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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (fee required)
For the fiscal year ended December 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (no fee required)
For the Transition Period From ________ To ________
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.)
51 Weaver Street, Building 2, Greenwich, CT 06831-5155
(Address of principal executive offices)
Registrant's telephone number, including area code (203) 532-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock ($0.01 par value) None
Rights to Purchase Common Stock None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. X
At January 30, 1998, there were 44,533,519 shares of registrant's Common Stock
outstanding. At January 30, 1998 the aggregate market value of registrant's
voting securities (consisting of its Common Stock) held by nonaffiliates of the
registrant, based on the average bid and asking price on such date of the Common
Stock of $3.56 per share, was approximately $128 million. The Common Stock
constitutes registrant's only outstanding security.
Portions of the registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders, which Proxy Statement registrant intends to file with
the Securities and Exchange Commission not later than 120 days after the close
of its fiscal year, is incorporated by reference with respect to certain
information contained therein, in Part III of this Annual Report.
The Exhibit Index is located in Part IV, Item 14, Page 37.
AmBase Corporation
Annual Report on Form 10-K
December 31, 1997
CROSS REFERENCE SHEET FOR
PARTS I, II, III and IV Page
- ------------------------------------------------------------------------------
PART I
Item 1. Business..........................................................1
Item 2. Properties........................................................2
Item 3. Legal Proceedings.................................................2
Item 4. Submission of Matters to a Vote of Security Holders...............3
Executive Officers of the Registrant..............................3
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................4
Item 6. Selected Financial Data...........................................5
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................5
Item 8. Financial Statements and Supplementary Data......................12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................36
PART III
Item 10. Directors and Executive Officers of the Registrant...............36
Item 11. Executive Compensation...........................................36
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................36
Item 13. Certain Relationships and Related Transactions...................36
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..............................................37
PART I
ITEM 1. BUSINESS
Corporate Profile
AmBase Corporation (the "Company") was incorporated in 1975 by the City
Investing Company ("City") as the holding company for The Home Insurance
Company, a New Hampshire insurance corporation, and its affiliated property and
casualty insurance companies ("The Home"). In 1985, City, which prior to that
date owned all the outstanding shares of the Common Stock of the Company,
distributed the Company's shares to City's common stockholders. The Home was
sold on February 13, 1991 to Home Holdings, Inc. ("Home Holdings").
In December 1997, the Company formed a new wholly-owned subsidiary, SDG
Financial Corp. ("SDG Financial"), to pursue merchant banking activities. SDG
Financial purchased an approximate 6.3% equity interest in SDG, Inc. for
$1,250,000 and was granted the exclusive right to act as the investment
banker/financial advisor to SDG, Inc. and all of its subsidiaries and
affiliates.
SDG, Inc. is a development stage company which specializes in creating new
technology-specific companies that are dedicated to the clinical and commercial
development of proprietary, targeted liposomal delivery systems for
pharmaceutical therapies and consumer product ingredients. SDG, Inc.'s lipid
vesicles are protected by numerous U.S. and related foreign patents.
Also in December 1997, the Company purchased $100,000 of convertible preferred
stock in AMDG, Inc. ("AMDG"), a majority owned subsidiary of SDG, Inc. AMDG is a
development stage pharmaceutical company focused on the clinical development of
new therapies for the treatment of both Type I and Type II diabetes and has
received from SDG, Inc. a worldwide, exclusive, royalty-free license to certain
patented technology. AMDG raised $3.7 million of equity through a private
placement in December 1997.
In November 1993, the Company acquired 51% of the issued and outstanding common
stock of Augustine Asset Management, Inc. ("Augustine"), a Florida based
investment advisory firm. On October 4, 1996, the Company sold its entire
interest in Augustine, to Augustine. See Item 8 - Note 6 to the Company's
consolidated financial statements for further information.
In August 1988, the Company acquired Carteret Bancorp Inc. Carteret Bancorp
Inc., through its principal wholly owned subsidiary, Carteret Savings Bank, FA
("Carteret"), was principally engaged in retail and consumer banking, and
mortgage banking including mortgage servicing. On December 4, 1992, the Office
of Thrift Supervision ("OTS") placed Carteret in receivership under the
management of the Resolution Trust Corporation ("RTC") and a new institution,
Carteret Federal Savings Bank, was established to assume the assets and certain
liabilities of Carteret. Following the seizure of Carteret, the Company was
deregistered as a savings and loan holding company by the OTS, although the OTS
retains jurisdiction for any regulatory violations prior to deregistration.
The Company's assets currently consist primarily of cash and cash equivalents,
investment securities and a receivable from Home Holdings. On or about January
15, 1998, Home Holdings filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code. See Item 8 - Note 4 to the Company's
consolidated financial statements for a further discussion regarding the
Company's receivable from Home Holdings.
The Company had 7 employees at December 31, 1997.
The Company's main source of non-operating revenue is interest income earned on
investment securities and cash equivalents. In order to maintain the principal
value of its assets, the Company has invested substantially all of its funds in
U.S. Treasury Bills and short-term money market funds. The Company continues to
evaluate a number of possible acquisitions, and is engaged in the management of
its remaining assets and liabilities, including the contingent and alleged tax
and litigation liabilities, as described in Item 8 - Notes 11 and 13 to the
Company's consolidated financial statements. The Company intends to aggressively
contest all pending and threatened litigation and contingencies, as well as
pursue all sources for contributions to settlements. In order to continue on a
long-term basis, the Company must both resolve its contingent and alleged
liabilities by prevailing upon or settling these claims for less than the
amounts claimed and generate profits by acquiring existing operations and/or by
developing new operations.
See Item 8 - Note 13 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
-1-
At December 31, 1997, the Company's liabilities, including reserves for
contingent and alleged liabilities, exceeded total recorded assets by
$25,181,000. The Company has significant alleged tax liabilities and is a
defendant in a number of lawsuits and proceedings, the ultimate outcome of which
could have a material adverse effect on its financial condition and results of
operations. Because of the nature of the contingent and alleged liabilities and
the inherent difficulty in predicting the outcome of the litigation and
governmental proceedings, management is unable to predict whether the Company's
recorded reserves will be adequate or its resources sufficient to satisfy its
ultimate obligations. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. For a discussion of the alleged tax liabilities, lawsuits and
proceedings, see Item 8 - Notes 11 and 13 to the Company's consolidated
financial statements. Although the basis for the calculation of the litigation
and contingency reserves and income tax reserves are regularly reviewed by the
Company's management and outside legal counsel, the assessment of these reserves
includes an exercise of judgment and is a matter of opinion.
Discontinued Operations
For a discussion of discontinued investment management operations, refer to Item
8 - Note 6 to the Company's consolidated financial statements.
ITEM 2. PROPERTIES
The Company leases approximately 4,800 square feet for use as its executive
office at 51 Weaver Street, Building 2, Greenwich, CT 06831-5155.
ITEM 3. LEGAL PROCEEDINGS
The Company has significant alleged tax liabilities and is a defendant in a
number of lawsuits and governmental proceedings, the ultimate outcome of which
could have a material adverse effect on its financial condition and results of
operations. Because of the nature of the contingent and alleged liabilities and
the inherent difficulty in predicting the outcome of the litigation and
governmental proceedings, management is unable to predict whether the Company's
recorded reserves will be adequate or its resources sufficient to satisfy its
ultimate obligations. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. Although the basis for the calculation of the litigation and
contingency reserves and income tax reserves are regularly reviewed by the
Company's management and outside legal counsel, the assessment of these reserves
includes an exercise of judgment and is a matter of opinion. At December 31,
1997, the litigation and contingency reserves were $2,340,000. For a discussion
of alleged tax liabilities and lawsuits, see Item 8 - Notes 11 and 13 to the
Company's consolidated financial statements.
In addition to the litigation and contingency reserves, the Company had a
reserve for income taxes of $79,088,000 at December 31, 1997. For a further
discussion, see Item 8 - Note 11, Income Taxes and Note 13, Legal Proceedings,
Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles)
and Fresh Start, to the Company's consolidated financial statements.
See Item 8 - Note 13 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
Management of the Company continually reviews the likelihood of liability and
associated costs of pending and threatened litigation. During 1996, the Company
determined that there was a reduced probability of incurring costs to defend
and/or settle potential litigation with respect to Carteret Savings Bank, FA
("Carteret"), see the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, Item 8 - Note 11. As a result, the Company reduced its
litigation and contingency reserves by $8,000,000 and recorded such amount as
other income during the 1996 second quarter. In making such determination,
management took into consideration numerous factors, including the failure of
the Resolution Trust Corporation ("RTC") to notify the Company of any potential
legal action prior to the expiration of a significant statute of limitations
deadline and the transfer of the investigative duties of the RTC to the Federal
Deposit Insurance Corporation ("FDIC") upon the expiration of the RTC's charter
on December 31, 1995 pursuant to federal statute. Management also considered the
July 1, 1996 decision by the U.S. Supreme Court in the consolidated supervisory
goodwill cases of Winstar, Glendale Federal and Statesman, which held the United
States liable for damages. At December 31, 1996, the litigation and contingency
reserves were $2,954.000.
-2-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Each executive officer is elected to serve in the executive officer capacity set
forth opposite his respective name until the next Annual Meeting of
Stockholders. The Company is not aware of any family relationships between any
of the executive officers or directors of the Company.
Set forth below is a list of executive officers of the Company at December 31,
1997:
================================================================================
Name Age Present Title
================================================================================
Richard A. Bianco 50 Chairman, President and
Chief Executive Officer of
AmBase Corporation
John P. Ferrara 36 Vice President, Chief Financial
Officer, Treasurer and Controller
of AmBase Corporation
Mr. Bianco was elected a director of the Company in January 1991, and has served
as President and Chief Executive Officer of the Company since May 1991. On
January 26, 1993, Mr. Bianco was elected Chairman of the Board of Directors of
the Company. He served as Chairman, President and Chief Executive Officer of
Carteret, then a subsidiary of the Company, from May 1991 to December 1992.
Mr. Ferrara was elected to the position of Vice President, Chief Financial
Officer, Treasurer and Controller of the Company in December 1995, having
previously served as Acting Chief Financial Officer, Treasurer and Assistant
Vice President and Controller since January 1995; as Assistant Vice President
and Controller from January 1992 to January 1995; and as Manager of Financial
Reporting from December 1988 to January 1992.
-3-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Common Stock of the Company trades through one or more market-makers, with
quotations made available in the "pink sheets" published by the National
Quotation Bureau, Inc. ("Pink Sheets"), under the symbol ABCP. The sales prices
per share for the Company's Common Stock represent the range of the reported
high and low bid quotations as indicated in the Pink Sheets or as communicated
orally to the Company by market-makers. Such prices reflect interdealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
================================================================================
1997 1996
High Low High Low
================================================================================
First Quarter $2.92 $2.50 $1.02 $0.46
Second Quarter 2.96 2.49 2.00 1.01
Third Quarter 3.02 2.58 2.50 1.68
Fourth Quarter 3.96 2.90 2.88 1.75
================================================================================
As of January 30, 1998, there were approximately 23,000 beneficial owners of the
Company's Common Stock. No dividends were declared or paid on the Company's
Common Stock in 1997 or 1996. The Company does not intend to declare or pay
dividends in the foreseeable future.
In connection with the proceeding entitled Rolo and Tenerelli v. City Investing
Company Liquidating Trust, et al., pending in the Third Circuit Court of
Appeals, as further described in Item 8 - Note 13 to the Company's consolidated
financial statements, the Company is unable to make any dividend payments
without further judicial action.
For information concerning the Company's stockholder rights plan, see Item 8 -
Note 7 to the Company's consolidated financial statements.
-4-
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with the Company's
consolidated financial statements included in Item 8 of this Form 10-K. The
consolidated statements of operations, for the periods ended prior to the
October 4, 1996 sale of Augustine were retroactively reclassified to reflect
their operations as discontinued operations.
