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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, 1996
|_| 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.)
Greenwich Office Park, Building 2, 51 Weaver Street, 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 31, 1997, there were 44,533,519 shares of registrant's Common Stock
outstanding. At January 31, 1997 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 $2.77 per share, was approximately $101 million. The Common Stock
constitutes registrant's only outstanding security.
Portions of the registrant's definitive Proxy Statement for its 1997 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 36.
AMBASE CORPORATION
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
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...................................3
Item 6. Selected Financial Data...........................................4
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................4
Item 8. Financial Statements and Supplementary Data......................11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...........................35
PART III
Item 10. Directors and Executive Officers of the Registrant...............35
Item 11. Executive Compensation...........................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management...35
Item 13. Certain Relationships and Related Transactions...................35
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..........................................36
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"), which was sold on February 13, 1991
to Home Holdings, Inc. ("Home Holdings"). 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.
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 5 to the Company's
consolidated financial statements for further information. The Company's
remaining subsidiaries are inactive.
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. The receivable arose
pursuant to The Home sale agreement, under which Home Holdings agreed to pay $48
million to the Company over a period of years to meet certain specified
obligations of the Company, as incurred, relating to litigation, taxes and
administrative expenses. During 1996, proceeds of $3,997,000 from the Home
Holdings receivable were collected, reducing the receivable to $13,186,000 at
December 31, 1996. As the Company has collected the full amounts of the
receivable with respect to litigation and administrative expenses, the remaining
receivable relates principally to taxes. See Item 8 - Note 4 to the Company's
consolidated financial statements for further information regarding the
Company's receivable from Home Holdings.
The Company had 9 employees at December 31, 1996.
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 10 and 12 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 12 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
At December 31, 1996, the Company's liabilities, including reserves for
contingent and alleged liabilities, exceeded total recorded assets by
$24,097,000. 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 10 and 12 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.
-1-
DISCONTINUED OPERATIONS
For a discussion of discontinued investment management operations, refer to Item
8 - Note 5 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 Greenwich Office Park, Building 2, 51 Weaver Street, 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 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 10 and 12 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.
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. In addition, $1,195,000 of payments for judgments,
settlements and legal fees were charged against the litigation and contingency
reserves during 1996, thereby reducing the litigation and contingency reserves
by a total of $9,195,000. At December 31, 1996, the litigation and contingency
reserves were $2,954,000. For a discussion of alleged tax liabilities and
lawsuits, see Item 8 - Notes 10 and 12 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, 1996. For a further
discussion, see Item 8 - Note 10, Income Taxes and Note 12, 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 12 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
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.
This amount consisted of a $7,200,000 reduction resulting from the settlement of
certain litigation at amounts less than claimed and previously anticipated,
offset by a $1,850,000 increase due to the continuing review of the costs
associated with litigation and proceedings pending against the Company, based
upon progress to date. In addition, $4,676,000 of payments for judgments,
settlements and legal fees were charged against the litigation and contingency
reserves during 1995, thereby reducing the litigation and contingency reserves
by a total of $10,026,000. At December 31, 1995, the litigation and contingency
reserves were $12,149,000.
In 1994, as part of the continuing reviews of the status of litigation pending
against the Company, the settlement of certain litigation at costs less than
previously anticipated, and a projected reduction of costs associated with
pending litigation based upon the progress to date, the Company recorded as
other income an $8,081,000 reduction in the litigation and contingency reserve.
Additionally, $4,337,000 of payments for judgments, settlements and legal fees
were charged against the litigation and contingency reserve during 1994, thereby
reducing the litigation and contingency reserves by a total of $12,418,000.
At December 31, 1994, the litigation and contingency reserves were $22,175,000.
-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 officers or directors of the Company.
Set forth below is a list of executive officers of the Company at December 31,
1996:
- ------------------------------------------------------------------------------
NAME AGE PRESENT TITLE
- ------------------------------------------------------------------------------
RICHARD A. BIANCO 49 Chairman, President and
Chief Executive Officer of
AmBase Corporation
JOHN P. FERRARA 35 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 currently serves as Vice President, Chief Financial Officer,
Treasurer and Controller of the Company, having previously served as Acting
Chief Financial Officer, Treasurer and Assistant Vice President and Controller
from January 1995 to December 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.
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. The National Association of Securities Dealers
("NASD") has declined to grant an exception to the requirements (specifically,
to the requirement that listing companies have a minimum net worth of $2
million) for listing the Common Stock of the Company on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") Small Capitalization
Issues list.
- ------------------------------------------------------------------------------
1996 1995
HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------
First Quarter $1.02 $0.46 $0.28 $0.19
Second Quarter 2.00 1.01 0.25 0.16
Third Quarter 2.50 1.68 0.74 0.20
Fourth Quarter 2.88 1.75 0.65 0.39
==============================================================================
As of January 31, 1997, there were approximately 21,000 beneficial owners of the
Company's Common Stock. No dividends were declared or paid on the Company's
Common Stock in 1996 or 1995. The Company does not intend to declare or pay
dividends in the foreseeable future.
-3-
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 12 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 6 to the Company's consolidated financial statements.
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 and the December 4, 1992 seizure of Carteret,
were retroactively reclassified to reflect their respective operations as
discontinued operations.
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
(IN THOUSANDS,
EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Operating revenue $ - $ - $ - $ - $ 1,070
Interest income, net 2,641 2,835 2,092 1,082 1,124
Income (loss) from continuing
operations, before
income taxes 6,636 6,005 6,246 (8,171) (3,776)
Income tax (expense) benefit 7,189 (1,997) (148) 11,354 (4,783)
Income (loss) from
continuing operations 13,825 4,008 6,098 3,183 (8,559)
Income from discontinued
investment management
operations, net of
income taxes 207 60 32 16 -
Income from discontinued
banking operations,
net of income taxes - - - - 32,017
Net income 14,032 4,068 6,130 3,199 23,458
PER SHARE DATA:
Income (loss) from
continuing operations 0.31 0.09 0.14 0.07 (0.21)
Income from discontinued
investment management
operations, net of
income taxes - - - - -
Income from discontinued
banking operations,
net of income taxes - - - - 0.79
Net income 0.31 0.09 0.14 0.07 0.58
Dividends - - - - -
===============================================================================
Total assets $66,229 $65,677 $70,113 $77,450 $70,365
Total stockholders' equity (24,097) (38,273) (42,204) (48,352) (51,964)
===============================================================================
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, 1996 aggregated $66,229,000, consisting
principally of cash and cash equivalents of $5,591,000, investment securities of
$47,259,000, and a $13,186,000 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. During 1996, proceeds of $3,997,000 from the Home
Holdings receivable were collected. For a further description, see Item 8 - Note
4 to the Company's consolidated financial statements. At December 31, 1996, the
Company's liabilities, including reserves for contingent and alleged
liabilities, as further described in Item 8 - Notes 10 and 12 to the Company's
consolidated financial statements, exceeded total recorded assets by
$24,097,000.
