ITEM 1. BUSINESS
AmBase Corporation (the "Company" or "AmBase") is a Delaware corporation that was incorporated in 1975 by City Investing Company ("City"). AmBase is a holding company that, through a wholly owned subsidiary, owns one commercial office building in Greenwich, Connecticut that is managed and operated by the Company. The building is approximately 14,500 square feet; with approximately 3,500 square feet utilized by the Company for its executive offices; the remaining space is currently unoccupied and available for lease. The executive office of the Company is located at 100 Putnam Green, Third Floor, Greenwich, Connecticut 06830.
The Company's assets currently consist primarily of cash and cash equivalents, investment securities, and real estate owned. The Company earns non-operating revenue principally consisting of investment earnings on investment securities and cash equivalents. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its assets and liabilities, including the contingent assets, as described in Part II - Item 8 - Notes 9 and 10 to the Company's consolidated financial statements. From time to time, the Company and its subsidiaries may be named as a defendant in various lawsuits or proceedings. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements. The Company had 6 employees at December 31, 2006.
In July 2005, the Company sold its 38,000 square foot office building at Two Soundview Drive in Greenwich, Connecticut ("Two Soundview"). Accordingly, the results of operations of Two Soundview have been retroactively reclassified as discontinued operations in the accompanying Consolidated Statement of Operations for the periods presented in accordance with Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). See Part II - Item 8 - Note 13 to the Company's Consolidated Financial Statements for further information.
Background
City originally incorporated AmBase as the holding company for The Home Insurance Company, and its affiliated property and casualty insurance companies ("The Home"). In 1985, City, which owned all the outstanding shares of the Common Stock of the Company, distributed the Company's shares to City's common stockholders. The Home was sold in February 1991.
In August 1988, the Company acquired Carteret Bancorp Inc. Carteret Bancorp Inc., through its principal wholly owned subsidiary, Carteret Savings Bank, FA ("Carteret"), was principally engaged in retail and consumer banking, and mortgage banking including mortgage servicing. On December 4, 1992, the Office of Thrift Supervision ("OTS") placed Carteret in receivership under the management of the Resolution Trust Corporation ("RTC") and a new institution, Carteret Federal Savings Bank, was established to assume the assets and certain liabilities of Carteret. Following the seizure of Carteret, the Company was deregistered as a savings and loan holding company by the OTS, although the OTS retains jurisdiction for any regulatory violations prior to deregistration. See Part II - Item 8 - Note 10 to the Company's consolidated financial statements for a discussion of Supervisory Goodwill litigation relating to Carteret.
In December 1997, the Company formed a new wholly owned subsidiary, SDG Financial Corp. ("SDG Financial"), to pursue merchant banking activities. SDG Financial purchased an equity interest in SDG, Inc. ("SDG") and was granted the exclusive right to act as the investment banking/financial advisor to SDG, Inc. and all of its subsidiaries and affiliates. The Company also purchased convertible preferred and common stock in AMDG, Inc. ("AMDG"), a majority owned subsidiary of SDG. SDG and AMDG are development stage pharmaceutical companies. In connection with a litigation settlement with SDG and AMDG, the Company received $72,000 in April 2006. The Company remains a shareholder in SDG and AMDG and will continue to monitor the status of SDG and its subsidiary, AMDG, Inc. These investments have no current carrying value, as the Company's original cost basis was previously written off.
STOCKHOLDER INQUIRIES
Stockholder inquiries, including requests for the following: (i) change of address; (ii) replacement of lost stock certificates; (iii) Common Stock name registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on Form 10-K; (vi) proxy material; and (vii) information regarding stockholdings, should be directed to:
American Stock Transfer and Trust Company 59 Maiden Lane New York, NY 10038 Attention: Shareholder Services (800) 937-5449 or (718) 921-8200 Ext. 6820
As the Company does not maintain a website, copies of Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Proxy Statements can also be obtained directly from the Company free of charge by sending a request to the Company by mail as follows:
AmBase Corporation 100 Putnam Green, 3rd Floor Greenwich, CT 06830 Attn: Shareholder Services
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Company's public reports, including Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Proxy Statements, can be obtained through the Securities and Exchange Commission ("SEC") EDGAR Database available on the SEC's website at www.sec.gov. Materials filed with the SEC may also be read or copied by visiting the SEC's Public Reference Room, 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
ITEM 1A.
ITEM 1A. RISK FACTORS
The Company is subject to various risks, many of which are beyond the Company's control, which could have a negative effect on the Company and its financial condition. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect the Company's business, financial condition, operating results and stock price. An investment in the Company's stock involves various risks, including those mentioned below and elsewhere in this Annual Report on Form 10-K (this "Annual Report"), and those that are detailed from time to time in the Company's other filings with the Securities and Exchange Commission. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this Annual Report, before you decide whether to purchase the Company's common stock.
The Company is a plaintiff in a legal proceedings seeking recovery of damages for the loss of the Company's investment in Carteret. There can be no assurances of a favorable outcome for the Company in this legal proceeding.
The Company is a plaintiff in a legal proceedings seeking recovery of damages from the United States Government for the loss of the Company's wholly owned subsidiary, Carteret Savings Bank, F.A. This legal proceeding was commenced in 1993 and will likely continue for several more years. There have been and may continue to be rulings in other "supervisory goodwill" cases which have had and/or may have adverse affects on the Company's Supervisory Goodwill proceeding. In addition, due to the extended length of time that proceedings, rulings, trial decisions and possible appeals in this matter may take, it is not possible for the Company to predict when this matter will be resolved or the likelihood of a favorable outcome.
The Company is subject to risks inherent in owning and leasing real estate.
The Company is subject to varying degrees of risk generally related to leasing and owning real estate many of which are beyond the Company's control. In addition to general risks related to owning commercial real estate, the Company's risks include, among others:
o deterioration in regional and local economic and real estate market conditions,
o potential changes in supply of, or demand for rental properties similar to the Company's,
o competition for tenants and changes in rental rates,
o concentration in a single real estate asset and class,
o difficulty in reletting properties on favorable terms or at all,
o impairments in the Company's ability to collect rent payments when due,
o the potential for uninsured casualty and other losses,
o the impact of present or future environmental legislation and compliance with environmental laws,
o adverse changes in zoning laws and other regulations,
o changes in federal or state tax laws, and
o acts of terrorism and war.
Each of these factors could cause a material adverse effect on the Company's financial condition and results of operations. In addition, real estate investments are relatively illiquid, which means that the Company's ability to promptly sell the Company's property in response to changes in economic and other conditions may be limited.
Property taxes on the Company's property may increase without notice.
The property the Company owns is subject to real property taxes. The real property taxes on the Company's property and any other properties that the Company acquires in the future may increase as property tax rates change and as those properties are assessed or reassessed by tax authorities. To the extent that the Company's available rental space remains unoccupied or future tenants are unable or unwilling to pay such increase in accordance with their leases, the Company's net operating expenses may increase.
The Company's business is concentrated in Southern Connecticut, and adverse conditions in the region could negatively impact the Company's operations.
The Company's current operations are concentrated in Southern Connecticut, specifically in the Greenwich area. As a result, the value of the Company's real estate is dependent on the economic strength of that region. Because of the Company's geographic concentration and its single property, the Company's operations are more vulnerable to adverse changes in the Greenwich economy than those of larger, more diversified companies. Should the Company experience softening in the Company's market and not be able to offset the potential negative market influences on price and volume, the Company's financial results could be negatively impacted.
The Company is in a competitive business.
The real estate industry is highly competitive. The Company competes for tenants for its unoccupied rental space with a large number of real estate property owners and other companies that sublet properties. The Company's principal means of competition are rents charged in relation to the income producing potential of the location. In addition, the Company expects other major real estate investors, some with much greater resources than the Company has, may compete with us for attractive acquisition opportunities. These competitors include REITs, investment banking firms and private institutional investors. This competition has increased prices for commercial properties and may impair the Company's ability to make suitable property acquisitions on favorable terms in the future.
The Company's future cash flow is dependent on renewal of leases and reletting of the Company's space.
The Company is subject to risks that its presently available rental space may not be successfully rented, that financial distress of the Company's tenants may lead to vacancies at the Company's property, that leases may not be renewed, that locations may not be relet or that the terms of renewal or reletting (including the cost of required renovations) may be less favorable than current lease terms. In addition, numerous properties compete with the Company's property in attracting tenants to lease space. The number of competitive properties in a particular area could have a material adverse effect on the Company's ability to lease the Company's property or newly acquired properties and on the rents charged. If the Company were unable to promptly relet or renew the leases for all or a substantial portion of this location, or if the rental rates upon such renewal or reletting were significantly lower than expected, the Company's cash flow could be adversely affected and the resale value of the Company's property could decline.
The Company may not be able to insure certain risks economically.
The Company may experience economic harm if any damage to the Company's property is not covered by insurance. The Company cannot be certain that the Company will be able to insure all risks that the Company desires to insure economically or that all of the Company's insurers will be financially viable if the Company make a claim. The Company may suffer losses that are not covered under the Company's insurance policies. If an uninsured loss or a loss in excess of insured limits should occur, the Company could lose capital invested in a property, as the well as any future revenue from the property.
Changes in the composition of the Company's assets and liabilities through acquisitions, divestitures or corporate restructuring may affect the Company's results.
The Company may make future acquisitions or divestitures of assets or changes in how such assets are held. Any change in the composition of the Company's assets and liabilities or how such assets and liabilities are held could significantly affect the Company's financial position and the risks that the Company faces.
The Company may not be able to generate sufficient taxable income to fully realize the Company's deferred tax asset.
The Company has federal income tax net operating tax loss ("NOL") carryforwards and other tax attributes. If the Company is unable to generate sufficient taxable income, the Company may not be able to fully realize the benefit of the NOL carryforwards.
Because the Company from time to time maintains a majority of its assets in securities, the Company may in the futurebe deemed to be an investment company under the Investment Company Act of 1940 resulting in additional costs and regulatory burdens.
Currently, the Company believes that either it is not within the definition of "Investment Company" as the term is defined under the Investment Company Act of 1940 (the "1940 Act") or, alternatively may rely on one or more of the 1940 Act's exemptions. The Company intends to continue to conduct its operations in a manner that will exempt the Company from the registration requirements of the 1940 Act. If the Company were to become deemed to be an investment company because of the Company's investments securities holdings, the Company would be required to register as an investment company under the 1940 Act. The 1940 Act places significant restrictions on the capital structure and corporate governance of a registered investment company, and materially restricts its ability to conduct transactions with affiliates. Compliance with the 1940 Act could also increase the Company's operating costs. Such changes could have a material adverse affect on the Company's business, results of operations and financial condition.
Terrorist attacks and other acts of violence or war may affect the market on which the Company's common stock trades,the markets in which the Company operate, the Company's operations and the Company's results of operations.
Terrorist attacks or armed conflicts could affect the Company's business or the businesses of the Company's tenants. The consequences of armed conflicts are unpredictable, and the Company may not be able to foresee events that could have an adverse effect on the Company's business. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. They also could be a factor resulting in, or a continuation of, an economic recession in the U.S. or abroad. Any of these occurrences could have a significant adverse impact on the Company's operating results and revenues and may result in volatility of the market price for the Company's common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Company owns one commercial office building in Greenwich, Connecticut. The building is approximately 14,500 square feet and is available for lease to unaffiliated third parties with approximately 3,500 square feet utilized by the Company for its executive offices.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
For a discussion of the Company's legal proceedings, including the Company's Supervisory Goodwill litigation, see Part II - Item 8 - Note 10 to the Company's consolidated financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
Each executive officer is elected to serve in the executive officer capacity set forth opposite his respective name until the next Annual Meeting of Stockholders. Other than those noted below, 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, 2005:
Mr. Bianco was elected a director of the Company in January 1991, and has served as President and Chief Executive Officer of the Company since May 1991. On January 26, 1993, Mr. Bianco was elected Chairman of the Board of Directors of the Company. He served as Chairman, President and Chief Executive Officer of Carteret, then a subsidiary of the Company, from May 1991 to December 1992.
Mr. Ferrara was elected to the position of Vice President, Chief Financial Officer and Controller of the Company in December 1995, having previously served as Acting Chief Financial Officer, Treasurer and Assistant Vice President and Controller since January 1995; as Assistant Vice President and Controller from January 1992 to January 1995; and as Manager of Financial Reporting from December 1988 to January 1992.
