-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L+Zy+Wu0HiNf+O/Q2u1TdxLIANrb8IHs6xycHhbsAHv3vYCxq56TAainno+6ZKSf Rx58G4KDVP7HtLaNTiPCFw== 0000020639-96-000011.txt : 19961021 0000020639-96-000011.hdr.sgml : 19961021 ACCESSION NUMBER: 0000020639-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961018 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBASE CORP CENTRAL INDEX KEY: 0000020639 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 952962743 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07265 FILM NUMBER: 96645376 BUSINESS ADDRESS: STREET 1: GREENWICH OFFICE PARK BLDG 2 STREET 2: 51 WEAVER STREET CITY: GREENWICH STATE: CT ZIP: 06831-5155 BUSINESS PHONE: 2035322000 MAIL ADDRESS: STREET 1: GREENWICH OFFICE PARK, BLDG 2 STREET 2: 51 WEAVER STREET CITY: GREENWICH STATE: CT ZIP: 06831-5155 FORMER COMPANY: FORMER CONFORMED NAME: HOME GROUP INC DATE OF NAME CHANGE: 19890608 FORMER COMPANY: FORMER CONFORMED NAME: CITYHOME CORP DATE OF NAME CHANGE: 19780917 10-Q 1 FORM 10-Q FOR THE QTR ENDED 9/30/96 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, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number 1-7265 AMBASE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State of incorporation) 95-2962743 (I.R.S. Employer Identification No.) GREENWICH OFFICE PARK, BUILDING 2, 51 WEAVER STREET GREENWICH, CONNECTICUT 06831-5155 (Address of principal executive offices) (Zip Code) (203) 532-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO At September 30, 1996 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 SEPTEMBER 30, 1996 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 15 Item 2. Changes in Securities 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 * Not Applicable. 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) ================================================================================ (in thousands, Third Quarter Nine Months except per share data) 1996 1995 1996 1995 ================================================================================ OPERATING EXPENSES: Compensation and benefits $ 533 $ 397 $ 1,343 $ 1,247 Professional and outside services 84 175 352 505 Insurance 36 54 142 194 Occupancy 27 34 68 143 Other operating 46 40 124 82 - ------------------------------------------------------------------------------ 726 700 2,029 2,171 - ------------------------------------------------------------------------------ Operating loss (726) (700) (2,029) (2,171) - ------------------------------------------------------------------------------ Interest income, net 690 779 1,948 2,167 Realized loss on sale of investment securities - available for sale - - (182) - Other income - 90 20 144 Other income - litigation and contingency reserves reversal - 1,750 8,000 1,750 - ------------------------------------------------------------------------------ Income (loss) from continuing operations before income taxes (36) 1,919 7,757 1,890 Income tax benefit (expense) (214) (1,849) 7,272 (1,948) - ------------------------------------------------------------------------------ Income (loss) from continuing operations (250) 70 15,029 (58) Income from discontinued investment management operations, net of income taxes 23 17 59 43 - ------------------------------------------------------------------------------ Net income (loss) $ (227) $ 87 $ 15,088 $ (15) ============================================================================== Per share data: Income (loss) from continuing operations $ - $ - $ 0.34 $ - Income from discontinued investment management operations, net of income taxes - - - - - ------------------------------------------------------------------------------ Net income (loss) $ - $ - $ 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 ================================================================================ September 30, December 31, 1996 1995 (in thousands) (unaudited) ================================================================================ ASSETS Cash and cash equivalents (includes $533 and $550 of restricted cash) $ 5,534 $ 7,752 Investment securities: Held to maturity (market value $47,644 and $40,086) 47,676 40,055 Available for sale, carried at fair value (cost $213) - 69 - -------------------------------------------------------------------------------- Total investment securities 47,676 40,124 - -------------------------------------------------------------------------------- Receivable from Home Holdings, Inc. 13,234 17,183 Net assets of discontinued investment management operations 464 - Investment management fees receivable - 146 Other assets 257 472 - ------------------------------------------------------------------------------ Total assets $ 67,165 $ 65,677 ============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued liabilities $ 278 $ 690 Supplemental retirement plan 4,698 4,798 Postretirement welfare benefits 1,546 1,633 Other liabilities 1,464 3,516 Litigation and contingency reserves 3,017 12,149 Income tax reserves 79,091 81,082 - ------------------------------------------------------------------------------ Total liabilities 90,094 103,868 - ------------------------------------------------------------------------------ Minority interest 112 82 - ------------------------------------------------------------------------------ Commitments and contingencies - - - ------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY: Common stock 447 447 Paid-in capital 547,712 547,712 Net unrealized losses on investment securities - available for sale - (144) Accumulated