ITEM 2. PROPERTIES
Descriptions of properties owned or utilized by the Partnership are contained in Item 1 of this report and such descriptions are hereby incorporated by reference into this Item 2. Under the captioned "Leases" in notes to the Partnership's financial statements included in Item 8 herein below, additional information is presented concerning obligations for lease and rental commitments. Said additional information is hereby incorporated by reference into this Item 2.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to several lawsuits arising in the ordinary course of business. Subject to certain deductibles and self-insurance retentions, substantially all the claims made in these lawsuits are covered by insurance policies.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Partnership did not hold a meeting of unitholders or otherwise submit any matter to a vote of security holders in the fourth quarter of 1996.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S SENIOR PREFERENCE UNITS AND PREFERENCE UNITS AND RELATED UNITHOLDER MATTERS
The Partnership's senior preference limited partner interests ("Senior Preference Units") and Preference Units are listed and traded on the New York Stock Exchange. At March 10, 1997, there were approximately 1,000 Senior Preference Unitholders of record and approximately 200 Preference Unitholders of record. Set forth below are prices and cash distributions for Senior Preference Units and Preference Units, respectively, on the New York Stock Exchange.
(a) Preference Units commenced trading on September 20, 1995.
The Partnership has paid the Minimum Quarterly Distribution on each outstanding Senior Preference Unit for each quarter since the Partnership's inception. The Partnership has also paid the Minimum Quarterly Distribution on Preference Units with respect to all quarters since inception of the Partnership, except for distributions in the second, third and fourth quarters of 1991 totaling $9,323,000 which have since been satisfied and no arrearages remain as of December 31, 1996. Prior to 1994, no distributions were paid on the outstanding Common Units, which are not entitled to arrearages in the payment of the Minimum Quarterly. Distributions paid on the Common Units were $1,738,000; $4,582,000 and $7,110,000 for 1994, 1995 and 1996, respectively.
Under the terms of its financing agreements, the Partnership is prohibited from declaring or paying any distribution if a default exists thereunder.
ITEM 6.

ITEM 6. SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth, for the periods and at the dates indicated, selected historical financial and operating data for Kaneb Pipe Line Partners, L.P. and Subsidiaries (the "Partnership"). The data in the table (in thousands, except per unit amounts) is derived from the historical financial statements of the Partnership and should be read in conjunction with the Partnership's audited financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(a) Includes the operations of ST since its acquisition on March 2, 1993. (b) Includes the operations of the West Pipeline since its acquisition in February 1995 and the operations of Steuart since its acquisition in December 1995. (c) Subsequent to the acquisition of ST in March 1993, certain operations are conducted in taxable entities. (d) Net income is allocated to the limited partnership units in an amount equal to the cash distributions declared for each reporting period and any remaining income or loss is allocated to the class of units that did not receive the same amount of cash distributions per unit (if any). If the same cash distributions per unit are declared to all classes of units, income is allocated pro rata based on the aggregate amount of distributions declared.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial statements of Kaneb Pipe Line Partners, L.P. and notes thereto and the summary historical and pro forma financial and operating data included elsewhere in this report.
GENERAL
In September 1989, Kaneb Pipe Line Company ("KPL"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), formed the Partnership to own and operate its refined petroleum products pipeline business. The Partnership operates through KPOP, a limited partnership in which the Partnership holds a 99% interest as limited partner and KPL owns a 1% interest as general partner in both the Partnership and KPOP. The Partnership is engaged through operating subsidiaries in the refined petroleum products pipeline business and, since 1993, terminaling and storage of petroleum products and specialty liquids.
The Partnership's pipeline business consists primarily of the transportation through the East Pipeline and the West Pipeline, as common carriers, of refined petroleum products. The Partnership acquired the West Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition was financed by the issuance of $27 million of first mortgage notes to a group of insurance companies due February 24, 2002, which bear interest at the rate of 8.37% per annum. The East Pipeline and the West Pipeline are collectively referred to as the "Pipelines." The Pipelines primarily transport gasoline, diesel oil, fuel oil and propane. The products are transported from refineries connected to the Pipeline, directly or through other pipelines, to agricultural users, railroads and wholesale customers in the states in which the Pipelines are located and in portions of other states. Substantially all of the Pipelines' operations constitute common carrier operations that are subject to federal or state tariff regulations. The Partnership has not engaged, nor does it currently intend to engage, in the merchant function of buying and selling refined petroleum products.
