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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
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.)
100 Putnam Green, 3rd Floor, Greenwich, CT 06830-6027
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 532-2000
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock ($0.01 par value)
Rights to Purchase Common Stock
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
-------- -------------
At February 28, 2003, there were 46,208,519 shares of registrant's Common Stock
outstanding. At June 28, 2002 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 $0.99 per share, was approximately $35 million. The Common Stock
constitutes registrant's only outstanding security.
Portions of the registrant's definitive Proxy Statement for its 2003 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 15, Page 31.
AmBase Corporation
Annual Report on Form 10-K
December 31, 2002
TABLE OF CONTENTS 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.................................................2
Executive Officers of the Registrant................................................................2
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 7A. Quantitative and Qualitative Disclosures About Market Risk..........................................9
Item 8. Financial Statements and Supplementary Data........................................................10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............30
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................30
Item 11. Executive Compensation.............................................................................30
Item 12. Security Ownership of Certain Beneficial Owners & Management & Related Stockholder Matters.........30
Item 13. Certain Relationships and Related Transactions.....................................................30
Item 14. Controls & Procedures..............................................................................30
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................31
PART I
ITEM 1. BUSINESS
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, and its affiliated property and casualty insurance companies
("The Home"). In 1985, City, which 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 in February 1991.
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. See
Part II - Item 8 - Note 10 to the Company's consolidated financial statements
for a discussion of Supervisory Goodwill litigation.
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 equity interest in SDG, Inc. and was granted the
exclusive right to act as the investment banking/financial advisor to SDG, Inc.
and all of its subsidiaries and affiliates. The Company also purchased
convertible preferred and common stock in AMDG, Inc. ("AMDG"), a majority owned
subsidiary of SDG, Inc., SDG and AMDG are development stage pharmaceutical
companies. In September 2002 the Company recorded a write down of its
investments in SDG and AMDG, see Part II - Item 7 - Results of Operations, for
further information.
In December 2002, the Company, through a wholly owned subsidiary, purchased a
38,000 square foot office building in Greenwich, Connecticut for investment
purposes. The purchase price was approximately $17,291,000 and was financed
using currently available funds. The Company also owns a 14,500 square foot
office building in Greenwich, Connecticut.
The Company's assets currently consist primarily of cash and cash equivalents,
investment securities, and real estate owned. The Company's main source of
operating revenue is rental income received on real estate owned. The Company
also earns non-operating revenue principally consisting of interest income
earned on investment securities and cash equivalents. The Company continues to
evaluate a number of possible acquisitions, and is engaged in the management of
its assets and liabilities, including the contingent assets and alleged
litigation liabilities, as described in Part II - Item 8 - Note 10 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. The Company had 5 employees
at December 31, 2002.
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
59 Maiden Lane
New York, NY 10038
Attention: Shareholder Services
(800) 937-5449 or (718) 921-8200 Ext. 6820
Copies of Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Proxy
Statements can also be obtained directly from the Company free of charge by
sending a request to the Company by mail as follows:
AmBase Corporation
100 Putnam Green, 3rd Floor
Greenwich, CT 06830
Attn: Shareholder Services
In addition, the Company's public reports, including Quarterly Reports on Form
10-Q, Annual Reports on Form 10-K and Proxy Statements, can be obtained through
the Securities and Exchange Commission ("SEC") EDGAR Database over the World
Wide Web at www.sec.gov. Materials filed with the SEC may also be read or copied
by visiting the SEC's Public Reference Room, 450 Fifth Street, NW, Washington,
DC 20549. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330.
ITEM 2. PROPERTIES
The Company owns two office buildings in Greenwich, Connecticut. The first
building is approximately 14,500 square feet, is substantially leased to
unaffiliated third parties with a small amount utilized by the Company for its
executive offices. The second building, purchased in December 2002, is
approximately 38,000 square feet and is fully leased to unaffiliated third
parties.
ITEM 3. LEGAL PROCEEDINGS
The Company has certain alleged liabilities and is a defendant in certain
lawsuits. The accompanying consolidated financial statements do not include
adjustments that might result from an ultimate unfavorable outcome of these
uncertainties. Although the basis for the calculation of the litigation reserves
are regularly reviewed by the Company's management and outside legal counsel,
the assessment of these reserves includes an exercise of judgment and is a
matter of opinion. At December 31, 2002, the litigation reserves were
$1,290,000. See Part II - Item 8 - Note 10 to the Company's consolidated
financial statements for a discussion of the Company's legal proceedings.
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,
2002:
Name Age Title
==== === ==========
Richard A. Bianco 55 Chairman, President and
Chief Executive Officer of
AmBase Corporation
John P. Ferrara 41 Vice President, Chief Financial Officer
and Controller of AmBase Corporation
Mr. Bianco was elected a director of the Company in January 1991, and has served
as President and Chief Executive Officer of the Company since May 1991. On
January 26, 1993, Mr. Bianco was elected Chairman of the Board of Directors of
the Company. He served as Chairman, President and Chief Executive Officer of
Carteret, then a subsidiary of the Company, from May 1991 to December 1992.
Mr. Ferrara was elected to the position of Vice President, Chief Financial
Officer 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. 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, markdown or commission, and may not necessarily
represent actual transactions.
2002 2001
===================== =====================
High Low High Low
==== ==== ==== ====
First Quarter....................... $ 1.60 $ 1.11 $ 0.79 $ 0.56
Second Quarter...................... 1.44 0.95 0.99 0.57
Third Quarter....................... 1.10 0.91 1.06 0.86
Fourth Quarter...................... 0.97 0.88 1.08 0.85
As of January 31, 2003, there were approximately 17,000 beneficial owners of the
Company's Common Stock. No dividends were declared or paid on the Company's
Common Stock in 2002 or 2001. The Company does not intend to declare or pay
dividends in the foreseeable future.
For information concerning the Company's stockholder rights plan and common
stock repurchase plan, see Part II - Item 8 - Note 5 to the Company's
consolidated financial statements.
