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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2006
or
[_] 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: 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 13-2615557
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
315 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
(212) 460-1900
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
--------------------------------------------------------------------------------
COMMON SHARES, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
7-3/4% SENIOR NOTES DUE AUGUST 15, 2013 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [_]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer[X] Accelerated Filer[_] Non-Accelerated Filer[_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at June 30, 2006 (computed by reference to the
last reported closing sale price of the Common Shares on the New York Stock
Exchange on such date): $4,751,155,000.
On February 15, 2007, the registrant had outstanding 216,351,466 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE:
--------------------------------------------------------------------------------
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
2007 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
EXPLANATORY NOTE
This report on Form 10-K/A amends and restates in its entirety Item 15
of the Annual Report on Form 10-K, of Leucadia National Corporation (the
"Company") for the fiscal year ended December 31, 2006 to reflect that the
financial statements referred to in Item 15(c)(1), (2) and (3) have been filed
herewith pursuant to Item 3-09(b) of Regulation S-X.
2
PART IV
Item 15. Exhibits and Financial Statement Schedule.
------- ------------------------------------------
(a)(1)(2) Financial Statements and Schedule.
Report of Independent Registered Public Accounting Firm...........F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 2006 and 2005.......F-3
Consolidated Statements of Operations for the years ended
December 31, 2006, 2005 and 2004..............................F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004..............................F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2006, 2005 and 2004..........F-7
Notes to Consolidated Financial Statements......................F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts.................F-49
(3) Executive Compensation Plans and Arrangements. See Item 15(b) below
for a complete list of Exhibits to this Report.
1999 Stock Option Plan, as amended April 5, 2006 (filed as Annex C
to the Company's Proxy Statement dated April 17, 2006 (the "2006
Proxy Statement")).
Form of Grant Letter for the 1999 Stock Option Plan (filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004 (the "2004 10-K")).
Amended and Restated Shareholders Agreement dated as of June 30,
2003 among the Company, Ian M. Cumming and Joseph S. Steinberg
(filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 (the "2003 10-K")).
Form of Amendment No. 1 to the Amended and Restated Shareholders
Agreement dated as of June 30, 2003 (filed as Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2006 (the "2nd Quarter 2006 10-Q")).
Leucadia National Corporation 2003 Senior Executive Annual Incentive
Bonus Plan, as amended May 16, 2006 (filed as Annex A to the 2006
Proxy Statement).
Leucadia National Corporation 2006 Senior Executive Warrant Plan
(filed as Annex B to the 2006 Proxy Statement).
Employment Agreement made as of June 30, 2005 by and between the
Company and Ian M. Cumming (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 13, 2005 (the "July 13, 2005
8-K")).
Employment Agreement made as of June 30, 2005 by and between the
Company and Joseph S. Steinberg (filed as Exhibit 99.2 to the July
13, 2005 8-K).
3
(b) Exhibits.
We will furnish any exhibit upon request made to our Corporate
Secretary, 315 Park Avenue South, New York, NY 10010. We charge
$.50 per page to cover expenses of copying and mailing.
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to
the Company's Current Report on Form 8-K dated July 14, 1993).*
3.2 Certificate of Amendment of the Certificate of Incorporation
dated as of May 14, 2002 (filed as Exhibit 3.2 to the 2003
10-K).*
3.3 Certificate of Amendment of the Certificate of Incorporation
dated as of December 23, 2002 (filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002 (the "2002 10-K")).*
3.4 Amended and Restated By-laws as amended through March 9, 2004
(filed as Exhibit 3.4 to the 2003 10-K).*
3.5 Certificate of Amendment of the Certificate of Incorporation
dated as of May 13, 2004 (filed as Exhibit 3.5 to the Company's
2004 10-K).*
3.6 Certificate of Amendment of the Certificate of Incorporation
dated as of May 17, 2005 (filed as Exhibit 3.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 2005 (the "2005 10-K")).*
4.1 The Company undertakes to furnish the Securities and Exchange
Commission, upon written request, a copy of all instruments with
respect to long-term debt not filed herewith.
10.1 1999 Stock Option Plan, as amended April 5, 2006 (filed as Annex
A to the 2006 Proxy Statement).*
10.2 Form of Grant Letter for the 1999 Stock Option Plan (filed as
Exhibit 10.4 to the Company's 2004 10-K).*
10.3 Amended and Restated Shareholders Agreement dated as of June 30,
2003 among the Company, Ian M. Cumming and Joseph S. Steinberg
(filed as Exhibit 10.5 to the 2003 10-K).*
10.4 Debtors' Modified Second Amended Joint Plan of Reorganization
under chapter 11 of the Bankruptcy Code, dated as of April 13,
2005, of ATX Communications, Inc. (filed as Exhibit 99.1 to ATX
Communication's Current Report on Form 8-K dated April 20,
2005).*
10.5 Services Agreement, dated as of January 1, 2004, between the
Company and Ian M. Cumming (filed as Exhibit 10.37 to the 2005
10-K).*
10.6 Services Agreement, dated as of January 1, 2004, between the
Company and Joseph S. Steinberg (filed as Exhibit 10.38 to the
2005 10-K).*
10.7 Leucadia National Corporation 2003 Senior Executive Annual
Incentive Bonus Plan, as amended May 16, 2006 (filed as Annex A
to the 2006 Proxy Statement).*
10.8 Employment Agreement made as of June 30, 2005 by and between the
Company and Ian M. Cumming (filed as Exhibit 99.1 to the July
13, 2005 8-K).*
10.9 Employment Agreement made as of June 30, 2005 by and between the
Company and Joseph S. Steinberg (filed as Exhibit 99.2 to the
July 13, 2005 8-K).*
4
10.10 Management Services Agreement dated as of February 26, 2001
among The FINOVA Group Inc., the Company and Leucadia
International Corporation (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).*
10.11 Voting Agreement, dated August 21, 2001, by and among Berkadia
LLC, Berkshire Hathaway Inc., the Company and The FINOVA Group
Inc. (filed as Exhibit 10.J to the Company's Current Report on
Form 8-K dated August 27, 2001).*
10.12 Second Amended and Restated Berkadia LLC Operating Agreement,
dated December 2, 2002, by and among BH Finance LLC and WMAC
Investment Corporation (filed as Exhibit 10.40 to the 2002
10-K).*
10.13 First Amended Joint Chapter 11 Plan of Reorganization of
Williams Communications Group, Inc. ("WCG") and CG Austria, Inc.
filed with the Bankruptcy Court as Exhibit 1 to the Settlement
Agreement (filed as Exhibit 99.3 to the Current Report on Form
8-K of WCG dated July 31, 2002 (the "WCG July 31, 2002 8-K")).*
10.14 Tax Cooperation Agreement between WCG and The Williams Companies
Inc. dated July 26, 2002, filed with the Bankruptcy Court as
Exhibit 7 to the Settlement Agreement (filed as Exhibit 99.9 to
the WCG July 31, 2002 8-K).*
10.15 Third Amended and Restated Credit And Guaranty Agreement, dated
as of September 8, 1999, as amended and restated as of April 25,
2001, as further amended and restated as of October 15, 2002,
and as further amended and restated as of September 24, 2004,
among WilTel, WilTel Communications, LLC, certain of its
domestic subsidiaries, as loan parties, the several banks and
other financial institutions or entities from time to time
parties thereto as lenders, Credit Suisse First Boston, acting
through its Cayman Islands branch, as administrative agent, as
first lien administrative agent and as second lien
administrative agent, and Wells Fargo Foothill, LLC, as
syndication agent (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated September 24, 2002 (the
"Company's September 24, 2002 8-K")).*
10.16 First Amendment to Third Amended and Restated Credit And
Guaranty Agreement, dated September 2, 2005, by and among WilTel
Communications, LLC, WilTel Communications Group LLC, the
Subsidiary Guarantors (as defined), and the First Lien
Administrative Agent, the Second Lien Administrative Agent and
the Administrative Agent for the Lenders (filed as Exhibit 99.1
to the Company's Current Report on Form 8-K dated September 2,
2005).*
10.17 Second Amended and Restated Security Agreement, dated as of
April 23, 2001, as amended and restated as of October 15, 2002,
and as further amended and restated as of September 24, 2004,
among WilTel, WilTel Communications, LLC, and the additional
grantors party thereto in favor of Credit Suisse First Boston,
acting through its Cayman Islands branch, as administrative
agent, as first lien administrative agent and as second lien
administrative agent (filed as Exhibit 99.2 to the Company's
September 24, 2002 8-K).*
10.18 Exhibit 1 to the Agreement and Plan of Reorganization between
the Company and TLC Associates, dated February 23, 1989 (filed
as Exhibit 3 to Amendment No. 12 to the Schedule 13D dated
December 29, 2004 of Ian M. Cumming and Joseph S. Steinberg with
respect to the Company).*
10.19 Termination, Mutual Release and Settlement Agreement dated June
15, 2005 among the Company, WCGLLC, WCLLC, SBC, SBC Operations,
Inc. and SBC Long Distance, LLC (filed as Exhibit 99.2 to the
Company's June 15, 2005 8-K/A).*
10.20 Information Concerning Executive Compensation (filed as Exhibit
10.1 to the Company's Current Report on Form 8-K dated January
11, 2007).*
5
10.21 Hotel Purchase Agreement, dated as of April 6, 2005, by and
between HWB 2507 Kalakaua, LLC and Gaylord Entertainment Co.
(filed as Exhibit 10.2. to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2005 (the
"1st Quarter 2005 10-Q")).*
10.22 Stock Purchase Agreement, dated as of May 2, 2005, by and among
the Company and the individuals named therein (filed as Exhibit
10.4 to the 1st Quarter 2005 10-Q).*
10.23 Purchase Agreement, dated as of October 30, 2005, among the
Company, Baldwin Enterprises, Inc., Level 3 Communications, LLC
and Level 3 Communications, Inc. ("Level 3") (filed as Exhibit
10.1 to the Company's Current Report on Form 8-K dated October
30, 2005).*
10.24 Registration Rights and Transfer Restriction Agreement, dated as
of December 23, 2005, by and among Level 3, the Company and
Baldwin Enterprises, Inc. (filed as Exhibit 10.2 to Level 3's
Current Report on Form 8-K dated December 23, 2005).*
10.25 Purchase and Sale Agreement ("Square 711 Purchase and Sale
Agreement"), dated as of November 14, 2005, between Square 711
Developer, LLC and Walton Acquisition Holdings V, L.L.C., a
Delaware limited liability company (filed as Exhibit 10.26 to
the 2005 10-K).*
10.26 First Amendment to Square 711 Purchase and Sale Agreement, dated
as of December 14, 2005 (filed as Exhibit 10.27 to the 2005
10-K).*
10.27 Share Purchase Agreement, dated May 2, 2005, between Inmet
Mining Corporation, the Company and MK Resources Company (filed
as Exhibit 2 to Amendment No. 10 to the Schedule 13D dated May
2, 2005 of the Company with respect to MK Resources Company (the
"MK 13D")).*
10.28 Agreement and Plan of Merger, dated as of May 2, 2005, among the
Company, Marigold Acquisition Corp. and MK Resources Company
(filed as Exhibit 3 to the MK 13D).*
10.29 Voting Agreement, dated as of May 2, 2005, between the Company
and Inmet Mining Corporation (filed as Exhibit 4 to the MK
13D).*
10.30 Letter Agreement, dated March 30, 2005 between SBC Services,
Inc. ("SBC Services") and WilTel Communications, LLC ("WCLLC")
(filed as Exhibit 10.1 to the 1st Quarter 2005 10-Q).*
10.31 Letter Agreement, dated April 27, 2005 between SBC Services and
WCLLC (filed as Exhibit 10.3 to the 1st Quarter 2005 10-Q).*
10.32 Letter Agreement, dated May 25, 2005 between SBC Services and
WCLLC (filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 2005).*
10.33 Master Services Agreement dated June 15, 2005 among WilTel
Communications Group ("WCGLLC"), WilTel Local Network, LLC, SBC
Services. and SBC Communications Inc. ("SBC") (filed as Exhibit
99.1 to the Company's Current Report on Form 8-K/A dated June
15, 2005 (the "June 15, 2005 8-K/A")).*
10.34 Form of Unit Purchase Agreement, dated as of April 6, 2006, by
and among GAR, LLC, the Company, AA Capital Equity Fund, L.P.,
AA Capital Biloxi Co-Investment Fund, L.P. and HRHC Holdings,
LLC (filed as Exhibit 10.1 to the 2nd Quarter 2006 10-Q).*
10.35 Form of Loan Agreement, dated as of April 6, 2006, by and among
Goober Drilling, LLC, the Subsidiaries of Goober Drilling, LLC
from time to time signatory thereto and the Company (filed as
Exhibit 10.2 to the 2nd Quarter 2006 10-Q).*
10.36 Form of First Amendment to Loan Agreement, dated as of June 15,
2006, between Goober Drilling, LLC, the Subsidiaries of Goober
Drilling, LLC from time to time signatory thereto and the
Company (filed as Exhibit 10.3 to the 2nd Quarter 2006 10-Q).*
6
10.37 Form of First Amended and Restated Limited Liability Company
Agreement of Goober Drilling, LLC, dated as of June 15, 2006, by
and among Goober Holdings, LLC, Baldwin Enterprises, Inc., the
Persons that become Members from time to time, John Special,
Chris McCutchen, Jim Eden, Mike Brown and Goober Drilling
Corporation (filed as Exhibit 10.4 to the 2nd Quarter 2006
10-Q).*
10.38 Form of Purchase and Sale Agreement, dated as of May 3, 2006, by
and among LUK-Symphony Management, LLC, Symphony Health
Services, LLC and RehabCare Group, Inc. (filed as Exhibit 10.5
to the 2nd Quarter 2006 10-Q).*
10.39 Form of Amendment No. 1, dated as of May 16, 2006, to the
Amended and Restated Shareholders Agreement dated as of June 30,
2003, by and among Ian M. Cumming, Joseph S. Steinberg and the
Company (filed as Exhibit 10.6 to the 2nd Quarter 2006 10-Q).*
10.40 Form of Credit Agreement, dated as of June 28, 2006, by and
among the Company, the various financial institutions and other
Persons from time to time party thereto and JPMorgan Chase Bank,
National Association (filed as Exhibit 10.7 to the 2nd Quarter
2006 10-Q).*
10.41 Form of Subscription Agreement, dated as of July 15, 2006, by
and among FMG Chichester Pty Ltd, the Company, and Fortescue
Metals Group Ltd (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2006 (the "3rd Quarter 2006 10-Q")).*
10.42 Form of Amending Agreement, dated as of August 18, 2006, by and
among FMG Chichester Pty Ltd, the Company and Fortescue Metals
Group Ltd (filed as Exhibit 10.2 to the 3rd Quarter 2006 10-Q).*
10.43 Compensation Information Concerning Non-Employee Directors
(filed under item 1.01 of the Company's Current Report on Form
8-K dated May 22, 2006).*
10.44 Leucadia National Corporation 2006 Senior Executive Warrant Plan
(filed as Annex B to the 2006 Proxy Statement).*
21 Subsidiaries of the registrant (filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 (the "2006 10-K").*
23.1 Consent of PricewaterhouseCoopers LLP with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (No. 333-51494) (filed as Exhibit 23.1 to
the Company's 2006 10-K).*
23.2 Consent of PricewaterhouseCoopers, with respect to the inclusion
in this Annual Report on Form 10-K the financial statements of
Olympus Re Holdings, Ltd. and with respect to the incorporation
by reference in the Company's Registration Statements on Form
S-8 (No. 333-51494).
23.3 Consent of independent auditors from BDO Seidman, LLP with
respect to the inclusion in this Annual Report on Form 10-K of
the financial statements of EagleRock Capital Partners (QP), LP
and EagleRock Master Fund, LP and with respect to the
incorporation by reference in the Company's Registration
Statements on Form S-8 (No. 333-51494).
23.4 Independent Auditors' Consent from KPMG LLP, with respect to the
inclusion in this Annual Report on Form 10-K of the financial
statements of Jefferies Partners Opportunity Fund II, LLC and
with respect to the incorporation by reference into the
Company's Registration Statements on Form S-8 (No. 333-51494).
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
7
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
31.3 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
31.4 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.**
31.5 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.**
31.6 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.**
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
32.3 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
32.4 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
32.5 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
32.6 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.**
(c) Financial statement schedules.
(1) Olympus Re Holdings, Ltd. consolidated financial statements as
of December 31, 2005 and for the years ended December 31, 2005
and 2004.
(2) EagleRock Capital Partners (QP), LP financial statements as of
December 31, 2006 and 2005 and for the years ended December
31, 2006, 2005 and 2004 and EagleRock Master Fund, LP
financial statements as of December 31, 2006 and 2005 and for
the years ended December 31, 2006, 2005 and 2004.
(3) Jefferies Partners Opportunity Fund II, LLC financial
statements: as of and for the year ended December 31, 2006
(unaudited), as of and for the year ended December 31, 2005
(audited), and as of and for the year ended December 31, 2004
(unaudited).
-----------------------------
* Incorporated by reference.
** Furnished herewith pursuant to item 601(b) (32) of Regulation S-K.
8
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.
LEUCADIA NATIONAL CORPORATION
March 23, 2007 By: /s/ Barbara L. Lowenthal
--------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
9
OLYMPUS RE HOLDINGS, LTD.
(Incorporated in Bermuda)
Consolidated Financial Statements
DECEMBER 31, 2005 AND 2004
(expressed in U.S. dollars)
[PricewaterhouseCoopers Logo]
--------------------------------------------------------------------------------
PricewaterhouseCoopers
Chartered Accountants
Dorchester House
7 Church Street
Hamilton HM 11
Bermuda
Telephone +1 (441) 295-2000
March 2, 2006 Facsimile+1 (441) 295-1242
www.pwc.com/bermuda
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF OLYMPUS RE HOLDINGS, LTD.
