ITEM 1. BUSINESS
Corporate Profile
AmBase Corporation (the "Company") was incorporated as a Delaware corporation in 1975 by the City Investing Company ("City") as the holding company for The Home Insurance Company, a New Hampshire insurance corporation, and its affiliated property and casualty insurance companies ("The Home"). In 1985, City, which prior to that date owned all the outstanding shares of the Common Stock of the Company, distributed the Company's shares to City's common stockholders. The Home was sold on February 13, 1991 to Home Holdings, Inc. ("Home Holdings").
In December 1997, the Company formed a new wholly-owned subsidiary, SDG Financial Corp. ("SDG Financial"), to pursue merchant banking activities. SDG Financial purchased an approximate 6.3% equity interest in SDG, Inc. for $1,250,000 and was granted the exclusive right to act as the investment banking/financial advisor to SDG, Inc. and all of its subsidiaries and affiliates.
SDG, Inc. is a development stage company which specializes in creating new technology-specific companies that are dedicated to the clinical and commercial development of proprietary, targeted liposomal delivery systems for pharmaceutical therapies and consumer product ingredients. SDG, Inc.'s lipid vesicles are protected by numerous U.S. and related foreign patents.
The Company has also purchased $350,000 of convertible preferred and common stock in AMDG, Inc. ("AMDG"), a majority owned subsidiary of SDG, Inc. AMDG is a development stage pharmaceutical company focused on the clinical development of new therapies for the treatment of both Type I and Type II diabetes and has received from SDG, Inc. a worldwide, exclusive, royalty-free license to certain patented technology. AMDG raised $3.7 million of equity through a private placement in December 1997.
In November 1993, the Company acquired 51% of the issued and outstanding common stock of Augustine Asset Management, Inc. ("Augustine"), a Florida based investment advisory firm. On October 4, 1996, the Company sold its entire interest in Augustine, to Augustine.
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 and investment securities.
The Company had 7 employees at December 31, 2000.
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 litigation liabilities, as described in Item 8 - Note 11 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 11 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation.
At December 31, 2000, the Company's liabilities, including reserves for contingent and alleged liabilities, exceeded total recorded assets by $24,097,000. The Company has significant alleged liabilities and is a defendant in a number of lawsuits and governmental proceedings, the ultimate outcome of which could have a material adverse effect on its financial condition and results of operations. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of the litigation and governmental proceedings, management is unable to predict whether the Company's recorded reserves will be adequate or its resources sufficient to satisfy its ultimate obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. For a discussion of the alleged liabilities, lawsuits and proceedings, see Item 8 - Note 11 to the Company's consolidated financial statements. Although the basis for the calculation of the litigation and contingency reserves and the withholding obligation reserve 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.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases approximately 4,800 square feet for use as its executive office at 51 Weaver Street, Building 2, Greenwich, CT 06831-5155.
The Company is currently in negotiations to purchase a 14,000 square feet office building in Greenwich, CT for approximately $2,400,000. Approximately 3,000 square feet is expected to be used by the Company for its executive offices with the remaining square footage leased to unaffiliated third parties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has significant alleged liabilities and is a defendant in a number of lawsuits and governmental proceedings, the ultimate outcome of which could have a material adverse effect on its financial condition and results of operations. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of the litigation and governmental proceedings, management is unable to predict whether the Company's recorded reserves will be adequate or its resources sufficient to satisfy its ultimate obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Although the basis for the calculation of the litigation and contingency reserves and the withholding obligation reserve are regularly reviewed by the Company's management and outside legal counsel, the assessment of these reserves includes an exercise of judgment and is a matter of opinion. At December 31, 2000, the litigation and contingency reserves were $1,746,000. For a discussion of alleged liabilities, lawsuits and proceedings, see Item 8 - Note 11 to the Company's consolidated financial statements.
In addition to the litigation and contingency reserves, the Company has a withholding obligation reserve of $66,388,000 at December 31, 2000. For a further discussion, see Item 8 - Note 11 - Legal Proceedings, Dispute with Internal Revenue Service Withholding Obligations (Netherlands Antilles), to the Company's consolidated financial statements.
See Item 8 - Note 11 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Each executive officer is elected to serve in the executive officer capacity set forth opposite his respective name until the next Annual Meeting of Stockholders. The Company is not aware of any family relationships between any of the executive officers or directors of the Company.
Set forth below is a list of executive officers of the Company at December 31, 2000:
Mr. Bianco was elected a director of the Company in January 1991, and has served as President and Chief Executive Officer of the Company since May 1991. On January 26, 1993, Mr. Bianco was elected Chairman of the Board of Directors of the Company. He served as Chairman, President and Chief Executive Officer of Carteret, then a subsidiary of the Company, from May 1991 to December 1992.
Mr. Ferrara was elected to the position of Vice President, Chief Financial Officer and Controller of the Company in December 1995, having previously served as Acting Chief Financial Officer, Treasurer and Assistant Vice President and Controller since January 1995; as Assistant Vice President and Controller from January 1992 to January 1995; and as Manager of Financial Reporting from December 1988 to January 1992.
PART II
ITEM 5.
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.
As of January 31, 2001, there were approximately 17,700 beneficial owners of the Company's Common Stock. No dividends were declared or paid on the Company's Common Stock in 2000 or 1999. The Company does not intend to declare or pay dividends in the foreseeable future.
For information concerning the Company's stockholder rights plan, see Item 8 - Note 5 to the Company's consolidated financial statements.
ITEM 6.
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 Asset Management, Inc. were retroactively reclassified to reflect their operations as discontinued operations.
ITEM 7.
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.
CONTINUING OPERATIONS
Financial Condition
The Company's assets at December 31, 2000 aggregated $53,102,000, consisting principally of cash and cash equivalents of $4,844,000 and investment securities of $46,547,000. At December 31, 2000, the Company's liabilities, including reserves for contingent and alleged liabilities, as further described in Item 8 - - Note 11 to the Company's consolidated financial statements, exceeded total recorded assets by $24,097,000.
