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: 1-6817
LEHMAN CMO INC.
(Exact name of registrant as specified in its charter)
Maryland 77-2022794
(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 100 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.
<PAGE>
INDEX
LEHMAN CMO INC.
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 1
------------------------------------------------------------
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 Results of Operations 2
---------------------------------------------
Item 8 - Financial Statements and Supplementary Data 3
----------------------------------------------------
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 3
PART III
Item 10 - Directors and Executive Officers
of the Registrant 3
Item 11 - Executive Compensation 3
--------------------------------
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 3
Item 13 - Certain Relationships and Related Transactions 3
--------------------------------------------------------
PART IV
Item 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 3
Signatures 4
<PAGE>
PART I
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 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.
1
<PAGE>
PART II
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 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 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.
2
<PAGE>
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. Financial Data Schedule*
(b) Reports on Form 8-K: None
* Filed herewith
3
<PAGE>
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
4
<PAGE>
LEHMAN CMO INC.
INDEX to FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Statements of Operations for the twelve months ended
November 30, 1996 and 1995 and the eleven months ended
November 30, 1994 F-3
Statements of Financial Condition as of
November 30, 1996 and 1995 F-4
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
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 Financial Statements F-7 to F-9
F - 1
<PAGE>
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
<PAGE>
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
F-3
<PAGE>
LEHMAN CMO INC.
STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
November 30, November 30,
1996 1995
---------------------- ----------------------
<S> <C> <C>
Cash $ 15,163 $ 14,901
Income taxes receivable from affiliate 103,698 91,389
---------------------- ----------------------
$118,861 $106,290
====================== ======================
LIABILITIES and STOCKHOLDER'S EQUITY
Liabilities:
Payables to affiliates $ 56,432 $ 40,615
Other liabilities and accrued expenses 988 566
---------------------- ----------------------
Total liabilities 57,420 41,181
---------------------- ----------------------
Stockholder's equity:
Common stock, $1 par value; 100 shares
authorized, issued and outstanding 100 100
Additional paid-in capital 55,656 44,904
Retained earnings 5,685 20,105
---------------------- ----------------------
Total stockholder's equity 61,441 65,109
---------------------- ----------------------
$118,861 $106,290
====================== ======================
</TABLE>
See notes to financial statements
F-4
<PAGE>
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
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Capital Retained Stockholder's
Earnings Equity
----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $100 $ 9,900 $185,548 $195,548
Net loss - - (26,297) (26,297)
Capital distributions to parent - - (113,334) (113,334)
----------------- ----------------- ----------------- -------------------
Balance, November 30, 1994 100 9,900 45,917 55,917
Net loss - - (25,812) (25,812)
Capital contributions from parent - 35,004 - 35,004
----------------- ----------------- ----------------- -------------------
Balance, November 30, 1995 100 44,904 20,105 65,109
Net loss - - (14,420) (14,420)
Capital contributions from parent - 10,752 - 10,752
----------------- ----------------- ----------------- -------------------
Balance, November 30, 1996 $100 $55,656 $ 5,685 $ 61,441
================= ================= ================= ===================
</TABLE>
See notes to financial statements
F-5
<PAGE>
LEHMAN CMO INC.
STATEMENTS of CASH FLOWS
<TABLE>
<CAPTION>
Twelve months ended Twelve months Eleven months ended
November 30, ended November 30,
1996 November 30, 1994
1995
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,420) $ (25,812) $ (26,297)
Adjustments to reconcile net loss to net cash used in operating activities:
Effect of changes in operating assets and liabilities:
Income taxes receivable from affiliate (12,309) (22,033) (22,234)
Payables to affiliates 15,817 13,091 19,486
Other liabilities and accrued expenses 422 56 (2,066)
-------------------- ------------------- --------------------
Net cash used in operating activities (10,490) (34,698) (31,111)
-------------------- ------------------- --------------------
Cash flows from financing activities:
Capital contributions (distributions)
from (to) parent 10,752 35,004 (113,334)
-------------------- ------------------- --------------------
Cash provided by (used in)
financing activities 10,752 35,004 (113,334)
-------------------- ------------------- --------------------
Net increase (decrease) in cash 262 306 (144,445)
Cash at the beginning of the year 14,901 14,595 159,040
-------------------- ------------------- --------------------
Cash at the end of the year $15,163 $ 14,901 $ 14,595
==================== =================== ====================
</TABLE>
See notes to financial statements
F-6
<PAGE>
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
<PAGE>
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.
F-8
<PAGE>
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.
F-9
<PAGE>
Exhibit 23
<PAGE>
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
<PAGE>
Exhibit 27
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
LEHMAN CMO INC.
This schedule contains summary financial information extracted from the
Company's Statement of Financial Condition at November 30, 1996 and the
Statement of Operations for the twelve months ended November 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 15,163
<RECEIVABLES> 103,698
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 0
<TOTAL-ASSETS> 118,861
<SHORT-TERM> 0
<PAYABLES> 56,432
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
<COMMON> 100
0
0
<OTHER-SE> 61,341
<TOTAL-LIABILITY-AND-EQUITY> 0
<TRADING-REVENUE> 261
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 0
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 0
<COMPENSATION> 5,500
<INCOME-PRETAX> (26,729)
<INCOME-PRE-EXTRAORDINARY> (14,420)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,420)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