In our opinion, the consolidated balance sheet as of December 31, 2005, and the
related consolidated statements of income, shareholders' equity, comprehensive
income and cash flows for each of two years in the period ended December 31,
2005, present fairly, in all material respects, the financial position of
Olympus Re Holdings, Ltd. and its subsidiaries at December 31, 2005, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with the auditing
standards generally accepted in the United States of America. Those standards
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 our opinion.
/s/ PricewaterhouseCoopers
CHARTERED ACCOUNTANTS
A list of partners can be obtained from the above addressPricewaterhouseCoopers
refers to the members of the worldwide PricewaterhouseCoopers organization
OLYMPUS RE HOLDINGS, LTD.
Consolidated Balance Sheet
AS OF DECEMBER 31, 2005
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
$
--------------
ASSETS
Cash and cash equivalents (note 3) 57,817,230
Investments (note 3) 894,649,371
Investment income accrued 9,528,640
Investments trade pending 5,036,070
Accounts and premiums receivable 204,081,053
Deferred acquisition costs 35,459,806
Deferred capital raise expenditures (note 11) 1,434,635
Other assets 369,730
--------------
1,208,376,535
==============
LIABILITIES
Loss and loss adjustment expense reserves (note 4) 1,025,993,782
Unearned premiums 120,607,036
Share subscriptions received in advance (note 11) 32,740,242
Accounts payable and accrued expenses 553,985
Advisory fees payable (note 6) 6,519,798
Accrued capital raise expenditures 653,552
--------------
1,187,068,395
--------------
SHAREHOLDERS' EQUITY
Capital stock (note 8) 35,193
Contributed surplus (note 8) 351,893,807
Accumulated other comprehensive income 2,132,591
Retained deficit (332,753,451)
--------------
21,308,140
--------------
1,208,376,535
==============
APPROVED BY THE BOARD OF DIRECTORS
__________________________ Director __________________________ Director
The accompanying notes are an integral part of these consolidated financial
statements.
OLYMPUS RE HOLDINGS, LTD.
Consolidated Statements of Income
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004
$ $
--------------------------------
REVENUES
Gross premiums written 518,811,790 521,031,407
--------------------------------
Net premiums written 518,811,790 521,031,407
Net change in unearned premiums 36,220,238 (14,034,538)
--------------------------------
Net premiums earned 555,032,028 506,996,869
Net investment income 34,531,532 25,373,016
Net realized (losses) gains on investments (16,882,643) 1,005,365
--------------------------------
TOTAL REVENUES 572,680,917 533,375,250
================================
EXPENSES
Losses and loss expenses (note 4) 1,026,331,103 296,732,651
Commissions 128,348,583 160,686,894
Premium taxes and fees 4,341,284 4,419,724
Other underwriting expenses 7,882,461 3,070,531
General and administrative expenses 2,383,140 2,336,496
--------------------------------
TOTAL EXPENSES 1,169,286,571 467,246,296
================================
NET (LOSS) INCOME FOR THE YEAR (596,605,654) 66,128,954
================================
The accompanying notes are an integral part of these consolidated financial
statements.
OLYMPUS RE HOLDINGS, LTD.
Consolidated Statements of Shareholders' Equity
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
------------------------------------------------------------------------------
(expressed in U.S. dollars)
ACCUMULATED
COMMON ADDITIONAL OTHER RETAINED TOTAL
VOTING PAID-IN COMPREHENSIVE EARNINGS SHAREHOLDERS'
SHARES CAPITAL INCOME (DEFICIT) EQUITY
$ $ $ $ $
--------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2003 43,857 438,527,543 11,515,650 268,717,467 718,804,517
Net income for the year -- -- -- 66,128,954 66,128,954
Change in unrealized depreciation
on marketable investments -- -- (8,537,273) -- (8,537,273)
Repurchase of common voting
shares (note 8) (6,693) (66,926,907) -- (56,051,006) (122,984,606)
--------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2004 37,164 371,600,636 2,978,377 278,795,415 653,411,592
Net loss for the year -- -- -- (596,605,654) (596,605,654)
Change in unrealized depreciation on
marketable investments -- -- (845,786) -- (845,786)
Repurchase of common voting
shares (note 8) (1,971) (19,706,829) -- (14,943,212) (34,652,012)
--------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2005 35,193 351,893,807 2,132,591 (332,753,451) 21,308,140
==========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
OLYMPUS RE HOLDINGS, LTD.
Consolidated Statements of Comprehensive Income
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004
$ $
-----------------------------
NET (LOSS) INCOME FOR THE YEAR (596,605,654) 66,128,954
OTHER COMPREHENSIVE LOSS
Change in unrealized depreciation on marketable
investments (845,786) (8,537,273)
-----------------------------
COMPREHENSIVE (LOSS) INCOME FOR THE YEAR (597,451,440) 57,591,681
=============================
The accompanying notes are an integral part of these consolidated financial
statements.
OLYMPUS RE HOLDINGS, LTD.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004
$ $
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income for the year (596,605,654) 66,128,954
Adjustments to reconcile net (loss) income
to net provided by operating activities
Loss (gain) on sale of investments 16,882,643 (1,005,365)
Net amortization of premium on fixed
maturities 2,324,210 5,337,495
Investment income accrued (266,549) (894,718)
Accounts and premiums receivable (24,663,081) (11,959,972)
Deferred acquisition costs 12,946,436 (1,673,918)
Other assets (80,833) (29,379)
Loss and loss adjustment expense reserves 724,972,054 186,704,587
Unearned premiums (36,220,238) 14,034,537
Accounts payable and accrued expenses 129,047 (166,368)
Advisory fees payable (9,238,385) (31,259,124)
-----------------------------
Cash provided by operating activities 90,179,650 225,216,729
-----------------------------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of investments (911,493,880) (698,087,800)
Proceeds from sales of investments (net of
investments trade pending) 830,894,757 610,701,636
-----------------------------
Cash used in investing activities (80,599,123) (87,386,164)
-----------------------------
CASH FLOWS FOR FINANCING ACTIVITIES
Repurchase of common shares (34,652,012) (122,984,606)
Deferred capital raise expenditures (1,434,635) --
Accrued capital raise expenditures 653,552 --
Share subscriptions received in advance 32,740,242 --
-----------------------------
Cash used in financing activities (2,692,853) (122,984,606)
-----------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 6,887,674 14,845,959
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 50,929,556 36,083,597
-----------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR 57,817,230 50,929,556
=============================
The accompanying notes are an integral part of these consolidated financial
statements.
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
1. NATURE OF THE BUSINESS
Olympus Re Holdings, Ltd. and its principal operating subsidiary Olympus
Reinsurance Company, Ltd. ("Olympus Re") were incorporated under the laws
of Bermuda on December 3, 2001 and commenced operations on January 1,
2002. On December 22, 2005 Olympus Re Holdings, Ltd. incorporated a new
subsidiary, Helicon Re Holdings, Ltd. ("Helicon") together with Helicon's
wholly-owned operating subsidiary Helicon Reinsurance Company, Ltd.
("Helicon Re") (see note 11) (Olympus Re Holdings, Ltd. and its
subsidiaries are referred to as "the Company"). Olympus Re is registered
as a Class 4 insurer under The Insurance Act 1978, amendments thereto and
related regulations ("The Act"). Helicon Re did not commence operations
prior to December 31, 2005.
The Company's bye-laws provide that the Board of Directors of Olympus Re
shall consist of persons who first have been elected as designated
directors by a resolution in a general meeting of the shareholders of the
Company. The Board of Directors of the Company must then vote all shares
of Olympus Re owned by the Company to elect such designated directors as
Olympus Re directors. The bye-law provisions with respect to the removal
of directors of Olympus Re operate similarly (see note 2(a)).
The Company, through Olympus Re, writes reinsurance business on a global
basis with an emphasis on property excess business. During the year ended
December 31, 2005, this was through two main sources, quota share
reinsurance agreements with a U.S. reinsurance company and a Swedish
reinsurance company (see note 7) and underwriting advisory contracts. The
purpose of these quota share agreements is to produce primarily property
reinsurance. Olympus Re's underwriting advisory contracts are with
non-U.S. advisors (see note 6) to recommend excess property and marine
reinsurance business and consult on the quota share agreements. The
non-U.S. advisors are related to the previously mentioned U.S. and Swedish
reinsurance companies through common ownership.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, as well as disclosure of contingent assets and liabilities as
at the balance sheet date. Estimates also affect the reported amounts of
income and expenses for the reporting period. Actual results could differ
from those estimates.
The following is a summary of the significant accounting policies adopted
by the Company:
(a) CONSOLIDATION
The consolidated financial statements include the financial
statements of the Company and its wholly-owned subsidiaries Olympus
Re and Helicon. All significant inter-company balances and
transactions have been eliminated on consolidation.
In December 2003, the FASB issued a FASB Interpretation No. 46,
Consolidation of variable interest entities - an interpretation of
ARB No. 51 (revised December 2003) ("FIN 46R"). FIN 46R clarifies
the accounting and reporting for certain entities in which equity
investors do not have the characteristics of a controlling financial
interest.
(1)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Olympus Re's Board of Directors, who are elected as described in
note 1, have unilateral authority to manage the affairs of Olympus
Re, except for certain actions that require approval by the Company
as sole shareholder. Since the Company and Olympus Re are under the
common control of the shareholders of the Company, the financial
statements of the Company were previously presented on a combined
basis, rather than on a consolidated basis, in accordance with ARB
No. 51.
The Company adopted FIN 46R during 2004, the impact of which is to
present the financial statements as consolidated rather than
combined. This has not had any impact on the Company's net income or
net shareholders' equity as presented in these financial statements.
(b) PREMIUMS AND UNEARNED PREMIUMS
The Company records premiums for the quota share treaties based on
cession statements received. Premiums are earned evenly over the
term of the underlying reinsurance contract, in proportion to the
risk assumed. The portion of the premium related to the unexpired
portion of the contract at the end of the fiscal period is reflected
in unearned premiums.
Other reinsurance premiums assumed are estimated at the inception of
the policy based on information provided by the underlying ceding
companies. The information used in establishing these estimates is
reviewed and subsequent adjustments are taken into income in the
period in which they are determined. These premiums are earned on a
pro-rata basis over the terms of the related reinsurance contracts.
Reinstatement premiums are recognized at the time a loss event
occurs where coverage limits for the remaining life of the contract
are reinstated under pre-defined contract terms and are fully earned
when recognized. Accrual of reinstatement premiums is based on the
cession statements received or information provided by the
underlying ceding companies.
(c) DEFERRED ACQUISITION COSTS
The Company records acquisition costs based on cessions statements
received, in addition to its own direct acquisition costs.
Policy acquisition costs are comprised of ceding commissions,
brokerage, premium taxes and other expenses that relate directly to
the acquisition of premiums. These costs are deferred and amortized
over the terms of the related contracts on a pro-rata basis.
Deferred policy acquisition costs are reviewed to determine if they
are recoverable from future underwriting profits, including
investment income. If such costs are estimated to be unrecoverable,
they are expensed.
(d) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The Company records loss and loss adjustment expenses based on
cessions statements received. Loss and loss adjustment expense
reserves, including losses incurred but not reported and provisions
for settlement expenses, include amounts determined from losses
reported to the Company, and management estimates. Due to limited
historical experience, industry data is relied upon in the reserving
process.
A significant portion of the Company's business is in the property
catastrophe market and programs with higher layers of risks.
Reserving for losses in such programs is inherently complicated in
that losses in excess of the attachment level of the underlying
policies are characterized by high severity and low frequency. This
limits the volume of industry claims experience available from which
to reliably predict ultimate losses following a loss event.
(2)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The Company uses industry data and professional judgment to estimate
the ultimate loss from reinsurance contracts exposed to a loss
event. Delays in reporting losses to the Company together with the
potential for unforeseen adverse developments may result in losses
and loss expenses significantly greater or less than the reserve
provided at the time of the loss event.
Loss and loss adjustment expense reserve estimates are regularly
reviewed and updated, as new information becomes known to the
Company. Any resulting adjustments are included in income in the
period in which they become known.
(e) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits with original
maturities of three months or less.
(f) INVESTMENTS
The Company's investments in fixed maturities are classified as
"available-for-sale" and are carried at fair value, based on quoted
market prices. Unrealized gains and losses are included within
accumulated other comprehensive income in shareholders' equity.
Net investment income is stated net of investment management and
custody fees. Interest income is recognized on the accrual basis and
includes the amortization of premium or discount on fixed interest
securities purchased at amounts different from their par value.
Gains and losses on investments are included in income when
realized. Investments are recorded on a trade date basis and the
cost of securities sold is determined on the first-in, first-out
basis.
Investments are reviewed periodically to determine if they have
sustained an impairment of value that is considered to be other than
temporary. The identification of potentially impaired investments
involves significant management judgment, which includes the
determination of their fair value and the assessment of whether any
decline in value is other than temporary. If investments are
determined to be impaired, a loss is charged to income in that
period.
(g) FOREIGN CURRENCY
Monetary assets and liabilities denominated in foreign currencies
have been translated to U.S. dollars at the rates of exchange
prevailing at the balance sheet date. Income and expense
transactions originating in foreign currencies are translated at the
rates of exchange prevailing on the date of the transaction. Gains
and losses on foreign currency translation are included in income.
3. INVESTMENTS
2005
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
$ $ $ $
-------------------------------------------------
U.S. Government 120,498,280 1,841,404 -- 122,339,684
U.S. Government-Sponsored
Enterprises 369,580,139 186,544 -- 369,766,683
Corporate 278,118,953 45,027 -- 278,163,980
Mortgage-backed
securities 124,319,408 59,616 -- 124,379,024
-------------------------------------------------
892,516,780 2,132,591 -- 894,649,371
=================================================
(3)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The estimated fair value of fixed interest securities is based on quoted
market values.
Realized gains and losses in 2005 include a loss of $7,859,862, relating
to certain fixed income investments where the Company determined that
there was an other than temporary decline in the value of those
investments.
As at December 31, 2005, it was determined that the total gross unrealized
losses on investments should be recognized as realized losses. This is a
direct result of the magnitude of the underwriting losses suffered by the
Company during 2005. Due to the potential short-term nature of expected
loss payments, the Company did not believe that it had the intent or the
ability to hold the relevant investments until a market price recovery, or
until maturity, and as such recognized an other than temporary impairment
in investments described above.
The Company did not have any investments in a single corporate security
which exceeded 2% of total fixed interest securities as of December 31,
2005.
The following table sets forth certain information regarding the
investment ratings of the company's fixed interest securities portfolio as
of December 31, 2005.
2005
--------------------------
Ratings AMORTIZED
COST
$ %
--------------------------
U.S. Government 120,498,280 14
U.S. Government-Sponsored Enterprises 369,580,139 41
AAA 132,929,361 15
AA 53,027,563 6
A 178,350,334 20
BBB 38,131,103 4
--------------------------
892,516,780 100
==========================
The amortized cost and estimated fair value amounts for fixed interest
securities held at December 31, 2005 are shown by contractual maturity.
Actual maturity may differ from contractual maturity because certain
borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
$ $
----------------------------
Due within one year 64,904,236 66,536,900
Due after one year through five years 655,432,333 655,731,158
Due after five years through ten years 47,860,803 48,002,289
----------------------------
768,197,372 770,270,347
Mortgage-backed securities 124,319,408 124,379,024
----------------------------
892,516,780 894,649,371
============================
(4)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The components of net investment income are as follows:
2005 2004
$ $
----------------------------
Interest on fixed maturities 37,085,044 30,403,659
Net amortization of premium on fixed
maturities (2,324,210) (5,337,495)
Interest on cash and cash equivalents 749,044 1,047,368
----------------------------
35,509,878 26,113,532
Net investment expenses (978,346) (740,516)
----------------------------
34,531,532 25,373,016
============================
During 2005 and 2004, proceeds from sales of available-for-sale securities
were $835,930,827 and $610,701,636 respectively. Gross realized gains were
$1,217,826 and $2,990,444 and gross realized losses were $18,100,469 and
$1,985,079 for the years ended December 31, 2005 and 2004 respectively.
White Mountain Advisors, LLC, the Company's investment advisors, receive a
management fee at an annual rate of 0.1% of net invested assets. In 2004
the annual rate was 0.1%.
In the normal course of business, the Company provides collateral in
accordance with certain reinsurance agreements. The Company has cash
equivalents of $7,358,639 and investments of $752,348,653 in trusts, as of
December 31, 2005 provided as collateral.
4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense reserves are estimates subject to
variability, and the variability could be material in the near term. The
variability arises because all events affecting the ultimate settlement of
claims have not taken place and may not take place for some time.
Variability can be caused by receipt of additional claim information,
changes in judicial interpretation of contracts or significant changes in
the severity or frequency of claims from historical trends. Loss and loss
adjustment expenses estimates are based on all relevant information
available to the Company. Methods of estimation are used which the Company
believes produce reasonable results given current information.
Reserve activity for loss and loss expenses is summarized below:
$
BALANCE - BEGINNING OF YEAR 301,021,728
-------------
Net claims and claims expenses incurred
for the year related to:
Current year 987,678,228
Prior year 38,652,875
-------------
1,026,331,103
-------------
Net paid claims and claims expenses
for the year related to:
Current year 89,881,651
Prior year 211,477,398
-------------
301,359,049
-------------
BALANCE - END OF YEAR 1,025,993,782
=============
(5)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The Company suffered significant catastrophe losses during 2005 (see note
5). In addition, during 2005 there was adverse development of $41.6
million on the loss and loss adjustment expense reserves for hurricanes
and typhoons recorded during 2004. The majority of this development was
for marine and energy claims from hurricane Ivan, which were reported for
the first time in 2005.
The December 31, 2005 year end balance is comprised of provisions for
reported claims of $676,149,004 and provisions for claims incurred but not
reported of $349,844,778.
