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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-16527
LEHMAN ABS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3447441
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Vesey Street, 20th floor, New York, NY 10285
(Address of principal executive offices) (Zip Code)
212-526-5594
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Each Class on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of class)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
Registrant had 1,000 shares of common stock outstanding (all owned indirectly by
Lehman Brothers Holdings Inc.) as of February 1, 1996.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J (1) (a)
AND (b) OF FORM 10-K AND THEREFORE IS FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT CONTEMPLATED THEREBY.
INDEX
LEHMAN ABS CORPORATION and SUBSIDIARY
Cover
Index Page
PART I
Item 1 - Business 1
----------
Item 2 - Properties 1
---------
Item 3 - Legal Proceedings 1
-----------------
Item 4 - Submission of Matters to a Vote of Security Holders 2
---------------------------------------------------
PART II
Item 5 - Market for Registrant's Common Stock
and Related Stockholder Matters 2
-------------------------------
Item 6 - Selected Financial Data 2
--------------------------------
Item 7 - Management's Discussion and Analysis of
------------------------------------------------
Financial Condition and Liquidity and Capital
---------------------------------------------
Resources and Results of Operations 2
-----------------------------------
Item 8 - Financial Statements and Supplementary Data 4
--------------------------------------------
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 4
--------------------------------------
PART III
Item 10 - Directors and Executive Offic eof the Registrant 4
------------------------------------------------
Item 11 - Executive Compensation 4
----------------------
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 4
---------------------
Item 13 - Certain Relationships and Related Transactions 4
----------------------------------------------
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 5
-----------------------
Signatures 6
PART I
ITEM 1 Business
The consolidated financial statements include the accounts of
Lehman ABS Corporation and Lehman Asset Backed Caps Inc., its
wholly owned subsidiary (together, the "Company"). Lehman ABS
Corporation was incorporated in the State of Delaware on
January 29, 1988 as a special purpose finance corporation. The
Company's activities consist of the issuance and sale of
securities (the "Securities") primarily collateralized by
purchased receivables arising from loans or financings (the
"Receivables") or collateralized by government and government
agency obligations or corporate debt securities (the "Bonds").
All of the outstanding capital stock is owned by Lehman
Commercial Paper Inc. ("LCPI"), an indirect wholly owned
subsidiary of Lehman Brothers Holdings Inc.
("Holdings").
Lehman Asset Backed Caps Inc. was incorporated in the State of
Delaware on June 15, 1994 for the purpose of entering into
interest rate cap agreements and related support agreements in
connection with securitization transactions.
The Company derives income from trading and/or interest earned
on securities owned. Trading income includes the profit (loss)
from the issuance and sale of securities and valuing
securities owned at market or fair value.
Securities may be issued and sold by the Company in one or
more series on terms to be determined at the time of sale.
Each series of Securities may consist of one or more classes.
Each series of Securities may be collateralized or otherwise
secured or backed by receivables arising in connection with
the sale or lease of motor vehicles, credit card purchases or
other designated receivables arising as a result of certain
loans, financings, or other specified transactions, by
Pass-through Certificates evidencing a fractional undivided
ownership interest in one or more grantor trusts that own or
hold one or more pools, or participations in one or more pools
of Receivables, or other collateral, including, but not
limited to, cash deposits, letters of credit, etc. Each series
of Securities may also be collateralized or otherwise secured
or backed by U.S. Government and government agency securities,
foreign government obligations or corporate debt securities
and certain derivative products including interest rate and
currency swaps, options, and other interest rate option
products including caps, collars and floors.
The Company has filed registration statements on Form S-3 with
the Securities and Exchange Commission ("the Commission")
which permit the Company to issue, from time to time,
Securities collateralized by Receivables in the principal
amount not to exceed $5.83 billion. The Company has also filed
registration statements on Form S-3 for the issuance of $.5
billion principal amount of Securities collateralized by
Bonds. As of November 30, 1995, approximately $3.1 billion was
available for issuance under the registration statements
referred to above.
