FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-7265
AMBASE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State of incorporation)
95-2962743
(I.R.S. Employer Identification No.)
GREENWICH OFFICE PARK, BUILDING 2, 51 WEAVER STREET
GREENWICH, CONNECTICUT 06831-5155
(Address of principal executive offices) (Zip Code)
(203) 532-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
At June 30, 1996 there were 44,533,519 shares of registrant's common stock,
$0.01 par value per share, outstanding, excluding 126,488 treasury shares.
<PAGE>
AMBASE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1996
CROSS REFERENCE SHEET FOR
PARTS I AND II PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K *
* Not Applicable.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30
(UNAUDITED)
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(in thousands, SECOND QUARTER SIX MONTHS
except per share data) 1996 1995 1996 1995
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REVENUE:
Investment management fees $ 159 $ 122 $ 305 $ 236
OPERATING EXPENSES:
Compensation and benefits 465 471 950 964
Professional and outside services 162 191 286 342
Insurance 53 70 107 141
Occupancy 27 60 52 119
Other operating 72 34 131 69
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779 826 1,526 1,635
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Operating loss (620) (704) (1,221) (1,399)
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Interest income, net 655 700 1,259 1,385
Realized loss on sale of investment
securities - available for sale (182) - (182) -
Minority interest (9) (12) (18) (19)
Other income 20 - 20 54
Other income - litigation and
contingency reserves reversal 8,000 - 8,000 -
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Income (loss) before income taxes 7,864 (16) 7,858 21
Income tax benefit (expense) (91) (67) 7,457 (123)
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NET INCOME (LOSS) $ 7,773 $ (83) $ 15,315 $ (102)
================================================================================
PER SHARE DATA:
NET INCOME (LOSS) $ 0.17 $ - $ 0.34 $ -
================================================================================
AVERAGE SHARES OUTSTANDING 44,534 44,534 44,534 44,534
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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JUNE 30, DECEMBER 31,
1996 1995
(IN THOUSANDS) (UNAUDITED)
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ASSETS
Cash and cash equivalents (includes $1,046
and $550 of restricted cash) $ 5,810 $ 7,752
Investment securities:
Held to maturity (market value $48,082 and $40,086) 48,138 40,055
Available for sale, carried at fair value (cost $213) - 69
Total investment securities 48,138 40,124
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Investment management fees receivable 162 146
Receivable from Home Holdings, Inc. 13,420 17,183
Other assets 487 472
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TOTAL ASSETS $ 68,017 $ 65,677
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 195 $ 690
Supplemental retirement plan 4,673 4,798
Postretirement welfare benefits 1,578 1,633
Other liabilities 2,128 3,516
Litigation and contingency reserves 3,062 12,149
Income tax reserves 79,095 81,082
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Total liabilities 90,731 103,868
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Minority interest 100 82
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Commitments and contingencies - -
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STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Net unrealized losses on investment securities
- available for sale - (144)
Accumulated deficit (570,326) (585,641)
Treasury stock (647) (647)
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Total stockholders' equity (22,814) (38,273)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,017 $ 65,677
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
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(IN THOUSANDS) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,315 $ (102)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operations:
Other assets (15) (38)
Accounts payable and accrued liabilities (495) (436)
Realized loss on sale of investment securities
- available for sale 182 -
Litigation and contingency reserves reversal (8,000) -
Litigation and contingency reserves uses (1,087) (3,170)
Income tax reserves, net (1,987) 1,694
Other, net (2,734) (2,025)
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Net cash provided by (used for) operating activities 1,179 (4,077)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities - held to maturity 22,580 60,685
Purchases of investment securities - held to maturity (29,495) (58,297)
Proceeds from sale of investment securities
- available for sale 31 -
Proceeds from Home Holdings, Inc. receivable 3,763 444
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Net cash provided by (used for) investing activities (3,121) 2,832
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Net decrease in cash and cash equivalents (1,942) (1,245)
Cash and cash equivalents at beginning of period 7,752 9,038
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,810 $ 7,793
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
The accompanying consolidated financial statements of AmBase Corporation and
subsidiaries (the "Company") are unaudited and subject to year-end adjustments.
