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 March 31, 1998
[ ] 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.)
51 WEAVER STREET, BUILDING 2
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 March 31, 1998, 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
MARCH 31, 1998
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..................................................12
Item 2. Changes in Securities..............................................13
Item 3. Defaults Upon Senior Securities....................................13
Item 4. Submission of Matters to a Vote of Security Holders................13
Item 5. Other Information..................................................13
Item 6. Exhibits and Reports on Form 8-K...................................13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED MARCH 31
(UNAUDITED)
<TABLE>
<CAPTION>
==============================================================================
(in thousands, except per share data) 1998 1997
==============================================================================
<S> <C> <C>
OPERATING EXPENSES:
Compensation and benefits $ 514 $ 516
Professional and outside services 270 61
Insurance 23 35
Occupancy 21 22
Other operating 43 38
- ------------------------------------------------------------------------------
871 672
- ------------------------------------------------------------------------------
Operating loss (871) (672)
- ------------------------------------------------------------------------------
Interest income 632 689
- ------------------------------------------------------------------------------
Income (loss) before income taxes (239) 17
Income tax (expense) benefit (64) 405
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (303) $ 422
==============================================================================
EARNINGS PER COMMON SHARE:
Net income (loss) - basic $(0.01) $ 0.01
Net income (loss) - assuming dilution (0.01) 0.01
==============================================================================
AVERAGE SHARES OUTSTANDING 44,534 44,534
==============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 1 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
===============================================================================
March 31, December 31,
1998 1997
(in thousands) (unaudited)
===============================================================================
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,155 $ 5,548
Investment securities:
Held to maturity (market value $47,374 and
$44,276, respectively) 47,370 44,310
Available for sale, carried at fair value (cost $100) 100 100
- ------------------------------------------------------------------------------
Total investment securities 47,470 44,410
- ------------------------------------------------------------------------------
Receivable from Home Holdings, Inc. 12,728 12,736
Investment in SDG, Inc. at cost 1,250 1,250
Other assets 262 326
- ------------------------------------------------------------------------------
TOTAL ASSETS $62,865 $64,270
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 515 $ 1,550
Supplemental retirement plan 4,918 4,865
Postretirement welfare benefits 1,376 1,412
Other liabilities 180 196
Litigation and contingency reserves 2,272 2,340
Income tax reserves 79,088 79,088
- ------------------------------------------------------------------------------
Total liabilities 88,349 89,451
- ------------------------------------------------------------------------------
Commitments and contingencies - -
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Accumulated deficit (572,996) (572,693)
Treasury stock (647) (647)
- ------------------------------------------------------------------------------
Total stockholders' equity (25,484) (25,181)
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $62,865 $64,270
==============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED MARCH 31
<TABLE>
<CAPTION>
==============================================================================
(in thousands) 1998 1997
==============================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (303) $ 422
Adjustments to reconcile net income (loss) to
net cash used by operations:
Other assets 39 32
Accounts payable and accrued liabilities (1,035) (1,186)
Litigation and contingency reserves uses (68) (103)
Interest income - investment securities (611) (617)
Other, net 2 (196)
- ------------------------------------------------------------------------------
Net cash used by operating activities (1,976) (1,648)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities - held to maturity 4,650 5,450
Purchases of investment securities - held to maturity (7,099) (3,508)
Proceeds from Home Holdings, Inc. receivable 7 90
Other, net 25 -
- ------------------------------------------------------------------------------
Net cash provided (used) by investing activities (2,417) 2,032
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,393) 384
Cash and cash equivalents at beginning of period 5,548 5,591
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,155 $5,975
==============================================================================
</TABLE>
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 1997 consolidated financial statements
to conform with the 1998 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, 1997.
The Company's main source of non-operating revenue is interest earned on
investment securities and cash equivalents. The Company's management expects
that operating cash needs for the remainder of 1998 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 March 31, 1998, the
litigation and contingency reserves were $2,272,000. 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 March 31, 1998. 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.
NOTE 3 - CASH AND CASH EQUIVALENTS
Highly liquid investments, consisting principally of funds held in short-term
money market accounts, are classified as cash equivalents.
- 4 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4 - Receivable From Home Holdings, Inc.
In 1991, the Company sold its entire interest in The Home Insurance Company and
its subsidiaries to Home Holdings, Inc. ("Home Holdings"). As part of the sale
proceeds, Home Holdings agreed to pay $48 million to the Company over a period
of years to meet certain specified future obligations of the Company, as
incurred, relating to tax issues, litigation and administrative expenses. The
Company has collected the portion of this receivable with respect to litigation
and administrative expenses. The Company's remaining receivable at March 31,
1998 is at least $12,728,000, and relates principally to tax issues.