ITEM 2 Properties
The Company owns no physical properties.
ITEM 3 Legal Proceedings
There are no pending legal proceedings.
ITEM 4 Submission of Matters to a Vote of Security Holders
Pursuant to General Instruction J of Form 10-K, the
information required by Item 4 is omitted.
PART II
ITEM 5 Market for Registrant's Common Stock and Related
Stockholder Matters
The Company's sole class of capital stock is its $0.25 par
value common stock, which is all owned by LCPI. There is no
public market for the Company's common stock.
ITEM 6 Selected Financial Data
Pursuant to General Instruction J of Form 10-K, the
information required by Item 6 is omitted.
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Liquidity and Capital Resources and Results of Operations
Set forth below is management's discussion and analysis of
financial condition and liquidity and capital resources and
results of operations for the twelve months ended November 30,
1995, the eleven months ended November 30, 1994 and the twelve
months ended December 31, 1993.
Financial Condition and Liquidity and Capital Resources
The Company's assets decreased from $28.1 million at November
30, 1994 to $27.6 million at November 30, 1995. Financial
instruments owned at November 30, 1995 aggregated $25.8
million and represent the portion of issued securities
retained by the Company as well as the fair value of interest
rate cap agreements purchased from an affiliate. These
securities are carried at market or fair value, as
appropriate.
Stockholder's equity increased from $21.1 million at November
30, 1994 to $23.7 million at November 30, 1995 as a result of
net income partially offset by net capital distributions to
LCPI. Capital contributions from LCPI are made to fund
securities retained by the Company from new issuances. The
Company continually monitors its capital position and makes
capital distributions to LCPI as excess funds are realized
from securities related transactions.
Results of Operations
For the twelve months ended November 30, 1995 and eleven
months ended November 30, 1994:
During 1995, the Company issued Lehman Home Equity Loan Trust
1995-1 totaling approximately $128.1 million principal amount,
Lehman Home Improvement Loan Trust 1995-2 totaling
approximately $66.8 million principal amount, Lehman FHA Title
I Loan
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Liquidity and Capital Resources and Results of Operations
(continued)
Trust 1995-3 totaling approximately $85.0 million principal
amount, Lehman FHA Title I Loan Trust 1995-4 totaling
approximately $110.0 million principal amount, Lehman Home
Equity Loan Trust 1995-5 totaling approximately $55.0 million
principal amount, Lehman FHA Title I Loan Trust 1995-6
totaling approximately $205.0 million principal amount, Lehman
Home Equity Loan Trust 1995-7 totaling approximately $130.0
million principal amount and Delta Funding Home Equity Loan
Trust 1995-2 totaling approximately $150.0 million principal
amount.
Trading revenues totaled $7,557,756 for the twelve months
ended November 30, 1995, principally attributable to the
issuance and sale of securities and valuing financial
instruments owned at market or fair value. Trading revenues
totaled $304,814 for the eleven months ended November 30,
1994, principally attributable to valuing financial
instruments owned at market or fair value.
Interest income decreased from $2,319,670 for the eleven
months ended November 30, 1994 to $1,623,749 for the twelve
months ended November 30, 1995. The decrease is principally
due to a decrease in interest bearing financial instruments
owned during the period. Management fees increased from
$768,466 for the eleven months ended November 30, 1994 to
$2,310,369 for the twelve months ended November 30, 1995,
reflecting increased trading and operating activities of the
Company. Management fees are the principal component of
general and administrative expenses in the accompanying
Consolidated Statements of Operations.