All material intercompany transactions and balances have been eliminated. In the
opinion of management, the interim financial statements reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the Company's financial position and results of operations. Results for interim
periods are not necessarily indicative of results for the full year. Certain
reclassifications have been made to the 1995 consolidated financial statements
to conform with the 1996 presentation. The financial statements have been
prepared in accordance with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions, that it deems reasonable, that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from such estimates and assumptions.
In addition, while the accompanying consolidated financial statements have been
prepared on a going concern basis, circumstances exist which raise substantial
doubt about the ability of the Company to continue as a going concern. The
financial statements do not include adjustments to the carrying value of assets
and liabilities which might be necessary should the Company not continue in
operation. Substantial contingent and alleged liabilities exist against the
Company through certain lawsuits and proceedings, see Part II - Item 1. In order
to continue on a long-term basis, the Company must both resolve its contingent
and alleged liabilities by prevailing upon or settling these claims for less
than the amounts claimed and generate profitable operations by acquiring
existing operations and/or by developing new operations. The Company continues
to evaluate a number of business opportunities to acquire operating
subsidiaries, and is engaged in the management of its remaining assets and
liabilities, including the contingent and alleged tax and litigation
liabilities, as described in Part II - Item 1. The Company intends to
aggressively contest all pending and threatened litigation and proceedings, as
well as pursue all sources for contributions to settlements. The unaudited
interim financial statements presented herein should be read in conjunction with
the Company's consolidated financial statements filed in its Annual Report on
Form 10-K for the year ended December 31, 1995.
In November 1993, the Company acquired 51% of the issued and outstanding stock
of Augustine Asset Management, Inc. ("Augustine"), a Florida based investment
advisory firm. The Company's ownership percentage in Augustine has subsequently
increased to 66%, due to Augustine's repurchase of outstanding shares. Augustine
provides equity and fixed income money management services to both institutional
and private clients. Augustine currently has over $224 million of assets under
management. At the current time, the Company's only source of operating revenue
is investment management fees generated from the Company's majority ownership
interest in Augustine. The Company's main source of non-operating revenue is
interest income earned on investment securities and cash equivalents. The
Company's management expects that operating cash needs for the remainder of 1996
will be met principally by the Company's current financial resources, the
receipt of non-operating revenue consisting of interest income received on
investment securities and cash equivalents, and investment management fees.
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AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - LEGAL PROCEEDINGS
The Company has significant alleged tax liabilities and is a defendant in
certain lawsuits and proceedings, the ultimate outcome of which could have a
material adverse effect on its financial condition and results of operations.
Because of the nature of the contingent and alleged liabilities described in
Part II - Item 1, and the inherent difficulty in predicting the outcome of the
litigation and proceedings, management is unable to predict whether the
Company's recorded liabilities will be adequate or its resources sufficient to
satisfy its ultimate obligations. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. For a discussion of the alleged tax liabilities and
lawsuits, see Part II - Item 1. Although the basis for the calculation of the
litigation and contingency reserves, and income tax reserves are regularly
reviewed by the Company's management and outside legal counsel, the assessment
of these reserves includes an exercise of judgment and is a matter of opinion.
Management of the Company continually reviews the likelihood of liability and
associated costs of pending and threatened litigation. In the second quarter of
1996, the Company determined that there was a reduced probability of incurring
costs to defend and/or settle potential litigation with respect to Carteret
Savings Bank, FA ("Carteret"), see Part II - Item 1 - Legal Proceedings,
Government Action and the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, Item 8 - Note 11. As a result, the Company reduced its
litigation and contingency reserves by $8,000,000 and recorded such amount as
other income during the second quarter and six month periods ended June 30,
1996. In making such determination, management took into consideration numerous
factors, including the failure of the Resolution Trust Corporation ("RTC") to
notify the Company of any potential legal action prior to the expiration of a
significant statute of limitations deadline and the transfer of the
investigative duties of the RTC to the Federal Deposit Insurance Corporation
("FDIC") upon the expiration of the RTC's charter on December 31, 1995 pursuant
to federal statute. Management also considered the July 1, 1996 decision by the
U.S. Supreme Court in the consolidated cases of Winstar, Glendale Federal and
Statesman supervisory goodwill cases, which held the United States liable for
damages. At June 30, 1996, the litigation and contingency reserves were
$3,062,000. For a discussion of alleged tax liabilities and lawsuits, see Part
II - Item 1.