The Partnership's business of terminaling petroleum products and specialty liquids is conducted under the name ST Services ("ST"). The Partnership is the third largest independent terminaling company in the United States. With the acquisition of Steuart (see below), ST operates 31 facilities in 16 states and the District of Columbia with an aggregate tankage capacity of approximately 17.2 million barrels. The Texas City terminal is a deep-water facility primarily serving the Gulf Coast petrochemical industry. The Westwego terminal, purchased in June 1994 and located on the West bank of the Mississippi River across from New Orleans, handles molasses, animal and vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore terminal is the largest independent terminal facility in the Baltimore area and handles asphalt, fructose, latex, caustic solutions and other liquids.
ST acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart") in December 1995 for $68 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition was initially financed with a $68 million bridge loan from a bank. The Partnership refinanced this bridge loan in June 1996 with a series of first mortgage notes (the "Steuart Notes") to a group of insurance companies bearing interest at rates ranging from 7.08% to 7.98% and maturing in varying amounts in June 2001, 2003, 2006 and 2016. The Steuart terminaling assets consist of seven petroleum product terminal facilities located in the District of Columbia, Florida, Georgia, Maryland and Virginia and the pipeline and terminaling facilities serving Andrews Air Force Base in Maryland. The Piney Point, Maryland terminal is the closest petroleum storage facility to Washington D.C. which has access to deep water. The Jacksonville terminal has 28 tanks with approximately 2.1 million barrels of aggregate storage capacity, which are currently used to store petroleum products. The remainder of ST's terminals primarily handle petroleum products.
The Partnership acquired ST in March 1993 for approximately $65 million (including $2 million in acquisition costs). In connection with the acquisition, the Partnership borrowed $65 million from a group of banks. In April 1993, the Partnership completed a public offering of 2.25 million Senior Preference Units at $25.25 per unit. The
bank loan was partially repaid with $50.8 million of the proceeds from the offering, and the balance was refinanced with first mortgage notes in December 1994. The Partnership continually evaluates other potential acquisitions.
PIPELINE OPERATIONS
The Pipelines' revenues are based on volumes shipped and the distances over which such volumes are transported. Revenues increased $3.2 million and $14.1 million in 1996 and 1995, respectively. The increases in both years are primarily due to the acquisition of the West Pipeline in February 1995. Because tariff rates are regulated by the FERC, the Pipelines compete primarily on the basis of quality of service, including delivering products at convenient locations on a timely basis to meet the needs of its customers. Barrel miles totaled 16.7 billion in 1996 compared to 16.6 billion in 1995. Barrel miles in 1995 increased from 14.5 billion barrel miles in 1994, primarily due to the acquisition of the West Pipeline.
Operating costs which include fuel and power costs, materials and supplies, maintenance and repair costs, salaries, wages and employee benefits, and property and other taxes, increased $1.1 million in 1996 and $4.8 million in 1995. The 1996 increase is primarily due to higher materials and supplies, including additives and outside services, and the 1995 increase is primarily a result of the West Pipeline acquisition. The 1995 increase in depreciation and amortization is a direct result of the February 1995 acquisition of the West Pipeline. General and administrative costs include managerial, accounting and administrative personnel costs, office rental and expense, legal and professional costs and other non-operating costs. The decrease in 1996 from 1995 was primarily due to lower legal and professional and other non-operating costs.
TERMINALING OPERATIONS
The increases in revenues are attributable to acquisitions and increases in prices charged for storage and tankage volumes utilized. Revenues increased 47% in 1996 primarily from the acquisition of the Steuart Petroleum terminals in December 1995 and 13% in 1995. Average annual tankage utilized increased 5.2 million barrels in 1996 to 11.9 million barrels compared to 6.7 million barrels in 1995 primarily as a result of the Steuart terminals acquired and increased 600,000 barrels in 1995 over 1994 also primarily as a result of other terminal acquisitions. Average annual revenues per barrel of tankage utilized was $4.55 per barrel in 1996 compared to $5.46 per barrel in 1995. The decrease in per barrel averages is due to the large proportionate volumes of petroleum products being stored at the Steuart terminals with lower rates per barrel than specialty chemicals with higher rates per barrel that are stored at other terminals. Average annual revenues per barrel of tankage utilized increased $0.13 per barrel in 1995 over 1994.
Total tankage capacity (17.2 million barrels at December 31, 1996) has been, and is expected to remain, adequate to meet existing customer storage requirements. Customers consider factors such as location, access to cost effective transportation and quality of service in addition to pricing when selecting terminal storage. Operating costs increased $8.2 million and $2.2 million and depreciation and amortization increased $2.7 million and $.4 million in 1996 and 1995, respectively, primarily as a result of terminal acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of current assets to current liabilities was 1.02 to 1 at December 31, 1996 and 0.9 to 1 at December 31, 1995. Cash provided by operating activities was $49.2 million, $44.5 million and $37.9 million for the years 1996, 1995 and 1994 respectively. The increase in cash flow from operating activities in 1995 was primarily a result of the West Pipeline and terminal acquisitions while the increase in cash flow from operating activities in 1996 was primarily a result of the acquisition of the Steuart terminaling assets.
