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
ITEM 2 Properties
The Company owns no physical properties.
ITEM 3
ITEM 3 Legal Proceedings
There are no pending legal proceedings.
ITEM 4
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
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
ITEM 6 Selected Financial Data
Pursuant to General Instruction J of Form 10-K, the information required by Item 6 is omitted.
ITEM 7
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
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.
ITEM 9
ITEM 9 Changes in and Disagreements with Accountants on Accounting - - ------ ----------------------------------------------------------- and Financial Disclosure ------------------------
Not applicable.
PART III
ITEM 10
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
ITEM 11 Executive Compensation
Pursuant to General Instruction J of Form 10-K, the information required by Item 11 is omitted.
ITEM 12
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
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
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
(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
Consolidated Statements of Operations for the twelve months ended November 30, 1996 and 1995 and the eleven months ended November 30, 1994
Consolidated Statements of Financial Condition as of November 30, 1996 and 1995
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
Consolidated Statements of Cash Flows for the twelve months ended November 30, 1996 and 1995 and the eleven months ended November 30, 1994
Notes to Consolidated Financial Statements to
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
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
LEHMAN ABS CORPORATION and SUBSIDIARY CONSOLIDATED STATEMENTS of FINANCIAL CONDITION
ASSETS
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, 1996 and 1995 and the eleven months ended November 30, 1994
See notes to consolidated financial statements.
LEHMAN ABS CORPORATION and SUBSIDIARY CONSOLIDATED STATEMENTS of CASH FLOWS
See notes to consolidated financial statements
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.
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.
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.
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.
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