-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LfyX4bFaI2mJojlo5du3rtDawRoYofewGA7MrXkDfg940nJzqGdRklJm1rtVWrL6 IOrWcn/CTP9DyxQ4/UlJew== 0000020639-98-000006.txt : 19980401 0000020639-98-000006.hdr.sgml : 19980401 ACCESSION NUMBER: 0000020639-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBASE CORP CENTRAL INDEX KEY: 0000020639 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 952962743 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07265 FILM NUMBER: 98583765 BUSINESS ADDRESS: STREET 1: GREENWICH OFFICE PARK BLDG 2 STREET 2: 51 WEAVER STREET CITY: GREENWICH STATE: CT ZIP: 06831-5155 BUSINESS PHONE: 2035322000 MAIL ADDRESS: STREET 1: GREENWICH OFFICE PARK, BLDG 2 STREET 2: 51 WEAVER STREET CITY: GREENWICH STATE: CT ZIP: 06831-5155 FORMER COMPANY: FORMER CONFORMED NAME: HOME GROUP INC DATE OF NAME CHANGE: 19890608 FORMER COMPANY: FORMER CONFORMED NAME: CITYHOME CORP DATE OF NAME CHANGE: 19780917 10-K 1 FORM 10-K FOR YEAR ENDED 12/31/97 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (fee required) For the fiscal year ended December 31, 1997 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) For the Transition Period From ________ To ________ Commission file Number 1-7265 AMBASE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2962743 (State of Incorporation) (I.R.S. Employer Identification No.) 51 Weaver Street, Building 2, Greenwich, CT 06831-5155 (Address of principal executive offices) Registrant's telephone number, including area code (203) 532-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($0.01 par value) None Rights to Purchase Common Stock None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. X At January 30, 1998, there were 44,533,519 shares of registrant's Common Stock outstanding. At January 30, 1998 the aggregate market value of registrant's voting securities (consisting of its Common Stock) held by nonaffiliates of the registrant, based on the average bid and asking price on such date of the Common Stock of $3.56 per share, was approximately $128 million. The Common Stock constitutes registrant's only outstanding security. Portions of the registrant's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders, which Proxy Statement registrant intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year, is incorporated by reference with respect to certain information contained therein, in Part III of this Annual Report. The Exhibit Index is located in Part IV, Item 14, Page 37. AmBase Corporation Annual Report on Form 10-K December 31, 1997 CROSS REFERENCE SHEET FOR PARTS I, II, III and IV Page - ------------------------------------------------------------------------------ PART I Item 1. Business..........................................................1 Item 2. Properties........................................................2 Item 3. Legal Proceedings.................................................2 Item 4. Submission of Matters to a Vote of Security Holders...............3 Executive Officers of the Registrant..............................3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................4 Item 6. Selected Financial Data...........................................5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................5 Item 8. Financial Statements and Supplementary Data......................12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................36 PART III Item 10. Directors and Executive Officers of the Registrant...............36 Item 11. Executive Compensation...........................................36 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................36 Item 13. Certain Relationships and Related Transactions...................36 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................................37 PART I ITEM 1. BUSINESS Corporate Profile AmBase Corporation (the "Company") was incorporated in 1975 by the City Investing Company ("City") as the holding company for The Home Insurance Company, a New Hampshire insurance corporation, and its affiliated property and casualty insurance companies ("The Home"). In 1985, City, which prior to that date owned all the outstanding shares of the Common Stock of the Company, distributed the Company's shares to City's common stockholders. The Home was sold on February 13, 1991 to Home Holdings, Inc. ("Home Holdings"). In December 1997, the Company formed a new wholly-owned subsidiary, SDG Financial Corp. ("SDG Financial"), to pursue merchant banking activities. SDG Financial purchased an approximate 6.3% equity interest in SDG, Inc. for $1,250,000 and was granted the exclusive right to act as the investment banker/financial advisor to SDG, Inc. and all of its subsidiaries and affiliates. SDG, Inc. is a development stage company which specializes in creating new technology-specific companies that are dedicated to the clinical and commercial development of proprietary, targeted liposomal delivery systems for pharmaceutical therapies and consumer product ingredients. SDG, Inc.'s lipid vesicles are protected by numerous U.S. and related foreign patents. Also in December 1997, the Company purchased $100,000 of convertible preferred stock in AMDG, Inc. ("AMDG"), a majority owned subsidiary of SDG, Inc. AMDG is a development stage pharmaceutical company focused on the clinical development of new therapies for the treatment of both Type I and Type II diabetes and has received from SDG, Inc. a worldwide, exclusive, royalty-free license to certain patented technology. AMDG raised $3.7 million of equity through a private placement in December 1997. In November 1993, the Company acquired 51% of the issued and outstanding common stock of Augustine Asset Management, Inc. ("Augustine"), a Florida based investment advisory firm. On October 4, 1996, the Company sold its entire interest in Augustine, to Augustine. See Item 8 - Note 6 to the Company's consolidated financial statements for further information. In August 1988, the Company acquired Carteret Bancorp Inc. Carteret Bancorp Inc., through its principal wholly owned subsidiary, Carteret Savings Bank, FA ("Carteret"), was principally engaged in retail and consumer banking, and mortgage banking including mortgage servicing. On December 4, 1992, the Office of Thrift Supervision ("OTS") placed Carteret in receivership under the management of the Resolution Trust Corporation ("RTC") and a new institution, Carteret Federal Savings Bank, was established to assume the assets and certain liabilities of Carteret. Following the seizure of Carteret, the Company was deregistered as a savings and loan holding company by the OTS, although the OTS retains jurisdiction for any regulatory violations prior to deregistration. The Company's assets currently consist primarily of cash and cash equivalents, investment securities and a receivable from Home Holdings. On or about January 15, 1998, Home Holdings filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. See Item 8 - Note 4 to the Company's consolidated financial statements for a further discussion regarding the Company's receivable from Home Holdings. The Company had 7 employees at December 31, 1997. The Company's main source of non-operating revenue is interest income earned on investment securities and cash equivalents. In order to maintain the principal value of its assets, the Company has invested substantially all of its funds in U.S. Treasury Bills and short-term money market funds. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its remaining assets and liabilities, including the contingent and alleged tax and litigation liabilities, as described in Item 8 - Notes 11 and 13 to the Company's consolidated financial statements. The Company intends to aggressively contest all pending and threatened litigation and contingencies, as well as pursue all sources for contributions to settlements. In order to continue on a long-term basis, the Company must both resolve its contingent and alleged liabilities by prevailing upon or settling these claims for less than the amounts claimed and generate profits by acquiring existing operations and/or by developing new operations. See Item 8 - Note 13 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation. -1- At December 31, 1997, the Company's liabilities, including reserves for contingent and alleged liabilities, exceeded total recorded assets by $25,181,000. The Company has significant alleged tax liabilities and is a defendant in a number of lawsuits and proceedings, the ultimate outcome of which could have a material adverse effect on its financial condition and results of operations. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of the litigation and governmental proceedings, management is unable to predict whether the Company's recorded reserves will be adequate or its resources sufficient to satisfy its ultimate obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. For a discussion of the alleged tax liabilities, lawsuits and proceedings, see Item 8 - Notes 11 and 13 to the Company's consolidated financial statements. Although the basis for the calculation of the litigation and contingency reserves and income tax reserves are regularly reviewed by the Company's management and outside legal counsel, the assessment of these reserves includes an exercise of judgment and is a matter of opinion. Discontinued Operations For a discussion of discontinued investment management operations, refer to Item 8 - Note 6 to the Company's consolidated financial statements. ITEM 2. PROPERTIES The Company leases approximately 4,800 square feet for use as its executive office at 51 Weaver Street, Building 2, Greenwich, CT 06831-5155. ITEM 3. LEGAL PROCEEDINGS The Company has significant alleged tax liabilities and is a defendant in a number of lawsuits and governmental proceedings, the ultimate outcome of which could have a material adverse effect on its financial condition and results of operations. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of the litigation and governmental proceedings, management is unable to predict whether the Company's recorded reserves will be adequate or its resources sufficient to satisfy its ultimate obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Although the basis for the calculation of the litigation and contingency reserves and income tax reserves are regularly reviewed by the Company's management and outside legal counsel, the assessment of these reserves includes an exercise of judgment and is a matter of opinion. At December 31, 1997, the litigation and contingency reserves were $2,340,000. For a discussion of alleged tax liabilities and lawsuits, see Item 8 - Notes 11 and 13 to the Company's consolidated financial statements. In addition to the litigation and contingency reserves, the Company had a reserve for income taxes of $79,088,000 at December 31, 1997. For a further discussion, see Item 8 - Note 11, Income Taxes and Note 13, Legal Proceedings, Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start, to the Company's consolidated financial statements. See Item 8 - Note 13 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation. Management of the Company continually reviews the likelihood of liability and associated costs of pending and threatened litigation. During 1996, the Company determined that there was a reduced probability of incurring costs to defend and/or settle potential litigation with respect to Carteret Savings Bank, FA ("Carteret"), see the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Item 8 - Note 11. As a result, the Company reduced its litigation and contingency reserves by $8,000,000 and recorded such amount as other income during the 1996 second quarter. In making such determination, management took into consideration numerous factors, including the failure of the Resolution Trust Corporation ("RTC") to notify the Company of any potential legal action prior to the expiration of a significant statute of limitations deadline and the transfer of the investigative duties of the RTC to the Federal Deposit Insurance Corporation ("FDIC") upon the expiration of the RTC's charter on December 31, 1995 pursuant to federal statute. Management also considered the July 1, 1996 decision by the U.S. Supreme Court in the consolidated supervisory goodwill cases of Winstar, Glendale Federal and Statesman, which held the United States liable for damages. At December 31, 1996, the litigation and contingency reserves were $2,954.000. -2- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Executive Officers of the Registrant Each executive officer is elected to serve in the executive officer capacity set forth opposite his respective name until the next Annual Meeting of Stockholders. The Company is not aware of any family relationships between any of the executive officers or directors of the Company. Set forth below is a list of executive officers of the Company at December 31, 1997: ================================================================================ Name Age Present Title ================================================================================ Richard A. Bianco 50 Chairman, President and Chief Executive Officer of AmBase Corporation John P. Ferrara 36 Vice President, Chief Financial Officer, Treasurer and Controller of AmBase Corporation Mr. Bianco was elected a director of the Company in January 1991, and has served as President and Chief Executive Officer of the Company since May 1991. On January 26, 1993, Mr. Bianco was elected Chairman of the Board of Directors of the Company. He served as Chairman, President and Chief Executive Officer of Carteret, then a subsidiary of the Company, from May 1991 to December 1992. Mr. Ferrara was elected to the position of Vice President, Chief Financial Officer, Treasurer and Controller of the Company in December 1995, having previously served as Acting Chief Financial Officer, Treasurer and Assistant Vice President and Controller since January 1995; as Assistant Vice President and Controller from January 1992 to January 1995; and as Manager of Financial Reporting from December 1988 to January 1992. -3- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company trades through one or more market-makers, with quotations made available in the "pink sheets" published by the National Quotation Bureau, Inc. ("Pink Sheets"), under the symbol ABCP. The sales prices per share for the Company's Common Stock represent the range of the reported high and low bid quotations as indicated in the Pink Sheets or as communicated orally to the Company by market-makers. Such prices reflect interdealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. ================================================================================ 1997 1996 High Low High Low ================================================================================ First Quarter $2.92 $2.50 $1.02 $0.46 Second Quarter 2.96 2.49 2.00 1.01 Third Quarter 3.02 2.58 2.50 1.68 Fourth Quarter 3.96 2.90 2.88 1.75 ================================================================================ As of January 30, 1998, there were approximately 23,000 beneficial owners of the Company's Common Stock. No dividends were declared or paid on the Company's Common Stock in 1997 or 1996. The Company does not intend to declare or pay dividends in the foreseeable future. In connection with the proceeding entitled Rolo and Tenerelli v. City Investing Company Liquidating Trust, et al., pending in the Third Circuit Court of Appeals, as further described in Item 8 - Note 13 to the Company's consolidated financial statements, the Company is unable to make any dividend payments without further judicial action. For information concerning the Company's stockholder rights plan, see Item 8 - Note 7 to the Company's consolidated financial statements. -4- ITEM 6. SELECTED FINANCIAL DATA The