Capital expenditures, excluding expansion capital expenditures, were $7.1 million, $9.0 million and $7.2 million for 1996, 1995 and 1994, respectively. During all periods, adequate pipeline capacity existed to accommodate volume growth, and the expenditures required for environmental and safety improvements were not, and are not expected in the future to be, material. Environmental damages caused by sudden and accidental occurrences are included under the Partnership's insurance coverages. Capital expenditures of the Partnership during 1997 are expected to be approximately $8 to $10 million.
The Partnership makes distributions of 100% of its Available Cash to Unitholders and the General Partner. Available Cash consists generally of all the cash receipts less all cash disbursements and reserves. Distributions of $2.30 per unit were declared to Senior Preference Unitholders and Preference Unitholders in 1996 and $2.20 per unit was declared in 1995 and 1994. During 1996, 1995 and 1994, the Partnership declared distributions of $7.3 million ($2.30 per unit); $6.3 million ($2.00 per unit); and $1.7 million ($0.55 per unit), respectively, to the holders of Common Units.
The Partnership expects to fund future cash distributions and maintenance capital expenditures with existing cash and cash flows from operating activities. Expansionary capital expenditures are expected to be funded through additional Partnership borrowings.
In 1994, a subsidiary of the Partnership issued $33 million of first mortgage notes (the "Series B Notes") to a group of insurance companies. Proceeds from these notes were used to refinance existing debt of the Partnership that was incurred in connection with the ST acquisition in 1993 and the terminal acquisitions in 1994. The notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. In 1994, the Partnership entered into the Credit Agreement with two banks that provides a $15 million revolving credit facility for working capital and other partnership purposes. Borrowings under the Credit Agreement bear interest at variable rates and are due and payable in November 1997. The Credit Agreement has a commitment fee of 0.2% per annum of the unused credit facility. $5 million was drawn under this credit facility at December 31, 1996.
The Partnership acquired the West Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the issuance of $27 million of first mortgage notes (the "Series A Notes") due February 24, 2002, which bear interest at the rate of 8.37% per annum. The Series A and B Notes and credit facility are secured by a mortgage on the East Pipeline.
The acquisition of the Steuart terminaling assets was initially financed by a $68 million bank bridge loan. The Partnership refinanced this bridge loan in June 1996 with a series of first mortgage notes (the "Steuart Notes") bearing interest at rates ranging from 7.08% to 7.98% and maturing in varying amounts in June 2001, 2003, 2006 and 2016. The Steuart Notes are secured, pari passu with the Series A and B Notes and credit facility, by a mortgage on the East Pipeline.
In the FERC's Lakehead decision issued June 15, 1995, the FERC partially disallowed Lakehead's inclusion of income taxes in its cost of service. Specifically, the FERC held that Lakehead was entitled to receive an income tax allowance with respect to income attributable to its corporate partners, but was not entitled to receive such an allowance for income attributable to the partnership interests held by individuals. Lakehead's motion for rehearing was denied by the FERC and Lakehead appealed the decision to the U. S. Court of Appeals. Subsequently, the case was settled by Lakehead and the appeal withdrawn. In another FERC proceeding that has not yet reached the hearing stage, involving
a different oil pipeline limited partnership, various shippers have challenged such pipeline's inclusion of an income tax allowance in its cost of service. The FERC Staff has also filed testimony that supports the disallowance of income taxes. If the FERC were to disallow the income tax allowance in the cost of service of the Pipelines on the basis set forth in the Lakehead order, the General Partner believes that the Partnership's ability to pay the Minimum Quarterly Distribution to the holders of the Senior Preference Units, Preference Units and Preference B Units would not be impaired; however, in view of the uncertainties involved in this issue, there can be no assurance in this regard.
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995 and requires the write-down to market of certain long-lived assets. The Partnership adopted SFAS 121 in the first quarter of 1996 and such adoption did not have a material effect on the Partnership's financial position or results of operations.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data of the Partnership begin on page of this report. Such information is hereby incorporated by reference into this item 8.
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
The Partnership is a limited partnership and has no directors. The Partnership is managed by the Company as general partner. Set forth below is certain information concerning the directors and executive officers of the Company. All directors of the Company are elected annually by Kaneb, as its sole stockholder. All officers serve at the discretion of the Board of Directors of the Company.
