Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – The Company and Basis of Presentation and Going Concern
The accompanying condensed consolidated financial statements of AmBase Corporation and subsidiaries (“AmBase” or the “Company”) are
unaudited and subject to year-end adjustments. All material intercompany transactions and balances have been eliminated. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal recurring
adjustments unless otherwise disclosed, necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows. Results for interim periods are not necessarily indicative of results for the full
year. The condensed 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 8 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 condensed consolidated financial statements presented herein are condensed and 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, 2017.
At September 30, 2018, the Company’s assets consisted primarily of cash and cash equivalents and a deferred tax asset. In January 2018, the Company sold
its commercial office building in Greenwich, Connecticut, see
Note 3
herein for additional information. See
Note 7
for additional information regarding taxes. The Company is engaged in the management of its assets and liabilities.
In June 2013, the Company purchased an equity interest in a real estate development property through a joint venture agreement to purchase and develop real
property located at 105 through
111 West 57
th
Street in New York, New York
(the “111 West 57
th
Property”). The Company has also made significant investments in the 111 West 57th Street Property in 2013, 2014 and 2015. The Company is engaged in material disputes and litigation with the sponsors of the joint venture (the “Sponsor”), both
mezzanine lenders to the joint venture (“Apollo” and “Spruce”). On August 30, 2017, Spruce issued a Notice of Retention of Pledged Collateral in Full Satisfaction of Indebtedness. By purporting to accept the pledged collateral, pursuant to a Strict
Foreclosure process, Spruce claims to have completed the retention of the collateral pledged by the junior mezzanine borrower, and therefore, the Company’s interest in the 111 West 57th Street Property (the “Strict Foreclosure”). Despite ongoing
litigation challenging the legitimacy of the actions taken by the Sponsors and Spruce in connection with the Company’s investment in the 111 West 57
th
Property as further discussed herein, in accordance with GAAP, the Company recorded an
impairment of its equity investment in the 111 West 57th Property in the full year period ended December 31, 2017. The carrying value of the Company’s equity investment in the 111 West 57
th
Property represented a substantial portion of
the Company’s assets and net equity value. The Company is currently attempting to have the Appellate Division declare the Strict Foreclosure invalid and to enjoin the Strict Foreclosure. There can be no assurance that the Company will prevail with
respect to any of its claims. See
Note 4
and
Note 8
herein for
additional information concerning the Company’s pending appeal of its challenge to the Strict Foreclosure, the Company’s recording of an impairment of its equity investment in the 111 West 57
th
Property and the Company’s legal
proceedings relating to the 111 West 57
th
Property.
A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a
going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. In accordance with this requirement, the Company has prepared its accompanying
condensed consolidated financial statements assuming the Company will continue as a going concern.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has incurred operating losses and used cash for operating activities for the past several years. The Company has continued to keep operating
expenses at a reduced level; however, there can be no assurance that the Company’s current level of operating expenses will not increase or that other uses of cash will not be necessary. The Company believes that based on its current level of
operating expenses, its currently available cash and financial resources together with the net proceeds from the sale of its commercial office building in Greenwich, Connecticut as further discussed in
Note 3
herein, may not be sufficient to cover operating cash needs through the twelve month period from the financial statement reporting date. Based on the above factors, management determined there
is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying condensed consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The financial statements do not include adjustments to the carrying value of assets and liabilities which might be necessary should the Company not continue in operation.
Over the next several months, the Company will seek to manage its current level of cash and cash equivalents, through various ways, including but not
limited to, reducing operating expenses, possible asset sales and/or long term borrowings which may include additional borrowings from affiliates of the Company, although this cannot be assured. In order to continue on a long-term basis, the
Company must raise additional capital through the sale of assets or long term borrowings. There can be no assurance that the Company will be able to sell any of its assets or attain such financing at terms acceptable to the Company, if at all.
In September 2017, the Company and Mr. Richard A. Bianco, the Company’s Chairman, President and Chief Executive Officer (“R. A. Bianco”) entered into an
agreement pursuant to which Mr. R. A. Bianco will fund the Company’s litigation expenses in connection with the 111 West 57
th
Property (the “Litigation Funding Agreement”). For additional information including the terms of the
Litigation Funding Agreement, see
Note 9
herein.
With respect to its disputes and litigation relating to its interest in the 111 West 57th Property, the Company is continuing to pursue various legal
courses of action, as well as considering other possible economic strategies, including the possible sale of the Company’s interest in and/or rights with respect to the 111 West 57th Property. The Company is continuing to pursue other options to
realize the Company’s investment value and/or protect its legal rights.
The Company can give no assurances regarding the outcome of the matters described herein, including as to the effect of Spruce’s actions described herein,
whether the Sponsors will perform their contractual commitments to the Company under the JV Agreement, as to what further action, if any, the lenders may take with respect to the project, as to the ultimate resolution of the ongoing litigation
proceedings relating to the Company’s investment interest in the 111 West 57
th
Property, as to the ultimate effect of the Sponsors’, the Company’s or the lenders’ actions on the project, as to the completion or ultimate success of the
project, or as to the value or ultimate realization of any portion of the Company’s equity investment in the 111 West 57
th
Street Property. For additional information with regard to the Company’s investment in the 111 West 57
th
Property and the Company’s legal proceedings related thereto, see
Note 4
and
Note 8.
While the Company’s management is evaluating future courses of action to protect and/or recover the value of the Company’s equity investment in the 111
West 57
th
Property, the adverse developments make it uncertain as to whether any such courses of action will be successful. Any such efforts are likely to require sustained effort over a period of time, and require substantial additional
financial resources. Inability to recover all or most of such value would in all likelihood have a material adverse effect on the Company’s financial condition and future prospects.
In May 2016, the Company and Mr. R. A. Bianco entered into an agreement for Mr. R. A. Bianco to provide to the Company a secured working capital line of
credit. Pursuant to this agreement, Mr. Bianco had made several loans to the Company, for use as working capital. In January 2018, in connection with the sale by the Company of its office building in Greenwich, Connecticut, the Company repaid the
full amount of the working capital loan, plus accrued interest to Mr. R. A. Bianco, and in connection therewith the working capital line of credit was terminated.
For additional
information, see
Note 10
herein
.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies
New accounting pronouncements
There are no new accounting pronouncements that would likely materially affect the Company’s condensed consolidated financial
statements.