In addition to the litigation and contingency reserves, the Company has a
reserve for income taxes of $79,095,000 at June 30, 1996. For a further
discussion, see Part II - Item 1 - Legal Proceedings, Disputes with Internal
Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start.
See Part II - Item 1 - Legal Proceedings, for a discussion of Goodwill
Litigation.
NOTE 3 - CASH AND CASH EQUIVALENTS
Highly liquid investments, consisting principally of funds held in short-term
money market accounts, are classified as cash equivalents. Included in cash and
cash equivalents at June 30, 1996 is $1,046,000 of funds held in escrow, to be
applied to the satisfaction of certain liabilities which have been classified as
restricted. Included in cash and cash equivalents at December 31, 1995 is
$550,000 of funds held in escrow in connection with a legal proceeding, which
have been classified as restricted.
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<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - INVESTMENT SECURITIES
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement 115"), which requires investment
securities to be classified as Held to Maturity (only permitted for securities
with a stated maturity), Available for Sale or Trading Securities.
Investment securities - held to maturity, at June 30, 1996 and December 31,
1995, consist of U.S. Treasury Bills with original maturities of one year or
less and which are carried at amortized cost based upon the Company's intent and
ability to hold these investments to maturity.
Investment securities - available for sale, at December 31, 1995, consisted of
investments in equity securities held for an indefinite period and which were
carried at fair value with net unrealized gains and losses recorded directly in
a separate component of stockholders' equity.
Investment securities, at June 30 and December 31, consist of the following:
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1996 1995
----------------------------- ------------------------------
COST OR COST OR
CARRYING AMORTIZED FAIR CARRYING AMORTIZED FAIR
(IN THOUSANDS) VALUE COST VALUE VALUE COST VALUE
- ------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury Bills
maturing within
one year $48,138 $ 48,138 $ 48,082 $40,055 $40,055 $40,086
Available for Sale:
Equity Securities - - - 69 213 69
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$48,138 $ 48,138 $ 48,082 $40,124 $40,268 $40,155
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The gross unrealized gains and losses on investment securities, at June 30 and
December 31, consist of the following:
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(IN THOUSANDS) 1996 1995
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Held to Maturity:
Gross unrealized gains (losses) $ (56) $ 31
================================================================================
Available for Sale:
Gross unrealized losses $ - $ 144
================================================================================
During the second quarter and six month period ended June 30, 1996, proceeds of
$31,000 were received from the sale of investment securities - available for
sale, resulting in a realized loss of $182,000.
No investment securities - available for sale were sold in the second quarter
and six month periods of 1995.
NOTE 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Additional information regarding cash flow for the six months ended June 30 is
as follows:
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AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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(IN THOUSANDS) 1996 1995
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Cash received (paid) during the period:
Interest expense $ - $ (3)
Income taxes refunded (paid), net 5,460 (107)
================================================================================
Income taxes refunded (paid) in 1996 include a 1977 tax refund of $7,613,000 and
$1,987,000 of payments to the Internal Revenue Service ("IRS"), principally for
the 1985 through 1991 tax years.