For the eleven months ended November 30, 1994 and twelve
months ended December 31, 1993:
During 1994, the Company issued Lehman Card Account Trust
1994-2 totaling approximately $267.8 million principal amount,
Lehman Card Account Trust 1994-1 totaling approximately $1.1
billion, Lehman Home Equity Loan Trust 1994-2 totaling
approximately $52.2 million principal amount and Lehman Home
Equity Loan Trust 1994-1 totaling approximately $208.5 million
principal amount. In addition, the Company issued
approximately $353 million principal amount of mortgage
pass-through certificates in private placements. During 1993,
the Company issued Lehman Home Equity Loan Trusts 1993-3,
1993-2 and 1993-1 totaling approximately $147.1 million,
$303.9 million and $166.1 million principal amount,
respectively. In addition, the Company issued, through a
Trust, $150 million of securities collateralized by
receivables in a private placement.
Trading revenues totaled $304,814 for the eleven months ended
November 30, 1994, principally attributable to valuing
financial instruments owned at market or fair value. Trading
revenues totaled $441,519 for the twelve months ended December
31, 1993, principally attributable to the issuance and sale of
securities and valuing financial instruments owned at market
or fair value.
Interest income increased from $1,262 for the twelve months
ended December 31, 1993 to $2,319,670 for the eleven months
ended November 30, 1994. The increase is principally due to an
increase in interest bearing financial instruments owned and
an increase in interest bearing deposits held with trustees
during the period. Management fees increased
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Liquidity and Capital Resources and Results of Operations
(continued)
from $123,201 for the twelve months ended December 31, 1993 to
$768,466 for the eleven months ended November 30, 1994,
reflecting the increase in revenues for the eleven months
ended November 30, 1994. Management fees are the principal
component of general and administrative expenses in the
accompanying Consolidated Statements of Operations.
ITEM 8 Financial Statements and Supplementary Data
The financial statements required by this Item and included in
this Report are referenced in the index appearing on page F-1.
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
ITEM 10 Directors and Executive Officers of the Registrant
Pursuant to General Instruction J of Form 10-K, the
information required by Item 10 is omitted.
ITEM 11 Executive Compensation
Pursuant to General Instruction J of Form 10-K, the
information required by Item 11 is omitted.
ITEM 12 Security Ownership of Certain Beneficial Owners and
Management
Pursuant to General Instruction J of Form 10-K, the
information required by Item 12 is omitted.
ITEM 13 Certain Relationships and Related Transactions
Pursuant to General Instruction J of Form 10-K, the
information required by Item 13 is omitted.
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Schedules
See Index to Financial Statements appearing on Page F-1
(3) Exhibits
Not applicable
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LEHMAN ABS CORPORATION
(Registrant)
By: THEODORE P. JANULIS
Theodore P. Janulis
President
Date: February 23, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE POSITION DATE
THEODORE P. JANULIS President February 23, 1996
Theodore P. Janulis
DAVID GOLDFARB Controller February 23, 1996
David Goldfarb
BRIAN R. ZIPP Director February 23, 1996
Brian R. Zipp
MICHAEL J. O'HANLON Chairman and Director February 23, 1996
Michael J. O'Hanlon
LEHMAN ABS CORPORATION AND SUBSIDIARY
INDEX to CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Statements of Operations for the twelve months ended
November 30, 1995, eleven months ended November 30, 1994 and twelve
months ended December 31, 1993 F-3
Consolidated Statements of Financial Condition as of
November 30, 1995 and 1994 F-4
Consolidated Statements of Changes in Stockholder's Equity for the
twelve months ended November 30, 1995, eleven months ended November
30, 1994 and twelve months ended December 31, 1993 F-5
Consolidated Statements of Cash Flows for the twelve months ended
November 30, 1995, eleven months ended November 30, 1994 and twelve
months ended December 31, 1993 F-6
Notes to Consolidated Financial Statements F-7 to F-10
Consent of Independent Auditors F-11
Report of Independent Auditors
The Board of Directors and Stockholder of
Lehman ABS Corporation and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Lehman ABS Corporation and Subsidiary (the "Company") as of November 30, 1995
and November 30, 1994, and the related consolidated statements of operations,
changes in stockholder's equity and cash flows for the year ended November 30,
1995, for the eleven-month period ended November 30, 1994 and for the year ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lehman ABS