================================================================================
(in thousands, Years ended December 31
except per share data) 1997 1996 1995 1994 1993
================================================================================
Interest income, net $2,661 $2,641 $2,835 $2,092 $1,082
Income (loss) from continuing
operations, before income taxes (1,275) 6,636 6,005 6,246 (8,171)
Income tax (expense) benefit 191 7,189 (1,997) (148) 11,354
Income (loss) from continuing
operations (1,084) 13,825 4,008 6,098 3,183
Income from discontinued
investment management
operations, net of income taxes - 207 60 32 16
Net income (loss) (1,084) 14,032 4,068 6,130 3,199
Earnings per common share - basic
Income (loss) from continuing
operations (0.02) 0.31 0.09 0.14 0.07
Income (loss) from discontinued
operations - - - - -
- --------------------------------------------------------------------------------
Net income (loss) (0.02) 0.31 0.09 0.14 0.07
================================================================================
Earnings per common share
- assuming dilution
Income (loss) from
continuing operations (0.02) 0.30 0.09 0.14 0.07
Income (loss) from
discontinued operations - - - - -
- --------------------------------------------------------------------------------
Net income (loss) (0.02) 0.30 0.09 0.14 0.07
================================================================================
Dividends - - - - -
================================================================================
Total assets $64,270 $66,229 $65,677 $70,113 $77,450
Total stockholders' equity (25,181) (24,097) (38,273) (42,204) (48,352)
================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and related notes which are contained in Item 8, herein. On October
4, 1996, the Company sold its entire interest in Augustine. Accordingly, the
operations of Augustine have been reclassified as discontinued investment
management operations in the accompanying consolidated financial statements.
CONTINUING OPERATIONS
Financial Condition
The Company's assets at December 31, 1997 aggregated $64,270,000, consisting
principally of cash and cash equivalents of $5,548,000, investment securities of
$44,410,000, and a receivable from Home Holdings acquired pursuant to the
agreement by which the Company sold The Home and its subsidiaries to Home
Holdings in February 1991. On or about January 15, 1998 Home Holdings filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code. See Item 8 - Note 4 to the Company's consolidated financial statements for
a further discussion regarding the Company's receivable from Home Holdings. At
December 31, 1997, the Company's liabilities, including reserves for contingent
and alleged liabilities, as further described in Item 8 - Notes 11 and 13 to the
Company's consolidated financial statements, exceeded total recorded assets by
$25,181,000.
The cash needs of the Company for 1997 were principally satisfied by interest
income received on investment securities and cash equivalents, and a $475,000
income tax refund.
The cash needs of the Company for 1996 were principally satisfied by the receipt
of a 1977 tax refund, collections of the receivable from Home Holdings and
interest income received on investment securities and cash equivalents.
-5-
The cash needs of the Company in 1995 were principally satisfied by interest
income received on investment securities and cash equivalents, and collections
of the receivable from Home Holdings. In addition, in June 1995, the Company
received, with respect to 1990 and 1991, $1,690,000 from The Home in connection
with a tax sharing agreement between the Company and The Home. This amount did
not reduce the receivable from Home Holdings. Since the $1,690,000 had
previously been considered in the calculation of income tax reserves, the
receipt thereof was recorded as an increase to the income tax reserves account.
Management believes that the Company's cash resources are sufficient to continue
operations for 1998. Because of the nature of the contingent and alleged
liabilities described in Item 8 - Notes 11 and 13 to the Company's consolidated
financial statements, the Company is unable to predict whether it will have the
ability to generate sufficient resources to satisfy its ultimate obligations.
For the year ended December 31, 1997, cash of $4,486,000 was used by operating
activities of continuing operations, including the payment of operating
expenses, and payments charged against litigation and contingency reserves
partially offset by the receipt of interest income, and a $475,000 income tax
refund.
For the year ended December 31, 1996, cash of $1,622,000 was used by operating
activities of continuing operations, including the payment of other liabilities,
payments charged against income tax reserves and litigation and contingency
reserves, and the payment of operating expenses, partially offset by the receipt
of a 1977 tax refund, and the receipt of interest income.
For the year ended December 31, 1995, cash of $6,820,000 was used by operating
activities of continuing operations, including payments charged against the
litigation and contingency reserve and the payment of operating expenses
partially offset by interest income, and the receipt of amounts with respect to
1990 and 1991, from The Home in connection with a tax sharing agreement between
the Company and The Home.
There were no material commitments for capital expenditures as of December 31,
1997. Inflation has had no material impact on the business and operations of the
Company.
The Company continues to evaluate a number of possible acquisitions, and is
engaged in the management of its remaining assets and liabilities, including the
contingent and alleged tax and litigation liabilities described in Item 8 -
Notes 11 and 13 to the Company's consolidated financial statements. Extensive
discussions and negotiations are ongoing with respect to certain of these
matters. The Company intends to aggressively contest all pending and threatened
litigation and contingencies, as well as pursue all sources for contributions to
settlements. In order to continue on a long-term basis, the Company must both
resolve its contingent and alleged liabilities by prevailing upon or settling
these claims for less than the amounts claimed, and generate profits by
acquiring existing operations and/or by developing new operations.
See Item 8 - Note 13 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
Management of the Company continually reviews the likelihood of liability and
associated costs of pending and threatened litigation. At December 31, 1997, the
litigation and contingency reserves were $2,340,000. For a discussion of alleged
tax liabilities and lawsuits, see Item 8 - Notes 11 and 13 to the Company's
consolidated financial statements.
In addition to the litigation and contingency reserves, the Company had a
reserve for income taxes of $79,088,000 at December 31, 1997. For a further
discussion, see Item 8 - Note 11, Income Taxes and Note 13, Legal Proceedings,
Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles)
and Fresh Start, to the Company's consolidated financial statements.
During 1996, the Company determined that there was a reduced probability of
incurring costs to defend and/or settle potential litigation with respect to
Carteret, see the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, Item 8 - Note 11. As a result, the Company reduced its
litigation and contingency reserves by $8,000,000 and recorded such amount as
other income during 1996. In making such determination, management took into
consideration numerous factors, including the failure of the RTC to notify the
Company of any potential legal action prior to the expiration of a significant
statute of limitations deadline and the transfer of the investigative duties of
the RTC to the FDIC upon the expiration of the RTC's charter on December 31,
1995 pursuant to federal statute. Management also considered the July 1, 1996
decision by the U.S. Supreme Court in the consolidated supervisory goodwill
cases of Winstar, Glendale Federal and Statesman, which held the United States
liable for damages. At December 31, 1996, the litigation and contingency
reserves were $2,954,000.
-6-
In addition to the litigation and contingency reserves, the Company had a
reserve for income taxes of $79,088,000 at December 31, 1996.
In 1995, as part of the Company's continuing review of the status of litigation
pending against the Company, with careful attention paid to costs associated
with defending pending and threatened litigation, the Company recorded as other
income a $5,350,000 net reduction in the litigation and contingency reserves,
primarily resulting from the settlement of certain litigation at amounts less
than claimed and previously anticipated.
As noted above, the Company has significant alleged tax liabilities and is a
defendant in a number of lawsuits and proceedings, the ultimate outcome of which
could have a material adverse effect on its financial condition and results of
operations. Because of the nature of the contingent and alleged liabilities and
the inherent difficulty in predicting the outcome of litigation and governmental
proceedings, management is unable to predict whether the Company's recorded
reserves will be adequate or its resources sufficient to satisfy its ultimate
obligations. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties. For a
discussion of the alleged tax liabilities, lawsuits and proceedings, see
Item 8 - Notes 11 and 13 to the Company's consolidated financial statements.
Although the basis for the calculation of the litigation and contingency
reserves and income tax reserves are regularly reviewed by the Company's
management and legal counsel, the assessment of these reserves includes an
exercise of judgment and is a matter of opinion.
The Company contractually assumed the tax liabilities of City, which, prior to
September 1985, owned all the outstanding shares of Common Stock of the Company.
The Company also contractually assumed certain tax liabilities of The Home and
its subsidiaries from September 1985 through 1989. For all periods through 1991,
the Internal Revenue Service ("IRS") and the Company do not agree with respect
to only two issues, withholding taxes in connection with a Netherlands Antilles
finance subsidiary of City, and "Fresh Start", an insurance industry issue.
During 1996, the Company received a 1977 income tax refund of $7,613,000; as a
result, City no longer remains open for refunds. This amount was recognized as
an income tax benefit in the accompanying 1996 Consolidated Statement of
Operations, based on management's continuing review of the overall tax liability
position of the Company.
During 1996, in connection with the completion by the IRS of the Company's 1985
to 1991 federal income tax audits (excluding Fresh Start), the Company made
payments to the IRS totaling $1,995,000. These amounts were previously reserved
for and charged against the income tax reserves account. During the first
quarter of 1997, $475,000 of income taxes were refunded as a result of an
overpayment to the IRS for 1988 through 1991 tax years. This amount was recorded
as an income tax benefit in the first quarter of 1997. The federal income tax
adjustments from the 1985 to 1991 audits (excluding Fresh Start) did not result
in additional payments of state or local income taxes. The IRS has completed its
review of the Company's federal income tax return for 1992 with no significant
adjustments. The Company's federal income tax returns for years subsequent to
1992 have not been reviewed by the IRS. New York State has recently completed
their examination of the Company's income tax returns for tax years 1990 to
1992, which resulted in zero tax assessment.
With respect to the withholding taxes in connection with a Netherlands Antilles
finance subsidiary of City, on May 11, 1995 the IRS issued a Notice of
Deficiency for withholding taxes on interest payments for the years 1979 through
1985. In the Notice of Deficiency, the IRS contends that City's wholly owned
Netherlands Antilles finance subsidiary should be disregarded for tax purposes.
The Company vigorously contested the IRS's position in accordance with the IRS's
internal appeals procedures. In January 1992, the National Office of the IRS
issued technical advice supporting the auditing agent's position. In October
1992, the Company appealed this technical advice to the National Office. The
National Office advised the Company that it expected to issue technical advice
supporting the auditing agent's position, whereupon, the Company advised the IRS
that it was withdrawing its technical advice request.
On June 30, 1995, the Company filed a petition in the United States Tax Court
("Tax Court") contesting the Notice of Deficiency. The IRS filed its answer on
August 23, 1995. The Company filed a motion for summary judgment in its favor on
February 13, 1996. On April 17, 1996, the IRS filed a Notice of Objection to the
Company's motion for summary judgment. The Tax Court requested, and the Company
filed, on July 3, 1996, a reply to the IRS's Notice of Objection. On September
19, 1996, the Tax Court denied the Company's motion for summary judgment without
prejudice. Based on the Tax Court's examination of the record and the status of
the discovery process, the Court concluded that summary adjudication at this
time was inappropriate. The Tax Court directed the parties to engage in full and
complete discovery as expeditiously as possible. A trial was held in this case
on March 24, 1997, after which the Judge asked the IRS and the Company to submit
post-trial briefs, which have subsequently been submitted to the Tax Court. If
the IRS were to prevail on this issue, the Company would be liable for taxes and
interest in excess of the Company's financial resources.
-7-
In a case dealing with a similar withholding tax issue, the Tax Court ruled in
favor of the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana")
in November 1995. The Tax Court rejected the IRS's contention that interest paid
to Northern Indiana's foreign subsidiary was subject to United States tax
withholding. The IRS appealed this decision (Northern Indiana Public Service Co.
v. Commissioner, 105 T.C. No. 22) to the United States Court of Appeals for the
7th Circuit ("Appeals Court"). The Appeals Court affirmed the Tax Court's ruling
in favor of Northern Indiana. Although the Appeals Court decision in the
Northern Indiana case could be beneficial to the Company's case, it is not
necessarily indicative of the ultimate result of the final settlement of the
Netherlands Antilles issue between the Company and the IRS.
Based on an evaluation of the IRS's contention, counsel has advised the Company
that, although the outcome in litigation can by no means be assured, the Company
has a very strong case and should prevail. Notwithstanding counsel's opinion and
the Tax Court's ruling in the Northern Indiana case, it is not possible at this
time to determine the final disposition of this issue, when the issues will be
resolved, or their final financial effect. A final disposition of this issue in
the Company's favor would have a material, positive effect on the Company's
Statement of Operations and Financial Condition.