Note 3 – Real Estate Sold
In January 2018, the Company sold its building in Greenwich, Connecticut, to Maria USA, Inc. an unaffiliated third party. A gain from the sale is reflected
in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2018. The Company used a portion of the sale proceeds to repay the full amount of the working capital loan plus accrued interest to Mr. R. A.
Bianco. See N
ote 11
for additional information. The remaining proceeds will be used for working capital.
Information relating to the sale of the Company’s real estate owned in Greenwich, Connecticut is as follows:
|
(in thousands)
|
|
Amounts
|
|
|
Gross sales price
|
|
$
|
5,200
|
|
|
Less: Transactions costs
|
|
|
(290
|
)
|
|
Proceeds from the sale of real estate owned, net
|
|
|
4,910
|
|
|
Less: Real estate carrying value, (net of accumulated depreciation)
|
|
|
(1,632
|
)
|
|
Net gain on sale of real estate
|
|
$
|
3,278
|
|
Note 4 – Investment in 111 West 57
th
Partners LLC
In June 2013, the Company purchased an equity interest in the 111 West 57
th
Property. The Company is engaged in material disputes and
litigation with the Sponsor, Spruce and Apollo. On August 30, 2017, Spruce issued a Notice of Retention of Pledged Collateral in Full Satisfaction of Indebtedness. By purporting to accept the pledged collateral, pursuant to a Strict Foreclosure
process, Spruce claims to have completed the retention of the collateral pledged by the junior mezzanine borrower, and therefore, the Company’s interest in the 111 West 57th Street Property. Despite ongoing litigation challenging the legitimacy of
the actions taken by the Sponsors and Spruce in connection with the Company’s investment in the 111 West 57
th
Property as further discussed herein, in accordance with GAAP, the Company recorded an impairment of its equity investment in
the 111 West 57th Property in the full year period ended December 31, 2017. The carrying value of the Company’s equity investment in the 111 West 57
th
Property represented a substantial portion of the Company’s assets and net equity
value. The Company is currently attempting to have the Appellate Division declare the Strict Foreclosure invalid and to enjoin the Strict Foreclosure. There can be no assurance that the Company will prevail with respect to any of its claims. For
additional information with regard to the Company’s legal proceedings relating to the 111 West 57
th
Property, see
Note 8
herein
.
See below for additional information with regard to background information regarding the Company’s 111 West 57
th
Property equity investment in
the 111 West 57
th
Property and events leading up to the Strict Foreclosure, as follows:
In June 2013, 111 West 57
th
Investment LLC, (“Investment LLC”), a then newly formed subsidiary of the Company, entered into a joint venture
agreement (as amended, the “JV Agreement”) with 111 West 57th Sponsor LLC, (the “Sponsor”), pursuant to which Investment LLC invested (the “Investment”) in a real estate development property to purchase and develop the 111 West 57
th
Street Property (the “111 West 57
th
Property”). In consideration for making the Investment, Investment LLC was granted a membership interest in 111 West 57
th
Partners LLC (“111 West 57
th
Partners”), which
indirectly acquired the 111 West 57
th
Property on June 28, 2013 (the “Joint Venture,” and such date, the “Closing Date”). The Company also indirectly contributed an additional amount to the Joint Venture in exchange for an additional
indirect interest in the Joint Venture. Other members and the Sponsor contributed additional cash and/or property to the Joint Venture. The Company recorded its investment in 111 West 57
th
Partners utilizing the equity method of
accounting. The Joint Venture plans were to redevelop the 111 West 57th Property into a luxury residential tower and retail project.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Amounts relating to the Company’s initial June 2013 investment and other information relating to the 111 West 57
th
Property follows:
|
($ in thousands)
|
|
|
|
|
Company’s aggregate initial investment
|
|
$
|
57,250
|
|
|
Company’s aggregate initial membership interest %
|
|
|
60.3
|
%
|
|
Other members and Sponsor initial investment
|
|
$
|
37,750
|
|
|
Approximate gross square feet of project
|
|
|
346,000
|
|
The JV Agreement and related operating agreements generally provide that all distributable cash shall be distributed as follows: (i) first, 100% to the
members in proportion to their percentage interests until Investment LLC has received distributions yielding a 20% internal rate of return as calculated; (ii) second, 100% to the Sponsor as a return of (but not a return on) any additional capital
contributions made by the Sponsor on account of manager overruns; and (iii) thereafter, (a) 50% to the members in proportion to their respective percentage interests at the time of such distribution, and (b) 50% to the Sponsor.
Additionally, the JV Agreement provides that (i) Mr. Richard A. Bianco (the Company’s current Chairman, President and Chief Executive Officer) (“Mr. R. A.
Bianco”)
,
his immediate family, and/or any limited liability company wholly-owned thereby, and/or a trust in which Mr. R. A. Bianco and/or his immediate family is the
beneficiary, shall at all times own, in the aggregate, not less than 20% of the outstanding shares of AmBase; and (ii) Mr. R. A. Bianco shall remain the Chairman of the Board of Directors of AmBase for the duration of the JV Agreement.
In March 2014, the Company entered into an amended and restated operating agreement for
Investment LLC (the “Amended and Restated Investment Operating Agreement”) to grant a 10% subordinated participation interest in Investment LLC to
Mr. R. A. Bianco
as
contingent future incentive for Mr. R. A. Bianco’s past, current and anticipated ongoing role to develop and commercialize the Company’s equity investment in the 111 West 57
th
Property. Pursuant to the terms of the Amended and Restated Investment Operating Agreement, Mr. R.A. Bianco has no voting rights with respect to his interest in Investment LLC, and his entitlement to receive 10% of the distributions
from Investment LLC is subject to the Company first receiving distributions equal to 150% of the Company’s initial aggregate investment in Investment LLC and the Joint Venture, plus any additional investments by the Company, and only with respect
to any distributions thereafter. At the current time the Company has not expensed nor accrued any amounts relating to this subordinated participation interest, as no amount or range of amounts can be reasonably estimated or assured.