Corporation and Subsidiary at November 30, 1995 and 1994, and the results of its
operations and its cash flows for the year ended November 30, 1995, for the
eleven-month period ended November 30, 1994 and for the year ended December 31,
1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
January 10, 1996
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS of OPERATIONS
Twelve months ended Eleven months ended Twelve months ended
November 30, 1995 November 30,1994 December 31, 1993
--------------------- --------------------- -----------------
Revenues:
Trading ............................................... $7,557,756 $ 304,814 $ 441,519
Interest .............................................. 1,623,749 2,319,670 1,262
---------- ---------- ----------
9,181,505 2,624,484 442,781
---------- ---------- ----------
Expenses:
Compensation .......................................... 5,000 4,587 5,000
General and
administrative .................................... 2,325,762 773,852 125,806
---------- ---------- ----------
2,330,762 778,439 130,806
---------- ---------- ----------
Income before income
tax provision ..................................... 6,850,743 1,846,045 311,975
Income tax provision .................................... 3,154,767 849,968 143,665
---------- ---------- ----------
Net income .............................................. $3,695,976 $ 996,077 $ 168,310
========== ========== ==========
See notes to consolidated financial statements
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS of FINANCIAL CONDITION
ASSETS
November 30, November 30,
1995 1994
Cash ............................................. $ 99,245 $ 43,858
Financial instruments owned, at fair value ....... 25,772,380 27,429,761
Receivables from brokers, dealers and
financial institutions ......................... 872,920 183,397
Due from others .................................. 105,077 102,136
Deferred registration costs, net of
accumulated amortization of $1,069,032 and
$758,625 in 1995 and 1994, respectively ........ 755,748 292,769
----------- -----------
$27,605,370 $28,051,921
=========== ===========
LIABILITIES and STOCKHOLDER'S EQUITY
Liabilities:
Financial instruments sold but not yet purchased ... $ 497,590 $2,932,907
Issuance expenses payable .......................... 429,118 746,399
Payables to brokers, dealers and
financial institutions ........................... 29,800 1,801,965
Payables to affiliates ............................. 2,978,394 438,547
Income taxes payable to affiliate .................. -- 985,195
Other liabilities and accrued expenses ............. -- 19,385
---------- ----------
Total liabilities .............. 3,934,902 6,924,398
---------- ----------
Stockholder's equity:
Common stock, $0.25 par value;
1,000 shares authorized,
issued and outstanding ..................... 250 250
Additional paid- in capital ...................... 18,829,737 19,982,768
Retained earnings ................................ 4,840,481 1,144,505
----------- -----------
Total stockholder's equity ... 23,670,468 21,127,523
----------- -----------
$27,605,370 $28,051,921
=========== ===========
See notes to consolidated financial statements
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
for the twelve months ended November 30, 1995,
eleven months ended November 30, 1994 and
twelve months ended December 31, 1993
Retained
Earnings
Additional (Accumulated Total
Common Stock Paid-in Capital Deficit) Stockholder's
Equity
---------------- ------------------- ------------------- ---------
Balance, December 31, 1992 ...................... $ 250 $ 225,533 $ (19,882) $ 205,901
Net income ...................................... -- -- 168,310 168,310
Capital contributions by parent ................. -- 30,675,202 -- 30,675,202
Capital distributions to parent ................. -- (2,902,266) -- (2,902,266)
------------- ------------- ------------- -------------
Balance, December 31, 1993 ...................... 250 27,998,469 148,428 28,147,147
Net income ...................................... -- -- 996,077 996,077
Capital contributions by parent ................. -- 44,992,585 -- 44,992,585
Capital distributions to parent ................. -- (53,008,286) -- (53,008,286)
------------- ------------- ------------- -------------
Balance, November 30, 1994 ...................... 250 19,982,768 1,144,505 21,127,523
Net income ...................................... -- -- 3,695,976 3,695,976
Capital contributions by parent ................. -- 250,340,432 -- 250,340,432
Capital distributions to parent ................. -- (251,493,463) -- (251,493,463)
------------- ------------- ------------- -------------
Balance, November 30, 1995 ...................... $ 250 $ 18,829,737 $ 4,840,481 $ 23,670,468
============= ============= ============= =============
See notes to consolidated financial statements.