- -------------- *Less than one percent
(a) Mr. Doherty, Chairman of the Board of the Company since September 1989, is also Senior Vice President of Kaneb. (b) Mr. Hutchens assumed his current position in January 1994, having been with KPL since January 1960. Mr. Hutchens had been Vice President since January 1981. Mr. Hutchens was Manager of Product Movement from July 1976 to January 1981. (c) Mr. Wadsworth also serves as Vice President, Treasurer and Secretary for Kaneb. Mr. Wadsworth joined Kaneb in October, 1990. (d) Mr. Harrison assumed his present position in November, 1992, prior to which he served in a variety of financial positions including Assistant Secretary and Treasurer with ARCO Pipe Line Company for approximately 19 years. (e) Mr. Barnes, a director of the Company, is also Chairman of the Board, President and Chief Executive Officer of Kaneb. (f) Mr. Cox, a director of the Company since September 1995, is also a director of Kaneb. Mr. Cox has held senior executive level positions for more than the past five years of his twenty-seven year career with Fluor Daniel, Inc. (g) Mr. Ahn, a director of the Company since July 1989, is also a director of Kaneb. Mr. Ahn has been a partner of Morgan Lewis Githens & Ahn, L.P., an investment banking firm, since 1982 and currently serves as a director of Gradall Industries, Inc., ITI Technologies, Inc., PAR Technology Corporation, Quaker Fabric Corporation, and Stuart Entertainment, Inc. (h) Mr. Burke, elected as a director of the Company in January 1997, is also a director of Kaneb. Mr. Burke has been Chairman and Managing General Partner of Burke, Mayborn Company, Ltd., a private investment company, for more than the past five years. He was previously associated with Peat, Marwick, Mitchell & Co. (now KPMG Peat Marwick, LLP), an international firm of certified public accountants, for twenty-four years.
(i) Mr. Whatley, a director of the Company since July 1989, is also a director of Kaneb. In addition to serving as Chairman of the Board of Directors of Kaneb from February 1981 until April 1989, Mr. Whatley was elected and served in the additional offices of President and Chief Executive Officer of Kaneb from June until October 1986. (j) Mr. Ralph Rehm, who is also a director of Kaneb, is President of NorthLake Consulting Company, which provides financial consulting services. (k) Mr. Biles joined the Company in November 1953 and served as President from January 1985 until his retirement at the close of 1993. (l) Units of the Partnership listed are those which are owned by the person indicated, his spouse or children living at home. None of the directors of the Company owns more than two percent of the outstanding Senior Preference Units or Preference Units, respectively, of the Partnership. Each director had sole power with respect to all or substantially all of the Units attributed to him.
AUDIT COMMITTEE
Messrs. Sangwoo Ahn and, effective February 20, 1997, Frank M. Burke, Jr. serve as the members of the Audit Committee of the Company. Such Committee will, on an annual basis, or more frequently as such Committee may determine to be appropriate, review policies and practices of the Company and the Partnership and deal with various matters as to which conflicts of interest may arise.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have a compensation committee or any other committee that performs the equivalent functions. During the fiscal year ended December 31, 1996, none of the Company's officers or employees participated in the deliberations of the Company's Board of Directors concerning executive officer compensation.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no executive officers, but is obligated to reimburse the Company for compensation paid to the Company's executive officers in connection with their operation of the Partnership's business.
The following table sets forth information with respect to the aggregate compensation paid or accrued by the Company during the fiscal years 1996, 1995 and 1994, to the Chief Executive Officer and each of the most highly compensated executive officers of the Company whose aggregate cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
(a) Amounts earned in year shown and paid the following year. (b) Represents the Company's contributions to Kaneb's Savings Investment Plan (a 401(k) plan) and the imputed value of Company-paid group term life insurance exceeding $50,000. (c) The Compensation for this individual is paid by Kaneb which is reimbursed for all or substantially all of such compensation by the Company. (d) Includes deferred compensation of $14,901.
Retirement Plan
Effective April 1, 1991, Kaneb established the Savings Investment Plan, a defined contribution 401(k) plan, that permits all full-time employees of the Company who have completed one year of service to contribute 2% to 12% of base compensation, on a pre-tax basis, into participant accounts. In addition to mandatory contribution equal to 2% of base compensation per year for each plan participant, the Company makes matching contributions from 25% to 50% of up to the first 6% of base pay contributed by a plan participant. Employee contributions, together with earnings thereon, are not subject to forfeiture. That portion of a participant's account balance attributable to Company contributions, together with earnings thereon, is vested over a five year period at 20% per year. Participants are credited with their prior years of service for vesting purposes, however, no amounts are accrued for the accounts of participants, including the Company's executive officers, for years of service previous to the plan commencement date. Participants may direct the investment of their contributions into a variety of investments, including Kaneb common stock. Plan assets are held and distributed pursuant to a trust arrangement. Because levels of future compensation, participant contributions and investment yields cannot be reliably predicted over the span of time contemplated by a plan of this nature, it is impractical to estimate the annual benefits payable at retirement to the individuals listed in the Summary Cash Compensation Table above.