-4-
The cash needs of the Company for 1996 were principally satisfied by the receipt
of a 1977 tax refund, the continued collections of the receivable from Home
Holdings and interest income received on investment securities and cash
equivalents.
Management believes that the Company's cash resources are sufficient to continue
operations for 1997. Because of the nature of the contingent and alleged
liabilities described in Item 8 - Notes 10 and 12 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.
The cash needs of the Company in 1995 were principally satisfied by interest
income received on investment securities and cash equivalents, and the continued
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.
The cash needs of the Company in 1994 were principally satisfied by collections
of the receivable from Home Holdings, and interest income received on investment
securities and cash equivalents.
For the year ended December 31, 1996, cash of $1,622,000 was used for 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 for operating
activities, 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.
For the year ended December 31, 1994, cash of $9,154,000 was used for operating
activities, including payments charged against the litigation and contingency
reserve and the payment of operating expenses partially offset by interest
income and tax refunds received. During 1994, principally as a result of a net
increase in investment securities - held to maturity of $17,527,000, there was a
net decrease in cash and cash equivalents of $20,728,000.
There were no material commitments for capital expenditures as of December 31,
1996. 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 10 and 12 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 12 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
-5-
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, 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. In addition,
$1,195,000 of payments for judgments, settlements and legal fees were charged
against the litigation and contingency reserves during 1996, thereby reducing
the litigation and contingency reserves by a total of $9,195,000. At December
31, 1996, the litigation and contingency reserves were $2,954,000. For a
discussion of alleged tax liabilities and lawsuits, see Item 8 - Notes 10 and 12
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, 1996. For a further
discussion, see Item 8 - Note 10, Income Taxes and Note 12, 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 12 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
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.
This amount consisted of a $7,200,000 reduction resulting from the settlement of
certain litigation at amounts less than claimed and previously anticipated,
offset by a $1,850,000 increase due to the continuing review of the costs
associated with litigation and proceedings pending against the Company, based
upon progress to date. In addition, $4,676,000 of payments for judgments,
settlements and legal fees were charged against the litigation and contingency
reserves during 1995, thereby reducing the litigation and contingency reserves
by a total of $10,026,000. At December 31, 1995, the litigation and contingency
reserves were $12,149,000. In addition to the litigation and contingency
reserves, the Company had a reserve for income taxes of $81,082,000 at December
31, 1995.
In 1994, as part of the continuing reviews of the status of litigation pending
against the Company, the settlement of certain litigation at costs less than
previously anticipated, and a projected reduction of costs associated with
pending litigation based upon the progress to date, the Company recorded as
other income an $8,081,000 reduction in the litigation and contingency reserve.
Additionally, $4,337,000 of payments for judgments, settlements and legal fees
were charged against the litigation and contingency reserve during 1994, thereby
reducing the litigation and contingency reserve by a total of $12,418,000.
At December 31, 1994, the litigation and contingency reserves were $22,175,000.
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 10 and 12 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.
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 has been recognized
as an income tax benefit in the accompanying consolidated Statement of
Operations, based on management's continuing review of the overall tax liability
position 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.
-6-
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. 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. New York State has
completed their examination of the Company's income tax returns through 1989 and
is currently reviewing the Company's income tax returns for tax years 1990 to
1992. The Company's federal income tax return for 1992 is currently under
examination. The Company's federal income tax returns for years subsequent to
1992 have not been reviewed by the IRS.
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. The Tax Court has scheduled the
trial for the week of March 24, 1997. 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. Although 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. The Company will continue to monitor the appeal.
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
Notice of Deficiency to the Company, with respect to taxes owed for the year
1987. The Company has disputed the Notice of Deficiency and has claimed that it
is entitled to "Fresh Start" transition relief under certain insurance company
tax provisions of the Tax Reform Act of 1986. If the IRS is successful, the
amount of the deficiency would be material. The Company believes that it has
meaningful defenses. On June 7, 1996, the Company filed a petition with the
United States Tax Court for a redetermination of the tax, and on July 23, 1996,
the IRS filed its answer. The IRS and the Company are presently engaged in an
informal discovery process, customary in Tax Court. See Item 8 - Note 10, Income
Taxes, and Note 12, Legal Proceedings, Disputes with Internal Revenue Service,
Withholding Taxes (Netherlands Antilles) and Fresh Start, to the Company's
consolidated financial statements, for additional details.
-7-
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) 1996 1995 1994
- ------------------------------------------------------------------------------
OPERATING EXPENSES:
Compensation and benefits $2,969 $2,119 $2,372
Professional and outside services 457 661 969
Insurance 177 247 318
Occupancy 89 173 214
Other operating 161 132 126
- ------------------------------------------------------------------------------
3,853 3,332 3,999
- ------------------------------------------------------------------------------
Operating loss (3,853) (3,332) (3,999)
- ------------------------------------------------------------------------------
Interest income 2,641 2,835 2,092
Other income 30 147 -
Other income - litigation and contingency
reserves reversal 8,000 5,350 8,081
Other income - reduction of previously
estimated liabilities - 1,005 -
Realized gain (loss) on sale of
investment securities
- available for sale (182) - 72
- ------------------------------------------------------------------------------
Income from continuing operations
before income taxes 6,636 6,005 6,246
Income tax benefit (expense) 7,189 (1,997) (148)
- ------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS $13,825 $4,008 $6,098
==============================================================================
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 1997 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 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.