In June 2000 the Company entered into a settlement agreement with Zurich SF Holdings LLC (f/k/a Reorganized Home Holdings, Inc.)("SF Holdings") settling the disputed claims relating to the April 1999 complaint the Company filed in the Supreme Court of New York. Pursuant to the settlement agreement, the Company received, among other things, net proceeds of $8,250,000 from SF Holdings. In addition, an affiliate of SF Holdings deposited $9,500,000 in an interest bearing escrow account (the "Escrow Account") to be used to pay 50% of certain expenses and/or withholding obligations, if any, up to the amount in the Escrow Account in connection with the dispute with the Internal Revenue Service ("IRS") over the Netherlands Antilles Withholding Obligation Issue. Upon final resolution of the Netherlands Antilles Withholding Obligation Issue with the IRS and payment of outstanding expenses, the residual of the Escrow Account, if any, will be delivered to an affiliate of SF Holdings.
In June 1998, the Company paid $12,700,000 to the IRS for tax and estimated interest to be applied to the Company's Fresh Start tax liability which related to a 1987 tax dispute with the IRS. This amount was previously reserved for as part of the Company's income tax reserves account. See Item 8 - Note 9 for a more complete discussion regarding the Company's payment to the IRS in connection with the Fresh Start tax proceeding and utilization of net operating loss carryforwards.
Pursuant to the Home Holdings Revised Third Amended and Restated Plan of Reorganization (the "Revised Plan"), on July 30, 1998 the Company received $15,200,000 in full satisfaction of all the Company's claims relating to Home Holdings other than certain disputed claims which were settled in June 2000 as further discussed above.
The cash needs of the Company in 2000 were principally satisfied by proceeds received in connection with the SF Holdings litigation settlement further described above, and interest income received on investment securities and cash equivalents. Management believes that the Company's cash resources are sufficient to continue operations for 2001. Because of the nature of the contingent and alleged liabilities described in Item 8 - Note 11 to the Company's consolidated financial statements, the Company is unable to predict whether it will have the ability to generate sufficient resources to satisfy its ultimate obligations. For the year ended December 31, 2000, cash of $2,590,000 was provided by operating activities, mainly due to the receipt of funds in connection with the SF Holdings litigation settlement offset by the payment of expenses, payment of other liabilities, and payments charged against litigation and contingency reserves.
The cash needs of the Company in 1999 were principally satisfied by interest income received on investment securities and cash equivalents, and the Company's current financial resources. Because of the nature of the contingent and alleged liabilities described in Item 8 - Note 11 to the Company's consolidated financial statements, the Company is unable to predict whether it will have the ability to generate sufficient resources to satisfy its ultimate obligations. For the year ended December 31, 1999, cash of $6,120,000 was used by operating activities, including the payment of expenses, payment of other liabilities and payments charged against litigation and contingency reserves, partially offset by the receipt of interest income.
The cash needs of the Company in 1998 were principally satisfied by interest income received on investment securities and cash equivalents, the Company's current financial resources and the $15,200,000 received pursuant to the Home Holdings Revised Plan. For the year ended December 31, 1998, cash of $14,892,000 was used by operating activities, including the payment of $12,700,000 to the Internal Revenue Service ("IRS") for the Company's Fresh Start tax liability, the payment of operating expenses and payments charged against the litigation and contingency reserve partially offset by interest income, and the receipt of amounts received pursuant to the Home Holdings Revised Plan.
Except for the possible purchase of an office building, as more fully discussed in Item 8 - Note 10, to the Company's consolidated financial statements, there are no material commitments for capital expenditures as of December 31, 2000. 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 and litigation liabilities described in Item 8 - Note 11 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 11 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation.
Management of the Company continually reviews the likelihood of liability and associated costs of pending and threatened litigation. At December 31, 2000, the litigation and contingency reserves were $1,746,000. For a discussion of alleged withholding obligation reserve, alleged liabilities, lawsuits and proceedings, see Item 8 - Note 11 to the Company's consolidated financial statements.
In addition to the litigation and contingency reserves, the Company had a withholding obligation reserve of $66,388,000 at December 31, 2000. For a further discussion, see Item 8 - Note 11 - Legal Proceedings, Dispute with Internal Revenue Service over Withholding Obligations (Netherlands Antilles), to the Company's consolidated financial statements.
As noted above, the Company has significant alleged liabilities and is a defendant in a number of lawsuits and governmental proceedings, the ultimate outcome of which could have a material adverse effect on its financial condition and results of operations. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of 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 liabilities, lawsuits and proceedings, see Item 8 - Note 11 to the Company's consolidated financial statements. Although the basis for the calculation of the litigation and contingency reserves and withholding obligation reserve 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.
In connection with the liquidation of City Investing Company ("City") the Company, among others, contractually assumed certain tax liabilities of City, which, prior to September 1985, owned all the outstanding shares of Common Stock of the Company. Other liabilities were assumed by, among others, City Investing Company Liquidating Trust (the "Trust"). The only issue that remains in dispute between City and the IRS is with respect to obligations for the withholding of taxes in connection with a Netherlands Antilles finance subsidiary of City (the "Withholding Issue").
With respect to the Withholding Issue, in connection with a Netherlands Antilles finance subsidiary of City, on May 11, 1995, the IRS issued a Notice of Deficiency for the withholding of tax 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, on behalf of City, 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, on behalf of City, 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 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 that time was inappropriate. The Tax Court directed the parties to engage in full and complete discovery as expeditiously as possible. A trial was held in this case on March 24, 1997, after which the Judge asked the IRS and the Company to submit post-trial briefs, which were submitted to the Tax Court in August 1997. If the IRS were to prevail on this issue, the Company could be liable for City's withholding obligation plus interest in excess of the Company's financial resources. A significant factor in determining the amount of the Company's ultimate liability for this issue is whether pursuant to the contractual arrangement between the Company and City, the Company is primarily liable for the withholding obligation and interest. See Item 8 - Note 11 - Legal Proceedings, AmBase Corporation v. City Investing Company Liquidating Trust et al., to the Company's consolidated financial statements.