On or about January 15, 1998, Home Holdings filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").
Home Holdings also filed a pre-arranged plan of reorganization under Chapter 11
(the "Bankruptcy Plan"). According to the Bankruptcy Plan and disclosure
statement, general unsecured creditors of Home Holdings, including the Company,
were to receive a projected future recovery of approximately 38.3% of the
amounts owed to them.
The Company filed with the United States Bankruptcy Court ("Bankruptcy Court")
an objection to the Bankruptcy Plan. Thereafter, Home Holdings filed a Second
Amended Plan (the "Amended Plan") on April 29, 1998. According to the Amended
Plan, Home Holdings proposes to leave the Company's claim unimpaired, which
means that the Company would retain its rights to seek the full amount of its
outstanding receivable from Home Holdings after the Amended Plan is confirmed,
and not be limited to a recovery of approximately 38.3%. The Company disagrees
with the characterization of its claim as unimpaired. The Company is currently
reviewing the Amended Plan, and must file its objections, if any, by May 14,
1998. Based on the Company's current analysis of the information available at
this time, no allowance for doubtful accounts has been provided as of March 31,
1998 or December 31, 1997.
Home Holdings has scheduled the Company's outstanding receivable from Home
Holdings as a contingent general unsecured claim in the amount of $11,703,136.
The Company disagrees with Home Holdings' characterization of its receivable as
contingent, and also with the amount of the outstanding receivable. The Company
has filed, in connection with the Home Holdings bankruptcy case, a Proof of
Claim ("Proof of Claim") for all damages, which is significantly in excess of
$12,728,000. The Bankruptcy Court has scheduled a hearing date for July 1998 to
determine the allowed amount of the Company's Proof of Claim.
- 5 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 - available for sale generally consist of investments in
equity securities held for an indefinite period and were carried at fair value
with net unrealized gains and losses reported in a separate component of
stockholders' equity. At March 31, 1998 and December 31, 1997 investment
securities - available for sale consist of $100,000 of convertible preferred
stock in AMDG, Inc., which the Company purchased through a private placement in
December 1997.
<TABLE>
<CAPTION>
Investment securities at March 31 and December 31 consist of the following:
=============================================================================
1998 1997
---------------------------- ---------------------------
Cost or Cost or
Carrying Amortized Fair Carrying Amortized Fair
(in thousands) Value Cost Value Value Cost Value
==============================================================================
<S> <C> <C> <C> <C> <C> <C>
Held to Maturity:
U.S. Treasury
Bills $47,370 $47,370 $47,374 $44,310 $44,310 $44,276
Available for Sale:
Equity Securities 100 100 100 100 100 100
- ------------------------------------------------------------------------------
$47,470 $47,470 $47,474 $44,410 $44,410 $44,376
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
The gross unrealized gains and losses on investment securities at March 31 and
December 31 consist of the following:
==============================================================================
(IN THOUSANDS) 1998 1997
==============================================================================
<S> <C> <C>
Held to Maturity - Gross unrealized gains (losses) $ 4 $ (34)
Available for Sale - Gross unrealized gains (losses) - -
==============================================================================
</TABLE>
- 6 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
The calculation of basic earnings per share and dilutive earnings per share,
including the effect of dilutive securities, for the periods ended March 31, is
as follows:
==============================================================================
1998
--------------------------------------
LOSS SHARES PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA) (NUMERATOR) (DENOMINATOR) AMOUNT
==============================================================================
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net loss $ (303) 44,534 $(0.01)
=== ====
EFFECT OF DILUTIVE SECURITIES:
Assumed stock option exercise - 1,727 -
-----
DILUTED EARNINGS PER SHARE:
Net loss and assumed conversions $ (303) 46,261 $(0.01)
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
==============================================================================
1997
--------------------------------------
INCOME SHARES PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA) (NUMERATOR) (DENOMINATOR) AMOUNT
==============================================================================
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 422 44,534 $ 0.01
=== ====
EFFECT OF DILUTIVE SECURITIES:
Assumed stock option exercise - 1,688 -
-----
DILUTED EARNINGS PER SHARE:
Net income and assumed conversions $ 422 46,222 $ 0.01
==============================================================================
</TABLE>
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Additional information regarding cash flow for the quarter ended March 31 is as
follows:
==============================================================================
(in thousands) 1998 1997
==============================================================================
<S> <C> <C>
Cash received (paid) during the period:
Income taxes refunded (paid), net $ (74) $ 402
==============================================================================
</TABLE>
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.
- 7 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - 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 March 31, 1998 and December 31, 1997, 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 1996 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 $30 million of NOL
carryforwards as noted in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, Item 8 - Note 11.
