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, 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 June 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.
AMBASE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
JUNE 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
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)
==============================================================================
(in thousands, Second Quarter Six Months
except per share data) 1998 1997 1998 1997
==============================================================================
OPERATING EXPENSES:
Compensation and benefits $ 444 $ 476 $ 958 $ 992
Professional and outside services 380 131 650 192
Insurance 22 36 45 71
Occupancy 22 21 43 43
Other operating 12 43 55 81
- ------------------------------------------------------------------------------
880 707 1,751 1,379
- ------------------------------------------------------------------------------
Operating loss (880) (707) (1,751) (1,379)
- ------------------------------------------------------------------------------
Interest income 593 663 1,225 1,352
- ------------------------------------------------------------------------------
Loss before income taxes (287) (44) (526) (27)
Income tax (expense) benefit (64) (70) (128) 335
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (351) $ (114) $ (654) $ 308
==============================================================================
EARNINGS PER COMMON SHARE:
Net income (loss) - basic $ (0.01) $ - $ (0.02) $ 0.01
Net income (loss) assuming dilution (0.01) - (0.02) 0.01
==============================================================================
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,
1998 1997
(in thousands) (unaudited)
==============================================================================
ASSETS
Cash and cash equivalents $ 2,072 $ 5,548
Investment securities - held to maturity (market
value $33,224 and $44,276, respectively) 33,215 44,310
Receivable from Home Holdings, Inc. 12,728 12,736
Investment in SDG, Inc. at cost 1,250 1,250
Other assets 332 426
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 49,597 $ 64,270
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 326 $ 1,550
Supplemental retirement plan 4,972 4,865
Postretirement welfare benefits 1,349 1,412
Other liabilities 172 196
Litigation and contingency reserves 2,225 2,340
Income tax reserves 66,388 79,088
- ------------------------------------------------------------------------------
Total liabilities 75,432 89,451
- ------------------------------------------------------------------------------
Commitments and contingencies - -
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 447 447
Paid-in capital 547,712 547,712
Accumulated deficit (573,347) (572,693)
Treasury stock (647) (647)
- ------------------------------------------------------------------------------
Total stockholders' equity (25,835) (25,181)
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,597 $ 64,270
==============================================================================
The accompanying notes are an integral part of these consolidated financial
statements. See Note 4 for further information with regard to the Company's
receivable from Home Holdings, Inc.
- 2 -
AMBASE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
==============================================================================
(in thousands) 1998 1997
==============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (654) $ 308
Adjustments to reconcile net income (loss) to
net cash used by operations:
Other assets 58 (2)
Accounts payable and accrued liabilities (1,224) (1,238)
Litigation and contingency reserves uses (115) (321)
Income tax reserves uses (12,700) -
Other liabilities (24) (278)
Interest income - investment securities (1,170) (1,236)
Other, net 46 (13)
- ------------------------------------------------------------------------------
Net cash used by operating activities (15,783) (2,780)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities - held to maturity 39,692 5,450
Purchases of investment securities - held to maturity (27,428) (3,508)
Proceeds from Home Holdings, Inc. receivable 8 275
Other, net 35 (25)
- ------------------------------------------------------------------------------
Net cash provided by investing activities 12,307 2,192
- ------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,476) (588)
Cash and cash equivalents at beginning of period 5,548 5,591
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,072 $ 5,003
==============================================================================
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 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 June 30, 1998, the
litigation and contingency reserves, other than for income tax issues, were
$2,225,000. 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 June 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 -
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 $15.2
million 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 Center Holdings. On
the effective date of the Revised Plan, the Company withdrew its Proof of Claim
and exchanged cross releases with Home Holdings and various other parties.