5. 2005 CATASTROPHE LOSSES
The Company suffered significant losses from the catastrophe events which
occurred in 2005, the largest of which were the losses from Hurricanes
Katrina, Rita and Wilma. The net impact to the Company was:
--------------------------------------------------------------------------
KATRINA RITA WILMA
--------------------------------------------------------------------------
Gross losses incurred $ 714,915,375 $ 72,374,829 $ 67,047,264
--------------------------------------------------------------------------
Reinstatement premiums earned (77,673,277) (4,357,371) (2,791,635)
--------------------------------------------------------------------------
Override commission, brokerage
& FET 10,872,548 541,295 356,162
--------------------------------------------------------------------------
NET IMPACT 648,114,646 68,558,753 64,611,791
--------------------------------------------------------------------------
The Company's estimates for these losses are based on currently available
information from cedants and actual losses may vary from these estimates
due to the inherent uncertainties in reserving for such losses, and these
variances could be material. 77% of the Company's loss and loss adjustment
expense reserves as at December 31, 2005 were for these three Hurricanes.
6. ADVISORY FEES PAYABLE
Advisory fees payable represents override commission payable to the
non-U.S. advisors, White Mountains Underwriting Limited and White
Mountains Underwriting (Bermuda) Limited, (collectively White Mountains
Underwriting) for all business on which they advise.
There is no profit commission payable by Olympus Re to White Mountains
Underwriting as at December 31, 2005 due to the underwriting loss
sustained in 2005. The advisory agreements with White Mountains
Underwriting provide for 20% of underwriting loss to be carried forward
and applied against future profit commissions payable until extinguished
(known as the "profit commission deficit"). As at December 31, 2005 the
total amount of the underwriting loss applicable to the advisory
agreements was $576,764,961.
7. MAJOR CUSTOMERS
During the years ended December 31, 2005 and 2004, the Company derived 75%
and 86%, respectively, of its premiums written from Folksamerica
Reinsurance Company ("Folksamerica") for which the Company pays an
override commission. During the years ended December 31, 2005 and 2004,
the Company derived 11% and 9% respectively, of its premiums written from
business recommended by White Mountains Underwriting for which the Company
pays an override commission. During the years ended December 31, 2005 and
2004, the Company derived 13% and 3% respectively, of its premiums written
from Sirius International Insurance Corporation("Sirius") for which the
Company pays an override commission. Folksamerica, White Mountains
Underwriting and Sirius are wholly-owned subsidiaries of White Mountains
Insurance Group Ltd. ("White Mountains"), parent of White Mountain
Advisors, LLC. White Mountains has an approximate 0.01% indirect ownership
in the Company. Included in premiums receivable for the year ended
December 31, 2005 was an amount of $148,335,494, due from Folksamerica and
$31,444,740 from Sirius.
(6)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
8. CAPITAL STOCK
(a) AUTHORIZED SHARES
The Company's authorized share capital is 20,000,000 common shares
of the par value of $0.01 each.
(b) COMMON SHARES
At December 31, 2005, the total issued and outstanding common shares
of the Company was 3,519,289, with a par value of $0.01. The holders
of the ordinary shares are entitled to receive dividends and are
allocated one vote per share, provided that, if the controlled
shares of any shareholder (excluding Leucadia National Corporation)
constitute 9.5 percent or more of the outstanding common shares of
the Company, only a fraction of the vote will be allowed so as not
to exceed 9.5 percent. There are various restrictions on the ability
of shareholders to dispose of their shares.
The Company's Bye-laws provide that the shareholders have an annual
put option to request that the Company repurchase any or all of
their shares. Such repurchase is subject to capital adequacy of the
Company under The Act and the approval of the Board of Directors of
the Company. At December 31, 2005 the Company had received requests
to repurchase 86,506 shares which will cost the Company $523,361 at
year end net asset value. The repurchase of these shares is subject
to approval by the Board of Directors at their first meeting in
2006.
In the years ended December 31, 2005 and 2004, the Company used cash
of $34,652,012 and $122,984,606 to repurchase a total of 197,088 and
669,336 shares respectively.
9. TAXATION
BERMUDA
The Company has received an undertaking from the Bermuda government
exempting it from all local income, withholding and capital gains taxes
until March 28, 2016. At the present time no such taxes are levied in
Bermuda.
UNITED STATES
The Company does not consider itself to be engaged in trade or business in
the United States and, accordingly, does not expect to be subject to
United States income tax.
10. STATUTORY REQUIREMENTS
Under The Act, Olympus Re is required to prepare Statutory Financial
Statements and to file a Statutory Financial Return. The Act also requires
Olympus Re to maintain a minimum share capital of $1,000,000 and to meet a
minimum solvency margin equal to the greater of $100,000,000, 50% of net
premiums written or 15% of the loss and loss adjustment expense reserves.
Olympus Re did not meet the minimum solvency margin at December 31, 2005.
Statutory capital and surplus as reported under The Act is different from
shareholders' equity as determined in conformity with accounting
principles generally accepted in the United States of America ("GAAP") due
to certain items that are capitalized under GAAP but expensed under The
Act.
Olympus Re is also required to maintain a minimum liquidity ratio under
the Act, which was met for the year ended December 31, 2005.
(7)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The Company reported the statutory non-compliance to the Bermuda Monetary
Authority ("BMA") and met with them to discuss plans to return to
compliance. Olympus Re returned to compliance under The Act in January
2006 following the completion of the capital raise (see note 11). The BMA
has restricted Olympus Re's license with effect from January 1, 2006 to
only write the quota share treaties with Folksamerica.
11. CAPITAL RAISING ACTIVITIES
During late 2005 and early 2006 the Company conducted a capital raise
through concurrent private placement memoranda (the "Memoranda"). The
Memoranda allowed potential investors the choice of investing in the
operations of the Company and/or Helicon. Helicon's operations involve the
participation, through Helicon Re, in the quota share business with
Folksamerica on similar terms as Olympus Re.
The Company received $32,740,242 in subscriptions in respect of the
capital raise prior to December 31, 2005. In addition the Company has
incurred expenses of $1,434,635 for the year ended December 31, 2005 in
respect of the capital raise and has deferred these. They will be offset
against the proceeds of the capital raise in 2006.
The capital raise closed in January 2006. The Company raised a total of
$156,500,000 for the operations of Olympus Re and an additional
$145,500,000 was raised for the operations of Helicon Re. At the date of
the closing Helicon repurchased its own shares from the Company and
consequently as of that date its results are no longer consolidated by
Olympus Re Holdings, Ltd.
The capital raise resulted in 8.5 million new shares issued by the Company
during January 2006 with an additional 17.5 million shares to be issued
promptly following the release of the audited financial statements for the
year ended December 31, 2005.
As part of the capital raise process of the Company, White Mountains
Underwriting has consented to an arrangement whereby Helicon Re may use
portions of Olympus Re's profit commission deficit (see note 6) to settle
profit commissions which would otherwise be payable by Helicon Re to White
Mountains Underwriting. This is accomplished by an agreement whereby
Helicon Re must annually purchase for cash from Olympus Re, at book value,
the amount of the profit commission deficit that Helicon Re can use in any
given year to settle its own profit commission payable to White Mountains
Underwriting. This arrangement will remain in place until all of Olympus
Re's profit commission deficit as of December 31, 2005 is utilized.
12. SUBSEQUENT EVENTS (UNAUDITED)
During 2006 the Company experienced adverse loss development on the 2005
hurricane losses of $249 million. The majority of this development was for
marine and energy claims from Hurricanes Katrina and Rita.
The Company has entered into an Indemnity Agreement with Folksamerica
Holdings Company Inc. (Folksamerica Holdings) under which it will be
reimbursed for up to $137 million of losses with dates of loss of December
31, 2005 and prior to the extent that they exceed the losses reflected on
Olympus Re's balance sheet as of March 31, 2006. Olympus Re expects to
recover the full $137 million. In addition, the Agreement provides that
Folksamerica Holdings will reimburse Olympus Re for all override
commissions earned by Folksamerica and White Mountains Underwriting after
March 31, 2006 in respect of business incepting prior to December 31,
2005.
(8)
EAGLEROCK CAPITAL
PARTNERS (QP), LP
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2006
EAGLEROCK CAPITAL
PARTNERS (QP), LP
================================================================================
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2006
EAGLEROCK CAPITAL PARTNERS (QP), LP
CONTENTS
================================================================================
EAGLEROCK CAPITAL PARTNERS (QP), LP
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS:
Statements of assets and liabilities 4
Statements of operations 5
Statements of changes in partners' capital 6
Statements of changes in net assets 7
Summary of business and significant accounting policies 8-9
Notes to financial statements 10-12
EAGLEROCK MASTER FUND, LP 13
INDEPENDENT AUDITORS' REPORT 14
FINANCIAL STATEMENTS:
Statements of assets and liabilities 15
Condensed schedule of investments - December 31, 2006 16-23
Condensed schedule of investments - December 31, 2005 24-30
Statements of operations 31
Statements of changes in partners' capital 32
Statements of changes in net assets 33
Summary of business and significant accounting policies 34-38
Notes to financial statements 39-41
2
INDEPENDENT AUDITORS' REPORT
The Partners
EagleRock Capital Partners (QP), LP
New York, New York
We have audited the accompanying statements of assets and liabilities of
EagleRock Capital Partners (QP), LP (a limited partnership) as of December 31,
2006 and 2005, and the related statements of operations, changes in partners'
capital, and changes in net assets for each of the three years in the period
ended December 31, 2006. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
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 EagleRock Capital Partners
(QP), LP as of December 31, 2006 and 2005, and the results of its operations,
changes in partners' capital and its changes in net assets for each of the three
years in the period ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, NY
February 28, 2007
3
EAGLEROCK CAPITAL PARTNERS (QP), LP
STATEMENTS OF ASSETS AND LIABILITIES
================================================================================
December 31, 2006 2005
--------------------------------------------------------------------------------
ASSETS
Investment in EagleRock Master Fund, LP $ 72,577,210 $122,938,768
Receivable from EagleRock Master Fund (Note 3) 9,920,929 --
Cash 556 556
Prepaid and other assets (Note 2) 62,088 4,766
--------------------------------------------------------------------------------
82,560,783 122,944,090
LIABILITIES
Capital withdrawals payable (Note 3) 9,920,929 1,805,269
--------------------------------------------------------------------------------
Contingency (Note 4)
NET ASSETS (PARTNERS' CAPITAL) (NOTE 3) $ 72,639,854 $121,138,821
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
4
EAGLEROCK CAPITAL PARTNERS (QP), LP
STATEMENTS OF OPERATIONS
================================================================================
Year ended December 31, 2006 2005 2004
--------------------------------------------------------------------------------
INVESTMENT LOSS
Net investment loss allocated
from EagleRock Master Fund, LP:
Interest $ 2,319,940 $ 7,019,216 $ 4,326,725
Dividends 1,387,290 942,273 1,024,367
Expenses (5,893,716) (10,675,122) (7,186,079)
NET INVESTMENT LOSS FROM (2,186,486) (2,713,633) (1,834,987)
EAGLEROCK MASTER FUND, LP
Interest income -- -- 556
TOTAL INVESTMENT LOSS (2,186,486) (2,713,633) (1,834,431)
EXPENSES:
Management fee (Note 2) 776,100 1,501,405 1,068,296
Other 4,400 4,400 --
TOTAL EXPENSES 780,500 1,505,805 1,068,296
NET INVESTMENT LOSS (2,966,986) (4,219,438) (2,902,727)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS ALLOCATED FROM
EAGLEROCK MASTER FUND, LP:
Net realized gain on investments 6,794,278 6,012,886 5,606,973
Net change in unrealized gain
on investments 18,514,492 (40,395,693) 37,703,722
NET INCOME (LOSS) (NOTE 1) $22,341,784 $(38,602,245) $40,407,968
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
5
EAGLEROCK CAPITAL PARTNERS (QP), LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
================================================================================
Three years ended December 31, 2006
--------------------------------------------------------------------------------
General Limited
partner partners Total
--------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2004 $ 6,429,065 $ 95,441,854 $ 101,870,919
Capital contributions -- 23,000,000 23,000,000
Capital withdrawals -- (3,732,552) (3,732,552)
Net income (Note 1):
Pro rata allocation 2,278,164 38,129,804 40,407,968
Performance allocation 4,427,330 (4,427,330) --
Profit participation
allocation (581,663) 581,663 --
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 12,552,896 148,993,439 161,546,335
Capital withdrawals -- (1,805,269) (1,805,269)
Net loss (Note 1):
Pro rata allocation (2,896,764) (35,705,481) (38,602,245)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 9,656,132 111,482,689 121,138,821
Capital withdrawals -- (70,840,751) (70,840,751)
Net income (Note 1):
Pro rata allocation 2,637,109 19,704,675 22,341,784
Profit participation
allocation (5,061) 5,061 --
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006 $ 12,288,180 $ 60,351,674 $ 72,639,854
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
6
EAGLEROCK CAPITAL PARTNERS (QP), LP
STATEMENTS OF CHANGES IN NET ASSETS
===============================================================================
Year ended December 31, 2006 2005 2004
-------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment loss $ (2,966,986) $ (4,219,438) $ (2,902,727)
Net realized gain on investments 6,794,278 6,012,886 5,606,973
Net change in unrealized gain
on investments 18,514,492 (40,395,693) 37,703,722
-------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN 22,341,784 (38,602,245) 40,407,968
NET ASSETS RESULTING FROM
OPERATIONS
-------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS
FROM CAPITAL TRANSACTIONS:
Capital contributions -- -- 23,000,000
Capital withdrawals (70,840,751) (1,805,269) (3,732,552)
-------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN
NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (70,840,751) (1,805,269) 19,267,448
-------------------------------------------------------------------------------
TOTAL (DECREASE) INCREASE (48,498,967) (40,407,514) 59,675,416
NET ASSETS, BEGINNING OF YEAR 121,138,821 161,546,335 101,870,919
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 72,639,854 $121,138,821 $161,546,335
===============================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
7
EAGLEROCK CAPITAL PARTNERS (QP), LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
================================================================================
BUSINESS EagleRock Capital Partners (QP), L.P. ("Partnership")
is a Delaware limited partnership organized to invest
and trade in securities and other investment vehicles
and instruments. The Partnership invests the majority
of its assets in EagleRock Master Fund, LP ("Master
Fund"). On November 1, 2004, EagleRock Master Fund, a
Delaware partnership, transferred its net assets and
partnership interests to the Master Fund, a Cayman
Islands exempted partnership that became the
surviving master partnership. As a result of the
transfer, the Partnership received a pro rata share
of the Partnership interest in the Master Fund on
that date. The Partnership is also a general partner
in the Master Fund. Mariel Capital Management, LLC
("General Partner") is the general partner of the
Partnership. The financial statements of the Master
Fund are included elsewhere in this report and should
be read with the Partnership's financial statements.
SIGNIFICANT ACCOUNTING Investment in EagleRock Master Fund, LP
POLICIES
The investment in the Master Fund is fair valued at
the Partnership's proportionate interest in the net
assets and net income (loss) of the Master Fund.
Valuation of the investments held by the Master Fund
is discussed in the notes to the Master Fund
financial statements included elsewhere in this
report. The percentage of the Master Fund partners'
capital owned by the Partnership at December 31, 2006
and 2005 was approximately 81% and 65%, respectively.
Investment Transactions
The Partnership records all security transactions and
related expenses on a trade date basis. Revenues and
expenses are recorded on the accrual basis. Dividends
are recorded on the ex-dividend date and interest is
accrued in the period earned.
8
EAGLEROCK CAPITAL PARTNERS (QP), LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
================================================================================
Income Taxes
No income tax provision has been made in the
accompanying financial statements since the partners
are required to report their respective shares of the
Partnership income in their individual income tax
returns.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the year. Actual results
could differ from those estimates.
New Accounting Pronouncement
In September 2006, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements". This standard clarifies the definition
of fair value for financial reporting, establishes a
framework for measuring fair value and requires
additional disclosures about the use of fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those
fiscal years. As of December 31, 2006, the
Partnership does not believe the adoption of SFAS No.
157 will impact the amounts reported in the financial
statements. However, additional disclosures will be
required about the inputs used to develop the
measurements of fair value and the effect of certain
of the measurements reported in the statement of
operations for a fiscal year.
9
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. ALLOCATION OF NET The net income (loss) for the three years
INCOME (LOSS), ended December 31, 2006 is allocated to each
PERFORMANCE partner in accordance with the ratio of the
ALLOCATION AND capital account of each partner to the total
PROFIT of all capital accounts at the beginning of
PARTICIPATION each fiscal period.
ALLOCATION
At the end of each performance period, 20%
of net income in excess of cumulative loss
is reallocated to the capital accounts of
the General Partner as a performance
allocation. The General Partner may, at its
discretion, reduce or waive this allocation.
For one of the limited partners of the
Partnership, a separate agreement exists
stating that at the end of each performance
period, 10% of net income in excess of
cumulative loss is reallocated to the
capital account of the General Partner. For
the year ended December 31, 2004, the
performance allocation was $4,427,330. There
was no performance allocation for the years
ended December 31, 2006 and 2005.
In consideration of one of the limited
partner's contribution, the limited partner
is entitled to receive 10% of any
performance allocation paid to the General
Partner by the Partnership and an affiliated
partnership (the "Profit Participation
Allocation"). For the years ended December
31, 2006, 2005 and 2004, the Profit
Participation Allocation was $5,061, $-0-
and $581,663, respectively.