In a case dealing with a similar withholding 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 withholding of tax. The IRS appealed this decision (Northern Indiana Public Service Co. v. Commissioner) to the United States Court of Appeals for the 7th Circuit (the "Appeals Court"). In June 1997 the Appeals Court affirmed the Tax Court's ruling in favor of Northern Indiana. Although the Appeals Court decision in the Northern Indiana case could be beneficial to the case involving City, it is not necessarily indicative of the ultimate result of the final settlement of the Netherlands Antilles issue involving City.
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 Consolidated Statement of Operations and Financial Condition.
The Company has a reserve for the withholding issue of $66,388,000 at December 31, 2000. For a further discussion, see Item 8 - Note 11 - Legal Proceedings, Dispute with Internal Revenue Service over Withholding Obligations (Netherlands Antilles), to the Company's consolidated financial statements.
Results of Operations
Summarized financial information for the operations of the Company for the years ended December 31 is as follows:
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 2001 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 net income of $5,174,000 or $0.11 per share, for the year ended December 31, 2000. As further described above the December 31, 2000 results includes $8,250,000 of other income principally representing net proceeds received in connection with the Company's litigation settlement with Zurich SF Holdings LLC, ("SF Holdings"). Excluding this other income the Company would have reported a net loss of $3,076,000 for the year ended December 31, 2000.
The Company recorded a net loss of $4,515,000 for the year ended December 31, 1999. As further detailed below the 1999 net loss reflects an increase in 1999 compared with 1998 of $1,579,000 of professional and outside service fees as a result of Supervisory Goodwill litigation expenses.
For the year ended December 31, 1998 the Company recorded net income of $181,000. As further described in Financial Condition, above, 1998 includes $2,548,000 of non-recurring other income, principally attributable to the receipt of $2,500,000 in connection with the Home Holdings Revised Plan. Excluding the non-recurring other income, the Company would have recorded a net loss of $2,367,000 for the year ended December 31, 1998.
Compensation and benefits were $3,507,000 in 2000, $3,605,000 in 1999 and $3,117,000 in 1998. The decrease in 2000 compared to 1999 is primarily due to a decrease in Year 2000 incentive compensation accrued in 2000 and paid in 2001. The increase of $488,000 in 1999, compared with 1998 is primarily due to increased incentive compensation and supplemental retirement plan accruals.
Professional and outside services decreased to $2,051,000 in 2000, compared to $2,707,000 in 1999. The amounts in the 2000 periods are comprised of expenses relating to the Supervisory Goodwill litigation although at a lower level compared to 1999, and expenses incurred relating to the litigation settlement with SF Holdings. The amounts in the 1999 periods are principally comprised of expenses relating to the Supervisory Goodwill litigation. The increase in 1999, compared to 1998, was due to an increase in Supervisory Goodwill litigation expenses as a result of litigation discovery expenses and the preparation of the Company's Summary Judgment Motion as further discussed in Item 8 - Note 11, offset to some effect by a reduction of legal fees attributable to the Home Holdings, Inc. bankruptcy case, which were incurred in 1998. Expenses for professional and outside services in 2000, 1999 and 1998 do not include costs associated with defending pending and threatened litigation which were previously reserved for and are charged against the litigation and contingency reserves when paid.
Insurance expenses decreased in 2000, compared to 1999, due to management's renegotiation of insurance programs.
Occupancy expenses were $91,000 in 2000, $100,000 in 1999 and $86,000 in 1998. The increase in 1999 compared to 1998 is the result of an increase in occupancy related maintenance expenses.
Interest income was $2,795,000 in 2000, $2,166,000 in 1999, and $2,430,000 in 1998. The increase in 2000 compared to the 1999 period, was attributable to a higher average level of investment securities and an increased yield on cash equivalents and investment securities. The decrease in 1999 compared to 1998, is the result of a lower average level of investment securities.
The additional other income of $186,000 in 2000 and $194,000 in 1999 is primarily attributable to the collection by an inactive subsidiary of a receivable previously considered uncollectible. Other income in 1998 of $2,548,000 is principally attributable to the receipt of $2,500,000 received in connection with the Home Holdings Revised Plan.
The 2000, 1999 and 1998 income tax provisions of $205,000, $235,000 and $242,000, respectively, are principally 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 9 to the Company's consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds short-term investments as a source of liquidity. The Company's interest rate sensitive investments at December 31, 2000 and 1999 with maturity dates of less than one year consist of the following:
The Company's current policy is to minimize the interest rate risk of its short-term investments by investing in U.S. Treasury Bills with maturities of less than one year. There were no significant changes in market exposures or the manner in which interest rate risk is managed during the year.
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
In addition, the Company's public reports, including Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Proxy Statements, can be obtained through the Securities and Exchange Commission EDGAR Database over the World Wide Web at www.sec.gov.
ITEM 8.
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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion.
The accompanying financial statements include a withholding obligation reserve relating to a significant issue discussed in Note 11. Final resolution of this issue is dependent upon future events, which may result in amounts more or less than those presented. The ultimate outcome of this issue cannot presently be determined.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, substantial operations of the Company have been discontinued, and substantial contingencies exist against the Company in various lawsuits and proceedings, which are discussed in Note 11 to the financial statements and the second paragraph of this report. The Company has a net capital deficiency of approximately $24,097,000 at December 31, 2000. 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.
PricewaterhouseCoopers LLP New York, New York March 12, 2001
AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31
The accompanying notes are an integral part of these consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31
The accompanying notes are an integral part of these consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31
The accompanying notes are an integral part of these consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31
The accompanying notes are an integral part of these consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Note 1 - Organization
AmBase Corporation (the "Company") is a holding company which, through a wholly owned subsidiary, owns a 6.3% ownership interest in SDG, Inc. The Company previously held a majority ownership interest in Augustine Asset Management, Inc. ("Augustine"), an investment advisor, and also previously owned a savings bank and an insurance company, all of which have been designated as discontinued operations, as further discussed below.
On 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").
