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, 1997
[ ] 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, 1997 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, 1997
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.................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................11
Item 2. Changes in Securities..............................................12
Item 3. Defaults Upon Senior Securities....................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
Item 5. Other Information..................................................12
Item 6. Exhibits and Reports on Form 8-K...................................12
<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)
==============================================================================
Third Quarter Nine Months
(in thousands, except per share data) 1997 1996 1997 1996
==============================================================================
OPERATING EXPENSES:
Compensation and benefits $ 472 $ 533 $ 1,464 $ 1,343
Professional and outside services 73 84 265 352
Insurance 22 36 93 142
Occupancy 22 27 65 68
Other operating 29 46 110 124
- ------------------------------------------------------------------------------
618 726 1,997 2,029
- ------------------------------------------------------------------------------
Operating loss (618) (726) (1,997) (2,029)
- ------------------------------------------------------------------------------
Interest income 656 690 2,008 1,948
Other income 55 - 55 20
Other income - litigation and
contingency reserves reversal - - - 8,000
Realized loss on sale of investment
securities - available for sale - - - (182)
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 93 (36) 66 7,757
Income tax benefit (expense) (73) (214) 262 7,272
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations 20 (250) 328 15,029
Income from discontinued investment
management operations,
net of income taxes - 23 - 59
- ------------------------------------------------------------------------------
Net income (loss) $ 20 $ (227) $ 328 $15,088
==============================================================================
PER SHARE DATA:
Income (loss) from
continuing operations $ - $ - $ 0.01 $ 0.34
Income from discontinued
investment management
operations, net of
income taxes - - - -
- ------------------------------------------------------------------------------
Net income (loss) $ - $ - $ 0.01 $ 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,
1997 1996
(in thousands) (unaudited)
==============================================================================
ASSETS:
Cash and cash equivalents
(includes $65 in 1996 of restricted cash) $ 7,37 $ 5,591
Investment securities - held to maturity
(market value $44,266 and $47,261) 44,252 47,259
Receivable from Home Holdings, Inc. 12,818 13,186
Other assets 211 193
- ------------------------------------------------------------------------------
Total assets $ 64,653 $ 66,229
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 222 $ 1,428
Supplemental retirement plan 4,820 4,724
Postretirement welfare benefits 1,435 1,527
Other liabilities 315 605
Litigation and contingency reserves 2,542 2,954
Income tax reserves 79,088 79,088
- ------------------------------------------------------------------------------
Total liabilities 88,422 90,326
- ------------------------------------------------------------------------------
Commitments and contingencies - -
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Accumulated deficit (571,281) (571,609)
Treasury stock (647) (647)
- ------------------------------------------------------------------------------
Total stockholders' equity (23,769) (24,097)
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 64,653 $ 66,229
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
==============================================================================
(in thousands) 1997 1996
==============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 328 $ 15,029
Adjustments to reconcile income from continuing
operations to net cash used by
continuing operations:
Other assets 6 (242)
Accounts payable and accrued liabilities (1,206) (458)
Litigation and contingency reserves uses (412) (1,132)
Litigation and contingency reserves reversal - (8,000)
Income tax reserves, net - (9,604)
Income tax refund - 1977 - 7,613
Other liabilities (290) (2,053)
Interest income - investment securities (1,832) (1,787)
Realized loss on sale of investment securities
- available for sale - 182
Other, net 5 27
- ------------------------------------------------------------------------------
Net cash used by operating activities of
continuing operations (3,401) (425)
- ------------------------------------------------------------------------------
Net cash provided by discontinued investment
management operations - 61
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESETING ACTIVITIES:
Maturities of investment securities - held to maturity 34,550 53,105
Purchases of investment securities - held to maturity (29,711) (58,939)
Proceeds from Home Holdings, Inc. receivable 368 3,949
Proceeds from sales of investment securities
-available for sale - 31
Other, net (25) -
- ------------------------------------------------------------------------------
Net cash provided (used) by investing activities 5,182 (1,854)
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,781 (2,218)
Cash and cash equivalents at beginning of period 5,591 7,752
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,372 $ 5,534
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<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 1996 consolidated financial statements
to conform with the 1997 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Substantial contingent and
alleged liabilities exist against the Company through certain lawsuits and
governmental proceedings, see Part II - Item I. These factors raise substantial
doubt about the Company's ability 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. In order to continue on a long-term basis, the Company must both
resolve its contingent and alleged liabilities by prevailing upon or settling
these claims for less than the amounts claimed and generate profits by acquiring
existing operations and/or by developing new operations. The Company continues
to evaluate a number of possible acquisitions, and is engaged in the management
of its remaining assets and liabilities, including the contingent and alleged
tax and litigation liabilities, as described in 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, 1996.
