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 September 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 September 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
SEPTEMBER 30, 1996
CROSS REFERENCE SHEET FOR
PARTS I AND II PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
* Not Applicable.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
================================================================================
(in thousands, Third Quarter Nine Months
except per share data) 1996 1995 1996 1995
================================================================================
OPERATING EXPENSES:
Compensation and benefits $ 533 $ 397 $ 1,343 $ 1,247
Professional and outside services 84 175 352 505
Insurance 36 54 142 194
Occupancy 27 34 68 143
Other operating 46 40 124 82
- ------------------------------------------------------------------------------
726 700 2,029 2,171
- ------------------------------------------------------------------------------
Operating loss (726) (700) (2,029) (2,171)
- ------------------------------------------------------------------------------
Interest income, net 690 779 1,948 2,167
Realized loss on sale of investment
securities - available for sale - - (182) -
Other income - 90 20 144
Other income - litigation and
contingency reserves reversal - 1,750 8,000 1,750
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations before
income taxes (36) 1,919 7,757 1,890
Income tax benefit (expense) (214) (1,849) 7,272 (1,948)
- ------------------------------------------------------------------------------
Income (loss) from
continuing operations (250) 70 15,029 (58)
Income from discontinued
investment management
operations, net of income
taxes 23 17 59 43
- ------------------------------------------------------------------------------
Net income (loss) $ (227) $ 87 $ 15,088 $ (15)
==============================================================================
Per share data:
Income (loss) from
continuing operations $ - $ - $ 0.34 $ -
Income from discontinued
investment management
operations, net of income taxes - - - -
- ------------------------------------------------------------------------------
Net income (loss) $ - $ - $ 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.
- 1 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
September 30, December 31,
1996 1995
(in thousands) (unaudited)
================================================================================
ASSETS
Cash and cash equivalents (includes $533
and $550 of restricted cash) $ 5,534 $ 7,752
Investment securities:
Held to maturity (market value $47,644 and $40,086) 47,676 40,055
Available for sale, carried at fair value (cost $213) - 69
- --------------------------------------------------------------------------------
Total investment securities 47,676 40,124
- --------------------------------------------------------------------------------
Receivable from Home Holdings, Inc. 13,234 17,183
Net assets of discontinued investment
management operations 464 -
Investment management fees receivable - 146
Other assets 257 472
- ------------------------------------------------------------------------------
Total assets $ 67,165 $ 65,677
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 278 $ 690
Supplemental retirement plan 4,698 4,798
Postretirement welfare benefits 1,546 1,633
Other liabilities 1,464 3,516
Litigation and contingency reserves 3,017 12,149
Income tax reserves 79,091 81,082
- ------------------------------------------------------------------------------
Total liabilities 90,094 103,868
- ------------------------------------------------------------------------------
Minority interest 112 82
- ------------------------------------------------------------------------------
Commitments and contingencies - -
- ------------------------------------------------------------------------------
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 (570,553) (585,641)
Treasury stock (647) (647)
- ------------------------------------------------------------------------------
Total stockholders' equity (23,041) (38,273)
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 67,165 $ 65,677
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30
==============================================================================
(in thousands) 1996 1995
==============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 15,029 $ (58)
Adjustments to reconcile income (loss)
from continuing operations to net cash
used by continuing operations:
Other assets (242) (36)
Accounts payable and accrued liabilities (458) (362)
Realized loss on sale of investment securities
- available for sale 182 -
Litigation and contingency reserves reversal (8,000) (1,750)
Litigation and contingency reserves uses (1,132) (2,993)
Income tax reserves, net (1,991) 3,494
Other, net (3,813) (2,761)
- ------------------------------------------------------------------------------
Net cash used by operating activities
of continuing operations (425) (4,466)
- ------------------------------------------------------------------------------
Cash provided by discontinued investment
management operations 61 45
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities - held to maturity 53,105 77,425
Purchases of investment securities - held to maturity (58,939) (73,859)
Proceeds from sale of investment securities
- available for sale 31 -
Proceeds from Home Holdings, Inc. receivable 3,949 633
Other, net - (49)
- ------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,854) 4,150
- ------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,218) (271)
Cash and cash equivalents at beginning of period 7,752 9,038
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5,534 $ 8,767
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
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.
