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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, 1996
[ ] 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 24, 1997.
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 2
--------------------------
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 - 4
-----------------------------------
Item 8 - Financial Statements and Supplementary Data 5
----------------------------------------------------
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 5
PART III
Item 10 - Directors and Executive Officers
of the Registrant 5
Item 11 - Executive Compensation 5
--------------------------------
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 5
Item 13 - Certain Relationships and Related Transactions 5
--------------------------------------------------------
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 6
Signatures 7
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 common 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 $11.33 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, 1996, approximately $5.3 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,
1996 and 1995 and the eleven months ended November 30, 1994.
Financial Condition and Liquidity and Capital Resources
The Company's assets increased from $27.6 million at November
30, 1995 to $34.4 million at November 30, 1996. The incease is
primarily due to a $5.6 million increase in financial
instruments owned. Financial instruments owned at November 30,
1996 aggregated $31.4 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
affiliates. These securities are carried at market or fair
value, as appropriate.
Stockholder's equity increased from $23.7 million at November
30, 1995 to $28.3 million at November 30, 1996 primarily as a
result of net income of $4.7 million. Capital contributions
from LCPI are made to fund securities retained by the Company
from new issuances or to fund operating expenses including
income taxes. The Company continually monitors its capital
position and makes capital distributions to LCPI as excess
funds are realized from securities related transactions.
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Liquidity and Capital Resources and Results of Operations
(continued)
--------------------------------------------------------------
Results of Operations
For the twelve months ended November 30, 1996 and twelve
months ended November 30, 1995:
During 1996, the Company issued Lehman Home Equity Loan Trust
1996-1 totaling approximately $146.2 million principal amount,
Short-Term Card Account Trust 1995-1 totaling approximately
$1.6 billion principal amount, Lehman FHA Title I Loan Trust
1996-2 totaling approximately $279.3 million principal amount,
Lehman Home Equity Loan Trust 1996-2 totaling approximately
$122.1 million principal amount, Delta Funding Home Equity
Loan Trust 1996-1 totaling approximately $225.0 million
principal amount, Banc One Home Equity Loan Trust 1996-A
totaling approximately $232.2 million principal amount, Lehman
FHA Title I Loan Trust 1996-3 totaling approximately $155.5
million principal amount, Provident Bank Home Equity Loan
Trust 1996-1 totaling approximately $153.7 million principal
amount, Delta Funding Home Equity Loan Trust 1996-2 totaling
approximately $180.0 million principal amount, Champion Home
Equity Loan Trust 1996-3 totaling approximately $120.0 million
principal amount, Wal-Mart 1996 Series 1 totaling
approximately $20.0 million principal amount, Wal-Mart 1996
Series 2 totaling approximately $30.0 million principal
amount, and Dayton-Hudson Series 1996-DHC-1 totaling
approximately $12.6 million principal amount.
Trading revenues totaled $8,799,660 and $7,557,756 for the
twelve months ended November 30, 1996 and 1995, respectively,
principally attributable to the issuance and sale of
securities and valuing financial instruments owned at market
or fair value.
Interest income increased from $1,623,749 for the twelve
months ended November 30, 1995 to $2,780,800 for the twelve
months ended November 30, 1996. The increase is principally
due to an increase in interest bearing financial instruments
owned during the period. Management fees increased from
$2,310,369 for the twelve months ended November 30, 1995 to
$2,913,510 for the twelve months ended November 30, 1996,
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.
Management's Discussion and Analysis of Financial Condition
and Liquidity and Capital Resources and Results of Operations
(continued)
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 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 and $304,814 for the eleven months
ended November 30, 1994, principally attributable to the
issuance and sale of securities and 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 and a decrease in interest bearing deposits held with
trustees 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.