deficit (570,553) (585,641) Treasury stock (647) (647) - ------------------------------------------------------------------------------ Total stockholders' equity (23,041) (38,273) - ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 67,165 $ 65,677 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements. - 2 - AMBASE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30 ============================================================================== (in thousands) 1996 1995 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $ 15,029 $ (58) Adjustments to reconcile income (loss) from continuing operations to net cash used by continuing operations: Other assets (242) (36) Accounts payable and accrued liabilities (458) (362) Realized loss on sale of investment securities - available for sale 182 - Litigation and contingency reserves reversal (8,000) (1,750) Litigation and contingency reserves uses (1,132) (2,993) Income tax reserves, net (1,991) 3,494 Other, net (3,813) (2,761) - ------------------------------------------------------------------------------ Net cash used by operating activities of continuing operations (425) (4,466) - ------------------------------------------------------------------------------ Cash provided by discontinued investment management operations 61 45 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Maturities of investment securities - held to maturity 53,105 77,425 Purchases of investment securities - held to maturity (58,939) (73,859) Proceeds from sale of investment securities - available for sale 31 - Proceeds from Home Holdings, Inc. receivable 3,949 633 Other, net - (49) - ------------------------------------------------------------------------------ Net cash provided (used) by investing activities (1,854) 4,150 - ------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (2,218) (271) Cash and cash equivalents at beginning of period 7,752 9,038 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 5,534 $ 8,767 ============================================================================== 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 1995 consolidated financial statements to conform with the 1996 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. In addition, while the accompanying consolidated financial statements have been prepared on a going concern basis, circumstances exist which raise substantial doubt about the ability of the Company 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. Substantial contingent and alleged liabilities exist against the Company through certain lawsuits and proceedings, see Part II - Item 1. 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 profitable operations by acquiring existing operations and/or by developing new operations. The Company continues to evaluate a number of business opportunities to acquire operating subsidiaries, 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, 1995. 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 1996 will be met principally by the Company's current financial resources, 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 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 described in Part II - Item 1, and the inherent difficulty in predicting the outcome of the litigation and proceedings, management is unable to predict whether the Company's recorded liabilities 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 the alleged tax liabilities and lawsuits, see Part II - Item 1. 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. - 4 - AMBASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Management of the Company continually reviews the likelihood of liability and associated costs of pending and threatened litigation. In the second quarter of 1996, the Company determined that there was a reduced probability of incurring costs to defend and/or settle potential litigation with respect to Carteret Savings Bank, FA ("Carteret"), see Part II - Item 1 - Legal Proceedings, Government Action and the Company's Annual Report on Form 10-K for the year ended December 31, 1995, Item 8 - Note 11. As a result, the Company reduced its litigation and contingency reserves by $8,000,000 and recorded such amount as other income during the 1996 second quarter. In making such determination, management took into consideration numerous factors, including the failure of the Resolution Trust Corporation ("RTC") to notify the Company of any potential legal action prior to the expiration of a significant statute of limitations deadline and the transfer of the investigative duties of the RTC to the Federal Deposit Insurance Corporation ("FDIC") upon the expiration of the RTC's charter on December 31, 1995, pursuant to federal statute. Management also considered the July 1, 1996 decision by the U.S. Supreme Court in the consolidated cases of Winstar, Glendale Federal and Statesman supervisory goodwill cases, which held the United States liable for damages. At September 30, 1996, the litigation and contingency reserves were $3,017,000. For a discussion of alleged tax liabilities and lawsuits, see Part II - Item 1. In addition to the litigation and contingency reserves, the Company has a reserve for income taxes of $79,091,000 at September 30, 1996. 