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 1997 will be met principally by
the Company's current financial resources, and 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 governmental proceedings, the ultimate outcome of which
could have a material adverse effect on its financial condition and results of
operations. Because of the nature of the contingent and alleged tax and
litigation 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
reserves will be adequate or its resources sufficient to satisfy its ultimate
obligations. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Although the basis for the calculation of the litigation and contingency
reserves and income tax reserves are regularly reviewed by the Company's
management and outside legal counsel, the assessment of these reserves includes
an exercise of judgment and is a matter of opinion. At September 30, 1997, the
litigation and contingency reserves were $2,542,000. For a discussion of alleged
tax liabilities, lawsuits and governmental proceedings, see Part II - Item 1.
In addition to the litigation and contingency reserves, the Company has a
reserve for income taxes of $79,088,000 at September 30, 1997. 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 Supervisory
Goodwill Litigation.
During the second quarter of 1996, the Company reduced its litigation and
contingencies reserves by $8,000,000 and recorded such amount as other income in
the second quarter ended June 30, 1996. This reduction was recorded based upon
the Company's determination, due to a number of factors, that there was a
reduced probability of incurring costs to defend and/or settle potential
litigation with respect to Carteret Savings Bank, F.A. ("Carteret"), see the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, Item
3, for a further discussion.
- 4 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3 - Discontinued Investment Management Operations
On October 4, 1996, the Company sold its entire interest in Augustine Asset
Management, Inc. ("Augustine") to Augustine, for $500,000 in cash. Accordingly,
as of September 30, 1996, the operations of Augustine were designated as
discontinued operations, and the consolidated statements of operations for the
periods presented herein were 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.
Summarized unaudited information relating to income from Augustine's
discontinued operations for the third quarter and nine months ended September
30, 1996 is as follows:
==============================================================================
Third Nine
(in thousands) Quarter Months
==============================================================================
Investment management fee revenue $ 174 $ 479
Operating expenses (116) (339)
Interest income 1 2
Minority interest (12) (30)
- ------------------------------------------------------------------------------
Income from discontinued operations before taxes 47 112
Income tax expense (24) (53)
- ------------------------------------------------------------------------------
Income from discontinued operations
through September 30, 1996 $ 23 $ 59
==============================================================================
Investment management fee revenue includes $49,000 and $142,000 for the third
quarter and nine months ended September 30, 1996, respectively, 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 December 31, 1996 is $65,000 of funds held in escrow, which
were applied to the satisfaction of certain liabilities and were classified as
restricted.
NOTE 5 - INVESTMENT SECURITIES
Investment securities - held to maturity consist of U.S. Treasury Bills with
original maturities of one year or less and which are carried at amortized cost
based upon the Company's intent and ability to hold these investments to
maturity.