selected financial data should be read in conjunction with the Company's consolidated financial statements included in Item 8 of this Form 10-K. The consolidated statements of operations, for the periods ended prior to the October 4, 1996 sale of Augustine were retroactively reclassified to reflect their operations as discontinued operations. ================================================================================ (in thousands, Years ended December 31 except per share data) 1997 1996 1995 1994 1993 ================================================================================ Interest income, net $2,661 $2,641 $2,835 $2,092 $1,082 Income (loss) from continuing operations, before income taxes (1,275) 6,636 6,005 6,246 (8,171) Income tax (expense) benefit 191 7,189 (1,997) (148) 11,354 Income (loss) from continuing operations (1,084) 13,825 4,008 6,098 3,183 Income from discontinued investment management operations, net of income taxes - 207 60 32 16 Net income (loss) (1,084) 14,032 4,068 6,130 3,199 Earnings per common share - basic Income (loss) from continuing operations (0.02) 0.31 0.09 0.14 0.07 Income (loss) from discontinued operations - - - - - - -------------------------------------------------------------------------------- Net income (loss) (0.02) 0.31 0.09 0.14 0.07 ================================================================================ Earnings per common share - assuming dilution Income (loss) from continuing operations (0.02) 0.30 0.09 0.14 0.07 Income (loss) from discontinued operations - - - - - - -------------------------------------------------------------------------------- Net income (loss) (0.02) 0.30 0.09 0.14 0.07 ================================================================================ Dividends - - - - - ================================================================================ Total assets $64,270 $66,229 $65,677 $70,113 $77,450 Total stockholders' equity (25,181) (24,097) (38,273) (42,204) (48,352) ================================================================================ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes which are contained in Item 8, herein. On October 4, 1996, the Company sold its entire interest in Augustine. Accordingly, the operations of Augustine have been reclassified as discontinued investment management operations in the accompanying consolidated financial statements. CONTINUING OPERATIONS Financial Condition The Company's assets at December 31, 1997 aggregated $64,270,000, consisting principally of cash and cash equivalents of $5,548,000, investment securities of $44,410,000, and a receivable from Home Holdings acquired pursuant to the agreement by which the Company sold The Home and its subsidiaries to Home Holdings in February 1991. On or about January 15, 1998 Home Holdings filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. See Item 8 - Note 4 to the Company's consolidated financial statements for a further discussion regarding the Company's receivable from Home Holdings. At December 31, 1997, the Company's liabilities, including reserves for contingent and alleged liabilities, as further described in Item 8 - Notes 11 and 13 to the Company's consolidated financial statements, exceeded total recorded assets by $25,181,000. The cash needs of the Company for 1997 were principally satisfied by interest income received on investment securities and cash equivalents, and a $475,000 income tax refund. The cash needs of the Company for 1996 were principally satisfied by the receipt of a 1977 tax refund, collections of the receivable from Home Holdings and interest income received on investment securities and cash equivalents. -5- The cash needs of the Company in 1995 were principally satisfied by interest income received on investment securities and cash equivalents, and collections of the receivable from Home Holdings. In addition, in June 1995, the Company received, with respect to 1990 and 1991, $1,690,000 from The Home in connection with a tax sharing agreement between the Company and The Home. This amount did not reduce the receivable from Home Holdings. Since the $1,690,000 had previously been considered in the calculation of income tax reserves, the receipt thereof was recorded as an increase to the income tax reserves account. Management believes that the Company's cash resources are sufficient to continue operations for 1998. Because of the nature of the contingent and alleged liabilities described in Item 8 - Notes 11 and 13 to the Company's consolidated financial statements, the Company is unable to predict whether it will have the ability to generate sufficient resources to satisfy its ultimate obligations. For the year ended December 31, 1997, cash of $4,486,000 was used by operating activities of continuing operations, including the payment of operating expenses, and payments charged against litigation and contingency reserves partially offset by the receipt of interest income, and a $475,000 income tax refund. For the year ended December 31, 1996, cash of $1,622,000 was used by operating activities of continuing operations, including the payment of other liabilities, payments charged against income tax reserves and litigation and contingency reserves, and the payment of operating expenses, partially offset by the receipt of a 1977 tax refund, and the receipt of interest income. For the year ended December 31, 1995, cash of $6,820,000 was used by operating activities of continuing operations, including payments charged against the litigation and contingency reserve and the payment of operating expenses partially offset by interest income, and the receipt of amounts with respect to 1990 and 1991, from The Home in connection with a tax sharing agreement between the Company and The Home. There were no material commitments for capital expenditures as of December 31, 1997. Inflation has had no material impact on the business and operations of the Company. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its remaining assets and liabilities, including the contingent and alleged tax and litigation liabilities described in Item 8 - Notes 11 and 13 to the Company's consolidated financial statements. Extensive discussions and negotiations are ongoing with respect to certain of these matters. The Company intends to aggressively contest all pending and threatened litigation and contingencies, as well as pursue all sources for contributions to settlements. In order to continue on a long-term basis, the Company must both resolve its contingent and alleged liabilities by prevailing upon or settling these claims for less than the amounts claimed, and generate profits by acquiring existing operations and/or by developing new operations. See Item 8 - Note 13 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation. Management of the Company continually reviews the likelihood of liability and associated costs of pending and threatened litigation. At December 31, 1997, the litigation and contingency reserves were $2,340,000. For a discussion of alleged tax liabilities and lawsuits, see Item 8 - Notes 11 and 13 to the Company's consolidated financial statements. In addition to the litigation and contingency reserves, the Company had a reserve for income taxes of $79,088,000 at December 31, 1997. For a further discussion, see Item 8 - Note 11, Income Taxes and Note 13, Legal Proceedings, Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start, to the Company's consolidated financial statements. During 1996, the Company determined that there was a reduced probability of incurring costs to defend and/or settle potential litigation with respect to Carteret, see the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Item 8 - Note 11. As a result, the Company reduced its litigation and contingency reserves by $8,000,000 and recorded such amount as other income during 1996. In making such determination, management took into consideration numerous factors, including the failure of the RTC to notify the Company of any potential legal action prior to the expiration of a significant statute of limitations deadline and the transfer of the investigative duties of the RTC to the FDIC upon the expiration of the RTC's charter on December 31, 1995 pursuant to federal statute. Management also considered the July 1, 1996 decision by the U.S. Supreme Court in the consolidated supervisory goodwill cases of Winstar, Glendale Federal and Statesman, which held the United States liable for damages. At December 31, 1996, the litigation and contingency reserves were $2,954,000. -6- In addition to the litigation and contingency reserves, the Company had a reserve for income taxes of $79,088,000 at December 31, 1996. In 1995, as part of the Company's continuing review of the status of litigation pending against the Company, with careful attention paid to costs associated with defending pending and threatened litigation, the Company recorded as other income a $5,350,000 net reduction in the litigation and contingency reserves, primarily resulting from the settlement of certain litigation at amounts less than claimed and previously anticipated. As noted above, the Company has significant alleged tax liabilities and is a defendant in a number of lawsuits and proceedings, the ultimate outcome of which could have a material adverse effect on its financial condition and results of operations. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of litigation and governmental proceedings, management is unable to predict whether the Company's recorded reserves will be adequate or its resources sufficient to satisfy its ultimate obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. For a discussion of the alleged tax liabilities, lawsuits and proceedings, see Item 8 - Notes 11 and 13 to the Company's consolidated financial statements. Although the basis for the calculation of the litigation and contingency reserves and income tax reserves are regularly reviewed by the Company's management and legal counsel, the assessment of these reserves includes an exercise of judgment and is a matter of opinion. The Company contractually assumed the tax liabilities of City, which, prior to September 1985, owned all the outstanding shares of Common Stock of the Company. The Company also contractually assumed certain tax liabilities of The Home and its subsidiaries from September 1985 through 1989. For all periods through 1991, the Internal Revenue Service ("IRS") and the Company do not agree with respect to only two issues, withholding taxes in connection with a Netherlands Antilles finance subsidiary of City, and "Fresh Start", an insurance industry issue. During 1996, the Company received a 1977 income tax refund of $7,613,000; as a result, City no longer remains open for refunds. This amount was recognized as an income tax benefit in the accompanying 1996 Consolidated Statement of Operations, based on management's continuing review of the overall tax liability position of the Company. During 1996, in connection with the completion by the IRS of the Company's 1985 to 1991 federal income tax audits (excluding Fresh Start), the Company made payments to the IRS totaling $1,995,000. These amounts were previously reserved for and charged against the income tax reserves account. During the first quarter of 1997, $475,000 of income taxes were refunded as a result of an overpayment to the IRS for 1988 through 1991 tax years. This amount was recorded as an income tax benefit in the first quarter of 1997. The federal income tax adjustments from the 1985 to 1991 audits (excluding Fresh Start) did not result in additional payments of state or local income taxes. The IRS has completed its review of the Company's federal income tax return for 1992 with no significant adjustments. The Company's federal income tax returns for years subsequent to 1992 have not been reviewed by the IRS. New York State has recently completed their examination of the Company's income tax returns for tax years 1990 to 1992, which resulted in zero tax assessment. With respect to the withholding taxes in connection with a Netherlands Antilles finance subsidiary of City, on May 11, 1995 the IRS issued a Notice of Deficiency for withholding taxes on interest payments for the years 1979 through 1985. In the Notice of Deficiency, the IRS contends that City's wholly owned Netherlands Antilles finance subsidiary should be disregarded for tax purposes. The Company vigorously contested the IRS's position in accordance with the IRS's internal appeals procedures. In January 1992, the National Office of the IRS issued technical advice supporting the auditing agent's position. In October 1992, the Company appealed this technical advice to the National Office. The National Office advised the Company that it expected to issue technical advice supporting the auditing agent's position, whereupon, the Company advised the IRS that it was withdrawing its technical advice request. On June 30, 1995, the Company filed a petition in the United States Tax Court ("Tax Court") contesting the Notice of Deficiency. The IRS filed its answer on August 23, 1995. The Company filed a motion for summary judgment in its favor on February 13, 1996. On April 17, 1996, the IRS filed a Notice of Objection to the Company's motion for summary judgment. The Tax Court requested, and the Company filed, on July 3, 1996, a reply to the IRS's Notice of Objection. On September 19, 1996, the Tax Court denied the Company's motion for summary judgment without prejudice. Based on the Tax Court's examination of the record and the status of the discovery process, the Court concluded that summary adjudication at this time was inappropriate. The Tax Court directed the parties to engage in full and complete discovery as expeditiously as possible. A trial was held in this case on March 24, 1997, after which the Judge asked the IRS and the Company to submit post-trial briefs, which have subsequently been submitted to the Tax Court. If the IRS were to prevail on this issue, the Company would be liable for taxes and interest in excess of the Company's financial resources. -7- In a case dealing with a similar withholding tax issue, the Tax Court ruled in favor of the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana") in November 1995. The Tax Court rejected the IRS's contention that interest paid to Northern Indiana's foreign subsidiary was subject to United States tax withholding. The IRS appealed this decision (Northern Indiana Public Service Co. v. Commissioner, 105 T.C. No. 22) to the United States Court of Appeals for the 7th Circuit ("Appeals Court"). The Appeals Court affirmed the Tax Court's ruling in favor of Northern Indiana. Although the Appeals Court decision in the Northern Indiana case could be beneficial to the Company's case, it is not necessarily indicative of the ultimate result of the final settlement of the Netherlands Antilles issue between the Company and the IRS. Based on an evaluation of the IRS's contention, counsel has advised the Company that, although the outcome in litigation can by no means be assured, the Company has a very strong case and should prevail. Notwithstanding counsel's opinion and the Tax Court's ruling in the Northern Indiana case, it is not possible at this time to determine the final disposition of this issue, when the issues will be resolved, or their final financial effect. A final disposition of this issue in the Company's favor would have a material, positive effect on the Company's Statement of Operations and Financial Condition. With respect to the "Fresh Start" issue, on March 13, 1996, the IRS issued a deficiency notice to the Company on the Fresh Start issue which asserts an increase in tax for the year 1987. If the IRS is successful, the amount of the deficiency would be material. On June 7, 1996, the Company filed a petition with