Mr. J. Bianco was elected to the position of Treasurer of the Company in January 1998. He has dedicated his career to the financial services and investment industry. Prior to his employment with the Company in 1996, he worked for Merrill Lynch & Co. ("Merrill") as Vice President, responsible for Sales and Marketing in the Merrill Global Securities Clearing division from 1983 to 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Common Stock of the Company trades through one or more market makers, with quotations made available in the "pink sheets" published by the National Quotation Bureau, Inc. ("Pink Sheets"), under the symbol ABCP. The sales prices per share for the Company's Common Stock represent the range of the reported high and low bid quotations as indicated in the Pink Sheets or as communicated orally to the Company by market makers. Such prices reflect interdealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.
As of February 28, 2007, there were approximately 14,300 beneficial owners of the Company's Common Stock. No dividends were declared or paid on the Company's Common Stock in 2006 or 2005. The Company does not intend to declare or pay dividends in the foreseeable future.
For information concerning the Company's stockholder rights plan, see Part II - Item 8 - Note 5 to the Company's consolidated financial statements.
Common Stock Repurchase Plan:
In January 2002, the Company announced a common stock repurchase plan (the "Repurchase Plan") which allows for the repurchase by the Company for up to 10 million shares of its common stock in the open market.
The Repurchase Plan is conditioned upon favorable business conditions and acceptable prices for the common stock. Purchases under the Repurchase Plan may be made, from time to time, in the open market, through block trades or otherwise. Depending on market conditions and other factors, purchases may be commenced or suspended any time or from time to time without prior notice.
Delaware Court of Chancery Section 220 Books and Records Action: Two Stockholders who owned approximately 14.4% of the Company's outstanding common stock (the "Stockholders") had previously made demand in January 2004 to inspect certain Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The Company opposed the request on various grounds, and the Stockholders brought suit in March 2004 to compel inspection of certain Company books and records. In August 2005, the Court of Chancery issued a Memorandum Opinion finding that the Stockholders had met the technical requirements of Section 220 and had stated a proper purpose under Section 220, and were legally entitled to inspect specified books and records, but declined to find the Company liable for the Stockholders' attorneys' fees.
In October 2006, in order to eliminate continued involvement in the above referenced action or potential future actions, and the resultant time, expense and potential adverse impact on the Company's current operations and litigation claims, the Company, its Chief Executive Officer and principal stockholder, and the Company's Directors entered into an agreement with the Stockholders who had initiated the action to obtain Company books and records. Pursuant to the agreement: (i) the Company's Chief Executive Officer agreed to purchase 6,615,531 shares of Company common stock (representing approximately 14.4% of the Company's outstanding common stock and all of the Company stock beneficially owned by the Stockholders), for a cash purchase price of $0.55 per share ($3,638,542 in the aggregate for all of the shares); (ii) the Stockholders agreed to dismiss the books and records action and release any additional claims the Stockholders might have, including claims the Stockholders said they had been considering litigating against the Company, its Directors and its Chief Executive Officer; (iii) the Stockholders entered into a standstill and other agreements which will preclude them from taking a position in the Company for a period of time; and (iv) the Company agreed to pay the Stockholders $1.1 million. No portion of the purchase price for the shares acquired by the Company's Chief Executive Officer was provided by or financed by the Company. Although the shares were not offered to the Company for purchase, the Company's Board of Directors declined to purchase the shares at the price they were offered to the Company's Chief Executive Officer. A settlement charge of $1,100,000 recorded as other expense and related insurance recovery of $400,000 recorded as other income, have been reflected Statement of Operations for the year ended December 31, 2006. The net cost to the Company of the settlement was approximately $700,000. This matter is, therefore, concluded.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the Company's Common Stock for the past five years with the performance of the Standard & Poor's 500 Financials Index (S&P 500 Financials) and the Standard & Poor's 500 Stock Index (S&P 500) for that period. The graph assumes that a $100 investment was made in the Company's Common Stock and each of the indices at the earliest date shown, and the dividends, if any, were reinvested. No dividends have been paid by the Company over the past five (5) years. The stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.
December 31
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data should be read in conjunction with the Company's consolidated financial statements included in Part II - Item 8 of this Form 10-K. The consolidated statements of operations, for the periods ended prior to the July 2005 sale of Two Soundview were retroactively reclassified to reflect the operations as discontinued operations.
(a) Net income in 2005 includes a $10,298,000 gain from the sale of Two Soundview.
(b) Net loss in 2002 includes a $1,600,000 write down of the Company's investments in SDG and AMDG.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes, which are contained in Part II - Item 8, herein. As a result of the sale of the Company's 38,000 square foot office building at Two Soundview Drive in Greenwich, CT ("Two Soundview") in July 2005, the results of operations of Two Soundview 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. See Part I - Item 8 - note 13 for additional information concerning the sale of Two Soundview.
FINANCIAL CONDITION AND LIQUIDITY
The Company's assets at December 31, 2006, aggregated $42,148,000, consisting principally of cash and cash equivalents of $2,601,000, investment securities of $36,040,000 and real estate owned of $2,171,000. At December 31, 2006, the Company's liabilities aggregated $17,481,000. Total stockholders equity was $24,667,000.
Other assets of $1,336,000 at December 31, 2006, consists principally of a $1,201,000 interest refund due from the Internal Revenue Service ("IRS"), which was received by the Company in January 2007. This amount was recorded as other income in the accompanying consolidated Statement of Operations for the year ending December 31, 2006. See Results of Operations - Continuing Operation, below for further information.
The liability for the Company's non tax-qualified supplemental retirement plan, initially adopted by the Company in 1985, and as amended and restated (the "Supplemental Plan"), which is accrued but not funded, increased to $16,282,000 at December 31, 2006 from $14,595,000 at December 31, 2005. The Supplemental Plan liability reflects the December 31, 2006 present value of the anticipated May 31, 2007 lump-sum payment amount of $16,676,115, utilizing a 5.75% discount rate factor.
In March 2006, the Supplemental Plan was amended to provide for its automatic termination immediately following the payment to Mr. Bianco of his Supplemental Plan lump-sum benefit on or about May 31, 2007. In accordance with the accounting for the Supplemental Plan's scheduled termination on or about May 31, 2007, in accordance with accounting principles generally accepted in the United States of America ("GAAP"), the ultimate liability relating to the anticipated termination of the Supplemental Plan is not reflected in the financial statements presented herein, as all conditions for the final termination of the Supplemental Plan have not yet been met. The Company will continue to recognize an expense for the Supplemental Plan and the Supplemental Plan liability will increase through the date on which the Supplemental Plan is terminated. The anticipated May 31, 2007 lump-sum Supplemental Plan benefit payment to Mr. Bianco of $16,676,115 is expected to be paid to him from the Company's available financial resources. The Supplemental Plan liability can be further affected by changes in discount rates, mortality, and experience which could be different from those assumed.
For a further discussion of the Supplemental Plan and Mr. Bianco's 2007 Employment Agreement, see Part II - Item 8 - Note 7 to the Company's consolidated financial statements and Application of Critical Accounting Policies - Supplemental Retirement Plan, below.
For the year ended December 31, 2006, cash of $4,519,000 was used by continuing operations, including the payment of operating expenses and prior year accruals; partially offset by the receipt of interest income and investment earnings. The cash needs of the Company for 2006 were principally satisfied by interest income received on investment securities and cash equivalents and the Company's financial resources. Management believes that the Company's capital resources are sufficient to continue operations for 2007.
For the year ended December 31, 2005, cash of $5,328,000 was used by continuing operations, including the payment of operating expenses and prior year's accruals (including the legal accrual described below); partially offset by the receipt of rental income, interest income and investment earnings. The cash needs of the Company for 2005 were principally satisfied by rental income and investment earnings received on investment securities and cash equivalents and the Company's financial resources. During July 2005, the Company received $27,442,000 of net cash proceeds from the sale of Two Soundview as further discussed in Part II - Item 8 - note 13. The proceeds were reinvested in treasury bills and are included in investment securities, held to maturity in the Company's Consolidated Balance Sheet.
In March 2005, the Company paid approximately $1.8 million of previously incurred legal fees and other expenses relating to the Company's defense of a withholding obligation issue with the IRS which was successfully concluded in October 2001. The Company had previously accrued these costs which were reflected in other liabilities in prior period consolidated financial statements.
For the year ended December 31, 2004, cash of $3,405,000 was used by continuing operations, including the payment of operating expenses and prior year accruals, partially offset by the receipt of rental income, interest income and investment earnings. The cash needs of the Company for 2004 were principally satisfied by rental income and investment earnings received on investment securities and cash equivalents and to a lesser extent, the Company's financial resources.
Real estate owned consists of a commercial office building in Greenwich, Connecticut which the Company owns and manages. The building is approximately 14,500 square feet; approximately 3,500 square feet is utilized by the Company for its executive offices; the remaining space is currently unoccupied and available for lease.
See Part II - Item 8 - note 13 for further information concerning the sale of the Company's 38,000 square foot building in July 2005. A gain from the sale, of approximately $10.3 million, is reflected in the Company's Statement of Operations for the year ending December 31, 2005.
Pursuant to the Company's Repurchase Plan, the Company repurchased, from unaffiliated parties, an aggregate of 1,265,000 shares of common stock during the year ended December 31, 2006, at various dates, at market prices at their time of purchase. See Part II - Item 8 - Note 5 for further details with regard to the Company's purchases of common stock pursuant to its common stock repurchase plan. There are no material commitments for capital expenditures as of December 31, 2006. See Part II - Item 8 - Note 7 to the Company's consolidated financial statements for information regarding the anticipated Supplemental Plan lump-sum benefit payment of $16,676,115 (to Mr. Bianco, the Company's Chairman, President and Chief Executive Officer), expected to be paid on or about May 31, 2007. Inflation has had no material impact on the business and operations of the Company.
The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its assets and liabilities, including the contingent assets. Discussions and negotiations are ongoing with respect to certain of these matters. The Company intends to aggressively contest all litigation and contingencies, as well as pursue all sources for contributions to settlements. For a discussion of lawsuits and proceedings, including a discussion of the Supervisory Goodwill litigation, see Part II - Item 8 - Note 10 to the Company's consolidated financial statements.
RESULTS OF OPERATIONS
Continuing Operations
The Company's main source of operating revenue has recently been rental income earned on real estate owned. The Company principally earns non-operating revenue consisting principally of investment earnings on investment securities and cash equivalents. The Company's management expects that operating cash needs in 2007 will be met principally by the receipt of non-operating revenue consisting of interest income earned on investment securities and cash equivalents, and the Company's current financial resources.
For the year ended December 31, 2006, the Company recorded a loss from continuing operations of $5,463,000 or $0.12 per share.
For the year ended December 31, 2005, the Company recorded a loss from continuing operations of $5,519,000 or $0.12 per share.
For the year ended December 31, 2004, the Company recorded a loss from continuing operations of $4,696,000 or $0.10 per share.
As indicated herein, as a result of the sale of Two Soundview in July 2005, the operating results of the Company's Two Soundview property for the years ended December 31, 2005 and 2004 have been reclassified to discontinued operations. Accordingly, rental income from real estate owned represents the Company's remaining property and was $92,000 in 2006 compared to $170,000 in 2005, and $176,000 in 2004. The decreased amount of $92,000 in 2006, compared to $170,000 in 2005, is principally the result of a decrease in rental income received in 2006 compared to 2005 due to unoccupied office space during the last half of 2006, which is currently available for lease, versus occupancy in 2005. The slight decreased amount of $170,000 in 2005, compared to $176,000 in 2004, is principally the result of office vacancy in 2005 compared to office vacancies during a portion of 2004.
Compensation and benefits increased to $4,778,000 in 2006 from $4,212,000 in 2005, and from $4,150,000 in 2004. Included in compensation and benefits is an accrual for the Supplemental Plan of $2,539,000 for 2006, $2,087,000 for 2005, and $1,890,000 for 2004.