With respect to the "Fresh Start" issue, on March 13, 1996, the IRS issued a
deficiency notice to the Company on the Fresh Start issue which asserts an
increase in tax for the year 1987. If the IRS is successful, the amount of the
deficiency would be material. On June 7, 1996, the Company filed a petition with
the United States Tax Court (the "Tax Court") to dispute the entire amount of
the asserted deficiency and to redetermine the tax, and on July 23, 1996, the
IRS filed its answer. The IRS and the Company began engaging in the informal
discovery process customary in the Tax Court.
On July 22, 1997, another insurance company taxpayer, Atlantic Mutual Insurance
Company ("Atlantic Mutual"), filed a petition for certiorari in its own case
seeking review of the Fresh Start issue by the United States Supreme Court (the
"Supreme Court"). In response, on September 19, 1997, the United States filed
its brief with the Supreme Court in that case in which it recommended that the
Supreme Court hear the case. The Supreme Court granted the petition on October
20, 1997, has received briefs, and heard oral argument on March 2, 1998.
A decision on the merits by the Supreme Court in Atlantic Mutual may control the
outcome of the Company's own case in the Tax Court. Because it is expected that
the Supreme Court will address the reserve strengthening issue, the Company and
the IRS have advised the Tax Court in the Company's own case that, in the
interests of efficiency, further informal discovery and negotiation of a
stipulation of facts have been deferred pending the Supreme Court's ruling in
Atlantic Mutual. No assurances can be given concerning the outcome of the
Company's litigation on this issue.
See Item 8 - Note 11, Income Taxes, and Note 13, Legal Proceedings, Disputes
with Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and
Fresh Start, to the Company's consolidated financial statements, for additional
details.
-8-
Results of Operations - Continuing Operations
Summarized financial information for the continuing operations of the Company
for the years ended December 31 is as follows:
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Operating expenses:
Compensation and benefits $3,116 $2,969 $2,119
Professional and outside services 512 457 661
Insurance 120 177 247
Occupancy 87 89 173
Other operating 160 161 132
- --------------------------------------------------------------------------------
3,995 3,853 3,332
- --------------------------------------------------------------------------------
Operating loss (3,995) (3,853) (3,332)
- --------------------------------------------------------------------------------
Interest income 2,661 2,641 2,835
Other income 59 30 147
Other income - litigation and
contingency reserves reversal - 8,000 5,350
Other income - reduction of
previously estimated liabilities - - 1,005
Realized loss on sale of investment
securities - available for sale - (182) -
- --------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (1,275) 6,636 6,005
- --------------------------------------------------------------------------------
Income tax benefit (expense) 191 7,189 (1,997)
- --------------------------------------------------------------------------------
Income (loss) from continuing operations $(1,084) $13,825 $4,008
================================================================================
The Company's main source of non-operating revenue is interest income earned on
investment securities and cash equivalents. The Company's management expects
that operating cash needs in 1998 will be met principally by the Company's
current financial resources and the receipt of non-operating revenue consisting
of interest income earned on investment securities and cash equivalents.
The Company recorded a loss from continuing operations of $1,084,000 in the year
ended December 31, 1997. As further described in Financial Condition, above, the
1997 period includes a $475,000 income tax benefit. In addition, the 1997 period
includes other income of $59,000 attributable to the collection by an inactive
subsidiary of a receivable previously considered uncollectible. Excluding these
non-recurring income items, the loss from continuing operations would have been
$1,618,000, or $0.04 per share, for the year ended December 31, 1997.
The Company recorded income from continuing operations of $13,825,000 in the
year ended December 31, 1996. As further described in Financial Condition,
above, the 1996 period includes other income of $8,000,000, resulting from a
reduction in the litigation and contingency reserves, and an additional income
tax benefit of $7,613,000. Excluding these non-recurring items, the Company
would have reported a loss from continuing operations of $1,788,000, or $0.04
per share, for the year ended December 31, 1996.
The Company recorded income from continuing operations of $4,008,000, or $0.09
per share, for the year ended December 31, 1995. As further described below, the
1995 results include a $5,350,000 net reduction in the litigation and
contingency reserves recorded as other income, and a $1,005,000 reduction of
previously estimated liabilities recorded as other income, offset by an increase
in the income tax reserves of $1,800,000 recorded as an additional income tax
expense. In addition, the 1995 results include $147,000 of non-recurring other
income, as further discussed below. Excluding these non-recurring other items,
the Company would have reported a loss from continuing operations of $694,000,
or $0.02 per share.
For the year ended December 31, 1997, the Company recorded a loss from
continuing operations before income taxes of $1,275,000, which includes $59,000
of other income, as further described above.
For the year ended December 31, 1996, the Company recorded income from
continuing operations before income taxes of $6,636,000, which includes an
$8,000,000 reduction in the litigation and contingency reserves, as further
described in Financial Condition, above.
-9-
The Company recorded income from continuing operations before income taxes of
$6,005,000 for the year ended December 31, 1995. These results include a
$5,350,000 net reduction in the litigation and contingency reserves, and a
$1,005,000 reduction in previously estimated liabilities, as further described
in Financial Condition, above.
Compensation and benefits was $3,116,000 in 1997, $2,969,000 in 1996, and
$2,119,000 in 1995. The increase in 1997 is due to increased compensation costs.
The increase in 1996, compared with 1995, is due to the hiring by the Company of
an employee who previously provided services as an independent consultant.
Professional and outside services increased to $512,000 in 1997, compared to
1996, and decreased to $457,000 in 1996, from $661,000 in 1995. The increase in
1997, compared to 1996, was due to an increase in litigation expenses. The
decrease in 1996, compared to 1995, of $204,000, or 31%, was principally the
result of a decrease in professional service fees in 1996 and the hiring by the
Company of an employee who previously provided services as an independent
consultant, as noted above. Expenses for professional and outside services in
1997, 1996, and 1995 do not include costs associated with defending pending and
threatened litigation which were previously reserved for and charged against the
litigation and contingency reserves when paid.
Insurance expenses decreased in 1997, 1996 and 1995, due to management's
renegotiation of insurance programs.
Occupancy expenses decreased to $87,000 in 1997, from $89,000 in 1996, and
$173,000 in 1995, as a result of the continued reduction of occupancy related
expenses, and the relocation of the Company's executive office and the closing
of an administrative office during 1996.
Interest income was $2,661,000 in 1997, $2,641,000 in 1996, and $2,835,000 in
1995. The increase in 1997, compared to 1996, was attributable to an increased
yield on cash equivalents and investment securities. The decrease in 1996,
compared to the 1995 period, was attributable to a decreased yield on cash
equivalents and investment securities.
Other income of $59,000 in 1997 is attributable to the collection by an inactive
subsidiary of a receivable previously considered uncollectible.
Other income of $147,000 in 1995 represents non-recurring other income,
principally the result of final payments received from management contracts
previously held by an inactive subsidiary of the Company.
The Company realized a loss of $182,000 in 1996 on the sale of investment
securities - available for sale.
During 1996, the Company recorded as other income an $8,000,000 reduction in the
litigation and contingency reserves, as more fully described in Financial
Condition, above.
During 1995, the Company recorded as other income a $5,350,000 net reduction in
the litigation and contingency reserves, and a $1,005,000 reduction of
previously estimated liabilities, as more fully described in Financial
Condition, above.
During 1997, the Company received a $475,000 income tax refund. This amount was
recognized as an income tax benefit in 1997. In addition, included in income tax
benefit is a state and local tax provision of $284,000 in 1997.
During 1996, the Company received a 1977 income tax refund of $7,613,000. This
amount was recognized as an income tax benefit in the accompanying 1996
Consolidated Statement of Operations, based on management's continuing review of
the overall tax liability position of the Company, as further described in
Financial Condition, above. In addition, included in income tax benefit is a
federal and state tax provision of $424,000 in 1996.
During 1995, the Company recorded as additional income tax expense a $1,800,000
increase in the income tax reserves. The increase in the income tax reserves was
the result of the continuing review of the income tax reserves including
additional reserves for amounts considered unrealizable. In addition, included
in income tax expense is a state and local tax provision of $197,000 in 1995.
A reconciliation between income taxes computed at the statutory federal rate and
the provision for income taxes is included in Item 8 - Note 11 to the Company's
consolidated financial statements.
-10-
Discontinued Investment Management Operations
See Item 8 - Note 6 to the Company's consolidated financial statements for
information.
RECENT DEVELOPMENTS
On or about January 15, 1998, Home Holdings filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. See Item 8 - Note
4 to the Company's consolidated financial statements for a further discussion
regarding the Company's receivable from Home Holdings.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"),
which is effective for financial statements issued for periods ending after
December 15, 1997. Statement 128 replaces earnings per share ("EPS") with a
presentation of basic EPS, and requires dual presentation of basic and diluted
EPS. Furthermore, a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS computation
is required. Based upon the Company's current capitalization structure, the
basic and diluted EPS amounts calculated in accordance with Statement 128
approximate the Company's EPS amounts computed in accordance with Accounting
Principles Board Opinion No. 15, "Earnings Per Share." See Item 8 - Note 5 to
the Company's consolidated financial statements for further information.