Director's Fees. During 1996, each member of the Company's Board of Directors who was not also an employee of the Company or Kaneb was paid an annual retainer of $4,000 in lieu of all attendance fees.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At March 10, 1997, the Company owned a combined 2% General Partner interest in the Partnership and the Operating Partnership, and owned Preference Units, Preference B Units and Common Units representing an aggregate limited partner interest of approximately 31%.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is entitled to certain reimbursements under the Partnership Agreement. For additional information regarding the nature and amount of such reimbursements, see Notes 5 and 6 to the Partnership's financial statements.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
(a) (2) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) (3) LIST OF EXHIBITS
3.1 Amended and Restated Agreement of Limited Partnership dated September 27, 1989, filed as Appendix A to the Registrant's Prospectus, dated September 25, 1989, in connection with the Registrant's Registration Statement on Form S-1 (S.E.C. File No. 33-30330) which exhibit is hereby incorporated by reference.
10.1 ST Agreement and Plan of Merger date December 21, 1992 by and between Grace Energy Corporation, Support Terminal Services, Inc., Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership, NSTS, Inc. and NSTI, Inc. as amended by Amendment of STS Merger Agreement dated March 2, 1993. Filed as Exhibit 10.1 of the exhibits to Registrant's current Report on Form 8-K, dated March 16, 1993, which exhibit is hereby incorporated by reference.
10.2 Restated Credit Agreement between Kaneb Operating Partnership, L.P. ("KPOP"), Texas Commerce Bank, N.A., ("TCB"), and certain other Lenders, dated December 22, 1994, filed as Exhibit 10.13 of the exhibits to the Registrant's 1994 Form 10-K, which exhibit is hereby incorporated by reference.
10.3 Pledge and Security Agreement between Kaneb Pipe Line Company ("KPL") and TCB, dated October 11, 1993, filed as Exhibit 10.3 of the exhibits to the Registrant's 1993 Form 10-K, which exhibit is hereby incorporated by reference.
10.4 Note Purchase Agreement, dated December 22, 1994 (the "1994 Note Purchase Agreement"), filed as Exhibit 10.2 of the exhibits to Registrant's Current Report on Form 8-K, dated March 13, 1995 (the "March 1995 Form 8-K"), which exhibit is hereby incorporated by reference.
10.5 Note Purchase Agreements, dated June 27, 1996, filed herewith.
10.6 Agreement for Sale and Purchase of Assets between Wyco Pipe Line Company and KPOP, dated February 19, 1995, filed as Exhibit 10.1 of the exhibits to the Registrant's Registrant's report on Form 8-K filed with the Securities and Exchange Commission on March 13, 1995, and said exhibit is hereby incorporated by reference.
10.7 Asset Purchase Agreements between and among Steuart Petroleum Company, SPC Terminals, Inc., Piney Point Industries, Inc., Steuart Investment Company, Support Terminals Operating Partnership, L.P. and KPOP, as amended, dated August 27, 1995. Said documents are on file as Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to Registrant's current report on Form 8-K dated January 3, 1996, and said exhibits are hereby incorporated by reference.
21 List of Subsidiaries, filed herewith.
24.1 Powers of Attorney, not applicable.
27 Financial Data Schedule, filed herewith.
(b) REPORTS ON FORM 8-K - NONE.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNER'S CAPITAL
(a) Kaneb Pipe Line Company owns a combined 2% interest in Kaneb Pipe Line Partners, L.P. as General Partner. (b) The Partnership Agreement allows for an additional issuance of up to 7.75 million senior preference units.
See notes to consolidated financial statements.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PARTNERSHIP ORGANIZATION
Kaneb Pipe Line Partners, L.P. (the "Partnership"), a master limited partnership, owns and operates a refined petroleum products pipeline business and a petroleum products and specialty liquids storage and terminaling business. The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership holds a 99% interest as limited partner. Kaneb Pipe Line Company (the "Company"), a wholly-owned subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner holds a 1% general partner interest in both the Partnership and KPOP. The Company's 1% interest in KPOP is reflected as the minority interest in the financial statements.
In September 1995, a subsidiary of the Company sold 3.5 million of the Preference Units ("PU") it held in a public offering and exchanged 1.0 million of its PU's for 1.0 million Preference B Units, which are subordinate to the PU's until September 30, 1997. At December 31, 1996, the Company owns an approximate 31% interest as a limited partner in the form of Preference Units, Preference B Units and Common Units, and as a general partner owns a combined 2% interest. The SPU's represent an approximate 44% interest in the Partnership and the 3.5 million publicly held Preference Units represent an approximate 22% interest. An approximate 1% ownership interest in the form of 61,700 PU's and 154,000 Common Units is held by officers of Kaneb.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by the Partnership in the preparation of the consolidated financial statements. The preparation of the Partnership's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership's policy is to invest cash in highly liquid investments with maturities of three months or less, upon purchase. Accordingly, uninvested cash balances are kept at minimum levels. Such investments are valued at cost, which approximates market, and are classified as cash equivalents. The Partnership does not have any derivative financial instruments.