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS of CASH FLOWS
Twelve months Eleven months Twelve months
ended November ended November ended December
30, 1995 30, 1994 31, 1993
------------------- -------------------- ------------------
Cash flows from operating activities:
Net income $ 3,695,976 $ 996,077 $ 168,310
------------- ------------- -------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Amortization ..................................................... 310,407 535,762 198,719
Effect of changes in operating assets and
liabilities:
Financial instruments owned, at fair
value ............................................................ 1,657,381 (4,674,002) (22,755,759)
Receivables from brokers, dealers and
financial institutions ........................................... (689,523) (183,397) --
Due from others .................................................. (2,941) 5,947,775 (6,049,911)
Deferred registration costs....................................... (773,386) (413,794) (482,250)
Financial instruments sold but not yet
purchased ............................................. (2,435,317) 2,932,907 --
Issuance expenses payable......................................... (317,281) (105,857) 852,256
Payables to brokers, dealers and
financial institutions............................................ (1,772,165) 1,801,965 --
Payables to affiliates............................................ 2,539,847 346,051 92,496
Income taxes payable to affi ..................................... (985,195) 849,968 143,975
Other liabilities and accrued expenses ........................... (19,385) 8,133 (2,760)
------------- ------------- -------------
Net cash provided by (used in)
operating activities.............................................. 1,208,418 8,041,588 (27,834,924)
------------- ------------- -------------
Cash flows from financing activities:
Capital contributions by parent................................... 250,340,432 44,992,585 30,675,202
Capital distributions to parent................................... (251,493,463) (53,008,286) (2,902,266)
------------- ------------- -------------
Cash (used in) provided by
financing activities.............................................. (1,153,031) (8,015,701) 27,772,936
------------- ------------- -------------
Net increase (decrease) in cash................................... 55,387 25,887 (61,988)
Cash at the beginning of the period............................... 43,858 17,971 79,959
------------- ------------- -------------
Cash at the end of the period..................................... 99,245 $ 43,858 $ 17,971
============= ============= =============
See notes to consolidated financial statements
LEHMAN ABS CORPORATION and SUBSIDIARY
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
The consolidated financial statements include the accounts of
Lehman ABS Corporation and Lehman Asset Backed Caps Inc., its
wholly owned subsidiary (together, the "Company"). Lehman ABS
Corporation was incorporated in the State of Delaware on January
29, 1988 as a special purpose finance corporation organized for
the purpose of issuing and selling securities (the "Securities")
primarily collateralized by purchased receivables arising from
loans or financings (the "Receivables"). All of the outstanding
capital stock is owned by Lehman Commercial Paper Inc. ("LCPI"),
an indirect wholly owned subsidiary of Lehman Brothers Holdings
Inc. ("Holdings").
Lehman Asset Backed Caps Inc. was incorporated in the State of
Delaware on June 15, 1994 for the purpose of entering into
interest rate cap agreements and related support agreements in
connection with securitization transactions.
The Company derives its income from trading and/or interest
earned on securities owned. Trading income includes the profit
(loss) from the issuance and sale of securities and valuing
securities owned at market or fair value.
The Company has filed registration statements on Form S-3 with
the Securities and Exchange Commission which permit the Company
to issue, from time to time, securities collateralized by
Receivables in the principal amount not to exceed $5.83 billion.