Investment securities - held to maturity, at September 30 and December 31,
consist of the following:
==============================================================================
1997 1996
---------------------------- ----------------------------
Cost or Cost or
Carrying Amortized Fair Carrying Amortized Fair
(in thousands) Value Cost Value Value Cost Value
==============================================================================
U.S. Treasury Bills $44,252 $44,252 $44,266 $47,259 $47,259 $47,261
==============================================================================
The gross unrealized gains on investment securities, at September 30 and
December 31, consist of the following:
==============================================================================
(in thousands) 1997 1996
==============================================================================
Held to Maturity:
Gross unrealized gains $ 14 $ 2
==============================================================================
- 5 -
<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 third quarter ended September
30 is as follows:
==============================================================================
(in thousands) 1997 1996
==============================================================================
Cash received (paid) during the period:
Income taxes refunded (paid), net $ 265 $5,299
==============================================================================
Income taxes refunded, net in 1997, include $475,000 of taxes refunded as a
result of an overpayment to the Internal Revenue Service ("IRS") for 1988
through 1991 tax years. Income taxes refunded, net in 1996, include a 1977 tax
refund of $7,613,000 and $1,991,000 of payments to the 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 $33
million, as of September 30, 1997 and December 31, 1996, arising primarily from
net operating loss ("NOL") carryforwards, the excess of book over tax reserves
and alternative minimum tax credits (not including the anticipated tax effects
of approximately $170 million of NOL's expected to be generated from the
Company's tax basis in Carteret Savings Bank, F.A. and subsidiaries
("Carteret"), resulting from the election decision, as more fully described
below). 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.
As a result of the OTS's December 4, 1992 placement of Carteret in receivership,
under the management of the Resolution Trust Corporation ("RTC")/Federal Deposit
Insurance Corporation ("FDIC"), and proposed Treasury Reg. ss.1.597-4(g), the
Company had previously filed its 1992 through 1995 federal income tax returns
with Carteret disaffiliated from the Company's consolidated federal income tax
return. Based upon the impact of Treasury Reg. ss.1.597-4(g), which was issued
in final form on December 20, 1995, a continuing review of the Company's tax
basis in Carteret, and the impact of prior year tax return adjustments on the
Company's 1992 federal income tax return as filed, the Company decided not to
make an election pursuant to final Treasury Reg. ss.1.597-4(g) to disaffiliate
Carteret from the Company's consolidated federal income tax return effective as
of December 4, 1992 (the "election decision").
The Company has made numerous requests to the RTC/FDIC for tax information
pertaining to Carteret and the resulting successor institution, Carteret Federal
Savings Bank ("Carteret FSB"), but this information has not yet been received.
Based on the Company not making the election decision, as described above, and
upon receipt of the requested information from the RTC/FDIC, the Company will
amend its 1992 through 1996 consolidated federal income tax returns to include
the federal income tax effects of Carteret and Carteret FSB. Based on the
information currently available, the Company does not believe a material
increase in the Company's tax liabilities will result.
The Company anticipates that, as a result of filing consolidated with Carteret
FSB, approximately $170 million of tax NOL carryforwards will be generated from
the Company's tax basis in Carteret/Carteret FSB as tax losses are incurred by
Carteret FSB. The NOL carryforwards generated from the Company's tax basis in
Carteret/Carteret FSB would expire no earlier than 2007, and would be available
to offset future taxable income, in addition to the $29 million of NOL
carryforwards as noted in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, Item 8 Note 10.
- 6 -
<PAGE>
During the first quarter of 1997, the Company received a $475,000 income tax
refund, as a result of an overpayment to the IRS for the 1988 through 1991 tax
years. This amount was recognized as an income tax benefit in the first quarter
ended March 31, 1997. During the first quarter of 1996, the Company received a
1977 income tax refund of $7,613,000, which was recognized as an income tax
benefit, based on management's 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.
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 consolidated
financial statements and related notes, which are contained in Item 1, herein.
On October 4, 1996, the Company sold its entire interest in Augustine.
Accordingly, the operations of Augustine have been reclassified as discontinued
investment management operations in the accompanying consolidated financial
statements.
FINANCIAL CONDITION
The Company's assets at September 30, 1997 aggregated $64,653,000, consisting
principally of cash and cash equivalents of $7,372,000, investment securities of
$44,252,000 and a $12,818,000 receivable from Home Holdings, Inc. ("Home
Holdings"). During the first nine months of 1997, proceeds of $368,000 from the
Home Holdings receivable were collected. The Company considers the receivable
from Home Holdings to be fully collectible; accordingly, no allowance for
doubtful accounts is provided. The Company will continue to monitor Home
Holdings' status. 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, 1996, Item 8-Note 4. At September 30, 1997, the Company's
liabilities, including reserves for contingent and alleged liabilities, as
further described in Part II - Item 1, exceeded total recorded assets by
$23,769,000.