PROPERTY AND EQUIPMENT
Property and equipment are carried at historical cost. Certain leases have been capitalized and the leased assets have been included in property and equipment. Additions of new equipment and major renewals and replacements of existing equipment are capitalized. Repairs and minor replacements that do not materially increase values or extend useful lives are expensed. Depreciation of property and equipment is provided on a straight-line basis at rates based upon expected useful lives of various classes of assets. The rates used for pipeline and storage facilities of KPOP are the same as those which have been promulgated by the Federal Energy Regulatory Commission.
REVENUE AND INCOME RECOGNITION
KPOP provides pipeline transportation of refined petroleum products and liquified petroleum gases. Revenue is recognized upon receipt of the products into the pipeline system.
ST provides terminaling and other ancillary services. Fees are billed one month in advance and are reported as deferred income. Revenue is recognized in the month services are provided.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS
The operations of the Partnership are subject to federal, state and local laws and regulations relating to protection of the environment. Although the Partnership believes its operations are in general compliance with applicable environmental regulations, risks of additional costs and liabilities are inherent in pipeline and terminal operations, and there can be no assurance significant costs and liabilities will not be incurred by the Partnership. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations of the Partnership, could result in substantial costs and liabilities to the Partnership.
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Partnership's commitment to a formal plan of action. The Partnership has recorded a reserve in other liabilities for environmental claims in the amount of $4.3 million at December 31, 1996, including $3.5 million relating to the acquisitions of the West Pipeline and Steuart.
The Company has indemnified the Partnership against liabilities for damage to the environment resulting from operations of the pipeline prior to October 3, 1989 (date of formation of the Partnership). The indemnification does not extend to any liabilities that arise after such date to the extent that the liabilities result from changes in environmental laws and regulations. In addition, ST's former owner has agreed to indemnify the Partnership against liabilities for damages to the environment from operations conducted by the former owner prior to March 2, 1993. The indemnity, which expires March 1, 1998, is limited in amount to 60% of any claim exceeding $0.1 million, up to a maximum of $10 million.
INCOME TAX CONSIDERATIONS
Income before income tax expense is made up of the following components:
Partnership operations are not subject to federal or state income taxes. However, certain operations of ST are conducted through wholly-owned corporate subsidiaries which are taxable entities. The provision for income taxes for the periods ended December 31, 1996, 1995 and 1994 consists of deferred U.S. federal income taxes of $.7 million, $.6 million and $.6 million, respectively, and current federal income taxes of $.2 million in 1996 and 1994. The net deferred tax liability of $2.3 million and $1.7 million at December 31, 1996 and 1995, respectively, consists of deferred tax liabilities of $7.4 million and $6.3 million, respectively, and deferred tax assets of $5.1 million and $4.6 million, respectively. The deferred tax liabilites consists primarily of tax depreciation in excess of book depreciation and the deferred tax assets consists primarily of net operating losses. The corporate operations have net operating losses for tax purposes totaling approximately $13.5 million which expire in years 2008 and 2011.
Since the income or loss of the operations which are conducted through limited partnerships will be included in the tax returns of the individual partners of the Partnership, no provision for income taxes has been recorded in the accompanying financial statements on these earnings. The tax returns of the Partnership are subject to examination by federal and state taxing authorities. If any such examination results in adjustments to distributive shares of taxable income or loss, the tax liability of the partners would be adjusted accordingly.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax attributes of the Partnership's net assets flow directly to each individual partner. Individual partners will have different investment bases depending upon the timing and prices of acquisition of partnership units. Further, each partner's tax accounting, which is partially dependent upon their individual tax position, may differ from the accounting followed in the financial statements. Accordingly, there could be significant differences between each individual partner's tax basis and their proportionate share of the net assets reported in the financial statements. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires disclosure by a publicly held partnership of the aggregate difference in the basis of its net assets for financial and tax reporting purposes. Management does not believe that, in the Partnership's circumstances, the aggregate difference would be meaningful information.
ALLOCATION OF NET INCOME AND EARNINGS
Net income is allocated to the limited partnership units in an amount equal to the cash distributions declared for each reporting period and any remaining income or loss is allocated to the class of units that did not receive the same amount of cash distributions per unit (if any). If the same cash distributions per unit are declared to all classes of units, income is allocated pro rata based on the aggregate amount of distributions declared.
Earnings per SPU and PU are calculated by dividing the amount of net income allocated to the SPU's and PU's by the weighted average number of SPUs and PUs outstanding, respectively.