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Substantial contingent and alleged liabilities exist against the Company through various lawsuits and proceedings, as described in Note 11. These factors raise substantial doubt about the Company's ability to continue as a going concern. In order to continue on a long-term basis, the Company must both resolve its contingent and alleged liabilities by prevailing upon or settling these claims for less than the amounts claimed, and generate profits by acquiring existing operations and/or by developing new operations. The financial statements do not include adjustments to the carrying value of assets and liabilities which might be necessary should the Company not continue in operation. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its remaining assets and liabilities, including the contingent and alleged liabilities, as described in Note 11. The Company intends to aggressively contest all pending and threatened litigation and governmental proceedings, as well as pursue all sources for contributions to settlements. The Company's main source of non-operating revenue is interest earned on investment securities and cash equivalents. The Company's management expects that operating cash needs in 2001 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 liabilities, lawsuits and governmental proceedings, see Note 11. Although the basis for the calculation of the litigation and contingency reserves and withholding obligation reserve 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 Note 11 for a discussion of Supervisory Goodwill Litigation.
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform with the 2000 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.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Principles of consolidation:
The consolidated financial statements are comprised of the accounts of the Company and its majority owned subsidiaries. All material intercompany transactions and balances have been eliminated. Investments in companies in which ownership interest is less than 20% are accounted for using the cost method.
Cash and cash equivalents:
Highly liquid investments, consisting principally of funds held in short-term money market accounts, are classified as cash equivalents.
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.
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 recognizes both the current and deferred tax consequences of all transactions that have been recognized in the financial statements, calculated based on the provisions of enacted tax laws, including the tax rates in effect for current and future years. Net deferred tax assets are recognized immediately when a more likely than not criterion is met; that is, unless a greater than 50% probability exists that the tax benefits will actually be realized sometime in the future. At the present time, management has no basis to conclude that realization is more likely than not.
Earnings per share:
Basic and fully diluted earnings per share ("EPS") are computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding.
Stock-based compensation:
The Company adopted the disclosure requirements of Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123") and continues to account for stock compensation using APB Opinion 25, "Accounting for Stock Issued to Employees" ("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 8.
Notes to Consolidated Financial Statements (continued)
Note 3 - Investment Securities
Investment securities - held to maturity consist of U.S. Treasury Bills with original maturities of one year or less and are carried at amortized cost based upon the Company's intent and ability to hold these investments to maturity.
Investment securities at December 31 consist of the following:
The gross unrealized gains and losses on investment securities at December 31, consist of the following:
Other investment securities at December 31, 2000 and 1999 consist of convertible preferred stock and/or common stock in AMDG, Inc., which were purchased through private placements, are classified as other assets, and are carried at cost which approximates market value; $350,000 at December 31, 2000 and 1999.
Notes to Consolidated Financial Statements (continued)
Note 4 - Earnings Per Share
The calculation of basic earnings per share and dilutive earnings per share, including the effect of dilutive securities, for the years ended December 31, is as follows:
Notes to Consolidated Financial Statements (continued)
Note 5 - 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 are as follows:
Common Stock balances exclude 126,488 treasury shares at December 31, 2000, 1999 and 1998, carried at an average cost of $5.12 per share aggregating approximately $647,000.
The Company issued 860,000 and 815,000 of previously authorized common shares during January 2000 and October 1999, respectively, in connection with the exercise of employee stock options.
At December 31, 2000, there were 5,185,000 common shares reserved for issuance under the Company's stock option and other employee benefit plans.
Stockholder Rights Plan:
On January 29, 1986, the Company's Board of Directors declared a dividend distribution of one right for each outstanding share of Common Stock of the Company. The rights, as amended, which entitle the holder to purchase from the Company a common share at a price of $75.00, are not exercisable until either a person or group of affiliated persons acquires 25% or more of the Company's outstanding common shares or upon the commencement or disclosure of an intention to commence a tender offer or exchange offer for 20% or more of the common shares. The rights are redeemable by the Company at $0.05 per right at any time until the earlier of the tenth day following an accumulation of 20% or more of the Company's shares by a single acquirer or group, or the occurrence of certain Triggering Events (as defined in the Stockholder Rights Plan). In the event the rights become exercisable and, thereafter, the Company is acquired in a merger or other business combination, or in certain other circumstances, each right will entitle the holder to purchase from the surviving corporation, for the exercise price, Common Stock having a market value of twice the exercise price of the right. The rights are subject to adjustment to prevent dilution. In November 2000, the Board of Directors approved an amendment to the Company's existing Shareholder Rights Plan (the "Plan") to extend the expiration date of the Plan to February 10, 2006 from February 10, 2001.
Notes to Consolidated Financial Statements (continued)
Note 6 - 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:
A reconciliation of the changes in the projected benefit obligation from the beginning of the year to the end of the year is as follows:
Accrued pension costs for the Supplemental Plan at December 31, and the major assumptions used to determine these amounts, are summarized below:
Notes to Consolidated Financial Statements (continued)
The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"), which is a "Section 401(k) Plan" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"). The Savings Plan permits eligible employees to make contributions of up to 15% of salary, which are matched by the Company at a percentage determined annually. The employer match is currently 100% of the first 3% of the employee's salary eligible for deferral. Employee contributions to the Savings Plan are invested at the employee's discretion, in various investment funds. The Company's matching contributions are invested in the same manner as the salary reduction contributions. The Company's matching contributions to the Savings Plan, charged to expense, were $17,000, $25,000 and $26,000 in 2000, 1999 and 1998, respectively. All contributions are subject to maximum limitations contained in the Code.
Note 7 - Postretirement Benefits Other Than Pensions
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.
Net periodic postretirement benefit (income) expense for the years ended December 31 was as follows:
A reconciliation of the changes in the accumulated postretirement benefit obligation from the beginning of the year to the end of the year is as follows:
Notes to Consolidated Financial Statements (continued)
The accrued postretirement benefit liability at December 31 is summarized below:
The accumulated benefit obligation for 2000, 1999 and 1998 was determined using the projected unit credit method and a discount rate of 7.5%, 7.75% and 6.75%, respectively. The health care cost trend rates were assumed to be 6% in 2000, 7% in 1999, and 8% in 1998, gradually declining to 5.5% in 2001 and remaining at that level, thereafter.