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. The Company also contractually assumed certain tax
liabilities of The Home and its subsidiaries from September 1985 through 1989.
For all periods through 1992, the IRS and the Company do not agree with respect
to only two issues, withholding taxes in connection with a Netherlands Antilles
finance subsidiary of City, and "Fresh Start" (an insurance industry issue).
During 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
was recognized as an income tax benefit in the first quarter ended March 31,
1996, based on management's review of the overall tax liability position of the
Company.
During the first nine months of 1996, in connection with the completion by the
IRS of the Company's 1985 to 1991 federal income tax audits (excluding Fresh
Start), the Company made payments to the IRS totaling $1,991,000. These amounts
were previously reserved for and recorded to the income tax reserves account.
During the first quarter of 1997, $475,000 of income taxes were refunded as a
result of an overpayment to the IRS for the 1988 through 1991 tax years. This
amount was recorded as an income tax benefit in the first quarter of 1997. The
federal income tax adjustments from the 1985 to 1991 audits (excluding Fresh
Start) did not result in additional payments of state or local income taxes. New
York State has completed their examination of the Company's income tax returns
through 1989, and is currently reviewing the Company's income tax returns for
tax years 1990 to 1992. The IRS has recently completed its review of the
Company's federal income tax return for 1992 with no adjustments. The Company's
federal income tax returns for years subsequent to 1992 have not been reviewed
by the IRS.
With respect to the Withholding Taxes issue, in connection with a Netherlands
Antilles finance subsidiary of City, on May 11, 1995, the IRS issued a Notice of
Deficiency for withholding taxes on interest payments for the years 1979 through
1985. In the Notice of Deficiency, the IRS contends that City's wholly owned
Netherlands Antilles finance subsidiary should be disregarded for tax purposes.
The Company vigorously contested the IRS's position in accordance with the IRS's
internal appeals procedures. In January 1992, the National Office of the IRS
issued technical advice supporting the auditing agent's position. In October
1992, the Company appealed this technical advice to the National Office. The
National Office advised the Company that it expected to issue technical advice
supporting the auditing agent's position, whereupon the Company advised the IRS
that it was withdrawing its technical advice request.
On June 30, 1995, the Company filed a petition in the United States Tax Court
("Tax Court") contesting the Notice of Deficiency. The IRS filed its answer on
August 23, 1995. The Company filed a motion for summary judgment in its favor on
February 13, 1996. On April 17, 1996, the IRS filed a Notice of Objection to the
Company's motion for summary judgment. The Tax Court requested, and the Company
filed, on July 3, 1996, a reply to the IRS's Notice of Objection. On September
19, 1996, the Court denied the Company's motion for summary judgment without
prejudice. Based on the Tax Court's examination of the record and the status of
the discovery process, the Tax Court concluded that summary
- 7 -
<PAGE>
adjudication at this time was inappropriate. The Tax Court directed the parties
to engage in full and complete discovery as expeditiously as possible. A trial
was held in this case on March 24, 1997, after which the Judge asked the IRS and
the Company to submit post-trial briefs, which have subsequently been submitted
to the Tax Court. If the IRS were to prevail on this issue, the Company would be
liable for taxes and interest in excess of the Company's financial resources.
In a case dealing with a similar withholding tax issue, the Tax Court ruled in
favor of the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana"),
in November 1995. The Tax Court rejected the IRS's contention that interest paid
to Northern Indiana's foreign subsidiary were subject to United States tax
withholding. The IRS appealed this decision (Northern Indiana Public Service Co.
v. Commissioner) to the United States Court of Appeals for the 7th Circuit. The
United States Court of Appeals for the 7th Circuit ("Appeals Court") recently
affirmed the Tax Court's ruling in favor of Northern Indiana. Although the
Appeals Court decision in the Northern Indiana case could be beneficial to the
Company's case, it is not necessarily indicative of the ultimate result of the
final settlement of the Netherlands Antilles issue between the Company and the
IRS.
Based on an evaluation of the IRS's contention, counsel has advised the Company
that, although the outcome in litigation can by no means be assured, the Company
has a very strong case and should prevail. Notwithstanding counsel's opinion and
the Appeals Court 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 Financial Condition.