CASH DISTRIBUTIONS
The Partnership makes quarterly distributions of 100% of its Available Cash, as defined in the Partnership Agreement, to holders of limited partnership units ("Unitholders") and the Company. Available Cash consists generally of all the cash receipts of the Partnership plus the beginning cash balance less all of its cash disbursements and reserves. The Partnership expects to make distributions of Available Cash for each quarter of not less than $.55 per Unit (the "Minimum Quarterly Distribution"), or $2.20 per Unit on an annualized basis, for the foreseeable future, although no assurance is given regarding such distributions. The Partnership expects to make distributions of all Available Cash within 45 days after the end of each quarter to holders of record on the applicable record date. Distributions of $2.30, $2.20 and $2.20 per unit were declared to Senior Preference and Preference Unitholders in 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, the Partnership declared distributions of $2.30, $1.45 and $.55, respectively, per unit to the Common Unitholders. As of December 31, 1996, no arrearages existed on any class of partnership interest.
Distributions by the Partnership of its Available Cash are made 99% to Unitholders and 1% to the Company, subject to the payment of incentive distributions to the General Partner if certain target levels of cash distributions to the Unitholders are achieved. The distribution of Available Cash for each quarter within the Preference Period, as defined, is subject to the preferential rights of the holders of the Senior Preference Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters, before any distribution of Available Cash is made to holders of Preference Units, Preference B Units or Common Units for such quarter. In addition, for each quarter within the Preference Period, the distribution of any amounts to holders of Common Units is subject to the preferential rights of the holders of the Preference B Units to receive the Minimum Quarterly Distribution for such quarter, plus any arrearages in the payment of the Minimum Quarterly Distribution for prior quarters. The Common Units are not entitled to arrearages in the payment of the Minimum Quarterly Distribution. In general, the Preference Period will continue indefinitely until the Minimum Distribution has been paid to the holders of the Senior Preference Units, the Preference Units, the Preference B Units and the Common Units for twelve consecutive quarters. The Minimum Quarterly distribution has been paid to all classes of Unitholders for all four quarters in 1996 and for the quarters ended September 30 and December 31, 1995. Prior to the end of the Preference Period, up to 2,650,000 of the Preference Units and the Preference B Units may be converted into Senior Preference Units on a one-for-one basis if the Third Target Distribution, as defined, is paid to all Unitholders for four full consecutive quarters. The Third Target distribution is reached when distributions of Available Cash equals $2.80 per Limited Partner ("LP") Unit on an annualized basis. After the Preference Period ends all differences and distinctions between the three classes of units for the purposes of cash distributions will cease.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHANGE IN PRESENTATION
Certain financial statement items have been reclassified to conform with the 1996 presentation.
3. ACQUISITIONS
In February 1995, the Partnership acquired, through KPOP, the refined petroleum product pipeline assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1 million plus transaction costs and the assumption of certain environmental liabilities. The West Pipeline was owned 60% by a subsidiary of GATX Terminals Corporation and 40% by a subsidiary of Amoco Pipe Line Company. The acquisition was financed by the issuance of $27 million of first mortgage notes. The assets acquired from Wyco Pipe Line Company did not include certain assets that were leased to Amoco Pipe Line Company and the purchase agreement did not provide for either (i) the continuation of an arrangement with Amoco Pipe Line Company for the monitoring and control of pipeline flows or (ii) the extension or assumption of certain credit agreements that Wyco Pipe Line Company had with its shareholders.
In December 1995, the Partnership acquired the liquids terminaling assets of Steuart Petroleum Company and certain of its affiliates (collectively, "Steuart") for $68 million plus transaction costs and the assumption of certain environmental liabilities. The acquisition price was initially financed by the issuance of a $68 million bank bridge loan which was refinanced during 1996 for $68 million of first mortgage notes. The asset purchase agreement includes a provision for an earn-out payment based upon revenues of one of the terminals exceeding a specified amount for a seven-year period beginning in January 1996. No amount was payable under the earn-out provision in 1996. The contracts also include a provision for the continuation of all terminaling contracts in place at the time of the acquisition, including those contracts with Steuart.