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
23. Consent of Ernst & Young LLP*
27. Finance Data Schedule*
(b) Reports on Form 8-K:
* Filed herewith
12/24/1996
12/24/1996
12/19/1996
12/16/1996
12/12/1996
12/11/1996
12/10/1996
12/09/1996
11/25/1996
11/21/1996
11/21/1996
09/26/1996
09/25/1996
09/25/1996
09/18/1996
09/17/1996
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 and Director
Date: February 24, 1997
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 and Director February 24, 1997
--------------------
Theodore P. Janulis
DAVID GOLDFARB Controller February 24, 1997
David Goldfarb
MARK L. ZUSY Chairman and Director February 24, 1997
---------------------
Mark L. Zusy
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, 1996 and 1995 and the eleven months
ended November 30, 1994 F-3
Consolidated Statements of Financial Condition as of
November 30, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholder's Equity for the
twelve months ended November 30, 1996 and 1995
and the eleven months ended November 30, 1994 F-5
Consolidated Statements of Cash Flows for the twelve months ended
November 30, 1996 and 1995 and the eleven months
ended November 30, 1994 F-6
Notes to Consolidated Financial Statements F-7 to F-10
F-1
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, 1996
and November 30, 1995, and the related consolidated statements of operations,
changes in stockholder's equity and cash flows for the years ended November 30,
1996 and 1995 and for the eleven-month period ended November 30, 1994. 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, 1996 and 1995, and the results of its
operations and its cash flows for the years ended November 30, 1996 and 1995 and
for the eleven-month period ended November 30, 1994, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
February 21, 1997
F-2
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS of OPERATIONS
Twelve months Twelve months Eleven months
ended ended ended
November 30, November 30, November 30,
1996 1995 1994
--------------------- ------------------ -------------
Revenues:
Trading $ 8,799,660 $7,557,756 $ 304,814
Interest 2,780,800 1,623,749 2,319,670
-------------------- --------------- ---------------
11,580,460 9,181,505 2,624,484
-------------------- ---------------- --------------
Expenses:
Compensation 5,000 5,000 4,587
General and
administrative 2,913,682 2,325,762 773,852
-------------------- ---------------- --------------
2,918,682 2,330,762 778,439
-------------------- ---------------- --------------
Income before income
tax provision 8,661,778 6,850,743 1,846,045
Income tax provision 3,988,749 3,154,767 849,968
-------------------- ----------------- -------------
Net income $4,673,029 $3,695,976 $ 996,077
==================== ================ =============
See notes to consolidated financial statements
F-3
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS of FINANCIAL CONDITION
ASSETS
November 30, 1996 November 30, 1995
---------------------- ----------------------
Cash $ 268,832 $ 99,245
Financial instruments owned, at fair value 31,369,972 25,772,380
Receivables from brokers, dealers and
financial institutions 739,056 872,920
Due from others 108,027 105,077
Deferred registration costs, net of
accumulated amortization of $2,198,888 and
$1,069,032 in 1996 and 1995, respectively 1,922,860 755,748
---------------------- ----------------------
$34,408,747 $27,605,370
====================== ======================
LIABILITIES and STOCKHOLDER'S EQUITY
Liabilities:
Financial instruments sold but not yet purchased $ 44,073 $ 497,590
Issuance expenses payable 1,394 429,118
Payables to brokers, dealers and
financial institutions 2,394,770 29,800
Payables to affiliates 3,660,939 2,978,394
---------------------- -----------------------
Total liabilities 6,101,176 3,934,902
---------------------- -----------------------
Stockholder's equity:
Common stock, $0.25 par value;
1,000 shares authorized,
issued and outstanding 250 250
Additional paid- in capital 18,793,811 18,829,737
Retained earnings 9,513,510 4,840,481
---------------------- -----------------------
Total stockholder's equity 28,307,571 23,670,468
---------------------- -----------------------
$34,408,747 $27,605,370
====================== =======================
See notes to consolidated financial statements
F-4
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
for the twelve months ended November 30, 1996 and 1995
and the eleven months ended November 30, 1994
Additional Total
Common Stock Paid-in Capital Retained Earnings Stockholder's
Equity
------------------ ----------------- ------------------- ------------------
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
Net income - - 4,673,029 4,673,029
Capital contributions by parent - 29,000,940 - 29,000,940
Capital distributions to parent - (29,036,866) - (29,036,866)
------------------ ----------------- ------------------- ------------------
Balance, November 30, 1996 $ 250 $18,793,811 $9,513,510 $28,307,571
================== ================= =================== ==================
See notes to consolidated financial statements.