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.
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.
- 4 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1996 second quarter. In making such determination,
management took into consideration numerous factors, including the failure of
the Resolution Trust Corporation ("RTC") to notify the Company of any potential
legal action prior to the expiration of a significant statute of limitations
deadline and the transfer of the investigative duties of the RTC to the Federal
Deposit Insurance Corporation ("FDIC") upon the expiration of the RTC's charter
on December 31, 1995, pursuant to federal statute. Management also considered
the July 1, 1996 decision by the U.S. Supreme Court in the consolidated cases of
Winstar, Glendale Federal and Statesman supervisory goodwill cases, which held
the United States liable for damages. At September 30, 1996, the litigation and
contingency reserves were $3,017,000. 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 $79,091,000 at September 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.
During the third quarter of 1995, the Company recorded as other income a
$1,750,000 net reduction in the litigation and contingency reserves. This amount
consisted of a $3,600,000 reduction resulting from the settlement of certain
litigation at amounts less than claimed and previously anticipated, offset by a
$1,850,000 increase due to the continuing review of the costs associated with
litigation and proceedings pending against the Company, based upon progress to
date. At September 30, 1995, the litigation and contingency reserves were
$17,432,000.
NOTE 3 - DISCONTINUED INVESTMENT MANAGEMENT OPERATIONS
On September 20, 1996, the Company agreed to sell its entire interest in
Augustine Asset Management, Inc. ("Augustine") to Augustine, for $500,000 in
cash. Augustine is controlled by Mr. Ronald J. Burns. Mr. Burns previously
served as a director of the Company from January 1991 until his resignation from
the Company's Board on December 28, 1995. The Company acquired a 51% ownership
interest in Augustine on November 10, 1993 for $200,000, and the Company's
ownership percentage in Augustine later increased to 66% due to Augustine's
repurchase of outstanding shares from other shareholders.
Accordingly as of September 30, 1996, the operations of Augustine have been
designated as discontinued operations, and the consolidated statements of
operations for the periods presented herein have been retroactively reclassified
to report the income from discontinued operations separately from the results of
continuing operations by excluding the operating revenues and expenses of
discontinued operations from the respective statement captions. The amount of
income taxes allocated to discontinued operations reflects the incremental
effect on income taxes that resulted from such operations.
See Note 8 to the Company's consolidated financial statements for further
information.
- 5 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized information relating to income from discontinued operations for the
third quarter and nine months ended September 30 is as follows:
==============================================================================
Third Quarter Nine Months
(in thousands) 1996 1995 1996 1995
==============================================================================
Investment management
fee revenue $ 174 $ 132 $ 479 $ 368
Operating expenses (116) (86) (339) (250)
Interest income 1 - 2 (3)
Minority interest (12) (12) (30) (31)
- ------------------------------------------------------------------------------
Income from discontinued
operations before taxes 47 34 112 84
Income tax expense (24) (17) (53) (41)
- ------------------------------------------------------------------------------
Income from discontinued
operations through
September 30, 1996 $ 23 $ 17 $ 59 $ 43
==============================================================================
Investment management fee revenue includes $49,000 and $142,000 for the third
quarter and nine months ended September 30, 1996, respectively, and $44,000 and
$118,000, in the comparable 1995 periods, from related parties.
The net assets of discontinued operations are presented in the consolidated
balance sheet at September 30, 1996, as a single amount as follows:
==============================================================================
(in thousands)
==============================================================================
Cash $ 99
Investment management fees receivable 177
Goodwill 217
Other assets 32
Other liabilities (61)
- ------------------------------------------------------------------------------
Net assets of discontinued operations $ 464
==============================================================================
The outside investors' interest in Augustine, $112,000 at September 30, 1996, is
reflected as minority interest in the consolidated balance sheet.
Investment management fees receivable includes $48,000 from related parties.
NOTE 4 - 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 September 30, 1996 is $533,000 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.