the United States Tax Court (the "Tax Court") to dispute the entire amount of the asserted deficiency and to redetermine the tax, and on July 23, 1996, the IRS filed its answer. The IRS and the Company began engaging in the informal discovery process customary in the Tax Court. On July 22, 1997, another insurance company taxpayer, Atlantic Mutual Insurance Company ("Atlantic Mutual"), filed a petition for certiorari in its own case seeking review of the Fresh Start issue by the United States Supreme Court (the "Supreme Court"). In response, on September 19, 1997, the United States filed its brief with the Supreme Court in that case in which it recommended that the Supreme Court hear the case. The Supreme Court granted the petition on October 20, 1997, has received briefs, and heard oral argument on March 2, 1998. A decision on the merits by the Supreme Court in Atlantic Mutual may control the outcome of the Company's own case in the Tax Court. Because it is expected that the Supreme Court will address the reserve strengthening issue, the Company and the IRS have advised the Tax Court in the Company's own case that, in the interests of efficiency, further informal discovery and negotiation of a stipulation of facts have been deferred pending the Supreme Court's ruling in Atlantic Mutual. No assurances can be given concerning the outcome of the Company's litigation on this issue. See Item 8 - Note 11, Income Taxes, and Note 13, Legal Proceedings, Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start, to the Company's consolidated financial statements, for additional details. -8- Results of Operations - Continuing Operations Summarized financial information for the continuing operations of the Company for the years ended December 31 is as follows: ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Operating expenses: Compensation and benefits $3,116 $2,969 $2,119 Professional and outside services 512 457 661 Insurance 120 177 247 Occupancy 87 89 173 Other operating 160 161 132 - -------------------------------------------------------------------------------- 3,995 3,853 3,332 - -------------------------------------------------------------------------------- Operating loss (3,995) (3,853) (3,332) - -------------------------------------------------------------------------------- Interest income 2,661 2,641 2,835 Other income 59 30 147 Other income - litigation and contingency reserves reversal - 8,000 5,350 Other income - reduction of previously estimated liabilities - - 1,005 Realized loss on sale of investment securities - available for sale - (182) - - -------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (1,275) 6,636 6,005 - -------------------------------------------------------------------------------- Income tax benefit (expense) 191 7,189 (1,997) - -------------------------------------------------------------------------------- Income (loss) from continuing operations $(1,084) $13,825 $4,008 ================================================================================ The Company's main source of non-operating revenue is interest income earned on investment securities and cash equivalents. The Company's management expects that operating cash needs in 1998 will be met principally by the Company's current financial resources and the receipt of non-operating revenue consisting of interest income earned on investment securities and cash equivalents. The Company recorded a loss from continuing operations of $1,084,000 in the year ended December 31, 1997. As further described in Financial Condition, above, the 1997 period includes a $475,000 income tax benefit. In addition, the 1997 period includes other income of $59,000 attributable to the collection by an inactive subsidiary of a receivable previously considered uncollectible. Excluding these non-recurring income items, the loss from continuing operations would have been $1,618,000, or $0.04 per share, for the year ended December 31, 1997. The Company recorded income from continuing operations of $13,825,000 in the year ended December 31, 1996. As further described in Financial Condition, above, the 1996 period includes other income of $8,000,000, resulting from a reduction in the litigation and contingency reserves, and an additional income tax benefit of $7,613,000. Excluding these non-recurring items, the Company would have reported a loss from continuing operations of $1,788,000, or $0.04 per share, for the year ended December 31, 1996. The Company recorded income from continuing operations of $4,008,000, or $0.09 per share, for the year ended December 31, 1995. As further described below, the 1995 results include a $5,350,000 net reduction in the litigation and contingency reserves recorded as other income, and a $1,005,000 reduction of previously estimated liabilities recorded as other income, offset by an increase in the income tax reserves of $1,800,000 recorded as an additional income tax expense. In addition, the 1995 results include $147,000 of non-recurring other income, as further discussed below. Excluding these non-recurring other items, the Company would have reported a loss from continuing operations of $694,000, or $0.02 per share. For the year ended December 31, 1997, the Company recorded a loss from continuing operations before income taxes of $1,275,000, which includes $59,000 of other income, as further described above. For the year ended December 31, 1996, the Company recorded income from continuing operations before income taxes of $6,636,000, which includes an $8,000,000 reduction in the litigation and contingency reserves, as further described in Financial Condition, above. -9- The Company recorded income from continuing operations before income taxes of $6,005,000 for the year ended December 31, 1995. These results include a $5,350,000 net reduction in the litigation and contingency reserves, and a $1,005,000 reduction in previously estimated liabilities, as further described in Financial Condition, above. Compensation and benefits was $3,116,000 in 1997, $2,969,000 in 1996, and $2,119,000 in 1995. The increase in 1997 is due to increased compensation costs. The increase in 1996, compared with 1995, is due to the hiring by the Company of an employee who previously provided services as an independent consultant. Professional and outside services increased to $512,000 in 1997, compared to 1996, and decreased to $457,000 in 1996, from $661,000 in 1995. The increase in 1997, compared to 1996, was due to an increase in litigation expenses. The decrease in 1996, compared to 1995, of $204,000, or 31%, was principally the result of a decrease in professional service fees in 1996 and the hiring by the Company of an employee who previously provided services as an independent consultant, as noted above. Expenses for professional and outside services in 1997, 1996, and 1995 do not include costs associated with defending pending and threatened litigation which were previously reserved for and charged against the litigation and contingency reserves when paid. Insurance expenses decreased in 1997, 1996 and 1995, due to management's renegotiation of insurance programs. Occupancy expenses decreased to $87,000 in 1997, from $89,000 in 1996, and $173,000 in 1995, as a result of the continued reduction of occupancy related expenses, and the relocation of the Company's executive office and the closing of an administrative office during 1996. Interest income was $2,661,000 in 1997, $2,641,000 in 1996, and $2,835,000 in 1995. The increase in 1997, compared to 1996, was attributable to an increased yield on cash equivalents and investment securities. The decrease in 1996, compared to the 1995 period, was attributable to a decreased yield on cash equivalents and investment securities. Other income of $59,000 in 1997 is attributable to the collection by an inactive subsidiary of a receivable previously considered uncollectible. Other income of $147,000 in 1995 represents non-recurring other income, principally the result of final payments received from management contracts previously held by an inactive subsidiary of the Company. The Company realized a loss of $182,000 in 1996 on the sale of investment securities - available for sale. During 1996, the Company recorded as other income an $8,000,000 reduction in the litigation and contingency reserves, as more fully described in Financial Condition, above. During 1995, the Company recorded as other income a $5,350,000 net reduction in the litigation and contingency reserves, and a $1,005,000 reduction of previously estimated liabilities, as more fully described in Financial Condition, above. During 1997, the Company received a $475,000 income tax refund. This amount was recognized as an income tax benefit in 1997. In addition, included in income tax benefit is a state and local tax provision of $284,000 in 1997. During 1996, the Company received a 1977 income tax refund of $7,613,000. This amount was recognized as an income tax benefit in the accompanying 1996 Consolidated Statement of Operations, based on management's continuing review of the overall tax liability position of the Company, as further described in Financial Condition, above. In addition, included in income tax benefit is a federal and state tax provision of $424,000 in 1996. During 1995, the Company recorded as additional income tax expense a $1,800,000 increase in the income tax reserves. The increase in the income tax reserves was the result of the continuing review of the income tax reserves including additional reserves for amounts considered unrealizable. In addition, included in income tax expense is a state and local tax provision of $197,000 in 1995. A reconciliation between income taxes computed at the statutory federal rate and the provision for income taxes is included in Item 8 - Note 11 to the Company's consolidated financial statements. -10- Discontinued Investment Management Operations See Item 8 - Note 6 to the Company's consolidated financial statements for information. RECENT DEVELOPMENTS On or about January 15, 1998, Home Holdings filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. See Item 8 - Note 4 to the Company's consolidated financial statements for a further discussion regarding the Company's receivable from Home Holdings. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"), which is effective for financial statements issued for periods ending after December 15, 1997. Statement 128 replaces earnings per share ("EPS") with a presentation of basic EPS, and requires dual presentation of basic and diluted EPS. Furthermore, a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is required. Based upon the Company's current capitalization structure, the basic and diluted EPS amounts calculated in accordance with Statement 128 approximate the Company's EPS amounts computed in accordance with Accounting Principles Board Opinion No. 15, "Earnings Per Share." See Item 8 - Note 5 to the Company's consolidated financial statements for further information. STOCKHOLDER INQUIRIES Stockholder inquiries, including requests for the following: (i) change of address; (ii) replacement of lost stock certificates; (iii) Common Stock name registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on Form 10-K; (vi) proxy material; and (vii) information regarding stockholdings, should be directed to: American Stock Transfer and Trust Company 40 Wall Street, 46th Floor New York, NY 10005 Attention: Shareholder Services (800) 937-5449 or (718) 921-8200 -11- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of AmBase Corporation In our opinion, the accompanying consolidated Balance Sheets and the related consolidated Statements of Operations, of Changes in Stockholders' Equity, and of Cash Flows present fairly, in all material respects, the financial position of AmBase Corporation and its subsidiaries (the "Company") at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Notes 11 and 13, the accompanying financial statements include income tax reserves relating to a number of issues. Final resolution of these issues is dependent upon future events, which may result in amounts more or less than those presented. The ultimate outcome of these issues cannot presently be determined. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, substantial operations of the Company have been discontinued, and substantial contingencies exist against the Company in various lawsuits and proceedings, which are discussed in Notes 11 and 13 to the financial statements and the second paragraph of this report. The Company has a net capital deficiency of approximately $25,000,000 at December 31, 1997. These factors raise substantial doubt about the Company's ability to continue as a going concern. It will be necessary for the Company to resolve the contingent liabilities by prevailing upon or settling these claims at amounts less than the claims and the amounts recorded and to generate, through acquisition or start up, profitable operations to continue on a long-term basis. See Note 1 for further discussion of management's plans. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Price Waterhouse LLP New York, New York March 26, 1998 -12- AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31 ================================================================================ (in thousands, except per share data) 1997 1996 1995 ================================================================================ Operating expenses: Compensation and benefits $3,116 $2,969 $2,119 Professional and outside services 512 457 661 Insurance 120 177 247 Occupancy 87 89 173 Other operating 160 161 132 - -------------------------------------------------------------------------------- 3,995 3,853 3,332 - -------------------------------------------------------------------------------- Operating loss (3,995) (3,853) (3,332) - -------------------------------------------------------------------------------- Interest income 2,661 2,641 2,835 Other income 59 30 147 Other income - litigation and contingency reserves reversal - 8,000 5,350 Other income - reduction of previously estimated liabilities - - 1,005 Realized loss on sale of investment securities - available for sale - (182) - - -------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (1,275) 6,636 6,005 Income tax benefit (expense) 191 7,189 (1,997) - -------------------------------------------------------------------------------- Income (loss) from continuing operations (1,084) 13,825 4,008 Income from discontinued investment management operations, net of income taxes - 207 60 - -------------------------------------------------------------------------------- Net income (loss) $(1,084) $14,032 $4,068 ================================================================================ Earnings per common share - basic Income (loss) from continuing operations $(0.02) $ 0.31 $ 0.09 Income (loss) from discontinued operations - - - - -------------------------------------------------------------------------------- Net income (loss) $(0.02) $ 0.31 $ 0.09 ================================================================================ Earnings per common share - assuming dilution Income (loss) from continuing operations $(0.02) $ 0.30 $ 0.09 Income (loss) from discontinued operations - - - - -------------------------------------------------------------------------------- Net income (loss) $(0.02) $ 0.30 $ 0.09 ================================================================================ Dividends $ - $ - $ - ================================================================================ Average shares outstanding 44,534 44,534 44,534 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. -13- AMBASE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31 ================================================================================ (in thousands) 