FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 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 June 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.
AMBASE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1997
CROSS REFERENCE SHEET FOR
PARTS I AND II PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................11
Item 2. Changes in Securities..............................................11
Item 3. Defaults Upon Senior Securities....................................11
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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30
(UNAUDITED)
==============================================================================
Second Quarter Six Months
(in thousands,
except per share data) 1997 1996 1997 1996
==============================================================================
OPERATING EXPENSES:
Compensation and benefits $ 476 $ 394 $ 992 $ 810
Professional and outside services 131 152 192 268
Insurance 36 53 71 106
Occupancy 21 22 43 41
Other operating 43 43 81 78
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707 664 1,379 1,303
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Operating loss (707) (664) (1,379) (1,303)
- ------------------------------------------------------------------------------
Interest income 663 655 1,352 1,258
Other income - litigation and
contingency reserves reversal - 8,000 - 8,000
Realized loss on sale of investment
securities - available for sale - (182) - (182)
Other income - 20 - 20
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (44) 7,829 (27) 7,793
Income tax benefit (expense) (70) (74) 335 7,486
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations (114) 7,755 308 15,279
Income from discontinued investment
management operations,
net of income taxes - 18 - 36
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (114) $ 7,773 $ 308 $15,315
==============================================================================
PER SHARE DATA:
Income (loss) from continuing
operations $ - $ 0.17 $ 0.01 $ 0.34
Income from discontinued
investment management
operations, net of income
taxes - - - -
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ - $ 0.17 $ 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 -
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==============================================================================
June 30, December 31,
1997 1996
(in thousands) (unaudited)
==============================================================================
ASSETS
Cash and cash equivalents (includes
$65 in 1996 of restricted cash) $ 5,003 $ 5,591
Investment securities - held to maturity
(market value $46,551 and $47,261) 46,553 47,259
Receivable from Home Holdings, Inc. 12,911 13,186
Other assets 220 193
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 64,687 $ 66,229
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 190 $ 1,428
Supplemental retirement plan 4,775 4,724
Postretirement welfare benefits 1,463 1,527
Other liabilities 327 605
Litigation and contingency reserves 2,633 2,954
Income tax reserves 79,088 79,088
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Total liabilities 88,476 90,326
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Commitments and contingencies - -
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STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Accumulated deficit (571,301) (571,609)
Treasury stock (647) (647)
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Total stockholders' equity (23,789) (24,097)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 64,687 $ 66,229
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- 2 -
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
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(in thousands) 1997 1996
==============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 308 $ 15,279
Adjustments to reconcile income from
continuing operations to net cash
provided (used) by continuing operations:
Other assets (2) (9)
Accounts payable and accrued liabilities (1,238) (502)
Litigation and contingency reserves uses (321) (1,087)
Litigation and contingency reserves reversal - (8,000)
Income tax reserves, net - (9,600)
Income tax refund - 1977 - 7,613
Other liabilities (278) (1,388)
Interest income - investment securities (1,236) (1,168)
Realized loss on sale of investment securities
- available for sale - 182
Other, net (13) (143)
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Net cash provided (used) by operating
activities of continuing operations (2,780) 1,177
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Net cash provided by discontinued investment
management operations - 2
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities
- held to maturity 5,450 22,580
Purchases of investment securities
- held to maturity (3,508) (29,495)
Proceeds from Home Holdings, Inc. receivable 275 3,763
Proceeds from sales of investment securities
-available for sale - 31
Other, net (25) -
- ------------------------------------------------------------------------------
Net cash provided (used) by investing activities 2,192 (3,121)
- ------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (588) (1,942)
Cash and cash equivalents at beginning of period 5,591 7,752
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,003 $ 5,810
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
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 June 30, 1997, the
litigation and contingency reserves were $2,633,000. 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 June 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
during the second quarter and six month periods 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 -
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. The Company
had acquired a 51% ownership interest in Augustine for $200,000 on November 10,
1993. The Company's ownership percentage later increased to 66% due to
Augustine's repurchase of outstanding shares from other shareholders.