During 2014, in connection with the funding of additional capital calls under the JV Agreement for required borrowing and development costs for the 111
West 57
th
Property, the Company’s management and its Board of Directors concluded that, given the continuing development risks of the 111 West 57
th
Property and the Company’s financial position, the Company should not at that
time increase its already significant concentration and risk exposure to the 111 West 57th Property. Nonetheless, the Company sought to limit dilution of its interest in the Joint Venture resulting from any failure to fund the capital call
requirements, but at the same time wished to avoid the time, expense and financial return requirements (with attendant dilution and possible loss of voting rights) that obtaining a replacement third-party investor would require. The Company
therefore entered into a second amended and restated operating agreement for Investment LLC (“Second Amended and Restated Investment Operating Agreement”) pursuant to which Capital LLC was admitted as a member of Investment LLC. In exchange for
Capital LLC contributing toward Investment LLC capital calls in respect of the 111 West 57
th
Property, available cash of Investment LLC will be distributed first to Capital LLC until it has received a 20% internal rate of return
(calculated as provided for in the JV Agreement as noted above), second to the Company until it has received 150% of its capital, and, thereafter, available cash is split 10/90, with 10% going to Mr. R. A. Bianco as the subordinated participation
interest noted above and 90% going to Capital LLC and the Company pari-passu, with Capital LLC receiving one-half of its pro-rata share based on capital contributed and the Company receiving the balance. No other material changes were made to the
Amended and Restated Investment Operating Agreement, and neither Mr. R. A. Bianco nor Capital LLC has any voting rights with respect to their interest and investment in Investment LLC.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
In accordance with the JV Agreement, Shortfall Capital Contributions may be treated either as a member loan or as a dilutive capital contribution by the
funding party valued at one and one-half times the amount actually contributed. The Sponsors deemed the Shortfall Capital Contributions as dilutive capital contributions to the Company. The Company disagrees with the Sponsors’ investment
percentage calculations. The Sponsors have taken the position that the Capital Contribution Requests, if taken together, would have caused the Company’s combined ownership percentage to be diluted to approximately 48%. The parties have a dispute
with regard to the calculation of the revised investment percentages resulting from the Capital Contribution Requests, along with the treatment and allocation of these Shortfall Capital Contribution amounts.
On June 30, 2015, 111 West 57
th
Partners obtained financing for the 111 West 57
th
Property. The financing was obtained in two
parts: (i) a first mortgage construction loan with AIG Asset Management (US), LLC (along with its affiliates “AIG”); and (ii) a mezzanine loan with Apollo Commercial Real Estate Finance, Inc. (along with its affiliates “Apollo”), as detailed herein
below. Both loans have a four-year term with a one-year extension option subject to satisfying certain conditions. The loan agreements (the “Loan Agreements”) also include customary events of default and other customary terms and conditions.
Simultaneously with the closing of the AIG and the Apollo financing, 111 West 57
th
Partners repaid all outstanding liabilities and obligations to Annaly CRE, LLC under the initial mortgage and acquisition loan agreement, dated June 28,
2013, between joint venture entities and Annaly CRE, LLC. The remaining loan proceeds were to be drawn down and used as necessary for construction and related costs, loan interest escrow and other related project expenses for development of the
111 West 57
th
Property.
Information relating to the June 30, 2015 financing for 111 West 57
th
Partners is as follows:
|
(in thousands)
|
|
|
|
|
Financing obtained by 111 West 57
th
Partners - AIG
|
|
$
|
400,000
|
|
|
Financing obtained by 111 West 57
th
Partners - Apollo
|
|
$
|
325,000
|
|
|
Annaly CRE LLC initial mortgage and acquisition loan repaid
|
|
$
|
230,000
|
|
In April 2016, AmBase initiated a litigation in the New York
State Supreme Court for New York County (the “NY Court”), Index No. 652301/2016, (“
AmBase v. 111 West 57
th
Sponsor LLC, et al.”)
(the “111 West 57
th
Action”).
The defendants in that litigation are 111 West 57th Sponsor LLC, 111 West 57th JDS LLC, PMG West 57th Street LLC, 111 West 57th Control LLC, 111 West 57th Developer LLC, 111 West 57
th
KM Equity LLC, 111 West 57
th
KM Group LLC, Kevin Maloney, Matthew Phillips, Michael Stern, Ned White, 111 Construction Manager LLC, Property Markets Group, Inc., JDS Development LLC, JDS Construction Group LLC (collectively, “Defendants”)
and nominal defendant 111 West 57th Partners LLC
. In June 2018, Defendants removed the complaint to the U.S. District Court for the Southern District of New York, where it is
docketed as case number 18-cv-5482-AT.
For additional information with regard to the Company’s legal proceedings relating to the 111 West 57
th
Property, see
Note 8
herein
.
In December 2016, the Sponsor proposed for approval a “proposed budget” (the “Proposed Budget”), which the Sponsor claims represented an increase to the
aggregate of hard cost line items of an amount slightly below the Equity Put Right threshold amount and a further increase in other costs thus resulting in the need for additional funding in order to complete the project. The Company disputes,
among other items, the calculation of the percentage increase of hard costs shown in the Proposed Budget. The Company believes the aggregate projected hard costs in the Proposed Budget exceed a contractually stipulated limit as a percentage of the
hard costs set forth in the prior approved budget, thus allowing Investment LLC the option to exercise its Equity Put Right. Consequently, subsequent to the Sponsors’ presentation of the Proposed Budget, Investment LLC notified the Sponsor that it
was exercising its Equity Put Right pursuant to the JV Agreement. The Sponsor refused to honor the exercise of Investment LLC’s Equity Put Right. The Sponsor claims, among other things, that the conditions precedent were not met because they claim
that the increase in aggregate hard costs in the Proposed Budget does not exceed the contractually stipulated limit that would allow exercise of the Equity Put Right.
The Company further contends that a portion of the Proposed Budget increases are manager overruns (as defined in the JV Agreement) and thus should be paid
for by the Sponsor. The Sponsor denies that the Proposed Budget increases were manager overruns. The Company continues to challenge the nature and substance of the Proposed Budget increases and how they should be treated pursuant to the JV
Agreement.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The Sponsor claimed that additional borrowings of $60 million to $100 million were needed to complete the project. In addition, the Company had been
informed by the Sponsors, that Apollo had indicated that due to budget increases, it believed the current loan was “out of balance” (meaning, according to Apollo, the projected budget exceeds the original budget approved in connection with the
loan); and thus 111 West 57th Partners LLC, or its subsidiaries would need additional funding in order to bring the loan back into balance. The Company considered approving the additional financing, but informed the Sponsor that it had concerns
about the Proposed Budget and the implications of the Proposed Budget, as well as other questions which needed to be addressed first.