NOTE 6 - INCOME TAXES
The Company and its 100% owned domestic subsidiaries file a consolidated federal
income tax return. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Statement 109 recognizes both the current and deferred
tax consequences of all transactions that have been recognized in the financial
statements, calculated based on the provisions of enacted tax laws, including
the tax rates in effect for current and future years. Statement 109 requires
that net deferred tax assets be recognized immediately when a more likely than
not criterion is met; that is, unless a greater than 50% probability exists that
the tax benefits will actually be realized sometime in the future. Under
Statement 109, the Company has calculated a net deferred tax asset of $26
million and $30 million, as of June 30, 1996 and December 31, 1995,
respectively, arising primarily from the excess of book over tax reserves and
alternative minimum tax credits. 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.
During the first quarter of 1996, the Company received a 1977 income tax refund
of $7,613,000. This amount has been recognized as an income tax benefit in the
accompanying consolidated Statement of Operations, based on management's
continuing review of the overall tax liability position of the Company.
During the first six months of 1996, $1,987,000 of payments to the IRS were
charged against income tax reserves, principally representing payments for
previously agreed to issues relating to the 1985 through 1991 tax years.
NOTE 7 - RELATED PARTIES
Investment management fee revenue includes $46,000 and $93,000 for the second
quarter and six months ended June 30, 1996, respectively, and $38,000 and
$74,000, in the comparable 1995 periods, from related parties.
At June 30, 1996 and December 31, 1995, investment management fees receivable
included $46,000 and $46,000, respectively, from related parties.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which follows, should be read in conjunction with the Financial
Statements and related notes, which are contained in Item 1, herein.
FINANCIAL CONDITION
The Company's assets at June 30, 1996 aggregated $68,017,000, consisting
principally of cash and cash equivalents of $5,810,000, investment securities of
$48,138,000 and a $13,420,000 receivable from Home Holdings, Inc. ("Home
Holdings") acquired pursuant to the agreement by which the Company sold The Home
Insurance Company ("The Home") and its subsidiaries to Home Holdings in February
1991. During the first six months of 1996, proceeds of $3,763,000 from the Home
Holdings receivable were collected, a portion of which will be applied to the
satisfaction of certain liabilities. For further information on the Company's
receivable from Home Holdings, see the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, Item 8 - Note 4, for the year ended December
31, 1995. At June 30, 1996, the Company's liabilities, including reserves for
contingent and alleged liabilities, as further described in Part II - Item 1,
exceeded total assets by $22,814,000.
The Company contractually assumed the tax liabilities of City Investing Company
("City"), which, prior to September 1985, owned all the outstanding shares of
Common Stock of the Company. During the first quarter of 1996, the Company
received a 1977 income tax refund of $7,613,000; as a result, City no longer
remains open for refunds. This amount has been recognized as an income tax
benefit in the accompanying consolidated Statement of Operations, based on
management's continuing review of the overall tax liability position of the
Company. The Company also contractually assumed certain tax liabilities of The
Home and its subsidiaries from September 1985 through 1989. For all periods
through 1991, the IRS and the Company do not agree with respect to only two
issues, withholding taxes (Netherlands Antilles) and "fresh start" (an insurance
industry issue).
With respect to withholding taxes (Netherlands Antilles), on May 11, 1995, the
IRS issued a notice of deficiency for withholding taxes on interest payments for
the years 1979 through 1985. In the notice of deficiency, the IRS contends that
City's wholly owned Netherlands Antilles finance subsidiary should be
disregarded for tax purposes. The Company vigorously contested the IRS's
position in accordance with the IRS's internal appeals procedures. In January
1992, the National Office of the IRS issued technical advice supporting the
auditing agent's position. In October 1992, the Company appealed this technical
advice to the National Office. The National Office advised the Company that it
expected to issue technical advice supporting the auditing agent's position,
whereupon, the Company advised the IRS that it was withdrawing its technical
advice request.
On June 30, 1995, the Company filed a petition in the United States Tax Court
contesting the notice of deficiency. The IRS filed its answer on August 23,
1995. The Company filed a motion for summary judgment in its favor on February
13, 1996. The IRS filed a Notice of Objection to the Company's motion for
summary judgment on April 17, 1996. The United States Tax Court requested, and
the Company filed, a reply to the IRS's Notice of Objection on July 3, 1996. If
the IRS were to prevail on this issue, the Company would be liable for taxes and
interest in excess of the Company's financial resources.