- 6 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - 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 September 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 September 30 and December 31, consist of the
following:
================================================================================
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 $47,676 $47,676 $47,644 $40,055 $40,055 $40,086
Available for Sale:
Equity Securities - - - 69 213 69
- --------------------------------------------------------------------------------
$47,676 $47,676 $47,644 $40,124 $40,268 $40,155
================================================================================
The gross unrealized gains and losses on investment securities, at September 30
and December 31, consist of the following:
================================================================================
(in thousands) 1996 1995
================================================================================
Held to Maturity:
Gross unrealized gains (losses) $ (32) $ 31
================================================================================
Available for Sale:
Gross unrealized losses $ - $ 144
================================================================================
During the nine month period ended September 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 third quarter of
1996 and the third quarter and nine month periods of 1995.
- 7 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Additional information regarding cash flow for the nine months ended September
30 is as follows:
================================================================================
(in thousands) 1996 1995
================================================================================
Cash received (paid) during the period:
Income taxes refunded (paid), net $ 5,299 $ (134)
================================================================================
Income taxes refunded (paid) in 1996 include a 1977 tax refund of $7,613,000 and
$1,991,000 of payments to the Internal Revenue Service ("IRS"), principally for
the 1985 through 1991 tax years.
NOTE 7 - 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 $28
million and $30 million, as of September 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 nine months of 1996, $1,991,000 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 8 - SUBSEQUENT EVENT
On October 4, 1996, the Company completed the sale of Augustine, resulting in a
pretax gain, to be recognized in the fourth quarter of 1996, of approximately
$148,000.
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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. On
September 20, 1996, the Company agreed to sell its entire interest in Augustine.
Accordingly, the operations of Augustine have been reclassified as discontinued
investment management operations in the accompanying consolidated financial
statements.
FINANCIAL CONDITION
The Company's assets at September 30, 1996 aggregated $67,165,000, consisting
principally of cash and cash equivalents of $5,534,000, investment securities of
$47,676,000 and a $13,234,000 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 nine months of 1996, proceeds of $3,949,000 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 September 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 $23,041,000.
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. 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 3, 1996, a reply to the IRS's Notice of
Objection. On September 19, 1996, the Court denied the Company's motion for
summary judgment without prejudice. Based on the Court's examination of the
record and the status of the discovery process, the Court concluded that summary
adjudication at this time was inappropriate. The Court directed the parties to
engage in full and complete discovery as expeditiously as possible. The Court
has set a trial date for March 17, 1997. 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.
- 9 -
<PAGE>
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
Consolidated Statement 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 1996 second quarter. 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, $1,132,000 of payments for settlements and legal fees were
charged against the litigation and contingency reserves during the first nine
months of 1996, reducing the litigation and contingency reserves by a total of
$9,132,000. At September 30, 1996, the litigation and contingency reserves were
$3,017,000. 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 $79,091,000 at September 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.
During the third quarter of 1995, the Company recorded as other income a
$1,750,000 net reduction in the litigation and contingency reserves. This amount
consisted of a $3,600,000 reduction resulting from the settlement of certain
litigation at amounts less than claimed and previously anticipated, offset by a
$1,850,000 increase due to the continuing review of the costs associated with
litigation and proceedings pending against the Company, based upon progress to
date. In addition, in the third quarter and nine month periods ended September
30, 1995, the Company recorded as additional income tax expense a $1,800,000
increase in the income tax reserves. The increase in the income tax reserves was
the result of the continuing review of the income tax reserves, including
additional reserves for amounts considered unrealizable.
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<PAGE>
In June 1995, the Company received, with respect to 1990 and 1991, $1,690,000
from The Home in connection with a tax sharing agreement between the Company and
The Home. This amount did not reduce the receivable from Home Holdings. Since
the $1,690,000 had previously been considered in the calculation of income tax
reserves, the receipt thereof was recorded as an increase to the income tax
reserves account at September 30, 1995.
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 nine months of 1996 were principally
satisfied by the receipt of a 1977 tax refund, the continued collections of the
receivable from Home Holdings and interest income received on investment
securities and cash equivalents. 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 nine months ended September 30, 1996, cash of $425,000 was used by
operating activities of continuing operations, including the payment of other
liabilities, payments charged against income tax reserves and litigation and
contingency reserves, and the payment of operating expenses, partially offset by
the receipt of a 1977 tax refund, and the receipt of interest income. For the
nine months ended September 30, 1995, cash of $4,466,000 was used by continuing
operations, including payments charged against the litigation and contingency
reserves and the payment of operating expenses partially offset by interest
income, and the receipt of $1,690,000, with respect to 1990 and 1991, from The
Home, in connection with a tax sharing agreement between the Company and The
Home.