The Company recorded income from continuing operations of $6,098,000, or $0.14
per share, for the year ended December 31, 1994. These results include other
income of $8,081,000, due to the reduction of the litigation and contingency
reserves in 1994, as further described in Financial Condition, above. Excluding
this non-recurring item, the Company would have reported a loss from continuing
operations of $1,983,000, or $0.04 per share, for the year ended December 31,
1994.
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.
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. In addition, as further discussed below, the 1995
results include $3,332,000 of operating expenses and $2,835,000 of non-operating
revenue representing interest income earned on investment securities and cash
equivalents.
-8-
The Company recorded income from continuing operations before income taxes of
$6,246,000 for the year ended December 31, 1994. As further discussed below, the
1994 results include $3,999,000 of operating expenses and $2,092,000 of
non-operating revenue representing interest income earned on investment
securities and cash equivalents. The 1994 results also include $8,081,000 of
other income, due to the reduction in the litigation and contingency reserve as
further discussed in Financial Condition, above.
Compensation and benefits was $2,969,000 in 1996, $2,119,000 in 1995, and
$2,372,000 in 1994. The increase in 1996 is due to increased compensation costs
and the hiring by the Company of an employee who previously provided services as
an independent consultant. The decrease in 1995, compared with 1994, is
generally due to reductions in staff.
Professional and outside services decreased to $457,000 in 1996, from $661,000
in 1995, and $969,000 in 1994. The decrease in professional and outside services
of $204,000, or 31%, in 1996, compared to 1995, 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. The decrease in 1995 of $308,000, or 32%, compared to 1994, was
principally the result of a decrease in legal and other professional service
fees and the inclusion in 1994 of expenses incurred relating to a terminated
proposed acquisition. Expenses for professional and outside services in 1996,
1995, and 1994 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 1996, 1995 and 1994, due to management's
renegotiation of insurance programs.
Occupancy expenses decreased to $89,000 in 1996, from $173,000 in 1995, and
$214,000 in 1994, as a result of the relocation of Company's executive office,
the closing of an administrative office and the continued reduction of other
occupancy related expenses.
Interest income was $2,641,000 in 1996, $2,835,000 in 1995, and $2,092,000 in
1994. The decrease in 1996, compared to the 1995 period, was attributable to a
decreased yield on cash equivalents and investment securities. The increase in
1995, compared with 1994, was attributable to an increased yield and a higher
average level of cash equivalents and investment securities - held to maturity
in the 1995 period.
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 and a gain of $72,000 in 1994 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.
In 1994, the Company recorded as other income an $8,081,000 reduction in the
litigation and contingency reserves, as more fully described in Financial
Condition, above.
During 1996, the Company received a 1977 income tax refund of $7,613,000. This
amount has been recognized as an income tax benefit in the accompanying
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.
The income tax provision recorded in 1994 was attributable to state and local
taxes.
A reconciliation between income taxes computed at the statutory federal rate and
the provision for income taxes is included in Item 8 - Note 10 to the Company's
consolidated financial statements.
-9-
DISCONTINUED INVESTMENT MANAGEMENT OPERATIONS
See Item 8 - Note 5 to the Company's consolidated financial statements for
information.
RECENT DEVELOPMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). This statement is effective for the Company's
December 31, 1996 financial statements. 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 Item 8 - Note 9 to
the Company's consolidated financial statements.
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
-10-
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, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, 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 10 and 12, 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 Notes 1 and 4 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 10 and 12 to the
financial statements and the second paragraph of this report. The Company has a
net capital deficiency of approximately $24,000,000 at December 31, 1996. 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
February 20, 1997
-11-
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
- ------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
- ------------------------------------------------------------------------------
OPERATING EXPENSES:
Compensation and benefits $2,969 $2,119 $2,372
Professional and outside services 457 661 969
Insurance 177 247 318
Occupancy 89 173 214
Other operating 161 132 126
- ------------------------------------------------------------------------------
3,853 3,332 3,999
- ------------------------------------------------------------------------------
Operating loss (3,853) (3,332) (3,999)
- ------------------------------------------------------------------------------
Interest income 2,641 2,835 2,092
Other income 30 147 -
Other income - litigation and contingency
reserves reversal 8,000 5,350 8,081
Other income - reduction of previously
estimated liabilities - 1,005 -
Realized gain (loss) on sale of
investment securities - available for sale (182) - 72
- ------------------------------------------------------------------------------
Income from continuing operations
before income taxes 6,636 6,005 6,246
Income tax benefit (expense) 7,189 (1,997) (148)
- ------------------------------------------------------------------------------
Income from continuing operations 13,825 4,008 6,098
Income from discontinued investment
management operations, net of income taxes 207 60 32
- ------------------------------------------------------------------------------
NET INCOME $14,032 $4,068 $6,130
==============================================================================
PER SHARE DATA:
Income from continuing operations $ 0.31 $ 0.09 $ 0.14
Income from discontinued investment
management operations, net of income taxes - - -
- ------------------------------------------------------------------------------
NET INCOME $ 0.31 $ 0.09 $ 0.14
==============================================================================
DIVIDENDS $ - $ - $ -
==============================================================================
AVERAGE SHARES OUTSTANDING 44,534 44,534 44,422
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-12-
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents
(including $65 and $550 of restricted cash) $ 5,591 $ 7,752
Investment securities:
Held to maturity (market value $47,261 and $40,086) 47,259 40,055
Available for sale, carried at fair value
cost $213 at December 31, 1995) - 69
- ------------------------------------------------------------------------------
Total investment securities 47,259 40,124
- ------------------------------------------------------------------------------
Investment management fees receivable - 146
Receivable from Home Holdings, Inc. 13,186 17,183
Other assets 193 472
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 66,229 $ 65,677
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 1,428 $ 690
Supplemental retirement plan 4,724 4,798
Postretirement welfare benefits 1,527 1,633
Other liabilities 605 3,516
Litigation and contingency reserves 2,954 12,149
Income tax reserves 79,088 81,082
- ------------------------------------------------------------------------------
Total liabilities 90,326 103,868
- ------------------------------------------------------------------------------
Minority interest - 82
- ------------------------------------------------------------------------------
Commitments and contingencies - -
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Net unrealized losses on investment securities
- available for sale - (144)
Accumulated deficit (571,609) (585,641)
Treasury stock (647) (647)
- ------------------------------------------------------------------------------