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 Goodwill Litigation. During the third quarter of 1995, the Company recorded as other income a $1,750,000 net reduction in the litigation and contingency reserves. This amount consisted of a $3,600,000 reduction resulting from the settlement of certain litigation at amounts less than claimed and previously anticipated, offset by a $1,850,000 increase due to the continuing review of the costs associated with litigation and proceedings pending against the Company, based upon progress to date. At September 30, 1995, the litigation and contingency reserves were $17,432,000. NOTE 3 - DISCONTINUED INVESTMENT MANAGEMENT OPERATIONS On September 20, 1996, the Company agreed to sell its entire interest in Augustine Asset Management, Inc. ("Augustine") to Augustine, for $500,000 in cash. Augustine is controlled by Mr. Ronald J. Burns. Mr. Burns previously served as a director of the Company from January 1991 until his resignation from the Company's Board on December 28, 1995. The Company acquired a 51% ownership interest in Augustine on November 10, 1993 for $200,000, and the Company's ownership percentage in Augustine 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 have been designated as discontinued operations, and the consolidated statements of operations for the periods presented herein have been 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. See Note 8 to the Company's consolidated financial statements for further information. - 5 - AMBASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Summarized information relating to income from discontinued operations for the third quarter and nine months ended September 30 is as follows: ============================================================================== Third Quarter Nine Months (in thousands) 1996 1995 1996 1995 ============================================================================== Investment management fee revenue $ 174 $ 132 $ 479 $ 368 Operating expenses (116) (86) (339) (250) Interest income 1 - 2 (3) Minority interest (12) (12) (30) (31) - ------------------------------------------------------------------------------ Income from discontinued operations before taxes 47 34 112 84 Income tax expense (24) (17) (53) (41) - ------------------------------------------------------------------------------ Income from discontinued operations through September 30, 1996 $ 23 $ 17 $ 59 $ 43 ============================================================================== Investment management fee revenue includes $49,000 and $142,000 for the third quarter and nine months ended September 30, 1996, respectively, and $44,000 and $118,000, in the comparable 1995 periods, from related parties. The net assets of discontinued operations are presented in the consolidated balance sheet at September 30, 1996, as a single amount as follows: ============================================================================== (in thousands) ============================================================================== Cash $ 99 Investment management fees receivable 177 Goodwill 217 Other assets 32 Other liabilities (61) - ------------------------------------------------------------------------------ Net assets of discontinued operations $ 464 ============================================================================== The outside investors' interest in Augustine, $112,000 at September 30, 1996, is reflected as minority interest in the consolidated balance sheet. Investment management fees receivable includes $48,000 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 September 30, 1996 is $533,000 of funds held in escrow, to be applied to the satisfaction of certain liabilities which have been classified as restricted. Included in cash and cash equivalents at December 31, 1995 is $550,000 of funds held in escrow in connection with a legal proceeding, which have been classified as restricted. - 6 - AMBASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - INVESTMENT SECURITIES The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement 115"), which requires investment securities to be classified as Held to Maturity (only permitted for securities with a stated maturity), Available for Sale or Trading Securities. Investment securities - held to maturity, at September 30, 1996 and December 31, 1995, consist of U.S. Treasury Bills with original maturities of one year or less and which are carried at amortized cost based upon the Company's intent and ability to hold these investments to maturity. Investment securities - available for sale, at December 31, 1995, consisted of investments in equity securities held for an indefinite period and which were carried at fair value with net unrealized gains and losses recorded directly in a separate component of stockholders' equity. Investment securities, at September 30 and December 31, consist of the following: ================================================================================ 1996 1995 ---------------------------- ---------------------------- Cost or Cost or Carrying Amortized Fair Carrying Amortized Fair (in thousands) Value Cost Value Value Cost Value ================================================================================ Held to Maturity: U.S. Treasury Bills maturing within one year $47,676 $47,676 $47,644 $40,055 $40,055 $40,086 Available for Sale: Equity Securities - - - 69 213 69 - -------------------------------------------------------------------------------- $47,676 $47,676 $47,644 $40,124 $40,268 $40,155 ================================================================================ The gross unrealized gains and losses on investment securities, at September 30 and December 31, consist of the following: ================================================================================ (in thousands) 1996 1995 ================================================================================ Held to Maturity: Gross unrealized gains (losses) $ (32) $ 31 ================================================================================ Available for Sale: Gross unrealized losses $ - $ 144 ================================================================================ During the nine month period ended September 30, 1996, proceeds of $31,000 were received from the sale of investment securities - available for sale, resulting in a realized loss of $182,000. No investment securities - available for sale were sold in the third quarter of 1996 and the third quarter and nine month periods of 1995. - 7 - AMBASE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Additional information regarding cash flow for the nine months ended September 30 is as follows: ================================================================================ (in thousands) 1996 1995 ================================================================================ Cash received (paid) during the period: Income taxes refunded (paid), net $ 5,299 $ (134) ================================================================================ Income taxes refunded (paid) in 1996 include a 1977 tax refund of $7,613,000 and $1,991,000 of payments to the Internal Revenue Service ("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 $28 million and $30 million, as of September 30, 1996 and December 31, 1995, respectively, arising primarily from the excess of book over tax reserves and alternative minimum tax credits. 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. During the first quarter of 1996, the Company received a 1977 income tax refund of $7,613,000. This amount has been recognized as an income tax benefit in the accompanying consolidated Statement of Operations, based on management's continuing review of the overall tax liability position of the Company. During the first nine months of 1996, $1,991,000 of payments to the IRS were charged against income tax reserves, principally representing payments for previously agreed to issues relating to the 1985 through 1991 tax years. NOTE 8 - SUBSEQUENT EVENT On October 4, 1996, the Company completed the sale of Augustine, resulting in a pretax gain, to be recognized in the fourth quarter of 1996, of approximately $148,000. - 8 - 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 Financial Statements and related notes, which are contained in Item 1, herein. On September 20, 1996, the Company agreed to sell its entire interest in Augustine. Accordingly, the operations of Augustine have been reclassified as discontinued investment management operations in the accompanying consolidated financial statements. FINANCIAL CONDITION The Company's assets at September 30, 1996 aggregated $67,165,000, consisting principally of cash and cash equivalents of $5,534,000, investment securities of $47,676,000 and a $13,234,000 receivable from Home Holdings, Inc. ("Home Holdings"), acquired pursuant to the agreement by which the Company sold The Home Insurance Company ("The Home") and its subsidiaries to Home Holdings in February 1991. During the first nine months of 1996, proceeds of $3,949,000 from the Home Holdings receivable were collected, a portion of which will be applied to the satisfaction of certain liabilities. 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, 1995, Item 8 Note 4, for the year ended December 31, 1995. At September 30, 1996, the Company's liabilities, including reserves for contingent and alleged liabilities, as further described in Part II - - Item 1, exceeded total assets by $23,041,000. 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. 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 has been recognized as an income tax benefit in the accompanying consolidated Statement of Operations, based on management's continuing review of the overall tax liability position 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 1991, the IRS and the Company do not agree with respect to only two issues, withholding taxes (Netherlands Antilles) and "fresh start" (an insurance industry issue). With respect to withholding taxes (Netherlands Antilles), 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 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 United States 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 Court's examination of the record and the status of the discovery process, the Court concluded that summary adjudication at this time was inappropriate. The Court directed the parties to engage in full and complete discovery as expeditiously as possible. The Court has set a trial date for March 17, 1997. 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 - In a case dealing with a withholding tax issue similar to the Company's, on November 6, 1995, the United States Tax Court ("Tax Court") ruled in favor of the taxpayer, Northern Indiana Public Service Co. ("Northern Indiana"). 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, 105 T.C. No. 22) to the United States Court of Appeals for the 7th Circuit. Although 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 Balance Sheet. With respect to the "fresh start" issue, on March 13, 1996, the IRS issued a Notice of Deficiency to the Company, which asserts an increase in tax for the year 1987. 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. 