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 the Company's entitlement to Fresh Start
transition relief under certain insurance company tax provisions of the Tax
Reform Act of 1986 (other insurance industry taxpayers face similar issues under
the Fresh Start provision). The Company's federal income tax returns for years
subsequent to 1992 have not been reviewed by the IRS.
The Company has a reserve for income taxes of $79,088,000 at March 31, 1998. 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 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 recorded as an income tax benefit in the first quarter
ended March 31, 1997.
- 8 -
<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 consolidated
financial statements and related notes, which are contained in Item 1, herein.
FINANCIAL CONDITION
The Company's assets at March 31, 1998 aggregated $62,865,000, consisting
principally of cash and cash equivalents of $1,155,000, investment securities of
$47,470,000, and a receivable from Home Holdings, Inc. ("Home Holdings"). On or
about January 15, 1998, Home Holdings filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code. See Item 1 - Note 4 to
the Company's consolidated financial statements for a further discussion
regarding the Company's receivable from Home Holdings. At March 31, 1998, the
Company's liabilities, including reserves for contingent and alleged
liabilities, as further described in Part II - Item 1, exceeded total recorded
assets by $25,484,000.
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 the Company's entitlement to Fresh Start
transition relief under certain insurance company tax provisions of the Tax
Reform Act of 1986 (other insurance industry taxpayers face similar issues under
the Fresh Start provision). 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 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
"Appeals Court"). The 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 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 Financial Condition.
- 9 -
<PAGE>
With respect to the Fresh Start issue, on March 13, 1996, the IRS issued a
deficiency notice to the Company on the Fresh Start issue which asserts an
increase in tax for the year 1987. If the IRS is successful, the amount of the
deficiency would be material. On June 7, 1996, the Company filed a petition with
the United States Tax Court (the "Tax Court") to dispute the entire amount of
the asserted deficiency and to redetermine the tax, and on July 23, 1996, the
IRS filed its answer. The IRS and the Company began engaging in the informal
discovery process customary in the Tax Court.
On July 22, 1997, another insurance company taxpayer, Atlantic Mutual Insurance
Company ("Atlantic Mutual"), filed a petition for certiorari in its own case
seeking review of the Fresh Start issue by the United States Supreme Court (the
"Supreme Court"). In response, on September 19, 1997, the United States filed
its brief with the Supreme Court in that case in which it recommended that the
Supreme Court hear the case. The Supreme Court granted the petition on October
20, 1997, has received briefs, and heard oral argument on March 2, 1998.
Because it was expected that the Supreme Court would address the reserve
strengthening issue, the Company and the IRS advised the Tax Court in the
Company's own case that, in the interests of efficiency, further informal
discovery and negotiation of a stipulation of facts had been deferred pending
the Supreme Court's ruling in Atlantic Mutual.
On April 21, 1998, the Supreme Court decided the Fresh Start issue against
Atlantic Mutual, agreeing with the government in upholding the IRS' regulation
which defines reserve strengthening for purposes of the Fresh Start transition
rule. The opinion was approved by nine justices without dissent. The Supreme
Court's decision in favor of the IRS in the Atlantic Mutual case has a
substantial adverse effect on the Company's own case pending in the Tax Court,
but at this time, the effect has not been quantified.
The Company has a reserve for income taxes of $79,088,000 at March 31, 1998. For
a further discussion, see Part II - Item 1 - Legal Proceedings, Disputes with
Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh
Start.
At March 31, 1998, the litigation and contingency reserves were $2,272,000. For
a discussion of alleged tax liabilities, lawsuits and governmental proceedings,
see Part II - Item 1.
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 liabilities and
the inherent difficulty in predicting the outcome of the litigation and
governmental proceedings, management is unable to predict whether the Company's
recorded reserves will be adequate or its resources sufficient to satisfy its
ultimate obligations. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. Although the basis for the calculation of the litigation and
contingency reserves and 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. For a discussion
of alleged tax liabilities, lawsuits and governmental proceedings, see Part II -
Item 1.
The cash needs of the Company for the first three months of 1998 were
principally satisfied by interest income received on investment securities and
cash equivalents, and the Company's current financial resources. Management
believes that the Company's cash resources are sufficient to continue operations
for 1998.
For the three months ended March 31, 1998, cash of $1,976,000 was used by
operations, including the payment of prior year accruals, and the payment of
operating expenses partially offset by the receipt of interest income. For the
three months ended March 31, 1997, cash of $1,648,000 was used by operations,
including the payment of prior year accruals and operating expenses, partially
offset by a $475,000 tax refund and the receipt of interest income.