Assumed health care cost trend rates could have a significant effect on the amounts reported. At December 31, 2000 a 1% change in the assumed health care cost trend rates, while holding all other assumptions constant, would have the following effects:
Note 8 - 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").
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.
Notes to Consolidated Financial Statements (continued)
Notwithstanding the foregoing, the 1994 Plan provides that in the event of a decrease in either or both of items (i) and/or (ii) above, the Annual Bonus Pool is determined by reference to the last Reference Year in which there was an increase in such item. If the Committee determines within the 120-day time period to award a Bonus, the share of the Annual Bonus Pool to be allocated to each Participant shall be as follows: 45% of the Annual Bonus Pool shall be allocated to the Company's Chief Executive Officer, and 55% of the Annual Bonus Pool shall be allocated pro rata to each of the Company's Participants as determined by the Committee. The Committee in its discretion may reduce the percentage of the Annual Bonus Pool to any Participant for any Reference Year, and such reduction shall not increase the share of any other Participant. The 1994 Plan is not the exclusive plan under which the Executive Officers may receive cash or other incentive compensation or bonuses.
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the Company may grant to officers and employees of the Company and its subsidiaries, stock options ("Options"), stock appreciation rights ("SARs"), restricted stock awards ("Restricted Stock"), merit awards ("Merit Awards") and performance share awards ("Performance Shares"), through May 28, 2008. An aggregate of 5,000,000 shares of the Company's Common Stock are reserved for issuance under the 1993 Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of Restricted Stock and Performance Shares); however, of such shares, only 2,500,000 shares in the aggregate shall be available for issuance for Restricted Stock Awards and Merit Awards. Such shares shall be authorized but unissued shares of Common Stock. 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.
As a condition to any award of Restricted Stock or Merit Award under the 1993 Plan, the Committee may require a participant to pay an amount equal to, or in excess of, the par value of the shares of Restricted Stock or Common Stock awarded to him or her. Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered during a "Restricted Period", which in the case of grants to employees shall not be less than one year from the date of grant. The Restricted Period with respect to any outstanding shares of Restricted Stock awarded to employees may be reduced by the Committee at any time, but in no event shall the Restricted Period be less than one year. Except for such restrictions, the employee as the owner of such stock shall have all of the rights of a stockholder including, but not limited to, the right to vote such stock and to receive dividends thereon as and when paid. In the event that an employee's employment is terminated for any reason, an employee's Restricted Stock will be forfeited; provided, however, that the Committee may limit such forfeiture in its sole discretion. At the end of the Restricted Period, all shares of Restricted Stock shall be transferred free and clear of all restrictions to the employee. In the case of a Change in Control of the Company (as defined in the 1993 Plan), an employee may receive his or her Restricted Stock free and clear of all restrictions in the discretion of the Committee, or as may otherwise be provided pursuant to the employee's Restricted Stock award.
Performance Share awards of Common Stock under the 1993 Plan shall be earned on the basis of the Company's performance in relation to established performance measures for a specific performance period. Such measures may include, but shall not be limited to, return on investment, earnings per share, return on stockholder's equity, or return to stockholders. Performance Shares may not be sold, assigned, transferred, pledged or otherwise encumbered during the relevant performance period. Performance Shares may be paid in cash, shares of Common Stock or shares of Restricted Stock in such portions as the Committee may determine. An employee must be employed at the end of the performance period to receive payments of Performance Shares; provided, however, in the event that an employee's employment is terminated by reason of death, disability, retirement or other reason approved by the Committee, the Committee may limit such forfeiture in its sole discretion. In the case of a Change in Control of the Company (as defined in the 1993 Plan), an employee may receive his or her Performance Shares in the discretion of the Committee, or as may otherwise be provided in the employee's Performance Share award.
During January 2000, the Board of Directors of the Company approved the award of incentive stock options to certain employees to acquire 90,000 shares of AmBase Common Stock at exercise prices between $0.95 and $1.05 per share, pursuant to the 1993 Plan.
Notes to Consolidated Financial Statements (continued)
Under the Company's 1985 Stock Option Plan (the "1985 Plan"), options to purchase shares of Common Stock could be granted to salaried employees. The 1985 Plan provided for the granting of up to 2,000,000 shares as incentive stock options and/or nonqualified stock options through May 22, 1995. No additional stock options can be awarded under the 1985 Plan. As of December 31, 2000, 75,000 shares are reserved for issuance under the 1985 Plan.
As discussed in Note 5, stock options previously awarded under the 1985 Plan, for 860,000 common shares and 815,000 common shares were exercised in January 2000 and October 1999, respectively.
Incentive plan activity is summarized as follows:
Notes to Consolidated Financial Statements (continued)
The following table summarizes information about the Company's stock options outstanding and exercisable under the 1985 Plan and 1993 Plan at December 31, 2000, as follows:
The details of the Company's incentive plans are summarized above. The Company has adopted the disclosure only provisions of Statement 123, 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 2000, 1999 and 1998. The fair value of stock options granted by the Company in 2000, 1999 and 1998 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 2000, 1999 and 1998, respectively: dividend yield 0% for all years, expected historical volatility of 0.44, 0.46 and 0.53, risk-free interest rates of 5.80%, 6.07% and 4.65% , and weighted average expected life of the options of 4 to 6 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 (loss) and net income (loss) 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 changes in the price per share of the Company's Common Stock during 2000, 1999 and 1998, 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
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Note 9 - Income Taxes
The components of income tax expense for the years ended December 31 are as follows:
The components of pretax income (loss) and the difference between income taxes computed at the statutory federal rate of 35% in 2000, 1999 and 1998, and the provision for income taxes for the years ended December 31 follows:
The composition of income tax expense for the year ended December 31 is as follows:
Notes to Consolidated Financial Statements (continued)
In June 1998, the Company paid $12,700,000 to the IRS for tax and estimated interest to be applied to the Company's Fresh Start tax liability, which related to a 1987 tax dispute with the IRS. Based on the Final Stipulation between the Company and the IRS on the Fresh Start issue, the Company received a $36,000 refund of tax and interest on the Fresh Start issue in August 2000. In connection with the Final Stipulation, the Company utilized approximately $29 million of NOL's. A summary of the Company's NOL carryforwards remaining after the utilization of the $29 million NOL's applied to Fresh Start is provided below.