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 stockholdings,
should be directed to:
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Shareholder Services
(800) 937-5449 or (718) 921-8200
-11-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
AmBase Corporation
In our opinion, the accompanying consolidated Balance Sheets and the related
consolidated Statements of Operations, of Changes in Stockholders' Equity, and
of Cash Flows present fairly, in all material respects, the financial position
of AmBase Corporation and its subsidiaries (the "Company") at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 11 and 13, the accompanying financial statements include
income tax reserves relating to a number of issues. Final resolution of these
issues is dependent upon future events, which may result in amounts more or less
than those presented. The ultimate outcome of these issues cannot presently be
determined.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, substantial operations of the Company have been
discontinued, and substantial contingencies exist against the Company in various
lawsuits and proceedings, which are discussed in Notes 11 and 13 to the
financial statements and the second paragraph of this report. The Company has a
net capital deficiency of approximately $25,000,000 at December 31, 1997. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. It will be necessary for the Company to resolve the contingent
liabilities by prevailing upon or settling these claims at amounts less than the
claims and the amounts recorded and to generate, through acquisition or start
up, profitable operations to continue on a long-term basis. See Note 1 for
further discussion of management's plans. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Price Waterhouse LLP
New York, New York
March 26, 1998
-12-
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31
================================================================================
(in thousands, except per share data) 1997 1996 1995
================================================================================
Operating expenses:
Compensation and benefits $3,116 $2,969 $2,119
Professional and outside services 512 457 661
Insurance 120 177 247
Occupancy 87 89 173
Other operating 160 161 132
- --------------------------------------------------------------------------------
3,995 3,853 3,332
- --------------------------------------------------------------------------------
Operating loss (3,995) (3,853) (3,332)
- --------------------------------------------------------------------------------
Interest income 2,661 2,641 2,835
Other income 59 30 147
Other income - litigation and contingency
reserves reversal - 8,000 5,350
Other income - reduction of
previously estimated liabilities - - 1,005
Realized loss on sale of investment
securities - available for sale - (182) -
- --------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (1,275) 6,636 6,005
Income tax benefit (expense) 191 7,189 (1,997)
- --------------------------------------------------------------------------------
Income (loss) from continuing operations (1,084) 13,825 4,008
Income from discontinued investment
management operations, net of income taxes - 207 60
- --------------------------------------------------------------------------------
Net income (loss) $(1,084) $14,032 $4,068
================================================================================
Earnings per common share - basic
Income (loss) from continuing operations $(0.02) $ 0.31 $ 0.09
Income (loss) from discontinued operations - - -
- --------------------------------------------------------------------------------
Net income (loss) $(0.02) $ 0.31 $ 0.09
================================================================================
Earnings per common share - assuming dilution
Income (loss) from continuing operations $(0.02) $ 0.30 $ 0.09
Income (loss) from discontinued operations - - -
- --------------------------------------------------------------------------------
Net income (loss) $(0.02) $ 0.30 $ 0.09
================================================================================
Dividends $ - $ - $ -
================================================================================
Average shares outstanding 44,534 44,534 44,534
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-13-
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
================================================================================
(in thousands) 1997 1996
================================================================================
Assets
Cash and cash equivalents (including $65 of
restricted cash at December 31, 1996) 5,548 5,591
Investment securities:
Held to maturity (market value $44,276 and
$47,261, respectively) 44,310 47,259
Available for sale, carried at fair value
(cost $100 at December 31, 1997) 100 -
- --------------------------------------------------------------------------------
Total investment securities 44,410 47,259
- --------------------------------------------------------------------------------
Receivable from Home Holdings, Inc. 12,736 13,186
Investment in SDG, Inc. at cost 1,250 -
Other assets 326 193
- --------------------------------------------------------------------------------
Total assets $ 64,270 $ 66,229
================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued liabilities $ 1,550 $ 1,428
Supplemental retirement plan 4,865 4,724
Postretirement welfare benefits 1,412 1,527
Other liabilities 196 605
Litigation and contingency reserves 2,340 2,954
Income tax reserves 79,088 79,088
- --------------------------------------------------------------------------------
Total liabilities 89,451 90,326
- --------------------------------------------------------------------------------
Commitments and contingencies - -
- --------------------------------------------------------------------------------
Stockholders' equity:
Common stock 447 447
Paid-in capital 547,712 547,712
Accumulated deficit (572,693) (571,609)
Treasury stock (647) (647)
- --------------------------------------------------------------------------------
Total stockholders' equity (25,181) (24,097)
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 64,270 $ 66,229
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-14-
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31
================================================================================
Net
Unrealized
Losses on
Investment
Paid- Securities-
Common In Available Accumulated Treasury
(in thousands) Stock Capital for Sale Deficit Stock Total
================================================================================
December 31, 1994 $447 $547,712 $ (7) $(589,709) $(647) $(42,204)
Net income - - - 4,068 - 4,068
Net unrealized
losses on
investment
securities
-available for
sale - - (137) - - (137)
- --------------------------------------------------------------------------------
December 31, 1995 447 547,712 (144) (585,641) (647) (38,273)
Net income - - - 14,032 - 14,032
Sale of securities - - 144 - - 144
- --------------------------------------------------------------------------------
December 31, 1996 447 547,712 - (571,609) (647) (24,097)
Net loss - - - (1,084) - (1,084)
- --------------------------------------------------------------------------------
December 31, 1997 $447 $547,712 $ - $(572,693) $(647) $(25,181)
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Cash flows from operating activities:
Income (loss) from continuing operations $(1,084) $13,825 $ 4,008
Adjustments to reconcile income (loss)
from continuing operations to net
cash used by continuing operations:
Other assets (128) 286 (18)
Accounts payable and accrued liabilities 122 692 113
Litigation and contingency reserves uses (614) (1,195) (4,676)
Litigation and contingency reserves
- (reserve reversal) - (8,000) (5,350)
Income tax reserves, net - 5,619 3,494
Income tax refund - 1977 - (7,613) -
Interest income - investment securities (2,419) (2,428) (2,501)
Realized loss on sale of investment securities
- available for sale - 182 -
Other, net (363) (2,990) (1,890)
- --------------------------------------------------------------------------------
Net cash used by operating activities of
continuing operations (4,486) (1,622) (6,820)
- --------------------------------------------------------------------------------
Cash provided (used) by discontinued
investment management operations - (291) 11
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Maturities of investment securities
- held to maturity 77,880 71,235 102,700
Purchases of investment securities
- held to maturity (72,512) (76,011) (97,857)
Purchases of investment securities
- available for sale (100) - -
Investment in SDG, Inc. (1,250) - -
Proceeds from sales of investment securities
- available for sale - 31 -
Proceeds from Home Holdings, Inc. receivable 450 3,997 691
Proceeds from sale of Augustine Asset
Management, Inc. - 500 -
Other, net (25) - (11)
- --------------------------------------------------------------------------------
Net cash provided (used) by investing
activities 4,443 (248) 5,523
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (43) (2,161) (1,286)
Cash and cash equivalents at beginning of year 5,591 7,752 9,038
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $5,548 $5,591 $ 7,752
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization
AmBase Corporation (the "Company") is a holding company which, through a wholly
owned subsidiary, owns a 6.3% ownership interest in SDG, Inc. See Part I - Item
1 for a further description. The Company previously held a majority ownership
interest in Augustine Asset Management, Inc. ("Augustine"), an investment
advisor, and also previously owned a savings bank and an insurance company, all
of which have been designated as discontinued operations, as further discussed
below.
On October 4, 1996, the Company sold its entire interest in Augustine, to
Augustine. See Note 6 for a further discussion.
On December 4, 1992, Carteret Savings Bank, FA ("Carteret") was placed in
receivership by the Office of Thrift Supervision ("OTS").
On February 13, 1991, the Company sold its ownership interest in The Home
Insurance Company ("The Home") and its subsidiaries to Home Holdings, Inc.
("Home Holdings"). See Note 4 for a further discussion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Substantial contingent and
alleged liabilities exist against the Company through various lawsuits and
proceedings, as described in Notes 11 and 13. These factors raise substantial
doubt about the Company's ability to continue as a going concern. In order to
continue on a long-term basis, the Company must both resolve its contingent and
alleged liabilities by prevailing upon or settling these claims for less than
the amounts claimed, and generate profits by acquiring existing operations
and/or by developing new operations. 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. The Company continues to
evaluate a number of possible acquisitions, and is engaged in the management of
its remaining assets and liabilities, including the contingent and alleged tax
and litigation liabilities, as described in Notes 11 and 13. The Company intends
to aggressively contest all pending and threatened litigation and governmental
proceedings, as well as pursue all sources for contributions to settlements. The
Company's main source of non-operating revenue is interest earned on investment
securities and cash equivalents. The Company's management expects that operating
cash needs in 1998 will be met principally by the Company's current financial
resources and the receipt of non-operating revenue consisting of interest income
earned on investment securities and cash equivalents. Because of the nature of
the contingent and alleged liabilities and the inherent difficulty in predicting
the outcome of litigation and governmental proceedings, management is unable to
predict whether the Company's recorded reserves will be adequate or its
resources sufficient to satisfy its ultimate obligations. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. For a discussion of the alleged
tax liabilities, lawsuits and governmental proceedings, see Notes 11 and 13 to
the Company's consolidated financial statements. Although the basis for the
calculation of the litigation and contingency reserves and income tax reserves
are regularly reviewed by the Company's management and outside legal counsel,
the assessment of these reserves includes an exercise of judgment and is a
matter of opinion.
See Item 8 - Note 13 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP"). Certain reclassifications
have been made to the 1996 and 1995 consolidated financial statements to conform
with the 1997 presentation.
Use of estimates in the preparation of financial statements:
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.
-17-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Principles of consolidation:
The consolidated financial statements are comprised of the accounts of the
Company and its majority owned subsidiaries. All material intercompany
transactions and balances have been eliminated. Investments in companies in
which ownership interest is less than 20% are accounted for using the cost
method.
Cash and cash equivalents:
Highly liquid investments, consisting principally of funds held in short-term
money market accounts, are classified as cash equivalents. Included in cash and
cash equivalents at December 31, 1996 is $65,000 of funds held in escrow, which
were subsequently applied to the satisfaction of certain liabilities.
Investment securities:
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement 115"). Statement 115, which addresses
the accounting and reporting of investments in equity securities that have
readily determinable fair values and all investments in debt securities,
requires investment securities to be classified as held to maturity (only
permitted for securities with a stated maturity), available for sale, or trading
securities.
Securities that the Company has both the positive intent and ability to hold to
maturity are classified as investment securities - held to maturity and are
carried at amortized cost. Investment securities - available for sale, which are
those securities that may be sold prior to maturity, are carried at fair value,
with any net unrealized gains or losses reported in a separate component of
stockholders' equity, net of deferred taxes.
Interest and dividends on investment securities are recognized in the Statement
of Operations when earned. Realized gains and losses on the sale of investment
securities - available for sale are calculated using the first-in/first-out
basis for determining the cost basis of the securities. The fair value of
publicly traded investment securities is determined by reference to current
market quotations.
Income taxes:
The Company and its domestic subsidiaries file a consolidated federal income tax
return. The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Statement 109 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. Statement 109 requires
that net deferred tax assets be recognized immediately when a more likely than
not criterion is met; that is, unless a greater than 50% probability exists that
the tax benefits will actually be realized sometime in the future. At the
present time, management has no basis to conclude that realization is more
likely than not.
Earnings per share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"),
which is effective for financial statements issued for periods ending after
December 15, 1997. Statement 128 replaces earnings per share ("EPS") with a
presentation of basic EPS, and requires dual presentation of basic and diluted
EPS. Furthermore, a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS computation
is required. Based upon the Company's current capitalization structure, the
basic and diluted EPS amounts calculated in accordance with Statement 128
approximate the Company's EPS amounts computed in accordance with Accounting
Principles Board Opinion No. 15, "Earnings Per Share."
Fair value of financial instruments:
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments" ("Statement 107"), the
Company discloses fair value information about financial instruments. For a
further discussion, see Note 14.
-18-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Statement 123 encourages companies to adopt a
fair value- based method of accounting for employee stock options, but allows
companies to continue to account for those plans using the accounting prescribed
by APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company adopted the disclosure requirements of the statement in 1996 and plans
to continue accounting for stock compensation using APB 25, making proforma
disclosures of net income and earnings per share as if the fair value based
method had been applied. For a further discussion, see Note 10.
Note 3 - Investment Securities
Investment securities - held to maturity consist of U.S. Treasury Bills with
original maturities of one year or less and which are carried at amortized cost
based upon the Company's intent and ability to hold these investments to
maturity.
Investment securities - available for sale generally consist of investments in
equity securities held for an indefinite period and were carried at fair value
with net unrealized gains and losses reported in a separate component of
stockholders' equity. At December 31, 1997 investment securities - available for
sale consist of $100,000 of convertible preferred stock in AMDG, Inc., which the
Company purchased through a private placement in December 1997. Investment
securities - available for sale were sold during 1996, resulting in proceeds of
$31,000 and a realized loss of $182,000.
Investment securities at December 31 consist of the following:
================================================================================
1997 1996
----------------------------- ------------------------------
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 $44,310 $44,310 $44,276 $47,259 $47,259 $47,261
Available for
Sale: Equity
Securities 100 100 100 - - -
================================================================================
The gross unrealized gains and losses on investment securities at December 31,
consist of the following:
================================================================================
(in thousands) 1997 1996
================================================================================
Held to Maturity - Gross unrealized gains (losses) $ (34) $ 2
Available for Sale - Gross unrealized gains (losses) - -
================================================================================
-19-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 4 - Receivable From Home Holdings
In 1991, the Company sold its entire interest in The Home and its subsidiaries.
As part of the sale proceeds, Home Holdings agreed to pay $48 million to the
Company over a period of years to meet certain specified future obligations of
the Company, as incurred, relating to tax issues, litigation and administrative
expenses. The Company has collected the portion of this receivable with respect
to litigation and administrative expenses. The Company's remaining receivable at
December 31, 1997 is at least $12,736,000, and relates principally to tax
issues.
On or about January 15, 1998, Home Holdings filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").
Home Holdings has also filed a pre-arranged plan of reorganization under Chapter
11 (the "Bankruptcy Plan"). According to the Bankruptcy Plan and disclosure
statement, general unsecured creditors of Home Holdings would receive a
projected future recovery of approximately 38.3% of the amounts owed to them.
Home Holdings has scheduled the Company's outstanding receivable from Home
Holdings as a contingent general unsecured claim in the amount of $11,703,136.
