, 2005, cash of $2,970,000 was used by operations, including the payment of prior year accruals and operating expenses, partially offset by the receipt of rental income, interest income and investment earnings. The cash needs of the Company for the first three months of 2005 were satisfied by the receipt of rental income, interest income received on investment securities and cash equivalents, and to a lesser extent the Company's current financial resources. Management believes that the Company's cash resources are sufficient to continue operations for 2005. 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 is currently exploring all legal options to seek recovery of this amount the Company paid, plus other related costs. For the three months ended March 31, 2004, cash of $1,078,000 was used by operations, including the payment of prior year accruals and operating expenses partially offset by the receipt of rental income, interest income, and investment earnings. The Company continues to evaluate a number of possible acquisitions and is engaged in the management of its assets and liabilities, including the contingent assets. Discussions and negotiations are ongoing with respect to certain of these matters. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements. For a discussion of lawsuits and proceedings, including the Supervisory Goodwill litigation see Part II - Item 1 - Legal Proceedings. The Company owns two commercial office buildings in Greenwich, Connecticut. One building is approximately 14,500 square feet and is leased to unaffiliated third parties with approximately 3,500 square feet utilized by the Company for its executive offices. The second building is approximately 38,000 square feet and is leased to unaffiliated third parties. The Company made no purchases of common stock pursuant to its common stock repurchase plan during the first three months of 2005. There are no material commitments for capital expenditures as of March 31, 2005. Inflation has had no material impact on the business and operations of the Company. Results of Operations for the Three Months ended March 31, 2005 vs. the Three Months Ended March 31, 2004 The Company's main source of operating revenue is rental income earned on real estate owned. The Company also earns non-operating revenue consisting principally of investment earnings on investment securities and cash equivalents. The Company's management expects that operating cash needs for the remainder of 2005 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 1,324,000 or $0.03 per share for three months ended March 31, 2005, compared with a net loss of $730,000 or $0.02 per share for three months ended March 31, 2004. For the three months ended March 31, 2005, the Company earned rental income from real estate owned of $573,000 as compared to $535,000 for the three months ended March 31, 2004. The increase in the 2005 period principally reflects increased rental income received in 2005 as a result of the leasing of office space which was vacant in the respective 2004 period. Compensation and benefits increased to $1,170,000 in the three months ended March 31, 2005, compared with $1,083,000 in the respective 2004 period. The increases were principally the result of a higher level of benefits costs and accruals. Included in compensation and benefits is an accrual for the Supplemental Retirement Plan of $521,000 for the three month period ended March 31, 2005, compared to $441,000 for the same 2004 period reflecting a decrease in discount rate assumptions and updated mortality tables. Professional and outside services increased to $557,000 in the three months ended March 31, 2005, compared to $108,000 in the respective 2004 period. The increase in the 2005 three month period as compared to the respective 2004 period is principally due to increased legal fees relating to the Supervisory Goodwill litigation proceeding during 2005 and to a lesser extent, other corporate professional fees. Property operating and maintenance expenses were $131,000 for the three months ended March 31, 2005, compared to $113,000 in the respective 2004 period. The increased expenses in 2005 compared to 2004 are generally due to increased cost of building repairs and maintenance. Property operating and maintenance expenses, have not been reduced by tenant reimbursements which are reflected as part of revenue. Interest income in the three months ended March 31, 2005, increased to $125,000, from $115,000, in the respective 2004 period. The increase is principally due to an increased yield on the investments in treasury bills for the first quarter of 2005 compared with the comparable 2004 period. For the first three months ended March 31, 2005, realized gains on sales of investment securities available for sale were $20,000 compared to $107,000 during the respective 2004 period. The 2004 period includes a gain of $89,000 from the sale of a U.S. Treasury Note. The income tax provisions of $30,000 for the three months ended March 31, 2005, and the three months ended March 31, 2004, are primarily attributable to a provision for a minimum tax on capital to the state of Connecticut. Income taxes applicable to operating income (loss) are generally determined by applying the estimated effective annual income tax rates to pretax income (loss) for the year-to-date interim period. Income taxes applicable to unusual or infrequently occurring items are provided in the period in which such items occur. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company holds short-term investments as a source of liquidity. The Company's interest rate sensitive investments at March 31, 2005 and December 31, 2004 with maturity dates of less than one year consist of the following:
2005 2004 ================= ================= Carrying Fair Carrying Fair Value Value Value Value (in thousands) ----------- -------- ---------- --------- U.S. Treasury Bills......................... $ 8,633 $ 8,633 $ 8,590 $ 8,586 ====== ====== ====== ====== Weighted average interest rate.............. 2.62% 1.71% ======= =======
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, 2005 2004 Equity Securities Available for Sale: ========== ========== Fair value ................................................ $1,652 $2,112 ======= ===== Hypothetical fair value at a 20% increase in market price.. $1,982 $2,534 ======= ===== Hypothetical fair value at a 20% decrease in market price.. $1,322 $1,690 ======= =====
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. 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 March 31, 2005. 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 significant changes in the Company's internal controls or other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. 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, 2004, 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. In April 2005, Judge Smith heard oral argument on the United States Department of Justice and the FDIC motions requesting that Judge Smith certify for immediate appeal his ruling that the Company is entitled to challenge the validity of the receivership deficit. Because Judge Smith's ruling on the receivership deficit issue is not a final order, both Judge Smith and the Federal Circuit Court would have to agree to an appeal of that issue at this time. Following the April 2005 oral argument, Judge Smith entered an order, staying resolution of the motions to certify an interlocutory appeal pending the holding of a "show cause" hearing. Judge Smith indicated at the oral argument that the purpose of the show cause hearing was to allow the Company to outline the evidence and arguments it was prepared to offer in order to challenge the validity and size of the receivership deficit. Judge Smith directed the parties to attempt to reach agreement regarding a schedule for the completion of discovery on receivership deficit issues, and he directed the parties to submit to the Court such an agreed proposed discovery schedule, or, if the parties are unable to reach agreement, separate proposed schedules for discovery, in early May 2005. Judge Smith further encouraged the parties to discuss the procedures and schedule for the show cause hearing, and to provide the Court with a proposed order on such matters. Finally, Judge Smith indicated that the procedures and scheduling of the show cause hearing would be addressed at the telephonic status conference scheduled in May 2005. If an immediate appeal is not granted, expert discovery is likely to commence at the close of the current round of factual discovery. No assurance can be given regarding the ultimate outcome of the litigation. The Court of Claims decisions in the Company's case, as well as other decisions in Winstar-related cases, are publicly available and may be relevant to the Company's Supervisory Goodwill claims, but are not necessarily indicative of the ultimate outcome of the Company's actions. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits > Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer Exhibit 32.1 Section 1350 Certification of Chief Executive Officer Exhibit 32.2 Section 1350 Certification of Chief Financial Officer (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMBASE CORPORATION /s/ John P. Ferrara ------------------------------------------------------ By JOHN P. FERRARA Vice President, Chief Financial Officer and Controller (Duly Authorized Officer and Principal Financial and Accounting Officer) Date: May 12, 2005