Accordingly, as of September 30, 1996, the operations of Augustine 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 second quarter and six months ended June 30,
1996 is as follows:
==============================================================================
Second Six
(in thousands) Quarter Months
==============================================================================
Investment management fee revenue $ 159 $ 305
Operating expenses (115) (223)
Interest income - 1
Minority interest (9) (18)
- ------------------------------------------------------------------------------
Income from discontinued operations before taxes 35 65
Income tax expense (17) (29)
- ------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS THROUGH JUNE 30, 1996 $ 18 $ 36
==============================================================================
Investment management fee revenue includes $46,000 and $93,000 for the second
quarter and six months ended June 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.
- 5 -
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 - held to maturity, at June 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 $46,553 $46,553 $46,551 $47,259 $47,259 $47,261
==============================================================================
The gross unrealized gains and losses on investment securities, at June 30 and
December 31, consist of the following:
==============================================================================
(in thousands) 1997 1996
==============================================================================
Held to Maturity:
Gross unrealized gains (losses) $ (2) $ 2
==============================================================================
NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Additional information regarding cash flow for the second quarter ended June 30
is as follows:
==============================================================================
(in thousands) 1997 1996
==============================================================================
Cash received (paid) during the period:
Income taxes refunded (paid), net $ 300 $ 5,475
==============================================================================
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 $1,987,000 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 June 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 tax effects of $170 million
of NOL's resulting from the Carteret Savings Bank, F.A. ("Carteret") 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.
- 6 -
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 during 1996, 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 has 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").
Based on the Company not making the election decision, as described above, the
Company will amend its 1992 through 1995 consolidated federal income tax returns
to include the federal income tax effects of Carteret and the resulting
successor institution, Carteret Federal Savings Bank. The Company does not
believe a material increase in the Company's tax liabilities will result.
As a result of filing consolidated with Carteret, the Company expects to have
available approximately $170 million of tax NOL carryforwards, expiring no
earlier than 2007, available to offset future taxable income, in addition to the
$29,319,000 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.
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 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 six months of 1996, $1,987,000 of payments to the
IRS were charged against income tax reserves, principally representing payments
for previously agreed to issues relating to the 1985 through 1991 tax years.
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 June 30, 1997 aggregated $64,687,000, consisting
principally of cash and cash equivalents of $5,003,000, investment securities of
$46,553,000 and a $12,911,000 receivable from Home Holdings, Inc. ("Home
Holdings"). During the first six months of 1997, proceeds of $275,000 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 June 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 $23,789,000.
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 six 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 $1,987,000. 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 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
- 7 -
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 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. The Company's lawyers are presently preparing the briefs. 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. The IRS and the Company are presently engaged in an
informal discovery process, customary in Tax Court. 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 June 30, 1997, the litigation and contingency reserves were $2,633,000. 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 June 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.
- 8 -
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 six 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 six months ended June 30, 1997, cash of $2,780,000 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 six months ended June 30, 1996, cash of $1,177,000 was
provided by operating activities, 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.
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 June 30, 1997.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
Summarized financial information for the continuing operations of the Company
for the second quarter and six months ended June 30 is as follows:
==============================================================================
Second Quarter Six Months
(in thousands) 1997 1996 1997 1996
==============================================================================
Operating expenses:
Compensation and benefits $ 476 $ 394 $ 992 $ 810
Professional and outside services 131 152 192 268
Insurance 36 53 71 106
Occupancy 21 22 43 41
Other operating 43 43 81 78
- ------------------------------------------------------------------------------
707 664 1,379 1,303
- ------------------------------------------------------------------------------
Operating loss (707) (664) (1,379) (1,303)
- ------------------------------------------------------------------------------
Interest income 663 655 1,352 1,258
Other income - litigation and
contingency reserves reversal - 8,000 - 8,000
Realized loss on sale of investment
securities - available for sale - (182) - (182)
Other income - 20 - 20
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (44) 7,829 (27) 7,793
Income tax benefit (expense) (70) (74) 335 7,486
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ (114) $ 7,755 $ 308 $ 15,279
==============================================================================
- 9 -
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 a loss from continuing operations of $114,000 and recorded
income from continuing operations of $308,000, or $0.01 per share, in the second
quarter and six month periods ended June 30, 1997, respectively. The 1997 six
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 loss from continuing operations of $167,000 in the
six month period ended June 30, 1997. In the 1996 second quarter and six month
periods the Company recorded income from continuing operations of $7,755,000, or
$0.17 per share, and $15,279,000, or $0.34 per share, respectively. As further
described in Financial Condition, above, the 1996 second quarter and six month
period include other income of $8,000,000, resulting from a reduction in the
litigation and contingency reserves, and the 1996 six month period includes an
additional income tax benefit of $7,613,000. Excluding these non-recurring
items, the Company would have reported a loss from continuing operations of
$245,000, or $0.01 per share, and $334,000, or $0.01 per share, in the second
quarter and six month periods ended June 30, 1996, respectively.