The Company has also filed registration statements on Form S-3
for the issuance of $.5 billion principal amount of Securities
collateralized by Bonds. During 1995, the Company issued Lehman
Home Equity Loan Trust 1995-1 totaling approximately $128.1
million principal amount, Lehman Home Improvement Loan Trust
1995-2 totaling approximately $66.8 million principal amount,
Lehman FHA Title I Loan Trust 1995-3 totaling approximately $85.0
million principal amount, Lehman FHA Title I Loan Trust 1995-4
totaling approximately $110.0 million principal amount, Lehman
Home Equity Loan Trust 1995-5 totaling approximately $55.0
million principal amount, Lehman FHA Title I Loan Trust 1995-6
totaling approximately $205.0 million principal amount, Lehman
Home Equity Loan Trust 1995-7 totaling approximately $130.0
million principal amount and Delta Funding Home Equity Loan Trust
1995-2 totaling approximately $150.0 million principal amount. As
of November 30, 1995, approximately $3.1 billion was available
for issuance under the registration statements referred to above.
The Company has established trusts to issue securities
collateralized by receivables. The Company has surrendered to
trusts all future economic interests in the Securities issued to
date together with the related collateral. According to the terms
of the trust agreements, the bondholders can look only to the
related collateral for repayment of both principal and interest.
In accordance with generally accepted accounting principles, the
Securities and related collateral have been removed from the
accompanying Consolidated Statements of Financial Condition.
During the twelve months ended November 30, 1995, LCPI
contributed $250.3 million in capital to the Company, and the
Company made capital distributions to LCPI of $251.5 million.
2. Summary of Significant Accounting Policies:
Deferred registration costs:
Deferred registration costs relate to filing fees and other
direct costs paid by the Company in connection with filings for
the registration of Securities which were or are to be issued by
the Company. These costs are deferred in anticipation of future
revenues upon the issuance of securities from the respective
shelf that has been established. Amortization of the costs is
based upon the percentage of issued Securities to the respective
shelf from which the Securities are issued and is included as a
component of net trading revenue in the accompanying Consolidated
Statements of Operations.
Financial instruments owned and financial instruments sold but
not yet purchased:
Financial instruments owned and financial instruments sold but
not yet purchased principally represent subordinated interests in
pools of receivables, instruments representing the right to
receive certain future interest payments on the underlying
receivables and interest rate cap agreements. Financial
instruments owned and financial instruments sold but not yet
purchased are valued at market or fair value, as appropriate,
with the related profit (loss) recorded in the Consolidated
Statements of Operations. Market value is generally based on
listed market prices. If listed market prices are not available,
fair value is determined based on other relevant factors,
including broker or dealer price quotations, and valuation
pricing models which take into account time value and volatility
factors underlying the securities.
All securities transactions are recorded in the accompanying
financial statements on a trade date basis.
Income taxes:
The Company is included in the consolidated U.S. federal income
tax return of Holdings and in combined state and local returns
with other affiliates of Holdings. The Company computes its
income tax provision on a separate return basis in accordance
with the terms of a tax allocation agreement between Holdings and
its subsidiaries. The provision for income taxes is greater than
that calculated by applying the statutory federal income tax rate
principally due to state and local taxes.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Management
believes that the estimates utilized in preparing its financial
statements are reasonable and prudent. Actual results could
differ from these estimates.
3. Related Party Transactions:
All receivables used to collateralize the Securities are
purchased from and recorded at an affiliate's carrying value,
which for such broker/dealer affiliates represents market value.
Certain directors and officers of the Company are also directors
and officers of Lehman Brothers Inc., LCPI and/or other
affiliates of the Company.
3. Related Party Transactions (continued):
Pursuant to a management agreement (the "Agreement"), the Company
is charged a management fee for various services rendered on its
behalf by LCPI. The Agreement provides for an allocation of costs
based upon the level of activity processed by LCPI on behalf of
the Company. Management fees of $2,310,369 for the twelve months
ended November 30, 1995, $768,466 for the eleven months ended
November 30, 1994 and $123,201 for the twelve months ended
December 31, 1993 are the principal component of general and
administrative expenses in the accompanying Consolidated
Statements of Operations. The Agreement is renewable each year
unless expressly terminated or renegotiated by the parties.