Total stockholders' equity (24,097) (38,273)
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,229 $ 65,677
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-13-
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
NET UNREALIZED
LOSSES ON
INVESTMENT
COMMON PAID-IN SECURITIES-
(IN THOUSANDS) STOCK CAPITAL AVAILABLE ACCUMULATED TREASURY
FOR SALE DEFICIT STOCK TOTAL
- --------------------------------------------------------------------------------
DECEMBER 31, 1993 $444 $547,690 $ - $(595,839) $ (647) $(48,352)
Net income - - - 6,130 - 6,130
Issuance of
common stock 3 22 - - - 25
Net unrealized
losses on
investment
securities
- available
for sale - - (7) - - (7)
- --------------------------------------------------------------------------------
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)
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-14-
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,825 $4,008 $ 6,098
Adjustments to reconcile income from
continuing operations to net cash
used by continuing operations:
Other assets 286 (18) (29)
Accounts payable and accrued liabilities 692 113 (213)
Litigation and contingency reserves
- (reserve reversal) (8,000) (5,350) (8,081)
Litigation and contingency reserves uses (1,195) (4,676) (4,337)
Income tax reserves, net 5,619 3,494 (301)
Income tax refund - 1977 (7,613) - -
Reduction of previously estimated liabilities - (1,005) -
Realized gain (loss) on sale of
investment securities - available for sale 182 - (72)
Other, net (5,418) (3,386) (2,219)
- --------------------------------------------------------------------------------
Net cash used by operating activities
of continuing operations (1,622) (6,820) (9,154)
- --------------------------------------------------------------------------------
Cash provided (used) by discontinued
investment management operations (291) 11 (2)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities
- held to maturity 71,235 102,700 108,687
Purchases of investment securities
- held to maturity (76,011) (97,857) (124,538)
Purchases of investment securities
- available for sale - - (469)
Proceeds from sales of investment securities
- available for sale 31 - 328
Proceeds from Home Holdings, Inc. receivable 3,997 691 4,394
Proceeds from sale of
Augustine Asset Management, Inc. 500 - -
Other, net - (11) 1
- --------------------------------------------------------------------------------
Net cash provided (used) by investing activities (248) 5,523 (11,597)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock - - 25
- --------------------------------------------------------------------------------
Net cash provided by financing activities - - 25
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,161) (1,286) (20,728)
Cash and cash equivalents at beginning of year 7,752 9,038 29,766
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $5,591 $7,752 $ 9,038
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-15-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
AmBase Corporation (the "Company") is a holding company which previously held a
majority ownership interest in Augustine Asset Management, Inc. ("Augustine"),
an investment advisor. The Company also previously owned a savings bank and an
insurance company, all of which have been designated as discontinued operations,
as further discussed below. The Company's remaining subsidiaries are inactive.
On October 4, 1996, the Company sold its entire interest in Augustine, to
Augustine. See Note 5 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 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 10 and 12. 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 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 10 and 12. The Company intends to
aggressively contest all pending and threatened litigation, 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 1997
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 proceedings, see Notes 10 and 12 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 12 to the Company's consolidated financial statements for a
discussion of Supervisory Goodwill Litigation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Certain reclassifications have been
made to the 1995 and 1994 consolidated financial statements to conform with the
1996 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.
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.
-16-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, to be
applied to the satisfaction of certain liabilities which have been classified as
restricted. Included in cash and cash equivalents at December 31, 1995 is
$550,000 of funds held in escrow in connection with a legal proceeding, which
have been classified as restricted.
INVESTMENT 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.
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.
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.
INCOME (LOSS) PER SHARE:
Income (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the periods. Common
stock equivalents did not have a material dilutive effect in the periods
presented and, therefore, are excluded from the computations of net income
(loss) 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 13.
-17-
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"). This statement is effective for the Company's
December 31, 1996 financial statements. 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 9.
NOTE 3 - INVESTMENT SECURITIES
Investment securities - held to maturity, at December 31, 1996 and December 31,
1995, 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, at December 31, 1995, consisted 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. All 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:
- -------------------------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
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 $47,259 $47,259 $47,261 $40,055 $40,055 $40,086
Available for Sale:
Equity Securities - - - 69 213 69
- -------------------------------------------------------------------------------
$47,259 $47,259 $47,261 $40,124 $40,268 $40,155
===============================================================================
The gross unrealized gains and losses on investment securities, at December 31,
consist of the following:
- -------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- -------------------------------------------------------------------------------
Held to Maturity:
Gross unrealized gains $ 2 $ 31
===============================================================================
Available for Sale:
Gross unrealized losses $ - $144
===============================================================================
During 1994, proceeds of $328,000 were received from the sale of investment
securities - available for sale, resulting in a realized gain of $72,000.
-18-
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;
accordingly, the consolidated operations of The Home, for the periods ended
prior to the sale of The Home, were designated as discontinued insurance
operations. 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 taxes, litigation, and
administrative expenses. The Company has collected the portion of this
receivable with respect to litigation and administrative expenses. The remaining
receivable of $13,186,000, as of December 31, 1996, relating principally to
taxes, is payable to the Company as reimbursement for Federal and state income
taxes (including interest thereon) paid by the Company, for tax years ending on
or before December 31, 1989, and is payable to the Company as incurred. To the
extent that the remaining receivable exceeds such reimbursements, the remaining
receivable, if any, is payable to the Company no later than the expiration of
the statute of limitations for the Company's tax years ending through December
31, 1992. During 1996, proceeds of $3,997,000 from the Home Holdings receivable
were collected.
Based upon public disclosures by Home Holdings, Home Holdings consummated,
during 1995, a definitive agreement with respect to the restructuring of The
Home's insurance business with Zurich Insurance Group and others. The Company
cannot determine whether the restructuring of The Home and Home Holdings
improves or diminishes the likelihood of the Company collecting all or a portion
of the remaining receivable from Home Holdings at the time amounts become
collectible by the Company. The Company will continue to monitor Home Holdings'
status.
