ITEM 1 Business
Lehman CMO Inc. (the "Company") was incorporated in the State of Maryland on March 14, 1984 as a special purpose finance corporation organized for the purpose of issuing and selling Mortgage-Backed Sequential Pay Bonds (the "Bonds") collateralized primarily by pass-through mortgage-backed certificates and/or mortgage loans (the "Certificates"). 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").
The Company derives its income from trading and/or interest earned on securities owned. Trading income includes profit (loss) from the issuance and sale of securities and valuing Bonds owned, if any, at market value. The Bonds may be sold by the Company in one or more series on terms to be determined at the time of the sale. Each series of Bonds will consist of one or more sequences. The Bonds of each series will be collateralized by "fully modified pass-through" mortgage-backed certificates guaranteed as to the full and timely payment of principal and interest by the Government National Mortgage Association, which guaranty is backed by the full faith and credit of the United States Government; by guaranteed mortgage pass-through certificates issued and guaranteed as to the full and timely payment of principal and interest by the Federal National Mortgage Association; by mortgage participation certificates issued and guaranteed as to the full and timely payment of interest and the ultimate payment of principal by the Federal Home Loan Mortgage Corporation, or by a combination of such Certificates.
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, Bonds in the principal amount not to exceed $5.5 billion. As of November 30, 1996, approximately $816 million 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 $1.00 par value common stock, which is all owned by LCPI. There is no public market for such 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 Capital Resources and Results of Operations
Set forth below is management's discussion and analysis of financial condition 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 Capital Resources
During the twelve months ended November 30, 1996 and 1995, the Company received capital contributions from LCPI of $10,752 and $35,004, respectively.
Results of Operations
For the twelve months ended November 30, 1996 and November 30, 1995:
No bonds were issued during the twelve months ended November 30, 1996. As such, no related revenues were generated during this period. Interest income decreased from $306 during the twelve months ended November 30, 1995 to $261 during the twelve months ended November 30, 1996 as a result of a decrease in interest bearing deposits during the period. General and administrative expenses includes management fees of $20,000 during the twelve months ended November 30, 1996 and 1995.
For the twelve months ended November 30, 1995 and eleven months ended November 30, 1994:
No Bonds were issued during the twelve months ended November 30, 1995. As such, no related revenues were generated during this period. Interest income decreased from $1,823 during the eleven months ended November 30, 1994 to $306 during the twelve months ended November 30, 1995 as a result of a decrease in interest bearing deposits during the period. General and administrative expenses includes management fees of $20,000 during the twelve months ended November 30, 1995 and $18,337 during the eleven months ended November 30, 1994.
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. Financial Data Schedule*
(b) Reports on Form 8-K: None
* Filed herewith
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 CMO INC. (Registrant)
By: NEAL LEONARD Neal Leonard President
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
NEAL LEONARD President February 24, 1997 Neal Leonard
DAVID GOLDFARB Controller February 24, 1997 David Goldfarb
THEODORE P. JANULIS Director February 24, 1997 Theodore P. Janulis
MARK L. ZUSY Chairman and Director February 24, 1997 --------------------------- Mark L. Zusy
LEHMAN CMO INC.
Report of Independent Auditors
Statements of Operations for the twelve months ended November 30, 1996 and 1995 and the eleven months ended November 30, 1994
Statements of Financial Condition as of November 30, 1996 and 1995
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
Statements of Cash Flows for the twelve months ended November 30, 1996 and 1995 and the eleven months ended November 30, 1994
Notes to Financial Statements to
F - 1
Report of Independent Auditors
The Board of Directors and Stockholder of Lehman CMO Inc.
We have audited the accompanying statements of financial condition of Lehman CMO Inc. (the "Company") as of November 30, 1996 and November 30, 1995, and the related 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 financial position of Lehman CMO Inc. 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 CMO INC. STATEMENTS of OPERATIONS
Twelve months Twelve months Eleven months ended ended ended November 30, November 30, November 30, 1996 1995 1994 ----------------- ------------- -----------
Revenues: Interest $ 261 $ 306 $ 1,823 -------------- --------------- --------
Expenses: Compensation 5,500 20,000 18,337
General and administrative 21,490 28,151 32,017 ---------------- ---------------- ----------
26,990 48,151 50,354 ---------------- --------------- ----------
Loss before income tax benefit (26,729) (47,845) (48,531)
Income tax benefit (12,309) (22,033) (22,234) --------------- -------------- -----------
Net loss $(14,420) $(25,812) $(26,297) ================= =============== =========
See notes to financial statements
LEHMAN CMO INC. STATEMENTS OF FINANCIAL CONDITION
ASSETS
See notes to financial statements
LEHMAN CMO INC. STATEMENTS of CHANGES IN STOCKHOLDER'S EQUITY for the twelve months ended November 30, 1996 and 1995 and for the eleven months ended November 30, 1994
See notes to financial statements
LEHMAN CMO INC. STATEMENTS of CASH FLOWS
See notes to financial statements
LEHMAN CMO INC. NOTES to FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
Lehman CMO Inc. (the "Company") is a special purpose finance corporation organized for the purpose of issuing and selling Mortgage-Backed Sequential Pay Bonds (the "Bonds") collateralized primarily by pass-through mortgage-backed certificates and/or mortgage loans (the "Certificates"). 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").
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, if any, at market value.
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, Bonds in principal amount not to exceed $5.5 billion. As of November 30, 1996, approximately $816 million was available for issuance under the registration statements referred to above.
The Company has issued Bonds collateralized by Certificates. The Company has surrendered all future economic interests in the Bonds, Certificates and Collateral. According to the terms of the various trust agreements, the Bond and Certificate holders can look only to the related collateral for repayment of both principal and interest. In accordance with generally accepted accounting principles, the Bonds and Certificates have been removed from the accompanying 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.
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 benefit on a separate return basis in accordance with a tax allocation agreement between Holdings and its subsidiaries. The benefit for income taxes is greater than that calculated by applying the statutory federal income tax rate principally due to state and local taxes.
F - 7
LEHMAN CMO INC. NOTES to FINANCIAL STATEMENTS
2. Related Party Transactions
All Certificates used to collateralize the Bonds are purchased from and recorded at an affiliate's carrying value, which for 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 $20,000 for the twelve months ended November 30, 1996 and 1995, and $18,337 for the eleven months ended November 30, 1994 are included in general and administrative expenses in the accompanying Statements of Operations. The Agreement is renewable each year unless expressly terminated or renegotiated by the parties.
Compensation expense includes amounts allocated to the Company by LCPI for compensation paid to certain common officers and directors of the Company and LCPI.
The Company believes that amounts arising through related party transactions, including fees referred to above, are reasonable and approximate the amounts that would have been recorded if the Company operated as an unaffiliated entity.
3. Financial Instruments with Off-Balance Sheet Risk and Concentration of Credit Risk:
The Company's activities are principally conducted with brokers, dealers and financial institutions. At November 30, 1996, the Company had no material individual counterparty concentration of credit risk, or any financial instruments with off-balance-sheet risk.
4. 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 Statements of Financial Condition.
5. 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.
LEHMAN CMO INC. NOTES to FINANCIAL STATEMENTS
6. 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 Statement (Form S-3 No. 33-11474) of Lehman CMO Inc. of our report dated February 21, 1997, with respect to the financial statements of Lehman CMO Inc. 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