In March 2017, the Company and Mr. R. A. Bianco entered into an agreement for Mr. R. A. Bianco to provide to the Company a financial commitment in the form
of a line of credit up to ten million dollars ($10,000,000) or additional amount(s) as may be necessary and agreed to enable AmBase to contribute capital to Investment LLC and/or other affiliated subsidiaries of the Company to meet capital calls
for the of 111 West 57
th
Property if and when the case may be necessary on terms agreeable to/by the Company (as determined by the independent members of the Board of Directors) and Mr. R. A. Bianco at such time. The agreement provides
that additional borrowings from Mr. R. A. Bianco pursuant to this line of credit shall be secured by the Company’s commercial office building in Greenwich, Connecticut. As a result of the sale of the Company’s commercial office building in
Greenwich CT. in January 2018, any borrowings from Mr. R.A. Bianco under this line of credit would be unsecured.
Around this time, Apollo provided loan forbearances to the borrowers and guarantors in order to allow the Sponsor time (while the building continued to be
built) to raise the additional financing that Sponsor claimed would be needed in order to complete the 111 West 57th project. This forbearance period ended on June 29, 2017. Around this date, the Company was advised that Apollo sold a portion of
the mezzanine loan—broken off as a junior mezzanine loan—to an affiliate of Spruce Capital Partners LLC, (“Spruce”) (the “Junior Mezzanine Loan”).
On June 30, 2017, Spruce declared an event of default under the Junior Mezzanine Loan and demanded immediate payment of the full outstanding balance of the
Junior Mezzanine Loan. Spruce then gave notice to the junior mezzanine borrower that it proposed to accept the pledged collateral (including the joint venture members’ collective interest in the property) in full satisfaction of the joint
venture’s indebtedness under the Junior Mezzanine Loan (i.e., a “Strict Foreclosure”).
On July 25, 2017, the Company filed a complaint against Spruce and the Sponsor and requested injunctive relief halting the Strict Foreclosure from
the New York State Supreme Court for New York County,
(the “NY Court”)
Index No. 655031/2017,
(the “111 West 57
th
Spruce Action”)
.
The defendants in the 111 West 57
th
Spruce action are 111 W57 Mezz Investor, LLC, Spruce Capital Partners LLC, 111 West 57th Sponsor LLC, Michael Z. Stern, and Kevin P. Maloney (collectively, “Defendants”) and nominal
defendants 111 West 57th Partners LLC and 111 West 57
th
Mezz 1 LLC. The Company has since voluntarily discontinued its claims against Sponsor, Stern, and Maloney,
without prejudice to reinstating them in the 111 West 57
th
Spruce Action or any other action.
For additional information with regard to the Company’s legal
proceedings relating to the 111 West 57
th
Property, see
Note 8
herein
.
In June 2018, the Company initiated another litigation in the NY Court, Index No.
655031/2017,
(the “Apollo Action”)
.
The defendants in the Apollo Action are ACREFI Mortgage
Lending, LLC, Apollo Credit Opportunity Fund III AIV I LP, AGRE Debt 1 – 111 W 57, LLC, and Apollo Commercial Real Estate Finance, Inc. (collectively, the “Apollo Defendants”).
In the Apollo Action, the Company alleges that the Apollo
Defendants aided and abetted the Sponsor, Stern, and Maloney in breaching their fiduciary duties to the Company in connection with the 111
West 57
th
Property and tortiously interfered with the JV Agreement.
The
Company is seeking damages as well as punitive damages for tortious interference with the JV Agreement and aiding and abetting the Sponsors’ breaches of their fiduciary duties
to the joint venture. For additional information with regard to the Company’s legal proceedings relating to the 111 West 57
th
Property, see
Note 8
herein
.
As further discussed herein, despite ongoing litigation challenging the legitimacy of the actions taken by the Sponsor and Spruce in connection with the
Company’s investment in the 111 West 57
th
Property, in accordance with GAAP, the Company recorded an impairment for the full amount of its equity investment in the 111 West 57
th
Property, in the full year period ended December
31, 2017. The carrying value of the Company’s equity investment in the 111 West 57
th
Property represented a substantial portion of the Company’s assets and net equity value. The Company is and will continue to pursue the recovery of its
asset value from various sources of recovery; however, there can be no assurance that the Company will prevail with respect to any of its claims.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
With respect to its disputes and litigation relating to its interest in the 111 West 57th Property, the Company is continuing to pursue various legal
courses of action, as well as considering other possible economic strategies, including the possible sale of the Company’s interest in and/or rights with respect to the 111 West 57th Property. The Company is continuing to pursue other options to
realize the Company’s investment value and/or protect its legal rights.
The Company can give no assurances regarding the outcome of the matters described herein, including as to the effect of Spruce’s actions described herein,
whether the Sponsor will perform their contractual commitments to the Company under the JV Agreement, as to what further action, if any, the lenders may take with respect to the project, as to the ultimate resolution of the ongoing litigation
proceedings relating to the Company’s investment interest in the 111 West 57
th
Property, as to the ultimate effect of the Sponsors’, the Company’s or the lenders’ actions on the project, as to the completion or ultimate success of the
project, or as to the value or ultimate realization of any portion of the Company’s equity investment in the 111 West 57
th
Street Property. For additional information with regard to the Company’s legal proceedings relating to the 111
West 57
th
Property, see
Note 8
herein
.
For information relating to the Litigation Funding Agreement entered into between the Company and Mr. Richard A. Bianco, the Company’s President and Chief
Executive Officer, see
Note 9.
While the Company’s management is evaluating future courses of action to protect and/or recover the value of the Company’s equity investment in the 111
West 57
th
Property, the adverse developments make it uncertain as to whether any such courses of action will be successful. Any such efforts are likely to require sustained effort over a period of time, and require substantial additional
financial resources. Inability to recover all or most of such value would in all likelihood have a material adverse effect on the Company’s financial condition and future prospects.
Note 5 - Savings Plan
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 a percentage of their compensation, which are matched by the Company at a percentage of the employees’ elected 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. All contributions
are subject to maximum limitations contained in the Code.
The Company’s matching contributions to the Savings Plan, charged to expense, were as follows:
|
($ in thousands
)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Company matching contributions
|
|
$
|
-
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
15
|
|
|
Employer match %
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
33
|
%
|
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 6 – Common Stock Repurchase Plan
The Company’s common stock repurchase plan (the “Repurchase Plan”) allows for the repurchase by the Company 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. Pursuant to the Repurchase Plan the Company repurchased shares of common stock from unaffiliated parties at various
dates at market prices at their time of purchase, including broker commissions.