1997 1996 ================================================================================ Assets Cash and cash equivalents (including $65 of restricted cash at December 31, 1996) 5,548 5,591 Investment securities: Held to maturity (market value $44,276 and $47,261, respectively) 44,310 47,259 Available for sale, carried at fair value (cost $100 at December 31, 1997) 100 - - -------------------------------------------------------------------------------- Total investment securities 44,410 47,259 - -------------------------------------------------------------------------------- Receivable from Home Holdings, Inc. 12,736 13,186 Investment in SDG, Inc. at cost 1,250 - Other assets 326 193 - -------------------------------------------------------------------------------- Total assets $ 64,270 $ 66,229 ================================================================================ Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities $ 1,550 $ 1,428 Supplemental retirement plan 4,865 4,724 Postretirement welfare benefits 1,412 1,527 Other liabilities 196 605 Litigation and contingency reserves 2,340 2,954 Income tax reserves 79,088 79,088 - -------------------------------------------------------------------------------- Total liabilities 89,451 90,326 - -------------------------------------------------------------------------------- Commitments and contingencies - - - -------------------------------------------------------------------------------- Stockholders' equity: Common stock 447 447 Paid-in capital 547,712 547,712 Accumulated deficit (572,693) (571,609) Treasury stock (647) (647) - -------------------------------------------------------------------------------- Total stockholders' equity (25,181) (24,097) - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 64,270 $ 66,229 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. -14- AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31 ================================================================================ Net Unrealized Losses on Investment Paid- Securities- Common In Available Accumulated Treasury (in thousands) Stock Capital for Sale Deficit Stock Total ================================================================================ December 31, 1994 $447 $547,712 $ (7) $(589,709) $(647) $(42,204) Net income - - - 4,068 - 4,068 Net unrealized losses on investment securities -available for sale - - (137) - - (137) - -------------------------------------------------------------------------------- December 31, 1995 447 547,712 (144) (585,641) (647) (38,273) Net income - - - 14,032 - 14,032 Sale of securities - - 144 - - 144 - -------------------------------------------------------------------------------- December 31, 1996 447 547,712 - (571,609) (647) (24,097) Net loss - - - (1,084) - (1,084) - -------------------------------------------------------------------------------- December 31, 1997 $447 $547,712 $ - $(572,693) $(647) $(25,181) ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. -15- AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31 ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Cash flows from operating activities: Income (loss) from continuing operations $(1,084) $13,825 $ 4,008 Adjustments to reconcile income (loss) from continuing operations to net cash used by continuing operations: Other assets (128) 286 (18) Accounts payable and accrued liabilities 122 692 113 Litigation and contingency reserves uses (614) (1,195) (4,676) Litigation and contingency reserves - (reserve reversal) - (8,000) (5,350) Income tax reserves, net - 5,619 3,494 Income tax refund - 1977 - (7,613) - Interest income - investment securities (2,419) (2,428) (2,501) Realized loss on sale of investment securities - available for sale - 182 - Other, net (363) (2,990) (1,890) - -------------------------------------------------------------------------------- Net cash used by operating activities of continuing operations (4,486) (1,622) (6,820) - -------------------------------------------------------------------------------- Cash provided (used) by discontinued investment management operations - (291) 11 - -------------------------------------------------------------------------------- Cash flows from investing activities: Maturities of investment securities - held to maturity 77,880 71,235 102,700 Purchases of investment securities - held to maturity (72,512) (76,011) (97,857) Purchases of investment securities - available for sale (100) - - Investment in SDG, Inc. (1,250) - - Proceeds from sales of investment securities - available for sale - 31 - Proceeds from Home Holdings, Inc. receivable 450 3,997 691 Proceeds from sale of Augustine Asset Management, Inc. - 500 - Other, net (25) - (11) - -------------------------------------------------------------------------------- Net cash provided (used) by investing activities 4,443 (248) 5,523 - -------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (43) (2,161) (1,286) Cash and cash equivalents at beginning of year 5,591 7,752 9,038 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of year $5,548 $5,591 $ 7,752 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. -16- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1 - Organization AmBase Corporation (the "Company") is a holding company which, through a wholly owned subsidiary, owns a 6.3% ownership interest in SDG, Inc. See Part I - Item 1 for a further description. The Company previously held a majority ownership interest in Augustine Asset Management, Inc. ("Augustine"), an investment advisor, and also previously owned a savings bank and an insurance company, all of which have been designated as discontinued operations, as further discussed below. On October 4, 1996, the Company sold its entire interest in Augustine, to Augustine. See Note 6 for a further discussion. On December 4, 1992, Carteret Savings Bank, FA ("Carteret") was placed in receivership by the Office of Thrift Supervision ("OTS"). On February 13, 1991, the Company sold its ownership interest in The Home Insurance Company ("The Home") and its subsidiaries to Home Holdings, Inc. ("Home Holdings"). See Note 4 for a further discussion. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Substantial contingent and alleged liabilities exist against the Company through various lawsuits and proceedings, as described in Notes 11 and 13. These factors raise substantial doubt about the Company's ability to continue as a going concern. In order to continue on a long-term basis, the Company must both resolve its contingent and alleged liabilities by prevailing upon or settling these claims for less than the amounts claimed, and generate profits by acquiring existing operations and/or by developing new operations. The financial statements do not include adjustments to the carrying value of assets and liabilities which might be necessary should the Company not continue in operation. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its remaining assets and liabilities, including the contingent and alleged tax and litigation liabilities, as described in Notes 11 and 13. The Company intends to aggressively contest all pending and threatened litigation and governmental proceedings, as well as pursue all sources for contributions to settlements. The Company's main source of non-operating revenue is interest earned on investment securities and cash equivalents. The Company's management expects that operating cash needs in 1998 will be met principally by the Company's current financial resources and the receipt of non-operating revenue consisting of interest income earned on investment securities and cash equivalents. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of litigation and governmental proceedings, management is unable to predict whether the Company's recorded reserves will be adequate or its resources sufficient to satisfy its ultimate obligations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. For a discussion of the alleged tax liabilities, lawsuits and governmental proceedings, see Notes 11 and 13 to the Company's consolidated financial statements. Although the basis for the calculation of the litigation and contingency reserves and income tax reserves are regularly reviewed by the Company's management and outside legal counsel, the assessment of these reserves includes an exercise of judgment and is a matter of opinion. See Item 8 - Note 13 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill Litigation. Note 2 - Summary of Significant Accounting Policies The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements to conform with the 1997 presentation. Use of estimates in the preparation of financial statements: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions, that it deems reasonable, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates and assumptions. -17- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Principles of consolidation: The consolidated financial statements are comprised of the accounts of the Company and its majority owned subsidiaries. All material intercompany transactions and balances have been eliminated. Investments in companies in which ownership interest is less than 20% are accounted for using the cost method. Cash and cash equivalents: Highly liquid investments, consisting principally of funds held in short-term money market accounts, are classified as cash equivalents. Included in cash and cash equivalents at December 31, 1996 is $65,000 of funds held in escrow, which were subsequently applied to the satisfaction of certain liabilities. Investment securities: The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115"). Statement 115, which addresses the accounting and reporting of investments in equity securities that have readily determinable fair values and all investments in debt securities, requires investment securities to be classified as held to maturity (only permitted for securities with a stated maturity), available for sale, or trading securities. Securities that the Company has both the positive intent and ability to hold to maturity are classified as investment securities - held to maturity and are carried at amortized cost. Investment securities - available for sale, which are those securities that may be sold prior to maturity, are carried at fair value, with any net unrealized gains or losses reported in a separate component of stockholders' equity, net of deferred taxes. Interest and dividends on investment securities are recognized in the Statement of Operations when earned. Realized gains and losses on the sale of investment securities - available for sale are calculated using the first-in/first-out basis for determining the cost basis of the securities. The fair value of publicly traded investment securities is determined by reference to current market quotations. Income taxes: The Company and its domestic subsidiaries file a consolidated federal income tax return. The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Statement 109 recognizes both the current and deferred tax consequences of all transactions that have been recognized in the financial statements, calculated based on the provisions of enacted tax laws, including the tax rates in effect for current and future years. Statement 109 requires that net deferred tax assets be recognized immediately when a more likely than not criterion is met; that is, unless a greater than 50% probability exists that the tax benefits will actually be realized sometime in the future. At the present time, management has no basis to conclude that realization is more likely than not. Earnings per share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement 128"), which is effective for financial statements issued for periods ending after December 15, 1997. Statement 128 replaces earnings per share ("EPS") with a presentation of basic EPS, and requires dual presentation of basic and diluted EPS. Furthermore, a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is required. Based upon the Company's current capitalization structure, the basic and diluted EPS amounts calculated in accordance with Statement 128 approximate the Company's EPS amounts computed in accordance with Accounting Principles Board Opinion No. 15, "Earnings Per Share." Fair value of financial instruments: In accordance with Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("Statement 107"), the Company discloses fair value information about financial instruments. For a further discussion, see Note 14. -18- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Stock-based compensation: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123 encourages companies to adopt a fair value- based method of accounting for employee stock options, but allows companies to continue to account for those plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company adopted the disclosure requirements of the statement in 1996 and plans to continue accounting for stock compensation using APB 25, making proforma disclosures of net income and earnings per share as if the fair value based method had been applied. For a further discussion, see Note 10. Note 3 - Investment Securities Investment securities - held to maturity consist of U.S. Treasury Bills with original maturities of one year or less and which are carried at amortized cost based upon the Company's intent and ability to hold these investments to maturity. Investment securities - available for sale generally consist of investments in equity securities held for an indefinite period and were carried at fair value with net unrealized gains and losses reported in a separate component of stockholders' equity. At December 31, 1997 investment securities - available for sale consist of $100,000 of convertible preferred stock in AMDG, Inc., which the Company purchased through a private placement in December 1997. Investment securities - available for sale were sold during 1996, resulting in proceeds of $31,000 and a realized loss of $182,000. Investment securities at December 31 consist of the following: ================================================================================ 1997 1996 ----------------------------- ------------------------------ Cost or Cost or Carrying Amortized Fair Carrying Amortized Fair (in thousands) Value Cost Value Value Cost Value ================================================================================ Held to Maturity: U.S. Treasury Bills $44,310 $44,310 $44,276 $47,259 $47,259 $47,261 Available for Sale: Equity Securities 100 100 100 - - - ================================================================================ The gross unrealized gains and losses on investment securities at December 31, consist of the following: ================================================================================ (in thousands) 1997 1996 ================================================================================ Held to Maturity - Gross unrealized gains (losses) $ (34) $ 2 Available for Sale - Gross unrealized gains (losses) - - ================================================================================ -19- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 4 - Receivable From Home Holdings In 1991, the Company sold its entire interest in The Home and its subsidiaries. As part of the sale proceeds, Home Holdings agreed to pay $48 million to the Company over a period of years to meet certain specified future obligations of the Company, as incurred, relating to tax issues, litigation and administrative expenses. The Company has collected the portion of this receivable with respect to litigation and administrative expenses. The Company's remaining receivable at December 31, 1997 is at least $12,736,000, and relates principally to tax issues. On or about January 15, 1998, Home Holdings filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). Home