Compensation expense represents amounts allocated to the Company
by LCPI for compensation paid to a common director of the
Company.
Income taxes of $4,139,962 were paid by the Company to LCPI in
accordance with the terms of the Company's tax allocation
agreement during the twelve months ended November 30, 1995. No
income taxes were paid by the Company during 1994 and 1993.
The Company believes that amounts arising through related party
transactions, including the fees referred to above, are
reasonable and approximate the amounts that would have been
recorded if the Company operated as an unaffiliated entity.
4. Due from Others:
At November 30, 1995 and 1994, the Company had interest bearing
deposits of $105,077 and $102,136, respectively, with independent
trustees in accordance with the terms of a securitization
transaction.
5. Financial Instruments with Off-Balance Sheet Risk and
Concentration of Credit Risk:
The Company's activities are principally conducted with financial
institutions. In connection with the terms of securitization
transactions, the Company has sold interest rate caps with a
notional amount of $1.32 billion, maturing in the year 2000, to
trusts. The fair value of the interest rate caps sold is
approximately $.5 million and is reported as financial
instruments sold but not yet purchased in the Consolidated
Statements of Financial Condition at November 30, 1995. In
addition, the Company has purchased interest rate caps, from an
affiliate, with a notional amount of $1.32 billion, maturing in
the year 2000. The fair value of the interest rate caps purchased
is approximately $2.4 million and is included in financial
instruments owned in the Consolidated Statements of Financial
Condition at November 30, 1995. At November 30, 1995, the Company
had no other material individual counterparty concentration of
credit risk.
6. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair values of most on- and off-balance sheet
financial instruments, for which it is practicable to estimate
that fair value. The scope of SFAS No. 107 excludes certain
financial instruments, such as trade receivables and payables
6. Fair Value of Financial Instruments (continued):
when the carrying value approximates the fair value, employee
benefit obligations and all non-financial instruments, such as
fixed assets. The fair value of the Company's assets and
liabilities which qualify as financial instruments under SFAS No.
107 approximate the carrying amounts presented in the
Consolidated Statements of Financial Condition.
Financial instruments owned principally represent subordinated
interest in pools of receivables and are carried at fair value,
with the remaining instruments representing the right to receive
certain future interest payments on the underlying receivables.
These financial instruments are generally non-rated or rated as
non-investment grade by recognized rating agencies. Changes in
interest rates could potentially have an adverse impact on the
future cash flows for financial instruments owned. In addition,
for certain securities, defaults on receivables underlying these
instruments could have a greater than proportional impact on
their fair value since the payments of principal and interest are
subordinate to other securities issued in the same series. These
risks, among other risks, are incorporated in the determination
of fair value of financial instruments owned.
7. Change of Fiscal Year-End
During 1994, the Company changed its fiscal year-end from
December 31 to November 30. Such a change to a non-calendar cycle
shifts certain year-end administrative activities to a time
period that conflicts less with the business needs of Holdings'
institutional customers.
The following is selected financial data for the eleven-month
transition period ending November 30 and the comparable prior
year period:
Eleven months ended
November 30, November 30,
1994 1993
------------------- ------------
(Unaudited)
Revenues $2,624,484 $ 271,594
Expenses 778,439 85,898
-------- -------
Income before income tax provision 1,846,045 185,696
Income tax provision 849,968 85,513
-------- -------
Net income $ 996,077 $ 100,183
========= =========
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-3 Nos. 33-20084, 33-58010 and 33-67542) of Lehman
ABS Corporation of our report dated January 10, 1996, with respect to
the consolidated financial statements of Lehman ABS Corporation
included in this Annual Report (Form 10-K) for the year ended November
30, 1995.
ERNST & YOUNG LLP
New York, New York
February 23, 1996