The increase in compensation and benefits in 2006 versus 2005 is principally due to a $452,000 increase in the Supplemental Plan accrual as discussed below and an increase resulting from the recognition of stock option expense of $88,000 in 2006, in accordance with the recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123R"). The increased amount of $4,212,000 in 2005, compared to $4,150,000 in 2004, is primarily due to an increased Supplemental Plan expense in 2005 versus 2004 as further described below, offset slightly by a lower level of incentive compensation accruals in 2005 versus 2004.
The increased Supplemental Plan expense of $2,539,000 in 2006 compared to $2,087,000 in 2005 is due to recognition of an expense of $1,687,000, comprised of an expense of $1,224,000 recorded to increase the Supplemental Plan liability to reflect the December 31, 2006 present value of the anticipated May 31, 2007 lump-sum payment amount of $16,676,115, utilizing a 5.75% discount rate factor based on the 2007 Employment Agreement between the Company and Mr. Bianco and the amendment of the Supplemental Plan as further described in Part II - Item 8 - - Note 7 to the Company's consolidated financial statements, and an expense of $463,000 to reflect actuarially determined pension costs.
An additional Supplemental Plan expense of $852,000 was recorded for the year ended December 31, 2006, to amortize the Supplemental Plan minimum pension liability adjustment. The minimum pension liability adjustment, which is included as a component of stockholders' equity within accumulated other comprehensive loss in the Company's consolidated financial statements, was $1,326,000 as of December 31, 2005, and is being amortized on a straight line basis over the 14-month period from April 1, 2006 through May 31, 2007, as an additional Supplemental Plan expense of $284,000 per quarter. The additional minimum pension liability amortization is included as a component of the aggregate Supplemental Plan expense of $2,539,000 for the full year period ended December 31, 2006. The amortization of the additional minimum pension liability of $852,000 for the full year period ended December 31, 2006, although recorded as a component of compensation expense in the Company's consolidated statement of operations, does not result in a decrease in total stockholders' equity, as its recognition results in an increase in one component and a corresponding decrease in another component of stockholders' equity. See Part II - Item 8 - Note 7 to the Company's consolidated financial statements for further information.
The Company adopted Statement 123R effective on January 1, 2006. In accordance with SFAS 123R, the Company has applied the "modified prospective" method in which compensation cost for stock options is recognized beginning with the effective date. During the year ended December 31, 2006, the Company recorded $88,000 of compensation expense relating to stock options. In accordance with the "modified prospective" method, no compensation expense relating to stock options was recorded for the years ended December 31, 2005 and 2004. For further information regarding the Company's adoption of SFAS 123R and its impact on the Company's financial statements, see Part II - Item 8 - Note 8 to the Company's consolidated financial statements.
Professional and outside services increased to $2,655,000 in 2006 from $2,003,000 in 2005 and from $1,422,000 in 2004. The increase in the 2006 period of $2,655,000 from $2,003,000 in 2005 is principally the result of higher legal fees relating to the Supervisory Goodwill litigation as a result of discovery, brief preparation and expert's reports relating to the Show Cause hearing and to a lesser extent, other corporate professional fees. The increase in the 2005 period to $2,003,000 from $1,422,000 in 2004 is principally the result of a higher level of legal fees in 2005, relating to the Supervisory Goodwill litigation as a result of discovery relating to the Show Cause hearing and to a lesser extent, other corporate professional fees. See Part II - Item 8 - Note 10 to the Company's consolidated financial statements for a discussion of the Supervisory Goodwill litigation proceedings.
The 2004 period includes an additional accrual of approximately $0.5 million of fees relating to the costs associated with a withholding obligation issue with the IRS as further discussed in Financial Condition and Liquidity, herein. Excluding this additional expense, professional and outside services would have been $922,000 for the year 2004, compared with $2,003,000 for the year 2005, primarily due to an overall lower level of legal expenses incurred during 2004 for the Supervisory Goodwill litigation proceedings.
Property operating and maintenance expenses were $123,000 in 2006, $124,000 in 2005, and $102,000 in 2004. The slight increase in 2005 compared to 2004 is due to increased utilities costs and other maintenance costs.
Interest income was $1,846,000 in 2006, $1,034,000 in 2005, and $505,000 in 2004. The increase in 2006 compared to 2005 is principally due to an increase in the aggregate amount of cash equivalents and investment securities invested for the full year of 2006, as a result of the cash proceeds received in connection with the July 2005 sale of real estate owned, and to a lesser extent, an increased yield on investments due to rising interest rates. The increase in 2005 compared to 2004 is principally due to an increase in the aggregate amount of cash equivalents and investment securities invested as a result of the cash proceeds received in connection with the sale of real estate owned in July 2005, and to a lesser extent, an increased yield on investments due to rising interest rates.
During 2006, 2005, and 2004 realized gains on sales of investment securities available for sale were $45,000, $20,000, and $747,000 respectively. The increase in 2004 is the result of a higher level of investment securities available for sale and realization of gains on sales due to market appreciation.
Other expense of $1,100,000 for 2006 is attributable to a payment in October 2006 for the settlement of claims as more fully described in Part II - Item 8 - Note 10 to the Company's consolidated financial statements. Other income of $400,000 for the year ended December 31, 2006, is attributable to receipt of insurance proceeds received. See Part II - Item 8 - Note 10 to the Company's consolidated financial statements for further information.
Other income of $1,273,000 in 2006 consists of $1,201,000 attributable to an IRS interest refund, consented to by the IRS in December 2006, and received by the Company in January 2007. The IRS refund resulted from the Company's pursuit of interest refund claims for several prior tax years under a tax code provision which allowed for the retroactive recovery of the interest differential where a taxpayer had a tax underpayment (subject to higher interest payment rates) for one tax year and a simultaneous tax overpayment (subject to lower interest refund rates) for another tax year. The Company is continuing to pursue similar claims from several other tax years, but at the current time the Company can give no assurances as to the final amounts of any additional interest refunds, if any, or when they might be received. The additional $72,000 of other income is attributable to settlement proceeds received from the litigation with SDG, Inc. The Company remains a shareholder in SDG and AMDG, but has no current carrying value for this investment, as the Company's original cost basis was previously written off.
As noted above herein, during the year ended December 31, 2006, the Company recorded various amounts of other non-recurring other income and other expense from various sources and matters. The net aggregate amount of these non-recurring items resulted in the recognition of other income of $573,000, for the year ended December 31, 2006.
The income tax provisions of $132,000 for the year ended December 31, 2006, is attributable to a provision for a minimum tax on capital to the state of Connecticut. The income tax provision for continuing operations of $95,000 for the year ending December 31, 2005, is attributable to a provision for a minimum tax on capital to the state of Connecticut. The Company utilized net operating loss ("NOL") carryforwards and alternative minimum tax ("AMT") NOL carryforwards which were available to offset taxable income generated from the sale of Two Soundview as discussed in Part II - Item 8 - Notes 9 and 13 to the Company's consolidated financial statements. Due to limitations on the amount of NOL carryforwards that can be utilized against taxable income, the income tax provision of $400,000 for discontinued operations for the year ended December 31, 2005, is attributable to a provision for federal alternative minimum tax of $150,000 and a provision of $250,000 for Connecticut state taxes.
The income tax provision of $120,000 for the year 2004 is primarily attributable to a provision for a minimum tax on capital to the state of Connecticut.
A reconciliation between income taxes computed at the statutory federal rate and the provision for income taxes is included in Part II - Item 8 - Note 9 to the Company's consolidated financial statements.
Discontinued Operations
As further discussed in Part II - Item 8, Note 13 to the Company's consolidated financial statements, the Company sold Two Soundview in July 2005. The sale price was $28,000,000 less normal real estate closing costs and adjustments. A gain from the sale of $10,298,000 is reflected in the Company's financial statements for the year ended December 31, 2005.
Income from discontinued operations before gain on disposition was $749,000 for the year ended December 31, 2005, which reflects the results of operations for Two Soundview for the period through July 15, 2005 (date of sale). For the full year 2004, income from discontinued operations was $1,345,000.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
See Part II - Item 8 - Note 7 to the Company's consolidated financial statements for information regarding the anticipated Supplemental Retirement Plan lump-sum benefit payment of $16,676,115 (to Mr. Bianco, the Company's Chairman, President and Chief Executive Officer), expected to be paid on or about May 31, 2007.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. The determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to the financial statements. We believe that the following accounting policies, which are important to our financial position and results of operations, require a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. For a summary of all our accounting policies, including the accounting policies discussed below, see Part II - Item 8 - Note 2 to the Company's consolidated financial statements.
Supplemental Retirement Plan: Our Supplemental Retirement Plan (the "Supplemental Plan") accrued liability and benefit costs are developed on the basis of actuarial calculations. Inherent in these calculations are key assumptions including discount rates, actuarially determined mortality tables, a retirement/payment date assumption, form of benefit payment such as annuity versus lump-sum, and projected future earnings. The assumptions are typically reviewed on an annual basis at the beginning of each year. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. Material changes in our accrued Supplemental Plan liability and annual costs may occur in the future due to changes in assumptions or experience different than that assumed. The Supplemental Plan liability is not funded. In accordance with GAAP, the December 31, 2006, Supplemental Plan liability reflects the present value of the anticipated May 31, 2007 lump-sum payment amount of $16,676,115, utilizing a 5.75% discount rate factor based on the 2007 Employment Agreement between the Company and Mr. Bianco and the amendment of the Supplemental Plan as further described in Part II - Item 8 - Note 7 to the Company's consolidated financial statements.
In connection with the Board of Director's determination that the Company's Supplemental Plan is to terminate automatically following the payment to Mr. Bianco of his lump-sum benefit of $16,676,115 on or about May 31, 2007 (the date on which Mr. Bianco's current employment agreement with the Company will expire by its terms), the Personnel Committee's agreement with Mr. Bianco to extend his employment with the Company for an additional five (5) years with no further Supplemental Plan accruals, and the Company's amendment to the Supplemental Plan to provide for the payment to Mr. Bianco of his Supplemental Plan benefit on or about May 31, 2007, certain assumptions and the basis utilized by the Company in developing the Supplemental Plan 2006 benefit costs and accrued liability were changed from those utilized in prior years. The 2006 assumptions, versus assumptions in 2005 are as follows: (i) we have assumed that Mr. Bianco's Supplemental Plan benefit (Mr. Bianco is the sole participant in the Supplemental Plan) will be paid in a lump-sum, versus the assumption made in prior years that annuity payments would be made; (ii) we have assumed Mr. Bianco's Supplemental Plan benefit entitlement date to be May 31, 2007 (his current employment contract expiration date and the date on or about his Supplemental Plan lump-sum benefit payment is to be paid), versus December 30, 2007 (age 60) in prior years; and (iii) we have projected that Mr. Bianco's total compensation in 2006 and 2007 for the calculation of Supplemental Plan benefits will not increase the average of the three highest years of compensation previously earned under the Supplemental Plan, as Mr. Bianco's Final Average Earnings (as defined in the Supplemental Plan) for Supplemental Plan benefit calculation purposes is capped as of December 31, 2004. In addition, a 5.75% discount rate and a "RP-2000" projected to 2004 mortality table were utilized in 2006, versus a 5.50% discount rate and the same mortality table utilized in 2005.
The 5.50% discount rate, (utilized for the 2005 actuarial calculations), was consistent with Moody's Aa bond index rate at December 31, 2005. The 5.75% discount rate being utilized for 2006 is the discount rate to be utilized pursuant to the agreement noted above. The mortality table for 2006 and 2005 reflects an up to date mortality table, which is being utilized for the calculation of Mr. Bianco's Supplemental Plan lump-sum benefit payment, pursuant to the agreements noted above.
See Financial Condition and Liquidity, above, and Part II - Item 8 - Note 7 to the Company's consolidated financial statements, for additional information with regard to the Supplemental Plan.
Legal Proceedings: From time to time the Company and its subsidiaries may be named as a defendant in various lawsuits or proceedings. The Company presently is not aware of any pending or threatened litigation which could have a material adverse effect on the consolidated financial statements presented herein. Management of the Company in consultation with outside legal counsel continually reviews the likelihood of liability and associated costs of pending and threatened litigation including the basis for the calculation of any litigation reserves which may be necessary. The assessment of such reserves includes an exercise of judgment and is a matter of opinion. The Company intends to aggressively contest all threatened litigation and contingencies, as well as pursue all sources for contributions to settlements. For a discussion of lawsuits and proceedings, see Part II - Item 8 - Note 10.