With respect to the "Fresh Start" issue, on March 13, 1996, the IRS issued a
Notice of Deficiency to the Company, with respect to taxes owed for the year
1987. The Company has disputed the Notice of Deficiency and has claimed that it
is entitled to "Fresh Start" transition relief under certain insurance company
tax provisions of the Tax Reform Act of 1986. 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, and on July 23, 1996,
the IRS filed its answer. 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.
At September 30, 1997, the litigation and contingency reserves were $2,542,000.
For a discussion of alleged tax liabilities, lawsuits and governmental
proceedings, see Part II - Item 1.
In addition to the litigation and contingency reserves, the Company has a
reserve for income taxes of $79,088,000 at September 30, 1997. For a further
discussion, see Part II - Item 1 - Legal Proceedings, Disputes with Internal
Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start.
The Company has significant alleged tax liabilities and is a defendant in a
number of lawsuits and proceedings, the ultimate outcome of which could have a
material adverse effect on its financial condition and results of operations.
Because of the nature of the contingent and alleged liabilities and the inherent
difficulty in predicting the outcome of the litigation and governmental
proceedings, management is unable to predict whether the Company's recorded
reserves will be adequate or its resources sufficient to satisfy its ultimate
obligations. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties. For a
discussion of alleged tax liabilities, lawsuits and governmental proceedings,
see Part II - Item 1. 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.
The cash needs of the Company for the first nine months of 1997 were principally
satisfied by interest income received on investment securities and cash
equivalents, a $475,000 income tax refund, and the Company's current financial
resources. Management believes that the Company's cash resources are sufficient
to continue operations for 1997.
For the nine months ended September 30, 1997, cash of $3,401,000 was used by
continuing operations, including the payment of prior year accruals, and the
payment of operating expenses partially offset by interest income and a $475,000
tax refund. For the nine months ended September 30, 1996, cash of $425,000 was
used by continuing operations, including the receipt of a 1977 tax refund, the
receipt of interest income partially offset by payments charged against the
litigation and contingency reserves and the payment of operating expenses.
- 8 -
<PAGE>
The Company continues to evaluate a number of possible acquisitions and is
engaged in the management of its remaining assets and liabilities, including the
contingent and alleged tax and litigation liabilities, as described in 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 governmental 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 profits by acquiring existing operations and/or by
developing new operations.
There were no material commitments for capital expenditures as of September 30,
1997.
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) 1997 1996 1997 1996
==============================================================================
OPERATING EXPENSES:
Compensation and benefits $ 472 $ 533 $1,464 $ 1,343
Professional and outside services 73 84 265 352
Insurance 22 36 93 142
Occupancy 22 27 65 68
Other operating 29 46 110 124
- ------------------------------------------------------------------------------
618 726 1,997 2,029
- ------------------------------------------------------------------------------
Operating loss (618) (726) (1,997) (2,029)
- ------------------------------------------------------------------------------
Interest income 656 690 2,008 1,948
Other income 55 - 55 20
Other income - litigation and
contingency reserves reversal - - - 8,000
Realized loss on sale of investment
securities - available for sale - - - (182)
- ------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 93 (36) 66 7,757
Income tax benefit (expense) (73) (214) 262 7,272
- ------------------------------------------------------------------------------
Income (loss) from
continuing operations $ 20 $(250) $ 328 $15,029
==============================================================================
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 1997 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 income from continuing operations of $20,000 and $328,000,
or $0.01 per share, in the third quarter and nine month periods ended September
30, 1997, respectively. The 1997 nine month period includes a $475,000 income
tax benefit, as further described in Financial Condition, above. The 1997 third
quarter and nine month periods also include other income of $55,000,
attributable to the collection by an inactive subsidiary of a receivable
previously considered uncollectible. Excluding these non-recurring items, the
Company would have reported a loss from continuing operations of $35,000 and
$202,000 in the third quarter and nine month periods ended September 30, 1997,
respectively. 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. 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, or $0.01 per share for the nine
month period ended September 30, 1996, respectively.