Information relating to the Repurchase Plan is as follows:
|
(in thousands
)
|
|
Nine months ended
September 30, 2018
|
|
|
Common shares repurchased to treasury during period
|
|
|
-
|
|
|
Aggregate cost of shares repurchased during period
|
|
$
|
-
|
|
|
(in thousands)
|
|
|
|
|
Total number of common shares authorized for repurchase
|
|
|
10,000
|
|
|
Total number of common shares repurchased to date
|
|
|
6,226
|
|
|
Total number of shares that may yet be repurchased
|
|
|
3,774
|
|
Note 7 - Income Taxes
The Company and its 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 condensed consolidated 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, a greater than 50% probability exists that the tax benefits will actually be realized sometime in the future.
The Company has not been notified of any potential tax audits by any federal, state or local tax authorities. As such, the Company believes the statutes
of limitations for the assessment of additional federal and state tax liabilities are generally closed for tax years prior to 2014. Interest and/or penalties related uncertain tax positions, if applicable, would be included as a component of income
tax expense (benefit). The accompanying financial statements do not include any amounts for interest and/or penalties.
State income tax amounts for the three and nine months ended September 30, 2018 and the three months and nine months ended September 30, 2017, reflect a
provision for a tax on capital imposed by the state jurisdictions.
The utilization of certain carryforwards and carrybacks is subject to limitations under U.S. federal income tax laws. Based on the Company’s federal tax
returns as filed and to be filed, the Company estimates it has federal NOL carryforwards available to reduce future federal taxable income which would expire if unused, as indicated below.
Based on the Company’s 2017 income tax returns as filed in October 2018, the Company’s NOL carryforwards increased due to the 2017 income tax loss
recognized with regard to the Company’s investment in the 111 West 57
th
Street Property. For additional information with regard to the Company’s investment in the 111 West 57
th
Property and the Company’s legal proceedings
related thereto, see
Note 4
and
Note 8.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The federal NOL carryforwards as of December 31, 2017, are as follows:
|
Tax Year
Originating
|
|
Tax Year
Expiring
|
|
Amount
|
|
|
|
|
|
|
|
|
|
2006
|
|
2026
|
|
$
|
500,000
|
|
|
2007
|
|
2027
|
|
|
12,700,000
|
|
|
2008
|
|
2028
|
|
|
4,600,000
|
|
|
2009
|
|
2029
|
|
|
2,400,000
|
|
|
2010
|
|
2030
|
|
|
1,900,000
|
|
|
2011
|
|
2031
|
|
|
1,900,000
|
|
|
2013
|
|
2033
|
|
|
3,700,000
|
|
|
2014
|
|
2034
|
|
|
4,900,000
|
|
|
2015
|
|
2035
|
|
|
4,200,000
|
|
|
2016
|
|
2036
|
|
|
3,400,000
|
|
|
2017
|
|
2037
|
|
|
68,200,000
|
|
|
|
|
|
|
$
|
108,400,000
|
|
Alternative Minimum Tax (“AMT”) Credit carryforwards available, which can be used to offset income generated in future years which are not subject to
expiration, are as follows
:
|
|
|
Amount
|
|
|
AMT Credits carryforwards
|
|
$
|
21,600,000
|
|
As noted above the Company has AMT Credit carryforwards from prior tax years. In accordance with the 2017 Tax Act AMT Credit carryforwards, subject to
certain estimated reduction adjustments to the amount indicated above, are expected to be claimed by the Company as refundable on tax returns to be filed in future tax years and at various percentages as noted below.
The Company’s AMT Credit carryforward
amount(s) projected to be claimed as refundable for
each tax year are
as follows:
|
Tax Year
(a)
|
|
Declining balance of the
AMT Credit
carryforward
amount(s) available for
each tax year
(a) (b)
|
|
|
% of AMT Credit
carryforward
amount(s)
available to be
claimed as
refundable for
each tax year
|
|
|
AMT Credit
carryforward
amount(s) projected
to be claimed as
refundable for each
tax year
(a)
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
20,092,000
|
|
|
|
50
|
%
|
|
$
|
10,046,000
|
|
|
2019
|
|
|
10,046,000
|
|
|
|
50
|
%
|
|
|
5,023,000
|
|
|
2020
|
|
|
5,023,000
|
|
|
|
50
|
%
|
|
|
2,511,500
|
|
|
2021
|
|
|
2,511,500
|
|
|
|
100
|
%
|
|
|
2,511,500
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,092,000
|
|
(a) Assumes no regular federal income tax liability in tax years presented above which would
reduce any AMT Credit carryforward amount(s) ultimately refunded.
(b) The declining balance of the AMT Credit carryforward amount(s) available for each tax year
and the AMT Credit carryforward amount(s) projected to be claimed as refundable for each tax year are net of certain estimated adjustments from the previously disclosed AMT Credit carryforward amounts.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The 2017 Tax Act makes broad and complex changes to the Internal Revenue Code of 1986, as
amended (the “Code”), including, among other changes, significant changes to the U.S. corporate tax rate and certain other changes to the Code that impact the taxation of corporations. The U.S. Treasury Department, the Internal Revenue Service
(“IRS”), and other standard-setting bodies could interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered that differs from our interpretation. As we complete our analysis of the 2017 Tax Act,
collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are
made. Additionally, there is risk relating to assumptions regarding the outcome of tax matters,
based in whole or in part upon consultation with outside advisors; risk relating to potential unfavorable decisions in tax proceedings; and
risks regarding changes in, and/or interpretations of federal and state income tax laws. Additionally, the Company’s tax advisors indicate that the IRS typically has broad discretion to examine taxpayer tax returns, even after refunds have been
paid to taxpayers, which could result in adjustments to AMT Credit carryforward amounts claimed as refundable and/or AMT Credit carryforward amounts ultimately received.
The Company’s management is continuing to work closely with outside advisors on the Company’s tax matters as they relate to the 2017 Tax Act and on the
various federal tax return matters for the numerous interrelated tax years, including the provisions and application of the 2017 Tax Act along with the amounts and timing of any AMT Credit carryforward refunds. The AMT Credit carryforward amounts
from prior tax years and related refund(s) could potentially be subject to IRS or other tax authority audits, including possible IRS Joint Committee review and/or approval. Neither the Company nor its outside advisors can predict whether or not
the IRS and/or other tax authorities will review the Company’s tax returns to be filed and/or as filed in prior years.
Based on the Company’s state tax returns as filed and to be filed, the Company estimates that it has state NOL carryforwards to reduce future state taxable
income, which would expire if unused, as indicated below.