The Company disagrees with Home Holdings' classification of its receivable and
also with the amount of the outstanding receivable. The Company has filed, in
connection with the Home Holdings bankruptcy case, a Proof of Claim ("Proof of
Claim") for all damages, which is significantly in excess of $12,736,000.
The Company intends to file with the United States Bankruptcy Court an objection
to the Bankruptcy Plan, will vigorously contest the Bankruptcy Plan and will
seek to collect from all parties the full amount of its claim as set forth in,
or related to, its Proof of Claim. Accordingly, no allowance for doubtful
accounts has been provided as of December 31, 1997.
-20-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 5 - Earnings Per Share
The calculation of basic earnings per share and dilutive earnings per share,
including the effect of dilutive securities, for the years ended December 31, is
as follows:
================================================================================
1997
-----------------------------------------
Loss Shares Per Share
(in thousands) (Numerator) (Denominator) Amount
================================================================================
Basic earnings per share:
Loss from continuing operations $(1,084) 44,534 $(0.02)
Effect of Dilutive Securities:
Assumed stock option exercise - 1,688 -
Diluted earnings per share:
Loss from continuing operations and
assumed conversions $(1,084) 46,222 $(0.02)
================================================================================
================================================================================
1996
-----------------------------------------
Income Shares Per Share
(in thousands) (Numerator) Denominator) Amount
================================================================================
Basic earnings per share:
Income from continuing operations $13,825 44,534 $0.31
Effect of Dilutive Securities:
Assumed stock option exercise - 1,603 -
Diluted earnings per share:
Income from continuing operations and
assumed conversions $13,825 46,137 $0.30
================================================================================
================================================================================
1995
-----------------------------------------
Income Shares Per Share
(in thousands) (Numerator) (Denominator) Amount
================================================================================
Basic earnings per share:
Income from continuing operations $4,008 44,534 $0.09
Effect of Dilutive Securities:
Assumed stock option exercise - 876 -
Diluted earnings per share:
Income from continuing operations and
assumed conversions $4,008 45,410 $0.09
================================================================================
-21-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 6 - Discontinued Investment Management Operations
On October 4, 1996, the Company sold its entire ownership interest in Augustine
to Augustine, for $500,000 in cash. Accordingly, as of September 30, 1996, the
operations of Augustine have been designated as discontinued operations, and the
consolidated statements of operations for the periods presented herein have been
retroactively reclassified to report the income from discontinued operations
separately from the results of continuing operations by excluding the operating
revenues and expenses of discontinued operations from the respective statement
captions. The amount of income taxes allocated to discontinued operations
reflects the incremental effect on income taxes that resulted from such
operations.
Income from discontinued operations was $207,000 for 1996. This reflects the
unaudited results of Augustine's operations of $59,000 for the nine month period
ended September 30, 1996, and a gain of $148,000 from the sale.
Summarized information relating to income from Augustine's discontinued
operations for 1996 (through date of disposition) and the full year period ended
December 31, 1995 is as follows:
================================================================================
(in thousands) 1996 1995
================================================================================
Investment management fee revenue $ 479 $ 508
Operating expenses (339) (355)
Interest income (expense) 2 (3)
Minority interest (30) (40)
- --------------------------------------------------------------------------------
Income from discontinued operations before taxes 112 110
Income tax expense (53) (50)
- --------------------------------------------------------------------------------
Income from discontinued operations, before
gain on disposition 59 60
Gain on disposition 148 -
- --------------------------------------------------------------------------------
Income from discontinued operations $ 207 $ 60
================================================================================
Investment management fee revenue included $142,000 for the nine month period
ended September 30, 1996 and $163,000 for the year ended December 31, 1995, from
related parties.
Note 7 - Stockholders' Equity
Authorized capital stock consists of 50,000,000 shares of cumulative preferred
stock, $0.01 par value, and 200,000,000 shares of Common Stock, $0.01 par value.
At December 31, 1997, 1996 and 1995, there were 44,533,519 shares of the
Company's Common Stock outstanding, excluding 126,488 treasury shares carried at
average cost of $5.12 per share, aggregating approximately $647,000.
In connection with the proceeding entitled Rolo and Tenerelli v. City Investing
Company Liquidating Trust, et al., pending in the Third Circuit Court of
Appeals, as further described in Note 13, the Company is unable to make any
dividend payments without further judicial action.
At December 31, 1997, there were 6,860,000 shares reserved for issuance under
the Company's stock option and other employee benefit plans.
-22-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Stockholder Rights Plan:
On January 29, 1986, the Company's Board of Directors declared a dividend
distribution of one right for each outstanding share of Common Stock of the
Company. The rights, as amended, which entitle the holder to purchase from the
Company a common share at a price of $75.00, are not exercisable until either a
person or group of affiliated persons acquires 25% or more of the Company's
outstanding common shares or upon the commencement or disclosure of an intention
to commence a tender offer or exchange offer for 20% or more of the common
shares. The rights are redeemable by the Company at $0.05 per right at any time
until the earlier of the tenth day following an accumulation of 20% or more of
the Company's shares by a single acquirer or group, or the occurrence of certain
Triggering Events (as defined in the Stockholder Rights Plan). In the event the
rights become exercisable and, thereafter, the Company is acquired in a merger
or other business combination, or in certain other circumstances, each right
will entitle the holder to purchase from the surviving corporation, for the
exercise price, Common Stock having a market value of twice the exercise price
of the right. The rights are subject to adjustment to prevent dilution, and
expire on February 10, 2001.
Note 8 - Pension and Savings Plans
The Company sponsors a non-qualified supplemental retirement plan ("Supplemental
Plan") under which only one current executive officer and certain former
officers of the Company are participants. The cost of the Supplemental Plan is
actuarially determined and is accrued but not funded.
Pension expense for the Supplemental Plan for the years ended December 31 was as
follows:
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Service cost of current period $306 $225 $185
Interest cost on projected benefit obligation 335 336 346
- --------------------------------------------------------------------------------
$641 $561 $531
================================================================================
Accrued pension costs for the Supplemental Plan at December 31, and the major
assumptions used to determine these amounts, are summarized below:
================================================================================
(dollars in thousands) 1997 1996
================================================================================
Actuarial present value of benefit obligations:
Accumulated benefit obligations, fully vested $4,513 $4,102
================================================================================
Projected benefit obligation for services
rendered to date $5,045 $4,733
Unrecognized net loss (180) (9)
- --------------------------------------------------------------------------------
Accrued pension costs $4,865 $4,724
================================================================================
Major assumptions:
Pre-retirement and postretirement discount rate 7.0% 7.5%
Rate of increase in future compensation 6.0% 6.0%
================================================================================
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
first 3% 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 $18,000, $16,000 and
$15,000 in 1997, 1996 and 1995, respectively. All contributions are subject to
maximum limitations contained in the Code.
-23-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 9 - Postretirement Benefits Other Than Pensions
Pursuant to a 1985 agreement, the Company has assumed the obligation to provide
a portion of retiree medical and life insurance coverage to individuals who
retired from City Investing Company ("City"), which, prior to September 1985,
owned all the outstanding shares of Common Stock of the Company. The Company and
its subsidiaries do not provide postretirement benefits to employees currently
retiring.
Retiree insurance coverage is provided to participants through group medical and
life insurance contracts. Retiree medical coverage provides supplemental
Medicare coverage for retirees and their eligible spouses. Life insurance is
provided to retirees at 25% of the participant's pre-retirement amount, not to
exceed $50,000. All participants are required to contribute a portion, which may
be adjusted, of the cost of their postretirement benefit coverage. The Company
does not pre-fund these plans and retains the right to modify or terminate these
plans in the future.
The Company accounts for postretirement benefits other than pensions in
accordance with Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". This statement
requires the costs of certain postretirement benefits to be recognized during
the period employees render service, with all such costs being recognized in
full by the eligibility date.
Net periodic postretirement benefit (income) expense for the years ended
December 31 was as follows:
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Interest cost on accumulated
postretirement benefit obligation $23 $32 $48
Amortization of prior service liability (66) (62) (53)
Amortization of unrecognized gain (45) (37) (33)
- --------------------------------------------------------------------------------
Net periodic postretirement benefit
(income) expense $(88) $(67) $(38)
================================================================================
The accrued postretirement benefit liability at December 31 is summarized below:
================================================================================
(in thousands) 1997 1996
================================================================================
Accumulated postretirement benefit obligation:
Retirees $323 $323
- --------------------------------------------------------------------------------
Unrecognized net gains 478 527
Unrecognized prior service liability 611 677
- --------------------------------------------------------------------------------
Accrued postretirement benefit liability $1,412 $1,527
================================================================================
The accumulated benefit obligation for 1997, 1996 and 1995 was determined using
the projected unit credit method and a discount rate of 7.0%, 7.5% and 7.5%,
respectively. The health care cost trend rates in 1997 were assumed to be 8%,
gradually declining to 5.5% in 2001 and remaining at that level, thereafter, 9%
in 1996, gradually declining to 5.5% in 2001 and remaining at that level,
thereafter, and 10% in 1995, gradually declining to 5.5% in 2001 and remaining
at that level, thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, a 1% increase each year in the health care trend
rate, while holding all other assumptions constant, would increase the
accumulated postretirement benefit obligation at December 31, 1997, by
approximately $23,000, and decrease the net periodic postretirement benefit
income for 1997 by approximately $2,000.
-24-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 10 - Incentive Plans
Under the Company's 1994 Senior Management Incentive Compensation Plan (the
"1994 Plan"), an executive officer of the Company whose compensation is required
to be reported to stockholders under the Securities Exchange Act of 1934 (the
"Participants") and who is serving as such at any time during the fiscal year as
to which an award is granted, may receive an award of a cash bonus ("Bonus"), in
an amount determined by the Personnel Committee of the Company's Board of
Directors (the "Committee") and payable from an annual bonus fund (the "Annual
Bonus Pool"). The Committee may award Bonuses under the 1994 Plan to
Participants not later than 120 days after the end of each fiscal year (the
"Reference Year"), beginning with the fiscal year ending on December 31, 1994.
If the Committee grants a Bonus under the 1994 Plan, the amount of the Annual
Bonus Pool will be an amount equal to the sum of (i) plus (ii), where:
(i) is ten percent (10%) of the amount by which the Company's Total
Stockholders' Equity, as defined, on the last day of a Reference Year increased
over the Company's Total Stockholders' Equity, as defined, on the last day of
the immediately preceding Reference Year; and
(ii) is five percent (5%) of the amount by which the Company's market value, as
defined, on the last day of the Reference Year increased over the Company's
market value on the last day of the immediately preceding Reference Year.
Notwithstanding the foregoing, the 1994 Plan provides that in the event of a
decrease in either or both of items (i) and/or (ii) above, the Annual Bonus Pool
is determined by reference to the last Reference Year in which there was an
increase in such item.
If the Committee determines within the 120-day time period to award a Bonus, the
share of the Annual Bonus Pool to be allocated to each Participant shall be as
follows: 45% of the Annual Bonus Pool shall be allocated to the Company's Chief
Executive Officer, and 55% of the Annual Bonus Pool shall be allocated pro rata
to each of the Company's Participants as determined by the Committee. The
Committee in its discretion may reduce the percentage of the Annual Bonus Pool
to any Participant for any Reference Year, and such reduction shall not increase
the share of any other Participant. The 1994 Plan is not the exclusive plan
under which the Executive Officers may receive cash or other incentive
compensation or bonuses.
