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, 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 September 30, 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
September 30, 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..................................................13
Item 2. Changes in Securities..............................................14
Item 3. Defaults Upon Senior Securities....................................14
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 5. Other Information..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
<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)
<TABLE>
<CAPTION>
==============================================================================
(in thousands, Third Quarter Nine Months
except per share data) 1998 1997 1998 1997
==============================================================================
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Compensation and benefits $ 473 $ 472 $ 1,431 $ 1,464
Professional and outside services 127 73 777 265
Insurance 20 22 65 93
Occupancy 22 22 65 65
Other operating 34 29 89 110
- ------------------------------------------------------------------------------
676 618 2,427 1,997
- ------------------------------------------------------------------------------
Operating loss (676) (618) (2,427) (1,997)
- ------------------------------------------------------------------------------
Interest income 595 656 1,820 2,008
Other income 2,500 55 2,500 55
- ------------------------------------------------------------------------------
Income before income taxes 2,419 93 1,893 66
Income tax (expense) benefit (59) (73) (187) 262
- ------------------------------------------------------------------------------
NET INCOME $2,360 $ 20 $ 1,706 $ 328
==============================================================================
EARNINGS PER COMMON SHARE:
Net income - basic $ 0.05 $ - $ 0.04 $ 0.01
Net income - assuming dilution 0.05 - 0.04 0.01
==============================================================================
AVERAGE SHARES OUTSTANDING 44,534 44,534 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>
==============================================================================
September 30, December 31,
1998 1997
(in thousands) (unaudited)
==============================================================================
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 606 $ 5,548
Investment securities - held to maturity (market
value $49,714 and $44,276, respectively) 49,642 44,310
Receivable from Home Holdings, Inc. - 12,736
Investment in SDG, Inc. at cost 1,250 1,250
Other assets 333 426
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 51,831 $ 64,270
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 233 $ 1,550
Supplemental retirement plan 5,025 4,865
Postretirement welfare benefits 1,319 1,412
Other liabilities 162 196
Litigation and contingency reserves 2,179 2,340
Income tax reserves 66,388 79,088
- ------------------------------------------------------------------------------
Total liabilities 75,306 89,451
- ------------------------------------------------------------------------------
Commitments and contingencies - -
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Accumulated deficit (570,987) (572,693)
Treasury stock (647) (647)
- ------------------------------------------------------------------------------
Total stockholders' equity (23,475) (25,181)
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,831 $ 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
NINE MONTHS ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
==============================================================================
(in thousands) 1998 1997
==============================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,706 $ 328
Adjustments to reconcile net income to
net cash used by operations:
Other assets 56 6
Accounts payable and accrued liabilities (1,317) (1,206)
Litigation and contingency reserves uses (161) (412)
Income tax reserves (12,700) -
Other liabilities 34 (290)
Amortization of discount - investment securities (1,749) (1,832)
Other, net 57 5
- ------------------------------------------------------------------------------
Net cash used by operating activities (14,074) (3,401)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities - held to maturity 44,746 34,550
Purchases of investment securities - held to maturity (48,329) (29,711)
Proceeds from Home Holdings, Inc. receivable 12,708 368
Other, net 7 (25)
- ------------------------------------------------------------------------------
Net cash provided by investing activities 9,132 5,182
- ------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,942) 1,781
Cash and cash equivalents at beginning of period 5,548 5,591
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 606 $ 7,372
==============================================================================
</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 1. 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 September 30, 1998, the
litigation and contingency reserves, other than for income tax issues, were
$2,179,000. 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 $66,388,000 at September 30, 1998. For a further
discussion, see Part II - Item 1 - Legal Proceedings, Disputes with Internal
Revenue Service, Withholding Taxes (Netherlands Antilles).
See Note 8 and Item 2 - Financial Condition for information regarding the
Company's June 1998 payment to the IRS for tax and estimated interest, in full
satisfaction of the Company's Fresh Start tax liability and utilization of net
operating loss carryforwards.
- 4 -
<PAGE>
AMBASE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
See Note 4 for further information regarding the Company's receivable from Home
Holdings, Inc. ("Home Holdings") and the Company's continuing rights to pursue
certain disputed claims against Home Holdings pursuant to the Home Holdings
bankruptcy case proceedings.
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.
Note 4 - Receivable From Home Holdings, Inc.
In 1991, the Company sold its entire interest in The Home Insurance Company
("Home Insurance") and its subsidiaries to Home Holdings, Inc. ("Home Holdings")
pursuant to an agreement between the Company, Home Insurance and Home Holdings
(then known as TVH Acquisition Corporation) dated as of September 28, 1990 (as
amended the "Stock Purchase Agreement"). 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 obligations of the Company, as incurred, relating to tax
issues, litigation and administrative expenses. The Company had collected the
portion of this receivable with respect to litigation and administrative
expenses. As of January 15, 1998, the Company believed that the remaining
receivable, related principally to tax issues, was at least $12,728,000.