10
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. MANAGEMENT FEE EagleRock Capital Management, LLC
("Investment Manager") serves as the
Investment Manager of the Partnership. The
Partnership incurs a quarterly fee payable
at the beginning of each quarter equal to
.375% (1.50% per annum) of the capital
account balance of each limited partner as
of the close of the preceding quarter. The
General Partner may, at its discretion,
reduce or eliminate this fee. Management
fees are paid by the Master Fund and are
discussed in the notes to the Master Fund's
financial statements included elsewhere in
this report. For one of the limited partners
of the Partnership, a separate agreement
exists stating that the Partnership incur a
quarterly fee payable at the beginning of
each quarter equal to .25% (1.00% per annum)
of the capital account balance of the
limited partner as of the close of the
preceding quarter. For the years ended
December 31, 2006, 2005 and 2004, the
Partnership's management fees were $766,100,
$1,501,405 and $1,068,296, respectively. At
December 31, 2006 the Partnership made an
advance payment of $61,723 to the Investment
Manager, which is included in prepaid and
other assets.
3. CAPITAL (a) Capital Withdrawals Payable
TRANSACTIONS
As of December 31, 2006, the Partnership had
a receivable from the Master Fund of
$9,920,929 with respect to capital
withdrawals payable to its limited partners.
As of February 28, 2007, the Partnership
made payments for such capital withdrawals
totaling $8,928,836.
(b) Subsequent Capital Transactions
From January 1, 2007 to February 28, 2007,
the Partnership made payments for capital
withdrawals totaling $8,928,836 (see Note
3(a)). There were no other capital
contributions or withdrawals in the same
period.
11
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
4. CONTINGENCY From time to time, the Partnership and its
affiliates receive inquiries from regulatory
agencies. The Partnership and its affiliates
fully cooperate with such inquiries. It is
not possible to predict the outcome of such
inquiries.
5. FINANCIAL The financial highlights represent the
HIGHLIGHTS Partnership's financial performance for the
three years ended December 31, 2006.
An individual partner's performance may vary
based on different financial arrangements
such as management fee, performance
allocation, and the timing of capital
transactions.
Total return is computed based on the change
in a limited partner capital account during
the year, adjusted for capital contributions
and withdrawals.
The operating expense and net investment
loss ratios do not reflect the effect of the
performance and profit participation
allocation.
Limited partner 2006 2005 2004
--------------------------------------------------------
Total return before 26.09% (23.96)% 34.11%
performance allocation
Performance allocation
net of profit
participation allocation -- -- (3.45)
--------------------------------------------------------
Total return after 26.09% (23.96)% 30.66%
performance and
profit
participation
allocation
========================================================
PERCENTAGES TO AVERAGE
NET ASSETS:
Operating expense ratio 7.50% 8.54% 7.28%
Performance allocation
net of profit
participation
allocation -- -- 3.45
--------------------------------------------------------
Total expenses and 7.50% 8.54% 10.73%
performance and
profit
participation
allocation
========================================================
Net investment loss (3.40)% (3.02)% (2.60)%
ratio
========================================================
12
EAGLEROCK MASTER FUND, LP
================================================================================
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2006
13
INDEPENDENT AUDITORS' REPORT
The Partners
EagleRock Master Fund, LP
Grand Cayman, Cayman Islands
We have audited the accompanying statements of assets and liabilities, including
the condensed schedules of investments, of EagleRock Master Fund LP (formerly,
EagleRock Master Fund) as of December 31, 2006 and 2005, and the related
statements of operations, changes in partners' capital, and changes in net
assets for each of the three years in the period ended December 31, 2006. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
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 EagleRock Master Fund LP as of
December 31, 2006 and 2005, and the results of its operations, changes in
partners' capital and changes in net assets for each of the three years in the
period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, NY
February 28, 2007
14
EAGLEROCK MASTER FUND, LP
STATEMENTS OF ASSETS AND LIABILITIES
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006 2005
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market or fair
value (cost $153,334,832 and $299,102,075)
(Notes 1 and 5) $214,117,270 $326,074,156
Investment in securities pledged to
counterparty, at fair value (cost $10,496,032
and $18,049,368)
(Notes 1, 4 and 5) 10,498,542 17,866,699
Due from brokers, net (Notes 1 and 5) 5,375,542 --
Dividends and interest receivable 1,040,896 657,016
--------------------------------------------------------------------------------
231,032,250 344,597,871
--------------------------------------------------------------------------------
LIABILITIES
Securities sold, not yet purchased, at market
or fair value
(proceeds $97,748,620 and $138,444,811)
(Notes 1, 4 and 5) 99,003,941 133,421,837
Unrealized loss on open swap contracts (Notes 1
and 5) 1,309,844 871,148
Due to brokers, net (Note 1) -- 19,344,126
Capital withdrawals payable to feeder funds
(Note 6(a)) 38,892,082 --
Dividends and interest payable 1,828,639 1,276,936
Accrued expenses 20,000 20,000
--------------------------------------------------------------------------------
141,054,506 154,934,047
--------------------------------------------------------------------------------
Contingency (Note 7)
NET ASSETS (PARTNERS' CAPITAL) (NOTE 6) $ 89,977,744 $189,663,824
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
15
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES:
Common stock:
United States:
Automotive:
7,118,709 Delphi Corporation 30.22% $ 27,193,468
Other 2.05 1,846,043
Building materials:
1,059,811 Owens Corning 5.89 5,297,179
Other .88 791,000
Business services 7.15 6,436,431
Capital equipment 1.07 959,805
Chemicals:
8,556,643 Solutia, Inc. 7.08 6,374,699
Other 3.50 3,149,953
Consumer products:
2,039,742 Interstate Bakeries Corp. 5.44 4,895,381
Other 3.66 3,291,724
Electronics 3.27 2,939,609
Energy 5.62 5,056,693
Financial services 2.13 1,919,922
Food processing:
2,633,716 Darling International, Inc. 16.13 14,511,775
Other .09 83,554
Health and death care .63 567,133
Index:
139,421 S&P depository receipts 21.94 19,744,802
Media, entertainment and
leisure 10.01 9,007,747
Mining and metals:
199,348 WCI Steel, Inc. 3.54 3,189,568
Other 8.72 7,838,397
Networking 4.04 3,631,341
Packaging and containers:
1,680,115 Constar International, Inc. 13.07 11,760,805
15,000 Graphic Packaging Corp. .07 64,950
Other 1.23 1,109,157
Paper products .32 288,547
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
16
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Common stock (continued):
United States (continued):
Pharmaceuticals and biotech 1.51% $ 1,361,866
Retail 4.54 4,087,682
Semiconductors 1.21 1,092,514
Software 2.24 2,014,617
Telecommunications 5.70 5,129,087
Transportation and defense:
395,581 Delta Air Lines, Inc. .57 514,255
Other 3.23 2,902,894
Utilities 2.33 2,092,785
Wireless communications 2.88 2,591,667
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - UNITED 181.96 163,737,050
STATES (COST $115,139,614)
--------------------------------------------------------------------------------
Bermuda:
Pharmaceutical and biotech .23 208,404
Telecommunications 1.04 934,594
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - 1.27 1,142,998
BERMUDA (COST $1,193,841)
--------------------------------------------------------------------------------
Canada:
Mining and metals .74 661,602
Transportation and defense .87 779,108
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - CANADA 1.61 1,440,710
(COST $1,344,271)
--------------------------------------------------------------------------------
China:
Automotive .21 192,014
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - CHINA .21 192,014
(COST $154,164)
--------------------------------------------------------------------------------
England:
Media, entertainment and
leisure .47 420,719
Mining and metals .47 419,715
Telecommunications .02 19,391
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - .96 859,825
ENGLAND (COST $781,739)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
17
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Common stock (continued):
France:
Telecommunications .46% $ 417,713
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - FRANCE .46 417,713
(COST $393,037)
--------------------------------------------------------------------------------
Germany:
Financial services .04 39,550
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - .04 39,550
GERMANY (COST $329,567)
--------------------------------------------------------------------------------
India:
Media, entertainment and
leisure .33 293,646
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - INDIA .33 293,646
(COST $290,495)
--------------------------------------------------------------------------------
Italy:
Food processing .07 63,320
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - ITALY .07 63,320
(COST $57,295)
--------------------------------------------------------------------------------
Taiwan:
Semiconductors .10 91,312
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - TAIWAN .10 91,312
(COST $88,389)
--------------------------------------------------------------------------------
TOTAL COMMON STOCK
(COST $119,772,412) 187.01 168,278,138
--------------------------------------------------------------------------------
Long-term debt securities:
United States:
Automotive 4.78 4,302,632
Business services 1.65 1,487,700
Financial services .46 409,500
Media, entertainment and
leisure 6.08 5,472,854
Mining and metals:
2,750,000 WCI Steel, Inc. 8.00% 5/1/16 3.03 2,722,500
15,750,000 WCI Steel, Inc. 10.00%
12/1/04
Sr Nts. (in default) .34 307,125
Other .77 699,750
Packaging and containers .18 165,454
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
18
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Long-term debt securities
(continued):
United States (continued):
Semiconductors .30% $ 271,500
Telecommunications 4.43 3,990,193
Transportation and defense:
Delta Air Lines Inc. 8.3%
11,040,000 12/15/29 8.22 7,396,800
Delta Air Lines Inc. 2.88%
900,000 02/18/24 .65 582,750
Delta Air Lines Inc. 7.90%
900,000 12/15/09 .66 589,500
Other 4.43 3,988,000
Wireless communications .60 537,188
Utilities .66 594,000
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 37.24 33,517,446
SECURITIES - UNITED
STATES (COST $27,113,890)
--------------------------------------------------------------------------------
Bermuda:
Pharmaceuticals and biotech 2.06 1,849,500
Telecommunications .52 469,500
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 2.58 2,319,000
SECURITIES - BERMUDA
(COST $1,350,006)
--------------------------------------------------------------------------------
Canada:
Electronics 3.31 2,975,469
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 3.31 2,975,469
SECURITIES - CANADA (COST
$3,056,205)
--------------------------------------------------------------------------------
England:
Automotive 3.45 3,102,500
Telecommunications 2.63 2,368,458
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 6.08 5,470,958
SECURITIES - ENGLAND
(COST $2,844,527)
--------------------------------------------------------------------------------
Mexico:
Telecommunications 2.78 2,497,389
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 2.78 2,497,389
SECURITIES - MEXICO (COST
$1,654,435)
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 51.99 46,780,262
SECURITIES (COST
$36,019,063)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
19
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Preferred stock:
United States:
Media, entertainment and
leisure .28% $ 252,450
Mining and metals:
317,716 WCI Steel, Inc. 6.78 6,100,147
Pharmaceuticals and biotech 1.00 900,900
--------------------------------------------------------------------------------
TOTAL PREFERRED STOCK 8.06 7,253,497
(COST $5,225,629)
--------------------------------------------------------------------------------
Options purchased:
Canada .04 38,813
United States 2.52 2,265,102
--------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED 2.56 2,303,915
(COST $2,813,760)
--------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SECURITIES (COST
$163,830,864) 249.62% $224,615,812
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
20
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
SECURITIES SOLD, NOT YET PURCHASED:
Common stock:
United States:
Automotive:
3,040,007 Delphi Corporation 12.91% $ 11,612,827
Other .08 68,224
Building materials:
497,131 Owens Corning 3.94 3,546,020
Capital equipment .05 44,630
Consumer products 1.12 1,006,425
Electronics .08 69,333
Energy .40 364,060
Food processing:
75,000 Darling International, Inc. .46 413,250
Other .55 495,041
Financial services .07 64,570
Index:
189,670 S&P depository receipts 29.85 26,861,065
Media, entertainment and
leisure .07 65,507
Networking .07 65,835
Paper products .01 10,117
Retail 1.69 1,521,985
Semiconductors .28 252,490
Transportation and defense:
153,061 Delta Air Lines, Inc. .22 198,979
Other .38 342,375
Utilities 1.72 1,545,668
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - UNITED 53.95 48,548,401
STATES (PROCEEDS
$46,584,384)
--------------------------------------------------------------------------------
Canada:
Financial services - 1,504
Mining and metals .31 274,576
Networking .07 63,404
Transportation and defense .33 296,076
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - CANADA .71 635,560
(PROCEEDS $617,004)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
21
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
SECURITIES SOLD, NOT YET PURCHASED
(CONTINUED):
Common stock (continued):
England:
Business services .04% $ 34,567
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - .04 34,567
ENGLAND (PROCEEDS $30,424)
--------------------------------------------------------------------------------
TOTAL COMMON STOCK
PROCEEDS $47,231,812) 54.70 49,218,528
--------------------------------------------------------------------------------
Long-term debt securities:
United States:
Automotive 3.86 3,474,001
Chemicals 3.30 2,970,000
Media, entertainment and
leisure 7.30 6,572,375
Mining and metals:
1,500,000 WCI Steel, Inc. 8.00% 5/1/16 1.65 1,485,000
Other 1.79 1,612,875
Packaging and containers:
Graphic Packaging Corp. 9.5%
5,850,000 8/15/13 6.89 6,201,000
Other 4.49 4,036,802
Retail:
5,000,000 Radio Shack 7.375% 5/15/11 5.69 5,115,900
Transportation and defense 2.56 2,300,000
Utilities:
8,000,000 AES Corp. 8.75% 6/15/08 9.22 8,300,000
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 46.75 42,067,953
SECURITIES - UNITED
STATES
(PROCEEDS $42,471,754)
--------------------------------------------------------------------------------
Bermuda:
Pharmaceuticals and biotech:
6,300,000 U.S. Steel 9.75% 5/15/10 7.49 6,741,000
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 7.49 6,741,000
SECURITIES - BERMUDA
(PROCEEDS $8,479,988)
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 54.24 48,808,953
SECURITIES (PROCEEDS
$50,951,742)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
22
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2006
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $89,977,744 fair value
--------------------------------------------------------------------------------
SECURITIES SOLD, NOT YET PURCHASED
(CONTINUED):
Options written:
United States 1.09% $ 976,460
--------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN 1.09 976,460
(PROCEEDS $1,099,310)
--------------------------------------------------------------------------------
TOTAL SECURITIES SOLD, NOT 110.03% $ 99,003,941
YET PURCHASED
(PROCEEDS $97,748,620)
--------------------------------------------------------------------------------
UNREALIZED LOSS ON OPEN SWAP
CONTRACTS:
Credit default swaps 1.46% $ 1,309,844
--------------------------------------------------------------------------------
TOTAL UNREALIZED LOSS ON
OPEN SWAP CONTRACTS 1.46% $ 1,309,844
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
23
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES:
Common stock:
United States:
Automotive 1.75% $ 3,319,015
Building materials .54 1,017,000
Business services 7.37 13,985,685
Capital equipment 7.62 14,447,084
Chemicals 5.49 10,420,607
Consumer products:
2,508,302 Interstate Bakeries Corp. 9.85 18,686,850
Other 5.18 9,816,624
Electronics 7.89 14,965,775
Energy 7.25 13,752,800
Financial services 3.75 7,106,285
Food processing:
2,540,864 Darling International Inc. 5.32 10,087,230
Other .01 10,027
Health and death care 3.10 5,888,703
Housing .35 666,248
Index 3.24 6,146,436
Media, entertainment and
leisure:
World Wrestling
754,744 Entertainment Inc. 5.84 11,079,642
Other 3.74 7,099,638
Mining and metals 3.88 7,352,194
Networking .16 312,509
Packaging and containers 4.68 8,882,504
Paper products .37 694,238
Pharmaceuticals and biotech 4.48 8,497,380
Retail 4.32 8,197,348
Semiconductors 6.05 11,468,661
Software 7.81 14,809,890
Telecommunications 11.29 21,393,586
Transportation and defense 3.13 5,940,373
Utilities 1.57 2,983,038
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - UNITED 126.03 239,027,370
STATES (COST $227,046,587)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
24
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Common stock (continued):
Bermuda:
Telecommunications .08% $ 150,794
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - .08 150,794
BERMUDA (COST $153,086)
--------------------------------------------------------------------------------
Canada:
Energy .03 60,236
Software .02 45,360
Transportation and defense .16 295,723
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - CANADA .21 401,319
(COST $420,605)
--------------------------------------------------------------------------------
England:
Telecommunications 3.03 5,755,826
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - 3.03 5,755,826
ENGLAND (COST $1,895,474)
--------------------------------------------------------------------------------
France:
Chemicals .17 326,345
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - FRANCE .17 326,345
(COST $148,620)
--------------------------------------------------------------------------------
Germany:
Financial services .17 331,100
--------------------------------------------------------------------------------
TOTAL COMMON STOCK -
GERMANY (COST $598,695) .17 331,100
--------------------------------------------------------------------------------
Italy:
Food processing 2.64 4,995,173
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - ITALY 2.64 4,995,173
(COST $6,486,204)
--------------------------------------------------------------------------------
South Africa:
Mining and metals .44 825,613
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - SOUTH .44 825,613
AFRICA (COST $700,163)
--------------------------------------------------------------------------------
TOTAL COMMON STOCK 132.77 251,813,540
(COST $237,449,434)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
25
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Long-term debt securities
United States:
Automotive .57% $ 1,072,315
Building materials 2.33 4,427,500
Business services .92 1,744,200
Chemicals .54 1,032,750
Consumer products .13 238,750
Electronics .52 982,500
Financial services .86 1,638,875
Health and death care .63 1,189,500
Media, entertainment and
leisure 7.59 14,391,647
Mining and metals:
15,750,000 WCI Steel, Inc. 10% 12/1/04
Sr Nts (in default) 5.77 10,946,250
Other 2.19 4,156,025
Packaging and containers .80 1,513,818
Retail .06 110,355
Semis .67 1,269,125
Telecommunications 3.11 5,907,630
Transportation and defense 5.79 10,972,143
Utilities .42 801,000
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT
SECURITIES - UNITED STATES
(COST $59,327,430) 32.90 62,394,383
--------------------------------------------------------------------------------
Bermuda:
Pharmaceuticals and biotech .74 1,397,250
Telecommunications .99 1,878,000
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 1.73 3,275,250
SECURITIES - BERMUDA (COST
$1,350,006)
--------------------------------------------------------------------------------
England:
Automotive .76 1,445,000
Telecommunications 2.67 5,059,672
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 3.43 6,504,672
SECURITIES - ENGLAND (COST
$6,686,967)
--------------------------------------------------------------------------------
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
26
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES
(CONTINUED):