Income Tax Audits: The Company's federal, state and local tax returns, from time to time, may be audited by the tax authorities, which could result in proposed assessments or a change in the net operating loss ("NOL") carryforwards currently available. The Company's federal income tax returns for the years subsequent to 1992 have not been reviewed by the Internal Revenue Service. The accrued amounts for income taxes reflects management's best judgment as to the amounts payable for all open tax years.
Deferred Tax Assets: As of December 31, 2006, the Company had deferred tax assets arising primarily from net operating loss carryforwards and alternative minimum tax credits available to offset taxable income in future periods. A valuation allowance has been established for the entire net deferred tax asset of $31 million, as management, at the current time, has no basis to conclude that realization is more likely than not. The valuation allowance was calculated in accordance with the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which places primary importance on a company's cumulative operating results for the current and preceding years. We intend to maintain a valuation allowance for the entire deferred tax asset until sufficient positive evidence exists to support a reversal. See Part II - Item 8 - Note 9.
New Accounting Pronouncements: In July 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in companies' financial statements in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position will be sustained upon examination. The second step is measurement whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 also provides guidance on derecognition threshold of recognized tax benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt the new requirements in the first quarter of 2007 and is currently evaluating the impact that the adoption of FIN 48 will have on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of SFAS No. 87, 88, 106 and 132R" ("SFAS 158"). SFAS 158 requires an employer to (i) recognize in its statement of financial position an asset for a plan's over funded status or a liability for a plan's under funded status; (ii) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for entities with publicly traded equity securities, and at the end of the fiscal year ending after June 15, 2007, for all other entities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. We do not believe that the adoption of SFAS 158 will have a material effect on the Company's consolidated financial statements as the Company intends to terminate its Supplemental Retirement Plan (the "Supplemental Plan") on or about May 31, 2007, as further discussed in Part II - Item 8 - Note 7. The Company will continue to recognize an expense through to the date on which the Supplemental Plan will terminate. The ultimate liability related to the final termination of the Supplemental Plan is not reflected as all conditions for the final termination of the Supplemental Plan have not yet been met.
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principals generally accepted in the United States of America ("GAAP") and expands disclosure requirements regarding fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for such fiscal year, including financial statements for an interim period within such fiscal year. The Company is evaluating the impact of the adoption of SFAS 157 on its financial statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. No entity is permitted to apply the Statement retrospectively to fiscal years preceding the effective date unless the entity chooses early adoption. The Company is evaluating the impact of the adoption of SFAS 159 on its financial statements.
Cautionary Statement for Forward-Looking Information
This Annual Report together with other statements and information publicly disseminated by the Company may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. The forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings; business prospects, projected ventures, anticipated market performance, anticipated litigation results or the timing of pending litigation, and similar matters. When used in this Annual Report, the words "estimates," "expects," "anticipates," "believes," "plans," "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to those set forth in "Item 1A, Risk Factors" and elsewhere in this Annual Report and in the Company's other public filings with the Securities and Exchange Commission including, but not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) risks inherent in the real estate business, including, but not limited to, tenant defaults, changes in occupancy rates or real estate values, (v) changes in regulatory requirements which could affect the cost of doing business, (vi) general economic conditions, (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) changes in federal and state tax laws, and (ix) risks arising from unfavorable decisions in the Company's current material litigation matters, or unfavorable decisions in other supervisory goodwill cases.
Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Annual Report or to reflect the occurrence of unanticipated events. Accordingly, there is no assurance that the Company's expectations will be realized.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds short-term investments as a source of liquidity. The Company's interest rate sensitive investments at December 31, 2006 and 2005, with maturity dates of less than one year consist of the following:
The Company's current policy is to minimize the interest rate risk of its short-term investments by investing in U.S. Treasury Bills with maturities of less than one year. There were no significant changes in market exposures or the manner in which interest rate risk is managed during the year.
The Company's portfolio of equity securities has exposure to equity price risk. Equity price risk is defined as the potential loss in fair value resulting from an adverse change in prices. The equity securities are primarily in the form of preferred stock in utility companies. The equity securities are held for an indefinite period, are accounted for as available for sale securities and are carried at fair value with net unrealized gains and losses recorded directly in a separate component of other comprehensive income (loss).
The table below summarizes the Company's equity price risk and shows the effect of a hypothetical 20% increase and a 20% decrease in market price as of the dates indicated below. The selected hypothetical changes are for illustrative purposes only and are not necessarily indicative of the best or worse case scenarios.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of AmBase Corporation
In our opinion, the accompanying consolidated balance sheets listed in the index appearing under Item 15(a) (1) and the related consolidated statement of operations, comprehensive income (loss), changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of AmBase Corporation and its subsidiaries at December 31, 2006 and 2005 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP New York, New York March 27, 2007
AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31
The accompanying notes are an integral part of these consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Note 1 - Organization
AmBase Corporation (the "Company") is a holding company which, through a wholly owned subsidiary, owns a commercial office building in Greenwich, Connecticut and a 6.3% ownership interest in SDG, Inc. ("SDG"), a development stage pharmaceutical company. The Company previously owned an insurance company and a savings bank.
In February 1991, the Company sold its ownership interest in The Home Insurance Company ("The Home") and its subsidiaries. On December 4, 1992, Carteret Savings Bank, FA ("Carteret") was placed in receivership by the Office of Thrift Supervision ("OTS").
The Company's main source of operating revenue is rental income earned on real estate owned. The Company also earns non-operating revenue principally consisting of interest earned on investment securities and cash equivalents. The Company continues to evaluate a number of possible acquisitions, and is engaged in the management of its assets and liabilities, including the contingent assets, as described in Notes 9 and 10.
In July 2005, the Company completed the sale of its 38,000 square foot office building at Two Soundview Drive in Greenwich, Connecticut ("Two Soundview"). Accordingly, the results of operations of Two Soundview have been retroactively reclassified as discontinued operations in the accompanying Consolidated Statement of Operations for the periods presented in accordance with Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). See Note 13 for additional information.
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions, that it deems reasonable, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates and assumptions.
Principles of consolidation:
The consolidated financial statements are comprised of the accounts of the Company and its majority owned subsidiaries. All material intercompany transactions and balances have been eliminated.
Cash and cash equivalents:
Highly liquid investments, consisting principally of funds held in short-term money market accounts, with original maturities of less than three months, are classified as cash equivalents.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Investment securities:
Securities that the Company has both the positive intent and ability to hold to maturity are classified as investment securities - held to maturity and are carried at amortized cost. Investment securities - available for sale, which are those securities that may be sold prior to maturity, are carried at fair value, with any net unrealized gains or losses reported in a separate component of other comprehensive income (loss), net of taxes.
Interest and dividends on investment securities are recognized in the Consolidated Statement of Operations when earned. Realized gains and losses on the sale of investment securities - available for sale are calculated using an average cost 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.
The Company continually reviews its investments to determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the security is written down to fair market value and the amount of the write down is included in the Consolidated Statement of Operations.
Income taxes:
The Company and its domestic subsidiaries file a consolidated federal income tax return. The Company recognizes both the current and deferred tax consequences of all transactions that have been recognized in the financial statements, calculated based on the provisions of enacted tax laws, including the tax rates in effect for current and future years. Net deferred tax assets are recognized immediately when a more likely than not criterion is met; that is, a greater than 50% probability exists that the tax benefits will actually be realized sometime in the future. At the present time, management has no basis to conclude that realization is more likely than not and a valuation reserve has been recorded against net deferred tax assets.
Earnings per share:
Basic earnings per share ("EPS") excludes dilution and is computed by dividing income (loss) from continuing operations by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of EPS that could occur if options to issue common stock were exercised.
Stock-based compensation:
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the Company may grant to officers and employees of the Company and its subsidiaries, stock options ("Options"), stock appreciation rights ("SARs"), restricted stock awards ("Restricted Stock"), merit awards ("Merit Awards") and performance share awards ("Performance Shares"), through May 28, 2008. An aggregate of 5,000,000 shares of the Company's Common Stock are reserved for issuance under the 1993 Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of Restricted Stock and Performance Shares); however, of such shares, only 2,500,000 shares in the aggregate shall be available for issuance for Restricted Stock Awards and Merit Awards. Such shares shall be authorized but unissued shares of Common Stock. Options may be granted as incentive stock options ("ISOs") intended to qualify for favorable tax treatment under Federal tax law or as nonqualified stock options ("NQSOs"). SARs may be granted with respect to any Options granted under the 1993 Plan and may be exercised only when the underlying Option is exercisable. The 1993 Plan requires that the exercise price of all Options and SARs be equal to or greater than the fair market value of the Company's Common Stock on the date of grant of that Option. The term of any ISO or related SAR cannot exceed ten years from the date of grant, and the term of any NQSO cannot exceed ten years and one month from the date of grant. Subject to the terms of the 1993 Plan and any additional restrictions imposed at the time of grant, Options and any related SARs ordinarily will become exercisable commencing one year after the date of grant. In the case of a "Change of Control" of the Company (as defined in the 1993 Plan), Options granted pursuant to the 1993 Plan may become fully exercisable as to all optioned shares from and after the date of such Change in Control in the discretion of the Committee or as may otherwise be provided in the grantee's Option agreement. Death, retirement, or absence for disability will not result in the cancellation of any Options.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements
Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123R"), using the modified prospective approach and therefore has not restated results for prior periods. Under this method, stock-based compensation expense for the year ended
December 31, 2006, includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS123"). Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006, for which vesting is based solely on employment service, will be based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs for only those shares expected to vest, on a straight-line basis over the requisite service period of the award, which is generally the option vesting term of two years. See Note 8 herein for a further discussion of stock-based compensation.
During the year ended December 31, 2006, the Company recorded compensation expense of $88,000 relating to unvested stock options. Compensation expense relating to stock options is recorded in the consolidated statement of operations, with a corresponding increase to additional paid in capital in the statement of stockholders' equity. Prior to 2006, as permitted by SFAS 123, the Company accounted for share-based payments to employees using APB 25's intrinsic value method and recognized no compensation cost for employee stock options in prior years. Had the Company adopted SFAS 123R in the prior period, the impact of that standard would have approximated the impact of SFAS 123 in the disclosure of pro-forma net income (loss) and earnings per share described as follows:
Deferred rent receivable and revenue recognition:
The Company previously earned rental income under operating leases with tenants. Minimum lease rentals are recognized on a straight-line basis over the term of the leases. The cumulative difference between lease revenue recognized under this method and the contractual lease payment terms, if any, is recorded as deferred rent receivable and would be included in other assets on the Consolidated Balance Sheets. Revenue from tenant reimbursement of common area maintenance, utilities and other operating expenses are recognized pursuant to the tenant's lease when earned and due from tenants.
Property operating and maintenance:
Included in property operating and maintenance are expenses for common area maintenance, utilities, real estate taxes and other reimbursable operating expenses, which have not been reduced by amounts reimbursed by tenants pursuant to lease agreements.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Depreciation:
Depreciation expense for buildings is calculated on a straight-line basis over 39 years. Tenant improvements are typically depreciated over the lesser of the remaining life of the tenants lease or the estimated useful lives.
New Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109" ("FIN 48"), which clarifies the accounting for uncertainty in income taxes recognized in companies' financial statements in accordance with FASB Statement 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position will be sustained upon examination. The second step is measurement whereby a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. FIN 48 also provides guidance on derecognition threshold of recognized tax benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt the new requirements in the first quarter of 2007 and is currently evaluating the impact that the adoption of FIN 48 will have on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment of SFAS No. 87, 88, 106 and 132R" ("SFAS 158"). SFAS 158 requires an employer to (i) recognize in its statement of financial position an asset for a plan's over funded status or a liability for a plan's under funded status; (ii) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for entities with publicly traded equity securities, and at the end of the fiscal year ending after June 15, 2007, for all other entities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. We do not believe that the adoption of SFAS 158 will have a material effect on the Company's consolidated financial statements as the Company intends to terminate its Supplemental Retirement Plan (the "Supplemental Plan") on or about May 31, 2007, as further discussed in Note 7 herein. The Company will continue to recognize an expense through to the date on which the Supplemental Plan will terminate. The ultimate liability related to the final termination of the Supplemental Plan is not reflected as all conditions for the final termination of the Supplemental Plan have not yet been met.