In a case dealing with a withholding tax issue similar to the Company's, on
November 6, 1995, the United States Tax Court ("Tax Court") ruled in favor of
the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana"). The Tax
Court rejected the IRS's contention that interest paid to Northern Indiana's
foreign subsidiary were subject to United States tax withholding. The IRS
appealed this decision (Northern Indiana Public Service Co. v. Commissioner, 105
T.C. No. 22) to the United States Court of Appeals for the 7th Circuit. Although
the Northern Indiana case could be beneficial to the Company's case, it is not
necessarily indicative of the ultimate result of the final settlement of the
Netherlands Antilles issue between the Company and the IRS.
Based on an evaluation of the IRS's contention, counsel has advised the Company
that, although the outcome in litigation can by no means be assured, the Company
has a very strong case and should prevail. Notwithstanding counsel's opinion and
the Tax Court's ruling in the Northern Indiana case, it is not possible at this
time to determine the final disposition of this issue, when the issues will be
resolved, or their final financial effect. A final disposition of this issue in
the Company's favor would have a material, positive effect on the Company's
Statement
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<PAGE>
of Operations and Balance Sheet.
With respect to the "fresh start" issue, on March 13, 1996, the IRS issued a
notice of deficiency to the Company, which asserts an increase in tax for the
year 1987. If the IRS is successful, the amount of the deficiency would be
material. The Company believes that it has meaningful defenses. On June 7, 1996,
the Company filed a petition with the United States Tax Court for
redetermination of the tax. See Part II - Item 1, Legal Proceedings, Withholding
Taxes (Netherlands Antilles) and Fresh Start for additional details. See Results
of Operations below, for a further discussion of taxes.
Management of the Company continually reviews the likelihood of liability and
associated costs of pending and threatened litigation. In the second quarter of
1996, the Company determined that there was a reduced probability of incurring
costs to defend and/or settle potential litigation with respect to Carteret, see
Part II - Item 1 - Legal Proceedings, Government Action. As a result, the
Company reduced its litigation and contingency reserves by $8,000,000 and
recorded such amount as other income during the second quarter and six month
periods ended June 30, 1996. In making such determination, management took into
consideration numerous factors, including the failure of the RTC to notify the
Company of any potential legal action prior to the expiration of a significant
statute of limitations deadline and the transfer of the investigative duties of
the RTC to the FDIC upon the expiration of the RTC's charter on December 31,
1995 pursuant to federal statute. Management also considered the July 1, 1996
decision by the U.S. Supreme Court in the consolidated cases of Winstar,
Glendale Federal and Statesman supervisory goodwill cases, which held the United
States liable for damages. In addition, $1,087,000 of payments for settlements
and legal fees were charged against the litigation and contingency reserves
during the first six months of 1996, reducing the litigation and contingency
reserves by a total of $9,087,000. At June 30, 1996, the litigation and
contingency reserves were $3,062,000. For a discussion of alleged tax
liabilities and lawsuits, see Part II - Item 1.
In addition to the litigation and contingency reserves, the Company has a
reserve for income taxes of $79,095,000 at June 30, 1996. For a further
discussion, see Part II - Item 1 - Legal Proceedings, Disputes with Internal
Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start.
Although the basis for the calculation of the litigation and contingency
reserves and the income tax reserves are regularly reviewed by the Company's
management and outside legal counsel, the assessment of these reserves includes
an exercise of judgment, and is a matter of opinion. Because of the nature of
the contingent and alleged liabilities and the inherent difficulty in predicting
the outcome of the litigation and proceedings, management is unable to predict
whether the Company's recorded liabilities will be adequate or its resources
sufficient to satisfy its ultimate obligations. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties. For a discussion of alleged tax liabilities and
lawsuits, see Part II - Item 1.