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. 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 September 30,
1996.
- 11 -
<PAGE>
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
Summarized financial information for the continuing operations of the Company
for the third quarter and nine months ended September 30 is as follows:
==============================================================================
Third Quarter Nine Months
(in thousands) 1996 1995 1996 1995
==============================================================================
Operating expenses:
Compensation and benefits $ 533 $ 397 $ 1,343 $ 1,247
Professional and outside services 84 175 352 505
Insurance 36 54 142 194
Occupancy 27 34 68 143
Other operating 46 40 124 82
- ------------------------------------------------------------------------------
726 700 2,029 2,171
- ------------------------------------------------------------------------------
Operating loss (726) (700) (2,029) (2,171)
- ------------------------------------------------------------------------------
Interest income, net 690 779 1,948 2,167
Realized loss on sale of
investment securities
- available for sale - - (182) -
Other income - 90 20 144
Other income - litigation
and contingency reserves reversal - 1,750 8,000 1,750
- ------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes (36) 1,919 7,757 1,890
Income tax benefit (expense) (214) (1,849) 7,272 (1,948)
- ------------------------------------------------------------------------------
Income (loss) from
continuing operations $ (250) $ 70 $15,029 $ (58)
==============================================================================
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 and the receipt of non-operating
revenue consisting of interest income earned on investment securities and cash
equivalents.
The Company recorded a loss from continuing operations of $250,000 in the third
quarter ended September 30, 1996, and income from continuing operations of
$15,029,000 in the nine month period ended September 30, 1996. In the same 1995
periods, the Company recorded income from continuing operations of $70,000 and a
loss from continuing operations of $58,000, respectively. As further described
in Financial Condition, above, the 1996 nine month period includes other income
of $8,000,000, resulting from a reduction in the litigation and contingency
reserves, and an additional income tax benefit of $7,613,000. Excluding these
non-recurring items, the Company would have reported a loss from continuing
operations of $584,000 for the nine month period ended September 30, 1996.
The Company recorded a loss from continuing operations before income taxes of
$36,000 in the third quarter ended September 30, 1996. For the nine month period
ended September 30, 1996, the Company recorded income from continuing operations
before income taxes of $7,757,000, which includes an $8,000,000 reduction in the
litigation and contingency reserves, as further described in Financial
Condition, above.
In the third quarter and nine month periods ended September 30, 1995, the
Company recorded income from continuing operations before income taxes of
$1,919,000 and $1,890,000, respectively, which includes a $1,750,000 net
reduction in litigation and contingency reserves, as further described in
Financial Condition, above.
Operating expenses increased by $26,000 in the 1996 third quarter, and declined
by $142,000 in the nine month period ended September 30, 1996, compared with the
third quarter and nine month periods of 1995. The reduced level of expenses in
the 1996 nine month period is the result of management's continuing efforts to
reduce and control costs.
- 12 -
<PAGE>
Compensation and benefits increased to $533,000 and $1,343,000 in the 1996 third
quarter and nine month periods, respectively, compared with $397,000 and
$1,247,000 for the comparable 1995 periods. The increase in the 1996 periods is
due to the hiring by the Company of an employee who previously provided services
as an independent consultant, offset, to some extent, by a net reduction in
benefit expenses.
Professional and outside services decreased to $84,000 and $352,000 in the third
quarter and nine month periods ended September 30, 1996, compared to $175,000
and $505,000 in the respective 1995 periods. This decrease was the result of an
overall decrease in expenses for legal and other professional and outside
services. The decrease in professional and outside services of $153,000, or 30%,
in the nine month period of 1996, compared with the same 1995 period, more than
offset the increase of $96,000, or 8%, in compensation and benefits in the same
1996 nine month period.
Insurance, occupancy and other operating expenses in the third quarter and nine
month periods ended September 30, 1996, as compared with the same 1995 periods,
decreased due to management's renegotiation of insurance programs and a
continuing reduction of expenses.