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principals generally accepted in the United States of America ("GAAP") and expands disclosure requirements regarding fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for such fiscal year, including financial statements for an interim period within such fiscal year. The Company is evaluating the impact of the adoption of SFAS 157 on its financial statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS 157. No entity is permitted to apply the Statement retrospectively to fiscal years preceding the effective date unless the entity chooses early adoption. The Company is evaluating the impact of the adoption of SFAS 159 on its financial statements.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Note 3 - Investment Securities
Investment securities - held to maturity consist of U.S. Treasury Bills and a U.S. Treasury Note with original maturities of one year or less and are carried at amortized cost based upon the Company's intent and ability to hold these investments to maturity.
Investment securities - available for sale, consist of investments in equity securities held for an indefinite period and are carried at fair value with net unrealized gains and losses recorded directly in a separate component of stockholders' equity.
Investment securities at December 31 consist of the following:
The gross unrealized gains (losses) on investment securities at December 31, consist of the following:
The realized gain on the sales of investment securities available for sale for the years ended December 31, 2006, 2005 and 2004 are as follows:
During 2004, the Company purchased and sold a $7 million U.S. Treasury Note and an $8 million U.S. Treasury Note resulting in gains of $89,000 and $24,000, respectively which are included in realized gains on investment securities in the 2004 Consolidated Statement of Operations.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Note 4 - Earnings Per Share
The calculation of basic and diluted earnings per share, including the effect of dilutive securities, for the years ended December 31, is as follows:
Options to purchase common stock of 1,240,000 shares in 2006, 1,440,000 shares in 2005 and 1,245,000 shares in 2004 were excluded from the computation of diluted earnings per share because these options were antidilutive in the computation of earnings per share from continuing operations.
Note 5 - Stockholders' Equity
Authorized capital stock consists of 50,000,000 shares of cumulative preferred stock, $0.01 par value, and 200,000,000 shares of Common Stock, $0.01 par value.
Changes in the outstanding shares of Common Stock of the Company are as follows:
At December 31, 2006, Common Stock balances exclude 1,441,488 treasury shares carried at an average cost of $0.96 per share, aggregating approximately $1,384,000.
At December 31, 2005, and December 31, 2004, Common Stock balances exclude 176,488 treasury shares carried at an average cost of $3.88 per share, aggregating approximately $685,000.
The Company issued 75,000 previously authorized common shares during February 2004, in connection with the exercise of an employee stock option at the exercise price of $0.21 per share.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
At December 31, 2006, there were 5,110,000 common shares reserved for issuance under the Company's stock option and other employee benefit plans.
Stockholder Rights Plan:
On January 29, 1986, the Company's Board of Directors declared a dividend distribution of one right for each outstanding share of Common Stock of the Company. The rights, as amended, which entitle the holder to purchase from the Company a common share at a price of $75.00, are not exercisable until either a person or group of affiliated persons acquires 25% or more of the Company's outstanding common shares or upon the commencement or disclosure of an intention to commence a tender offer or exchange offer for 20% or more of the common shares. The rights are redeemable by the Company at $0.05 per right at any time until the earlier of the tenth day following an accumulation of 20% or more of the Company's shares by a single acquirer or group, or the occurrence of certain Triggering Events (as defined in the Stockholder Rights Plan). In the event the rights become exercisable and thereafter, the Company is acquired in a merger or other business combination, or in certain other circumstances, each right will entitle the holder to purchase from the surviving corporation, for the exercise price, Common Stock having a market value of twice the exercise price of the right. The rights are subject to adjustment to prevent dilution and expire on February 10, 2011.
Common Stock Repurchase Plan:
In January 2002, the Company announced a common stock repurchase plan (the "Repurchase Plan") which allows for the repurchase by the Company for up to 10 million shares of its common stock in the open market.
The Repurchase Plan is conditioned upon favorable business conditions and acceptable prices for the common stock. Purchases under the Repurchase Plan may be made, from time to time, in the open market, through block trades or otherwise. Depending on market conditions and other factors, purchases may be commenced or suspended any time or from time to time without prior notice.
During the year 2006, the Company repurchased 1,265,000 shares of common stock, at various market prices, pursuant to the Repurchase Plan.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Note 6 - Comprehensive Income (Loss)
Comprehensive income (loss), for the year ended December 31 is composed of net income (loss) and other comprehensive income (loss) which includes the change in unrealized gains (losses) on investment securities available for sale, and recognition of additional minimum pension liability as follows:
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Note 7 - Pension and Savings Plans
The Company sponsors a non tax-qualified supplemental retirement plan, initially adopted by the Company in 1985, and as amended and restated (the "Supplemental Plan"), under which only one current executive officer of the Company is currently the sole participant. The cost of the Supplemental Plan is accrued but not funded. Mr. Bianco (the Company's Chairman, President and Chief Executive Officer, and the former President and Chief Executive Officer of Carteret Savings Bank, FA), is the only current employee of the Company who participates in the Supplemental Plan and his Supplemental Plan benefit is fully vested.
The liability for the Supplemental Plan, which is accrued but not funded, increased to $16,282,000 at December 31, 2006, from $14,595,000 at December 31, 2005. The Supplemental Plan liability reflects the December 31, 2006 present value of the anticipated May 31, 2007 lump-sum payment amount of $16,676,115, utilizing a 5.75% discount rate factor. The Supplemental Plan liability can be further affected by changes in discount rates, mortality, and experience which could be different from those assumed.
The Personnel Committee of the Board of Directors of the Company (the "Personnel Committee") reviewed the Supplemental Plan and the Company's related liability, including the desirability of continuing to maintain and administer the Supplemental Plan, the untying of Mr. Bianco's future employment with the Company from the timing of his Supplemental Plan benefit payment(s), the Company's overall financial position, and the desirability of continued accruals under the Supplemental Plan after Mr. Bianco's current employment contract expires on May 31, 2007. In connection with this review, the Personnel Committee considered various options, including whether or not to terminate and/or curtail the Supplemental Plan. For purposes of computing his accrued benefit under the Supplemental Plan, Mr. Bianco had 15.67 and 14.67 years of credited service as of December 31, 2006 and 2005, respectively. Assuming continued employment with the Company, he will have 16.08 years of credited service upon the expiration of his current employment contract with the Company on May 31, 2007. His accrual percentage under the Supplemental Plan is 4%, in effect from the time of his initial employment with the Company, and in accordance with the Supplemental Plan (prior to the amendment described below), he had the entitlement to receive his Supplemental Plan benefit in either a lump-sum or an annuity upon termination of his employment with the Company.
During March 2006, the Company entered into a new employment agreement with Mr. Bianco to extend his employment with the Company for an additional five (5) years beyond May 31, 2007, until May 31, 2012 (the "2007 Employment Agreement"). As part of the 2007 Employment Agreement terms (i) Mr. Bianco's annual rate of base salary will not increase from his current rate of base salary during the first three years of the 2007 Employment Agreement (the amount of Mr. Bianco's base salary for the fourth and fifth years of the 2007 Employment Agreement term to be determined by the Personnel Committee, in its sole discretion, although in no event less than $625,000 per annum); (ii) Mr. Bianco's service accruals under the Supplemental Plan will cease as of May 31, 2007; (iii) Mr. Bianco's Final Average Earnings (as defined in the Supplemental Plan) for Supplemental Plan benefit calculation purposes, are capped as of December 31, 2004; and (iv) Mr. Bianco's annual bonus opportunity will no longer be linked to recovery efforts in connection with the Company's Supervisory Goodwill litigation. Instead, on or about May 31, 2007, Mr. Bianco will receive a lump-sum payment of his Supplemental Plan benefit of $16,676,115, which amount was calculated on the basis of a 5.75% discount rate, a "RP-2000" projected to 2004 mortality table, and 16.08 years of credited service, and the Company and Mr. Bianco have agreed to a long term incentive bonus formula, at varying percentages ranging from 5% to 10%, or more, based upon recoveries received by the Company for its investment in Carteret Savings Bank, through litigation or otherwise (including the Company's Supervisory Goodwill litigation). The anticipated lump-sum Supplemental Plan benefit payment to Mr. Bianco is expected to be paid to him on or about May 31, 2007 from the Company's available financial resources.
The Supplemental Plan has been amended to provide for its automatic termination immediately following the payment to Mr. Bianco of his Supplemental Plan lump-sum benefit on or about May 31, 2007. In accordance with the accounting for the Supplemental Plan's scheduled termination on or about May 31, 2007, in accordance with GAAP, the ultimate liability relating to the anticipated termination of the Supplemental Plan is not reflected in the financial statements presented herein, as all conditions for the final termination of the Supplemental Plan have not yet been met. The Company will continue to recognize an expense for the Supplemental Plan and the Supplemental Plan liability will increase through the date on which the Supplemental Plan is terminated.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Based on the 2007 Employment Agreement and the amendment of the Supplemental Plan, each as described above, the Company revised the calculation of the Supplemental Plan liability to reflect a 5.75% discount rate as of April 1, 2006, as set forth in the agreements, as compared to the 5.50% discount rate utilized as of December 31, 2005. During 2006, the Supplemental Plan liability was increased by an expense of $1,687,000 comprised of an expense of $1,224,000 recorded to increase the Supplemental Plan liability to the December 31, 2006 present value of the anticipated May 31, 2007 lump-sum payment amount of $16,676,115, utilizing the 5.75% discount rate factor and an expense of $463,000 to reflect actuarially determined pension costs.
An additional Supplemental Plan expense of $852,000 was recorded for the year ended December 31, 2006, to amortize the Supplemental Plan minimum pension liability adjustment. The minimum pension liability adjustment, which is included as a component of stockholders' equity within accumulated other comprehensive loss in the Company's consolidated financial statements, was $1,326,000 as of December 31, 2005, and is being amortized on a straight line basis over the 14-month from April 1, 2006 through May 31, 2007, as an additional Supplemental Plan expense of $284,000 per quarter. The additional minimum pension liability amortization is included as a component of the aggregate Supplemental Plan expense of $2,539,000 for the full year period ended December 31, 2006.
Pension expense for the Supplemental Plan for the years ended December 31 was as follows:
A reconciliation of the changes in the projected benefit obligation from the beginning of the year to the end of the year for 2006 and 2005 is as follows:
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Accrued pension costs for the Supplemental Plan at December 31, 2006 and 2005, and some of the assumptions used to determine these amounts, are summarized below:
As of December 31, 2005, the Company's accrued pension liability under the Supplemental Plan was increased by an additional minimum liability to reflect the amount of the unfunded accumulated benefit obligation under the Supplemental Plan at December 31, 2005. The 2005 additional minimum liability of $914,000 was recorded as a charge to other comprehensive loss in 2005.
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 compensation, which are matched by the Company at a percentage determined annually. The employer match is currently 100% of the amount the employee elects to defer. 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 compensation reduction contributions. The Company's matching contributions to the Savings Plan, charged to expense, were $55,000, $50,000 and $45,000 in 2006, 2005 and 2004, respectively. All contributions are subject to maximum limitations contained in the Code.
Note 8- Incentive Plans
Under the Company's 1994 Senior Management Incentive Compensation Plan (the "1994 Plan"), any executive officer of the Company whose compensation is required to be reported to stockholders under the Securities Exchange Act of 1934 (the "Participants") and who is serving as such at any time during the fiscal year as to which an award is granted, may receive an award of a cash bonus ("Bonus"), in an amount determined by the Personnel Committee of the Company's Board of Directors (the "Committee") and payable from an annual bonus fund (the "Annual Bonus Pool"). The Committee may award Bonuses under the 1994 Plan to Participants not later than 120 days after the end of each fiscal year (the "Reference Year").