NOTE 5 - DISCONTINUED INVESTMENT MANAGEMENT OPERATIONS
On October 4, 1996, the Company sold its entire ownership interest in Augustine
to Augustine, for $500,000 in cash. The Company had acquired a 51% ownership
interest in Augustine for $200,000 on November 10, 1993. The Company's ownership
percentage later increased to 66%, due to Augustine's repurchase of outstanding
shares from other shareholders. Prior to the Company's acquisition, Augustine
was controlled by Mr. Ronald J. Burns. Mr. Burns previously served as a director
of the Company from January 1991 until his resignation from the Company's Board
of Directors on December 28, 1995.
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.
-19-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 the gain of $148,000 from the sale, on October 4,
1996, of the Company's entire interest in Augustine.
Summarized information relating to income from Augustine's discontinued
operations for 1996 (through date of disposition) and the full year periods
ended December 31, 1995 and 1994 are as follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------
Investment management fee revenue $ 479 $ 508 $432
Operating expenses (339) (355) (355)
Interest income (expense) 2 (3) 4
Minority interest (30) (40) (30)
- ------------------------------------------------------------------------------
Income from discontinued operations before taxes 112 110 51
Income tax expense (53) (50) (19)
- ------------------------------------------------------------------------------
Income from discontinued operations,
before gain on disposition 59 60 32
Gain on disposition 148 - -
- ------------------------------------------------------------------------------
Income from discontinued operations $ 207 $ 60 $ 32
==============================================================================
Investment management fee revenue includes $142,000 for the nine month period
ended September 30, 1996 and $163,000 and $179,000 for the years ended December
31, 1995 and 1994, respectively, from related parties.
NOTE 6 - 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.
Changes in the outstanding shares of Common Stock of the Company follow:
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at beginning of year 44,533,519 44,533,519 44,308,519
Issuance of common shares - - 225,000
- ------------------------------------------------------------------------------
BALANCE AT END OF YEAR 44,533,519 44,533,519 44,533,519
==============================================================================
Common Stock balances exclude 126,488 treasury shares aggregating approximately
$647,000 at December 31, 1996, 1995 and 1994. Treasury stock is carried at an
average cost of $5.12 per share as of December 31, 1996, 1995 and 1994.
In June 1994, Mr. Neil L. Cohen, the Company's former Executive Vice President,
Chief Financial Officer, Treasurer and Secretary, exercised 225,000 vested
option shares pursuant to a stock option granted to him in January 1993. These
shares were issued to Mr. Cohen from previously authorized unissued shares of
the Company's Common Stock. The average of bid and asked trading prices of the
Company's Common Stock on the date of exercise was $0.235 per share. Mr. Cohen's
remaining shares under option were canceled upon his resignation on August 31,
1994, in accordance with Mr. Cohen's stock option agreement.
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 12, the Company is unable to make any
dividend payments without further judicial action.
At December 31, 1996, there were 6,872,500 shares reserved for issuance under
the Company's stock option and other employee benefit plans.
-20-
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, 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 7 - 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) 1996 1995 1994
- ------------------------------------------------------------------------------
Service cost of current period $225 $185 $235
Interest cost on projected benefit obligation 336 346 350
- ------------------------------------------------------------------------------
$561 $531 $585
==============================================================================
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) 1996 1995
- ------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, fully vested $4,102 $4,339
==============================================================================
Projected benefit obligation for service rendered to date $4,733 $4,702
Unrecognized net gain (loss) (9) 96
- ------------------------------------------------------------------------------
ACCRUED PENSION COSTS $4,724 $4,798
==============================================================================
Major assumptions:
Pre-retirement and postretirement discount rate 7.5% 7.5%
Rate of increase in future compensation 6.0% 6.0%
==============================================================================
In 1993, the Board of Directors approved the adoption of 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 $16,000, $15,000 and $23,000 in 1996, 1995 and 1994,
respectively. All contributions are subject to maximum limitations contained in
the Code.
-21-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - 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) 1996 1995 1994
- ------------------------------------------------------------------------------
Interest cost on accumulated
postretirement benefit obligation $ 32 $ 48 $ 76
Amortization of prior service liability (62) (53) (36)
Amortization of unrecognized gain (37) (33) (13)
- --------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT
(INCOME) EXPENSE $(67) $(38) $ 27
==============================================================================
The accrued postretirement benefit liability at December 31 is summarized below:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 323 $ 447
- ------------------------------------------------------------------------------
Unrecognized net gains 527 493
Unrecognized prior service liability 677 693
- ------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT LIABILITY $1,527 $1,633
==============================================================================
The accumulated benefit obligation for 1996, 1995 and 1994 was determined using
the projected unit credit method and a discount rate of 7.5%, 7.5% and 8.5%,
respectively. The health care cost trend rates in 1996 were assumed to be 9%,
gradually declining to 5.5% in 2001 and remaining at that level, thereafter, 10%
in 1995, gradually declining to 5.5% in 2001 and remaining at that level,
thereafter, and 11% in 1994, gradually declining to 5.5% in 2002 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, 1996, by
approximately $23,000, and decrease the net periodic postretirement benefit
income for 1996 by approximately $2,000.
-22-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - 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"). 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.
-23-
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.
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. As of May 22,
1995, no additional stock options can be awarded 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. The 1985 Plan provided that nonqualified
stock options may be granted at an exercise price determined by the committee
that administers the 1985 Plan.