Long-term debt securities
(continued):
Mexico:
Telecommunications 1.20% $ 2,278,943
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 1.20 2,278,943
SECURITIES - MEXICO (COST
$1,654,435)
--------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 39.26 74,453,248
SECURITIES (COST
$69,018,838)
--------------------------------------------------------------------------------
Preferred stock:
United States:
Automotive .06 110,412
Building materials 3.86 7,309,470
Media, entertainment and
leisure .92 1,742,624
Mining and metals 2.20 4,176,975
Pharmaceuticals and biotech .36 685,125
Telecommunications .20 377,304
Transportation and defense .03 60,015
Utilities .84 1,594,368
--------------------------------------------------------------------------------
TOTAL PREFERRED STOCK 8.47 16,056,293
(COST $8,703,602)
--------------------------------------------------------------------------------
Options purchased (cost
$1,979,569):
United States .83 1,617,774
--------------------------------------------------------------------------------
TOTAL INVESTMENTS IN 181.33% $343,940,855
SECURITIES (COST
$317,151,443)
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
27
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
SECURITIES SOLD, NOT YET PURCHASED:
Common stock:
United States:
Automotive .40% $ 753,936
Building materials 1.48 2,813,505
Capital equipment 2.59 4,903,060
Chemicals .47 896,928
Consumer products .66 1,252,292
Electronics .23 439,951
Energy .74 1,409,055
Financial services 1.22 2,318,349
Health and death care .34 652,761
Index 4.50 8,517,486
Media, entertainment and
leisure .10 183,376
Mining and metals .54 1,031,102
Packaging and containers .41 783,036
Paper products .01 18,640
Pharmaceuticals and biotech .35 662,450
Retail 1.26 2,397,753
Telecommunications .73 1,385,920
Transportation and defense .32 599,164
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - UNITED
STATES (PROCEEDS
$32,928,257) 16.35 31,018,764
--------------------------------------------------------------------------------
Canada:
Transportation and defense .16 295,723
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - CANADA .16 295,723
(PROCEEDS $279,130)
--------------------------------------------------------------------------------
England:
Telecommunications 2.29 4,343,345
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - ENGLAND 2.29 4,343,345
(PROCEEDS $4,024,423)
--------------------------------------------------------------------------------
Germany:
Food packaging .15 291,632
--------------------------------------------------------------------------------
TOTAL COMMON STOCK - GERMANY .15 291,632
(PROCEEDS $299,456)
--------------------------------------------------------------------------------
TOTAL COMMON STOCK -
(PROCEEDS $37,531,266) 18.95 35,949,464
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
28
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
SECURITIES SOLD, NOT YET PURCHASED
(CONTINUED):
Long-term debt securities:
United States:
Automotive 2.27% $ 4,301,875
Building materials:
15,100,000 Owens Corning 7.5% 8/1/18 6.13 11,627,000
Other 1.09 2,070,000
Capital equipment .51 970,000
Chemicals 1.61 3,051,000
Consumer products 1.13 2,143,250
Financial services 1.21 2,291,500
Health and death care 2.20 4,182,000
Media, entertainment and leisure 5.32 10,081,125
Mining and metals:
9,900,000 U.S. Steel 9.75% 5/15/10 5.64 10,692,000
Other 6.89 13,070,500
Paper products .67 1,274,000
Packaging and containers 7.24 13,742,250
Retail 2.79 5,287,500
Transportation and defense .61 1,148,000
Utilities 4.41 8,360,000
--------------------------------------------------------------------------------
TOTAL UNITED STATES
(PROCEEDS $97,872,728) 49.72 94,292,000
--------------------------------------------------------------------------------
Preferred stock:
United States:
Building materials .72 1,365,000
Utilities .36 679,250
--------------------------------------------------------------------------------
TOTAL PREFERRED STOCK 1.08 2,044,250
(PROCEEDS $1,973,982)
--------------------------------------------------------------------------------
Options written:
United States .61 1,136,123
--------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN .61 1,136,123
(PROCEEDS $1,066,836)
--------------------------------------------------------------------------------
TOTAL SECURITIES SOLD, NOT 70.36% $133,421,837
YET PURCHASED
(PROCEEDS $138,444,812)
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
29
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
December 31, 2005
--------------------------------------------------------------------------------
Number of % of ne
shares/face assets oft Market or
value Description $189,663,824 fair value
--------------------------------------------------------------------------------
UNREALIZED LOSS ON OPEN SWAP
CONTRACTS:
Credit default swaps .46% $ 871,148
--------------------------------------------------------------------------------
TOTAL UNREALIZED LOSS ON .46% $ 871,148
OPEN SWAP CONTRACTS
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
30
EAGLEROCK MASTER FUND, LP
STATEMENTS OF OPERATIONS
(EXPRESSED IN US DOLLARS)
================================================================================
Year ended December 31, 2006 2005 2004
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 3,690,270 $ 10,899,042 $ 5,053,958
Dividends, net of withholding
taxes 2,164,884 1,282,542 1,159,591
--------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 5,855,154 12,181,584 6,213,549
--------------------------------------------------------------------------------
EXPENSES:
Interest on securities sold, not
yet purchased 4,738,585 11,536,812 4,526,696
Margin interest 1,871,243 1,975,739 2,486,380
Dividends on securities sold, not
yet purchased 1,435,181 425,658 900,263
Other, net, primarily stock
borrow fees (Note 4) 1,323,958 2,586,283 473,715
--------------------------------------------------------------------------------
TOTAL EXPENSES 9,368,967 16,524,492 8,387,054
--------------------------------------------------------------------------------
NET INVESTMENT LOSS (3,513,813) (4,342,908) (2,173,505)
NET REALIZED GAIN ON INVESTMENTS 10,685,078 10,430,167 4,381,952
NET CHANGE IN UNREALIZED GAIN ON
INVESTMENTS 28,936,843 (62,562,860) 52,979,588
--------------------------------------------------------------------------------
NET INCOME (LOSS) (NOTE 2) $36,108,108 $(56,475,601) $55,188,035
================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
31
EAGLEROCK MASTER FUND, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(EXPRESSED IN US DOLLARS)
===========================================================================================================
Three years ended December 31, 2006
-----------------------------------------------------------------------------------------------------------
EagleRock
EagleRock EagleRock Capital
Capital Capital Partners
Partners Partners, Offshore Fund,
QP, L.P. L.P. Ltd. Total
-----------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2004 $102,776,970 $ 9,829,369 $ -- $112,606,339
Transfer from EagleRock Capital Partners
Offshore Fund, Ltd. -- -- 10,100,017 10,100,017
Capital contributions 23,000,000 15,654,565 13,525,012 52,179,577
Capital withdrawals (3,732,552) -- -- (3,732,552)
Net income (Note 2):
Pro rata allocation 41,475,708 7,430,887 6,281,440 55,188,035
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 163,520,126 32,914,821 29,906,469 226,341,416
Capital contributions -- 5,500,000 35,700,000 41,200,000
Capital withdrawals (3,484,918) (9,037,074) (8,879,999) (21,401,991)
Net loss (Note 2):
Pro rata allocation (37,096,440) (6,907,641) (12,471,520) (56,475,601)
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005 122,938,768 22,470,106 44,254,950 189,663,824
Capital withdrawals ( (73,483,842) ( (10,188,618) ( (52,121,728) ( 135,794,188)
Net income (Note 2):
Pro rata allocation 23,122,284 5,119,046 7,866,778 36,108,108
-----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006 $ 72,577,210 $ 17,400,534 $ -- $ 89,977,744
===========================================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
32
EAGLEROCK MASTER FUND, LP
STATEMENTS OF CHANGES IN NET ASSETS
(EXPRESSED IN US DOLLARS)
=======================================================================================
41
Year ended December 31, 2006 2005 2004
---------------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment loss $ (3,513,81) $ (4,342,908) $ (2,173,505)
Net realized gain on investments 10,685,078 10,430,167 4,381,952
Net change in unrealized gain
on investments 28,936,843 (62,562,860) 52,979,588
---------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS 36,108,108 (56,475,601) 55,188,035
---------------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS
FROM CAPITAL TRANSACTIONS:
Transfer from EagleRock Capital
Partners Offshore Fund, Ltd. -- -- 10,100,017
Capital contributions -- 41,200,000 52,179,577
Capital withdrawals (135,794,188) (21,401,991) (3,732,552)
---------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN
NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS (135,794,188) 19,798,009 58,547,042
---------------------------------------------------------------------------------------
TOTAL (DECREASE) INCREASE (99,686,080) (36,677,592) 113,735,077
NET ASSETS, BEGINNING OF YEAR 189,663,824 226,341,416 112,606,339
---------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $ 89,977,744 $ 189,663,824 $ 226,341,416
=======================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
33
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
BUSINESS EagleRock Master Fund, LP ("Partnership") is
a Cayman Islands exempted partnership that
invests and trades in securities and other
investment vehicles and instruments.
The Partnership is a successor of EagleRock
Master Fund, a Delaware partnership, which
transferred all of its net assets on
November 1, 2004. As a result, the financial
statements are presented as if the entities
were always the same reporting entity. In
addition, the EagleRock Capital Partners
Offshore Fund, Ltd. transferred all of its
net assets to the Partnership in exchange
for a pro rata share of the Partnership
interests based on net assets contributed at
that date and became a feeder fund of the
Partnership.
EagleRock Capital Partners, LP, EagleRock
Capital Partners (QP), LP and EagleRock
Capital Partners Offshore Fund, Ltd.
(collectively "Feeder Funds") and Mariel
Capital Management, LLC ("Mariel") are the
general partners of the Partnership
(collectively "General Partners"). The
Feeder Funds are all entities under common
control and are also limited partners of the
Partnership. Mariel had no capital balance
at December 31, 2006 and 2005.
SIGNIFICANT ACCOUNTING Basis of Presentation
POLICIES
The financial statements are presented in
United States ("U.S.") dollars in accordance
with accounting principles generally
accepted in the United States of America.
Investment Transactions
The Partnership records all security
transactions and related expenses on a trade
date basis. Revenues and expenses are
recorded on the accrual basis. Dividends are
recorded on the ex-dividend date and
interest is accrued in the period earned.
34
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
Investment Valuation
Securities and other investments listed or
traded on a national securities exchange or
on the national market system of NASDAQ are
valued at their last sales price on the date
of valuation or if there has been no sale on
that date, at the mean of the bid (for
investments) or ask (for securities sold,
not yet purchased) prices supplied by market
making broker-dealers at the close of
business. Certain long-term debt and other
securities for which quotations are not
readily available are valued at estimated
fair value as determined in good faith by
the General Partners. The values assigned to
such investments are based upon available
information and do not necessarily represent
amounts which might ultimately be realized.
Because of the inherent uncertainty of
valuation, those estimated fair values may
differ from the values that would have been
used had a ready market for the investments
existed and those differences could be
material. The resulting unrealized gains and
losses are reflected in the statements of
operations.
Accounting for Derivative Instruments and
Hedging Activities
The Partnership recognizes all derivatives
as either assets or liabilities in the
statement of assets and liabilities and
measures those instruments at fair value.
Fair values for derivatives traded on a
national exchange, principally certain
options, are based on quoted market prices.
35
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
The Partnership uses purchased and written
option contracts as part of its investment
strategy and to manage market risk. Option
contracts are contractual agreements that
give the purchaser the right, but not the
obligation, to purchase or sell a financial
instrument at a predetermined exercise
price. In return for this right, the
purchaser pays a premium to the seller of
the option. By selling or writing options,
the Partnership receives a premium and
becomes obligated during the term of the
option to purchase or sell a financial
instrument at a predetermined exercise price
if the option is exercised, and assumes the
risk of not being able to enter into a
closing transaction if a liquid secondary
market does not exist. Option contracts are
recorded in the statement of assets and
liabilities at fair value as discussed
above. Gains and losses on option contracts
are recorded in the statements of operations
in net realized and unrealized gain/loss on
investments.
The Partnership enters into credit default
swaps which are agreements in which one
party pays fixed periodic payments to a
counterparty in consideration for a
guarantee from the counterparty to make a
specific payment should a negative credit
event take place. Risks arise from the
possible inability of counterparties to meet
the terms of their contracts. The unrealized
gains or losses on open credit default swaps
are included on the statements of assets and
liabilities, with net changes in unrealized
gains or losses included in the statements
of operations.
The Partnership may be obligated to make a
payment upon a default of significant change
in the credit quality or the underlying
financial instrument of the credit default
swap contract. In connection with these
contracts, the Partnership attempts to
mitigate its exposure to market risk by
entering into offsetting derivatives
contracts and security positions.
36
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
Foreign Currency
Investment securities and other assets and
liabilities denominated in foreign
currencies are translated into U.S. dollar
amounts at the date of valuation. Purchases
and sales of investment securities and
income and expense items denominated in
foreign currencies are translated into U.S.
dollar amounts on the respective dates of
such transactions.
The Partnership does not isolate that
portion of the results of operations
resulting from changes in foreign exchange
rates on investments from the fluctuations
arising from changes in market prices of
securities held. Such fluctuations are
included with the net realized and
unrealized gain or loss from investments.
Income Taxes
The Partnership is exempt from all forms of
taxation in the Cayman Islands including
income, capital gains and withholding taxes.
In jurisdictions other than the Cayman
Islands, foreign taxes may be withheld on
dividends and interest received by the
Partnership at rates up to 30%. Capital
gains derived by the Partnership are
generally exempt from foreign income or
withholding taxes at source. Dividend income
is recorded net of any such withholding
taxes.
Prior to November 1, 2004, there was no U.S.
income tax provision made in the
accompanying financial statements since the
partners were required to report their
respective shares of the Partnership's
income in their individual income tax
returns.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles
generally accepted in the United States of
America requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
year. Actual results could differ from those
estimates.
37
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
New Accounting Pronouncement
In September 2006, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements". This
standard clarifies the definition of fair
value for financial reporting, establishes a
framework for measuring fair value and
requires additional disclosures about the
use of fair value measurements. SFAS No. 157
is effective for financial statements issued
for fiscal years beginning after November
15, 2007 and interim periods within those
fiscal years. As of December 31, 2006, the
Partnership does not believe the adoption of
SFAS No. 157 will impact the amounts
reported in the financial statements.
However, additional disclosures will be
required about the inputs used to develop
the measurements of fair value and the
effect of certain of the measurements
reported in the statement of operations for
a fiscal year.
38
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
1. BROKERAGE The Partnership has agreements with
brokerage firms AGREEMENTS to carry its
customer account. These brokers have custody
of the Partnership's securities and, from
time to time, cash balances, which may be
due from these brokers.
These securities and/or cash positions serve
as collateral for any amounts due to brokers
as well as collateral for securities sold,
not yet purchased.
The Partnership is subject to credit risk if
the brokers are unable to repay balances due
or deliver securities in their custody.
2. ALLOCATION OF The net income (loss) for each of the three
INCOME (LOSS) years NET ended December 31, 2006 is
allocated to each partner in accordance with
the ratio of the capital account of each
partner to the total of all capital accounts
at the beginning of each fiscal period.
3. FEEDER FUND EagleRock Capital Management, LLC
MANAGEMENT FEES ("Investment Manager") serves as the
Investment Manager of the Partnership. The
Partnership pays a quarterly management fee
on behalf of its three Feeder Funds. During
the three years ended December 31, 2006, the
Partnership paid the 2006, 2005 and 2004
management fee and was reimbursed by the
Feeder Funds in the form of a capital
withdrawal which amounted to $1,728,389,
$2,898,515, and $2,302,938, respectively.
4. INVESTMENTS IN The Partnership has entered into certain
SECURITIES PLEDGED stock borrow agreements. At December 31,
TO COUNTERPARTY 2006 and 2005, the Partnership has pledged
$10,498,542 and $17,866,699, respectively,
of investments in securities related to
stock borrow transactions. For the years
ended December 31, 2006, 2005 and 2004,
stock borrow fees charged by the broker
amounted to $1,314,732, $2,588,754 and
$636,581, respectively, and are included in
other expenses in the statements of
operations.
39
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
5. FINANCIAL The Partnership invests in marketable
INSTRUMENTS WITH securities and is exposed to market risks
OFF-BALANCE SHEET resulting from changes in the fair value of
RISK their investments. Derivative financial
instruments are used by the Partnership to
help manage such market risk.
Securities sold, not yet purchased by the
Partnership, may give rise to off-balance
sheet risk. The Partnership may sell a
security it does not own in anticipation of
a decline in the fair value of that
security. When the Partnership sells a
security short, it must borrow the security
sold short. A gain, limited to the price at
which the Partnership sold the security
short, or a loss, unlimited in amount, will
be recognized upon the termination of a
short sale. The Partnership has recorded
this obligation in the financial statements
at the December 31, 2006 and 2005 market
value of these securities. There is an
element of market risk in that, if the
securities increase in value, it will be
necessary to purchase the securities at a
cost in excess of the price reflected in the
statement of assets and liabilities. The
amounts reflected in investments in
securities and securities sold, not yet
purchased include $41,276,945 and
$32,633,954 of identical securities held
both long and short at December 31, 2006 and
2005, respectively.
The Partnership is exposed to credit-related
losses in the event of nonperformance by
counterparties to financial instruments, but
it does not expect any counterparties to
fail to meet their obligations.
6. CAPITAL (a) Capital Withdrawals Payable
TRANSACTIONS
At December 31, 2006, $38,892,082 was
payable to the Feeder Funds for capital
withdrawals. As of February 28, 2007,
the Fund made payments for such capital
withdrawals totaling $34,994,630.
(b) Subsequent Capital Transactions
From January 1, 2007 to February 28,
2007, the Fund made payment for capital
withdrawals totaling $34,994,630 (see
Note 6(a)). There were no other capital
contributions or withdrawals in the
same period.