The state NOL carryforwards as of December 31, 2017, are as follows:
|
Tax Year
Originating
|
|
Tax Year
Expiring
|
|
Amount
|
|
|
|
|
|
|
|
|
|
2011
|
|
2031
|
|
$
|
1,800,000
|
|
|
2013
|
|
2033
|
|
|
2,700,000
|
|
|
2014
|
|
2034
|
|
|
4,200,000
|
|
|
2015
|
|
2035
|
|
|
4,100,000
|
|
|
2016
|
|
2036
|
|
|
2,800,000
|
|
|
2017
|
|
2037
|
|
|
68,200,000
|
|
|
|
|
|
|
$
|
83,800,000
|
|
The Company has a deferred tax asset arising primarily from NOL carryforwards and AMT Credit carryforwards. At December 31, 2017, a valuation allowance was
released in relation to the AMT Credit carryforwards which are projected to be refundable as part of the 2017 Tax Act enacted in December 2017. A full valuation allowance remains on the remaining deferred tax asset amounts, as management has no
basis to conclude that realization is more likely than not. Management does not believe that any significant changes in unrecognized income tax benefits are expected to occur over the next year.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 8 - Legal Proceedings
From time to time, the Company and its subsidiaries may be named as a defendant in various lawsuits or proceedings. At the current time except as set
forth below, the Company is unaware of any legal proceedings pending against the Company. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements.
The Company is a party to material legal proceedings as follows:
AmBase Corp., et al. v. 111 West 57
th
Sponsor LLC, et al.
In April 2016, AmBase initiated a litigation in the New York State Supreme Court for New York County (the “NY Court”), Index No. 652301/2016, (“
AmBase v. 111 West 57
th
Sponsor LLC, et al.”)
(the “111 West 57
th
Action”). The defendants in that litigation are 111 West 57th Sponsor LLC, 111 West 57th JDS LLC, PMG West 57th Street LLC, 111 West 57th Control LLC, 111 West
57th Developer LLC, 111 West 57
th
KM Equity LLC, 111 West 57
th
KM Group LLC, Kevin Maloney, Matthew Phillips, Michael Stern, Ned White, 111 Construction Manager LLC,
Property Markets Group, Inc., JDS Development LLC, JDS Construction Group LLC (collectively, “Defendants”) and nominal defendant 111 West 57th Partners LLC
. In the current
version of the complaint,
AmBase alleges that Defendants violated multiple provisions in the JV Agreement, including by failing to honor the
exercise of AmBase’s contractual “equity put right” as set forth in the JV Agreement (the “Equity Put Right”), and committed numerous acts of fraud and breaches of fiduciary duty. AmBase is seeking compensatory damages, as well as treble damages
under the federal Racketeer Influenced and Corrupt Organizations Act (RICO), punitive damages, indemnification and equitable relief including a declaration of the parties’ rights, and an accounting. The Company has also demanded from the Sponsor
access to the books and records for the 111 West 57
th
Property which the Sponsor refused,
claiming they have provided all books and records as required. The Defendants filed motions to dismiss, and on January 12, 2018, the NY Court issued an opinion allowing some of AmBase’s claims to go forward and dismissing others. Among other
claims that the NY Court declined to dismiss was AmBase’s claim that the Defendants violated the implied covenant of good faith and fair dealing by frustrating AmBase’ s Equity Put Right. Claims that the NY Court dismissed included AmBase’s claim
that the Defendants breached their contract with AmBase by financing capital contributions for the project through funds obtained from third parties. On January 16, 2018, some of the Defendants wrote to the NY Court suggesting that the opinion
contained certain clerical errors and was missing a page. On January 18, 2018, the NY Court removed its previous opinion from the docket and on January 29, 2018, posted a revised opinion. A discovery conference in this case is was held on
February 27, 2018. On April 27, 2018, the Company filed a third amended complaint adding federal RICO claims, and new claims for declaratory judgment, breach of contract, fraud, and breach of fiduciary duty, based on information discovered during
the course of discovery and events that have transpired since the Company filed its previous complaint in the 111 West 57th Action.
On June 18, 2018, Defendants removed the complaint to the U.S. District Court for the Southern District of
New York, where it is docketed as case number 18-cv-5482-AT. Defendants filed their motion to dismiss on August 7, 2018, the Company filed its opposition brief on September 11, 2018, and Defendants filed their reply on October 2, 2018. A pre-trial
hearing was held on October 25, 2018 at which time the court issued an order granting the defendants’ motion to dismiss with regard to the Company’s RICO claims and declined to exercise supplemental jurisdiction over the Company’s state claims. The
Company is considering future courses of action.
For additional information with regard to the Company’s investment in the 111 West 57
th
Property, see
Note 4
.
AmBase Corp., et al. v. Spruce Capital Partners, et al.
In July
2017, the Company initiated a second litigation in the NY Court, Index No.
655031/2017,
(the “111 West 57
th
Spruce Action”)
.
The defendants in the 111 West 57
th
Spruce action are 111 W57 Mezz Investor, LLC, Spruce Capital Partners LLC, 111 West 57th Sponsor
LLC, Michael Z. Stern, and Kevin P. Maloney (collectively, “Defendants”) and nominal defendants 111 West 57th Partners LLC and 111 West 57
th
Mezz 1 LLC. The Company
has since voluntarily discontinued its claims against Sponsor, Stern, and Maloney, without prejudice to reinstating them in the 111 West 57
th
Spruce Action or any
other action.
Spruce had given notice to the junior mezzanine borrower that it proposed to accept the pledged collateral (including the joint venture members’ collective
interest in the property) in full satisfaction of the joint venture’s indebtedness under the Junior Mezzanine Loan (i.e., a “Strict Foreclosure”). After the Sponsors refused to object to Spruce’s proposal on behalf of the junior mezzanine borrower,
and Spruce refused to commit to honor Investment LLC’s objection on its own behalf, the Company initiated this litigation to obtain injunctive relief halting the Strict Foreclosure. For additional information on the events leading to this
litigation see
Note 4
.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
On July 26, 2017, the NY Court issued a temporary restraining order barring Spruce from accepting the collateral, pending a preliminary injunction hearing
scheduled for August 14, 2017. Spruce and the Sponsors subsequently filed papers in opposition to the request for a preliminary injunction and cross-motions to dismiss and quash subpoenas. On August 14, 2017, the NY Court postponed the hearing
until August 28, 2017, keeping the temporary restraining order preventing a Strict Foreclosure in effect until the August 28, 2017, hearing. Subsequently the Company filed response briefs in support of their request for injunctive relief halting
the Strict Foreclosure process and briefs in opposition to the motions to quash the subpoenas.