Holdings has also filed a pre-arranged plan of reorganization under Chapter 11 (the "Bankruptcy Plan"). According to the Bankruptcy Plan and disclosure statement, general unsecured creditors of Home Holdings would receive a projected future recovery of approximately 38.3% of the amounts owed to them. Home Holdings has scheduled the Company's outstanding receivable from Home Holdings as a contingent general unsecured claim in the amount of $11,703,136. The Company disagrees with Home Holdings' classification of its receivable and also with the amount of the outstanding receivable. The Company has filed, in connection with the Home Holdings bankruptcy case, a Proof of Claim ("Proof of Claim") for all damages, which is significantly in excess of $12,736,000. The Company intends to file with the United States Bankruptcy Court an objection to the Bankruptcy Plan, will vigorously contest the Bankruptcy Plan and will seek to collect from all parties the full amount of its claim as set forth in, or related to, its Proof of Claim. Accordingly, no allowance for doubtful accounts has been provided as of December 31, 1997. -20- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 5 - Earnings Per Share The calculation of basic earnings per share and dilutive earnings per share, including the effect of dilutive securities, for the years ended December 31, is as follows: ================================================================================ 1997 ----------------------------------------- Loss Shares Per Share (in thousands) (Numerator) (Denominator) Amount ================================================================================ Basic earnings per share: Loss from continuing operations $(1,084) 44,534 $(0.02) Effect of Dilutive Securities: Assumed stock option exercise - 1,688 - Diluted earnings per share: Loss from continuing operations and assumed conversions $(1,084) 46,222 $(0.02) ================================================================================ ================================================================================ 1996 ----------------------------------------- Income Shares Per Share (in thousands) (Numerator) Denominator) Amount ================================================================================ Basic earnings per share: Income from continuing operations $13,825 44,534 $0.31 Effect of Dilutive Securities: Assumed stock option exercise - 1,603 - Diluted earnings per share: Income from continuing operations and assumed conversions $13,825 46,137 $0.30 ================================================================================ ================================================================================ 1995 ----------------------------------------- Income Shares Per Share (in thousands) (Numerator) (Denominator) Amount ================================================================================ Basic earnings per share: Income from continuing operations $4,008 44,534 $0.09 Effect of Dilutive Securities: Assumed stock option exercise - 876 - Diluted earnings per share: Income from continuing operations and assumed conversions $4,008 45,410 $0.09 ================================================================================ -21- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 6 - Discontinued Investment Management Operations On October 4, 1996, the Company sold its entire ownership interest in Augustine to Augustine, for $500,000 in cash. Accordingly, as of September 30, 1996, the operations of Augustine have been designated as discontinued operations, and the consolidated statements of operations for the periods presented herein have been retroactively reclassified to report the income from discontinued operations separately from the results of continuing operations by excluding the operating revenues and expenses of discontinued operations from the respective statement captions. The amount of income taxes allocated to discontinued operations reflects the incremental effect on income taxes that resulted from such operations. Income from discontinued operations was $207,000 for 1996. This reflects the unaudited results of Augustine's operations of $59,000 for the nine month period ended September 30, 1996, and a gain of $148,000 from the sale. Summarized information relating to income from Augustine's discontinued operations for 1996 (through date of disposition) and the full year period ended December 31, 1995 is as follows: ================================================================================ (in thousands) 1996 1995 ================================================================================ Investment management fee revenue $ 479 $ 508 Operating expenses (339) (355) Interest income (expense) 2 (3) Minority interest (30) (40) - -------------------------------------------------------------------------------- Income from discontinued operations before taxes 112 110 Income tax expense (53) (50) - -------------------------------------------------------------------------------- Income from discontinued operations, before gain on disposition 59 60 Gain on disposition 148 - - -------------------------------------------------------------------------------- Income from discontinued operations $ 207 $ 60 ================================================================================ Investment management fee revenue included $142,000 for the nine month period ended September 30, 1996 and $163,000 for the year ended December 31, 1995, from related parties. Note 7 - Stockholders' Equity Authorized capital stock consists of 50,000,000 shares of cumulative preferred stock, $0.01 par value, and 200,000,000 shares of Common Stock, $0.01 par value. At December 31, 1997, 1996 and 1995, there were 44,533,519 shares of the Company's Common Stock outstanding, excluding 126,488 treasury shares carried at average cost of $5.12 per share, aggregating approximately $647,000. In connection with the proceeding entitled Rolo and Tenerelli v. City Investing Company Liquidating Trust, et al., pending in the Third Circuit Court of Appeals, as further described in Note 13, the Company is unable to make any dividend payments without further judicial action. At December 31, 1997, there were 6,860,000 shares reserved for issuance under the Company's stock option and other employee benefit plans. -22- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Stockholder Rights Plan: On January 29, 1986, the Company's Board of Directors declared a dividend distribution of one right for each outstanding share of Common Stock of the Company. The rights, as amended, which entitle the holder to purchase from the Company a common share at a price of $75.00, are not exercisable until either a person or group of affiliated persons acquires 25% or more of the Company's outstanding common shares or upon the commencement or disclosure of an intention to commence a tender offer or exchange offer for 20% or more of the common shares. The rights are redeemable by the Company at $0.05 per right at any time until the earlier of the tenth day following an accumulation of 20% or more of the Company's shares by a single acquirer or group, or the occurrence of certain Triggering Events (as defined in the Stockholder Rights Plan). In the event the rights become exercisable and, thereafter, the Company is acquired in a merger or other business combination, or in certain other circumstances, each right will entitle the holder to purchase from the surviving corporation, for the exercise price, Common Stock having a market value of twice the exercise price of the right. The rights are subject to adjustment to prevent dilution, and expire on February 10, 2001. Note 8 - Pension and Savings Plans The Company sponsors a non-qualified supplemental retirement plan ("Supplemental Plan") under which only one current executive officer and certain former officers of the Company are participants. The cost of the Supplemental Plan is actuarially determined and is accrued but not funded. Pension expense for the Supplemental Plan for the years ended December 31 was as follows: ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Service cost of current period $306 $225 $185 Interest cost on projected benefit obligation 335 336 346 - -------------------------------------------------------------------------------- $641 $561 $531 ================================================================================ Accrued pension costs for the Supplemental Plan at December 31, and the major assumptions used to determine these amounts, are summarized below: ================================================================================ (dollars in thousands) 1997 1996 ================================================================================ Actuarial present value of benefit obligations: Accumulated benefit obligations, fully vested $4,513 $4,102 ================================================================================ Projected benefit obligation for services rendered to date $5,045 $4,733 Unrecognized net loss (180) (9) - -------------------------------------------------------------------------------- Accrued pension costs $4,865 $4,724 ================================================================================ Major assumptions: Pre-retirement and postretirement discount rate 7.0% 7.5% Rate of increase in future compensation 6.0% 6.0% ================================================================================ The Company sponsors the AmBase 401(k) Savings Plan (the "Savings Plan"), which is a "Section 401(k) Plan" within the meaning of the Internal Revenue Code of 1986, as amended (the "Code"). The Savings Plan permits eligible employees to make contributions of up to 15% of salary, which are matched by the Company at a percentage determined annually. The employer match is currently 100% of the first 3% of the employee's salary eligible for deferral. Employee contributions to the Savings Plan are invested at the employee's discretion, in various investment funds. The Company's matching contributions are invested in the same manner as the salary reduction contributions. The Company's matching contributions to the Savings Plan, charged to expense, were $18,000, $16,000 and $15,000 in 1997, 1996 and 1995, respectively. All contributions are subject to maximum limitations contained in the Code. -23- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 9 - Postretirement Benefits Other Than Pensions Pursuant to a 1985 agreement, the Company has assumed the obligation to provide a portion of retiree medical and life insurance coverage to individuals who retired from City Investing Company ("City"), which, prior to September 1985, owned all the outstanding shares of Common Stock of the Company. The Company and its subsidiaries do not provide postretirement benefits to employees currently retiring. Retiree insurance coverage is provided to participants through group medical and life insurance contracts. Retiree medical coverage provides supplemental Medicare coverage for retirees and their eligible spouses. Life insurance is provided to retirees at 25% of the participant's pre-retirement amount, not to exceed $50,000. All participants are required to contribute a portion, which may be adjusted, of the cost of their postretirement benefit coverage. The Company does not pre-fund these plans and retains the right to modify or terminate these plans in the future. The Company accounts for postretirement benefits other than pensions in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This statement requires the costs of certain postretirement benefits to be recognized during the period employees render service, with all such costs being recognized in full by the eligibility date. Net periodic postretirement benefit (income) expense for the years ended December 31 was as follows: ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Interest cost on accumulated postretirement benefit obligation $23 $32 $48 Amortization of prior service liability (66) (62) (53) Amortization of unrecognized gain (45) (37) (33) - -------------------------------------------------------------------------------- Net periodic postretirement benefit (income) expense $(88) $(67) $(38) ================================================================================ The accrued postretirement benefit liability at December 31 is summarized below: ================================================================================ (in thousands) 1997 1996 ================================================================================ Accumulated postretirement benefit obligation: Retirees $323 $323 - -------------------------------------------------------------------------------- Unrecognized net gains 478 527 Unrecognized prior service liability 611 677 - -------------------------------------------------------------------------------- Accrued postretirement benefit liability $1,412 $1,527 ================================================================================ The accumulated benefit obligation for 1997, 1996 and 1995 was determined using the projected unit credit method and a discount rate of 7.0%, 7.5% and 7.5%, respectively. The health care cost trend rates in 1997 were assumed to be 8%, gradually declining to 5.5% in 2001 and remaining at that level, thereafter, 9% in 1996, gradually declining to 5.5% in 2001 and remaining at that level, thereafter, and 10% in 1995, gradually declining to 5.5% in 2001 and remaining at that level, thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a 1% increase each year in the health care trend rate, while holding all other assumptions constant, would increase the accumulated postretirement benefit obligation at December 31, 1997, by approximately $23,000, and decrease the net periodic postretirement benefit income for 1997 by approximately $2,000. -24- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 10 - Incentive Plans Under the Company's 1994 Senior Management Incentive Compensation Plan (the "1994 Plan"), an executive officer of the Company whose compensation is required to be reported to stockholders under the Securities Exchange Act of 1934 (the "Participants") and who is serving as such at any time during the fiscal year as to which an award is granted, may receive an award of a cash bonus ("Bonus"), in an amount determined by the Personnel Committee of the Company's Board of Directors (the "Committee") and payable from an annual bonus fund (the "Annual Bonus Pool"). The Committee may award Bonuses under the 1994 Plan to Participants not later than 120 days after the end of each fiscal year (the "Reference Year"), beginning with the fiscal year ending on December 31, 1994. If the Committee grants a Bonus under the 1994 Plan, the amount of the Annual Bonus Pool will be an amount equal to the sum of (i) plus (ii), where: (i) is ten percent (10%) of the amount by which the Company's Total Stockholders' Equity, as defined, on the last day of a Reference Year increased over the Company's Total Stockholders' Equity, as defined, on the last day of the immediately preceding Reference Year; and (ii) is five percent (5%) of the amount by which the Company's market value, as defined, on the last day of the Reference Year increased over the Company's market value on the last day of the immediately preceding Reference Year. Notwithstanding the foregoing, the 1994 Plan provides that in the event of a decrease in either or both of items (i) and/or (ii) above, the Annual Bonus Pool is determined by reference to the last Reference Year in which there was an increase in such item. If the Committee determines within the 120-day time period to award a Bonus, the share of the Annual Bonus Pool to be allocated to each Participant shall be as follows: 45% of the Annual Bonus Pool shall be allocated to the Company's Chief Executive Officer, and 55% of the Annual Bonus Pool shall be allocated pro rata to each of the Company's Participants as determined by the Committee. The Committee in its discretion may reduce the percentage of the Annual Bonus Pool to any Participant for any Reference Year, and such reduction shall not increase the share of any other Participant. The 1994 Plan is not the exclusive plan under which the Executive Officers may receive cash or other incentive compensation or bonuses. Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the Company may grant to officers and employees of the Company and its subsidiaries, stock options ("Options"), stock appreciation rights ("SARs"), restricted stock awards ("Restricted Stock"), merit awards ("Merit Awards") and performance share awards ("Performance Shares"), through May 28, 1998. An aggregate of 5,000,000 shares of the Company's Common Stock are reserved for issuance under the 1993 Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of Restricted Stock and Performance Shares); however, of such shares, only 2,500,000 shares in the aggregate shall be available for issuance for Restricted Stock Awards and Merit Awards. Such shares shall be authorized but unissued shares of Common Stock. Options may be granted as incentive stock options ("ISOs") intended to qualify for favorable tax treatment under Federal tax law or as nonqualified stock options ("NQSOs"). SARs may be granted with respect to any Options granted under the 1993 Plan and may be exercised only when the underlying Option is exercisable. The 1993 Plan requires that the exercise price of all Options and SARs be equal to or greater than the fair market value of the Company's Common Stock on the date of grant of that Option. The term of any ISO or related SAR cannot exceed ten years from the date of grant, and the term of any NQSO cannot exceed ten years and one month from the date of grant. Subject to the terms of the 1993 Plan and any additional restrictions imposed at the time of grant, Options and any related SARs ordinarily will become exercisable commencing one year after the date of grant. In the case of a "Change of Control" of the Company (as defined in the 1993 Plan), Options granted pursuant to the 1993 Plan may become fully exercisable as to all optioned shares from and after the date of such Change in Control in the discretion of the Committee or as may otherwise be provided in the grantee's Option agreement. Death, retirement, resignation or absence for disability will not result in the cancellation of any Options. -25- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) As a condition to any award of Restricted Stock or Merit Award under the 1993 Plan, the Committee may require a participant to pay an amount equal to, or in excess of, the par value of the shares of Restricted Stock or Common Stock awarded to him or her. Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered during a "Restricted Period", which in the case of grants to employees shall not be less than one year from the date of grant. The Restricted Period with respect to any outstanding shares of Restricted Stock awarded to employees may be reduced by the Committee at any time, but in no event shall the Restricted Period be less than one year. Except for such restrictions, the employee as the owner of such stock shall have all of the rights of a stockholder including, but not limited to, the right to vote such stock and to receive dividends thereon as and when paid. In the event that an employee's employment is terminated for any reason, an employee's Restricted Stock will be forfeited; provided, however, that the Committee may limit such forfeiture in its sole discretion. At the end of the Restricted Period, all shares of Restricted Stock shall be transferred free and clear of all restrictions to the employee. In the case of a Change in Control of the Company (as defined in the 1993 Plan), an employee may receive his or her Restricted Stock free and clear of all restrictions in the discretion of the Committee, or as may otherwise be provided pursuant to the employee's Restricted Stock award. Performance Share awards of Common Stock under the 1993 Plan shall be earned on the basis of the Company's performance in relation to established performance measures for a specific performance period. Such measures may include, but shall not be limited to, return on investment, earnings per share, return on stockholder's equity, or return to stockholders. Performance Shares may not be sold, assigned, transferred, pledged or otherwise encumbered during the relevant performance period. Performance Shares may be paid in cash, shares of Common Stock or shares of Restricted Stock in such portions as the Committee may determine. An employee must be employed at the end of the performance period to receive payments of Performance Shares; provided, however, in the event that an employee's employment is terminated by reason of death, disability, retirement or other reason approved by the Committee, the Committee may limit such forfeiture in its sole discretion. In the case of a Change in Control of the Company (as defined in the 1993 Plan), an employee may receive his or her Performance Shares in the discretion of the Committee, or as may otherwise be provided in the employee's Performance Share award. During January 1998, the Board of Directors of the Company approved the award of incentive stock options to certain employees to acquire 85,000 shares of AmBase Common Stock at exercise prices between $3.65 and $4.02 per share, pursuant to the 1993 Plan. Under the Company's 1985 Stock Option Plan (the "1985 Plan"), options to purchase shares of Common Stock could be granted to salaried employees. The 1985 Plan provided for the granting of up to 2,000,000 shares as incentive stock options and/or nonqualified stock options through May 22, 1995. No additional stock options can be awarded under the 1985 Plan. As of December 31, 1997, 1,750,000 shares are reserved for issuance under the 1985 Plan. The exercise price of incentive stock options could not be less than 100% of the fair market value of the Company's Common Stock on the date of grant, with a maximum life of ten years, and may not be exercised to purchase stock until vesting requirements have been met. -26- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Incentive plan activity is summarized as follows: ================================================================================ 1993 Stock 1985 Stock (shares in thousands) Incentive Plan Option Plan ================================================================================ Weighted Weighted Shares Average Shares Average Under Exercise Under Exercise Option Price Option Price ================================================================================ Outstanding at December 31, 1994 - $ - 1,375 $0.14 Granted - - 625 0.23 Forfeited - - (237) 0.29 - -------------------------------------------------------------------------------- Outstanding at December 31, 1995 - - 1,763 0.15 Granted 100 2.09 - - Forfeited - - - - - -------------------------------------------------------------------------------- Outstanding at December 31, 1996 100 2.09 1,763 0.15 Granted 5 2.84 - - Forfeited - - (13) 0.21 - -------------------------------------------------------------------------------- Outstanding at December 31, 1997 105 $2.13 1,750 $0.15 ================================================================================ Options exercisable at: December 31, 1995 - $ - 1,150 $ 0.11 December 31, 1996 - - 1,456 0.13 December 31, 1997 50 2.09 1,750 0.15 ================================================================================ ================================================================================ 1993 Stock 1985 Stock Incentive Plan Option Plan ================================================================================ Weighted average fair value of options granted during: 1995 $ - $ 0.15 1996 1.35 - 1997 1.81 - ================================================================================ The following table summarizes information about the Company's stock options outstanding and exercisable under the 1985 Plan and 1993 Plan at December 31, 1997, as follows: ================================================================================ (shares in thousands) Options Outstanding Options Exercisable ================================================================================ Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Price Shares Price ================================================================================ $0.11 1,150 5 years $ 0.11 1,150 $ 0.11 $0.20 to 0.23 600 3 years 0.23 600 0.23 $2.09 100 9 years 2.09 50 2.09 $2.84 5 9 years 2.84 - - - -------------------------------------------------------------------------------- Total 1,855 1,800 ================================================================================ -27- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) The details of the Company's incentive plans are summarized above. The Company adopted the disclosure only provisions of Statement 123 in 1996, but continues to apply APB 25 in accounting for employee stock options. No compensation expense, attributable to stock incentive plans, was charged to earnings during 1997, 1996 and 1995. The fair value of stock options granted by the Company in 1996 and 1995 used to compute proforma net income and earnings per share disclosures is the estimated fair value at date of grant, using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively: dividend yield 0% for all years, expected historical volatility of 0.84, 0.84 and 0.87, risk-free interest rates of 5.84%, 6.15% and 5.57%, and weighted average expected life of the options of 4 years. If the Company had elected to recognize compensation cost for stock options based on the fair value at date of grant for stock options under the 1993 Plan and the 1985 Plan, consistent with the method prescribed by Statement 123, net income and net income per share would have been changed to the proforma amounts indicated below. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, and given the substantial appreciation in the price per share of the Company's Common Stock during 1997 and 1996, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's proforma information for the years ended December 31 follows: ================================================================================ (in thousands, except per share data) 1997 1996 1995 ================================================================================ Net income (loss) As reported $(1,084) $14,032 $4,068 Proforma (1,171) 13,959 4,038 ================================================================================ Per share data As reported $(0.02) $ 0.31 $ 0.09 Proforma (0.02) 0.31 0.09 ================================================================================ -28- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 11 - Income Taxes The components of income tax (expense) benefit for the years ended December 31 are as follows: ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Income tax (expense) benefit: Continuing operations $ 191 $ 7,189 $(1,997) Discontinued investment management operations - (53) (50) ================================================================================ The components of pretax income (loss) and the difference between income taxes from continuing operations computed at the statutory federal rate of 35% in 1997, 1996 and 1995, and the provision for income taxes from continuing operations for the years ended December 31 follows: ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Income (loss) from continuing operations before income taxes $(1,275) 6,636 $ 6,005 ================================================================================ Tax (expense) benefit: Tax at statutory federal rate $ 446 $(2,323) $(2,102) Prior year tax refund 475 7,613 - Benefit of operating loss carryforwards - 2,323 - Accounting loss benefit not recognized (446) - - Accounting loss benefit recognized - - 2,102 Prior years' issues - - (1,800) Federal income taxes - (76) - State income taxes (284) (348) (197) - -------------------------------------------------------------------------------- $ 191 $ 7,189 $(1,997) ================================================================================ The composition of income tax (expense) benefit from continuing operations for the year ended December 31 is as follows: ================================================================================ in thousands) 1997 1996 1995 ================================================================================ Current: Federal $ - $ (76) $ - State (284) (348) (197) - -------------------------------------------------------------------------------- (284) (424) (197) - -------------------------------------------------------------------------------- Deferred (primarily federal): Prior year tax refund 475 7,613 - Prior years' issues - - (1,800) - -------------------------------------------------------------------------------- 475 7,613 (1,800) - -------------------------------------------------------------------------------- $ 191 $ 7,189 $(1,997) ================================================================================ The Company contractually assumed the tax liabilities of City, which, prior to September 1985, owned all the outstanding shares of Common Stock of the Company. Included in the income tax benefit during 1996 is a federal and state tax provision of $424,000. The Company also contractually assumed certain tax liabilities of The Home and its subsidiaries from September 1985 through 1989. For all periods through 1992, the Internal Revenue Service ("IRS") and the Company do not agree with respect to only two issues, withholding taxes in connection with a Netherlands Antilles finance subsidiary of City, and "Fresh Start", an insurance industry issue. During 1996, the Company received a 1977 income tax refund of $7,613,000; as a result, City no longer remains open for refunds. This amount was recognized as an income tax benefit in the accompanying 1996 Consolidated Statement of Operations, based on management's continuing review of the overall tax liability position of the Company. See Note 13 to the Company's consolidated financial statements, Legal Proceedings, Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start, for additional details. -29- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) During 1996, in connection with the completion by the IRS of the Company's 1985 to 1991 federal income tax audits (excluding Fresh Start), the Company made payments to the IRS totaling $1,995,000. These amounts were previously reserved for and charged against the income tax reserves account. During the first quarter of 1997, $475,000 of income taxes were refunded as the result of an overpayment to the IRS for 1988 through 1991 tax years. This amount was recorded as an income tax benefit in the first quarter of 1997. The federal income tax adjustments from the 1985 to 1992 audits (excluding Fresh Start) did not result in additional payments of state or local income taxes. The IRS has completed its review of the Company's federal income tax return for 1992 with no significant adjustments. The Company's federal income tax returns for years subsequent to 1992 have not been reviewed by the IRS. New York State recently completed their examination of the Company's income tax returns for tax years 1990 to 1992, which resulted in zero tax assessment. As a result of the OTS's December 4, 1992 placement of Carteret in receivership, under the management of the Resolution Trust Corporation ("RTC")/Federal Deposit Insurance Corporation ("FDIC"), and proposed Treasury Reg. S.1.597-4(g), the Company had previously filed its 