40
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
7. CONTINGENCY From time to time, the Partnership and its
affiliates receive inquiries from regulatory
agencies. The Partnership and its affiliates
fully cooperate with such inquiries. It is
not possible to predict the outcome of such
inquiries.
8. FINANCIAL The financial highlights represent the
HIGHLIGHTS Partnership's financial performance for the
three years ended December 31, 2006.
An individual partner's performance may vary
based on the timing of capital transactions.
Total return is computed based on the change
in a limited partner capital account during
the year, adjusted for capital contribution
and withdrawals.
Limited partner 2006 2005 2004
-----------------------------------------------
Total return 27.28% (23.13)% 34.99%
===============================================
PERCENTAGES TO
AVERAGE NET
ASSETS:
Operating expense
ratio 6.60% 7.45% 6.16%
===============================================
Net investment
income (loss)
ratio 2.48% (1.96)% (1.60)%
===============================================
41
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Financial Statements
December 31, 2006
(Unaudited)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Financial Condition
December 31, 2006
(Unaudited)
ASSETS
Cash and cash equivalents $ 49,252,205
Receivable from affiliated brokers and dealers 27,680,060
Securities owned 119,407,600
Securities borrowed 20,282,080
Other assets 755,642
------------
Total assets $217,377,587
============
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Securities sold, not yet purchased $ 31,957,228
Payable to affiliated brokers and dealers 17,520,265
Payable to Jefferies & Company, Inc. 252,532
Accrued expenses and other liabilities 437,188
------------
Total liabilities 50,167,213
Members' equity 167,210,374
------------
Total liabilities and members' equity $217,377,587
============
See accompanying notes to financial statements.
1
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2006
(Unaudited)
PERCENTAGE
OF MEMBERS'
Description FAIR VALUE EQUITY
------------------------------------------------------- ------------- ------------
Securities owned:
Corporate bonds:
Australia - Mining $ 303,000 0.2%
Bermuda - Telecommunications 102,120 0.1
Canada:
Engineering and Construction 8,000 --
Iron and Steel 1,051,382 0.6
Media 105,886 0.1
Mining 698,660 0.4
Oil and Gas 787,750 0.5
------------ ------
Total Canada 2,651,678 1.6
Cayman Islands - Oil and Gas 3,755 --
Great Britain:
Oil and Gas 4,000 --
Shipping 982,300 0.6
Telecommunications 128,317 0.1
------------ ------
Total Great Britain 1,114,617 0.7
Ireland - Pharmaceuticals 172,840 0.1
Luxembourg - Telecommunications 119,900 0.1
Marshall Island - Transportation 10,000 --
United States:
Aerospace and Defense 4,140 --
Agriculture 1,199,130 0.7
Auto Parts and Equipment 2,044,670 1.2
Beverages 12,477 --
Building Materials 137,475 0.1
Entertainment 51,675 --
Environmental Control 430,027 0.3
Financial Services - Diversified 264,195 0.2
Food 2,329,719 1.4
Healthcare Products and Services 945,091 0.6
Holding Companies-Diversified 13,128 --
Home Builders 491,168 0.3
Household Products 10,525 --
Iron and Steel 2,843,237 1.7
Leisure Time 1,286,780 0.8
Lodging 5,296,650 3.2
Media 3,026,297 1.8
(Continued)
2
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2006
(Unaudited)
PERCENTAGE
OF MEMBERS'
Description FAIR VALUE EQUITY
------------------------------------------------------- ------------- ------------
Metal Fabrication and Hardware 2,245,861 1.3&
Mining $ 363,970 0.2
Miscellaneous Manufacturing 6,579,000 3.9
Office and Business Equipment 10,863 --
Oil and Gas:
Ascent Energy 11.75% 5/1/15 16,100,270 9.6
Ascent Energy 16% 2/1/10 5,543,943 3.3
Oil and Gas - Other 12,742,304 7.6
Packaging and Containers 971,643 0.6
REITS 20,500 --
Retail 916,645 0.5
Semiconductors 110,000 0.1
Storage and Warehousing 8,560 --
Telecommunications 2,263,333 1.4
Transportation 8,524,050 5.1
------------ ------
Total United States 76,787,326 45.9
------------ ------
Total corporate bonds 81,265,236 48.6
Common stock:
Great Britain:
Auto Parts and Equipment 45,862 --
Telecommunications 1,151,150 0.7
------------ ------
Total Great Britain 1,197,012 0.7
United States:
Auto Parts and Equipment 142,120 0.1
Beverages 1,369,323 0.8
Building Materials 4,057,680 2.4
Chemicals 910,800 0.5
Electrical Components and Equipment 1,664,960 1.0
Energy 3,340,425 2.0
Financial Services - Diversified 2,189,132 1.3
Healthcare Products and Services 257,864 0.2
Iron and Steel 1,742,108 1.0
Oil and Gas:
Ascent Energy 2,136 --
Oil and Gas - Other 2,613,243 1.6
Packaging and Containers 269,054 0.2
Publishing 52,797 --
Retail 6,826 --
Telecommunications 5,668,980 3.4
(Continued)
3
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2006
(Unaudited)
PERCENTAGE
OF MEMBERS'
Description FAIR VALUE EQUITY
------------------------------------------------------- ------------- ------------
Transportation 734,745 0.4%
------------ ------
Total United States 25,022,193 15.0
------------ ------
Total common stock 26,219,205 15.7
Preferred stock - United States:
Lodging $ 1,416 --%
Oil and Gas:
Ascent Energy 8% Series A Units 4,862,080 2.9
------------ ------
Total preferred stock - United States 4,863,496 2.9
Warrants - United States:
Healthcare Products and Services 28 --
Mining 1,200,000 0.7
Oil and Gas:
Ascent Energy 8% Series A Preferred 315,436 0.2
Telecommunications 24 --
Transportation 35 --
------------ ------
Total warrants - United States 1,515,523 0.9
Other holdings - United States
Escrow position - Chemicals 581,457 0.3
Escrow position - Electronics 59,611 --
Escrow position - Machinery 554,052 0.3
Investment Companies - Financial Services 721,890 0.4
Investment Companies - Oil and Gas 3,197,854 1.9
Trade Claim - Financial Services 429,276 0.3
------------ ------
Total other holdings - United States 5,544,140 3.3
------------ ------
Total securities owned $119,407,600 71.4%
============ ======
Securities sold, not yet purchased:
Corporate bonds:
Australia - Mining $ 172,432 0.1%
Bermuda:
Telecommunications 1,097,800 0.7
Transportation 82,792 --
------------ ------
Total Bermuda 1,180,592 0.7
Canada:
Iron and Steel 401,955 0.2
Oil and Gas 26,880 --
------------ ------
Total Canada 428,835 0.3
(Continued)
4
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2006
(Unaudited)
PERCENTAGE
OF MEMBERS'
Description FAIR VALUE EQUITY
------------------------------------------------------- ------------- ------------
France - Oil and Gas 110,550 0.1
Marshall Island - Transportation 294,250 0.2
Sweden - Holding Companies - Diversified 122,170 0.1
United States:
Aerospace and Defense 81,551 --
Auto Parts and Equipment 2,526,273 1.5
Coal 1,863,145 1.1
Commercial Services 382,963 0.2
Energy 7,920 --
Entertainment 2,909,105 1.7
Environmental Control 123,595 0.1
Financial Services - Diversified 16,481 --
Food 668,650 0.4
Healthcare Services 1,412,710 0.8
Home Builders 1,727,880 1.0
Household Products and Wares 643,732 0.4
Iron and Steel 1,307,001 0.8
Leisure Time 27,560 --
Lodging 2,008,335 1.2
Media 608,770 0.4
Metal Fabrication and Hardware 669,180 0.4
Mining 284,460 0.2
Miscellaneous Manufacturing 307,680 0.2
Office and Business Equipment 23,320 --
Oil and Gas 9,454,877 5.7
Packaging and Containers 94,600 0.1
Pharmaceuticals 112,132 0.1
REITS 206,000 0.1
Retail 1,486,744 0.9
Semiconductors 114,675 0.1
Telecommunications 559,402 0.3
------------ ------
Total United States 29,628,741 17.7
------------ ------
Total corporate bonds 31,937,570 19.1
Common stock - United States:
Oil and Gas 19,658 --
------------ ------
Total common stock - United States 19,658 --
------------ ------
Total securities sold, not yet purchased $ 31,957,228 19.1%
============ ======
See accompanying notes to financial statements
5
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Earnings
Year Ended December 31, 2006
(Unaudited)
Revenues:
Principal transactions, net of direct trading expenses (See note 5) 37,485,202
Interest:
Interest income 4,705,744
Interest expense (836,293)
------------
Net interest 3,869,451
------------
Net revenues 41,354,653
------------
Expenses:
General and administrative 680,120
Management fee (See note 5) 1,324,427
------------
Total expenses 2,004,547
------------
Net income $ 39,350,106
============
See accompanying notes to financial statements.
6
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Changes in Members' Equity
Year Ended December 31, 2006
(Unaudited)
TOTAL
CLASS B MEMBERS'
MEMBERS MEMBER EQUITY
------------- ------------- -------------
Balance, December 31, 2005 $ 162,962,886 1,000 162,963,886
Allocation of carried interest (4,974,974) 4,974,974 --
Distributions (30,128,644) (4,974,974) (35,103,618)
Net earnings 39,350,106 -- 39,350,106
------------- ------------- -------------
Balance, December 31, 2006 $ 167,209,374 1,000 167,210,374
============= ============= =============
See accompanying notes to financial statements.
7
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Cash Flows
Year Ended December 31, 2006
(Unaudited)
Cash flows from operating activities:
Net income $ 39,350,106
Adjustments to reconcile net earnings to net cash
used in operating activities:
Amortization of financing costs 107,644
Changes in operating assets and liabilities:
Increase in receivable from affiliated brokers and dealers (12,070,535)
Decrease in securities owned 25,471,200
Increase in securities borrowed (9,010,380)
Increase in other assets (138,748)
Increase in securities sold, not yet purchased 15,135,475
Increase in payable to affiliated brokers and dealers 1,360,562
Decrease in payable to Jefferies & Company, Inc. (287,060)
Increase in accrued expenses and other liabilities 360,831
------------
Net cash provided by operating activities 60,279,095
------------
Cash flows from financing activities:
Proceeds from bank loans 7,047,145
Repayment of bank loans (7,047,145)
Distributions (35,103,618)
------------
Net cash used in financing activities (35,103,618)
------------
Net increase in cash and cash equivalents 25,175,477
Cash and cash equivalents at beginning of year 24,076,728
------------
Cash and cash equivalents at end of year $ 49,252,205
============
Supplemental disclosures of cash flow information - Cash paid
during the year for interest $ 432,221
See accompanying notes to financial statements.
8
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2006
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferies Partners Opportunity Fund II, LLC (the Fund) is a Delaware
limited liability company. The Fund commenced operations on January 19,
2000. The investment objective of the Fund is to generate returns for its
members by making, holding, and disposing of a diverse portfolio of
primarily below investment grade debt and equity investments. The Fund was
established to offer members the opportunity to participate in the
trading, investment, and brokerage activities of the High Yield Department
of Jefferies & Company, Inc. (Jefferies). The Fund employs a trading and
investment strategy substantially similar to that historically employed by
Jefferies' High Yield Department. The Fund acquires, actively manages, and
trades a diverse portfolio of primarily non-investment grade investments
consisting of the following three asset groups: High Yield Debt, Special
Situation Investments, and, to a lesser extent, Bank Loans. The Fund has
appointed Jefferies to serve as manager to the Fund (the Manager). The
Fund participates in the non-syndicate trading and investment activities
of the High Yield Department on a pari passu basis with Jefferies. To
permit such participation, the Fund has been registered as a broker dealer
under the Securities Exchange Act of 1934 and with the National
Association of Securities Dealers.
The Fund was due to terminate on January 18, 2007. The term of the Fund
was extended, as permitted, until January 18, 2008, unless extended for up
to two successive one-year terms by the vote of the Manager and a majority
of the member interests. (See note 8)
The Fund claims an exemption from Rule 15c3-3 as of December 31, 2006,
based on Section (k)(2)(ii). Securities transactions are cleared through
an affiliated broker-dealer on a fully disclosed basis. The Fund does not
execute any securities transactions with or on behalf of any customers.
The Fund prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America (U.S. GAAP).
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds, which are part of
the cash management activities of the Fund, and have original
maturities of 90 days or less. At December 31, 2006, such cash
equivalents amounted to $48,520,815.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Fund's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including
cash and cash equivalents, securities borrowed, and certain
receivables, are carried at fair value or contracted amounts which
approximate fair value due to the short period to maturity.
Similarly, liabilities, including certain payables, are carried at
amounts approximating fair value.
Securities and other inventory positions owned and securities and
other inventory positions sold, but not yet purchased (all of which
are recorded on a trade-date basis) are valued at fair value,, with
unrealized gains and losses reflected in Principal transactions in
the Statement of Earnings. Fair value generally is determined based
on listed prices or broker quotes. In certain instances, such price
quotations may be deemed unreliable when the instruments are thinly
traded and the listed price is not deemed to be readily realizable.
In these instances the Fund determines fair value based on
(Continued)
9
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2006
(Unaudited)
management's best estimate, giving appropriate consideration to
reported prices, the extent of public trading in similar securities
and the discount from the listed price associated with the cost at
the date of acquisition, among other factors. When listed prices or
broker quotes are not available, the Fund determines fair value
based on pricing models or other valuation techniques, including the
use of implied pricing from similar instruments. The Fund typically
uses pricing models to derive fair value based on the net present
value of estimated future cash flows including adjustments, when
appropriate, for liquidity, credit and/or other factors.
(c) SECURITIES TRANSACTIONS
The Fund records its securities transactions on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued
at fair value, and unrealized gains or losses are reflected in
Principal transactions in the Statements of Earnings.
(d) CONTRIBUTIONS
Capital contributions were recorded net of the Fund's closing costs
and placement fees. Each member is charged a one-time placement fee
of 1% of gross contributions.
(e) FEDERAL AND STATE INCOME TAXES
Under current federal and applicable state limited liability company
laws and regulations, limited liability companies are treated as
partnerships for tax reporting purposes and, accordingly, are not
subject to income taxes. Therefore, no provision for income taxes
has been made in the Fund's financial statements. For tax purposes,
income or losses are included in the tax returns of the members.
(f) ALLOCATION OF INCOME AND EXPENSE
Income and expense are allocated 100% to the members based on the
pro rata share of their capital contributed to the Fund until the
total allocation equals the aggregate members' preferred return of
8% of contributed capital. All remaining income and expense are
allocated 80% to the members and 20% to the Class B Member.
(g) USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires the Fund Manager to make a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses to prepare these financial
statements. Actual results could differ from those estimates.
(h) NEW ACCOUNTING PRONOUNCEMENT
In September 2006, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 157 Fair Value
Measurements (FAS 157). FAS 157 establishes an authoritative
definition of fair value, sets out a framework for measuring fair
value, and requires additional disclosures about fair-value
measurements. The application of FAS 157 is required for fiscal
(Continued)
10
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2006
(Unaudited)
years beginning after November 15, 2007. Management is in the
process of assessing the impact of this standard on the financial
statements of the Fund.
(2) RECEIVABLE FROM, AND PAYABLE TO, AFFILIATED BROKERS AND DEALERS
The following is a summary of the major categories of receivable from, and
payable to, affiliated brokers and dealers as of December 31, 2006:
Receivable from affiliated brokers and dealers:
Securities failed to deliver $26,365,057
Other 1,315,003
-----------
$27,680,060
===========
Payable to affiliated brokers and dealers:
Securities failed to receive $17,520,265
(3) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the fair value of major categories of
Securities owned and Securities sold, not yet purchased, as of December
31, 2006:
SECURITIES
SECURITIES SOLD, NOT YET
OWNED PURCHASED
------------ ------------
Corporate debt securities $ 81,265,236 31,937,570
Corporate equity securities 31,082,701 19,658
Other 7,059,663 --
------------ ------------
$119,407,600 31,957,228
============ ============
(4) REVOLVING CREDIT FACILITY
In June 2006, the Fund renewed a revolving credit facility agreement with
an unaffiliated third party to be used in connection with the Fund's
investing activities. At December 31, 2006, $85,200,000 was available
under the terms of the revolving credit facility agreement. The revolving
credit facility expires in June 2007, but provides for annual extensions.
Advances under this facility bear interest at the lender's commercial
paper rate plus 115 basis points. The Fund incurs a liquidity fee on the
total amount available under the revolving credit facility. The Fund
incurs a program fee on amounts borrowed under the revolving credit
facility. The Fund incurs a minimum program fee if program fees do not
reach a certain threshold. For the year ended December 31, 2006, the Fund
was charged a liquidity fee of $323,937, a program fee of $264,060 and an
administrative fee of $160, which are included in Interest expense in the
Statement of Earnings. During the year ended December 31, 2006, the Fund
borrowed, and subsequently repaid, $7,047,145 under the revolving credit
facility. For the year ended December 31, 2006, the Fund was charged
interest of $37,797 on balances borrowed under the revolving credit
facility. At December 31, 2006, there were no outstanding balances under
the revolving credit facility.
(Continued)
11
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2006
(Unaudited)
The Fund incurred costs in securing the revolving credit facility. These
costs have been capitalized and are being amortized over seven years. At
December 31, 2006, the net unamortized costs of $8,970 are included in
Other assets. For the year ended December 31, 2006, amortization expense
of $107,644 is included in Interest expense in the Statement of Earnings.
(5) RELATED PARTY TRANSACTIONS
At December 31, 2006, members' equity included an investment in the Fund
by Jefferies of $27,159,268. Additionally, Jefferies, as the Class B
Member, contributed $1,000 of capital for the right to receive a
distribution of 20% of the Fund's distributions in excess of an 8%
preferred return paid to the members. During the year ended December 31,
2006, the Fund distributed, in cash, undistributed net income of
$35,103,618 to the members, of which $4,974,974 was distributed to the
Class B Member in accordance with its carried interest.