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. Management of the Company continually reviews the likelihood of liability and associated costs of pending and threatened litigation. In the second quarter of 1996, the Company determined that there was a reduced probability of incurring costs to defend and/or settle potential litigation with respect to Carteret, see Part II - Item 1 - Legal Proceedings, Government Action. As a result, the Company reduced its litigation and contingency reserves by $8,000,000 and recorded such amount as other income during the 1996 second quarter. In making such determination, management took into consideration numerous factors, including the failure of the RTC to notify the Company of any potential legal action prior to the expiration of a significant statute of limitations deadline and the transfer of the investigative duties of the RTC to the FDIC upon the expiration of the RTC's charter on December 31, 1995 pursuant to federal statute. Management also considered the July 1, 1996 decision by the U.S. Supreme Court in the consolidated cases of Winstar, Glendale Federal and Statesman supervisory goodwill cases, which held the United States liable for damages. In addition, $1,132,000 of payments for settlements and legal fees were charged against the litigation and contingency reserves during the first nine months of 1996, reducing the litigation and contingency reserves by a total of $9,132,000. At September 30, 1996, the litigation and contingency reserves were $3,017,000. For a discussion of alleged tax liabilities and lawsuits, see Part II Item 1. In addition to the litigation and contingency reserves, the Company has a reserve for income taxes of $79,091,000 at September 30, 1996. For a further discussion, see Part II - Item 1 - Legal Proceedings, Disputes with Internal Revenue Service, Withholding Taxes (Netherlands Antilles) and Fresh Start. During the third quarter of 1995, the Company recorded as other income a $1,750,000 net reduction in the litigation and contingency reserves. This amount consisted of a $3,600,000 reduction resulting from the settlement of certain litigation at amounts less than claimed and previously anticipated, offset by a $1,850,000 increase due to the continuing review of the costs associated with litigation and proceedings pending against the Company, based upon progress to date. In addition, in the third quarter and nine month periods ended September 30, 1995, the Company recorded as additional income tax expense a $1,800,000 increase in the income tax reserves. The increase in the income tax reserves was the result of the continuing review of the income tax reserves, including additional reserves for amounts considered unrealizable. - 10 - In June 1995, the Company received, with respect to 1990 and 1991, $1,690,000 from The Home in connection with a tax sharing agreement between the Company and The Home. This amount did not reduce the receivable from Home Holdings. Since the $1,690,000 had previously been considered in the calculation of income tax reserves, the receipt thereof was recorded as an increase to the income tax reserves account at September 30, 1995. 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. Because of the nature of the contingent and alleged liabilities and the inherent difficulty in predicting the outcome of the litigation and proceedings, management is unable to predict whether the Company's recorded liabilities 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 and lawsuits, see Part II - Item 1. The cash needs of the Company for the first nine months of 1996 were principally satisfied by the receipt of a 1977 tax refund, the continued collections of the receivable from Home Holdings and interest income received on investment securities and cash equivalents. Management believes that the Company's cash resources are sufficient to continue operations for 1996. Because of the nature of the contingent and alleged 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 liabilities will be adequate or its resources sufficient to satisfy its ultimate obligations. For the nine months ended September 30, 1996, cash of $425,000 was used by operating activities of continuing operations, including the payment of other liabilities, payments charged against income tax reserves and litigation and contingency reserves, and the payment of operating expenses, partially offset by the receipt of a 1977 tax refund, and the receipt of interest income. For the nine months ended September 30, 1995, cash of $4,466,000 was used by continuing operations, including payments charged against the litigation and contingency reserves and the payment of operating expenses partially offset by interest income, and the receipt of $1,690,000, with respect to 1990 and 1991, from The Home, in connection with a tax sharing agreement between the Company and The Home. The Company continues to evaluate a number of business opportunities to acquire operating subsidiaries, 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 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 profitable operations by acquiring existing operations and/or by developing new operations. There were no material commitments for capital expenditures as of September 30, 1996. - 11 - RESULTS OF OPERATIONS - CONTINUING OPERATIONS Summarized financial information for the continuing operations of the Company for the third quarter and nine months ended September 30 is as follows: ============================================================================== Third Quarter