-24-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Incentive plan activity is summarized as follows:
- ------------------------------------------------------------------------------
1993 STOCK 1985 STOCK
(AWARDS IN THOUSANDS) INCENTIVE PLAN OPTION PLAN
- ------------------------------------------------------------------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE
- ------------------------------------------------------------------------------
Outstanding at December 31, 1993 - $ - 1,600 $ 0.11
Granted - - 225 0.29
Exercised - - (225) 0.11
Forfeited - - (225) 0.11
- ------------------------------------------------------------------------------
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
==============================================================================
Options exercisable at:
December 31, 1994 - $ - 575 $ 0.11
December 31, 1995 - - 1,150 0.11
December 31, 1996 - - 1,456 0.13
==============================================================================
- ------------------------------------------------------------------------------
1993 STOCK 1985 STOCK
INCENTIVE PLAN OPTION PLAN
- ------------------------------------------------------------------------------
Weighted average fair value of options
granted during:
1995 $ - $0.15
1996 1.35 -
- ------------------------------------------------------------------------------
The following table summarizes information about the Company's stock options
outstanding and exercisable under the 1985 Plan and 1993 Plan at December 31,
1996, as follows:
- ------------------------------------------------------------------------------
(AWARDS 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 6 years $ 0.11 1,150 $ 0.11
$0.20 to 0.23 613 4 years 0.23 306 0.23
$2.09 100 10 years 2.09 - -
- ------------------------------------------------------------------------------
TOTAL 1,863 1,456
==============================================================================
-25-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1995, the Board of Directors of the Company approved the award of
incentive stock options to acquire shares of AmBase Common Stock pursuant to the
1985 Plan, as follows: 500,000 incentive stock options to the Company's
Chairman, 100,000 incentive stock options to Mr. Ferrara, and 25,000 incentive
stock options to certain employees of the Company. The exercise price of these
options were between $0.20 and $0.23 per share, based upon the average of the
high bid and low asked trading prices of the Company's Common Stock on the date
of grant, pursuant to the 1985 Plan. The Chairman's options were granted at 110%
of such average, in accordance with the 1985 Plan. These options become
exercisable in 50% increments in 1996 and 1997 and generally can be exercised by
the optionee only if employed by the Company at the time of exercise. Other than
the Company's Chairman, none of these individuals had any stock options for
Common Stock of the Company prior to 1995.
The details of the Company's incentive plans are summarized above. The Company
has 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 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 1996 and 1995, respectively: dividend yield 0%
for all years, expected historical volatility of 0.84 and 0.87, risk-free
interest rates of 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 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) 1996 1995
- ------------------------------------------------------------------------------
NET INCOME
As reported $14,032 $4,068
Proforma 13,959 4,038
==============================================================================
PER SHARE DATA
As reported $ 0.31 $ 0.09
Proforma 0.31 0.09
==============================================================================
-26-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - INCOME TAXES
The components of income tax (expense) benefit for the years ended December 31
are as follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------
Income tax (expense) benefit:
Continuing operations $7,189 $(1,997) $(148)
Discontinued investment management operations (53) (50) (19)
==============================================================================
The components of pretax income (loss) and the difference between income taxes
from continuing operations computed at the statutory federal rate of 35% in 1996
and 1995 and 34% in 1994, and the provision for income taxes from continuing
operations for the years ended December 31 follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------
Income from continuing operations
before income taxes $6,636 $6,005 $6,246
==============================================================================
Tax (expense) benefit:
Tax at statutory federal rate $(2,323) $(2,102) $(2,124)
Prior year tax refund 7,613 - -
Benefit of operating loss carryforwards 2,323 - -
Accounting loss benefit recognized - 2,102 2,124
Prior years' issues - (1,800) -
Federal income taxes (76) - -
State income taxes (348) (197) (148)
- ------------------------------------------------------------------------------
$7,189 $(1,997) $(148)
==============================================================================
The composition of income tax (expense) benefit from continuing operations for
the year ended December 31 is as follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------
Current:
Federal $ (76) $ - $ -
State (348) (197) (148)
- ------------------------------------------------------------------------------
(424) (197) (148)
- ------------------------------------------------------------------------------
Deferred (primarily federal):
Prior year tax refund 7,613 - -
Prior years' issues - (1,800) -
- ------------------------------------------------------------------------------
7,613 (1,800) -
- ------------------------------------------------------------------------------
$7,189 $(1,997) $(148)
==============================================================================
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.
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 has been recognized
as an income tax benefit in the accompanying consolidated Statement of
Operations, based on management's continuing review of the overall tax liability
position of the Company. Included in the income tax benefit is a federal and
state tax provision of $424,000 in 1996. 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. See Note 12 to the Company's consolidated
financial statements, Legal Proceedings, Disputes with Internal Revenue Service,
Withholding Taxes (Netherlands Antilles) and Fresh Start, for additional
details.
-27-
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. 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. New York State has
completed their examination of the Company's income tax returns through 1989 and
is currently reviewing the Company's income tax returns for tax years 1990 to
1992. The Company's federal income tax return for 1992 is currently under
examination. The Company's federal income tax returns for years subsequent to
1992 have not been reviewed by the IRS.
Based on a continuing review of the Company's tax basis in Carteret, the impact
of prior year tax return adjustments on the 1992 tax return as filed, and the
impact of Treasury Reg. ss.1.597-4(g) which was issued in final form during 1996
as further described below, the Company has available approximately $154 million
of tax basis in Carteret, which should result in net operating loss ("NOL")
carryforwards, in addition to the $29,319,000 of NOL carryforwards noted below,
expiring no earlier than 2007, available to offset future taxable income.
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"), AmBase may make an election pursuant to final
Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's
consolidated federal income tax return effective as of December 4, 1992 (the
"election decision"). The Company has previously filed its 1992 through 1995
federal income tax returns with Carteret disaffiliated from the Company's
consolidated federal income tax return. Due to the RTC/FDIC not providing the
Company with information relating to Carteret and the resulting successor
institution, Carteret Federal Savings Bank ("Carteret FSB"), the IRS has granted
the Company an extension of time to make the election decision. The Company is
still evaluating whether or not to make the election decision.
If the election decision is not made, the Company will amend its 1992 through
1995 consolidated federal income tax returns to include the federal income tax
effects of Carteret and the resulting successor institution, Carteret FSB. While
the information from the RTC/FDIC has not been provided to the Company, the
Company believes $154 million of NOL's will be generated from its tax basis in
Carteret. Regardless, if an election decision is made, and the Company amends
its consolidated federal income tax returns to include the income tax effects of
Carteret/Carterret FSB for federal income tax purposes, the Company does not
believe a material increase in the Company's tax liabilities will be
encountered.
In connection with the completion of the federal tax audit years (excluding
Fresh Start) as noted above and the Company's federal income tax returns as
filed from 1992 to 1995, at December 31, 1996 the Company has NOL carryforwards
available to reduce future federal taxable income, which expire if unused, as
follows:
2006 $ 1,983,000
2007 12,097,000
2008 2,981,000
2009 6,911,000
2010 5,347,000
-----------
$29,319,000
==========
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 credits, which are not subject to expiration.