1992 through 1995 federal income tax returns with Carteret disaffiliated from the Company's consolidated federal income tax return. Based upon the impact of Treasury Reg. S.1.597-4(g), which was issued in final form on December 20, 1995, a continuing review of the Company's tax basis in Carteret, and the impact of prior year tax return adjustments on the Company's 1992 federal income tax return as filed, the Company decided not to make an election pursuant to final Treasury Reg. S.1.597-4(g) to disaffiliate Carteret from the Company's consolidated federal income tax return effective as of December 4, 1992 (the "election decision"). The Company has made numerous requests to the RTC/FDIC for tax information pertaining to Carteret and the resulting successor institution, Carteret Federal Savings Bank ("Carteret FSB"), but this information has not yet been received. Based on the Company not making the election decision, as described above, and upon receipt of the requested information from the RTC/FDIC, the Company will amend its 1992 through 1996 consolidated federal income tax returns to include the federal income tax effects of Carteret and Carteret FSB. Based on the information currently available, the Company does not believe a material increase in the Company's tax liabilities will result. The Company anticipates that, as a result of filing a consolidated federal income tax return with Carteret FSB, approximately $170 million of tax NOL carryforwards will be generated from the Company's tax basis in Carteret/Carteret FSB as tax losses are incurred by Carteret FSB. The NOL carryforwards generated from the Company's tax basis in Carteret/Carteret FSB would expire no earlier than 2007, and would be available to offset future taxable income, in addition to the $30 million of NOL carryforwards as further detailed below. In connection with the completion of the federal tax audit years (excluding Fresh Start) through 1992 (excluding the $170 million of tax NOL carryforwards from the Company's tax basis in Carteret/Carteret FSB), as noted above and the Company's federal income tax returns as filed from 1993 to 1996 (subject to IRS audit adjustments), at December 31, 1997 the Company has NOL carryforwards available to reduce future federal taxable income, which expire if unused, as follows: 2006 $ 3,000,000 2007 12,000,000 2008 3,000,000 2009 7,000,000 2010 5,000,000 --------- $30,000,000 The utilization of certain carryforwards is subject to limitations under U.S. federal income tax laws. In addition, the Company has approximately $21 million of alternative minimum tax credit carryforwards, which are not subject to expiration. Under Statement 109, the Company has calculated a net deferred tax asset of $33 million as of December 31, 1997 and 1996, arising primarily from NOL's, the excess of book over tax reserves and alternative minimum tax credits (not including the anticipated tax effects of the approximately $170 million of NOL's expected to be generated from the Company's tax basis in Carteret, resulting from the election decision, as more fully described above). A valuation allowance has been established for the entire net deferred tax asset, as management, at the current time, has no basis to conclude that realization is more likely than not. -30- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) During 1995, the Company recorded as additional income tax expense a $1,800,000 increase in the income tax reserves. The increase in the income tax reserves was the result of the continuing review of the income tax reserves including additional reserves for amounts considered unrealizable. In addition, included in income tax expense is a state tax provision of $197,000 in 1995. Note 12 - Commitments and Contingencies Future minimum rental payments, principally for office space, under noncancellable operating leases at December 31, 1997, are: 1998, $74,000; 1999, $79,000; 2000, $80,000; 2001, $20,000; 2002, $0 and thereafter, $0. Rent expense charged to earnings was $67,000, $46,000 and $142,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Note 13 - Legal Proceedings (a) The Company is a defendant in a number of lawsuits or proceedings, including the following: Rolo and Tenerelli v. City Investing Company Liquidating Trust, et al. This is a purported class action filed in the United States District Court for the District of New Jersey (the "District Court"). Plaintiffs assert a variety of Federal and state causes of action in connection with an alleged fraudulent scheme involving the marketing and sale of homesites and houses by General Development Corporation ("GDC"), a former subsidiary of City. Plaintiffs have named as defendants the Company and Carteret, as well as a number of directors and other financial institutions that had business dealings with GDC. On December 27, 1993, the District Court entered an Order and Opinion dismissing the action against all parties (amended on January 17, 1994, to include the dismissal of Carteret Bancorp, Inc. and Carteret). Plaintiffs appealed the order to the United States Court of Appeals for the Third Circuit which affirmed the order and subsequently remanded the case for reconsideration in light of an intervening decision. Upon remand, the District Court again dismissed plaintiffs' complaint on August 24, 1995 and denied plaintiffs' petition for reconsideration. Plaintiffs have appealed the District Court's most recent order to the Court of Appeals where the case remains pending. The parties have completed briefing and argument and are awaiting a decision by the Court of Appeals on the plaintiffs' appeal of the dismissal of the case by the District Court. In United States v. Brown, an action commenced in the United States District Court for the Southern District of Florida, certain officers of GDC, none of whom were officers of the Company, were convicted of violating the Federal Mail Fraud Statute and certain other related statutes. This development led two of GDC's insurers, National Union Fire Insurance Co. and Pacific Insurance Co., to seek to terminate their directors and officers' insurance coverage in two actions pending in the United States District Court for the Southern District of Florida, Pacific Insurance Co. v. Brown, et al. and National Union Fire Ins. Co. v. Brown, et al. During the fourth quarter of 1996, the U.S. Court of Appeals for the 11th Circuit reversed the conviction of the officers of GDC. Although the Company is not a party to these actions, certain individuals who were directors of GDC and the Company are defendants. Should the insurers be successful in the termination of their coverage, it is anticipated that the Company would be exposed to claims for indemnification. The parties to this litigation are currently engaged in settlement negotiations. Marshall Manley v. AmBase Corporation. On November 14, 1996, Marshall Manley ("Manley"), a former President, Chief Executive Officer and Director of the Company, commenced an action against the Company, seeking indemnification from the Company pursuant to a May 27, 1993 employment settlement agreement between Manley and the Company. Manley seeks reimbursement of certain alleged payments he made to the Trustee in the bankruptcy proceedings of the law firm of Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey (the "Manley action"), arguing that he served at such firm at the request of the Company. The Manley action is pending in the United States District Court for the Southern District of New York. The Company filed its answer on January 21, 1997, raising substantial affirmative defenses which the Company intends to vigorously pursue. On October 30, 1997, AmBase amended its Answer and Counterclaims to include a claim of fraud against Manley. In December 1997, Manley moved for summary judgment in his favor. The Company raised substantial opposition to the motion and moved to strike certain of Manley's affirmative defenses which Manley raised in connection with the Company's fraud claim against Manley. Oral argument on the motions is set for May 15, 1998. -31- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Disputes with Internal Revenue Service. The Company contractually assumed the tax liabilities of City, which, prior to September 1985, owned all the outstanding shares of Common Stock of the Company. The Company also contractually assumed certain tax liabilities of The Home and its subsidiaries from September 1985 through 1989. For all periods through 1991, the IRS and the Company do not agree with respect to only two issues; (1) withholding taxes in connection with a Netherlands Antilles finance subsidiary of City, and (2) "Fresh Start", an insurance industry issue. (1) Withholding Taxes (Netherlands Antilles). On May 11, 1995, the IRS issued a Notice of Deficiency for withholding taxes on interest payments for the years 1979 through 1985. In the Notice of Deficiency, the IRS contends that City's wholly owned Netherlands Antilles finance subsidiary should be disregarded for tax purposes. The Company vigorously contested the IRS's position in accordance with the IRS's internal appeals procedures. In January 1992, the National Office of the IRS issued technical advice supporting the auditing agent's position. In October 1992, the Company appealed this technical advice to the National Office. The National Office advised the Company that it expected to issue technical advice supporting the auditing agent's position, whereupon, the Company advised the IRS that it was withdrawing its technical advice request. On June 30, 1995, the Company filed a petition in the United States Tax Court contesting the Notice of Deficiency. The IRS filed its answer on August 23, 1995. The Company filed a motion for summary judgment in its favor on February 13, 1996. On April 17, 1996, the IRS filed a Notice of Objection to the Company's motion for summary judgment. The Tax Court requested, and the Company filed on July 3, 1996, a reply to the IRS's Notice of Objection. On September 19, 1996, the Tax Court denied the Company's motion for summary judgment without prejudice. Based on the Tax Court's examination of the record and the status of the discovery process, the Tax Court concluded that summary adjudication at this time was inappropriate. The Tax Court directed the parties to engage in full and complete discovery as expeditiously as possible. A trial was held in this case on March 24, 1997, after which the Judge asked the IRS and the Company to submit post-trial briefs, which have subsequently been submitted to the Tax Court. If the IRS were to prevail on this issue, the Company would be liable for taxes and interest in excess of the Company's financial resources. In a case dealing with a similar withholding tax issue, the Tax Court ruled in favor of the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana") in November 1995. The Tax Court rejected the IRS's contention that interest paid to Northern Indiana's foreign subsidiary was subject to United States tax withholding. The IRS has appealed this decision (Northern Indiana Public Service Co. v. Commissioner, 105 T.C. No. 22) to the United States Court of Appeals for the 7th Circuit ("Appeals Court"). The Appeals Court affirmed the Tax Court's ruling in favor of Northern Indiana. Although the Appeals Court decision in the Northern Indiana case could be beneficial to the Company's case, it is not necessarily indicative of the ultimate result of the final settlement of the Netherlands Antilles issue between the Company and the IRS. Based on an evaluation of the IRS's contention, counsel has advised the Company that, although the outcome in litigation can by no means be assured, the Company has a very strong case and should prevail. Notwithstanding counsel's opinion and the Tax Court's ruling in the Northern Indiana case, it is not possible at this time to determine the final disposition of this issue, when the issues will be resolved, or their final financial effect. A final disposition of this issue in the Company's favor would have a material, positive effect on the Company's Statement of Operations and Financial Condition. (2) Fresh Start. The one issue remaining for tax year 1987 is the Company's entitlement to Fresh Start transition relief under certain insurance company tax provisions of the Tax Reform Act of 1986 (other insurance industry taxpayers face similar issues under the Fresh Start provision). On March 13, 1996, the IRS issued a deficiency notice to the Company on the Fresh Start issue which asserts an increase in tax for the year 1987. If the IRS is successful, the amount of the deficiency would be material. On June 7, 1996, the Company filed a petition with the United States Tax Court (the "Tax Court") to dispute the entire amount of the asserted deficiency and to redetermine the tax, and on July 23, 1996, the IRS filed its answer. The IRS and the Company began engaging in the informal discovery process customary in the Tax Court. -32- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) On July 22, 1997, another insurance company taxpayer, Atlantic Mutual Insurance Company ("Atlantic Mutual"), filed a petition for certiorari in its own case seeking review of the Fresh Start issue by the United States Supreme Court (the "Supreme Court"). In response, on September 19, 1997, the United States filed its brief with the Supreme Court in that case in which it recommended that the Supreme Court hear the case. The Supreme Court granted the petition on October 20, 1997, has received briefs, and heard oral argument on March 2, 1998. A decision on the merits by the Supreme Court in Atlantic Mutual may control the outcome of the Company's own case in the Tax Court. Because it is expected that the Supreme Court will address the reserve strengthening issue, the Company and the IRS have advised the Tax Court in the Company's own case that, in the interests of efficiency, further informal discovery and negotiation of a stipulation of facts have been deferred pending the Supreme Court's ruling in Atlantic Mutual. No assurances can be given concerning the outcome of the Company's litigation on this issue. The actions against the Company, including those identified in (a) above, are in various stages. Nevertheless, the allegations and claims are material and, if successful, could result in substantial judgments against the Company. To the extent the aggregate of any such judgments were to exceed the resources available, these matters could have a material adverse effect on the Company's financial condition and results of operations. Due to the nature of these proceedings, the Company and its counsel are unable to express any opinion as to their probable outcome. (b) Supervisory Goodwill Litigation: During the third quarter of 1993, the Company filed a claim against the United States, in the United States Court of Federal Claims (the "Court of Federal Claims"), based upon the impact of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") on the Company's investment in Carteret. Approximately 120 other similar so-called "supervisory goodwill" cases, commenced in recent years by other financial institutions and/or their shareholders, are pending in the Court of Federal Claims. Three of these cases, Winstar Corp. v. United States, Glendale Federal Bank, FSB v. United States, and Statesman Savings Holding Corp. v. United States (the "consolidated cases"), which involve many of the same issues raised in the Company's suit, were appealed to the United States Supreme Court (the "Supreme Court"). On July 1, 1996, the Supreme Court issued a decision in the consolidated cases. The Supreme Court's decision affirmed the lower Court's grant of summary judgment in favor of the plaintiffs on the issue of liability and remanded the cases for a determination of damages. Although the decision in the consolidated