Nine Months (in thousands) 1996 1995 1996 1995 ============================================================================== Operating expenses: Compensation and benefits $ 533 $ 397 $ 1,343 $ 1,247 Professional and outside services 84 175 352 505 Insurance 36 54 142 194 Occupancy 27 34 68 143 Other operating 46 40 124 82 - ------------------------------------------------------------------------------ 726 700 2,029 2,171 - ------------------------------------------------------------------------------ Operating loss (726) (700) (2,029) (2,171) - ------------------------------------------------------------------------------ Interest income, net 690 779 1,948 2,167 Realized loss on sale of investment securities - available for sale - - (182) - Other income - 90 20 144 Other income - litigation and contingency reserves reversal - 1,750 8,000 1,750 - ------------------------------------------------------------------------------ Income (loss) from continuing operations before income taxes (36) 1,919 7,757 1,890 Income tax benefit (expense) (214) (1,849) 7,272 (1,948) - ------------------------------------------------------------------------------ Income (loss) from continuing operations $ (250) $ 70 $15,029 $ (58) ============================================================================== 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 1996 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 $250,000 in the third quarter ended September 30, 1996, and income from continuing operations of $15,029,000 in the nine month period ended September 30, 1996. In the same 1995 periods, the Company recorded income from continuing operations of $70,000 and a loss from continuing operations of $58,000, respectively. As further described in Financial Condition, above, the 1996 nine month period includes other income of $8,000,000, resulting from a reduction in the litigation and contingency reserves, and an additional income tax benefit of $7,613,000. Excluding these non-recurring items, the Company would have reported a loss from continuing operations of $584,000 for the nine month period ended September 30, 1996. The Company recorded a loss from continuing operations before income taxes of $36,000 in the third quarter ended September 30, 1996. For the nine month period ended September 30, 1996, the Company recorded income from continuing operations before income taxes of $7,757,000, which includes an $8,000,000 reduction in the litigation and contingency reserves, as further described in Financial Condition, above. In the third quarter and nine month periods ended September 30, 1995, the Company recorded income from continuing operations before income taxes of $1,919,000 and $1,890,000, respectively, which includes a $1,750,000 net reduction in litigation and contingency reserves, as further described in Financial Condition, above. Operating expenses increased by $26,000 in the 1996 third quarter, and declined by $142,000 in the nine month period ended September 30, 1996, compared with the third quarter and nine month periods of 1995. The reduced level of expenses in the 1996 nine month period is the result of management's continuing efforts to reduce and control costs. - 12 - Compensation and benefits increased to $533,000 and $1,343,000 in the 1996 third quarter and nine month periods, respectively, compared with $397,000 and $1,247,000 for the comparable 1995 periods. The increase in the 1996 periods is due to the hiring by the Company of an employee who previously provided services as an independent consultant, offset, to some extent, by a net reduction in benefit expenses. Professional and outside services decreased to $84,000 and $352,000 in the third quarter and nine month periods ended September 30, 1996, compared to $175,000 and $505,000 in the respective 1995 periods. This decrease was the result of an overall decrease in expenses for legal and other professional and outside services. The decrease in professional and outside services of $153,000, or 30%, in the nine month period of 1996, compared with the same 1995 period, more than offset the increase of $96,000, or 8%, in compensation and benefits in the same 1996 nine month period. Insurance, occupancy and other operating expenses in the third quarter and nine month periods ended September 30, 1996, as compared with the same 1995 periods, decreased due to management's renegotiation of insurance programs and a continuing reduction of expenses. Interest income in the third quarter and nine month periods of 1996 decreased to $690,000 and $1,948,000, respectively, from $779,000 and $2,167,000 in the respective 1995 periods. The decrease in the 1996 periods, compared to the 1995 periods, was attributable to a decreased yield on cash equivalents and investment securities. During the first quarter of 1996, the Company received a 1977 income tax refund of $7,613,000. This amount has been recognized as an income tax benefit in the accompanying Statement of Operations, based on management's continuing review of the overall tax liability position of the Company, as further described in Financial Condition, above. In addition, included in income tax benefit (expense) is a federal and state tax provision of $214,000 and $341,000 in the third quarter and nine month period ended September 30, 1996, respectively. In the third quarter and nine month periods ended September 30, 1995, the Company recorded as additional income tax expense a $1,800,000 increase in the income tax reserves. The increase in the income tax reserves in the 1995 periods was the result of the continuing review of the income tax reserves including additional reserves for amounts considered unrealizable. In addition, included in income tax expense is a state tax provision of $49,000 and $148,000 in the 1995 third quarter and nine month period, respectively. 