Interest income in the third quarter and nine month periods of 1996 decreased to
$690,000 and $1,948,000, respectively, from $779,000 and $2,167,000 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.
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 Statement of Operations, based on management's continuing review of
the overall tax liability position of the Company, as further described in
Financial Condition, above. In addition, included in income tax benefit
(expense) is a federal and state tax provision of $214,000 and $341,000 in the
third quarter and nine month period ended September 30, 1996, respectively. In
the third quarter and nine month periods ended September 30, 1995, the Company
recorded as additional income tax expense a $1,800,000 increase in the income
tax reserves. The increase in the income tax reserves in the 1995 periods was
the result of the continuing review of the income tax reserves including
additional reserves for amounts considered unrealizable. In addition, included
in income tax expense is a state tax provision of $49,000 and $148,000 in the
1995 third quarter and nine month period, respectively. 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.
- 13 -
<PAGE>
DISCONTINUED INVESTMENT MANAGEMENT OPERATIONS
Income from discontinued operations for the third quarter and nine month periods
ended September 30, 1996 was $23,000 and $59,000, respectively, which reflects
the unaudited results of Augustine's operations. For the third quarter and nine
month periods ended September 30, 1995, income from discontinued investment
management operations was $17,000 and $43,000, respectively. A gain from the
sale of the Company's entire interest in Augustine, is expected to be recognized
in the fourth quarter of 1996. See Item 1 - Notes 3 and 8 to the Company's
consolidated financial statements for a further discussion.
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
- 14 -
<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 periods ended March 31, 1996 and June 30, 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:
Angel et al. v. AmBase Corp., et al. In the Angel case, the Company has entered
into negotiations to settle the case with the plaintiffs. Further proceedings in
this matter have been postponed until the completion of the negotiations.
Rolo and Tenerelli v. City Investing Company Liquidating Trust et al. The
parties have completed briefing and argument and are awaiting a decision by the
Court of Appeals on the plaintiffs' appeal of the dismissal of the case by the
District Court.
Sovereign Metal. The Company moved for summary judgment and the dismissal of
plaintiffs' claims. The case is currently scheduled for a pretrial conference on
November 18, 1996.
Disputes with Internal Revenue Service.
Withholding Taxes (Netherlands Antilles). The Company filed a motion for
summary judgment in its favor on February 13, 1996. On April 17, 1996, the
IRS filed a Notice of Objection to the Company's motion for summary judgment.
The United States Tax Court requested, and the Company filed on July 3, 1996,
a reply to the IRS's Notice of Objection. On September 19, 1996, the Court
denied the Company's motion for summary judgment without prejudice. Based on
the Court's examination of the record and the status of the discovery
process, the Court concluded that summary adjudication at this time was
inappropriate. The Court directed the parties to engage in full and complete
discovery as expeditiously as possible. The Court has set a trial date for
March 17, 1997.
The actions against the Company, including those identified in (a) 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.
(b)Goodwill Litigation:
During the third quarter of 1993, the Company filed a claim against the United
States, in the United States Court of Federal Claims (the "Court of Federal
Claims"), based upon the impact of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") on 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 pending in the Court of Federal Claims. On August
26, 1996, the stay order expired in all "Winstar-related" cases. 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 approximately
120 other so-called "Winstar-related" cases. At present, no trial date has been
set in the Company's action or any of the other "Winstar- related" cases, other
than the Glenfed and Statesman cases.
- 15 -
<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
Does not apply.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K
None
- 16 -
<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
BY JOHN P. FERRARA
Vice President, Chief Financial Officer,
Treasurer and Controller
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: October 18, 1996
- 17 -
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,534
<SECURITIES> 47,676
<RECEIVABLES> 13,234
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,165
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 447
<OTHER-SE> (23,488)
<TOTAL-LIABILITY-AND-EQUITY> 67,165
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,757<F1>
<INCOME-TAX> 7,272<F2>
<INCOME-CONTINUING> 15,029
<DISCONTINUED> 59
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,088
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
<FN>
<F1> Income-pretax includes other income of $8,000, resulting from a reduction
in the litigation & contingency reserves. <F2> 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>