The following table summarizes information about securities authorized for
issuance under equity compensation plans of the Company at December 31, 2002 as
follows:
Shares to be issued Weighted average
(shares in upon exercise of exercise price of Shares available for
thousands) outstanding options outstanding options future issuance
========== =================== =================== ====================
Plans approved
by stockholders 1,170 $ 1.20 3,905
===================
Plan not approved
by stockholders - 110
--------------------- ---------------------
Total 1,170 $ 1.20 4,015
===================== =================== =====================
Plan not approved by stockholders:
The Company has 110,000 shares of common stock reserved for issuance under the
AmBase Corporation Stock Bonus Plan (the "Stock Bonus Plan"), which was approved
for adoption by the Board of Directors of the Company in 1989. The purpose of
the Stock Bonus Plan is to encourage individual performance and to reward
eligible employees whose performance, special achievements, longevity of service
to the Company or suggestions make a significant improvement or contribution to
the growth and profitability of the Company. The Stock Bonus Plan is
administered by the Personnel Committee of the Board of Directors. Members of
the Personnel Committee are not eligible for an award pursuant to the Stock
Bonus Plan. The Company's President may also designate eligible employees to
receive awards, which awards are not to be in excess of 100 shares of Common
Stock. No fees or expenses of any kind are to be charged to a participant. Any
employee of the Company, except for certain officers or directors of the
Company, are eligible to receive shares under the Stock Bonus Plan.
Distributions of shares may be made from authorized but unissued shares,
treasury shares or shares purchased on the open market.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with the Company's
consolidated financial statements included in Part II - Item 8 of this Form
10-K.
Years ended December 31
=================================================================
(in thousands, except per share data) 2002 2001 2000 1999 1998
==== ==== ==== ==== ====
Operating revenue .......................... $ 477 $ 179 $ - $ - $ -
Interest income............................. 705 2,099 2,795 2,166 2,430
Net income (loss)........................... (5,133) 62,110 5,174 (4,515) 181
====== ====== ====== ====== =====
Net income (loss) per common share
Basic....................................... $ (0.11) $ 1.34 $ 0.11 $(0.10) $ -
Assuming dilution........................... (0.11) 1.34 0.11 (0.10) -
====== ====== ====== ====== ======
Dividends .................................. - - - - -
====== ====== ====== ====== ======
Total assets ............................... $ 43,656 $ 50,445 $ 53,102 $47,678 $ 51,638
Total stockholders' equity.................. 32,902 38,013 (24,097) (29,424) (25,000)
====== ====== ====== ====== ======
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 Part II - Item 8, herein.
Financial Condition and Liquidity
The Company's assets at December 31, 2002, aggregated $43,656,000, consisting
principally of cash and cash equivalents of $4,918,000, investment securities of
$18,880,000 and real estate owned of $19,622,000. At December 31, 2002, the
Company's liabilities, including reserves for litigation liabilities, as further
described in Part II - Item 8 - Note 10 to the Company's consolidated financial
statements, aggregated $10,754,000. Total stockholders equity was $32,902,000.
At December 31, 2002, the litigation reserves were $1,290,000. For a discussion
of alleged liabilities, lawsuits and governmental proceedings, see Part II -
Item 8 - Note 10.
The liability for the supplemental retirement plan (the" Supplemental Plan"),
which is accrued but not funded, increased to $7,608,000 at December 31, 2002
from $6,682,000 at December 31, 2001. The Supplemental Plan liability reflects
the actuarially determined Accrued Pension Costs in accordance with GAAP. The
increased liability is the result of an additional year of accrued service and
interest cost on the liability. The Supplemental Plan liability is further
affected by changes in discount rates and experience which could be different
from that assumed. See Part II - Item 8 - Note 6 for further details.
The decrease in the liability for postretirement welfare benefits in 2002
compared to 2001 is due to the termination of the postretirement welfare plans.
The Company has no further liability for postretirement welfare benefits. See
Part II - Item 8 - Note 7 for further details.
For the year ended December 31, 2002, cash of $5,936,000 was used by operations,
including the payment of operating expenses and prior year accruals, partially
offset by the receipt of interest income. The cash needs of the Company for 2002
were principally satisfied by interest income received on investment securities
and cash equivalents, the Company's financial resources and rental income.
Management believes that the Company's cash resources are sufficient to continue
operations for 2003.
For the year ended December 31, 2001, cash of $4,640,000 was used by operations,
including the payment of prior year accruals and operating expenses, partially
offset by the receipt of interest income. The cash needs of the Company for 2001
were principally satisfied by interest income received on investment securities
and cash equivalents, and the Company's financial resources.
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 reserves. The cash
needs of the Company in 2000 were principally satisfied by proceeds received in
connection with the SF Holdings litigation settlement, and interest income
received on investment securities and cash equivalents.
The Company owns a 14,500 square foot office building in Greenwich, Connecticut.
The Company utilizes 2,100 square feet for its executive offices and leases the
remaining approximately 12,400 square feet of office space to unaffiliated third
parties.
In December 2002 the Company, through a wholly owned subsidiary, purchased a
38,000 square foot office building in Greenwich, Connecticut for investment
purposes. The purchase price was approximately $17,291,000 and was financed
using currently available funds.
In connection with an escrow account established by Zurich SF Holdings LLC ("SF
Holdings") pursuant to a June 2000 settlement agreement with SF Holdings, the
Company requested, in December 2001, the payment of approximately $1,500,000
from the escrow account for reimbursement of certain expenses previously paid by
the Company (the "Escrow Request"). SF Holdings refused to release escrow funds
for the payment of these expenses. As a result of SF Holdings' refusal, the
Escrow Request was arbitrated in accordance with the settlement agreement. In
October 2002, an arbitrator denied the Company's Escrow Request and ordered that
the Company pay SF Holdings' arbitration expenses of approximately $520,000,
which were paid by the Company in December 2002. Based on the arbitrator's
decision, the escrow account was terminated and the remaining escrow funds were
delivered to SF Holdings in accordance with the agreement.
The Company has made no purchases under its common stock repurchase plan as of
December 31, 2002. There are no additional material commitments for capital
expenditures as of December 31, 2002. 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 assets and liabilities, including the
contingent assets and alleged litigation liabilities. 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.