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 March 31,
1998.
- 10 -
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Summarized financial information of the Company for the first quarter ended
March 31 is as follows:
==============================================================================
(in thousands) 1998 1997
==============================================================================
<S> <C> <C>
Operating expenses:
Compensation and benefits $ 514 $ 516
Professional and outside services 270 61
Insurance 23 35
Occupancy 21 22
Other operating 43 38
- ------------------------------------------------------------------------------
871 672
- ------------------------------------------------------------------------------
Operating loss (871) (672)
- ------------------------------------------------------------------------------
Interest income 632 689
- ------------------------------------------------------------------------------
Income (loss) before income taxes (239) 17
Income tax (expense) benefit (64) 405
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (303) $ 422
==============================================================================
</TABLE>
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 1998 will be met principally by
the Company's current financial resources and the receipt of non-operating
revenue consisting of interest income earned on investment securities and cash
equivalents.
The Company recorded a net loss of $303,000, or $0.01 per share for the first
quarter ended March 31, 1998.
The Company recorded net income of $422,000 in the first quarter ended March 31,
1997, which includes a $475,000 income tax benefit, as further described in
Financial Condition, above. Excluding the $475,000 income tax benefit, the
Company would have reported a net loss of $53,000 for the first quarter ended
March 31, 1997.
Professional and outside services increased to $270,000 in the first quarter
ended March 31, 1998, compared to $61,000 in the respective 1997 period. This
increase was primarily the result of legal fees incurred with current legal
proceedings.
Insurance expenses decreased to $23,000 in the first quarter ended March 31,
1998, from $35,000 in the same 1997 period, due to management's continued
renegotiation of insurance programs.
Interest income was $632,000 in the first quarter, compared to $689,000 in the
respective 1997 period. The decrease was primarily attributable to a lower
average level of cash equivalents and investment securities.
The income tax provision of $64,000 in the first quarter ended March 31, 1998 is
primarily attributable to a provision for state taxes. The income tax benefit of
$405,000 in the first quarter of 1997 is attributable to a $475,000 income tax
refund, as further described in Financial Condition, above, and a provision for
state taxes of $70,000. 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
- 11 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Item 8 - Note 13 in AmBase's Annual Report on Form
10-K for the year ended December 31, 1997 is incorporated by reference herein
and the defined terms set forth below have the same meaning ascribed to them in
that report. 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.
Fresh Start. The one issue remaining for tax year 1987 is the Company's
entitlement to Fresh Start transition relief under certain insurance company
tax provisions of the Tax Reform Act of 1986 (other insurance industry
taxpayers face similar issues under the Fresh Start provision). On March 13,
1996, the IRS issued a deficiency notice to the Company on the Fresh Start
issue which asserts an increase in tax for the year 1987. If the IRS is
successful, the amount of the deficiency would be material. On June 7, 1996,
the Company filed a petition with the United States Tax Court ("Tax Court")
to dispute the entire amount of the asserted deficiency and to redetermine
the tax, and on July 23, 1996, the IRS filed its answer. The IRS and the
Company began engaging in the informal discovery process customary in the
Tax Court.
On July 22, 1997, another insurance company taxpayer, Atlantic Mutual
Insurance Company ("Atlantic Mutual"), filed a petition for certiorari in
its own case seeking review of the Fresh Start issue by the United States
Supreme Court ("Supreme Court"). The Supreme Court granted the petition on
October 20, 1997, received briefs and heard oral argument on March 2, 1998.
Because it was expected that the Supreme Court would address the reserve
strengthening issue, the Company and the IRS advised the Tax Court in the
Company's own case that, in the interests of efficiency, further informal
discovery and negotiation of a stipulation of facts had been deferred
pending the Supreme Court's ruling in Atlantic Mutual.
On April 21, 1998, the Supreme Court decided the Fresh Start issue against
Atlantic Mutual, agreeing with the government in upholding the IRS'
regulation which defines reserve strengthening for purposes of the Fresh
Start transition rule. The opinion was approved by nine justices without
dissent. The Supreme Court's decision in favor of the IRS in the Atlantic
Mutual case has a substantial adverse effect on the Company's own case
pending in the Tax Court but, at this time, the effect has not been
quantified.
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.
- 12 -
<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
27. Financial Data Schedule
(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
and Controller
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: May 15, 1998
- 13 -
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,155
<SECURITIES> 47,470
<RECEIVABLES> 12,728
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,865
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 447
<OTHER-SE> (25,931)
<TOTAL-LIABILITY-AND-EQUITY> 62,865
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 871
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (239)
<INCOME-TAX> 64
<INCOME-CONTINUING> (303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (303)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