The cash needs of the Company for the first six months of 1996 were principally
satisfied by the receipt of a 1977 tax refund, the continued collections of the
receivable from Home Holdings, interest income received on investment securities
and cash equivalents, and investment management fees received. Management
believes that the Company's cash resources are sufficient to continue operations
for 1996. Because of the nature of the contingent and alleged liabilities
described in Part II - Item 1, and the inherent difficulty in predicting the
outcome of the litigation and governmental proceedings, management is unable to
predict whether the Company's recorded liabilities will be adequate or its
resources sufficient to satisfy its ultimate obligations.
For the six months ended June 30, 1996, cash of $1,179,000 was provided by
operating activities, including the receipt of a 1977 tax refund, collections of
the receivable from Home Holdings, the receipt of interest income partially
offset by payments charged against income tax reserves, litigation and
contingency reserves, and the payment of operating expenses. For the six months
ended June 30, 1995, cash of $4,077,000 was used for operating activities,
including payments charged against the litigation and contingency reserves and
the payment of operating expenses partially offset by interest income and
investment management fees received.
The Company continues to evaluate a number of business opportunities to acquire
operating subsidiaries, and is engaged in the management of its remaining assets
and liabilities, including the contingent and alleged tax and
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<PAGE>
litigation liabilities, as described in Part II - Item 1. Extensive discussions
and negotiations are ongoing with respect to certain of these matters. The
Company intends to aggressively contest all pending and threatened litigation
and proceedings, as well as pursuing all sources of contributions to
settlements. In order to continue on a long-term basis, the Company must both
resolve its contingent and alleged liabilities by prevailing upon or settling
these claims for less than the amounts claimed and generate profitable
operations by acquiring existing operations and/or by developing new operations.
There were no material commitments for capital expenditures as of June 30, 1996.
RESULTS OF OPERATIONS
Summarized financial information for the operations of the Company for the
second quarter and six months ended June 30 is as follows:
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SECOND QUARTER SIX MONTHS
(IN THOUSANDS) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
REVENUE:
Investment management fees $ 159 $ 122 $ 305 $ 236
OPERATING EXPENSES:
Compensation and benefits 465 471 950 964
Professional and outside services 162 191 286 342
Insurance 53 70 107 141
Occupancy 27 60 52 119
Other operating 72 34 131 69
- ------------------------------------------------------------------------------
779 826 1,526 1,635
- ------------------------------------------------------------------------------
Operating loss (620) (704) (1,221) (1,399)
- ------------------------------------------------------------------------------
Interest income, net 655 700 1,259 1,385
Realized loss on sale of
investment securities -
available for sale (182) - (182) -
Minority interest (9) (12) (18) (19)
Other income 20 - 20 54
Other income - litigation
and contingency reserves reversal 8,000 - 8,000 -
- ------------------------------------------------------------------------------
Income (loss) before income taxes 7,864 (16) 7,858 21
Income tax benefit (expense) (91) (67) 7,457 (123)
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ 7,773 $ (83) $15,315 $ (102)
================================================================================
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<PAGE>
At the current time, the Company's only source of operating revenue is
investment management fees generated from the Company's majority ownership
interest in Augustine. The Company's main source of non-operating revenue is
interest income earned on investment securities and cash equivalents. The
Company's management expects that operating cash needs for the remainder of 1996
will be met principally by the Company's current financial resources, the
receipt of non-operating revenue consisting of interest income earned on
investment securities and cash equivalents, and investment management fees.
The Company recorded net income of $7,773,000 and $15,315,000 in the second
quarter and six month periods ended June 30, 1996, respectively. In the same
1995 periods, the Company recorded a net loss of $83,000 and $102,000,
respectively. As further described in Financial Condition, above, the 1996
second quarter and six month periods include other income of $8,000,000,
resulting from a reduction in the litigation and contingency reserves, and the
1996 six month period includes an additional income tax benefit of $7,613,000.