Under Statement 109, the Company has calculated a net deferred tax asset of $33
million and $30 million, as of December 31, 1996 and 1995, respectively, arising
primarily from NOL's, the excess of book over tax reserves and alternative
minimum tax credits (not including the tax effects of the $154 million of NOL's
that may arise from the Carteret election decision, 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.
-28-
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 11 - COMMITMENTS AND CONTINGENCIES
Future minimum rental payments, principally for office space, under
noncancellable operating leases at December 31, 1996, are: 1997, $67,000; 1998,
$75,000; 1999, $79,000; 2000, $79,000; 2001, $20,000 and thereafter, $0. Rent
expense charged to earnings, was $46,000, $142,000 and $178,000 for the years
ended December 31, 1996, 1995, and 1994, respectively.
NOTE 12 - LEGAL PROCEEDINGS
(a) The Company is a defendant in a number of lawsuits or proceedings, including
the following:
Angel, et al. v. AmBase Corp. (the "Angel litigation"). Plaintiffs, Angel, et
al., commenced an action against the Company in the United States District Court
for the Southern District of New York on July 12, 1991, asserting causes of
action under Section 10(b) of the Securities Exchange Act of 1934, as amended,
and under Rule 10b-5 thereunder, and under Sections 11, 12(2) and 15 of the
Securities Act of 1993, as amended, as well as causes of action based on common
law fraud and negligence under New Jersey State law. The plaintiffs in the Angel
litigation are approximately 50 purchasers of the Company's Common Stock,
including the Lindner Fund. This action is asserted individually on behalf of
each of the plaintiffs. The Company and a majority of the plaintiffs have
reached an agreement in principle providing for the settlement of the bulk of
the actions comprising the Angel litigation. Claims representing an aggregate
purchase price of the Company's securities of less than $500,000 remain
outstanding. The Company has entered into negotiations to settle the case with
the plaintiffs. Further proceedings in this matter have been postponed until the
completion of the negotiations.
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.
-29-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sovereign Metal. On February 1, 1991, Sovereign Metal Corporation ("Sovereign
Metal") and American Alloy Steel Pension Plan ("American Alloy") commenced an
action against Richard M. Ciraco ("Ciraco"), Home Capital Services, Inc. ("Home
Capital"), the Company and John Does 1-20, in the United States District Court,
Southern District of New York, alleging that defendants committed securities
fraud, violated the New York State General Business Law, committed fraud, and
breached their fiduciary duties to plaintiffs. The Plaintiffs sought
compensatory and punitive damages. Plaintiffs, two related corporate clients of
Home Capital, alleged that on December 19, 1989, Ciraco, a Senior Vice President
of Home Capital, purchased for plaintiffs' account two Drexel Burnham Lambert
("Drexel") six-month notes, without plaintiffs' authorization. Plaintiffs
alleged that they were not aware of these investments at the time they were made
or at any time prior to Drexel's filing for bankruptcy on February 13, 1990, and
that defendants purchased the notes in violation of plaintiffs' long-standing
investments guidelines and with knowledge of plaintiffs' aversion to dealing
with Drexel. As a result of Drexel's bankruptcy, it was alleged that plaintiffs
might incur losses of up to $1.53 million on these investments. On February 10,
1992, a jury returned a verdict in defendant's favor, finding that plaintiffs
knew before February 1, 1990, of defendants' purchase, on plaintiffs' behalf, of
Drexel commercial paper. As a result, the Court dismissed that securities fraud
claim with prejudice. The Court declined to exercise its pendent jurisdiction
and dismissed plaintiffs' state law claims without prejudice. In April 1992, the
Court awarded defendants $20,000 in costs associated with the trial. No appeal
was taken and plaintiffs' Federal claims have been definitively resolved against
them.
On March 13, 1992, Sovereign Metal and Americal Alloy served defendants Ciraco,
Home Capital, and the Company with a complaint filed in the New York State
Supreme Court (the "State Court"), containing allegations similar to those in
the Federal action. Plaintiffs seek compensatory damages in addition to
interest, punitive damages, and attorneys' fees. On June 1, 1992, defendants
moved to dismiss that complaint on the basis of the jury verdict in the Federal
action. Plaintiffs cross-moved for summary judgment on one of their claims. By
an opinion dated April 10, 1993, the State Court dismissed plaintiffs' cause of
action alleging fraud as to all parties with prejudice, denied defendants'
motions to dismiss plaintiffs' causes of action relating to breach of fiduciary
duty and breach of contract, denied plaintiffs' motion for summary judgment and
severed and dismissed all of plaintiffs' causes of action against the Company.
Plaintiffs filed an amended complaint naming the Company in new counts of
fraudulent conveyance and breach of fiduciary duty. In a Memorandum Decision
dated January 10, 1994, the State Court denied plaintiffs' motion to serve an
amended complaint containing any causes of action against the Company, without
prejudice to any action alleging fraudulent conveyance against the Company in a
separate suit. The State Court granted plaintiffs' motion to serve an amended
complaint containing breach of contract and breach of fiduciary duty causes of
action against defendants Ciraco and Home Capital. Plaintiffs filed an amended
complaint alleging a fraudulent conveyance claim against the Company and Home
Capital and breach of contract and breach of fiduciary duty claims against
defendants Ciraco and Home Capital.
The Company and Home Capital moved for summary judgment as to the fraudulent
conveyance claims and the dismissal of plaintiffs' claims against the Company.
The State Court, on December 11, 1996, granted the summary judgment motion on
behalf of the Company and Home Capital for the fraudulent conveyance claims and
granted the motion to dismiss the Company from the suit. The plaintiffs have
appealed that judgment. The remaining issues in the case against Home Capital
and Ciraco are currently scheduled for trial in April 1997.
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.
-30-
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. The
Tax Court has scheduled the trial for the week of March 24, 1997. 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.
Although 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. The Company will continue to monitor the appeal.