Management of the Company in consultation with outside legal counsel,
continually reviews the likelihood of liability and associated costs of pending
and threatened litigation. At December 31, 2002, the litigation reserves were
$1,290,000. For a discussion of alleged liabilities, lawsuits and proceedings,
and a discussion of the Supervisory Goodwill litigation, see Part II - Item 8 -
Note 10 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:
(in thousands) 2002 2001 2000
==== ==== ====
Revenues:
Rental income $ 477 $ 179 $ -
-------- -------- --------
Operating expenses:
Compensation and benefits..................................... 3,515 5,021 3,507
Professional and outside services............................. 1,641 1,020 2,051
Property operating & maintenance.............................. 130 117 91
Depreciation ................................................. 74 57 16
Insurance..................................................... 73 65 60
Other operating............................................... 106 126 127
-------- -------- --------
5,539 6,406 5,852
-------- -------- --------
Operating loss................................................ (5,062) (6,227) (5,852)
-------- -------- --------
Interest income............................................... 705 2,099 2,795
Other income - termination of postretirement welfare plans.... 788 - -
Other income.................................................. 215 75 186
Reversal of withholding obligation reserve.................... - 66,388
Other income - litigation settlement.......................... - - 8,250
Write down of investments..................................... (1,600) - -
-------- -------- --------
Income (loss) before income taxes............................. (4,954) 62,335 5,379
Income tax expense............................................ (179) (225) (205)
-------- -------- --------
Net income (loss)............................................. $ (5,133) $ 62,110 $ 5,174
======== ======== ========
The Company's main source of operating revenue is rental income earned on real
estate owned. The Company also earns non-operating revenue consisting
principally of interest income on investment securities and cash equivalents.
The Company's management expects that operating cash needs in 2002 will be met
principally by rental income, the Company's current financial resources and the
receipt of non-operating revenue consisting of interest income earned on
investment securities and cash equivalents.
The Company recorded a net loss of $5,133,000 or $0.11 per share, for the year
ended December 31, 2002. As further described above, 2002 results include
non-recurring other income of $788,000 representing the termination of
postretirement benefit plans and $215,000 of additional other income. The year
ended December 31, 2002 also includes a charge of $1,600,000 to reflect a write
down of the Company's investments in AMDG and SDG, as further described below.
For the year ended December 31, 2001, the Company recorded net income of
$62,110,000 or $1.34 per share. As further described below, 2001 results include
non-recurring other income representing the reversal of the Withholding
Obligation reserve.
The Company recorded net income of $5,174,000 or $0.11 per share, for the year
ended December 31, 2000. The 2000 results include $8,250,000 of other income
principally representing net proceeds received in connection with the Company's
litigation settlement with SF Holdings.
Compensation and benefits were $3,515,000 in 2002, $5,021,000 in 2001 and
$3,507,000 in 2000. The decrease in 2002 compared to 2001 is primarily due to a
decrease in incentive compensation. The increased amount in 2001 compared to
2002 and 2000 is primarily due to an increase in 2001 incentive compensation
paid as a result of the successful resolution of the withholding obligation
issue as further described below.
Professional and outside services increased to $1,641,000 in 2002, compared to
$1,020,000 in 2001. The increase for the year 2002 compared with the year 2001
is primarily due to legal expenses incurred in connection with the Zurich
Arbitration proceedings. Professional and outside services were $2,051,000 for
the year 2000 and were principally comprised of expenses relating to the
Supervisory Goodwill litigation, and expenses incurred relating to the
litigation settlement with SF Holdings. Expenses for professional and outside
services in 2002, 2001 and 2000 do not include costs associated with defending
pending and threatened litigation, which were previously reserved for and are
charged against the litigation reserves when paid.
Property operating and maintenance expenses were $130,000 in 2002, $117,000 in
2001 and $91,000 in 2000. The 2002 period includes expenses relating to a 14,500
square foot building for a full year, plus expenses for a 38,000 square foot
building for December 2002. The lower expense in 2001 compared to 2002 is due to
the fact that the 2001 period reflects property ownership expenses for a 14,500
square foot building for only 8 months, offset to some extent by office
relocation costs incurred in 2001. Amounts in 2000 reflect occupancy costs of
office space leased by the Company. Property operating and maintenance expenses
have not been reduced by tenant reimbursements.
Interest income was $705,000 in 2002, $2,099,000 in 2001 and $2,795,000 in 2000.
The decrease in 2002 compared to the 2001 period, was primarily attributable to
a lower yield on cash equivalents and investment securities, and to a lesser
extent, a lower average level of investment securities. Interest rates on
investments in treasury bills dropped significantly throughout 2002 compared to
2001. During 2002 interest rates on investments in treasury bills ranged from
1.9% down to 1.2% compared to 2001 interest rates ranging from 6.0% down to
3.5%. The decrease in 2001 compared to 2000 was principally attributable to a
decreased yield on investments held in 2001 compared with 2000.
Other income of $788,000 relating to the termination of postretirement welfare
plans recorded in 2002 is the result of the full termination of the retiree
medical and life insurance plans. The Company has no future liability for any of
these medical or life insurance plans. The Company and its subsidiaries do not
provide postretirement welfare benefits to current employees.
Additional other income of $215,000 in 2002 is principally attributable to the
collection on an investment previously written off. Other income of $75,000 and
$186,000 for the years ended December 31, 2001 and 2000, respectively, is
attributable to the collection of a receivable previously considered
uncollectable.
The 2001 results include a $66,388,000 Withholding Obligation reserve reversal
which is reflected as other income in the Consolidated Statement of Operations
as a result of a May 2001 United States Tax Court ruling in favor of City
Investing Company ("City"), holding that City was not liable for the payment of
withholding taxes. The IRS had contended that the withholding of tax on interest
payments were due by City in connection with City's Netherlands Antilles finance
subsidiary for the years 1979 through 1985.
Other income of $8,250,000 for the year ended December 31, 2000, is attributable
to the net proceeds received in June 2000, relating to the SF Holdings
litigation settlement.
Write down of investments in 2002 reflects the Company's write down of its
investments in SDG and AMDG of $1,250,000 and $350,000, respectively. The
Company recorded the write down in September 2002, in connection with the
ongoing evaluation of its investments, and the determination that the value of
its investments in SDG and AMDG had been other than temporarily impaired. Under
GAAP, if an investment is other than temporarily impaired, the Company is
required to reflect an adjustment in its Financial Statements.