F-5
LEHMAN ABS CORPORATION and SUBSIDIARY
CONSOLIDATED STATEMENTS of CASH FLOWS
Twelve months Twelve months Eleven months
ended November 30, ended November 30, ended November
1996 1995 30, 1994
----------------------- ---------------------- ---------------------
Cash flows from operating activities:
Net income $4,673,029 $ 3,695,976 $ 996,077
----------------------- ---------------------- ---------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization 1,129,856 310,407 535,762
Effect of changes in operating assets and liabilities:
Financial instruments owned, at fair value (5,597,592) 1,657,381 (4,674,002)
Receivables from brokers, dealers and
financial institutions 133,864 (689,523) (183,397)
Due from others (2,950) (2,941) 5,947,775
Deferred registration costs (2,296,968) (773,386) (413,794)
Financial instruments sold but not yet
purchased (453,517) (2,435,317) 2,932,907
Issuance expenses payable (427,724) (317,281) (105,857)
Payables to brokers, dealers and
financial institution 2,364,970 (1,772,165) 1,801,965
Payables to affiliates 682,545 2,539,847 346,051
Income taxes payable to affiliate - (985,195) 849,968
Other liabilities and accrued expenses - (19,385) 8,133
----------------------- ---------------------- ---------------------
Net cash provided by
operating activities 205,513 1,208,418 8,041,588
--------------------- ---------------------- ---------------------
Cash flows from financing activities:
Capital contributions by parent 29,000,940 250,340,432 44,992,585
Capital distributions to parent (29,036,866) (251,493,463) (53,008,286)
--------------------- ---------------------- ---------------------
Net cash (used in) financing
activities (35,926) (1,153,031) (8,015,701)
--------------------- ---------------------- ---------------------
Net increase in cash 169,587 55,387 25,887
Cash at the beginning of the period 99,245 43,858 17,971
--------------------- ---------------------- ---------------------
Cash at the end of the period $ 268,832 $ 99,245 $ 43,858
===================== ====================== =====================
See notes to consolidated financial statements
F-6
LEHMAN ABS CORPORATION and SUBSIDIARY
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Basis of Presentation
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
common 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 $11.33 billion.
The Company has also filed registration statements on Form S-3
for the issuance of $.5 billion principal amount of Securities
collateralized by government and government agency obligations or
corporate debt securities. As of November 30, 1996, approximately
$5.3 billion was available for issuance under the registration
statements referred to above.
The Company has established trusts to issue securities
collateralized by receivables and other securities. 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
securityholders 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.
The Company uses the trade date basis of accounting for recording
principal transactions.
Use of Estimates
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.
F-7
LEHMAN ABS CORPORATION and SUBSIDIARY
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued):
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
Financial instruments owned and securities and other 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 and are valued at fair value with the related
profit (loss) recorded in the Consolidated Statements of
Operations. Fair value is determined based on relevant factors,
such as, broker or dealer price quotations and valuation pricing
models which take into account time value and volatility factors
underlying the securities.
Income Taxes
The Company's income 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.
2. 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 fair 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.
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 $2,913,510 and $2,310,369 for the
twelve months ended November 30, 1996 and 1995, respectively, and
$768,466 for the eleven months ended November 30, 1994 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.
F-8
LEHMAN ABS CORPORATION and SUBSIDIARY
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
2. Related Party Transactions (continued):
Compensation expense represents amounts allocated to the Company
by LCPI for compensation paid to a common director of the
Company.
Income taxes of $3,988,749 and $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,
1996 and 1995, respectively. No income taxes were paid by the
Company during 1994.
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.
3. Due from Others:
At November 30, 1996 and 1995, the Company had interest bearing
deposits of $108,027 and $105,077, respectively, with independent
trustees in accordance with the terms of a securitization
transaction.
4. 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 $44,000 and is reported as financial instruments
sold but not yet purchased in the Consolidated Statements of
Financial Condition at November 30, 1996. 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 $870,000 and is included in financial instruments
owned in the Consolidated Statements of Financial Condition at
November 30, 1996. At November 30, 1996, the Company had no other
material individual counterparty concentration of credit risk.
5. Fair Value of Financial Instruments:
Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments," requires
the Company to report the fair value of 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 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.
F-9
LEHMAN ABS CORPORATION and SUBSIDIARY
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
5. Fair Value of Financial Instruments (continued):
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.
6. 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.
7. Accounting for Transfers of Financial Assets
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"), which is effective for transactions occurring after
December 31, 1996. SFAS No. 125 provides new accounting guidance
for the transfer of financial assets, including securitizations,
repurchase agreements and securities lending transactions. SFAS
No. 125 outlines specific conditions which must be met for
financial asset transfers to obtain either sale or financing
treatment. Sale treatment is generally obtained if the seller
meets the specified conditions to demonstrate that it has
surrendered control over the assets; consequently the
counterparty to the sale must recognize the related financial
assets received. Financing treatment is generally obtained if the
borrower agrees to repurchase substantially the same securities
prior to maturity of the agreement while maintaining adequate
collateral levels, provided that control of the securities is
retained by the borrower (i.e. the owner of the securities has
the ability to redeem the collateral on short notice).
In December 1996, the FASB issued SFAS No. 127 deferring the
effective date one year for certain provisions of SFAS No. 125
dealing with repurchase agreements, dollar repurchase agreements,
securities lending and similar financing transactions.
It is unlikely that SFAS No. 125 will have an impact on the
Company's financial condition.
F-10
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-3 Nos. 333-14293 and 33-73438) of Lehman
ABS Corporation of our report dated February 21, 1997, 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, 1996.
ERNST & YOUNG LLP
New York, New York
February 24, 1997
Exhibit 27