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the Company may
grant to officers and employees of the Company and its subsidiaries, stock
options ("Options"), stock appreciation rights ("SARs"), restricted stock awards
("Restricted Stock"), merit awards ("Merit Awards") and performance share awards
("Performance Shares"), through May 28, 1998. An aggregate of 5,000,000 shares
of the Company's Common Stock are reserved for issuance under the 1993 Plan
(upon the exercise of Options and Stock Appreciation Rights, upon awards of
Restricted Stock and Performance Shares); however, of such shares, only
2,500,000 shares in the aggregate shall be available for issuance for Restricted
Stock Awards and Merit Awards. Such shares shall be authorized but unissued
shares of Common Stock. Options may be granted as incentive stock options
("ISOs") intended to qualify for favorable tax treatment under Federal tax law
or as nonqualified stock options ("NQSOs"). SARs may be granted with respect to
any Options granted under the 1993 Plan and may be exercised only when the
underlying Option is exercisable. The 1993 Plan requires that the exercise price
of all Options and SARs be equal to or greater than the fair market value of the
Company's Common Stock on the date of grant of that Option. The term of any ISO
or related SAR cannot exceed ten years from the date of grant, and the term of
any NQSO cannot exceed ten years and one month from the date of grant. Subject
to the terms of the 1993 Plan and any additional restrictions imposed at the
time of grant, Options and any related SARs ordinarily will become exercisable
commencing one year after the date of grant. In the case of a "Change of
Control" of the Company (as defined in the 1993 Plan), Options granted pursuant
to the 1993 Plan may become fully exercisable as to all optioned shares from and
after the date of such Change in Control in the discretion of the Committee or
as may otherwise be provided in the grantee's Option agreement. Death,
retirement, resignation or absence for disability will not result in the
cancellation of any Options.
-25-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
As a condition to any award of Restricted Stock or Merit Award under the 1993
Plan, the Committee may require a participant to pay an amount equal to, or in
excess of, the par value of the shares of Restricted Stock or Common Stock
awarded to him or her. Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered during a "Restricted Period", which in the case
of grants to employees shall not be less than one year from the date of grant.
The Restricted Period with respect to any outstanding shares of Restricted Stock
awarded to employees may be reduced by the Committee at any time, but in no
event shall the Restricted Period be less than one year. Except for such
restrictions, the employee as the owner of such stock shall have all of the
rights of a stockholder including, but not limited to, the right to vote such
stock and to receive dividends thereon as and when paid. In the event that an
employee's employment is terminated for any reason, an employee's Restricted
Stock will be forfeited; provided, however, that the Committee may limit such
forfeiture in its sole discretion. At the end of the Restricted Period, all
shares of Restricted Stock shall be transferred free and clear of all
restrictions to the employee. In the case of a Change in Control of the Company
(as defined in the 1993 Plan), an employee may receive his or her Restricted
Stock free and clear of all restrictions in the discretion of the Committee, or
as may otherwise be provided pursuant to the employee's Restricted Stock award.
Performance Share awards of Common Stock under the 1993 Plan shall be earned on
the basis of the Company's performance in relation to established performance
measures for a specific performance period. Such measures may include, but shall
not be limited to, return on investment, earnings per share, return on
stockholder's equity, or return to stockholders. Performance Shares may not be
sold, assigned, transferred, pledged or otherwise encumbered during the relevant
performance period. Performance Shares may be paid in cash, shares of Common
Stock or shares of Restricted Stock in such portions as the Committee may
determine. An employee must be employed at the end of the performance period to
receive payments of Performance Shares; provided, however, in the event that an
employee's employment is terminated by reason of death, disability, retirement
or other reason approved by the Committee, the Committee may limit such
forfeiture in its sole discretion. In the case of a Change in Control of the
Company (as defined in the 1993 Plan), an employee may receive his or her
Performance Shares in the discretion of the Committee, or as may otherwise be
provided in the employee's Performance Share award.
During January 1998, the Board of Directors of the Company approved the award of
incentive stock options to certain employees to acquire 85,000 shares of AmBase
Common Stock at exercise prices between $3.65 and $4.02 per share, pursuant to
the 1993 Plan.
Under the Company's 1985 Stock Option Plan (the "1985 Plan"), options to
purchase shares of Common Stock could be granted to salaried employees. The 1985
Plan provided for the granting of up to 2,000,000 shares as incentive stock
options and/or nonqualified stock options through May 22, 1995. No additional
stock options can be awarded under the 1985 Plan. As of December 31, 1997,
1,750,000 shares are reserved for issuance under the 1985 Plan. The exercise
price of incentive stock options could not be less than 100% of the fair market
value of the Company's Common Stock on the date of grant, with a maximum life of
ten years, and may not be exercised to purchase stock until vesting requirements
have been met.
-26-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Incentive plan activity is summarized as follows:
================================================================================
1993 Stock 1985 Stock
(shares in thousands) Incentive Plan Option Plan
================================================================================
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
================================================================================
Outstanding at December 31, 1994 - $ - 1,375 $0.14
Granted - - 625 0.23
Forfeited - - (237) 0.29
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995 - - 1,763 0.15
Granted 100 2.09 - -
Forfeited - - - -
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 100 2.09 1,763 0.15
Granted 5 2.84 - -
Forfeited - - (13) 0.21
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 105 $2.13 1,750 $0.15
================================================================================
Options exercisable at:
December 31, 1995 - $ - 1,150 $ 0.11
December 31, 1996 - - 1,456 0.13
December 31, 1997 50 2.09 1,750 0.15
================================================================================
================================================================================
1993 Stock 1985 Stock
Incentive Plan Option Plan
================================================================================
Weighted average fair value of
options granted during:
1995 $ - $ 0.15
1996 1.35 -
1997 1.81 -
================================================================================
The following table summarizes information about the Company's stock options
outstanding and exercisable under the 1985 Plan and 1993 Plan at December 31,
1997, as follows:
================================================================================
(shares in thousands) Options Outstanding Options Exercisable
================================================================================
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Price Shares Price
================================================================================
$0.11 1,150 5 years $ 0.11 1,150 $ 0.11
$0.20 to 0.23 600 3 years 0.23 600 0.23
$2.09 100 9 years 2.09 50 2.09
$2.84 5 9 years 2.84 - -
- --------------------------------------------------------------------------------
Total 1,855 1,800
================================================================================
-27-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
The details of the Company's incentive plans are summarized above. The Company
adopted the disclosure only provisions of Statement 123 in 1996, but continues
to apply APB 25 in accounting for employee stock options. No compensation
expense, attributable to stock incentive plans, was charged to earnings during
1997, 1996 and 1995. The fair value of stock options granted by the Company in
1996 and 1995 used to compute proforma net income and earnings per share
disclosures is the estimated fair value at date of grant, using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield
0% for all years, expected historical volatility of 0.84, 0.84 and 0.87,
risk-free interest rates of 5.84%, 6.15% and 5.57%, and weighted average
expected life of the options of 4 years. If the Company had elected to recognize
compensation cost for stock options based on the fair value at date of grant for
stock options under the 1993 Plan and the 1985 Plan, consistent with the method
prescribed by Statement 123, net income and net income per share would have been
changed to the proforma amounts indicated below.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, and given the
substantial appreciation in the price per share of the Company's Common Stock
during 1997 and 1996, 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 proforma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's proforma
information for the years ended December 31 follows:
================================================================================
(in thousands, except per share data) 1997 1996 1995
================================================================================
Net income (loss)
As reported $(1,084) $14,032 $4,068
Proforma (1,171) 13,959 4,038
================================================================================
Per share data
As reported $(0.02) $ 0.31 $ 0.09
Proforma (0.02) 0.31 0.09
================================================================================
-28-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 11 - Income Taxes
The components of income tax (expense) benefit for the years ended December 31
are as follows:
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Income tax (expense) benefit:
Continuing operations $ 191 $ 7,189 $(1,997)
Discontinued investment management operations - (53) (50)
================================================================================
The components of pretax income (loss) and the difference between income taxes
from continuing operations computed at the statutory federal rate of 35% in
1997, 1996 and 1995, and the provision for income taxes from continuing
operations for the years ended December 31 follows:
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Income (loss) from continuing operations
before income taxes $(1,275) 6,636 $ 6,005
================================================================================
Tax (expense) benefit:
Tax at statutory federal rate $ 446 $(2,323) $(2,102)
Prior year tax refund 475 7,613 -
Benefit of operating loss carryforwards - 2,323 -
Accounting loss benefit not recognized (446) - -
Accounting loss benefit recognized - - 2,102
Prior years' issues - - (1,800)
Federal income taxes - (76) -
State income taxes (284) (348) (197)
- --------------------------------------------------------------------------------
$ 191 $ 7,189 $(1,997)
================================================================================
The composition of income tax (expense) benefit from continuing operations for
the year ended December 31 is as follows:
================================================================================
in thousands) 1997 1996 1995
================================================================================
Current:
Federal $ - $ (76) $ -
State (284) (348) (197)
- --------------------------------------------------------------------------------
(284) (424) (197)
- --------------------------------------------------------------------------------
Deferred (primarily federal):
Prior year tax refund 475 7,613 -
Prior years' issues - - (1,800)
- --------------------------------------------------------------------------------
475 7,613 (1,800)
- --------------------------------------------------------------------------------
$ 191 $ 7,189 $(1,997)
================================================================================
The Company contractually assumed the tax liabilities of City, which, prior to
September 1985, owned all the outstanding shares of Common Stock of the Company.
Included in the income tax benefit during 1996 is a federal and state tax
provision of $424,000. The Company also contractually assumed certain tax
liabilities of The Home and its subsidiaries from September 1985 through 1989.
For all periods through 1992, the Internal Revenue Service ("IRS") and the
Company do not agree with respect to only two issues, withholding taxes in
connection with a Netherlands Antilles finance subsidiary of City, and "Fresh
Start", an insurance industry issue. During 1996, the Company received a 1977
income tax refund of $7,613,000; as a result, City no longer remains open for
refunds. This amount was recognized as an income tax benefit in the accompanying
1996 Consolidated Statement of Operations, based on management's continuing
review of the overall tax liability position of the Company. See Note 13 to the
Company's consolidated financial statements, Legal Proceedings, Disputes with
Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh
Start, for additional details.
-29-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
During 1996, in connection with the completion by the IRS of the Company's 1985
to 1991 federal income tax audits (excluding Fresh Start), the Company made
payments to the IRS totaling $1,995,000. These amounts were previously reserved
for and charged against the income tax reserves account. During the first
quarter of 1997, $475,000 of income taxes were refunded as the result of an
overpayment to the IRS for 1988 through 1991 tax years. This amount was recorded
as an income tax benefit in the first quarter of 1997. The federal income tax
adjustments from the 1985 to 1992 audits (excluding Fresh Start) did not result
in additional payments of state or local income taxes. The IRS has completed its
review of the Company's federal income tax return for 1992 with no significant
adjustments. The Company's federal income tax returns for years subsequent to
1992 have not been reviewed by the IRS. New York State recently completed their
examination of the Company's income tax returns for tax years 1990 to 1992,
which resulted in zero tax assessment.
As a result of the OTS's December 4, 1992 placement of Carteret in receivership,
under the management of the Resolution Trust Corporation ("RTC")/Federal Deposit
Insurance Corporation ("FDIC"), and proposed Treasury Reg. S.1.597-4(g), the
Company had previously filed its 1992 through 1995 federal income tax returns
with Carteret disaffiliated from the Company's consolidated federal income tax
return. Based upon the impact of Treasury Reg. S.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. S.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"), but this information has not yet been received.
Based on the Company not making the election decision, as described above, and
upon receipt of the requested information from the RTC/FDIC, the Company will
amend its 1992 through 1996 consolidated federal income tax returns to include
the federal income tax effects of Carteret and Carteret FSB. Based on the
information currently available, the Company does not believe a material
increase in the Company's tax liabilities will result.
The Company anticipates that, as a result of filing a consolidated federal
income tax return with Carteret FSB, 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. The NOL
carryforwards generated from the Company's tax basis in Carteret/Carteret FSB
would expire no earlier than 2007, and would be available to offset future
taxable income, in addition to the $30 million of NOL carryforwards as further
detailed below.
In connection with the completion of the federal tax audit years (excluding
Fresh Start) through 1992 (excluding the $170 million of tax NOL carryforwards
from the Company's tax basis in Carteret/Carteret FSB), as noted above and the
Company's federal income tax returns as filed from 1993 to 1996 (subject to IRS
audit adjustments), at December 31, 1997 the Company has NOL carryforwards
available to reduce future federal taxable income, which expire if unused, as
follows:
2006 $ 3,000,000
2007 12,000,000
2008 3,000,000
2009 7,000,000
2010 5,000,000
---------
$30,000,000
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 alternative minimum tax credit carryforwards, which are not subject to
expiration.