Factors considered in the Company's decision to write down these investments
included, in part, the general inactive status of SDG's and AMDG's clinical
testing, as well as SDG's and AMDG's current financial condition. The Company is
not selling or disposing of its investments in SDG or AMDG and remains hopeful
that it will be able to fully realize its investment value. In September 2000,
the Company filed a lawsuit against SDG, and certain of its officers and
directors, to pursue claims against the parties, including but not limited to
SDG's failure to honor a contract which granted the Company the right to act as
the exclusive investment banking/financial advisor to SDG, and all of its
subsidiaries and affiliates. See Part II - Item 8, Note 10 to the Company's
consolidated financial statements, for further information. The Company will
continue to monitor the status of its SDG and AMDG investments and vigorously
pursue recovery of its legal claims. However, there can be no assurance that the
Company will be able to recover all or any part of its investment in these
companies.
The 2002, 2001 and 2000 income tax provisions of $179,000, $225,000 and
$205,000, 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 Part II - Item 8 - Note 9 to the
Company's consolidated financial statements.
From time to time, the Company may publish "Forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Act"), and Section 21E of the Exchange Act or make oral statements that
constitute forward-looking statements. These forward-looking statements may
relate to such matters as anticipated financial performance, future revenues or
earnings, business prospects, projected ventures, anticipated market
performance, and similar matters. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company cautions readers that a
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, include, but are not limited to: (i) transaction
volume in the securities markets, (ii) the volatility of the securities markets,
(iii) fluctuations in interest rates, (iv) changes in occupancy rates or real
estate values, (v) changes in regulatory requirements which could affect the
cost of doing business, (vi) general economic conditions, (vii) changes in the
rate of inflation and the related impact on the securities markets, (viii)
changes in federal and state tax laws, and (ix) risks arising from unfavorable
decisions in our current material litigation matters, or unfavorable decisions
in other supervisory goodwill cases. The Company does not undertake any
obligation to update or revise any forward-looking statements whether as a
result of future events, new information or otherwise.
Application of Critical Accounting Policies:
Our consolidated financial statements are based on the selection and application
of accounting principles generally accepted in the United States of America,
which require us to make estimates and assumptions about future events that
affect the amounts reported in our financial statements and the accompanying
notes. Future events and their effects cannot be determined with absolute
certainty. The determination of estimates requires the exercise of judgment.
Actual results could differ from those estimates, and any such differences may
be material to the financial statements. We believe that the following
accounting policies, which are important to our financial position and results
of operations, require a higher degree of judgment and complexity in their
application and represent the critical accounting policies used in the
preparation of our financial statements. If different assumptions or conditions
were to prevail, the results could be materially different from our reported
results. For a summary of all our accounting policies, including the accounting
policies discussed below, see Part II - Item 8 - Note 2.
Supplemental Retirement Plan: Our supplemental pension plan (the "Supplemental
Plan") accrued liability and benefit costs are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates, and projected future earnings, which are updated on an annual basis at
the beginning of each year. We are required to consider current market
conditions, including changes in interest rates, in making these assumptions.
Material changes in our accrued Supplemental Plan liability and annual costs may
occur in the future due to changes in assumptions or experience different than
that assumed. The Supplemental Plan liability is not funded and is net of
unrecognized losses of $1,993,000.
The key assumptions used in developing the 2002 Supplemental Plan benefit costs
and accrued liability were a 6.75% discount rate, a 6% rate of compensation
increase, and the amortization of unrecognized losses over the average remaining
lives of active participants. These assumptions were consistent with prior year
assumptions except that the discount rate was reduced by one-quarter of a
percent due to current market conditions.
Legal Proceedings: The Company has certain alleged liabilities and is a
defendant in certain lawsuits. The accompanying consolidated financial
statements do not include adjustments that might result from an ultimate
unfavorable outcome of these uncertainties. Management of the Company in
consultation with outside legal counsel continually reviews the likelihood of
liability and associated costs of pending and threatened litigation including
the basis for the calculation of the litigation reserves. The assessment of
these reserves includes an exercise of judgment and is a matter of opinion. At
December 31, 2002, the litigation reserves were $1,290,000. The Company intends
to aggressively contest all pending and threatened litigation and contingencies,
as well as pursue all sources for contributions to settlements. For a discussion
of alleged liabilities, lawsuits and proceedings, see Part II - Item 8 - Note
10.
Income Tax Audits: The Company's federal, state and local tax returns, from time
to time, may be audited by the tax authorities, which could result in proposed
assessments or a change in the net operating loss ("NOL") carryforwards
currently available. The Company's federal income tax returns for years
subsequent to 1992 have not been reviewed by the Internal Revenue Service. The
accrued amounts for income taxes reflects management's best judgment as to the
amounts payable for all open tax years.
Deferred Tax Assets: As of December 31, 2002 the Company had deferred tax assets
arising primarily from net operating loss carryforwards and alternative minimum
tax credits available to offset taxable income in future periods. A valuation
allowance has been established for the entire net deferred tax asset of $31
million, as management, at the current time, has no basis to conclude that
realization is more likely than not. The valuation allowance was calculated in
accordance with the provisions of Financial Accounting Standards Board Statement
of Financial Accounting, Standards No. 109, "Accounting for Income Taxes"
("Statement 109"), which places primary importance on a company's cumulative
operating results for the current and preceding years. We intend to maintain a
valuation allowance for the entire deferred tax asset until sufficient positive
evidence exists to support a reversal. See Part II - Item 8 - Note 10.
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, 2002 and 2001 with maturity
dates of less than one year consist of the following:
2002 2001
====================== =====================
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- -------
(in thousands)
U.S. Treasury Bills....................................... $18,259 $18,260 $ 40,232 $40,245
======= ======= ======== =======
Weighted average interest rate............................ 1.24% 1.87%
======= ========
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.