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. On March 13, 1996, the IRS issued a Notice of Deficiency to
the Company with respect to taxes owed for the year 1987. The Company
has disputed the Notice of Deficiency and has claimed that it is
entitled to "Fresh Start" transition relief under certain insurance
company tax provisions of the Tax Reform Act of 1986. If the IRS is
successful, the amount of the deficiency would be material. The Company
believes that it has meaningful defenses. On June 7, 1996, the Company
filed a petition with the United States Tax Court for a redetermination
of the tax, and on July 23, 1996, the IRS filed its answer. The IRS and
the Company are presently engaged in an informal discovery process,
customary in Tax Court.
The numerous 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.
-31-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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. On July 1, 1996, the United States
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. At a
hearing held on January 30, 1997, the Court of Federal Claims made a tentative
ruling on a motion filed by the FDIC permitting the FDIC to intervene as an
additional plaintiff in forty-five cases, including the Company's case, but not
allowing the FDIC to substitute itself as the sole plaintiff. As of February 24,
1997, the Court had not yet issued a final ruling on the FDIC's motion to
intervene and substitute. A trial date has not been set in the Company's case.
No assurance can be given regarding the ultimate outcome of the litigation.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the fair value information about 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 are based on current market quotations. The carrying value of
applicable other liabilities approximates their fair value. The fair value of
the Company's receivable from Home Holdings is estimated using the expected
future cash flows discounted at risk adjusted interest rates.
The estimated fair value of financial instruments of the Company at December 31,
other than those financial instruments on which carrying amounts approximates
fair value, are as follows:
- ------------------------------------------------------------------------------
1996 1995
----------------------- ------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------
ASSETS
Investment securities:
Held to maturity $47,259 $47,261 $40,055 $40,086
Receivable from
Home Holdings, Inc. 13,186 12,127 17,183 15,540
==============================================================================
NOTE 14 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Additional information regarding cash flow for the years ended December 31 is as
follows:
- ------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
- ------------------------------------------------------------------------------
Cash received (paid) during the period:
Income tax refunded (paid), net $5,190 $ (173) $ (50)
==============================================================================
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.
-32-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Income taxes paid in 1994, net, includes a pre-1985 state tax refund of
$340,000.
NOTE 15 - 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
- --------------------------------------------------------------------------------
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(a) - 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)(b) 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
================================================================================
PER SHARE DATA:
Income (loss) from
continuing operations $0.17 $0.17 $ - $ (0.03) $ 0.31
Income from discontinued
investment management
operations, net of
income taxes - - - - -
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $0.17 $ 0.17 $ - $(0.03) $ 0.31
================================================================================
(a) Represents a reduction in the Company's litigation and contingency reserves.
See Item 7 - Financial Condition for a further discussion.
(b) 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.
-33-
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FIRST SECOND THIRD FOURTH FULL
PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------
1995:
Operating expenses $ 719 $ 752 $ 700 $1,161 $ 3,332
- --------------------------------------------------------------------------------
Operating loss (719) (752) (700) (1,161) (3,332)
Interest income 686 702 779 668 2,835
Other income 54 - 90 3 147
Other income
- litigation and
contingency reserves
reversal (c) - - 1,750 3,600 5,350
Other income - reduction
of previously estimated
liabilities - - - 1,005 1,005
- --------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes 21 (50) 1,919 4,115 6,005
Income tax expense (d) (49) (50) (1,849) (49) (1,997)
- --------------------------------------------------------------------------------
Income (loss) from
continuing operations (28) (100) 70 4,066 4,008
Income from discontinued
investment management
operations, net of
income taxes 9 17 17 17 60
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ (19) $ (83) $ 87 $4,083 $4,068
================================================================================
PER SHARE DATA:
Income (loss) from
continuing operations $ - $ - $ - $ 0.09 $ 0.09
Income from discontinued
investment management
operations, net of
income taxes - - - - -
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ - $ - $ - $ 0.09 $ 0.09
================================================================================
(c) Represents a reduction in the Company's litigation and contingency reserves.
See Item 7 - Financial Condition for a further discussion.
(d) Includes as additional income tax expense a $1,800,000 increase in the
income tax reserves. See Item 7 - Financial Condition for a further discussion.
-34-
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 1, 1997,
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 1, 1997, 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 1, 1997, 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 1, 1997, 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.
-35-
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..................................11
Consolidated Statements of Operations..............................12
Consolidated Balance Sheets........................................13
Consolidated Statements of Changes in Stockholders' Equity.........14
Consolidated Statements of Cash Flows..............................15
Notes to Consolidated Financial Statements.........................16
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).
-36-
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 herein.
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).
11. Computation of Earnings Per Share.
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, 1996.
-37-
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 25th day of
February 1997.
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 25th day of February 1997.
RICHARD A. BIANCO JOHN P. FERRARA
Chairman, President and Vice President, Chief Financial Officer,
Chief Executive Officer Treasurer and Controller
(Principal Financial and
Accounting Officer)
ROBERT E. LONG JOHN B. COSTELLO
Director Director
-38-
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 Treasurer and Controller
INVESTOR INFORMATION
ANNUAL MEETING OF STOCKHOLDERS
The 1997 Annual Meeting is currently scheduled to be held at 9:00 a.m., Eastern
Daylight Time, on Thursday, May 1, 1997, at:
GREENWICH LIBRARY, THE COLE AUDITORIUM
101 West Putnam Avenue
Greenwich, CT 06830
CORPORATE HEADQUARTERS
AMBASE CORPORATION
Greenwich Office Park, Bldg. 2
51 Weaver Street
Greenwich, CT 06831-5155
(203) 532-2000
COMMON STOCK TRADING
AmBase stock is traded through one or more market-makers with quotations made
available in the "pink sheets" published by the National Quotation Bureau, Inc.
ISSUE ABBREVIATION TICKER SYMBOL
Common Stock AmBase ABCP
TRANSFER AGENT AND REGISTRAR
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
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
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
NUMBER OF STOCKHOLDERS
As of January 31, 1997, there were approximately 21,000
stockholders
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EXHIBITS ATTACHED WITH THIS FORM 10-K
Exhibit
No. Description
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10-G Employment Agreement Amendment dated February 24, 1997
between AmBase Corporation and Richard A. Bianco
11 Computation of Earnings Per Share
22 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
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