The acquisitions have been accounted for using the purchase method of accounting. The total purchase price has been allocated to the assets and liabilities based on their respective fair values based on valuations and other studies. Assuming the above acquisitions in 1995 occurred as of the beginning of the year ended December 31, 1995, the summarized unaudited pro forma revenues, net income and allocation of net income per SPU and PU for 1995 would be $117.9 million, $35.7 million and $2.20, respectively.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is summarized as follows:
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT AND LEASES
In 1994, a wholly-owned subsidiary of the Partnership issued $33 million of first mortgage notes ("Notes") to a group of insurance companies. The Notes bear interest at the rate of 8.05% per annum and are due on December 22, 2001. Also in 1994, another wholly-owned subsidiary entered into a Restated Credit Agreement with a group of banks that provides a $15 million revolving credit facility through January 31, 1998. The credit facility bears interest at variable interest rates and has a commitment fee of .2% per annum of the unused credit facility. At December 31, 1996, $5.0 million was drawn under the credit facility. No amounts were drawn under the credit facility at December 31, 1995. In 1995, the Partnership financed the acquisition of the West Pipeline with the issuance of $27 million of Notes due February 24, 2002 which bear interest at the rate of 8.37% per annum. The Notes and the credit facility are secured by a mortgage on substantially all of the pipeline assets of the Partnership and contain certain financial and operational covenants. The acquisition of the Steuart terminaling assets was initially financed by a $68 million bridge loan from a bank. In June 1996, the Partnership refinanced this obligation with $68.0 million of new first mortgage notes (the "Steuart notes") bearing interest at rates ranging from 7.08% to 7.98%. $35 million of the Steuart notes is due June 2001, $8.0 million is due June 2003, $10.0 million is due June 2006 and $15.0 million is due June 2016. The loan is secured, pari passu with the existing Notes and credit facility, by a mortgage on the East Pipeline.
The following is a schedule by years of future minimum lease payments under capital and operating leases together with the present value of net minimum lease payments for capital leases as of December 31, 1996:
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The capital lease is secured by certain pipeline equipment and the Partnership has accrued its obligation to purchase this equipment for approximately $4.1 million at the termination of the lease.
Total rent expense under operating leases amounted to $1.2, $.9 and $.9 million for each of the years ended December 31, 1996, 1995 and 1994, respectively.
KPOP and the Company entered into a payment priority agreement related to the capital lease obligation for pipeline equipment under which the Company is primarily liable for rental payments of approximately $2.9 million per year through April 1997 and KPOP is primarily liable for the remaining rental payments. KPOP has recorded a receivable of $1.0 million at December 31, 1996 from the Company for the present value of these future lease payments. This receivable bears interest at an annual rate of 13.8%, which reflects the imputed interest rate on the capital lease. KPOP recorded interest income of $.3 million, $.7 million and $.9 million from the Company on this receivable balance for the periods ended December 31, 1996, 1995 and 1994, respectively. The amount of the capital lease obligation that exceeds the receivable from the Company ($7.5 million at December 31, 1996) represents the present value of the lease obligation and purchase option due subsequent to April 1997.
The estimated fair value of all long term debt (excluding capital leases) as of December 31, 1996 was approximately $134 million as compared to the carrying value of $133 million. These fair values were estimated using discounted cash flow analysis, based on the Partnership's current incremental borrowing rates for similar types of borrowing arrangements. The Partnership has not determined the fair value of its capital leases as it is not practicable. These estimates are not necessarily indicative of the amounts that would be realized in a current market exchange. The Partnership has no derivative financial instruments.
6. RELATED PARTY TRANSACTIONS
The Partnership has no employees and is managed and controlled by the Company. The Company and Kaneb are entitled to reimbursement of all direct and indirect costs related to the business activities of the Partnership. These costs, which totaled $10.5 million, $9.5 million and $9.0 million for the years ended December 31, 1996, 1995 and 1994, respectively, include compensation and benefits paid to officers and employees of the Company and Kaneb, insurance premiums, general and administrative costs, tax information and reporting costs, legal and audit fees. Included in this amount is $8.4 million, $7.7 million and $7.0 million of compensation and benefits, including pension costs, paid to officers and employees of the Company for the periods ended December 31, 1996, 1995 and 1994, respectively, which represent the actual amounts paid by the Company or Kaneb. In addition, the Partnership paid $.2 million during each of these respective periods for an allocable portion of the Company's overhead expenses. At December 31, 1996 and 1995, the Partnership owed the Company $.7 million and $1.0 million, respectively, for these expenses which are due under normal invoice terms.
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1996 and 1995 are summarized as follows:
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BUSINESS SEGMENT DATA
Selected financial data pertaining to the operations of the Partnership's business segments is as follows:
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Kaneb Pipe Line Partners, L.P.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 30 present fairly, in all material respects, the financial position of Kaneb Pipe Line Partners, L.P. and its subsidiaries (the "Partnership") at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas February 20, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, Kaneb Pipe Line Partners, L.P. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KANEB PIPE LINE PARTNERS, L.P.
By: Kaneb Pipe Line Company ---------------------------- General Partner
By: EDWARD D. DOHERTY ---------------------------- Chairman of the Board and Chief Executive Officer Date: March 24, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of Kaneb Pipe Line Partners, L.P. and in the capacities with Kaneb Pipe Line Company and on the date indicated.
EXHIBIT INDEX


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