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, Comprehensive Income (Loss), Changes in
Stockholders' Equity, and Cash Flows present fairly, in all material respects,
the financial position of AmBase Corporation and its subsidiaries (the
"Company") at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 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 for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 19, 2003
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31
(in thousands, except per share data) 2002 2001 2000
==== ==== ====
Revenues:
Rental income $ 477 $ 179 $ -
-------- -------- --------
Operating expenses:
Compensation and benefits..................................... 3,515 5,021 3,507
Professional and outside services............................. 1,641 1,020 2,051
Property operating and maintenance ........................... 130 117 91
Depreciation ................................................. 74 57 16
Insurance..................................................... 73 65 60
Other operating............................................... 106 126 127
-------- -------- --------
5,539 6,406 5,852
-------- -------- --------
Operating loss................................................ (5,062) (6,227) (5,852)
-------- -------- --------
Interest income............................................... 705 2,099 2,795
Other income - termination of postretirement welfare plans.... 788 - -
Other income.................................................. 215 75 186
Reversal of withholding obligation reserve.................... - 66,388 -
Other income - litigation settlement.......................... - - 8,250
Write down of investments..................................... (1,600) - -
-------- -------- --------
Income (loss) before income taxes............................. (4,954) 62,335 5,379
Income tax expense ........................................... (179) (225) (205)
-------- -------- --------
Net income (loss)............................................. $ (5,133) $ 62,110 $ 5,174
======== ======== ========
Net income (loss) per common share:
Basic......................................................... $ (0.11) $ 1.34 $ 0.11
Assuming dilution ............................................ (0.11) 1.34 0.11
===== ===== =====
Dividends..................................................... $ - $ - $ -
===== ===== =====
Weighted average common shares outstanding:
Basic......................................................... 46,209 46,209 46,209
====== ====== ======
Assuming dilution............................................. 46,209 46,314 46,264
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31
(in thousands, except for share amounts) 2002 2001
==== ====
Assets:
Cash and cash equivalents....................................................... $ 4,918 $ 6,130
Investment securities:
Held to maturity (market value $18,260 and $40,245, respectively)........... 18,259 40,232
Available for sale, carried at fair value................................... 621 -
------- -------
Total investment securities..................................................... 18,880 40,232
------- -------
Accounts receivable ............................................................ 109 6
Real estate owned:
Land....................................................................... 6,954 1,880
Buildings.................................................................. 12,772 555
------- -------
19,726 2,435
Less: accumulated depreciation ............................................ (104) (42)
------- -------
Real estate owned, net.......................................................... 19,622 2,393
------- -------
Investment in SDG, Inc. at cost in 2001......................................... - 1,250
Other assets.................................................................... 127 434
------- -------
Total assets.................................................................... $ 43,656 $ 50,445
======= =======
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued liabilities........................................ $ 1,563 $ 3,267
Supplemental retirement plan.................................................... 7,608 6,682
Postretirement welfare benefits................................................. - 913
Other liabilities............................................................... 293 99
Litigation reserves............................................................. 1,290 1,471
-------- --------
Total liabilities............................................................... 10,754 12,432
-------- --------
Commitments and contingencies................................................... - -
-------- --------
Stockholders' equity:
Common stock ($0.01 par value, 200,000,000 authorized,
46,335,007 issued)........................................................... 463 463
Paid-in capital................................................................. 547,940 547,940
Accumulated other comprehensive income.......................................... 22 -
Accumulated deficit............................................................. (514,876) (509,743)
Treasury stock, at cost 126,488 shares.......................................... (647) (647)
-------- --------
Total stockholders' equity...................................................... 32,902 38,013
-------- --------
Total liabilities and stockholders' equity...................................... $ 43,656 $ 50,445
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Accumulated other
(in thousands) Common Paid-in comprehensive Accumulated Treasury
stock capital income (loss) deficit stock Total
======== ======== ============== =========== ======== ========
December 31, 1999............. $ 455 $547,795 $ - $ (577,027) $ (647) $(29,424)
Stock options exercised 8 145 - - - 153
Net income.................... - - - 5,174 - 5,174
--------- -------- -------------- ----------- ------- --------
December 31, 2000............. 463 547,940 - (571,853) (647) (24,097)
Net income.................... - - - 62,110 - 62,110
--------- -------- -------------- ----------- ------- --------
December 31, 2001............. 463 547,940 - (509,743) (647) 38,013
Net loss - - (5,133) - (5,133)
Other comprehensive
income (loss) - - 22 - - 22
--------- --------- ------------- ---------- ------- --------
December 31, 2002............. $ 463 $ 547,940 $ 22 $(514,876) $ (647) $32,902
========= ========= ============= ========== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31
(in thousands)
2002 2001 2000
======== ======== =======
Net income (loss) .......................................... $(5,133) $ 62,110 $ 5,174
Unrealized holding gains on investment securities - available
for sale, net of tax effect of $0............................ 22 - -
------- -------- -------
Comprehensive income (loss).................................. $(5,111) $ 62,110 $ 5,174
======= ======== =======
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
(in thousands) 2002 2001 2000
====== ====== ======
Cash flows from operating activities:
Net income (loss)........................................................ $(5,133) $62,110 $5,174
Adjustments to reconcile net income (loss) to net cash (used) provided
by operating activities:
Accretion of discount - investment securities........................ (631) (2,037) (2,732)
Depreciation and amortization........................................ 74 57 16
Termination of postretirement welfare plans ......................... (788) - -
Reversal of withholding obligation reserve........................... - (66,388) -
Changes in other assets and liabilities:
Write down of investments ........................................... 1,600 - -
Other assets......................................................... (188) (3) 36
Accounts payable and accrued liabilities............................. (1,704) 1,378 (13)
Other liabilities.................................................... 994 518 346
Litigation reserves uses............................................. (181) (275) (237)
Other, net............................................................... 21 - -
------- ------- ------
Net cash provided (used) by operating activities......................... (5,936) (4,640) 2,590
------- ------- ------
Cash flows from investing activities:
Maturities of investment securities - held to maturity................... 128,715 102,765 118,084
Purchases of investment securities - held to maturity.................... (106,111) (94,413) (118,639)
Purchases of investment securities - available for sale.................. (599) - -
Purchase of real estate.................................................. (17,291) (2,435) -
Other, net............................................................... 10 9 10
-------- ------- --------
Net cash provided (used) by investing activities......................... 4,724 5,926 (545)
-------- ------- --------
Cash flows from financing activities:
Stock options exercised.................................................. - - 153
-------- ------- --------
Net cash provided by financing activities................................ - - 153
-------- ------- --------
Net increase (decrease) in cash and cash equivalents..................... (1,212) 1,286 2,198
Cash and cash equivalents at beginning of year........................... 6,130 4,844 2,646
-------- ------- --------
Cash and cash equivalents at end of year................................. $ 4,918 $ 6,130 $ 4,844
======== ======= ========
Supplemental cash flow disclosure:
Income taxes paid........................................................ $ 209 $ 240 $ 170
======== ======= ========
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 two office buildings in Greenwich, Connecticut and 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 an insurance company and a savings bank.
In February 1991, the Company sold its ownership interest in The Home Insurance
Company ("The Home") and its subsidiaries. On December 4, 1992, Carteret Savings
Bank, FA ("Carteret") was placed in receivership by the Office of Thrift
Supervision ("OTS").