Excluding these non-recurring items, the Company would have reported a net loss
of $227,000 and $298,000 in the second quarter and six month periods ended June
30, 1996, respectively.
The Company recorded pretax income of $7,864,000 and $7,858,000 in the second
quarter and six months ended June 30, 1996, respectively, compared to a pretax
loss of $16,000 and pretax income of $21,000 in the respective 1995 periods. The
1996 pretax income results include an $8,000,000 reduction in the litigation and
contingency reserves, as further described in Financial Condition, above. The
1996 second quarter and six month period also includes $18,000 and $36,000 of
net income attributable to the Company's ownership interest in Augustine,
compared to $9,000 and $26,000 in the same 1995 periods.
Operating expenses declined by $47,000 and $109,000 in the 1996 second quarter
and six month periods, respectively, compared with the second quarter and six
month periods of 1995. The reduced level of expenses in the 1996 periods is the
result of management's continuing efforts to reduce and control costs.
Compensation and benefits decreased to $465,000 and $950,000 in the 1996 second
quarter and six month periods, respectively, compared with $471,000 and $964,000
for the comparable 1995 periods. The decrease in the 1996 periods is principally
due to a net reduction in benefit expenses.
Professional and outside services decreased to $162,000 and $286,000 in the
second quarter and six month periods ended June 30, 1996, compared to $191,000
and $342,000 in the respective 1995 periods. This decrease was the result of an
overall decrease in expenses for legal and other professional and outside
services.
Insurance, occupancy and other operating expenses in the second quarter and six
month periods ended June 30, 1996, as compared with the same 1995 periods,
decreased slightly due to management's renegotiation of insurance programs and a
continuing reduction of expenses.
Interest income in the second quarter and six month periods of 1996 decreased to
$655,000 and $1,259,000, respectively, from $700,000 and $1,385,000 in the
respective 1995 periods. The decrease in the 1996 periods, compared to the 1995
periods, was attributable to a decreased yield on cash equivalents and
investment securities.
- 11 -
<PAGE>
During the first quarter of 1996, the Company received a 1977 income tax refund
of $7,613,000, which has been recognized as an income tax benefit in the
accompanying Statement of Operations, based on management's continuing review of
the overall tax liability position of the Company, as further described in
Financial Condition, above. In addition, included in the income tax benefit is a
state tax provision of $91,000 and $156,000 in the 1996 second quarter and six
month period, respectively. The income tax provision in the second quarter and
six month period of 1995 was primarily attributable to state taxes. The 1995
losses before income taxes did not result in a federal income tax benefit to the
consolidated statements of operations. Income taxes applicable to operating
income (loss) are generally determined by applying the estimated effective
annual income tax rates to pretax income (loss) for the year-to-date interim
period. Income taxes applicable to unusual or infrequently occurring items are
provided in the period in which such items occur.
STOCKHOLDER INQUIRIES
Stockholder inquiries, including requests for the following: (i) change of
address; (ii) replacement of lost stock certificates; (iii) Common Stock name
registration changes; (iv) Quarterly Reports on Form 10-Q; (v) Annual Reports on
Form 10-K; (vi) proxy material; and (vii) information regarding stockholdings,
should be directed to:
AMERICAN STOCK TRANSFER AND TRUST COMPANY
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Shareholder Services
(800) 937-5449 OR (718) 921-8200
- 12 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Item 8 - Note 11 in AmBase's Annual Report on Form
10-K for the year ended December 31, 1995 and in AmBase's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1996 are incorporated by
reference herein and the defined terms set forth below have the same meaning
ascribed to them in those Reports. There have been no material developments in
such legal proceedings, except as set forth below.
(a) The Company is a defendant in a number of lawsuits or proceedings,
including, but not limited to, the following:
Withholding Taxes (Netherlands Antilles). On April 17, 1996, the IRS filed a
Notice of Objection to the Company's motion for summary judgment. The United
States Tax Court requested, and the Company filed on July 13, 1996, a reply to
the IRS's Notice of Objection.