As a result of the Office of Thrift Supervision's December 4, 1992 placement of Carteret in receivership, under the management of the Resolution Trust Corporation ("RTC")/Federal Deposit Insurance Corporation ("FDIC"), and proposed Treasury Reg. ss.1.597-4(g), the Company had previously filed its 1992 and subsequent federal income tax returns with Carteret disaffiliated from the Company's consolidated federal income tax return. Based upon the impact of Treasury Reg. ss.1.597-4(g), which was issued in final form on December 20, 1995, a continuing review of the Company's tax basis in Carteret, and the impact of prior year tax return adjustments on the Company's 1992 federal income tax return as filed, the Company decided not to make an election pursuant to final Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's consolidated federal income tax return effective as of December 4, 1992 (the "election decision").
The Company has made numerous requests to the RTC/FDIC for tax information pertaining to Carteret and the resulting successor institution, Carteret Federal Savings Bank ("Carteret FSB"); however all of the information still has not been received. Based on the Company not making the election decision, as described above, and the receipt of some of the requested information from the RTC/FDIC, the Company has amended its 1992 consolidated federal income tax return to include the federal income tax effects of Carteret and Carteret FSB. The Company is still in the process of amending its consolidated federal income tax returns for 1993 and subsequent years.
The Company anticipates that, as a result of filing a consolidated federal income tax return with Carteret FSB, a total of approximately $170 million of tax NOL carryforwards will be generated from the Company's tax basis in Carteret/Carteret FSB as tax losses are incurred by Carteret FSB of which $158 million are still available for future use. Based on the Company's recent filing of its amended 1992 consolidated federal income tax return to include the federal income tax effects of Carteret FSB, approximately $56 million of NOL carryforwards are generated for tax year 1992 which expire in 2007, with the remaining approximate $102 million of NOL carryforwards to be generated, expiring no earlier than 2008. These NOL carryforwards would be available to offset future taxable income, in addition to the NOL carryforwards as further detailed below.
Based upon the Company's federal income tax returns as filed from 1993 to 1999 (subject to IRS audit adjustments), an estimate of year 2000 federal income tax return, after utilizing $29 million of NOL carryforwards in connection with Fresh Start; and excluding the NOL carryforwards generated from the Company's tax basis in Carteret/Carteret FSB, as noted above, at December 31, 2000 the Company has NOL carryforwards available to reduce future federal taxable income, which expire if unused, as follows:
The Company's federal income tax returns for years subsequent to 1992 have not been reviewed by the IRS. The utilization of certain carryforwards is subject to limitations under U.S. federal income tax laws. In addition, the Company has approximately $21 million of alternative minimum tax credit carryforwards, which are not subject to expiration.
Notes to Consolidated Financial Statements (continued)
Under Statement 109, the Company has calculated a net deferred tax asset of $27 million and $28 million as of December 31, 2000 and 1999, respectively, arising primarily from NOL's, alternative minimum tax credits and the excess of book over tax reserves (not including the anticipated tax effects of the NOL's expected to be generated from the Company's tax basis in Carteret, resulting from the election decision, as more fully described above). A valuation allowance has been established for the entire net deferred tax asset, as management, at the current time, has no basis to conclude that realization is more likely than not.
Note 10 - Commitments and Contingencies
Future minimum rental payments, principally for office space, under noncancellable operating leases at December 31, 2000, are: 2001, $20,000. Rent expense charged to earnings was $67,000, $67,000 and $66,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company is currently in negotiations to purchase a 14,000 square foot office building in Greenwich, CT for approximately $2,400,000. Approximately 3,000 square feet will be used by the Company for its executive offices with the remaining square footage leased to unaffiliated third parties.
Note 11 - Legal Proceedings
(a) The Company is or has been a defendant in a number of lawsuits or proceedings, including the following:
Marshall Manley v. AmBase Corporation. On November 14, 1996, Marshall Manley ("Manley"), a former President, Chief Executive Officer and Director of the Company, commenced an action against the Company, seeking indemnification from the Company pursuant to a May 27, 1993 employment settlement agreement between Manley and the Company. Manley seeks reimbursement of certain alleged payments he made to the Trustee in the bankruptcy proceedings of the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey (the "Manley action"), arguing that he served at such firm at the request of the Company. The Manley action is pending in the United States District Court for the Southern District of New York. The Company filed its answer on January 21, 1997, raising substantial affirmative defenses which the Company intends to vigorously pursue. On October 30, 1997, AmBase amended its Answer and Counterclaims to include a claim of fraud against Manley. In December 1997, Manley moved for summary judgment. The Company raised substantial opposition to the motion and moved to strike certain of Manley's affirmative defenses which Manley raised in connection with the Company's fraud claim against Manley. Oral argument on Manley's Motion for Summary Judgment and the Company's motion to strike Manley's affirmative defenses was held on May 15, 1998. The court denied both motions. The jury trial of the plaintiff's breach of contract claims took place in May, 2000 and resulted in a verdict against the Company. The Company's counterclaims for fraud and reformation were tried to the Court immediately following the jury's verdict. In December, 2000, the Court, in response to the Company's motion for judgment as a matter of law and/or for a new trial, vacated the jury's earlier verdict (therefore nullifying it) and ordered a new trial. The Court has not yet fixed a date for the new trial. Subsequent to the Court's vacatur of the jury's verdict in January, 2001 the Court dismissed the Company's courterclaims for fraud and reformation. The Company intends to vigorously defend against Manley's contract claims on retrial.
Dispute with Internal Revenue Service over Withholding Obligations (Netherlands Antilles). In connection with the liquidation of City Investing Company ("City") the Company, among others, contractually assumed certain tax liabilities of City, which, prior to September 1985, owned all the outstanding shares of Common Stock of the Company. Other liabilities were assumed by, among others, City Investing Company Liquidating Trust (the "Trust"). The only issue that remains in dispute between City and the IRS is with respect to obligations for withholding of taxes in connection with a Netherlands Antilles finance subsidiary of City (the "Withholding Issue").