On August 28, 2017, the NY Court held a preliminary injunction hearing, lifted the temporary restraining order, denied Plaintiffs’ request for a
preliminary injunction, and granted Defendants’ cross-motions. In order to prevent the Strict Foreclosure process from going forward, the Company immediately obtained an interim stay from the New York Supreme Court Appellate Division, First
Judicial Department (“Appellate Division”). That stay remained in place until four (4) P.M. August 29, 2017, permitting the Company to obtain an appealable order, notice an appeal, and move for a longer-term stay or injunctive relief pending
appeal. The Appellate Division held a hearing on August 29, 2017, to consider the Company’s motion for an interim stay or injunctive relief pending appeal, both of which it denied, thus allowing the purported Strict Foreclosure to move forward.
On August 30, 2017, Spruce issued a Notice of Retention of Pledged Collateral in Full Satisfaction of Indebtedness. By purporting to accept the pledged
collateral, pursuant to a Strict Foreclosure process, Spruce claims to have completed the retention of the collateral pledged by the junior mezzanine borrower, and therefore, the Company’s interest in the 111 West 57th Street Property. The
carrying value of the Company’s equity investment in the 111 West 57
th
Property represented a substantial portion of the Company’s assets and net equity value. The Company will continue to challenge the validity of the actions that led
to this purported transfer of title, including appeal.
The Company has an appeal pending on its challenge to the Strict Foreclosure, which has not yet been resolved. The Company is currently attempting to have
the Appellate Division declare the Strict Foreclosure invalid and to enjoin the Strict Foreclosure. The Company moved for a stay or injunctive relief pending appeal, and that motion was denied by the appellate court on January 18, 2018. The Company
filed its opening brief on February 12, 2018, Spruce filed its opposition brief on August 17, 2018, and the Company filed its reply brief on September 14, 2018.
Since the Company is not party to the Loan Agreements, it does not have access to communications with the lenders, except for those individual
communications that the Sponsors have elected to share or that have been produced in the ongoing litigation. The Company has continued to demand access to such information, including access to the books and records for the 111 West 57
th
Property both under the JV Agreement and as part of the 111 West 57
th
Action and the 111 West 57
th
Spruce Action.
For additional information with regard to the Company’s investment in the 111 West 57
th
Property and the Company’s recording of an impairment of
its equity investment in the 111 West 57
th
Property; see
Note 4.
The carrying value of the Company’s equity investment in the 111 West 57
th
Property represented substantially all of the Company’s assets and net equity value.
AmBase Corp., et al. v. ACREFI Mortgage Lending LLC, et al.
In June 2018, the Company initiated another litigation in the NY Court, Index No.
655031/2017,
(the “Apollo Action”)
.
The defendants in the Apollo Action are ACREFI Mortgage Lending,
LLC, Apollo Credit Opportunity Fund III AIV I LP, AGRE Debt 1 – 111 W 57, LLC, and Apollo Commercial Real Estate Finance, Inc. (collectively, the “Apollo Defendants”).
In the Apollo Action, the Company alleges that the Apollo Defendants
aided and abetted the Sponsor, Stern, and Maloney in breaching their fiduciary duties to the Company in connection with the 111
West 57
th
Property and tortuously interfered with the JV Agreement.
The Company is seeking damages and
punitive damages for tortious interference with the JV Agreement and aiding and abetting the Sponsors’ breaches of their fiduciary duties to the joint venture. The Defendants filed their motion to dismiss on August 17, 2018, and the Company filed
its opposition brief on September 17, 2018, and the Defendants filed their reply brief on October 5, 2018. The Court has scheduled oral argument on the motion to dismiss for February 26, 2019. For additional information with regard to the Company’s
investment in the 111 West 57
th
Property and the JV Agreement; see
Note 4.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
With respect to its disputes and litigation relating to its interest in the 111 West 57th Property, the Company is continuing to pursue various legal
courses of action, as well as considering other possible economic strategies, including the possible sale of the Company’s interest in and/or rights with respect to the 111 West 57th Property. The Company is continuing to pursue other options to
realize the Company’s investment value and/or protect its legal rights.
The Company can give no assurances regarding the outcome of the matters described herein, including as to the effect of Spruce’s actions described herein,
whether the Sponsors will perform their contractual commitments to the Company under the JV Agreement, as to what further action, if any, the lenders may take with respect to the project, as to the ultimate resolution of the ongoing litigation
proceedings relating to the Company’s investment interest in the 111 West 57
th
Property, as to the ultimate effect of the Sponsors’, the Company’s or the lenders’ actions on the project, as to the completion or ultimate success of the
project, or as to the value or ultimate realization of any portion of the Company’s equity investment in the 111 West 57
th
Street Property. For additional information with regard to the Company’s investment in the 111 West 57
th
Property see
Note 4.
For information relating to the Litigation Funding Agreement entered into between the Company and Mr. Richard A. Bianco, the Company’s President and Chief
Executive Officer, see
Note 9.
While the Company’s management is evaluating future courses of action to protect and/or recover the value of the Company’s equity investment in the 111
West 57
th
Property, the adverse developments make it uncertain as to whether any such courses of action will be successful. Any such efforts are likely to require sustained effort over a period of time, and require substantial additional
financial resources. Inability to recover all or most of such value would in all likelihood have a material adverse effect on the Company’s financial condition and future prospects.
IsZo Capital L.P. derivatively and on behalf of AmBase Corporation v.
Richard A. Bianco, et al
.
In February 2018, IsZo Capital L.P. commenced an
action,
IsZo Capital L.P. derivatively and on behalf of AmBase Corporation v. Richard A. Bianco, et al.