- 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:
===============================================================================
1998 1997
--------------------------- ----------------------------
Cost or Cost or
Carrying Amortized Fair Carrying Amortized Fair
(in thousands) Value Cost Value Value Cost Value
===============================================================================
U.S. Treasury
Bills $33,215 $33,215 $33,224 $44,310 $44,310 $44,276
===============================================================================
The gross unrealized gains and losses on investment securities at June 30 and
December 31 consist of the following:
===============================================================================
(IN THOUSANDS) 1998 1997
===============================================================================
Held to Maturity - Gross unrealized gains (losses) $ 9 $ (34)
===============================================================================
Other investment securities at June 30, 1998 and December 31, 1997 consist of
$100,000 of convertible preferred stock in AMDG, Inc., that the Company
purchased through a private placement in December 1997, is classified as other
assets and carried at cost which approximates market value.
- 6 -
AMBASE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - EARNINGS PER SHARE
The calculation of basic earnings per share and dilutive earnings per share,
including the effect of dilutive securities, for the second quarter and six
months ended June 30, is as follows:
===============================================================================
Quarter Ended June 30, 1998 Six Months Ended June 30, 1998
-------------------------------- --------------------------------
(in thousands Per Per
except per Loss Shares Share Loss Shares Share
share data) (Numerator)(Denominator) Amount (Numerator) (Denominator) Amount
===============================================================================
BASIC EARNINGS
PER SHARE:
Net loss $ (351) 44,534 $(0.01) $ (654) 44,534 $(0.02)
=== ==== === ====
EFFECT OF
DILUTIVE
SECURITIES:
Assumed stock
option
exercise 1,711 - 1,719 -
----- -----
DILUTED EARNINGS
PER SHARE:
Net loss and
assumed
conversions $ (351) 46,245 $(0.01) $ (654) 46,253 $(0.02)
===============================================================================
===============================================================================
Quarter Ended June 30, 1997 Six Months Ended June 30, 1997
-------------------------------- --------------------------------
(in thousands Per Per
except per Loss Shares Share Income Shares Share
share data) (Numerator)(Denominator) Amount (Numerator) (Denominator) Amount
===============================================================================
BASIC EARNINGS
PER SHARE:
Net income
(loss) $(114) 44,534 $ - $ 308 44,534 $ 0.01
=== === === ====
EFFECT OF
DILUTIVE
SECURITIES:
Assumed stock
option
exercise - 1,686 - - 1,675 -
----- -----
DILUTED EARNINGS
PER SHARE:
Net income
(loss) and
assumed
conversions $(114) 46,220 $ - $ 308 46,209 $ 0.01
===============================================================================
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Additional information regarding cash flow for the six months ended June 30 is
as follows:
===============================================================================
(in thousands) 1998 1997
===============================================================================
Cash received (paid) during the period:
Income taxes refunded (paid), net $(12,861) $ 300
===============================================================================
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 -
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 $28
million, as of June 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
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 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, which 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.
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 -
The Company has a reserve for income taxes of $66,388,000 at June 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.
NOTE 9 - SUBSEQUENT EVENT
As more fully discussed in Note 4, the Home Holdings Revised Plan became
effective on July 29, 1998 and on July 30, 1998 the Company received $15,200,000
pursuant to Home Holdings Revised Plan, in full satisfaction of all of the
Company's claims relating to Home Holdings other than certain Disputed Claims.
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 June 30, 1998 aggregated $49,597,000, consisting
principally of cash and cash equivalents of $2,072,000 and investment securities
of $33,215,000 and a receivable from Home Holdings, Inc. ("Home Holdings") of
$12,728,000. At June 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 $25,835,000.
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
- 9 -
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.
The Company has a reserve for income taxes of $66,388,000 at June 30, 1998. For
a further discussion, see Part II Item 1 - Legal Proceedings, Disputes with
Internal Revenue Service, Withholding Taxes (Netherlands Antilles).
At June 30, 1998, the litigation and contingency reserves, other than for income
tax issues, were $2,225,000. 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 six 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 six months ended June 30, 1998, cash of $15,783,000 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. For
the six months ended June 30, 1997, cash of $2,780,000 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 June 30, 1998.