On January 15, 1998, Home Holdings filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). Home Holdings
scheduled the Company's outstanding receivable from Home Holdings as a
contingent general unsecured claim in the amount of $11,703,136. The Company
disagreed with Home Holdings' characterization of its receivable as contingent,
and also with the amount of the outstanding receivable. The Company filed, in
connection with the Home Holdings bankruptcy case, a proof of claim ("Proof of
Claim") for all damages, which was significantly in excess of $12,728,000.
On January 15, 1998, Home Holdings filed, along with its petition, a
pre-arranged plan of reorganization under Chapter 11 (the "Plan"). According to
Home Holdings' Plan and accompanying 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 Plan. Thereafter, Home Holdings filed a Second Amended Plan
(the "Amended Plan"). According to the Amended Plan, Home Holdings purported 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 was confirmed, and would not be limited to a
recovery of approximately 38.3%. The Company disagreed with the characterization
of its claim as unimpaired, and filed an objection to the Amended Plan.
Home Holdings then filed a number of amended plans, culminating in the Revised
Third Amended and Restated Plan of Reorganization (the "Revised Plan"), to which
the Company agreed. The Revised Plan was confirmed by order of the Bankruptcy
Court dated June 9, 1998, and was declared effective on July 29, 1998.
Pursuant to the Revised Plan, on July 30, 1998, the Company received $15,200,000
in full satisfaction of all of the Company's claims relating to Home Holdings
other than certain disputed claims relating to Section 7.4(c)(iii) of the Stock
Purchase Agreement (the "Disputed Claims"). The Company's rights against Home
Holdings in respect of the Disputed Claims are preserved and survive the
effective date of the Revised Plan, and the Company may pursue any such claims
in federal or state court. The Revised Plan further provides credit support for
any amounts due the Company on account of the Disputed Claims in the form of a
Keepwell Agreement provided by Zurich Reinsurance Centre Holdings. On the
effective date of the Revised Plan, the Company withdrew its Proof of Claim and
exchanged releases with Home Holdings and various other parties.
- 5 -
<PAGE>
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.
<TABLE>
<CAPTION>
Investment securities - held to maturity at September 30, 1998 and December 31,
1997 consist of the following:
===============================================================================
September 30, 1998 December 31, 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>
U.S. Treasury
Bills $49,642 $49,642 $49,714 $44,310 $44,310 $44,276
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
The gross unrealized gains (losses) on investment securities at September 30 and
December 31 consist of the following:
===============================================================================
(IN THOUSANDS) 1998 1997
===============================================================================
<S> <C> <C>
Held to Maturity - Gross unrealized gains (losses) $ 72 $ (34)
===============================================================================
</TABLE>
Other investment securities at September 30, 1998 and December 31, 1997 consist
of $100,000 of convertible preferred stock in AMDG, Inc., that was purchased
through a private placement in December 1997, is classified as other assets and
is carried at cost which approximates market value.
- 6 -
<PAGE>
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 third quarter and nine
months ended September 30, is as follows:
===============================================================================
Quarter Ended Sept. 30, 1998 Nine Months Ended Sept. 30, 1998
-------------------------------- --------------------------------
(in thousands Per Per
except per Income Shares Share Income Shares Share
share data) (Numerator)(Denominator) Amount (Numerator) (Denominator) Amount
===============================================================================
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS
PER SHARE:
Net income $2,360 44,534 $ 0.05 $1,706 44,534 $ 0.04
===== ==== ===== ====
EFFECT OF
DILUTIVE
SECURITIES:
Assumed stock
option
exercise 1,684 - 1,709 -
------ ---- ------ ----
DILUTED EARNINGS
PER SHARE:
Net loss and
assumed
conversions $2,360 46,218 $ 0.05 $1,706 46,243 $ 0.04
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
===============================================================================
Quarter Ended Sept. 30, 1997 Nine Months Ended Sept. 30, 1997
-------------------------------- --------------------------------
(in thousands Per Per
except per Income Shares Share Income Shares Share
share data) (Numerator)(Denominator) Amount (Numerator) (Denominator) Amount
===============================================================================
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS
PER SHARE:
Net income
(loss) $ 20 44,534 $ - $ 328 44,534 $ 0.01
===== ===
EFFECT OF
DILUTIVE
SECURITIES:
Assumed stock
option
exercise 1,695 - 1,678 -
------ ---- ----- ====
DILUTED EARNINGS
PER SHARE:
Net income
(loss) and
assumed
conversions $ 20 46,229 $ - $ 328 46,212 $ 0.01
===============================================================================
</TABLE>
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Additional information regarding cash flow for the nine months ended September
30 is as follows:
===============================================================================
(in thousands) 1998 1997
===============================================================================
<S> <C> <C>
Cash received (paid) during the period:
Income taxes refunded (paid), net $(12,893) $ 265
===============================================================================
</TABLE>
Income taxes paid, net in 1998 include $12,700,000 for tax and estimated
interest paid to the Internal Revenue Service ("IRS") in full satisfaction of
the Company's Fresh Start tax liability. See Part II - Item 1 - Legal
Proceedings, Disputes with Internal Revenue Service, Fresh Start for further
information.