At December 31, 2006, receivable from and payable to affiliated brokers
and dealers are for amounts due from and due to Jefferies related to trade
execution and settlement. (See note 2)
For the year ended December 31, 2006, interest income included $289,079 of
income received from Jefferies Execution Services, Inc. related to stock
borrow transactions. During the year ended December 31, 2006, Jefferies
Execution Services, Inc. was the sole counterparty to all of the Fund's
stock borrow transactions. At December 31, 2006, Payable to Jefferies &
Company, Inc. of $252,532 is for amounts due for direct trading expenses,
general and administrative expenses, and management fees. For the year
ended December 31, 2006, direct trading expenses of $3,627,182 is netted
against principal transactions revenue. The Fund reimburses Jefferies for
general and administrative expenses based on the Fund's pro rata portion
of actual charges incurred. For the year ended December 31, 2006,
reimbursed expenses of $522,212 are included in General and administrative
expenses.
For the year ended December 31, 2006, the Fund was charged interest of
$102,695 by Jefferies related to securities failed to receive.
Jefferies, in its capacity as Manager, receives a management fee equal to
1% per annum of the sum of 100% of the average balance of securities owned
and 98% of the average balance of securities sold, not yet purchased. At
December 31, 2006, accrued management fees of $117,844 were included in
Payable to Jefferies & Company, Inc.
(6) FINANCIAL INSTRUMENTS
(a) OFF-BALANCE SHEET RISK
The Fund has contractual commitments arising in the ordinary course
of business for securities sold, not yet purchased. These financial
instruments contain varying degrees of off-balance sheet risk
whereby the fair values of the securities underlying the financial
instruments may be in excess of, or less than, the contract amount.
The settlement of these transactions is not expected to have a
material effect upon the Fund's financial statements.
(Continued)
12
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2006
(Unaudited)
(b) CREDIT RISK
In the normal course of business, the Fund is involved in the
execution, settlement, and financing of various principal securities
transactions. Securities transactions are subject to the risk of
counterparty nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the
associated risk to changes in the fair value of the security through
settlement date.
The Fund seeks to control the risk associated with these
transactions by establishing and monitoring collateral and
transaction levels daily.
(c) CONCENTRATION OF CREDIT RISK
The Fund's activities are executed exclusively with Jefferies.
Concentrations of credit risk can be affected by changes in
economic, industry, or geographical factors. The Fund seeks to
control its credit risk and the potential risk concentration through
a variety of reporting and control procedures including those
described in the preceding discussion of credit risk.
(7) NET CAPITAL REQUIREMENT
The Fund is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. The Fund has elected to use the alternative method permitted by
Rule 15c3-1, which requires that the Fund maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit
balances arising from customer transactions, as defined.
At December 31, 2006, the Fund had net capital of $90,891,025, which was
$90,641,025 in excess of required net capital.
(8) SUBSEQUENT EVENTS
On January 15, 2007, the Manager and a majority of the member interests
elected to extend the Fund's term until January 18, 2008. The Fund will be
in effect until January 18, 2008, unless extended for up to two successive
one-year terms by the vote of the Manager and a majority of the member
interests.
On February 15, 2007, the Fund distributed, in cash, undistributed net
income of $39,350,106 to the members, of which $5,824,273 was distributed
to the Class B Member in accordance with its carried interest.
13
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Financial Statements
As of December 31, 2005
and for the year then ended
(With Independent Auditors' Report Thereon)
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-----------------------------------------------------------
The Members
Jefferies Partners Opportunity Fund II, LLC:
We have audited the accompanying statement of financial condition of Jefferies
Partners Opportunity Fund II, LLC (the "Fund"), including the condensed schedule
of investments, as of December 31, 2005, and the related statements of earnings,
changes in members' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards 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. 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 audit provides 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 Jefferies Partners Opportunity
Fund II, LLC as of December 31, 2005, and the results of its operations and its
cash flows for the year then ended in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
February 28, 2006
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Financial Condition
December 31, 2005
ASSETS
Cash and cash equivalents $ 24,076,728
Receivable from affiliated brokers and dealers 15,609,525
Securities owned 144,878,800
Securities borrowed 11,271,700
Other assets 724,538
-------------------
Total assets $ 196,561,291
===================
LIABILITIES AND MEMBERS' EQUITY
Securities sold, not yet purchased $ 16,821,753
Payable to affiliated brokers and dealers 16,159,703
Payable to Jefferies & Company, Inc. 539,592
Accrued expenses and other liabilities 76,357
-------------------
Total liabilities 33,597,405
-------------------
Members' equity: 162,963,886
-------------------
Total liabilities and members' equity $ 196,561,291
===================
See accompanying notes to financial statements.
2
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2005
PERCENTAGE OF
MEMBERS'
DESCRIPTION FAIR VALUE EQUITY
--------------------------------------------------------------------------- -------------------- -------------------
Securities owned:
Corporate Bonds:
Bermuda - Transportation $ 1,537,515 0.9%
British Virgin Islands - Oil & Gas 537,600 0.3%
Canada:
Engineering & Construction 351,540 0.2%
Oil & Gas 266,520 0.2%
Transportation 73,260 0.0%
-------------------- -------------------
Total Canada 691,320 0.4%
-------------------- -------------------
Cayman Islands - Oil & Gas 6,000 0.0%
France - Oil & Gas 6,240 0.0%
Luxembourg - Telecommunications 125,400 0.1%
Norway - Oil & Gas 353,100 0.2%
Sweden - Holding Companies - Diversified 54,000 0.0%
United States:
Aerospace & Defense 48,000 0.0%
Agriculture 2,019,750 1.2%
Airlines 1,353,514 0.8%
Apparel 873,038 0.5%
Auto Parts & Equipment 2,388,170 1.5%
Biotechnology 70,920 0.0%
Building Materials 315,630 0.2%
Chemicals 47,040 0.0%
Coal 487,785 0.3%
Commercial Services 772,681 0.5%
Cosmetics & Personal Care 37,440 0.0%
Electrical Components & Equipment 393,500 0.2%
Electronics 8,738,006 5.4%
Engineering & Construction 389,760 0.2%
Entertainment 31,076 0.0%
Environmental Control 93,150 0.1%
Financial Services - Diversified 239,705 0.1%
Food 747 0.0%
Healthcare Services 3,880 0.0%
3 (Continued)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2005
PERCENTAGE OF
MEMBERS'
DESCRIPTION FAIR VALUE EQUITY
--------------------------------------------------------------------------- -------------------- -------------------
Holding Companies-Diversified 1,665,129 1.0%
Home Builders 50,880 0.0%
Iron & Steel 5,415,836 3.3%
Leisure Time 1,577,025 1.0%
Lodging 7,026,360 4.3%
Media 548,520 0.3%
Metal Fabrication & Hardware 2,631,778 1.6%
Mining 508,963 0.3%
Miscellaneous Manufacturing 5,466,885 3.4%
Oil & Gas:
Ascent Energy 11.75% 5/1/15 15,706,374 9.6%
Texcal Energy Ser A Units 31,644,800 19.4%
Oil & Gas - Other 9,116,942 5.6%
Packaging & Containers 1,306,840 0.8%
Retail 692,825 0.4%
Telecommunications 4,725,802 2.9%
Textiles 12 0.0%
Transportation 77,780 0.0%
-------------------- -------------------
Total United States 106,466,543 65.3%
-------------------- -------------------
Total corporate bonds 109,777,718 67.4%
-------------------- -------------------
Common Stock:
Canada - Airlines 2,840,976 1.7%
Great Britain - Telecommunications 3,260,208 2.0%
United States:
Auto Parts & Equipment 55,440 0.0%
Beverages 1,493,796 0.9%
Chemicals 3,867,942 2.4%
Commercial Services 5,067,728 3.1%
Distribution - Wholesale 197,086 0.1%
Electrical Components & Equipment 8,316 0.0%
Electronics 742,323 0.5%
Financial Services - Diversified 2,375,674 1.5%
Iron & Steel 1,176,480 0.7%
Machinery:
Fairfield Manufacturing 12,861,600 7.9%
Publishing 57,595 0.0%
4 (Continued)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2005
PERCENTAGE OF
MEMBERS'
DESCRIPTION FAIR VALUE EQUITY
--------------------------------------------------------------------------- -------------------- -------------------
Retail 7,422 0.0%
Telecommunications 172,998 0.1%
Textiles 2,605 0.0%
-------------------- -------------------
Total United States 28,087,005 17.2%
-------------------- -------------------
Total common stock 34,188,189 21.0%
-------------------- -------------------
Warrants:
United States 27,125 0.0%
-------------------- -------------------
Investment Companies
United States 885,768 0.5%
-------------------- -------------------
Total securities owned $ 144,878,800 88.9%
==================== ===================
Securities sold, not yet purchased:
Corporate Bonds:
Canada:
Electrical Components & Equipment $ 257,720 0.2%
Financial Services - Diversified 195,020 0.1%
Forest Products & Paper 27,863 0.0%
Iron & Steel 604,800 0.4%
Mining 218,400 0.1%
-------------------- -------------------
Total Canada 1,303,803 0.8%
-------------------- -------------------
Marshall Island - Transportation 97,920 0.1%
United States:
Aerospace & Defense 371,870 0.2%
Auto Parts & Equipment 300,600 0.2%
Building Materials 9,950 0.0%
Coal 1,457,505 0.9%
Commercial Services 11,400 0.0%
Electrical Components & Equipment 3,510 0.0%
Electronics 251,548 0.2%
Entertainment 646,010 0.4%
Environmental Control 57,600 0.0%
Financial Services - Diversified 83,270 0.1%
Food 174,100 0.1%
Forest Products & Paper 546,000 0.3%
5 (Continued)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Condensed Schedule of Investments
December 31, 2005
PERCENTAGE OF
MEMBERS'
DESCRIPTION FAIR VALUE EQUITY
--------------------------------------------------------------------------- -------------------- -------------------
Healthcare Services 725,400 0.4%
Household Products & Wares 571,825 0.4%
Iron & Steel 630,470 0.4%
Lodging 2,124,518 1.3%
Media 125,495 0.1%
Metal Fabrication & Hardware 626,830 0.4%
Mining 638,280 0.4%
Miscellaneous Manufacturing 138,600 0.1%
Oil & Gas 3,226,374 2.0%
Packaging & Containers 418,860 0.3%
Pharmaceuticals 122,400 0.1%
Retail 1,306,737 0.8%
Telecommunications 337,773 0.2%
Transportation 511,665 0.3%
-------------------- -------------------
Total United States 15,418,590 9.5%
-------------------- -------------------
Total corporate bonds 16,820,313 10.3%
-------------------- -------------------
Warrants:
United States 1,440 0.0%
-------------------- -------------------
Total securities sold, not yet purchased $ 16,821,753 10.3%
==================== ===================
See accompanying notes to financial statements.
6
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Earnings
Year ended December 31, 2005
Revenues:
Principal transactions, net of direct trading
expenses (See Note 5) $ 33,330,000
Interest:
Interest income 4,120,287
Interest expense (757,797)
-------------------
Net interest 3,362,490
-------------------
Net revenues 36,692,490
-------------------
Expenses:
General and administrative 473,117
Management fee 1,115,755
-------------------
Total expenses 1,588,872
-------------------
Net income $ 35,103,618
===================
See accompanying notes to financial statements.
7
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Changes in Members' Equity
Year ended December 31, 2005
TOTAL
CLASS B MEMBERS'
MEMBERS MEMBER EQUITY
------------------ ------------------ ------------------
Balance, December 31, 2004 $ 151,260,161 $ 1,000 $ 151,261,161
Allocation of carried interest (2,634,430) 2,634,430 --
Distributions (20,766,463) (2,634,430) (23,400,893)
Net earnings 35,103,618 -- 35,103,618
------------------ ------------------ ------------------
Balance, December 31, 2005 $ 162,962,886 $ 1,000 $ 162,963,886
================== ================== ==================
See accompanying notes to financial statements.
8
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Cash Flows
Year ended December 31, 2005
Cash flows from operating activities:
Net income
Adjustments to reconcile net earnings to net cash used in operating activities: $ 35,103,618
Amortization of financing costs 107,644
Changes in operating assets and liabilities:
Decrease in receivable from affiliated brokers and dealers 4,289,054
Increase in securities owned (66,448,299)
Increase in securities borrowed (9,948,630)
Increase in other assets (178,919)
Increase in securities sold, not yet purchased 13,316,236
Increase in payable to affiliated brokers and dealers 12,547,779
Increase in payable to Jefferies & Company, Inc. 179,189
Decrease in accrued expenses and other liabilities (423,875)
-------------------
Net cash used in operating activities (11,456,203)
-------------------
Cash flows from financing activities:
Distributions (23,400,893)
-------------------
Net cash used in financing activities (23,400,893)
-------------------
Net decrease in cash and cash equivalents (34,857,096)
Cash and cash equivalents at beginning of year 58,933,824
-------------------
Cash and cash equivalents at end of year $ 24,076,728
===================
Supplemental disclosures of cash flow information - Cash paid
during the year for interest $ 876,497
See accompanying notes to financial statements.
9
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
Year ended December 31, 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferies Partners Opportunity Fund II, LLC (the "Fund") is a Delaware
limited liability company. The Fund commenced operations on January 19,
2000. The investment objective of the Fund is to generate returns for its
members by making, holding, and disposing of a diverse portfolio of
primarily below investment grade debt and equity investments. The Fund was
established to offer members the opportunity to participate in the trading,
investment, and brokerage activities of the High Yield Department of
Jefferies & Company, Inc. ("Jefferies"). The Fund employs a trading and
investment strategy substantially similar to that historically employed by
Jefferies' High Yield Department. The Fund acquires, actively manages, and
trades a diverse portfolio of primarily non-investment grade investments
consisting of the following three asset groups: High Yield Debt, Special
Situation Investments, and, to a lesser extent, Bank Loans. The Fund has
appointed Jefferies to serve as manager to the Fund (the "Manager"). The
Fund participates in the non-syndicate trading and investment activities of
the High Yield Department on a pari passu basis with Jefferies. To permit
such participation, the Fund has been registered as a broker dealer under
the Securities Exchange Act of 1934 and with the National Association of
Securities Dealers.
The Fund will be in effect until January 18, 2007, unless extended for up
to three successive one-year terms by the vote of the Manager and a
majority of the member interests.
The Fund claims an exemption from Rule 15c3-3 as of December 31, 2005,
based on Section (k)(2)(ii). Securities transactions are cleared through an
affiliated broker-dealer on a fully disclosed basis. The Fund does not
execute any securities transactions with or on behalf of any customers.
The Fund prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S.
GAAP").
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds, which are part of the
cash management activities of the Fund, and have original maturities
of 90 days or less. At December 31, 2005, such cash equivalents
amounted to $23,589,985.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Fund's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash
and cash equivalents, securities borrowed, and certain receivables,
are carried at fair value or contracted amounts which approximate fair
value due to the short period to maturity. Similarly, liabilities,
including certain payables, are carried at amounts approximating fair
value.
Securities and other inventory positions owned and securities and
other inventory positions sold, but not yet purchased (all of which
are recorded on a trade-date basis) are valued at fair value, with
unrealized gains and losses reflected in Principal transactions in the
Statement of Earnings. Fair value generally is determined based on
listed prices or broker quotes. In certain instances, such price
quotations may be deemed unreliable when the instruments are thinly
traded or when the Fund holds a substantial block of a particular
security and the listed price is not deemed to be readily realizable.
In these instances, the Fund determines fair value based on
management's best estimate, giving appropriate consideration to
10 (Continued)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2005
reported prices and the extent of public trading in similar
securities, the discount from the listed price associated with the
cost at the date of acquisition, and the size of the position held in
relation to the liquidity in the market, among other factors. When the
size of the holding of a listed security is likely to impair the
Fund's ability to realize the quoted market price, the Fund records
the position at a discount to the quoted price reflecting management's
best estimate of fair value. In such instances, the Fund generally
determines fair value with reference to the discount associated with
the acquisition price of the security. When listed prices or broker
quotes are not available, the Fund determines fair value based on
pricing models or other valuation techniques, including the use of
implied pricing from similar instruments. The Fund typically uses
pricing models to derive fair value based on the net present value of
estimated future cash flows including adjustments, when appropriate,
for liquidity, credit and/or other factors.
(c) SECURITIES TRANSACTIONS
The Fund records its securities transactions on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued at
fair value, and unrealized gains or losses are reflected in Principal
transactions in the Statements of Earnings.
(d) CONTRIBUTIONS
Capital contributions were recorded net of the Fund's closing costs
and placement fees. Each member is charged a one-time placement fee of
1% of gross contributions.
(e) FEDERAL AND STATE INCOME TAXES
Under current federal and applicable state limited liability company
laws and regulations, limited liability companies are treated as
partnerships for tax reporting purposes and, accordingly, are not
subject to income taxes. Therefore, no provision for income taxes has
been made in the Fund's financial statements. For tax purposes, income
or losses are included in the tax returns of the members.
(f) ALLOCATION OF INCOME AND EXPENSE
Income and expense are allocated 100% to the members based on the pro
rata share of their capital contributed to the Fund until the total
allocation equals the aggregate members' preferred return of 8% of
contributed capital. All remaining income and expense are allocated
80% to the members and 20% to the Class B Member.
(g) COMMITMENTS
As of December 31, 2005, the Fund had unfunded commitments of
$2,760,000 under a revolving credit facility.
11 (Continued)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2005
(h) USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP
requires the Fund Manager to make a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses to prepare these financial
statements. Actual results could differ from those estimates.