- 10 -
RESULTS OF OPERATIONS
Summarized financial information of the Company for the second quarter and six
months ended June 30 is as follows:
==============================================================================
Second Quarter Six Months
(in thousands) 1998 1997 1998 1997
==============================================================================
Operating expenses:
Compensation and benefits $ 444 $ 476 $ 958 $ 992
Professional and outside services 380 131 650 192
Insurance 22 36 45 71
Occupancy 22 21 43 43
Other operating 12 43 55 81
- ------------------------------------------------------------------------------
880 707 1,751 1,379
- ------------------------------------------------------------------------------
Operating loss (880) (707) (1,751) (1,379)
- ------------------------------------------------------------------------------
Interest income 593 663 1,225 1,352
- ------------------------------------------------------------------------------
Loss before income taxes (287) (44) (526) (27)
Income tax benefit (expense) (64) (70) (128) 335
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (351) $ (114) $ (654) $ 308
==============================================================================
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 $351,000, or $0.01 per share and $654,000, or
$0.02 per share for the second quarter and six months ended June 30, 1998,
respectively.
The Company recorded a net loss of $114,000 and recorded net income 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.
Compensation and benefits decreased to $444,000 and $958,000 in the second
quarter and six month periods ended June 30, 1998, respectively, compared with
$476,000 and $992,000 for the comparable 1997 periods The decrease in the 1998
periods is due to a decrease in compensation costs in the 1998 periods compared
with the respective 1997 periods.
Professional and outside services increased to $380,000 and $650,000 in the
second quarter and six months ended June 30, 1998, respectively, compared to
$131,000 and $192,000 in the respective 1997 periods. This increase was
primarily the result of legal fees incurred attributable to the Home Holdings
bankruptcy case.
Insurance expenses decreased to $22,000 and $45,000 in the second quarter and
six months ended June 30, 1998, respectively, from $36,000 and $71,000 in the
same 1997 periods, due to management's continued renegotiation of insurance
programs.
Interest income in the second quarter and six months ended June 30, 1998
decreased to $593,000 and $1,225,000, respectively, from $663,000 and $1,352,000
in the respective 1997 periods. The decrease was primarily attributable to a
lower average level of cash equivalents and investment securities.
- 11 -
The income tax provision of $64,000 and $128,000 in the second quarter and six
months ended June 30, 1998, respectively, is primarily attributable to a
provision for state taxes. 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. 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 -
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 Report on
Form 10-Q for the quarterly period ended March 31, 1998 are 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:
Marshall Manley v. AmBase Corporation. Oral argument on Manley's Motion for
Summary Judgment and the Company's motion to strike Manley's affirmative
defenses was held on May 15, 1998. The court denied both motions. The case is
currently scheduled for trial in October 1998.
Disputes with Internal Revenue Service.
Fresh Start. The one issue remaining for tax year 1987 was 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.
Based on the Supreme Court's decision in the Atlantic Mutual case and
discussion with the Company's outside advisors, on June 10, 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. In calculating the amount paid to the IRS, the Company also
utilized approximately $40 million of its NOL carryforwards, as further
described in Part I - Item 1 - Note 8.
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 -
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
At the Annual Meeting of Stockholders on May 28, 1998, the following proposals
were voted upon:
Stockholders approved the appointment of Price Waterhouse LLP as the independent
accountants of the Company for the year ending December 31, 1998. The shares
were voted as follows: 39,388,389 shares for and 691,839 against, with 53,637
shares abstaining. There were no broker non-votes.
Stockholders also approved an amendment to AmBase Corporation's 1993 Stock
Incentive Plan, extending the termination date for the period during which
awards may be granted under the 1993 Plan to May 28, 2008 from May 28, 1998, by
a vote of 14,971,430 for the proposal and 3,741,564 against the proposal, with
182,223 shares abstaining. There were 21,238,648 broker non-votes.
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: July 31, 1998
- 14 -
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule - June 30, 1998
27 Restated Financial Data Schedule - March 31, 1996
27 Restated Financial Data Schedule - June 30, 1996
27 Restated Financial Data Schedule - September 30, 1996
27 Restated Financial Data Schedule - December 31, 1996
- 15 -