If the Committee grants a Bonus under the 1994 Plan, the amount of the Annual Bonus Pool will be an amount equal to the sum of (i) plus (ii), where:
(i) is ten percent (10%) of the amount by which the Company's Total Stockholders' Equity, as defined, on the last day of a Reference Year increased over the Company's Total Stockholders' Equity, as defined, on the last day of the immediately preceding Reference Year; and
(ii) is five percent (5%) of the amount by which the Company's market value, as defined, on the last day of the Reference Year increased over the Company's market value on the last day of the immediately preceding Reference Year.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Notwithstanding the foregoing, the 1994 Plan provides that in the event of a decrease in either or both of items (i) and/or (ii) above, the Annual Bonus Pool is determined by reference to the last Reference Year in which there was an increase in such item. If the Committee determines within the 120-day time period to award a Bonus, the share of the Annual Bonus Pool to be allocated to each Participant shall be as follows: 45% of the Annual Bonus Pool shall be allocated to the Company's Chief Executive Officer, and 55% of the Annual Bonus Pool shall be allocated pro rata to each of the Company's Participants as determined by the Committee. The Committee in its discretion may reduce the percentage of the Annual Bonus Pool to any Participant for any Reference Year, and such reduction shall not increase the share of any other Participant. The 1994 Plan is not the exclusive plan under which the Executive Officers may receive cash or other incentive compensation or bonuses. No Bonuses were paid attributable to the 1994 Plan for 2006, 2005, or 2004.
Under the Company's 1993 Stock Incentive Plan (the "1993 Plan"), the Company may grant to officers and employees of the Company and its subsidiaries, stock options ("Options"), stock appreciation rights ("SARs"), restricted stock awards ("Restricted Stock"), merit awards ("Merit Awards") and performance share awards ("Performance Shares"), through May 28, 2008. An aggregate of 5,000,000 shares of the Company's Common Stock are reserved for issuance under the 1993 Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of Restricted Stock and Performance Shares); however, of such shares, only 2,500,000 shares in the aggregate shall be available for issuance for Restricted Stock Awards and Merit Awards. Such shares shall be authorized but unissued shares of Common Stock. Options may be granted as incentive stock options ("ISOs") intended to qualify for favorable tax treatment under Federal tax law or as nonqualified stock options ("NQSOs"). SARs may be granted with respect to any Options granted under the 1993 Plan and may be exercised only when the underlying Option is exercisable. The 1993 Plan requires that the exercise price of all Options and SARs be equal to or greater than the fair market value of the Company's Common Stock on the date of grant of that Option. The term of any ISO or related SAR cannot exceed ten years from the date of grant, and the term of any NQSO cannot exceed ten years and one month from the date of grant. Subject to the terms of the 1993 Plan and any additional restrictions imposed at the time of grant, Options and any related SARs ordinarily will become exercisable commencing one year after the date of grant. In the case of a "Change of Control" of the Company (as defined in the 1993 Plan), Options granted pursuant to the 1993 Plan may become fully exercisable as to all optioned shares from and after the date of such Change in Control in the discretion of the Committee or as may otherwise be provided in the grantee's Option agreement. Death, retirement, or absence for disability will not result in the cancellation of any Options.
As a condition to any award of Restricted Stock or Merit Award under the 1993 Plan, the Committee may require a participant to pay an amount equal to, or in excess of, the par value of the shares of Restricted Stock or Common Stock awarded to him or her. Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered during a "Restricted Period", which in the case of grants to employees shall not be less than one year from the date of grant. The Restricted Period with respect to any outstanding shares of Restricted Stock awarded to employees may be reduced by the Committee at any time, but in no event shall the Restricted Period be less than one year. Except for such restrictions, the employee as the owner of such stock shall have all of the rights of a stockholder including, but not limited to, the right to vote such stock and to receive dividends thereon as and when paid. In the event that an employee's employment is terminated for any reason, an employee's Restricted Stock will be forfeited; provided, however, that the Committee may limit such forfeiture in its sole discretion. At the end of the Restricted Period, all shares of Restricted Stock shall be transferred free and clear of all restrictions to the employee. In the case of a Change in Control of the Company (as defined in the 1993 Plan), an employee may receive his or her Restricted Stock free and clear of all restrictions in the discretion of the Committee, or as may otherwise be provided pursuant to the employee's Restricted Stock award.
Performance Share awards of Common Stock under the 1993 Plan shall be earned on the basis of the Company's performance in relation to established performance measures for a specific performance period. Such measures may include, but shall not be limited to, return on investment, earnings per share, return on stockholder's equity, or return to stockholders. Performance Shares may not be sold, assigned, transferred, pledged or otherwise encumbered during the relevant performance period. Performance Shares may be paid in cash, shares of Common Stock or shares of Restricted Stock in such portions as the Committee may determine. An employee must be employed at the end of the performance period to receive payments of Performance Shares; provided, however, in the event that an employee's employment is terminated by reason of death, disability, retirement or other reason approved by the Committee, the Committee may limit such forfeiture in its sole discretion. In the case of a Change in Control of the Company (as defined in the 1993 Plan), an employee may receive his or her Performance Shares in the discretion of the Committee, or as may otherwise be provided in the employee's Performance Share award.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
The Company's 1985 Stock Option Plan (the "1985 Plan"), provided for the granting of up to 2,000,000 shares of stock options for the purchase of up to 2,000,000 shares of Common Stock to salaried employees, through May 22, 1995. No additional stock options are outstanding or can be awarded under the 1985 Plan. Under the 1985 Plan, there were 75,000 shares under option outstanding and exercisable as of December 31, 2003 at a weighted average exercise price of $0.21 per share. In February 2004, the outstanding stock option, under the 1985 Plan, for 75,000 common shares was exercised.
Incentive plan activity is summarized as follows:
The following table summarizes information about the Company's stock options outstanding and exercisable under the 1993 Plan at December 31, 2006, as follows:
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
At December 31, 2006, the weighted average remaining contractual life in years for options outstanding and options exercisable was 4.40 and 4.34 years, respectively. At December 31, 2006, the exercise price of stock options outstanding and exercisable was greater than the market price of the Company's stock; therefore, no intrinsic value for stock options is reflected herein.
During the year ended December 31, 2006, the Company recorded compensation expense of $88,000 relating to unvested stock options. Compensation expense relating to stock options is recorded in the consolidated statement of operations, with a corresponding increase to additional paid in capital in the statement of stockholders' equity. Prior to 2006, as permitted by SFAS 123, the Company accounted for share-based payments to employees using APB 25's intrinsic value method and recognized no compensation cost for employee stock options in prior years. See Note 2 for additional information, including disclosure of the pro-forma net income (loss) and earnings per share had the Company adopted SFAS 123R in prior periods.
The fair value of each option award was estimated on the date of grant using the Black-Scholes-Merton option valuation model ("Black-Scholes") that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company's stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options granted is estimated based on the contractual lives of option grants, option vesting period and historical data and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury bond yield in effect at the time of grant. No adjustments were made in 2006 to the input assumptions for the calculation of the fair value of stock options granted in 2005 and prior years from the pro forma amounts previously presented in the Company's prior period financial statements.
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions noted herein represent management's best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, our recorded and pro forma stock-based compensation expense could have been materially different from that depicted herein. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be materially different.
The Company believes that the use of the Black-Scholes model meets the fair value measurement objectives of SFAS 123R and reflects all substantive characteristics of the instruments being valued. No stock options were granted during the year ending December 31, 2006. The per share grant date weighted average estimated values of employee stock option grants under the 1993 Plan, as well as the assumptions used to calculate such values granted during the years ended December 31, 2005 and 2004 are as follows:
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
The following table presents information regarding non-vested option activity during the full year period ended December 31, 2006:
The total fair value of shares vested during the full year periods ended December 31, 2006 and December 31, 2005, was $134,000 and $88,000, respectively. As of December 31, 2006, there was no remaining unamortized compensation cost related to non-vested share-based compensation arrangements related to stock options granted under the 1993 Plan.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, and given the substantial changes in the price per share of the Company's Common Stock, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For a summary of the pro forma amounts calculated in accordance with SFAS 123, see Note 2.
Note 9 - Income Taxes
The components of income tax expense for continuing operations for the years ended December 31 are as follows:
The components of pretax income (loss) and the difference between income taxes from continuing operations, computed at the statutory federal rate of 35% in 2006, 2005 and 2004, and the provision for income taxes from continuing operations for the years ended December 31 follows:
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
State income tax amounts for 2006 and 2004 primarily consist of a minimum tax on capital to the state of Connecticut. In 2005, the Company utilized net operating loss ("NOL") carryforwards and alternative minimum tax ("AMT") NOL carryforwards as available to offset taxable income generated from the 2005 sale of Two Soundview as discussed in Note 13 herein. However, due to limitations on the amount of NOL carryforwards that could be utilized against taxable income, an income tax provision of $400,000 for discontinued operations, attributable to a provision for federal alternative minimum tax of $150,000 and a provision of $250,000 for Connecticut state taxes was recorded in the fourth quarter ended December 31, 2005.
In December 2006, the Company recorded other income of $1,201,000 attributable to an Internal Revenue Service ("IRS") interest refund, consented to by the IRS in December 2006, and received by the Company in January 2007. The refund resulted from the Company's pursuit of interest refund claims for several prior tax years under a tax code provision which allowed for the retroactive recovery of the interest differential where a taxpayer had a tax underpayment (subject to higher interest payment rates) for one tax year and a simultaneous tax overpayment (subject to lower interest refund rates) for another tax year. The Company is continuing to pursue similar claims from several other tax years, but at the current time the Company can give no assurances as to the final amounts of any additional interest refunds, if any, or when they might be received.
As a result of the Office of Thrift Supervision's December 4, 1992 placement of Carteret in receivership, under the management of the Resolution Trust Corporation ("RTC")/Federal Deposit Insurance Corporation ("FDIC"), and then proposed Treasury Reg. ss.1.597-4(g), the Company had previously filed its 1992 and subsequent federal income tax returns with Carteret disaffiliated from the Company's consolidated federal income tax return. Based upon the impact of Treasury Reg. ss.1.597-4(g), which was issued in final form on December 20, 1995, a continuing review of the Company's tax basis in Carteret, and the impact of prior year tax return adjustments on the Company's 1992 federal income tax return as filed, the Company decided not to make an election pursuant to final Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's consolidated federal income tax return effective as of December 4, 1992 (the "Election Decision").
The Company has made numerous requests to the RTC/FDIC for tax information pertaining to Carteret and the resulting successor institution, Carteret Federal Savings Bank ("Carteret FSB"); however all of the information still has not been received. Based on the Company's Election Decision, described above, and the receipt of some of the requested information from the RTC/FDIC, the Company has amended its 1992 consolidated federal income tax return to include the federal income tax effects of Carteret and Carteret FSB (the "1992 Amended Return"). The Company is still in the process of amending its consolidated federal income tax returns for 1993 and subsequent years.
The Company anticipates that, as a result of filing a consolidated federal income tax return with Carteret FSB, a total of approximately $170 million of tax NOL carryforwards will be generated from the Company's tax basis in Carteret/Carteret FSB as tax losses are incurred by Carteret FSB of which $158 million are still available for future use. Based on the Company's filing of the 1992 Amended Return , approximately $56 million of NOL carryforwards are generated for tax year 1992 which expire in 2007, with the remaining approximately $102 million of NOL carryforwards to be generated, expiring no earlier than 2008. These NOL carryforwards would be available to offset future taxable income, in addition to the NOL carryforwards as further detailed below. The Company can give no assurances with regard to the 1992 Amended Return or amended returns for subsequent years, or the final amount or expiration of NOL carryforwards ultimately generated from the Company's tax basis in Carteret.
In March 2000, the Company filed several carryback claims and amendments to previously filed carryback claims with the IRS (the "Carryback Claims") seeking refunds from the IRS of alternative minimum tax and other federal income taxes paid by the Company in prior years plus applicable IRS interest, based on the filing of the 1992 Amended Return. In April 2003, IRS examiners issued a letter to the Company proposing to disallow the Carryback Claims. The Company sought administrative review of the letter by protesting to the Appeals Division of the IRS. In February 2005, IRS Appeals officials completed their review of the Carryback Claims, and disallowed them. The Company is currently considering whether to file suit for the tax refunds it seeks, plus interest, with respect to the Carryback Claims. Even if the Company files suit, the Company can give no assurances as to the final amount of refunds, if any, or when they might be received.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
Based upon the Company's federal income tax returns as filed from 1993 to 2005 (subject to IRS audit adjustments), excluding the NOL carryforwards utilized in 2005 and excluding the NOL carryforwards expected to be generated from the Company's tax basis in Carteret/Carteret FSB, as noted above, at December 31, 2006, the Company has NOL carryforwards available to reduce future federal taxable income, which expire if unused, as follows:
The Company's federal income tax returns for the years subsequent to 1992 have not been reviewed by the IRS. The utilization of certain carryforwards is subject to limitations under U.S. federal income tax laws. In addition, the Company has approximately $21 million of AMT credit carryforwards ("AMT Credits"), which are not subject to expiration. Based on the filing of the Carryback Claims, as further discussed above, the Company would seek to realize approximately $8 million of the $21 million of AMT Credits.