The Company's main source of operating revenue is rental income earned on real
estate owned. The Company also earns non-operating revenue principally
consisting of interest earned on investment securities and cash equivalents. The
Company continues to evaluate a number of possible acquisitions, and is engaged
in the management of its assets and liabilities, including the contingent assets
and alleged litigation liabilities, as described in Note 12.
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). Certain reclassifications have been made to the prior year
consolidated financial statements to conform with the 2002 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. Investments in non-public
companies in which ownership interest is less than 20% are accounted for using
the cost method. The Company continually reviews its investments to determine
whether a decline in fair value below the cost basis is other than temporary. If
the decline in fair value is judged to be other than temporary, the cost basis
of the security is written down to fair market value and the amount of the write
down is included in the Consolidated Statement of Operations.
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 taxes.
Interest and dividends on investment securities are recognized in the
Consolidated 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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, 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 and a valuation reserve has been
recorded against net deferred tax assets.
Earnings per share:
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution of EPS that could
occur if options to issue common stock were exercised.
Stock-based compensation:
The Company adopted the disclosure requirements of Financial Accounting
Standards Board, 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 pro forma disclosures of net income
(loss) and earnings per share as if the fair value based method had been
applied. No compensation expense, attributable to stock incentive plans, has
been charged to earnings. For a further discussion and a summary of assumptions
used, see Note 8.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. If the Company had
elected to recognize compensation cost for stock options based on the fair value
at date of grant for stock options, consistent with the method prescribed by
Statement 123, net income (loss) and net income (loss) per share for the year
ended December 31, would have been changed to the pro forma amounts indicated
below.
(in thousands, except per share data) 2002 2001 2000
======= ======= =======
Net income (loss):
As reported..................................................... $ (5,133) $ 62,110 $ 5,174
Deduct: pro forma stock based compensation expense for
stock options pursuant to Statement 123..................... (216) (42) (84)
------- ------- -------
Pro forma....................................................... $ (5,349) $ 62,068 $ 5,090
======= ======= =======
Net income (loss) per common share:
Basic - as reported............................................. $ (0.11) $ 1.34 $ 0.11
Basic - pro forma............................................... (0.11) 1.34 0.11
Assuming dilution - as reported................................. (0.11) 1.34 0.11
Assuming dilution - pro forma .................................. (0.11) 1.34 0.11
======= ======= ======
Revenue recognition:
Minimum rental revenue attributable to operating leases are recognized when
earned and due from tenants. Revenue from tenant reimbursement of common area
maintenance, utilities and other operating expenses are recognized pursuant to
the tenant's lease. The effects of scheduled rent increases and rent
concessions, if any, are presented on a straight line basis over the term of the
lease.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Property operating and maintenance:
Included in property operating and maintenance are expenses for common area
maintenance, utilities, real estate taxes and other reimbursable operating
expenses, which have not been reduced by amounts reimbursable by tenants
pursuant to lease agreements.
Depreciation:
Depreciation expense for buildings is calculated on a straight-line basis over
39 years.
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 - available for sale, consist of investments in equity
securities held for an indefinite period and are carried at fair value with net
unrealized gains and losses recorded directly in a separate component of
stockholders' equity.
Investment securities at December 31 consist of the following:
2002 2001
========================================= ========================================
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....... $18,259 $18,259 $18,260 $ 40,232 $ 40,232 $40,245
Available for Sale:
Equity Securities......... 621 599 621 - - -
------- ------- ------- -------- -------- -------
$18,880 $18,858 $18,881 $ 40,232 $ 40,232 $40,245
======= ======= ======= ======== ======== =======
The gross unrealized gains on investment securities at December 31, consist of
the following:
(in thousands) 2002 2001
==== ====
Held to Maturity - Gross unrealized gains........................................... $ 1 $ 13
==== ====
Available for Sale - Gross unrealized gains......................................... $ 22 $ -
==== ====
Other investment securities at December 31, 2001 consisted of convertible
preferred stock and common stock in AMDG, Inc., which were purchased through
private placements, were classified as other assets, and were carried at cost of
$350,000 at December 31, 2001. No investment securities - available for sale
were sold during 2002.
In September 2002, in connection with the ongoing evaluation of its investments,
the Company determined the value of its investments in SDG, Inc., ("SDG") and
AMDG had been other than temporarily impaired. Under GAAP, if an investment is
other than temporarily impaired, the Company is required to reflect an
adjustment in its Financial Statements. Accordingly, the Company recorded a
write down of its investments in SDG and AMDG of $1,250,000 and $350,000,
respectively. See Note 10 - Legal Proceedings - Litigation with SDG, Inc. for
further information.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 4 - Earnings Per Share
The calculation of basic and diluted earnings per share, including the effect of
dilutive securities, for the years ended December 31, is as follows:
(in thousands, except per share data) 2002 2001 2000
===== ====== ======
Net income (loss)............................................. $ (5,133) $ 62,110 $ $5,174
===== ====== ======
Weighted average common shares outstanding ................... 46,209 46,209 46,209
Effect of Dilutive Securities:
Assumed stock option exercise................................. - 105 55
------ ------ ------
Weighted average common shares outstanding assuming dilution.. 46,209 46,314 46,264
====== ====== ======
Net income (loss) per common share:
Basic......................................................... $ (0.11) $ 1.34 $ 0.11
Assuming dilution ............................................ (0.11) 1.34 0.11
====== ====== =====
Options to purchase common stock of 1,170,000 shares in 2002, 175,000 shares in
2001 and 370,000 shares in 2000 were excluded from the computation of diluted
earnings per share because these options were antidilutive.
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:
2002 2001 2000
========== ========== ==========
Balance at beginning of year................................... 46,208,519 46,208,519 45,348,519
Issuance of common shares...................................... - - 860,000
---------- ---------- ----------
Balance at end of year......................................... 46,208,519 46,208,519 46,208,519
========== ========== ==========
Common Stock balances exclude 126,488 treasury shares at December 31, 2002, 2001
and 2000, carried at an average cost of $5.12 per share aggregating
approximately $647,000.
The Company issued 860,000 previously authorized common shares during January
2000, in connection with the exercise of employee stock options.