Under Statement 109, the Company has calculated a net deferred tax asset of $33
million as of December 31, 1997 and 1996, arising primarily from NOL's, the
excess of book over tax reserves and alternative minimum tax credits (not
including the anticipated tax effects of the approximately $170 million of NOL's
expected to be generated from the Company's tax basis in Carteret, resulting
from the election decision, as more fully described above). A valuation
allowance has been established for the entire net deferred tax asset, as
management, at the current time, has no basis to conclude that realization is
more likely than not.
-30-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
During 1995, the Company recorded as additional income tax expense a $1,800,000
increase in the income tax reserves. The increase in the income tax reserves was
the result of the continuing review of the income tax reserves including
additional reserves for amounts considered unrealizable. In addition, included
in income tax expense is a state tax provision of $197,000 in 1995.
Note 12 - Commitments and Contingencies
Future minimum rental payments, principally for office space, under
noncancellable operating leases at December 31, 1997, are: 1998, $74,000; 1999,
$79,000; 2000, $80,000; 2001, $20,000; 2002, $0 and thereafter, $0. Rent expense
charged to earnings was $67,000, $46,000 and $142,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Note 13 - Legal Proceedings
(a) The Company is a defendant in a number of lawsuits or proceedings, including
the following:
Rolo and Tenerelli v. City Investing Company Liquidating Trust, et al. This is a
purported class action filed in the United States District Court for the
District of New Jersey (the "District Court"). Plaintiffs assert a variety of
Federal and state causes of action in connection with an alleged fraudulent
scheme involving the marketing and sale of homesites and houses by General
Development Corporation ("GDC"), a former subsidiary of City. Plaintiffs have
named as defendants the Company and Carteret, as well as a number of directors
and other financial institutions that had business dealings with GDC. On
December 27, 1993, the District Court entered an Order and Opinion dismissing
the action against all parties (amended on January 17, 1994, to include the
dismissal of Carteret Bancorp, Inc. and Carteret). Plaintiffs appealed the order
to the United States Court of Appeals for the Third Circuit which affirmed the
order and subsequently remanded the case for reconsideration in light of an
intervening decision. Upon remand, the District Court again dismissed
plaintiffs' complaint on August 24, 1995 and denied plaintiffs' petition for
reconsideration. Plaintiffs have appealed the District Court's most recent order
to the Court of Appeals where the case remains pending. The parties have
completed briefing and argument and are awaiting a decision by the Court of
Appeals on the plaintiffs' appeal of the dismissal of the case by the District
Court.
In United States v. Brown, an action commenced in the United States District
Court for the Southern District of Florida, certain officers of GDC, none of
whom were officers of the Company, were convicted of violating the Federal Mail
Fraud Statute and certain other related statutes. This development led two of
GDC's insurers, National Union Fire Insurance Co. and Pacific Insurance Co., to
seek to terminate their directors and officers' insurance coverage in two
actions pending in the United States District Court for the Southern District of
Florida, Pacific Insurance Co. v. Brown, et al. and National Union Fire Ins. Co.
v. Brown, et al. During the fourth quarter of 1996, the U.S. Court of Appeals
for the 11th Circuit reversed the conviction of the officers of GDC. Although
the Company is not a party to these actions, certain individuals who were
directors of GDC and the Company are defendants. Should the insurers be
successful in the termination of their coverage, it is anticipated that the
Company would be exposed to claims for indemnification. The parties to this
litigation are currently engaged in settlement negotiations.
Marshall Manley v. AmBase Corporation. On November 14, 1996, Marshall Manley
("Manley"), a former President, Chief Executive Officer and Director of the
Company, commenced an action against the Company, seeking indemnification from
the Company pursuant to a May 27, 1993 employment settlement agreement between
Manley and the Company. Manley seeks reimbursement of certain alleged payments
he made to the Trustee in the bankruptcy proceedings of the law firm of Finley,
Kumble, Wagner, Heine, Underberg, Manley & Casey (the "Manley action"), arguing
that he served at such firm at the request of the Company. The Manley action is
pending in the United States District Court for the Southern District of New
York. The Company filed its answer on January 21, 1997, raising substantial
affirmative defenses which the Company intends to vigorously pursue. On October
30, 1997, AmBase amended its Answer and Counterclaims to include a claim of
fraud against Manley. In December 1997, Manley moved for summary judgment in his
favor. The Company raised substantial opposition to the motion and moved to
strike certain of Manley's affirmative defenses which Manley raised in
connection with the Company's fraud claim against Manley. Oral argument on the
motions is set for May 15, 1998.
-31-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Disputes with Internal Revenue Service. The Company contractually assumed the
tax liabilities of City, which, prior to September 1985, owned all the
outstanding shares of Common Stock of the Company. The Company also
contractually assumed certain tax liabilities of The Home and its subsidiaries
from September 1985 through 1989. For all periods through 1991, the IRS and the
Company do not agree with respect to only two issues; (1) withholding taxes in
connection with a Netherlands Antilles finance subsidiary of City, and (2)
"Fresh Start", an insurance industry issue.
(1) Withholding Taxes (Netherlands Antilles). On May 11, 1995, the IRS issued a
Notice of Deficiency for withholding taxes on interest payments for the years
1979 through 1985. In the Notice of Deficiency, the IRS contends that City's
wholly owned Netherlands Antilles finance subsidiary should be disregarded for
tax purposes. The Company vigorously contested the IRS's position in accordance
with the IRS's internal appeals procedures. In January 1992, the National Office
of the IRS issued technical advice supporting the auditing agent's position. In
October 1992, the Company appealed this technical advice to the National Office.
The National Office advised the Company that it expected to issue technical
advice supporting the auditing agent's position, whereupon, the Company advised
the IRS that it was withdrawing its technical advice request.
On June 30, 1995, the Company filed a petition in the United States Tax Court
contesting the Notice of Deficiency. The IRS filed its answer on August 23,
1995. The Company filed a motion for summary judgment in its favor on February
13, 1996. On April 17, 1996, the IRS filed a Notice of Objection to the
Company's motion for summary judgment. The Tax Court requested, and the Company
filed on July 3, 1996, a reply to the IRS's Notice of Objection. On September
19, 1996, the Tax Court denied the Company's motion for summary judgment without
prejudice. Based on the Tax Court's examination of the record and the status of
the discovery process, the Tax Court concluded that summary adjudication at this
time was inappropriate. The Tax Court directed the parties to engage in full and
complete discovery as expeditiously as possible. A trial was held in this case
on March 24, 1997, after which the Judge asked the IRS and the Company to submit
post-trial briefs, which have subsequently been submitted to the Tax Court. If
the IRS were to prevail on this issue, the Company would be liable for taxes and
interest in excess of the Company's financial resources.
In a case dealing with a similar withholding tax issue, the Tax Court ruled in
favor of the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana")
in November 1995. The Tax Court rejected the IRS's contention that interest paid
to Northern Indiana's foreign subsidiary was subject to United States tax
withholding. The IRS has appealed this decision (Northern Indiana Public Service
Co. v. Commissioner, 105 T.C. No. 22) to the United States Court of Appeals for
the 7th Circuit ("Appeals Court"). The Appeals Court affirmed the Tax Court's
ruling in favor of Northern Indiana. Although the Appeals Court decision in the
Northern Indiana case could be beneficial to the Company's case, it is not
necessarily indicative of the ultimate result of the final settlement of the
Netherlands Antilles issue between the Company and the IRS.
Based on an evaluation of the IRS's contention, counsel has advised the Company
that, although the outcome in litigation can by no means be assured, the Company
has a very strong case and should prevail. Notwithstanding counsel's opinion and
the Tax Court's ruling in the Northern Indiana case, it is not possible at this
time to determine the final disposition of this issue, when the issues will be
resolved, or their final financial effect. A final disposition of this issue in
the Company's favor would have a material, positive effect on the Company's
Statement of Operations and Financial Condition.
(2) Fresh Start. The one issue remaining for tax year 1987 is the Company's
entitlement to Fresh Start transition relief under certain insurance company tax
provisions of the Tax Reform Act of 1986 (other insurance industry taxpayers
face similar issues under the Fresh Start provision). On March 13, 1996, the IRS
issued a deficiency notice to the Company on the Fresh Start issue which asserts
an increase in tax for the year 1987. If the IRS is successful, the amount of
the deficiency would be material. On June 7, 1996, the Company filed a petition
with the United States Tax Court (the "Tax Court") to dispute the entire amount
of the asserted deficiency and to redetermine the tax, and on July 23, 1996, the
IRS filed its answer. The IRS and the Company began engaging in the informal
discovery process customary in the Tax Court.
-32-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
On July 22, 1997, another insurance company taxpayer, Atlantic Mutual Insurance
Company ("Atlantic Mutual"), filed a petition for certiorari in its own case
seeking review of the Fresh Start issue by the United States Supreme Court (the
"Supreme Court"). In response, on September 19, 1997, the United States filed
its brief with the Supreme Court in that case in which it recommended that the
Supreme Court hear the case. The Supreme Court granted the petition on October
20, 1997, has received briefs, and heard oral argument on March 2, 1998.
A decision on the merits by the Supreme Court in Atlantic Mutual may control the
outcome of the Company's own case in the Tax Court. Because it is expected that
the Supreme Court will address the reserve strengthening issue, the Company and
the IRS have advised the Tax Court in the Company's own case that, in the
interests of efficiency, further informal discovery and negotiation of a
stipulation of facts have been deferred pending the Supreme Court's ruling in
Atlantic Mutual. No assurances can be given concerning the outcome of the
Company's litigation on this issue.
The actions against the Company, including those identified in (a) above, are in
various stages. Nevertheless, the allegations and claims are material and, if
successful, could result in substantial judgments against the Company. To the
extent the aggregate of any such judgments were to exceed the resources
available, these matters could have a material adverse effect on the Company's
financial condition and results of operations. Due to the nature of these
proceedings, the Company and its counsel are unable to express any opinion as to
their probable outcome.
(b) Supervisory Goodwill Litigation:
During the third quarter of 1993, the Company filed a claim against the United
States, in the United States Court of Federal Claims (the "Court of Federal
Claims"), based upon the impact of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") on the Company's investment in Carteret.
Approximately 120 other similar so-called "supervisory goodwill" cases,
commenced in recent years by other financial institutions and/or their
shareholders, are pending in the Court of Federal Claims. Three of these cases,
Winstar Corp. v. United States, Glendale Federal Bank, FSB v. United States, and
Statesman Savings Holding Corp. v. United States (the "consolidated cases"),
which involve many of the same issues raised in the Company's suit, were
appealed to the United States Supreme Court (the "Supreme Court"). On
July 1, 1996, the Supreme Court issued a decision in the consolidated cases. The
Supreme Court's decision affirmed the lower Court's grant of summary judgment in
favor of the plaintiffs on the issue of liability and remanded the cases for a
determination of damages. Although the decision in the consolidated cases is
beneficial to the Company's case, it is not necessarily indicative of the
ultimate outcome of the Company's action. On September 18, 1996, the Court of
Federal Claims entered an Omnibus Case Management Order that will govern further
proceedings in the Company's action and most of the other so-called
"Winstar-related" cases. On March 14, 1997, the Court entered an order
permitting the FDIC to intervene as an additional plaintiff in forty-three
cases, including the Company's case, but not allowing the FDIC to be substituted
as the sole plaintiff in those cases. On December 22, 1997, the Court issued a
decision which addressed eleven "common issues" applicable to a number of the
Winstar-related cases, and rejected the government's arguments with respect to
each such issue. Although this decision is also beneficial to the Company's
case, it is not necessarily indicative of the ultimate outcome of the Company's
action. Case-specific discovery in thirty Winstar- related cases, including the
Company's case, is scheduled to begin in April 1998. A trial date has not yet
been set in the Company's case. No assurance can be given regarding the ultimate
outcome of the litigation.