The Company has calculated a net deferred tax asset of $31 million and $32 million as of December 31, 2006 and 2005, respectively, arising primarily from NOL's and alternative minimum tax credits (not including the anticipated tax effects of the NOL's expected to be generated from the Company's tax basis in Carteret, resulting from the Election Decision, as more fully described above). A valuation allowance has been established for the entire net deferred tax asset, as management, at the current time, has no basis to conclude that realization is more likely than not.
Note 10 - Legal Proceedings
The Company is or has been a party in a number of lawsuits or proceedings, including the following:
(a) 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" or the "Court"), based upon the impact of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") on the Company's investment in Carteret Savings Bank ("Carteret"). Approximately 120 other similar so-called "supervisory goodwill" cases, were commenced by other financial institutions and/or their shareholders, many are still pending in the Court of Federal Claims. Three of these cases, Winstar Corp. v. United States, Glendale Federal Bank, FSB v. United States, and Statesman Savings Holding Corp. v. United States (the "Consolidated Cases"), which involve many of the same issues raised in the Company's suit, were appealed to the United States Supreme Court (the "Supreme Court"). On July 1, 1996, the Supreme Court issued a decision in the Consolidated Cases. The Supreme Court's decision affirmed the lower Court's grant of summary judgment in favor of the plaintiffs on the issue of liability and remanded the cases for a determination of damages. Although the decision in the Consolidated Cases is beneficial to the Company's case, it is not necessarily indicative of the ultimate outcome of the Company's action.
On September 18, 1996, the Court of Federal Claims entered an Omnibus Case Management Order that will govern further proceedings in the Company's action and most of the other so-called "Winstar-related" cases. On March 14, 1997, the Court entered an order permitting the Federal Deposit Insurance Company ("FDIC") to intervene as an additional plaintiff in forty-three cases, including the Company's case, but not allowing the FDIC to be substituted as the sole plaintiff in those cases.
AMBASE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued)
On March 20, 1998, the FDIC filed a motion for partial summary judgment against the United States on certain liability issues, and the Company filed a memorandum in support of that motion. Fact discovery for the Company was completed November 30,1999 pursuant to an extension of time granted by the Court. On September 9, 1999, the Company filed a Motion For Partial Summary Judgment On Liability under a Fifth Amendment Takings claim theory of recovery. On November 24, 1999, the FDIC, as successor to the rights of Carteret and as Plaintiff-Intervenor in the case, filed a response brief opposing the Company's Motion. On December 6, 1999, the Department of Justice (the "DOJ") (on behalf of the United States) filed a brief opposing the Company's Motion For Partial Summary Judgment On Liability and Cross-Moved for Summary Judgment On the Company's Takings claim. On January 25, 2000, the Company responded to the DOJ's brief and the FDIC's brief by filing a Brief (i) In Reply To Defendant's Opposition To Plaintiffs' Motion For Partial Summary Judgment, (ii) In Opposition To Defendant's Cross-Motion For Summary Judgment, and (iii) In Reply To FDIC's Response To Plaintiffs' Motion For Partial Summary Judgment. On February 22, 2000 the DOJ filed a brief in Reply To Plaintiffs' Opposition To Defendant's Cross-Motion For Summary Judgment.
On October 2, 2000, Senior Judge Loren Smith of the Court of Federal Claims ("Judge Smith") heard oral arguments in the Company's Supervisory Goodwill case against the United States government. The Court heard arguments both as to the contractual liability of the United States to Carteret Savings Bank, and as to the Company's claim against the United States under the Takings Clause of the Fifth Amendment.
On August 25, 2003, the Court of Federal Claims issued a decision in which it (i) ruled that the Government had entered into and breached its supervisory goodwill contracts with the Company's wholly-owned subsidiary, Carteret; (ii) rejected the Company's claim that it was entitled to recover damages directly from the Government under the Takings Clause for the loss of Carteret; and (iii) rejected the Company's claim that the Government had "illegally exacted" $62.5 million that the Company paid into Carteret subsequent to the Government's breach of the Goodwill contracts. Specifically, the Court held that the Company could not recover damages under the Takings Clause because it could be restored to the position it was in before the breach through Carteret's breach of contract action.
On September 17, 2003, the Company filed a motion to dismiss the FDIC and to define the appropriate measure of Carteret's contract damages. On September 30, 2003, the FDIC, as plaintiff-intervenor in the case, and the United States, as defendant in the case, each filed a separate response to the Company's motion. The Company argued in its motion that because Carteret would not have been seized but for the Government's breach of contract, no receivership deficit would have been incurred. Accordingly, the Company argued that Carteret should be entitled to recover contract damages that include both: (i) the full amount of the receivership deficit, as an offset to the deficit and (ii) the full amount of the positive value it would have had but for the breach. Alternatively, the Company argued that, if Carteret is not entitled to recover both these amounts, or if any award must be offset by the amount of the receivership deficit, the Company should be entitled to demonstrate why the receivership deficit has been erroneously overstated. The DOJ responded with the theories that Carteret would have failed even if Supervisory Goodwill was counted. The FDIC, who is both the receiver for the estate of Carteret (and hence its legal advocate in court) as well as a creditor of the estate, took the position that the Court of Federal Claims has no jurisdiction to review the accuracy, validity, or amount of the Carteret receivership deficit reported by the FDIC. That receivership deficit consists of the FDIC's subrogated claim against the thrift, interest, taxes, and administrative expenses charged by the FDIC to the thrift. Because the receivership deficit continues to accrue interest, it grows on a daily basis. The FDIC has represented to the Court of Federal Claims that is does not expect to present any expert testimony articulating a theory of damages for Carteret that would exceed the current size of the receivership. While the failure to seek damages in excess of the receivership deficit has previously been held to be cause for dismissal for lack of standing, the FDIC has stated that it believes it still has standing in this case based upon the damage theories it expects the Company to present.
AMBASE CORPORATION AND SUBSIDIAIRES Notes to Consolidated Financial Statements (continued)
On October 1, 2003, the Court held a telephonic status conference pursuant to an order set forth in the August 25, 2003 opinion. Pursuant to that status conference, the Court ordered that through their additional briefing on the Company's Motion to Dismiss the FDIC and to define the appropriate measure of Carteret's contract damages (i.e., through the Company's reply brief and the surreply brief granted to the FDIC and the United States), the parties should address the question of, "whether the Court has the power to review the amount of the receivership deficit as administered by the FDIC." In an order dated October 16, 2003, the Court modified the briefing schedule such that the Company filed its reply brief as required on October 31, 2003, and the surreply brief of the FDIC and the United States were filed as required in November, 2003. The Court held oral argument on this issue on November 20, 2003. The DOJ and the FDIC filed briefs arguing that (1) the Court of Federal Claims had no authority to scrutinize the validity of the receivership deficit reported by the FDIC and (2) the Court should dismiss AmBase's remaining damages claims because they were allegedly waived. On August 31, 2004, the Court denied the Company's Motion to Dismiss the FDIC, but granted the Company's Motion to Define the Measure of Carteret's Contract Damages to the extent it requested the Court to consider the size and value of the FDIC's receivership deficit when calculating damages. The Court subsequently conducted a status conference on October 4, 2004, and ordered the Company to submit a proposed litigation time-line to the Court by October 22, 2004 which was timely submitted. The Court ordered the United States and the FDIC to respond to the Company's proposed litigation time-line by November 5, 2004 which was timely submitted. A status conference was held on January 11, 2005. On January 12, 2005, the Court ordered that pursuant to the Court's order from the bench, the Defendant's Motion for Reconsideration of the August 31, 2004 Ruling, and, in the Alternative, to dismiss the Stockholder Derivative Claim and the Complaint-in-Intervention is denied. The Court further ordered that this matter be stayed for 30 days for the Defendant and/or Plaintiff-Intervenor to consider filing a Request for Certification for Interlocutory Appeal. The Court held a telephonic status conference on February 11, 2005 at which time the Court ordered that fact discovery was to resume on February 14, 2005 and would continue for at least three (3) months. The Court further scheduled a telephonic status conference for May 2005, to discuss the need for further discovery.
On January 12, 2005, Judge Smith denied the government's motion to dismiss the Company's remaining claims arising out of damages for breach of contract. On March 15, 2005, the United States Department of Justice and the FDIC each filed motions requesting that Judge Smith certify for immediate appeal his ruling that the Company is entitled to challenge the validity of the receivership deficit. The Company's filed its reply to these motions on March 29, 2005. In April 2005, Judge Smith heard oral argument on the United States Department of Justice and the FDIC motions requesting that Judge Smith certify for immediate appeal his ruling that the Company is entitled to challenge the validity of the receivership deficit. Because Judge Smith's ruling on the receivership deficit issue is not a final order, both Judge Smith and the Court of Appeals for the Federal Circuit would have to agree to an appeal of that issue at this time. Following the April 2005 oral argument, Judge Smith entered an order, on April 25, 2005, staying resolution of the motions to certify an interlocutory appeal pending the holding of a "show cause" hearing. Judge Smith indicated at the oral argument that the purpose of the show cause hearing was to allow the Company to outline the evidence and arguments it was prepared to offer in order to challenge the validity and size of the receivership deficit. Judge Smith directed the parties to attempt to reach agreement regarding a schedule for the completion of discovery on receivership deficit issues, and he directed the parties to submit to the Court such an agreed proposed discovery schedule, or, if the parties are unable to reach agreement, separate proposed schedules for discovery, in early May 2005. Judge Smith further encouraged the parties to discuss the procedures and schedule for the show cause hearing, and to provide the Court with a proposed order on such matters.
In accordance with the Court's direction, the parties agreed upon a schedule for the completion of fact discovery and procedures for the show cause proceeding. In accordance with the parties' agreement, Judge Smith entered an order on May 23, 2005, providing that fact discovery would be completed within 45 days of the completion of document production by the Government. The May 23, 2005, order further provided that (i) 45 days after the close of discovery, the Company is to file a statement of issues summarizing the respects in which the receivership books allegedly overstate or misstate the receivership deficit; (ii) 45 days after the filing of the Company's statement of issues, the United States and the FDIC are to file responses; and (iii) 15 days after the filing of such responses, the Company is to file a reply.
AMBASE CORPORATION AND SUBSIDIAIRES Notes to Consolidated Financial Statements (continued)
In May and June of 2005, the Government provided the Company with access to Carteret's documents and documents relating to the management of the receivership. The Company selected approximately 3 million pages of documents to be imaged at the Government's expense. In September 2005, a status conference was held before Judge Smith. The Government indicated that it would complete production of all the images of the selected materials by the end of September 2005. Additionally, at the status conference, all parties agreed that the schedule previously set forth by the Court's May 23, 2005 order should be changed in one respect: the Company would be given 75 days from the completion of the document production to complete discovery. The Court issued an order on September 26, 2005 memorializing this agreement. On January 11, 2006, the Court held a status conference. At that time, the Court indicated that the document production would be deemed complete as of that date. The Court's order of January 13, 2006, memorialized this ruling. Accordingly, fact discovery was completed in April 2006, and the Company's statement of issues was ultimately filed in June of 2006. In May 2006, the Company served on the Government an expert report in support of some of the arguments the Company made regarding the size of the receivership deficit. The Company's expert was deposed in July 2006. In early August 2006, the Government submitted its own expert report on receivership deficit issues, and in October 2006, the Company deposed the Government's expert. In late August 2006, the Government filed a response to the Company's Statement of Issues, and in September 2006, the FDIC filed its own response to the Statement of Issues. The Company filed its reply in support of its Statement of Issues in October 2006. A status conference was held in November 2006 and December 2006, to discuss further proceedings. On December 13, 2006, the Court entered an order denying defendant's request that the Court allow an immediate appeal of the Court's ruling that it had jurisdiction to consider the validity of the receivership deficit. The Court also found that it continued to have jurisdiction to hear the case. The Court also ordered the parties to enter a schedule for expert discovery. Under the proposed schedule submitted by the parties, expert discovery is scheduled to close in October 2007. A status conference has been set for April 2007. No assurance can be given regarding the ultimate outcome of the litigation.