The Company recorded income from continuing operations before income taxes of
$93,000 and $66,000 in the third quarter and nine month periods ended September
30, 1997, respectively. The 1997 third quarter and nine month periods include
non-recurring other income of $55,000. 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.
- 9 -
<PAGE>
Compensation and benefits decreased to $472,000 in the third quarter ended
September 30, 1997, compared with $533,000 for the comparable 1996 period. For
the nine month period ended September 30, 1997, compensation and benefits
increased to $1,464,000 from $1,343,000 in the 1996 nine month period. The
increase in the 1997 nine month period is due to the hiring by the Company of an
employee who previously provided services as an independent consultant.
Professional and outside services decreased to $73,000 and $265,000 in the third
quarter and nine month periods ended September 30, 1997, compared to $84,000 and
$352,000 in the respective 1996 periods. This decrease was primarily the result
of the hiring by the Company of an employee who previously provided services as
an independent consultant, as noted above.
Insurance expenses in the third quarter and nine month periods ended September
30, 1997, as compared with the same 1996 periods, decreased due to management's
continued renegotiation of insurance programs.
Interest income was $656,000 and $2,008,000 in the third quarter and nine month
periods of 1997, respectively, compared to $690,000 and $1,948,000 in the
respective 1996 periods.
Other income of $55,000 in the 1997 third quarter and nine month periods is
attributable to the collection by an inactive subsidiary of a receivable
previously considered uncollectible.
The income tax provision of $73,000 in the third quarter ended September 30,
1997 is primarily attributable to a provision for state taxes. The income tax
benefit of $262,000 in the nine month period ended September 30, 1997 is
attributable to a $475,000 income tax refund, as further described in Financial
Condition, above, and a provision for state taxes of $213,000. During the first
quarter of 1996, the Company received a 1977 income tax refund of $7,613,000,
which was recognized as an income tax benefit in the first quarter ended March
31, 1996, based on management's 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 for the third quarter and nine month periods
ended September 30, 1996, respectively, is a federal and state tax provision of
$214,000 and $341,000. 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
- 10 -
<PAGE>
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Item 8 - Note 12 in AmBase's Annual Report on Form
10-K for the year ended December 31, 1996 and in AmBase's Quarterly Report on
Form 10-Q for the quarterly periods ended March 31, 1997 and June 30, 1997 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:
Disputes with Internal Revenue Service.
(1)Withholding Taxes (Netherlands Antilles). A trial was held in this case
on March 24, 1997, after which the Judge asked the Internal Revenue
Service (the "IRS") and the Company to submit post trial briefs, which
have been subsequently submitted to the United States Tax Court (the "Tax
Court").
(2)Fresh Start. On October 20, 1997, the United States Supreme Court (the
"Supreme Court") granted Atlantic Mutual Insurance Company's ("Atlantic
Mutual") petition for certiorari for review of the Fresh Start issue. The
Supreme Court could be expected to issue an opinion in Atlantic Mutual's
case during this term.
The Company and the IRS have advised the Tax Court in the Company's Fresh
Start case that, in the interest of efficiency, further informal
discovery and negotiation of a stipulation of facts have been deferred
pending the outcome of Atlantic Mutual's case in the Supreme Court.
A decision on the merits in Atlantic Mutual's case by the Supreme Court
may control the outcome of the Company's Fresh Start case. No assurances
can be given concerning the outcome of the Company's litigation on this
issue.
The actions against the Company, including those identified in (a), above, are
in various stages. Nevertheless, the allegations and claims are material and, if
successful, could result in substantial judgments against the Company. To the
extent the aggregate of any such judgments were to exceed the resources
available, these matters could have a material adverse effect on the Company's
financial condition and results of operations. Due to the nature of these
proceedings, the Company and its counsel are unable to express any opinion as to
their probable outcome.
- 11 -
<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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K
None
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 28, 1997
- 12 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,372
<SECURITIES> 44,252
<RECEIVABLES> 12,818
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 64,653
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 447
<OTHER-SE> (24,216)
<TOTAL-LIABILITY-AND-EQUITY> 64,653
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,997
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 66
<INCOME-TAX> (262)
<INCOME-CONTINUING> 328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 328
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