Income taxes refunded, net in 1997, include $475,000 of taxes refunded as a
result of an overpayment to the 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 not actually be realized sometime in the future. Under
Statement 109, the Company has calculated a net deferred tax asset of $27
million, as of September 30, 1998 and $33 million as of 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 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 Office of Thrift Supervision's ("OTS") 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
and subsequent federal income tax returns with Carteret disaffiliated from the
Company's consolidated federal income tax return. Based upon the impact of
Treasury Reg. ss.1.597-4(g), which was issued in final form on December 20,
1995, a continuing review of the Company's tax basis in Carteret, and the impact
of prior year tax return adjustments on the Company's 1992 federal income tax
return as filed, the Company decided not to make an election pursuant to final
Treasury Reg. ss.1.597-4(g) to disaffiliate Carteret from the Company's
consolidated federal income tax return effective as of December 4, 1992 (the
"election decision").
The Company has made numerous requests to the RTC/FDIC for tax information
pertaining to Carteret and the resulting successor institution, Carteret Federal
Savings Bank ("Carteret FSB"), 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 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 federal income
tax returns 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, of which $145
million are still available. 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 NOL
carryforwards as noted below.
In June 1998, the Company paid $12,700,000 to the IRS for tax and estimated
interest in full satisfaction of the Company's Fresh Start tax liability. In
connection with the Company's payment to the IRS, the Company also utilized
approximately $40 million of NOL's. As a result, the Company has remaining NOL
carryforwards of approximately $15 million expiring beginning in 2008, and $145
million of additional NOL carryforwards generated from the Company's tax basis
in Carteret/Carteret FSB expiring no earlier than 2007. See Item 2 - Financial
Condition and Part II - Item 1 Legal Proceedings, Disputes with Internal Revenue
Service for further information regarding the Company's payment to the IRS in
connection with the Fresh Start tax proceeding.
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 disagree only with respect
to withholding taxes in connection with a Netherlands Antilles finance
subsidiary of City. The Company's federal income tax returns for years
subsequent to 1992 have not been reviewed by the IRS.
- 8 -
<PAGE>
The Company has a reserve for income taxes of $66,388,000 at September 30, 1998.
For a further discussion, see Part II - Item 1 - Legal Proceedings, Disputes
with Internal Revenue Service, Withholding Taxes (Netherlands Antilles).
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.
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 September 30, 1998 aggregated $51,831,000, consisting
principally of cash and cash equivalents of $606,000 and investment securities
of $49,642,000. At September 30, 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 $23,475,000.
In June 1998, the Company paid $12,700,000 to the IRS for tax and estimated
interest in full satisfaction of the Company's Fresh Start tax liability. This
amount was previously reserved for as part of the Company's income tax reserves
account. See Note 8 for a more complete discussion regarding the Company's
payment to the IRS in connection with the Fresh Start tax proceeding and
utilization of net operating loss carryforwards.
Pursuant to the Home Holdings Revised Third Amended and Restated Plan of
Reorganization (the "Revised Plan"), on July 30, 1998 the Company received
$15,200,000 in full satisfaction of all the Company's claims relating to Home
Holdings other than certain disputed claims. See Item 1 - Note 4 for further
information regarding the Company's receivable from Home Holdings.
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 disagree only with respect
to withholding taxes in connection with a Netherlands Antilles finance
subsidiary of City. 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.
- 9 -
<PAGE>
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.
The Company has a reserve for income taxes of $66,388,000 at September 30, 1998.
For a further discussion, see Part II - Item 1 - Legal Proceedings, Disputes
with Internal Revenue Service, Withholding Taxes (Netherlands Antilles).
At September 30, 1998, the litigation and contingency reserves, other than for
income tax issues, were $2,179,000. 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 nine months of 1998 were principally
satisfied by interest income received on investment securities and cash
equivalents, and the Company's current financial resources. On July 30, 1998 the
Company received $15,200,000 pursuant to the Home Holdings Revised Plan.