Both the Court of Federal Claims and the Court of Appeals for the Federal Circuit have issued numerous decisions in cases that involve claims against the United States based upon its breach of its contracts with savings and loan institutions through its 1989 enactment of FIRREA. In particular, the Federal Circuit has issued decisions rejecting Takings Clause claims advanced by shareholders of failed thrifts. Castle v. United States, 301F.3d 1328 (Fed. Cir. 2002); Bailey v. United States, 341 F. 3d 1342 (Fed. Cir 2003) petition for certiorari which was filed January 26, 2004. In April 2004, the Company filed an amicus brief in support of the petition for certiorari filed by Bailey. In June 2004, the United States Supreme Court denied the petition for certiorari filed by Bailey. The Court of Claims decision in the Company's case, as well as other decisions in Winstar-related cases, are publicly available and may be relevant to the Supervisory Goodwill Company's claims, but are not necessarily indicative of the ultimate outcome of the Company's actions.
(b) Delaware Court of Chancery Section 220 Books and Records Action: Two Stockholders who owned approximately 14.4% of the Company's outstanding common stock (the "Stockholders") had previously made demand in January 2004 to inspect certain Company books and records pursuant to Section 220 of the Delaware General Corporation Law. The Company opposed the request on various grounds, and the Stockholders brought suit in March 2004 to compel inspection of certain Company books and records. In August 2005, the Court of Chancery issued a Memorandum Opinion finding that the Stockholders had met the technical requirements of Section 220 and had stated a proper purpose under Section 220, and were legally entitled to inspect specified books and records, but declined to find the Company liable for the Stockholders' attorneys' fees.
AMBASE CORPORATION AND SUBSIDIAIRES Notes to Consolidated Financial Statements (continued)
In October 2006, in order to eliminate continued involvement in the above referenced action or potential future actions, and the resultant time, expense and potential adverse impact on the Company's current operations and litigation claims, the Company, its Chief Executive Officer and principal stockholder, and the Company's Directors entered into an agreement with the Stockholders who had initiated the action to obtain Company books and records. Pursuant to the agreement: (i) the Company's Chief Executive Officer agreed to purchase 6,615,531 shares of Company common stock (representing approximately 14.4% of the Company's outstanding common stock and all of the Company stock beneficially owned by the Stockholders), for a cash purchase price of $0.55 per share ($3,638,542 in the aggregate for all of the shares); (ii) the Stockholders agreed to dismiss the books and records action and release any additional claims the Stockholders might have, including claims the Stockholders said they had been considering litigating against the Company, its Directors and its Chief Executive Officer; (iii) the Stockholders entered into a standstill and other agreements which will preclude them from taking a position in the Company for a period of time; and (iv) the Company agreed to pay the Stockholders $1.1 million. No portion of the purchase price for the shares acquired by the Company's Chief Executive Officer was provided by or financed by the Company. Although the shares were not offered to the Company for purchase, the Company's Board of Directors declined to purchase the shares at the price they were offered to the Company's Chief Executive Officer. A settlement charge of $1,100,000 recorded as other expense and related insurance recovery of $400,000 recorded as other income, have been reflected Statement of Operations for the year ended December 31, 2006. The net cost to the Company of the settlement was approximately $700,000. This matter is, therefore, concluded.
Note 11 - Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value due to the short-term nature of these instruments. The fair value of investment securities - held to maturity and investment securities available for sale are based on current market quotations. The carrying value of applicable other liabilities approximates their fair value. See note 13 herein for information regarding the Company's sale of Two Soundview in July 2005.
Note 12 - Property Owned
The Company owns one commercial office building in Greenwich, Connecticut that contains approximately 14,500 square feet. The Company utilizes approximately 3,500 square feet for its executive offices; the remaining space is currently unoccupied and available for lease. Depreciation expense is recorded on a straight-line basis over 39 years. The building is carried at cost, net of accumulated depreciation of $283,000 and $232,000 at December 31, 2006 and 2005, respectively. See note 13 herein for information regarding the Company's sale of Two Soundview in July 2005.
AMBASE CORPORATION AND SUBSIDIAIRES Notes to Consolidated Financial Statements (continued)
Note 13 - Discontinued Operations
In May 2005, the Company entered into an agreement to sell Two Soundview, originally purchased in December 2002, to Ceruzzi Holdings, LLC, an unaffiliated third party. In July 2005, the Company completed the sale of Two Soundview. The sale price was $28,000,000 less normal real estate closing costs and adjustments. As a result of the sale of Two Soundview, the results of operations of Two Soundview 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, in accordance with SFAS 144. A gain from the sale, of $10,298,000, is reflected in the Company's financial statements for the year ending December 31, 2005.
Net gain on sale of real estate is as follows:
Transaction costs above include broker commissions, transfer taxes, and legal and other fees. Other assets above includes $519,000 of deferred rental revenue resulting from the recognition of rental revenue on a straight-line basis over the terms of tenant leases versus contractual lease payment terms, and $37,000 of real estate commissions previously capitalized.
Income from discontinued operations, as summarized below, for the twelve months periods ended December 31, 2005, reflects the results of operations of Two Soundview and the net gain realized upon disposition.
Income from discontinued operations is as follows:
AMBASE CORPORATION AND SUBSIDIAIRES Notes to Consolidated Financial Statements (continued)
The Company utilized NOL carryforwards and AMT NOL carryforwards as available to offset taxable income generated from sale of Two Soundview as discussed in Note 9 to the Company's consolidated financial statements. However, due to limitations on the amount of NOL carryforwards that could be utilized against taxable income, an income tax provision of $400,000 for discontinued operations attributable to a provision for federal alternative minimum tax of $150,000 and a provision of $250,000 for Connecticut state taxes was recorded in the fourth quarter ended December 31, 2005.
Note 14 - Quarterly Financial Information (unaudited)
Summarized quarterly financial information follows:
(a) Results for the third quarter and full year 2005, includes a gain of $10,298,000 from the sale of real estate.
(b) The loss from discontinued operations for the fourth quarter 2005, is attributable to an additional tax provision of $250,000 for discontinued operations and reclassification of $150,000 of the tax provision for the nine months ended September 30, 2005 from continuing operations to discontinued operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2006, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning executive officers required by this item is set forth following Item 4 of Part I of this report under the caption "Executive Officers of the Registrant", pursuant to General Instruction G to Form 10-K. For the information required to be set forth by the Company in response to this item concerning directors of the Company, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 2007, under the captions "Proposal No. 1 - Election of Director" and "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 2006 fiscal year.
Code of Ethics
We have adopted a Code of Ethics that applies to our Chief Executive Officer, Chief Financial Officer and other senior officers. A copy of the Code of Ethics was filed with the SEC as Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
For the information required to be set forth by the Company in response to this item, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 2007, under the captions "Executive Compensation," "Employment Contracts," and "Compensation of Directors" which are 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 2006 fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table summarizes information about securities authorized for issuance under equity compensation plans of the Company at December 31, 2006 as follows:
Plan not approved by stockholders
The Company has 110,000 shares of common stock reserved for issuance under the AmBase Corporation Stock Bonus Plan (the "Stock Bonus Plan"), which was approved by the Board of Directors of the Company in 1989. The purpose of the Stock Bonus Plan is to encourage individual performance and to reward eligible employees whose performance, special achievements, longevity of service to the Company or suggestions make a significant improvement or contribution to the growth and profitability of the Company. The Stock Bonus Plan is administered by the Personnel Committee of the Board of Directors. Members of the Personnel Committee are not eligible for an award pursuant to the Stock Bonus Plan. The Company's President may also designate eligible employees to receive awards, which are not to be in excess of 100 shares of Common Stock. No fees or expenses of any kind are to be charged to a participant. Any employee of the Company, except for certain officers or directors of the Company, are eligible to receive shares under the Stock Bonus Plan. Distributions of shares may be made from authorized but unissued shares, treasury shares or shares purchased on the open market.
For other 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 18, 2007, 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 2006 fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information required to be set forth by the Company in response to this item, see the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 2007, under the captions "Proposal No. 1 - Election of Directors" and "Information Concerning the Board and its Committees," which are incorporated herein by reference, which the Company intends to file with Securities and Exchange Commission not later than 120 days after the close of its 2006 fiscal year.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information concerning Principal Accountant Fees and Services is set forth by the Company under the heading "Proposal 2 - Appointment of Independent Registered Public Accounting Firm" in the Company's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 2007, 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 2006 fiscal year.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2. Index to Financial Statements Schedules:
Schedule III - Real Estate and Accumulated Depreciation
(b) 3. Exhibits:
3A. Restated Certificate of Incorporation of AmBase Corporation (as amended through February 12, 1991) (incorporated by reference to Exhibit 3A to the Company's Annual Report on Form 10-K for the year ended December 31, 1990).
3B. By-Laws of AmBase Corporation (as amended through March 15, 1996), (incorporated by reference to Exhibit 3B to the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
4. Rights Agreement dated as of February 10, 1986 between the Company and American Stock Transfer and Trust Co. (as amended March 24, 1989, November 20, 1990, February 12, 1991, October 15, 1993, February 1, 1996 and November 1, 2000 and November 9, 2005), (incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990, the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1993, the Company's Annual Report on Form 10-K for the year ended December 31, 1995, the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000), and the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, respectively).
10A. 1985 Stock Option Plan for Key Employees of AmBase and its Subsidiaries (incorporated by reference to Exhibit 10B to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10B. 1993 Stock Incentive Plan as amended (incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 28, 1998).
10C. 1994 Senior Management Incentive Compensation Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 27, 1994).
10D. AmBase Officers and Key Employees Stock Purchase and Loan Plan (incorporated by reference to Exhibit 10E to the Company's Annual Report on Form 10-K for the year ended December 31, 1989).
10E. AmBase Supplemental Retirement Plan (incorporated by reference to Exhibit 10C to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) and as amended March 30, 2006 (incorporated by reference to Exhibit 10E to the Company's Annual Report on Form 10-K for the year ended December 31, 2005).
10F. Assignment and Assumption Agreement dated as of August 30, 1985, between the Company and City Investing Company (incorporated by reference to Exhibit 28 to the Company's Current Report on Form 8-K dated September 12, 1985).
10G. Employment Agreement dated as of June 1, 1991 between Richard A. Bianco and the Company, as amended December 30, 1992 (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1992), as amended February 24, 1997, (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 1996), as amended March 6, 2001, (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ended December 31, 2000), and as amended December 16, 2001, (incorporated by reference to Exhibit 10G to the Company's Annual Report on Form 10-K for the year ending December 31, 2001).
10H. Employment Agreement dated as of March 30, 2006 between Richard A. Bianco and the Company, for employment from June 1, 2007 through May 31, 2012, (incorporated by reference to Exhibit 10H to the Company's Annual Report on Form 10-K for the year ending December 31, 2005).
14. AmBase Corporation - Code of Ethics as adopted by Board of Directors (incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the year ending December 31, 2003).
21. Subsidiaries of the Registrant.
23. Consent of Independent Registered Public Accounting Firm.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer Pursuant to Rule 13a-14.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer Pursuant to Rule 13a-14.
32.1 Section 1350 Certification of Chief Executive Officer pursuant to Rule 18 U.S.C. Section 1350.
32.2 Section 1350 Certification of Chief Financial Officer pursuant to Rule 18 U.S.C. Section 1350.
Exhibits, except as otherwise indicated above, are filed herewith.
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.
AMBASE CORPORATION
/s/ RICHARD A. BIANCO Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: March 29, 2007
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 on the dates indicated.
/s/ RICHARD A. BIANCO /s/ JOHN P. FERRARA Chairman, President, Vice President, Chief Financial Officer Chief Executive Officer and Director and Controller Date: March 29, 2007 (Principal Financial and Accounting Officer) Date: March 29, 2007
/s/ ROBERT E. LONG /s/ SALVATORE TRANI Director Director Date: March 29, 2007 Date: March 29, 2007
/s/ PHILIP M. HALPERN Director Date: March 29, 2007
AMBASE CORPORATION AND SUBSIDIARIES SCHEDULE III. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2006 (dollars in thousands)
DIRECTORS AND OFFICERS
INVESTOR INFORMATION