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. - 13 - DISCONTINUED INVESTMENT MANAGEMENT OPERATIONS Income from discontinued operations for the third quarter and nine month periods ended September 30, 1996 was $23,000 and $59,000, respectively, which reflects the unaudited results of Augustine's operations. For the third quarter and nine month periods ended September 30, 1995, income from discontinued investment management operations was $17,000 and $43,000, respectively. A gain from the sale of the Company's entire interest in Augustine, is expected to be recognized in the fourth quarter of 1996. See Item 1 - Notes 3 and 8 to the Company's consolidated financial statements for a further discussion. 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 - 14 - PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information contained in Item 8 - Note 11 in AmBase's Annual Report on Form 10-K for the year ended December 31, 1995 and in AmBase's Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 1996 and June 30, 1996 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: Angel et al. v. AmBase Corp., et al. In the Angel case, the Company has entered into negotiations to settle the case with the plaintiffs. Further proceedings in this matter have been postponed until the completion of the negotiations. Rolo and Tenerelli v. City Investing Company Liquidating Trust et al. The parties have completed briefing and argument and are awaiting a decision by the Court of Appeals on the plaintiffs' appeal of the dismissal of the case by the District Court. Sovereign Metal. The Company moved for summary judgment and the dismissal of plaintiffs' claims. The case is currently scheduled for a pretrial conference on November 18, 1996. Disputes with Internal Revenue Service. Withholding Taxes (Netherlands Antilles). 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 United States 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 Court's examination of the record and the status of the discovery process, the Court concluded that summary adjudication at this time was inappropriate. The Court directed the parties to engage in full and complete discovery as expeditiously as possible. The Court has set a trial date for March 17, 1997. The actions against the Company, including those identified in (a) above, are in various stages. 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. (b)Goodwill Litigation: During the third quarter of 1993, the Company filed a claim against the United States, in the United States Court of Federal Claims (the "Court of Federal Claims"), based upon the impact of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") on its investment in Carteret. Similar so-called "supervisory goodwill" litigation, commenced in recent years by other financial institutions and/or their shareholders regarding a breach of contract issue, were heard in various trial and appellate courts, including the U.S. Supreme Court. On January 19, 1996, the United States Supreme Court granted review in Winstar Corp. v. United States, Glendale Federal Bank, FSB v. United States, and Statesman Savings Holding Corp. v. United States (the "consolidated cases"), which involve many of the same issues raised in the Company's suit. On July 1, 1996, the United States Supreme Court issued its decision in the consolidated cases. The Supreme Court's decision affirmed the lower Court's grant of summary judgment in favor of the plaintiffs on the issue of liability and remanded the cases for a determination of damages. Although the decision in the consolidated cases is beneficial to the Company's case, it is not necessarily indicative of the ultimate outcome of the Company's action. The Company's case is currently pending in the Court of Federal Claims. On August 26, 1996, the stay order expired in all "Winstar-related" cases. On September 18, 1996, the Court of Federal Claims entered an Omnibus Case Management Order that will govern further proceedings in the Company's action and approximately 120 other so-called "Winstar-related" cases. At present, no trial date has been set in the Company's action or any of the other "Winstar- related" cases, other than the Glenfed and Statesman cases. - 15 - 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 Does not apply. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Form 8-K None - 16 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: AMBASE CORPORATION BY JOHN P. FERRARA Vice President, Chief Financial Officer, Treasurer and Controller (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Date: October 18, 1996 - 17 - EXHIBIT INDEX Exhibit No. Description - ------- ----------- 27 Financial Data Schedule -17- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 SEP-30-1996 5,534 47,676 13,234 0 0 0 0 0 67,165 0 0 0 0 447 (23,488) 67,165 0 0 0 0 2,029 0 0 7,757 7,272 15,029 59 0 0 15,088 0.34 0.34 Income-pretax includes other income of $8,000, resulting from a reduction in the litigation & contingency reserves. Income-tax includes a 1977 income tax refund of $7,613, which has been recognized as an income tax benefit in the Statement of Operations.
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