cases is beneficial to the Company's case, it is not necessarily indicative of the ultimate outcome of the Company's action. On September 18, 1996, the Court of Federal Claims entered an Omnibus Case Management Order that will govern further proceedings in the Company's action and most of the other so-called "Winstar-related" cases. On March 14, 1997, the Court entered an order permitting the FDIC to intervene as an additional plaintiff in forty-three cases, including the Company's case, but not allowing the FDIC to be substituted as the sole plaintiff in those cases. On December 22, 1997, the Court issued a decision which addressed eleven "common issues" applicable to a number of the Winstar-related cases, and rejected the government's arguments with respect to each such issue. Although this decision is also beneficial to the Company's case, it is not necessarily indicative of the ultimate outcome of the Company's action. Case-specific discovery in thirty Winstar- related cases, including the Company's case, is scheduled to begin in April 1998. A trial date has not yet been set in the Company's case. No assurance can be given regarding the ultimate outcome of the litigation. -33- AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Note 14 - Fair Value of Financial Instruments The carrying amounts reported in the balance sheet for cash and cash equivalents, and accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of investment securities - held to maturity are based on current market quotations. The fair value of investment securities - available for sale is based upon the December 1997 cost for these privately placed shares. The carrying value of applicable other liabilities approximates their fair value. Note 15 - Supplemental Disclosure of Cash Flow Information Additional information regarding cash flow for the years ended December 31 is as follows: ================================================================================ (in thousands) 1997 1996 1995 ================================================================================ Cash received (paid) during the period: Income tax refunded (paid), net $ 244 $5,190 $ (173) ================================================================================ In 1997, income taxes refunded include $475,000 of taxes refunded as a result of an overpayment to the IRS for 1988 through 1991 tax years. In 1996, income taxes refunded (paid) include a 1977 tax refund of $7,613,000 and $1,995,000 of payments to the IRS, principally for the 1985 through 1991 tax years. In June 1995 the Company received, with respect to 1990 and 1991, $1,690,000 from The Home in connection with a tax sharing agreement between the Company and The Home. -34- AMBASE CORPORATION AND SUBSIDIARIES Note 16 - Quarterly Financial Information (unaudited) Summarized quarterly financial information follows: ================================================================================ (in thousands, except First Second Third Fourth Full per share data) Quarter Quarter Quarter Quarter Year ================================================================================ 1997: Operating expenses $ 672 $ 707 $ 618 $ 1,998 $ 3,995 - -------------------------------------------------------------------------------- Operating loss (672) (707) (618) (1,998) (3,995) Interest income 689 663 656 653 2,661 Other income - - 55 4 59 - -------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 17 (44) 93 (1,341) (1,275) Income tax benefit (expense)(a) 405 (70) (73) (71) 191 - -------------------------------------------------------------------------------- Income (loss) from continuing operations 422 (114) 20 (1,412) (1,084) Income from discontinued investment management operations, net of income taxes - - - - - - -------------------------------------------------------------------------------- Net income (loss) $ 422 $ (114) $ 20 $(1,412) $(1,084) ================================================================================ Earnings per common share - basic: Income (loss) from continuing operations $ 0.01 $ - $ - $ (0.03) $ (0.02) Income from discontinued operations - - - - - - -------------------------------------------------------------------------------- Net income (loss) $ 0.01 $ $ $ (0.03) $ (0.02) ================================================================================ Earnings per common share - assuming dilution: Income (loss) from continuing operations $ 0.01 $ - $ - $ (0.03) $ (0.02) Income from discontinued operations - - - - - - -------------------------------------------------------------------------------- Net income (loss) $ 0.01 $ - $ - $ (0.03) $ (0.02) ================================================================================ (a)Includes $475,000 of taxes refunded. See Item 7 - Results of Operations for a further discussion. 1996: Operating expenses $ 639 $ 664 $ 726 $ 1,824 $ 3,853 - -------------------------------------------------------------------------------- Operating loss (639) (664) (726) (1,824) (3,853) Interest income 603 655 690 693 2,641 Other income - 20 - 10 30 Other income - litigation and contingency reserves reversal(b) - 8,000 - - 8,000 Realized loss on investment securities - available for sale - (182) - - (182) - -------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (36) 7,829 (36) (1,121) 6,636 Income tax benefit (expense) c) 7,560 (74) (214) (83) 7,189 - -------------------------------------------------------------------------------- Income (loss) from continuing operations 7,524 7,755 (250) (1,204) 13,825 Income from discontinued investment management operations, net of income taxes 18 18 23 148 207 - -------------------------------------------------------------------------------- Net income (loss) $7,542 $7,773 $(227) $(1,056) $14,032 ================================================================================ Earnings per common share - basic: Income (loss) from continuing operations $0.17 $0.17 $ - $ (0.03) $ 0.31 Income from discontinued operations - - - - - - -------------------------------------------------------------------------------- Net income (loss) $0.17 $0.17 $ - $ (0.03) $ 0.31 ================================================================================ Earnings per common share - assuming dilution: Income (loss) from continuing operations $0.16 $0.17 $ - $ (0.03) $ 0.30 Income from discontinued operations - - - - - - -------------------------------------------------------------------------------- Net income (loss) $0.16 $0.17 $ - $ (0.03) $ 0.30 ================================================================================ (b) Represents a reduction in the Company's litigation and contingency reserves. See Item 7 - Financial Condition for a further discussion. (c)Includes a non-recurring income tax benefit of $7,613,000 as a result of the receipt of a 1977 income tax refund. See Item 7 - Financial Condition for a further discussion. -35- AMBASE CORPORATION AND SUBSIDIARIES ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning executive officers required by this item is set forth following Item 4 of Part I of this report under the caption "Executive Officers of the Registrant", pursuant to General Instruction G to Form 10-K. For the information required to be set forth by the Company in response to this item concerning directors of the Company, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 28, 1998, under the caption "Information Concerning the Board and its Committees", which is incorporated herein by reference, which the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION For the information required to be set forth by the Company in response to this item, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 28, 1998, under the caption "Executive Compensation", which is incorporated herein by reference, which the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For the information required to be set forth by the Company in response to this item, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 28, 1998, under the caption "Stock Ownership", which is incorporated herein by reference, which the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For the information required to be set forth by the Company in response to this item, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 28, 1998, under the caption "Certain Relationships and Related Transactions", which is incorporated herein by reference, which the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of its fiscal year. -36- AMBASE CORPORATION AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report: 1. Index to Financial Statements: Page AmBase Corporation and Subsidiaries: Report of Independent Accountants..................................12 Consolidated Statements of Operations..............................13 Consolidated Balance Sheets........................................14 Consolidated Statements of Changes in Stockholders' Equity.........15 Consolidated Statements of Cash Flows..............................16 Notes to Consolidated Financial Statements.........................17 2. Index to Financial Statements Schedules: All schedules have been omitted because they are not applicable. 3. Exhibits 3A. Restated Certificate of Incorporation of AmBase Corporation (as amended through February 12, 1991) (incorporated by reference to Exhibit 3A to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 3B. By-Laws of AmBase Corporation (as amended through March 15, 1996), (incorporated by reference to Exhibit 3B to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4. Rights Agreement dated as of February 10, 1986 between the Company and American Stock Transfer and Trust Co. (as amended March 24, 1989, November 20, 1990, February 12, 1991, October 15, 1993 and February 1, 1996) (incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993 and the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10A. 1985 Stock Option Plan for Key Employees of AmBase and its Subsidiaries (incorporated by reference to Exhibit 10B to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). 10B. 1993 Stock Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 28, 1993). 10C. 1994 Senior Management Incentive Compensation Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 27, 1994). 10D. AmBase Officers and Key Employees Stock Purchase and Loan Plan (incorporated by reference to Exhibit 10E to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). 10E. AmBase Supplemental Retirement Plan (incorporated by reference to Exhibit 10C to the Company's Annual Report on Form 10-K for the year ended December 31, 1989). 10F. Assignment and Assumption Agreement dated as of August 30, 1985, between the Company and City (incorporated by reference to Exhibit 28 to the Company's Current Report on Form 8-K dated September 12, 1985). -37- AMBASE CORPORATION AND SUBSIDIARIES 10G. Employment Agreement dated as of June 1, 1991 between Richard A. Bianco and the Company, as amended dated as of December 30, 1992 (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1992), and as amended February 24, 1997 (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10H. Stock Purchase Agreement among AmBase Corporation, The Home Insurance Company and TVH Acquisition Corporation, dated as of September 28, 1990 and amended as of December 12, 1990, as of December 21, 1990 and as of February 4, 1991 (incorporated by reference to Exhibit 10HH to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10I. Indemnity Agreement dated as of February 13, 1991 among the Company, The Home Insurance Company and TVH Acquisition Corporation (incorporated by reference to Exhibit 10JJ to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10J. Consulting Agreement dated as of February 13, 1991 between the Company and TVH Acquisition Corporation (incorporated by reference to Exhibit 10KK to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 22. Subsidiaries of the Registrant. 23. Consent of Independent Accountants. 27. Financial Data Schedule Exhibits, except as otherwise indicated above, are filed herewith. (b) Form 8-K The Company was not required to file a Current Report on Form 8-K during the quarter ended December 31, 1997. -38- AMBASE CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 31st day of March 1998. AMBASE CORPORATION RICHARD A. BIANCO Chairman, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 31st day of March 1998. RICHARD A. BIANCO JOHN P. FERRARA Chairman, President and Vice President, Chief Financial Officer Chief Executive Officer and Controller (Principal Financial and Accounting Officer) ROBERT E. LONG JOHN B. COSTELLO Director Director -39- AMBASE CORPORATION AND SUBSIDIARIES DIRECTORS AND OFFICERS BOARD OF DIRECTORS: Richard A. Bianco John B. Costello Robert E. Long Chairman, President and Private Investor President and Chief Executive Officer Chief Executive Officer AmBase Corporation Business News Network, Inc. AMBASE OFFICERS: Richard A. Bianco John P. Ferrara Chairman, President and Vice President, Chief Financial Officer Chief Executive Officer and Controller INVESTOR INFORMATION ANNUAL MEETING OF STOCKHOLDERS CORPORATE HEADQUARTERS The 1998 Annual Meeting is AmBase Corporation currently scheduled to be held at 51 Weaver Street, Bldg. 2 9:00 a.m. Eastern Daylight Time, Greenwich, CT 06831-5155 on Thursday, May 28, 1998, at: (203) 532-2000 Hyatt Regency Hotel 1800 East Putnam Avenue Greenwich, CT 06870 STOCKHOLDER INQUIRIES COMMON STOCK TRADING Stockholder inquiries, including AmBase stock is traded through one requests for the following:(i) change or more market-makers with quotations of address; (ii) replacement of lost made available in the "pink sheets" stock certificates; (iii) Common Stock published by the National Quotation name registration changes; (iv) Bureau, Inc. Quarterly Reports on Form 10-Q; (v) Annual Reports on Form 10-K; (vi) ISSUE ABBREVIATION TICKER SYMBOL proxy material; and (vii) information regarding stockholdings, should be Common AmBase ABCP directed to: Stock AMERICAN STOCK TRANSFER AND TRUST TRANSFER AGENT AND REGISTRAR COMPANY 40 Wall Street - 46th Floor AMERICAN STOCK TRANSFER AND TRUST New York, NY 10005 COMPANY Attention: Shareholder Services 40 Wall Street - 46th Floor (800) 937-5449 or (718) 921-8200 New York, NY 10005 Attention: Shareholder Services (800) 937-5449 or (718) 921-8200 INDEPENDENT ACCOUNTANTS NUMBER OF STOCKHOLDERS PRICE WATERHOUSE LLP As of January 30, 1998, there were 1177 Avenue of the Americas approximately 23,000 stockholders. New York, NY 10036 -40- EXHIBITS ATTACHED WITH THIS FORM 10-K Exhibit No. Description - ------- ----------- 22 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Schedule -41- EX-22 2 AMBASE CORPORATION - SUBSIDIARY LISTING EXHIBIT 22 AMBASE CORPORATION SUBSIDIARY LISTING AS OF DECEMBER 31, 1997 Jurisdiction Percentage Voting In Which Securities Owned by Name Organized Immediate Parent - -------------------------------------------------------------------------------- AmBase Corporation Delaware N/A Carteret Bancorp, Inc. Delaware 100% Home Capital Services, Inc. Delaware 100% Maiden Lane Associates, Ltd. Delaware 100% SDG Financial Corp. Delaware 100% Note: Interrelationships shown by indentation with 100% ownership unless otherwise indicated. EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Registration Statements 333-22553, 33-27417, 33-32224 and 33-17829 on Forms S-8 of our report dated March 30, 1998 appearing on Page 12 of the Annual Report of AmBase Corporation on Form 10-K for the year ended December 31, 1997. Price Waterhouse, L.L.P. New York, New York March 26, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 DEC-31-1997 5,548 44,410 12,736 0 0 0 0 0 64,270 0 0 0 0 447 (25,628) 64,270 0 0 0 0 3,995 0 0 (1,275) (191) (1,084) 0 0 0 (1,084) (0.02) (0.02)
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