With respect to the Withholding Issue, in connection with a Netherlands Antilles finance subsidiary of City, on May 11, 1995, the IRS issued a Notice of Deficiency for the withholding of tax 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, on behalf of City, 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.
Notes to Consolidated Financial Statements (continued)
On June 30, 1995, the Company, on behalf of City, 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 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 that time was inappropriate. The Tax Court directed the parties to engage in full and complete discovery as expeditiously as possible. A trial was held in this case on March 24, 1997, after which the Judge asked the IRS and the Company to submit post-trial briefs, which were submitted to the Tax Court in August 1997. If the IRS were to prevail on this issue, the Company could be liable for City's withholding obligation plus interest in excess of the Company's financial resources. A significant factor in determining the amount of the Company's ultimate liability for this issue is whether pursuant to the contractual arrangement between the Company and City, the Company is primarily liable for the withholding obligation and interest. See AmBase Corporation v. City Investing Company Liquidating Trust, et al., below.
In a case dealing with a similar withholding 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 withholding of tax. The IRS appealed this decision (Northern Indiana Public Service Co. v. Commissioner) to the United States Court of Appeals for the 7th Circuit (the "Appeals Court"). In June 1997 the Appeals Court affirmed the Tax Court's ruling in favor of Northern Indiana. Although the Appeals Court decision in the Northern Indiana case could be beneficial to the case involving City, it is not necessarily indicative of the ultimate result of the final settlement of the Netherlands Antilles issue involving City.
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 Consolidated Statement of Operations and Financial Condition.
The actions against the Company 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 would 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.
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 Savings Bank ("Carteret"). Approximately 120 other similar so-called "supervisory goodwill" cases, commenced in recent years by other financial institutions and/or their shareholders, are pending in the Court of Federal Claims. Three of these cases, Winstar Corp. v. United States, Glendale Federal Bank, FSB v. United States, and Statesman Savings Holding Corp. v. United States (the "consolidated cases"), which involve many of the same issues raised in the Company's suit, were appealed to the United States Supreme Court (the "Supreme Court"). On July 1, 1996, the Supreme Court issued a decision in the consolidated cases. The Supreme Court's decision affirmed the lower Court's grant of summary judgment in favor of the plaintiffs on the issue of liability and remanded the cases for a determination of damages. Although the decision in the consolidated cases is beneficial to the Company's case, it is not necessarily indicative of the ultimate outcome of the Company's action.
On September 18, 1996, the Court of Federal Claims entered an Omnibus Case Management Order that will govern further proceedings in the Company's action and most of the other so-called "Winstar-related" cases. On March 14, 1997, the Court entered an order permitting the Federal Deposit Insurance Company ("FDIC") to intervene as an additional plaintiff in forty-three cases, including the Company's case, but not allowing the FDIC to be substituted as the sole plaintiff in those cases.
On April 9, 1999 and April 16,1999, respectively, the Court issued decisions addressing damage claims in two of the Winstar-related cases, Glendale Federal Bank, FSB v. United States, and California Federal Bank v. United States. In the Glendale case, the Court awarded Glendale $908.9 million in restitution and non-overlapping reliance damages, representing the benefit conferred on the government as a result of the contract at issue in that case, plus certain non-overlapping damages suffered by Glendale as a result of the government's breach of contract. The Court declined to award expectation damages as requested by Glendale. In the California Federal case, the Court awarded California Federal $23.4 million in damages, representing expenses incurred by California Federal in raising new capital to replace the supervisory goodwill lost as a result of the government's breach of contract. The Court declined to award expectation damages, restitution, or other reliance damages as requested by California Federal. On February 16, 2001, the United States Court of Appeals for the Federal Circuit issued a decision in the case of Glendale Federal Bank, FSB v. United States, which involves certain damages issues related to the Company's case. The decision vacated in part the decision of the United States Court of Federal Claims dated April 9, 1999, and remanded the case back to the Court of Federal Claims for a determination of total reliance damages. The trial court and appellate decisions in Glendale and California Federal as well as other case decisions, may be relevant to the Company's claims, but are not necessarily indicative of the ultimate outcome of the Company's action.
On March 20, 1998, the FDIC filed a motion for partial summary judgment against the United States on certain liability issues, and the Company has filed a memorandum in support of that motion. The FDIC's motion is currently under submission to the court.
Fact discovery for the Company was completed November 30,1999 pursuant to an extension of time granted by the Court. On September 9, 1999, the Company filed a Motion For Partial Summary Judgment on liability under a Fifth Amendment Takings claim theory of recovery. On November 24, 1999, the FDIC, as successor to the rights of Carteret and as Plaintiff-Intervenor in the case, filed a response brief opposing the Company's Motion. On December 6, 1999, the Department of Justice (the "DOJ") (on behalf of the United States) filed a brief opposing the Company's Motion For Partial Summary Judgment On Liability And Cross-Moved for Summary Judgment On the Company's Takings claim. On January 25, 2000, the Company responded to the DOJ's brief and the FDIC's brief by filing a Brief (i) In Reply To Defendant's Opposition To Plaintiffs' Motion For Partial Summary Judgment, (ii) In Opposition To Defendant's Cross-Motion For Summary Judgment, And (iii) In Reply To FDIC's Response To Plaintiffs' Motion For Partial Summary Judgment. On February 22, 2000 the DOJ filed a brief in Reply To Plaintiffs' Opposition To Defendant's Cross-Motion For Summary Judgment.
Notes to Consolidated Financial Statements (continued)
On February 18, 2000, the Court issued an Order granting the Company's motion to suspend the expert discovery period until after the Company's Summary Judgment Motion has been decided. The expert discovery period will now commence with the Company's identification of its experts within 30 days of the decision of the Court on the Company's pending Summary Judgment Motion. On October 2, 2000, Senior Judge Loren Smith of the Court of Federal Claims heard oral arguments in the Company's supervisory goodwill case against the United States government. The court heard arguments both as to the contractual liability of the United States to Carteret Savings Bank, and as to the Company's claim against the United States under the Takings Clause of the Fifth Amendment. No assurance can be given regarding the ultimate outcome of the litigation.