The Company recorded a loss from continuing operations before income taxes of
$44,000 and $27,000 in the second quarter and six month periods ended June 30,
1997, respectively. For the second quarter and six month period ended June 30,
1996 the Company recorded income from continuing operations before income taxes
of $7,829,000 and $7,793,000, respectively, which includes an $8,000,000
reduction in the litigation and contingencies reserves, as further described in
Financial Condition, above.
Compensation and benefits increased to $476,000 and $992,000 in the second
quarter and six month periods ended June 30, 1997, respectively, compared with
$394,000 and $810,000 for the comparable 1996 period. The increase in the 1997
periods 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 $131,000 and $192,000 in the
second quarter and six month periods ended June 30, 1997, compared to $152,000
and $268,000 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 second quarter and six month periods ended June 30,
1997, as compared with the same 1996 periods, decreased due to management's
continued renegotiation of insurance programs.
Interest income in the second quarter and six month periods of 1997 increased to
$663,000 and $1,352,000, respectively, from $655,000 and $1,258,000 in the
respective 1996 period.
The income tax provision of $70,000 in the second quarter ended June 30, 1997 is
primarily attributable to a provision for state taxes. The income tax benefit of
$335,000 in the six month period ended June 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 $140,000. 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 second quarter and six month periods
ended June 30, 1996, respectively, is a state tax provision of $74,000 and
$127,000. 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
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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 period ended March 31, 1997 are incorporated by
reference herein and the defined terms set forth below have the same meaning
ascribed to them in those 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:
Angel, et al. v. AmBase Corp. All claims in this action have been settled or
dismissed. Therefore, this action is concluded.
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 IRS and the Company to
submit post trial briefs. The Company's lawyers are presently preparing
the briefs. In the case of Northern Indiana Public Service Co. v.
Commissioner, 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.
(2) Fresh Start. On April 24, 1997, the United States Court of Appeals for
the Third Circuit issued its opinion in Atlantic Mutual Insurance Co. v.
Commissioner, concluding that the IRS regulation defining "reserve
strengthening" is valid. Although this decision is not controlling
precedent in the Company's case (which would be appealable to the Second
Circuit), Atlantic Mutual is the first Court of Appeals decision
upholding the government's position on this issue. This decision is in
conflict with the decision of the Eighth Circuit Court of Appeals in
Western National Mutual Ins. Co. v. Commissioner (8th Cir. 1995). It is
possible that Atlantic Mutual may seek Supreme Court review. 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.
ITEM 2. CHANGES IN SECURITIES
Does not apply.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Does not apply.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 1, 1997, the following
proposals were voted upon:
The following persons were nominated to be elected as director, as set forth
below:
NUMBER OF SHARES
FOR WITHHELD
Robert E. Long 38,175,623 414,818
There were no broker non-votes.
Stockholders approved the appointment of Price Waterhouse LLP as the independent
accountants of the Company for the year ending December 31, 1997. The shares
were voted as follows: 38,238,510 shares for and 262,796 against, with 89,135
shares abstaining. There were no broker non-votes.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K
None
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: July 24, 1997
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EXHIBIT INDEX
Exhibit
No. Description
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27 Financial Data Schedule
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