At December 31, 2002, there were 5,185,000 common shares reserved for issuance
under the Company's stock option and other employee benefit plans.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Stockholder Rights Plan:
On January 29, 1986, the Company's Board of Directors declared a dividend
distribution of one right for each outstanding share of Common Stock of the
Company. The rights, as amended, which entitle the holder to purchase from the
Company a common share at a price of $75.00, are not exercisable until either a
person or group of affiliated persons acquires 25% or more of the Company's
outstanding common shares or upon the commencement or disclosure of an intention
to commence a tender offer or exchange offer for 20% or more of the common
shares. The rights are redeemable by the Company at $0.05 per right at any time
until the earlier of the tenth day following an accumulation of 20% or more of
the Company's shares by a single acquirer or group, or the occurrence of certain
Triggering Events (as defined in the Stockholder Rights Plan). In the event the
rights become exercisable and, thereafter, the Company is acquired in a merger
or other business combination, or in certain other circumstances, each right
will entitle the holder to purchase from the surviving corporation, for the
exercise price, Common Stock having a market value of twice the exercise price
of the right. The rights are subject to adjustment to prevent dilution and
expire on February 10, 2006.
Common Stock Repurchase Plan:
The Company's Board of Directors have approved and authorized management to
establish and implement a common stock repurchase plan (the "Repurchase Plan").
The Repurchase Plan is dependent upon favorable business conditions and
acceptable purchase prices for the common stock and allows for the repurchase of
up to 10 million shares of the Company's common stock in the open market. No
purchases have been made under the Repurchase Plan as of December 31, 2002.
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:
(in thousands) 2002 2001 2000
==== ==== ====
Service cost of current period................................ $ 756 $ 537 $ 469
Interest cost on projected benefit obligation................. 549 521 468
Amortization of unrecognized losses........................... 82 51 11
----- ----- -----
$ 1,387 $ 1,109 $ 948
===== ===== =====
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:
(in thousands) 2002 2001
==== ====
Projected benefit obligation at beginning of year............................... $8,077 $ 7,170
Service cost.................................................................... 756 537
Interest cost................................................................... 549 521
Actuarial (gain) loss, including effect of change in assumptions................ 679 309
Benefits paid................................................................... (460) (460)
----- -----
Projected benefit obligation at end of year..................................... $9,601 $ 8,077
===== =====
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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) 2002 2001
==== ====
Actuarial present value of benefit obligations:
Accumulated benefit obligations, fully vested................................... $ 7,521 $ 6,310
===== =====
Projected benefit obligation for service rendered to date....................... $ 9,601 $ 8,077
Unrecognized net loss........................................................... (1,993) (1,395)
------ -----
Accrued pension costs........................................................... $ 7,608 $6,682
====== =====
Major assumptions:
Discount rate................................................................... 6.75% 7.0%
Rate of increase in future compensation......................................... 6.0% 6.0%
===== =====
The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"), which
is a "Section 401(k) Plan" within the meaning of the Internal Revenue Code of
1986, as amended (the "Code"). The Savings Plan permits eligible employees to
make contributions of up to 15% of salary, which are matched by the Company at a
percentage determined annually. The employer match is currently 100% of the
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 $24,000, $14,000 and $17,000 in 2002, 2001 and
2000, respectively. All contributions are subject to maximum limitations
contained in the Code.
Note 7 - Postretirement Benefits Other Than Pensions
The Company had previously assumed the obligation to provide a portion of
retiree medical and life insurance coverage to individuals who retired from City
Investing Company, which, prior to September 1985, owned all the outstanding
shares of Common Stock of the Company.
As of December 31, 2002 the Company recorded other income of $788,000 relating
to the termination of postretirement benefit plans as a result of the full
termination of the retiree medical and life insurance plans, in accordance with
generally accepted accounting principles. The Company has no future liability
for any of these medical or life insurance plans. The Company and its
subsidiaries do not provide postretirement benefits to current employees.
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.
AMBASE CORPORATION AND SUBSIDIARIES
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. No Bonuses were paid
attributable to the 1994 Plan for 2002.
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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
During January 2002, the Board of Directors of the Company approved the award of
incentive stock options to certain employees to acquire 700,000 shares of AmBase
Common Stock at exercise prices between $1.09 and $1.19 per share, pursuant to
the 1993 Plan.
The Company's 1985 Stock Option Plan (the "1985 Plan"), provided for the
granting of up to 2,000,000 shares of stock options for the purchase of Common
Stock to salaried employees, through May 22, 1995. No additional stock options
can be awarded under the 1985 Plan. As of December 31, 2002, 75,000 shares are
reserved for issuance under the 1985 Plan.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Incentive plan activity is summarized as follows:
1993 Stock 1985 Stock
(shares in thousands) Incentive Plan Option Plan
======================== ========================
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
====== ======= ======= =======
Outstanding at December 31, 1999................... 280 $ 2.83 935 $ 0.18
Granted............................................ 90 1.00 - -
Exercised.......................................... - - (860) 0.11
------ ======= ------- =======
Outstanding at December 31, 2000................... 370 $ 2.38 75 $ 0.21
Granted............................................ 280 0.64 - -
Forfeited.......................................... (255) 1.86 - -
------ ======= ------- =======
Outstanding at December 31, 2001................... 395 $ 1.49 75 $ 0.21
Granted............................................ 700 1.14 - -
------ ======= ------- =======
Outstanding at December 31, 2002................... 1,095 $ 1.27 75 $ 0.21
====== ======= ======= =======
Options exercisable at:
December 31, 2002............................. 285 $ 1.81 75 $ 0.21
December 31, 2001............................. 145 2.85 75 0.21
December 31, 2000............................. 235 2.86 75 0.21
===== ======== ======= =======
The following table summarizes information about the Company's stock options
outstanding and exercisable under the 1985 Plan and 1993 Plan at December 31,
2002, as follows:
(shares in thousands) Options Outstanding Options Exercisable
============================ =================================
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Life Exercise Exercise
Prices Shares (in years) Price Shares Price
====== ====== ======== ======= ====== =======
$0.21 75 2 $ 0.21 75 $ 0.21
$0.60 to $0.66 220 3 0.66 110 0.66
$0.95 to $1.05 60 3 1.03 60 1.03
$1.09 to $1.19 700 6 1.14 - -
$2.56 to $3.65 70 3 2.88 70 2.88
$4.02 45 1 4.02 45 4.02
----- ======= ====== ------ ======
Total 1,170 360
===== ======
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
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, has been charged to
earnings. The fair value of stock options granted by the Company in 2002, 2001
and 2000 used to compute pro forma net income (loss) and earnings per share
disclosures is the estimated fair value at date of grant.