Fresh Start. On March 13, 1996, the IRS issued a notice of deficiency to the
Company on the "fresh start" issue which asserts an increase in tax for the year
1987. If the IRS is successful, the amount of the deficiency would be material.
The Company believes that it has meaningful defenses. On June 7, 1996, the
Company filed a petition with the United States Tax Court for redetermination of
the tax.
(b) The Company is not itself a defendant in, but may be affected by the outcome
of, the following proceeding:
Government Action. On December 4, 1992, the Office of Thrift Supervision placed
Carteret in receivership under the management of the RTC. The RTC at that time
commenced an investigation to determine whether it should pursue civil actions
seeking monetary damages from former officers and directors of Carteret and/or
from the Company and/or certain of its present and former officers and
directors. The Company was called on to indemnify certain former officers and
directors, including payment of their legal expenses in connection with this
matter. The RTC has not notified the Company of any potential legal action prior
to the expiration of a significant statute of limitations deadline. In addition,
the investigative duties of the RTC were transferred to the FDIC upon the
expiration of the RTC's charter on December 31, 1995 pursuant to federal
statute. These factors, along with the July 1, 1996 decision by the U.S. Supreme
Court in the consolidated cases of Winstar, Glendale Federal and Statesman
supervisory goodwill cases which held the United States liable for damages,
contribute to the Company's determination that the probability of further
proceedings by government agencies in this action are not likely.
The actions against the Company, including those identified in (a) and (b)
above, are in various stages. The allegations and claims are material and, if
successful, could result in substantial judgments against the Company. To the
extent the aggregate of any such judgments were to exceed the resources
available, these matters could have a material adverse effect on the Company's
financial condition and results of operations. Due to the nature of these
proceedings, the Company and its counsel are unable to express any opinion as to
their probable outcome.
- 13 -
<PAGE>
(c) 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, based upon the impact of
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") on its investment in Carteret. Similar so-called "supervisory
goodwill" litigation, commenced in recent years by other financial institutions
and/or their shareholders regarding a breach of contract issue, were heard in
various trial and appellate courts, including the U.S. Supreme Court. On January
19, 1996, the United States Supreme Court granted review in 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. On July 1, 1996, the
United States Supreme Court issued its 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. The Company's case is currently stayed
in the United States Court of Federal Claims.
- 14 -
<PAGE>
ITEM 2. CHANGES IN SECURITIES
Does not apply.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Does not apply.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 17, 1996, the following
proposals were voted upon:
The following persons were nominated to be elected as director, as set forth
below:
NUMBER OF SHARES
FOR WITHHELD
Richard A. Bianco 37,048,207 451,785
John B. Costello 36,591,717 908,275
There were no broker non-votes.
Stockholders approved the appointment of Price Waterhouse LLP as the independent
accountants of the Company for the year ending December 31, 1996. The shares
were voted as follows: 37,294,321 shares for and 113,003 against, with 92,668
shares abstaining. There were no broker non-votes.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K
None
- 15 -
<PAGE>
SIGNATURES
Pursuant to the requirements 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
Date: August 6, 1996 BY JOHN P. FERRARA
Vice President, Chief Financial Officer,
Treasurer and Controller
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
- 16 -
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,810
<SECURITIES> 48,138
<RECEIVABLES> 13,582<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,017
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 447
<OTHER-SE> (23,261)
<TOTAL-LIABILITY-AND-EQUITY> 68,017
<SALES> 305
<TOTAL-REVENUES> 305
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,858<F2>
<INCOME-TAX> 7,457<F3>
<INCOME-CONTINUING> 15,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,315
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<FN>
<F1> Receivables include investment management fees receivable of $162 and
a receivable from Home Holdings, Inc. of $13,420.
<F2> Income-pretax includes other income of $8,000, resulting from a
reduction in the litigation & contingency reserves.
<F3> Income-tax includes a 1977 income tax refund of $7,613, which has been
recognized as an income tax benefit in the Statement of Operations.
</FN>
</TABLE>