Management believes that the Company's cash resources are sufficient to continue
operations for 1998.
For the nine months ended September 30, 1998, cash of $14,074,000 was used by
operations, including the payment of $12,700,000 to the IRS for the Company's
Fresh Start tax liability, the payment of prior year accruals, and the payment
of operating expenses partially offset by the receipt of interest income and
amounts received pursuant to the Home Holdings Revised Plan. For the nine months
ended September 30, 1997, cash of $3,401,000 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 September 30,
1998.
- 10 -
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Summarized financial information of the Company for the second quarter and six
months ended June 30 is as follows:
==============================================================================
Third Quarter Nine Months
(in thousands) 1998 1997 1998 1997
==============================================================================
<S> <C> <C> <C> <C>
Operating expenses:
Compensation and benefits $ 473 $ 472 $ 1,431 $ 1,464
Professional and outside services 127 73 777 265
Insurance 20 22 65 93
Occupancy 22 22 65 65
Other operating 34 29 89 110
- ------------------------------------------------------------------------------
676 618 2,427 1,997
- ------------------------------------------------------------------------------
Operating loss (676) (618) (2,427) (1,997)
- ------------------------------------------------------------------------------
Interest income 595 656 1,820 2,008
Other income 2,500 55 2,500 55
- ------------------------------------------------------------------------------
Income before income taxes 2,419 93 1,893 66
Income tax benefit (expense) (59) (73) (187) 262
- ------------------------------------------------------------------------------
NET INCOME $2,360 $ 20 $ 1,706 $ 328
==============================================================================
</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 net income of $2,360,000, or $0.05 per share and
$1,706,000, or $0.04 per share for the third quarter and nine months ended
September 30, 1998, respectively. The 1998 third quarter and nine month period
includes $2,500,000 of other income received in connection with the Home
Holdings Revised Plan, as further described in Item 1 Note 4, above. Excluding
the $2,500,000 other income, the Company would have reported a net loss of
$140,000 and $794,000 in the third quarter and nine month period ended September
30, 1998, respectively.
The Company recorded net income 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. Excluding the $475,000 income tax
benefit, the Company would have reported a net loss of $147,000 in the nine
month period ended September 30, 1997.
Compensation and benefits were to $473,000 and $1,431,000 in the third quarter
and nine month periods ended September 30, 1998, respectively, compared with
$472,000 and $1,464,000 for the comparable 1997 periods.
Professional and outside services increased to $127,000 and $777,000 in the
third quarter and nine months ended September 30, 1998, respectively, compared
to $73,000 and $265,000 in the respective 1997 periods. This increase in the
1998 periods was primarily the result of legal fees incurred attributable to the
Home Holdings bankruptcy case.
Insurance expenses decreased to $20,000 and $65,000 in the third quarter and
nine months ended September 30, 1998, respectively, from $22,000 and $93,000 in
the same 1997 periods, due to management's continued renegotiation of insurance
programs.
Interest income in the third quarter and nine months ended September 30, 1998
decreased to $595,000 and $1,820,000, respectively, from $656,000 and $2,008,000
in the respective 1997 periods. The decrease was primarily attributable to a
lower average level of cash equivalents and investment securities during the
1998 periods.
As noted above, the $2,500,000 of other income in the 1998 third quarter and
nine month periods represents a portion of the amounts received pursuant to the
Home Holdings Revised Plan.
- 11 -
<PAGE>
The income tax provision of $59,000 and $187,000 in the third quarter and nine
months ended September 30, 1998, respectively, is primarily attributable to a
provision for state taxes. 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. 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 stock holdings,
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
In addition, the Company's public reports, including Quarterly Reports on Form
10-Q, Annual Reports on Form 10-K and Proxy Statements, can be obtained through
the Securities and Exchange Commission EDGAR Database over the Internet.
- 12 -
<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 and in AmBase's Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 1998 and June 30, 1998 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:
Rolo and Tenerelli v. City Investing Company Liquidating Trust, et al. On August
31, 1998, the Court of Appeals for the Third Circuit affirmed dismissal of this
action by the District Court. Plaintiffs may file a petition for writ of
certiorari seeking review by the Supreme Court on or before November 30, 1998.
Marshall Manley v. AmBase Corporation. The trial of this case has been adjourned
by the Court until June 1999.
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.
- 13 -
<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 (only submitted to SEC in electronic format)
(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: November 5, 1998
- 14 -
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule - September 30, 1998
- 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 606
<SECURITIES> 49,642
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 51,831
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 447
<OTHER-SE> (23,992)
<TOTAL-LIABILITY-AND-EQUITY> 51,831
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,893
<INCOME-TAX> 187
<INCOME-CONTINUING> 1,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