The Black-Scholes option pricing model was used to estimate the fair value of
the options at grant date based on factors as follows:
2002 2001 2000
==== ===== ====
Dividend yield..................................... 0% 0% 0%
Volatility......................................... 0.56 0.51 0.44
Risk free interest rate............................ 5.04% 5.04% 5.80%
Expected life in years............................. 5-6 4-6 4-6
Weighted average fair value at grant date.......... $0.59 $0.25 $0.45
==== ===== =====
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, 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 a summary of
the pro forma amounts calculated in accordance with Statement 123, see Note 2.
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:
(in thousands) 2002 2001 2000
==== ==== ====
Income tax expense - current state and local.................. $ (179) $ (225) $ (205)
==== ==== ====
The components of pretax income (loss) and the difference between income taxes
computed at the statutory federal rate of 35% in 2002, 2001 and 2000, and the
provision for income taxes for the years ended December 31 follows:
(in thousands) 2002 2001 2000
===== ====== =====
Income (loss) before income taxes............................... $(5,133) $ 62,335 $5,379
===== ====== =====
Tax (expense) benefit:
Tax at statutory federal rate................................... $ 1,797 $(21,817) $ (1,883)
Reversal of Withholding Obligation reserve...................... - 23,236 -
Accounting loss benefit not recognized.......................... (1,797) (1,419) -
Accounting loss benefit recognized.............................. - - 1,883
State income taxes.............................................. (179) (225) (205)
----- ------- ------
$ (179) $ (225) $ (205)
===== ======= ======
As a result of the Office of Thrift Supervision's December 4, 1992 placement of
Carteret in receivership, under the management of the Resolution Trust
Corporation ("RTC")/Federal Deposit Insurance Corporation ("FDIC"), and then
proposed Treasury Reg. ss.1.597-4(g), the Company had previously filed its 1992
and subsequent federal income tax returns with Carteret disaffiliated from the
Company's consolidated federal income tax return. Based upon the impact of
Treasury Reg. ss.1.597-4(g), which was issued in final form on December 20,
1995, a continuing review of the Company's tax basis in Carteret, and the impact
of prior year tax return adjustments on the Company's 1992 federal income tax
return as filed, the Company decided not to make an election pursuant to final
Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's
consolidated federal income tax return effective as of December 4, 1992 (the
"election decision").
The Company has made numerous requests to the RTC/FDIC for tax information
pertaining to Carteret and the resulting successor institution, Carteret Federal
Savings Bank ("Carteret FSB"); however all of the information still has not been
received. Based on the Company's election decision, 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 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 approximately $102 million of NOL carryforwards to be generated,
expiring no earlier than 2008. These NOL carryforwards would be available to
offset future taxable income, in addition to the NOL carryforwards as further
detailed below.
The IRS is currently reviewing the Company's 1992 amended federal income tax
return in connection with several carryback claims filed by the Company during
2000, as further described below. The Company can give no assurances with regard
to the amended federal income tax return filed with the IRS, or the final amount
or expiration of NOL carryforwards ultimately generated from the Company's tax
basis in Carteret.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Based upon the Company's federal income tax returns as filed from 1993 to 2001
(subject to IRS audit adjustments), and excluding the NOL carryforwards
generated from the Company's tax basis in Carteret/Carteret FSB, as noted above,
at December 31, 2002 the Company has NOL carryforwards available to reduce
future federal taxable income, which expire if unused, as follows:
2008 $1,300,000
2009 6,900,000
2010 5,300,000
2012 1,100,000
2018 5,400,000
2019 4,000,000
2020 2,600,000
2021 4,000,000
-----------
$30,600,000
===========
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 AMT credit carryforwards ("AMT Credits"), which are
not subject to expiration. As further discussed below the Company has filed
several carryback claims with the IRS seeking to realize approximately $8
million of the $21 million of AMT Credits.
The Company has filed several carryback claims with the IRS (the "Carryback
Claims") seeking refunds from the IRS of alternative minimum tax and other
federal income taxes paid by the Company in prior years plus applicable IRS
interest based on the filing of an amended 1992 federal income tax return. The
Carryback Claims and amended 1992 federal income tax return are currently being
reviewed by the IRS. IRS examiners have indicated that they will soon issue a
letter to the Company proposing to disallow the Carryback Claims. The Company
intends to seek administrative review of the letter by protesting to the Appeals
Division of the IRS. The Company can give no assurances that the Carryback
Claims will be ultimately allowed by the IRS, the final amount of the refunds,
if any, or when they might be received.
The Company has calculated a net deferred tax asset of $31 million and $30
million as of December 31, 2002 and 2001, respectively, arising primarily from
NOL's and alternative minimum tax credits (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.
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 10 - Legal Proceedings
The Company is or has been a party in a number of lawsuits or proceedings,
including the following:
(a) 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"), of
approximately $2.4 million plus interest, arguing that he served at such firm at
the request of the Company. 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 in the United States District Court for the Southern District of New York,
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 (thereby nullifying it) and ordered a new trial. Subsequent to the
Court's vacatur of the jury's verdict in January 2001 the Court dismissed the
Company's counterclaims for fraud and reformation. A second jury trial was held
commencing on November 5, 2001 which resulted in a verdict in favor of the
Company. Manley has filed a Notice of Appeal and a Fed. R. Civ. P. 59 motion
seeking to set aside this second verdict. In March 2002, the Court denied
Manley's Fed. R. Civ. P. 59 motion. In April 2002, Manley filed an amended
Notice of Appeal. Oral argument on the amended Notice of Appeal was heard in
January 2003. The Manley action is currently pending in the Second Circuit Court
of Appeals. The Company intends to vigorously oppose the appeal.
The allegations and claims against the Company, as noted above, are material
and, if successful, could result in substantial judgments against the Company.
Due to the nature of these proceedings, the Company and its counsel are unable
to express any opinion as to their probable outcome.
(b) Litigation with SDG, Inc. In September 2000, the Company filed a lawsuit in
the United States District Court for the District of Connecticut (Case No.
3:00CV1694 (DJS)) against SDG Inc. ("SDG"), and certain of its officers and
directors to pursue va