(c) Other - AmBase Corporation v. City Investing Company Liquidating Trust, et al.
The Delaware Court Action - In August 2000, the Company filed a complaint against City Investing Company Liquidating Trust (the "Trust") seeking determination by the Delaware Chancery Court that the Trust, as successor to City Investing Company, (as opposed to AmBase Corporation), should be primarily liable for amounts, if any, owed to the IRS in connection with the NV Withholding Obligation Issue, as further discussed herein above. The Company is also seeking other relief and certain other damages from the Trust and its Trustees. On September 29, 2000, the Trust moved to dismiss the Company's complaint on the grounds that it fails to state a claim for which relief can be granted and the Company's claims are barred by the statute of limitations. The Company subsequently filed a brief in response to the Trust's motion.
On December 14, 2000 oral argument on Trust's motion to dismiss was heard before the Delaware Court. On January 3, 2001, Vice Chancellor Strine of the Court of Chancery of the State of Delaware granted the Motion to Dismiss this action filed by the defendants. On February 7, 2001, Vice Chancellor Strine denied AmBase's Motion for Reargument of this dismissal. On March 8, 2001 the Company filed a Notice of Appeal of the February 7, 2001 denial, to the Supreme Court of the State of Delaware, but has subsequently withdrawn this appeal in order to proceed more directly with its New York Court action against the Trust, described below.
The New York Court Action - On January 31, 2001, the Company filed a Complaint in the United States District Court for the Southern District of New York (the "NY Court") seeking determination that the Trust, as successor to City Investing Company, should be primarily liable for amounts, if any, owed to the IRS in connection with the NV Withholding Obligation Issue. The Company is also seeking other relief and certain other damages from the Trust and its Trustees. On February 23, 2001, the Trust filed a Motion to Dismiss the Company's Complaint in this action. On March 9, 2001 the Company filed its opposition to the Trust's Motion to Dismiss. No assurances can be given regarding the ultimate outcome of the litigation.
Note 12 - Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash equivalents, and accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of investment securities - held to maturity are based on current market quotations. Other investment securities are based upon the December 2000 and 1999 cost for these privately placed shares. The carrying value of applicable other liabilities approximates their fair value.
Notes to Consolidated Financial Statements (continued)
Note 13 - Supplemental Disclosure of Cash Flow Information
Additional information regarding cash flow for the years ended December 31 is as follows:
For the years ended December 31, 2000, 1999 and 1998 no cash interest was paid.
Note 14 - Quarterly Financial Information (unaudited)
Summarized quarterly financial information follows:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.
PART III
ITEM 10.
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 June 1, 2001, 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.
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 June 1, 2001, 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.
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 June 1, 2001, 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.
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 June 1, 2001, 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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
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, February 1, 1996 and November 1, 2000) (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, the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and the Company's Quarterly Report on Form 10-Q for the Quarterly period ended September 30, 2000, respectively).
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 as amended (incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 28, 1998).
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).
10G. Employment Agreement dated as of June 1, 1991 between Richard A. Bianco and the Company, as amended 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), as amended February 24, 1997 (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) and as amended March 6, 2001 included herein.
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
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, 2000.
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 29th day of March 2001.
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 29th day of March 2001.
RICHARD A. BIANCO JOHN P. FERRARA Chairman, President and Vice President, Chief Financial Officer Chief Executive Officer and Controller (Principal Financial and Accounting Officer)
JOHN B. COSTELLO ROBERT E. LONG Director Director
MICHAEL L. QUINN Director
DIRECTORS AND OFFICERS
Board of Directors Richard A. Bianco John B. Costello Robert E. Long Chairman, President and Private Investor Managing Director Chief Executive Officer Goodwyn, Long & Black AmBase Corporation
Michael Quinn Private Investor
AmBase Officers Richard A. Bianco John P. Ferrara Chairman, President and Vice President, Chief Financial Officer Chief Executive Officer and Controller
INVESTOR INFORMATION
Annual Meeting of Stockholders Corporate Headquarters ============================== ======================
The 2001 Annual Meeting is currently AmBase Corporation scheduled to be held at 9:00 a.m. Eastern 51 Weaver Street, Bldg. 2 Daylight Time, on Friday, June 1, 2001, at: Greenwich, CT 06831-5155 (203) 532-2000 Greenwich Library, the Cole Auditorium 101 West Putnam Avenue Greenwich, CT 06830 Stockholder Inquiries =====================
Common Stock Trading Stockholder inquiries, ==================== including requests for the following: (i) change of AmBase stock is traded through one or address; (ii) replacement of more market-makers (ii) replacement of lost stock certificates; lost stock certificates; with (iii) Common Stock name quotations made available in the "pink registration changes; (iv) sheets" (iii) Common Stock name Quarterly Reports on Form registration changes; published by the 10-Q; (v) Annual Reports on National Quotation Bureau, Inc. Form 10-K; (vi)proxy material; and (vii) information regard- ing stock holdings, should be directed to:
Issue Abbreviation Ticker Symbol American Stock Transfer and ===== ============ ============= Trust Company 40 Wall Street - 46th Floor Common Stock AmBase ABCP New York, NY 10005 Attn: Shareholder Services (800) 937-5449 or Transfer Agent and Registrar (718) 921-8200 ============================ In addition, the Company's American Stock Transfer and public reports, including Trust Company Quarterly Report on Form 10-Q, 40 Wall Street - 46th Floor Annual Report on Form 10-K New York, NY 10005 and Proxy Statements, can be Attn: Shareholder Services Obtained through the (800) 937-5449 or (718) 921-8200 Securities and Exchange Commission EDGAR Database Independent Accountants over the World Wide Web at ======================= www.sec.gov. PricewaterhouseCoopers LLP 1177 Avenue of the Americas Number of Stockholders New York, NY 10036 ====================== As of January 31, 2001, there were approximately 17,700 stockholders.
EXHIBITS ATTACHED WITH THIS FORM 10-K