-33-
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 14 - Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, and accounts payable and accrued liabilities approximate fair value
due to the short-term nature of these instruments. The fair value of investment
securities - held to maturity are based on current market quotations. The fair
value of investment securities - available for sale is based upon the December
1997 cost for these privately placed shares. The carrying value of applicable
other liabilities approximates their fair value.
Note 15 - Supplemental Disclosure of Cash Flow Information
Additional information regarding cash flow for the years ended December 31 is as
follows:
================================================================================
(in thousands) 1997 1996 1995
================================================================================
Cash received (paid) during the period:
Income tax refunded (paid), net $ 244 $5,190 $ (173)
================================================================================
In 1997, income taxes refunded include $475,000 of taxes refunded as a result of
an overpayment to the IRS for 1988 through 1991 tax years. In 1996, income taxes
refunded (paid) include a 1977 tax refund of $7,613,000 and $1,995,000 of
payments to the IRS, principally for the 1985 through 1991 tax years.
In June 1995 the Company received, with respect to 1990 and 1991, $1,690,000
from The Home in connection with a tax sharing agreement between the Company and
The Home.
-34-
AMBASE CORPORATION AND SUBSIDIARIES
Note 16 - Quarterly Financial Information (unaudited)
Summarized quarterly financial information follows:
================================================================================
(in thousands, except First Second Third Fourth Full
per share data) Quarter Quarter Quarter Quarter Year
================================================================================
1997:
Operating expenses $ 672 $ 707 $ 618 $ 1,998 $ 3,995
- --------------------------------------------------------------------------------
Operating loss (672) (707) (618) (1,998) (3,995)
Interest income 689 663 656 653 2,661
Other income - - 55 4 59
- --------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes 17 (44) 93 (1,341) (1,275)
Income tax benefit
(expense)(a) 405 (70) (73) (71) 191
- --------------------------------------------------------------------------------
Income (loss) from
continuing operations 422 (114) 20 (1,412) (1,084)
Income from discontinued
investment management
operations, net of
income taxes - - - - -
- --------------------------------------------------------------------------------
Net income (loss) $ 422 $ (114) $ 20 $(1,412) $(1,084)
================================================================================
Earnings per common
share - basic:
Income (loss) from
continuing operations $ 0.01 $ - $ - $ (0.03) $ (0.02)
Income from discontinued
operations - - - - -
- --------------------------------------------------------------------------------
Net income (loss) $ 0.01 $ $ $ (0.03) $ (0.02)
================================================================================
Earnings per common share
- assuming dilution:
Income (loss) from
continuing operations $ 0.01 $ - $ - $ (0.03) $ (0.02)
Income from discontinued
operations - - - - -
- --------------------------------------------------------------------------------
Net income (loss) $ 0.01 $ - $ - $ (0.03) $ (0.02)
================================================================================
(a)Includes $475,000 of taxes refunded. See Item 7 - Results of Operations for a
further discussion.
1996:
Operating expenses $ 639 $ 664 $ 726 $ 1,824 $ 3,853
- --------------------------------------------------------------------------------
Operating loss (639) (664) (726) (1,824) (3,853)
Interest income 603 655 690 693 2,641
Other income - 20 - 10 30
Other income - litigation
and contingency
reserves reversal(b) - 8,000 - - 8,000
Realized loss on investment
securities - available
for sale - (182) - - (182)
- --------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes (36) 7,829 (36) (1,121) 6,636
Income tax benefit
(expense) c) 7,560 (74) (214) (83) 7,189
- --------------------------------------------------------------------------------
Income (loss) from
continuing operations 7,524 7,755 (250) (1,204) 13,825
Income from discontinued
investment management
operations, net of
income taxes 18 18 23 148 207
- --------------------------------------------------------------------------------
Net income (loss) $7,542 $7,773 $(227) $(1,056) $14,032
================================================================================
Earnings per common
share - basic:
Income (loss) from
continuing operations $0.17 $0.17 $ - $ (0.03) $ 0.31
Income from discontinued
operations - - - - -
- --------------------------------------------------------------------------------
Net income (loss) $0.17 $0.17 $ - $ (0.03) $ 0.31
================================================================================
Earnings per common
share - assuming
dilution:
Income (loss) from
continuing operations $0.16 $0.17 $ - $ (0.03) $ 0.30
Income from discontinued
operations - - - - -
- --------------------------------------------------------------------------------
Net income (loss) $0.16 $0.17 $ - $ (0.03) $ 0.30
================================================================================
(b) Represents a reduction in the Company's litigation and contingency reserves.
See Item 7 - Financial Condition for a further discussion. (c)Includes a
non-recurring income tax benefit of $7,613,000 as a result of the receipt of
a 1977 income tax refund. See Item 7 - Financial Condition for a further
discussion.
-35-
AMBASE CORPORATION AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers required by this item is set forth
following Item 4 of Part I of this report under the caption "Executive Officers
of the Registrant", pursuant to General Instruction G to Form 10-K. For the
information required to be set forth by the Company in response to this item
concerning directors of the Company, see the Company's definitive Proxy
Statement for its Annual Meeting of Shareholders to be held on May 28, 1998,
under the caption "Information Concerning the Board and its Committees", which
is incorporated herein by reference, which the Company intends to file with the
Securities and Exchange Commission not later than 120 days after the close of
its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
For the information required to be set forth by the Company in response to this
item, see the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 28, 1998, under the caption "Executive
Compensation", which is incorporated herein by reference, which the Company
intends to file with the Securities and Exchange Commission not later than 120
days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For the information required to be set forth by the Company in response to this
item, see the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 28, 1998, under the caption "Stock Ownership",
which is incorporated herein by reference, which the Company intends to file
with the Securities and Exchange Commission not later than 120 days after the
close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information required to be set forth by the Company in response to this
item, see the Company's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held on May 28, 1998, under the caption "Certain
Relationships and Related Transactions", which is incorporated herein by
reference, which the Company intends to file with the Securities and Exchange
Commission not later than 120 days after the close of its fiscal year.
-36-
AMBASE CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Index to Financial Statements: Page
AmBase Corporation and Subsidiaries:
Report of Independent Accountants..................................12
Consolidated Statements of Operations..............................13
Consolidated Balance Sheets........................................14
Consolidated Statements of Changes in Stockholders' Equity.........15
Consolidated Statements of Cash Flows..............................16
Notes to Consolidated Financial Statements.........................17
2. Index to Financial Statements Schedules:
All schedules have been omitted because they are not applicable.
3. Exhibits
3A. Restated Certificate of Incorporation of AmBase Corporation (as
amended through February 12, 1991) (incorporated by reference to
Exhibit 3A to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990).
3B. By-Laws of AmBase Corporation (as amended through March 15, 1996),
(incorporated by reference to Exhibit 3B to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
4. Rights Agreement dated as of February 10, 1986 between the Company
and American Stock Transfer and Trust Co. (as amended March 24, 1989,
November 20, 1990, February 12, 1991, October 15, 1993 and February
1, 1996) (incorporated by reference to Exhibit 4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990, the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1993 and the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10A. 1985 Stock Option Plan for Key Employees of AmBase and its
Subsidiaries (incorporated by reference to Exhibit 10B to the
Company's Annual Report on Form 10-K for the year ended December 31,
1989).
10B. 1993 Stock Incentive Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement for the Annual Meeting of
Stockholders held on May 28, 1993).
10C. 1994 Senior Management Incentive Compensation Plan (incorporated
by reference to Exhibit A to the Company's Proxy Statement for the
Annual Meeting of Stockholders held on May 27, 1994).
10D. AmBase Officers and Key Employees Stock Purchase and Loan
Plan (incorporated by reference to Exhibit 10E to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989).
10E. AmBase Supplemental Retirement Plan (incorporated by reference to
Exhibit 10C to the Company's Annual Report on Form 10-K for the year
ended December 31, 1989).
10F. Assignment and Assumption Agreement dated as of August 30, 1985,
between the Company and City (incorporated by reference to Exhibit
28 to the Company's Current Report on Form 8-K dated September 12,
1985).
-37-
AMBASE CORPORATION AND SUBSIDIARIES
10G. Employment Agreement dated as of June 1, 1991 between Richard A.
Bianco and the Company, as amended dated as of December 30, 1992
(incorporated by reference to Exhibit 10G to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992), and as
amended February 24, 1997 (incorporated by reference to Exhibit 10G
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10H. Stock Purchase Agreement among AmBase Corporation, The Home
Insurance Company and TVH Acquisition Corporation, dated as of
September 28, 1990 and amended as of December 12, 1990, as of
December 21, 1990 and as of February 4, 1991 (incorporated by
reference to Exhibit 10HH to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990).
10I. Indemnity Agreement dated as of February 13, 1991 among the Company,
The Home Insurance Company and TVH Acquisition Corporation
(incorporated by reference to Exhibit 10JJ to the Company's Annual
Report on Form 10-K for the year ended December 31, 1990).
10J. Consulting Agreement dated as of February 13, 1991 between the
Company and TVH Acquisition Corporation (incorporated by reference to
Exhibit 10KK to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990).
22. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedule
Exhibits, except as otherwise indicated above, are filed herewith.
(b) Form 8-K
The Company was not required to file a Current Report on Form 8-K during the
quarter ended December 31, 1997.
-38-
AMBASE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 31st day of March
1998.
AMBASE CORPORATION
RICHARD A. BIANCO
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 31st day of March 1998.
RICHARD A. BIANCO JOHN P. FERRARA
Chairman, President and Vice President, Chief Financial Officer
Chief Executive Officer and Controller
(Principal Financial and Accounting Officer)
ROBERT E. LONG JOHN B. COSTELLO
Director Director
-39-
AMBASE CORPORATION AND SUBSIDIARIES
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS:
Richard A. Bianco John B. Costello Robert E. Long
Chairman, President and Private Investor President and
Chief Executive Officer Chief Executive Officer
AmBase Corporation Business News Network, Inc.
AMBASE OFFICERS:
Richard A. Bianco John P. Ferrara
Chairman, President and Vice President, Chief Financial Officer
Chief Executive Officer and Controller
INVESTOR INFORMATION
ANNUAL MEETING OF STOCKHOLDERS CORPORATE HEADQUARTERS
The 1998 Annual Meeting is AmBase Corporation
currently scheduled to be held at 51 Weaver Street, Bldg. 2
9:00 a.m. Eastern Daylight Time, Greenwich, CT 06831-5155
on Thursday, May 28, 1998, at: (203) 532-2000
Hyatt Regency Hotel
1800 East Putnam Avenue
Greenwich, CT 06870
STOCKHOLDER INQUIRIES
COMMON STOCK TRADING
Stockholder inquiries, including
AmBase stock is traded through one requests for the following:(i) change
or more market-makers with quotations of address; (ii) replacement of lost
made available in the "pink sheets" stock certificates; (iii) Common Stock
published by the National Quotation name registration changes; (iv)
Bureau, Inc. Quarterly Reports on Form 10-Q; (v)
Annual Reports on Form 10-K; (vi)
ISSUE ABBREVIATION TICKER SYMBOL proxy material; and (vii) information
regarding stockholdings, should be
Common AmBase ABCP directed to:
Stock
AMERICAN STOCK TRANSFER AND TRUST
TRANSFER AGENT AND REGISTRAR COMPANY
40 Wall Street - 46th Floor
AMERICAN STOCK TRANSFER AND TRUST New York, NY 10005
COMPANY Attention: Shareholder Services
40 Wall Street - 46th Floor (800) 937-5449 or (718) 921-8200
New York, NY 10005
Attention: Shareholder Services
(800) 937-5449 or (718) 921-8200
INDEPENDENT ACCOUNTANTS NUMBER OF STOCKHOLDERS
PRICE WATERHOUSE LLP As of January 30, 1998, there were
1177 Avenue of the Americas approximately 23,000 stockholders.
New York, NY 10036
-40-
EXHIBITS ATTACHED WITH THIS FORM 10-K
Exhibit
No. Description
- ------- -----------
22 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
-41-