(2) RECEIVABLE FROM, AND PAYABLE TO, AFFILIATED BROKERS AND DEALERS
The following is a summary of the major categories of receivable from, and
payable to, affiliated brokers and dealers as of December 31, 2005:
Receivable from affiliated brokers and dealers:
Securities failed to deliver $ 15,581,273
Other 28,252
----------------
$ 15,609,525
================
Payable to affiliated brokers and dealers:
Securities failed to receive $ 14,972,987
Other 1,186,716
----------------
$ 16,159,703
================
(3) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the fair value of major categories of
Securities owned and Securities sold, not yet purchased, as of December 31,
2005:
SECURITIES
SECURITIES SOLD, NOT YET
OWNED PURCHASED
----------------- -----------------
Corporate debt securities $ 109,777,718 $ 16,820,313
Corporate equity securities 34,215,314 1,440
Other 885,768 --
----------------- -----------------
$ 144,878,800 $ 16,821,753
================= =================
(4) REVOLVING CREDIT FACILITY
In June 2005, the Fund renewed a revolving credit facility agreement with
an unaffiliated third party to be used in connection with the Fund's
investing activities. At December 31, 2005, $85,200,000 was available under
the terms of the revolving credit facility agreement. The revolving credit
facility expires in June 2006, but provides for annual extensions. Advances
under this facility bear interest at the lender's commercial paper rate
plus 115 basis points. The Fund incurs a liquidity fee on the total amount
available under the revolving credit facility. The Fund incurs a program
fee on amounts borrowed under the revolving credit facility. The Fund
incurs a minimum program fee if program fees do not reach a certain
threshold. For the year ended December 31, 2005, the Fund was charged a
12 (Continued)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2005
liquidity fee of $323,938 and a program fee of $257,304, which are included
in Interest expense in the Statement of Earnings. During the year ended
December 31, 2005, the Fund did not borrow under the revolving credit
facility. At December 31, 2005, there were no outstanding balances under
the revolving credit facility.
The Fund incurred costs in securing the revolving credit facility. These
costs have been capitalized and are being amortized over seven years. At
December 31, 2005, the net unamortized costs of $116,614 are included in
Other assets. For the year ended December 31, 2005, amortization expense of
$107,644 is included in Interest expense in the Statement of Earnings.
(5) RELATED PARTY TRANSACTIONS
At December 31, 2005, members' equity included an investment in the Fund by
Jefferies of $27,159,268. Additionally, Jefferies, as the Class B Member,
contributed $1,000 of capital for the right to receive a distribution of
20% of the Fund's distributions in excess of an 8% preferred return paid to
the members. During the year ended December 31, 2005, the Fund distributed,
in cash, undistributed net income of $23,400,893 to the members, of which
$2,634,430 was distributed to the Class B Member in accordance with its
carried interest.
At December 31, 2005, receivable from and payable to affiliated brokers and
dealers are for amounts due from and due to Jefferies related to trade
execution and settlement.
For the year ended December 31, 2005, interest income included $38,263 of
income received from Jefferies Execution Services, Inc. related to stock
borrow transactions. During the year ended December 31, 2005, Jefferies
Execution Services, Inc. was the sole counterparty to all of the Fund's
stock borrow transactions.
At December 31, 2005, Payable to Jefferies & Company, Inc. of $539,592 is
for amounts due for direct trading expenses, general and administrative
expenses, and management fees. For the year ended December 31, 2005, direct
trading expenses of $3,005,998 is netted against principal transactions
revenue. The Fund reimburses Jefferies for general and administrative
expenses based on the Fund's pro rata portion of actual charges incurred.
For the year ended December 31, 2005, reimbursed expenses of $506,228 are
included in General and administrative expenses.
For the year ended December 31, 2005, the Fund was charged interest of
$68,912 by Jefferies related to securities failed to receive.
Jefferies, in its capacity as Manager, receives a management fee equal to
1% per annum of the sum of 100% of the average balance of securities owned
and 98% of the average balance of securities sold, not yet purchased. At
December 31, 2005, accrued management fees of $129,202 were included in
Payable to Jefferies & Company, Inc.
13 (Continued)
JEFFERSON PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2005
(6) FINANCIAL INSTRUMENTS
(a) OFF-BALANCE SHEET RISK
The Fund has contractual commitments arising in the ordinary course of
business for securities sold, not yet purchased. These financial
instruments contain varying degrees of off-balance sheet risk whereby
the fair values of the securities underlying the financial instruments
may be in excess of, or less than, the contract amount. The settlement
of these transactions is not expected to have a material effect upon
the Fund's financial statements.
(b) CREDIT RISK
In the normal course of business, the Fund is involved in the
execution, settlement, and financing of various principal securities
transactions. Securities transactions are subject to the risk of
counterparty nonperformance. However, transactions are collateralized
by the underlying security, thereby reducing the associated risk to
changes in the fair value of the security through settlement date.
The Fund seeks to control the risk associated with these transactions
by establishing and monitoring collateral and transaction levels
daily.
(c) CONCENTRATION OF CREDIT RISK
The Fund's activities are executed exclusively with Jefferies.
Concentrations of credit risk can be affected by changes in economic,
industry, or geographical factors. The Fund seeks to control its
credit risk and the potential risk concentration through a variety of
reporting and control procedures including those described in the
preceding discussion of credit risk.
(7) NET CAPITAL REQUIREMENT
The Fund is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. The Fund has elected to use the alternative method permitted by
Rule 15c3-1, which requires that the Fund maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined.
At December 31, 2005, the Fund had net capital of $51,434,728, which was
$51,184,728 in excess of required net capital.
(8) SUBSEQUENT EVENT
On February 15, 2006, the Fund distributed, in cash, undistributed net
income of $35,103,618 to the members, of which $4,974,974 was distributed
to the Class B Member in accordance with its carried interest.
14
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Financial Statements
December 31, 2004
(Unaudited)
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Financial Condition
December 31, 2004
(Unaudited)
ASSETS
Cash and cash equivalents $ 58,933,824
Receivable from affiliated brokers and dealers 19,898,579
Securities owned 78,430,501
Securities borrowed 1,323,070
Other assets 653,263
------------
Total assets $159,239,237
============
LIABILITIES AND MEMBERS' EQUITY
Securities sold, not yet purchased $ 3,505,517
Payable to affiliated brokers and dealers 3,611,924
Payable to Jefferies & Company, Inc. 360,403
Accrued expenses and other liabilities 500,232
------------
Total liabilities 7,978,076
------------
Members' equity:
Members' capital, net 126,255,099
Retained earnings 25,006,062
------------
Total members' equity 151,261,161
------------
Total liabilities and members' equity $159,239,237
============
See accompanying notes to financial statements.
2
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Earnings
Year Ended December 31, 2004
(Unaudited)
Revenues:
Principal transactions, net of direct trading expenses $21,984,146
Interest 4,089,426
-----------
Net revenues 26,073,572
-----------
Expenses:
General and administrative 1,124,743
Management fee 968,639
Interest 579,297
-----------
Total expenses 2,672,679
-----------
Net income $23,400,893
===========
See accompanying notes to financial statements.
3
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Changes in Members' Equity
Year Ended December 31, 2004
(Unaudited)
TOTAL
MEMBERS' RETAINED MEMBERS'
CAPITAL, NET EARNINGS EQUITY
------------- ------------- -------------
Balance, December 31, 2003 $ 126,255,099 22,655,707 148,910,806
Distributions -- (21,050,538) (21,050,538)
Net earnings -- 23,400,893 23,400,893
------------- ------------- -------------
Balance, December 31, 2004 $ 126,255,099 $ 25,006,062 $ 151,261,161
============= ============= =============
See accompanying notes to financial statements.
4
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Cash Flows
Year Ended December 31, 2004
(Unaudited)
Cash flows from operating activities:
Net income $ 23,400,893
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of financing costs 107,644
Changes in operating assets and liabilities:
Increase in receivable from affiliated brokers and dealers (13,813,937)
Decrease in securities owned 13,328,463
Decrease in securities borrowed 318,970
Decrease in other assets 1,806,435
Increase in securities sold, not yet purchased 904,117
Decrease in payable to affiliated brokers and dealers (5,582,577)
Decrease in payable to Jefferies & Company, Inc. (279,101)
Increase in accrued expenses and other liabilities 298,492
------------
Net cash provided by operating activities 20,489,399
------------
Cash flows from financing activities:
Distributions (21,050,538)
------------
Net cash used in financing activities (21,050,538)
------------
Net decrease in cash and cash equivalents (561,139)
Cash and cash equivalents at beginning of year 59,494,963
------------
Cash and cash equivalents at end of year $ 58,933,824
============
Supplemental disclosures of cash flow information - Cash paid
during the year for interest $ 496,359
See accompanying notes to financial statements.
5
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2004
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferies Partners Opportunity Fund II, LLC (the "Fund") is a Delaware
limited liability company. The Fund commenced operations on January 19,
2000. The investment objective of the Fund is to generate returns for its
members by making, holding, and disposing of a diverse portfolio of
primarily below investment grade debt and equity investments. The Fund was
established to offer members the opportunity to participate in the
trading, investment, and brokerage activities of the High Yield Department
of Jefferies & Company, Inc. ("Jefferies"). The Fund employs a trading and
investment strategy substantially similar to that historically employed by
Jefferies' High Yield Department. The Fund acquires, actively manages, and
trades a diverse portfolio of primarily non-investment grade investments
consisting of the following three asset groups: High Yield Debt, Special
Situation Investments, and, to a lesser extent, Bank Loans. The Fund has
appointed Jefferies to serve as manager to the Fund (the "Manager"). The
Fund participates in the non-syndicate trading and investment activities
of the High Yield Department on a pari passu basis with Jefferies. To
permit such participation, the Fund has been registered as a broker dealer
under the Securities Exchange Act of 1934 and with the National
Association of Securities Dealers. Although this entity is often referred
to as a fund, it is a "broker dealer" in accordance with the American
Institute of Certified Public Accountants ("AICPA") Audit and Accounting
Guide, "Brokers and Dealers in Securities" (the "Guide").
The Fund will be in effect until January 18, 2007, unless extended for up
to three successive one-year terms by the vote of the Manager and a
majority of the member interests.
The Fund, in connection with its activities as a broker dealer, does not
hold funds or securities for customers. Accordingly, the computation for
determination of reserve requirements pursuant to Rule 15c3-3 has been
omitted.
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds, which are part of
the cash management activities of the Fund, and generally mature
within 90 days. At December 31, 2004, such cash equivalents amounted
to $57,637,717.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Fund's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including
cash and cash equivalents, securities borrowed, and certain
receivables, are carried at fair value or contracted amounts which
approximate fair value due to the short period to maturity.
Similarly, liabilities, including certain payables, are carried at
amounts approximating fair value.
Securities and other inventory positions owned and securities and
other inventory positions sold, but not yet purchased (all of which
are recorded on a trade-date basis) are valued at market or fair
value, as appropriate, with unrealized gains and losses reflected in
Principal transactions in the Statement of Earnings. The Fund
follows the AICPA Guide when determining market or fair value for
financial instruments. Market value generally is determined based on
listed prices or broker quotes. In certain instances, such price
quotations may be deemed unreliable when the instruments are thinly
traded or when the Fund holds a substantial block of a particular
security and the listed price is not deemed to be readily
(Continued)
6
realizable. In accordance with the AICPA Guide, in these instances,
the Fund determines fair value based on management's best estimate,
giving appropriate consideration to reported prices and the extent
of public trading in similar securities, the discount from the
listed price associated with the cost at the date of acquisition,
and the size of the position held in relation to the liquidity in
the market, among other factors. When the size of the holding of a
listed security is likely to impair the Fund's ability to realize
the quoted market price, the Fund records the position at a discount
to the quoted price reflecting management's best estimate of fair
value. In such instances, the Fund generally determines fair value
with reference to the discount associated with the acquisition price
of the security. When listed prices or broker quotes are not
available, the Fund determines fair value based on pricing models or
other valuation techniques, including the use of implied pricing
from similar instruments. The Fund typically uses pricing models to
derive fair value based on the net present value of estimated future
cash flows including adjustments, when appropriate, for liquidity,
credit and/or other factors.
(c) SECURITIES TRANSACTIONS
The Fund records its securities transactions on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued
at market, and unrealized gains or losses are reflected in revenues
from principal transactions in the statements of earnings.
(d) CONTRIBUTIONS
Capital contributions are recorded net of the Fund's closing costs
and placement fees. Each member is charged a one-time placement fee
of 1% of gross contributions.
(e) FEDERAL AND STATE INCOME TAXES
Under current federal and applicable state limited liability company
laws and regulations, limited liability companies are treated as
partnerships for tax reporting purposes and, accordingly, are not
subject to income taxes. Therefore, no provision for income taxes
has been made in the Fund's financial statements. For tax purposes,
income or losses are included in the tax returns of the members.
(f) ALLOCATION OF INCOME AND EXPENSE
Income and expense are allocated 100% to the members based on the
pro rata share of their capital contributed to the Fund, until the
total allocation equals the aggregate member preferred return of 8%
of contributed capital. All remaining income and expense are
allocated 80% to the members and 20% to the Manager.
(g) USE OF ESTIMATES
Management of the Fund has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(Continued)
7
(2) RECEIVABLE FROM, AND PAYABLE TO, AFFILIATED BROKERS AND DEALERS
The following is a summary of the major categories of receivable from, and
payable to, affiliated brokers and dealers as of December 31, 2004:
Receivable from affiliated brokers and dealers:
Securities failed to deliver $ 7,719,379
Other 12,179,200
-----------
$19,898,579
===========
Payable to affiliated brokers and dealers:
Securities failed to receive $ 3,401,175
Other 210,749
-----------
$ 3,611,924
===========
(3) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of December
31, 2004:
SECURITIES
SOLD,
SECURITIES NOT YET
OWNED PURCHASED
----------- -----------
Corporate debt securities $60,364,458 3,505,517
Corporate equity securities 18,066,043 --
----------- -----------
$78,430,501 3,505,517
=========== ===========
(4) REVOLVING CREDIT FACILITY
In June 2004, the Fund renewed a revolving credit facility agreement with
an unaffiliated third party to be used in connection with the Fund's
investing activities. At December 31, 2004, $85,200,000 was available
under the terms of the revolving credit facility agreement. The revolving
credit facility expires in June 2005, but provides for annual extensions.
Advances under this facility bear interest at the lender's commercial
paper rate plus 115 basis points. The Fund incurs a liquidity fee on the
total amount available under the revolving credit facility. For the year
ended December 31, 2004, the Fund was charged a liquidity fee of $324,825
and a program fee of $230,589 which are included in interest expense.
During the year ended December 31, 2004, the Fund did not borrow under the
revolving credit facility. At December 31, 2004, there were no outstanding
balances under the revolving credit facility.
The Fund incurred costs in securing the revolving credit facility. These
costs have been capitalized and are being amortized over seven years. At
December 31, 2004, the net unamortized costs of $224,259 are included in
other assets. For the year ended December 31, 2004, amortization expense
of $107,644 is included in general and administrative expenses.
(Continued)
8
(5) RELATED PARTY TRANSACTIONS
At December 31, 2004, members' capital included an investment in the Fund
by Jefferies of $27,159,268. Additionally, Jefferies, in its capacity as
Manager, contributed $1,000 of capital for the right to participate in 20%
of the Fund's earnings in excess of an 8% preferred return paid to the
members.
At December 31, 2004, receivable from and payable to affiliated brokers
and dealers are for amounts due from and due to Jefferies.
For the year ended December 31, 2004, interest income included $2,200 of
income received from Jefferies Execution Services, Inc. related to stock
borrow transactions. During the year ended December 31, 2004, Jefferies
Execution Services, Inc. was the sole counterparty to all of the Fund's
stock borrow transactions.
At December 31, 2004, payable to Jefferies of $360,403 is for amounts due
for direct trading expenses, general and administrative expenses, and
management fees. For the year ended December 31, 2004, direct trading
expenses of $4,482,141 is net against principal transactions revenue. The
Fund reimburses Jefferies for general and administrative expenses based on
the Fund's pro rata portion of actual charges incurred. For the year ended
December 31, 2004, reimbursed expenses of $549,660 are included in general
and administrative expenses.
For the year ended December 31, 2004, the Fund was charged interest of
$23,882 by Jefferies related to securities failed to receive.
Jefferies, in its capacity as Manager, receives a management fee equal to
1% per annum of the sum of 100% of the average balance of securities owned
and 98% of the average balance of securities sold, not yet purchased. At
December 31, 2004, accrued management fees of $73,715 were included in
payable to Jefferies.
(6) FINANCIAL INSTRUMENTS
(a) OFF-BALANCE SHEET RISK
The Fund has contractual commitments arising in the ordinary course
of business for securities sold, not yet purchased. These financial
instruments contain varying degrees of off-balance sheet risk
whereby the market values of the securities underlying the financial
instruments may be in excess of, or less than, the contract amount.
The settlement of these transactions is not expected to have a
material effect upon the Fund's financial statements.
(b) CREDIT RISK
In the normal course of business, the Fund is involved in the
execution, settlement, and financing of various principal securities
transactions. Securities transactions are subject to the risk of
counterparty nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the
associated risk to changes in the market value of the security
through settlement date.
(Continued)
9
The Fund seeks to control the risk associated with these
transactions by establishing and monitoring collateral and
transaction levels daily.
(Continued)
10
(c) CONCENTRATION OF CREDIT RISK
The Fund's activities are executed exclusively with Jefferies.
Concentrations of credit risk can be affected by changes in
economic, industry, or geographical factors. The Fund seeks to
control its credit risk and the potential risk concentration through
a variety of reporting and control procedures including those
described in the preceding discussion of credit risk.
(7) NET CAPITAL REQUIREMENT
The Fund is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. The Fund has elected to use the alternative method permitted by
Rule 15c3-1, which requires that the Fund maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit
balances arising from customer transactions, as defined.
At December 31, 2004, the Fund had net capital of $99,913,043, which was
$99,663,043 in excess of required net capital.
(8) SUBSEQUENT EVENT
On February 15, 2005, the Fund made a distribution to the Fund members of
$23,400,893.
11