, Index No. 650812/2018 in the New York State Supreme
Court for New York County (the “IsZo Capital L.P. action”). The defendants in the action include all officers and directors of AmBase Corporation and AmBase Corporation as a nominal defendant. The plaintiff alleges various breaches of fiduciary
duty against all of the directors and officers concerning the decisions made in the 111 West 57
th
Street Property investment and a certain litigation funding agreement. IsZo Capital L.P. also seeks declaratory judgment relief concerning
a litigation funding agreement and the 111 West 57
th
Street Property. AmBase and the officers and directors intend to vigorously defend themselves. Service of the summons and complaint has been accepted by counsel on behalf of all
defendants and a motion to dismiss was served and filed in early May 2018. The motion was returnable on July 17, 2018 and all motion papers have now been submitted to the Court. Oral argument was held on the motion on October 19, 2018, at which
time the Court decided that Alessandra Bianco, Richard Bianco, Jr., Jerry Carnegie, John Ferrara and Joseph Bianco should be dismissed as defendants in the case. The Court reserved decision as to dismissal of the balance of the case pending the
Court's receipt of a transcript of the oral argument. The Company can give no assurances regarding the outcome of the matters described herein.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 9 – Litigation Funding Agreement
In September 2017, the Company’s executive officers and its Board of Directors concluded that it was in the Company’s interest to obtain a litigation
funding commitment to finance litigation with respect to the ongoing disputes with the Sponsors and the lenders in the 111 West 57
th
Street Property project, and to seek to recover value for the Company with respect to its equity
investment in 111 West 57
th
Street Property, whether by direct recovery or from asserting claims against the Sponsors, their principals and/or certain of the lenders (collectively, “Future Recovery Litigation”).
As a result of developments in the legal proceedings concerning the Company’s equity investment in the 111 West 57
th
Property, the Company’s
interest in obtaining a litigation funding commitment to finance litigation with respect to the ongoing disputes with the Sponsors and the lenders in the 111 West 57
th
Street Property project, and the Company’s efforts to seek to recover
value for the Company with respect to its equity investment in the 111 West 57
th
Property, the Company’s Board of Directors negotiated and accepted an offer from Mr. Richard Bianco, its long-time chief executive officer, to provide a
litigation fund of seven million dollars ($7,000,000) (along with additional amounts as may be necessary from time to time as agreed to by the Company and Mr. Bianco), to fund the Company’s litigation expenses in connection with Future Recovery
Litigation, (the “Litigation Funding Agreement”).
In consideration of such financial commitment, the Litigation Funding Agreement provides that any financial recovery in such Future Recovery Litigation
shall be distributed as follows:
|
i.
|
first, to reimburse Mr. Bianco on a dollar-for-dollar basis for any Company litigation expenses and/or other unpaid amounts advanced by him in connection with Future
Recovery Litigation; and
|
|
ii.
|
thereafter, a percentage of the recovery to the Company and a percentage of the recovery to Mr. Bianco, respectively, (the “Recovery Sharing Ratio”); with the ratio and
percentages of 30% to 45% depending on the length of time to obtain recovery.
|
The payment of the amounts pursuant to the Litigation Funding Agreement could become payable by the Company in the future based on the recovery by the
Company of amounts relating to the 111 West 57
th
Property. The recovery, by the Company, of any amounts are not within the control of the Company and cannot be predicted at this time, and therefore, the aggregate amounts funded pursuant
to the Litigation Funding Agreement are presented in a temporary equity classification below total liabilities in the Company’s consolidated balance sheets for the periods presented, until such time that the legal proceedings or the Litigation
Funding Agreement are concluded. The Company shall not be obligated to repay such funded amounts except as described herein.
Legal expenses incurred attributable to the Litigation Funding Agreement are included in the Company’s condensed consolidated statement of operations as
part of professional and outside services, as follows:
|
($ in thousands
)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
Legal expenses attributable to the Litigation Funding Agreement
|
|
$
|
304
|
|
|
$
|
1,169
|
|
|
$
|
1,575
|
|
|
$
|
1,169
|
|
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 10 – Loans Payable
In May 2016, the Company and Mr. Richard A. Bianco, the Company’s Chairman, President and Chief Executive Officer (“Mr. R. A. Bianco”) entered into an
agreement for Mr. R. A. Bianco to provide to the Company a secured working capital line of credit of up to one million dollars ($1,000,000) or additional amount(s) as may be necessary and agreed to on an as needed basis, if and when necessary,
subject to customary and market terms and conditions to be agreed upon at such time (the “WC Agreement”).
Pursuant to the WC Agreement, Mr. R. A. Bianco made several loans to the Company for use as working capital. The loans were due on the earlier of the date
the Company received funds from any source sufficient to pay all amounts due under the loans, including accrued interest thereon, or the due date noted below. Accrued interest payable associated with the loans was included in accounts payable and
accrued liabilities in the Company’s consolidated balance sheet.
In January 2018, pursuant to the WC Agreement, Mr. R.A. Bianco made an additional loan to the Company, as noted in the condensed consolidated statement of
cash flows, for use as working capital as reflected and in accordance with the same terms of the loans payable noted herein.
Information regarding the loans payable is as follows:
|
|
|
Date
of Loan
|
|
|
Rate
|
|
|
Due
Date
|
|
|
September 30,
2018
|
|
|
|
December 31,
2017
|
|
|
Loan payable
|
|
January 2017
|
|
|
5.25
|
%
|
|
December 31, 2019
|
|
$
|
-
|
|
|
$
|
500,000
|
|
|
Loan payable
|
|
April 2017
|
|
|
5.25
|
%
|
|
December 31, 2019
|
|
|
-
|
|
|
|
500,000
|
|
|
Loan payable
|
|
June 2017
|
|
|
5.25
|
%
|
|
December 31, 2019
|
|
|
-
|
|
|
|
500,000
|
|
|
Loan payable
|
|
September 2017
|
|
|
5.25
|
%
|
|
December 31, 2019
|
|
|
-
|
|
|
|
150,000
|
|
|
Loan payable
|
|
October 2017
|
|
|
5.25
|
%
|
|
December 31, 2019
|
|
|
-
|
|
|
|
446,000
|
|
|
Loan payable
|
|
December 2017
|
|
|
5.25
|
%
|
|
December 31, 2019
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
2,296,000
|
|
Information regarding accrued interest expense on the loans payable is as follows:
|
(in thousands)
|
|
December 31,
2017
|
|
|
Accrued interest expense
|
|
$
|
67
|
|
The amounts noted above pursuant to the WC Agreement are distinct from the line of credit agreement for the 111 West 57
th
Property as discussed in
Note 4
herein and distinct from the Litigation Funding Agreement amounts as discussed in
Note 9
herein.
In January 2018, in connection with the sale by the Company of its commercial office building in Greenwich, Connecticut, the Company repaid the full amount
of the working capital loan, plus accrued interest aggregating $2,623,000 to Mr. R. A. Bianco, and the working capital line of credit agreement was terminated. See
Note
3
herein for additional information.
Note 11 - Subsequent Events
The Company has performed a review of events subsequent to the balance sheet dated September 30, 2018, through the report issuance date.