SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
(AMENDMENT NO. 2)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2005
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
--------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of 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
7-7/8% SENIOR SUBORDINATED NOTES DUE OCTOBER 15, 2006 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, 2005 (computed by reference to the
last reported closing sale price of the Common Shares on the New York Stock
Exchange on such date): $3,130,796,000.
On February 23, 2006, the registrant had outstanding 108,072,508 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
2006 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, as amended, of Leucadia National Corporation
(the "Company") for the fiscal year ended December 31, 2005 to reflect that the
financial statements referred to in Item 15(c)(1), (2), (3) and (5) 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, 2005 and 2004............................ F-3
Consolidated Statements of Operations for the years ended December 31, 2005,
2004 and 2003..................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003..................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2005, 2004 and 2003.................................................. 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 (filed as Annex A to the Company's Proxy
Statement dated April 9, 1999 (the "1999 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")).
Leucadia National Corporation 2003 Senior Executive Annual
Incentive Bonus Plan, as amended May 17, 2005 (filed as Annex A
to the Company's Proxy Statement dated April 22, 2005 (the "2005
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 3.6 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005, as amended (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 (filed as Annex A to the 1999 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 Form of Amended and Restated Revolving Credit Agreement (the
"Revolving Credit Agreement") dated as of March 11, 2003
between the Company, Fleet National Bank as Administrative
Agent, The Chase Manhattan Bank, as Syndication Agent, and
the Banks signatory thereto, with Fleet Boston Robertson
Stephens, Inc., as Arranger (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003).*
10.5 Amendment, dated as of March 31, 2004, to the Revolving
Credit Agreement (filed as Exhibit 10.7 to the Company's
2004 10-K).*
10.6 Amendment, dated as of June 29, 2004, to the Revolving
Credit Agreement (filed as Exhibit 10.8 to the Company's
2004 10-K).*
10.7 Leucadia National Corporation 2003 Senior Executive Annual
Incentive Bonus Plan, as amended May 17, 2005 (filed as
Annex A to the 2005 Proxy Statement).*
4
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
Company's 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).*
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).*
5
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 Letter Agreement, dated February 3, 2005, between the
Company and Jefferies & Company, Inc. (filed as Exhibit
10.55 to the Company's 2004 10-K).*
10.20 Information Concerning Executive Compensation (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated January 9, 2006).*
10.21 Compensation of Non-Employee Directors (filed as Exhibit
10.21 to the Company's 2005 10-K).*
10.22 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")).*
10.23 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 Company's 1st Quarter 2005 10-Q).*
10.24 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).*
10.25 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).*
10.26 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 Company's 2005 10-K).*
10.27 First Amendment to Square 711 Purchase and Sale Agreement,
dated as of December 14, 2005 (filed as Exhibit 10.27 to the
Company's 2005 10-K).*
10.28 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")).*
10.29 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).*
10.30 Voting Agreement, dated as of May 2, 2005, between the
Company and Inmet Mining Corporation (filed as Exhibit 4 to
the MK 13D).*
10.31 Letter Agreement, dated March 30, 2005 between SBC Services,
Inc. ("SBC Services") and WilTel Communications, LLC
("WCLLC") (filed as Exhibit 10.1 to the Company's 1st
Quarter 2005 10-Q).*
6
10.32 Letter Agreement, dated April 27, 2005 between SBC Services
and WCLLC (filed as Exhibit 10.3 to the Company's 1st
Quarter 2005 10-Q).*
10.33 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).*
10.34 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")).*
10.35 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).*
10.36 Debtors' Modified Second Amended Joint Plan of
Reorganization under chapter 11 of he 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).*
10.37 Services Agreement, dated as of January 1, 2004, between the
Company and Ian M. Cumming (filed as Exhibit 10.37 to the
Company's 2005 10-K).*
10.38 Services Agreement, dated as of January 1, 2004, between the
Company and Joseph S. Steinberg (filed as Exhibit 10.38 to
the Company's 2005 10-K).*
21 Subsidiaries of the registrant (filed as Exhibit 21 to the
Company's 2005 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 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434),
Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No.
33-61682), Form S-8 (File No. 33-61718), Form S-8 (File No.
333-51494) and Form S-3 (File No. 333-118102) (filed as
Exhibit 23.1 to the Company's 2005 10-K).*
23.2 Consent of Ernst & Young LLP with respect to the inclusion
in this Annual Report on Form 10-K/A of the financial
statements of Berkadia LLC and with respect to the
incorporation by reference in the Company's Registration
Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No.
33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3
(No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No.
33-61718), Form S-8 (No. 333-51494) and Form S-3 (File No.
333-118102).
23.3 Consent of PricewaterhouseCoopers, with respect to the
inclusion in this Annual Report on Form 10-K/A 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. 2-84303), Form S-8 and S-3 (No.
33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3
(No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No.
33-61718), Form S-8 (No. 333-51494) and Form S-3 (File No.
333-118102).
23.4 Consent of independent auditors from BDO Seidman, LLP with
respect to the inclusion in this Annual Report on Form
10-K/A 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. 2-84303), Form S-8
7
and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form
S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form
S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form S-3
(File No. 333-118102).
23.5 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K
of the financial statements of WilTel Communications Group,
Inc. and with respect to the incorporation by reference in
the Company's Registration Statements on Form S-8 (No.
2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3
(No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8
(No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No.
333-51494) and Form S-3 (File No. 333-118102) (filed as
Exhibit 23.5 to the Company's 2005 10-K).*
23.6 Independent Registered Public Accountants' Consent from KPMG
LLP, with respect to the inclusion in this Annual Report on
Form 10-K/A of their report on the financial statements of
Jefferies Partners Opportunity Fund II, LLC and with respect
to the incorporation by reference of such report into the
Company's Registration Statements on Form S-8 (No. 2-84303),
Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No.
33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No.
33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494)
and Form S-3 (File No. 333-118102).
23.7 Consent of PricewaterhouseCoopers LLP with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434),
Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No.
33-61682), Form S-8 (File No. 33-61718), Form S-8 (File No.
333-51494) and Form S-3 (File No. 333-118102) (filed as
Exhibit 23.7 to the Company's 2005 10-K).*
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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.
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.**
(c) Financial statement schedules.
(1) Berkadia LLC financial statements for the years ended
December 31, 2004 and 2003.
(2) Olympus Re Holdings, Ltd. consolidated financial
statements as of December 31, 2005 and 2004 and for the
years ended December 31, 2005, 2004 and 2003.
(3) EagleRock Capital Partners (QP), LP financial statements
as of December 31, 2005 and 2004 and for the years ended
December 31, 2005, 2004 and 2003 and EagleRock Master
Fund, LP financial statements as of December 31, 2005
and 2004 and for the years ended December 31, 2005, 2004
and 2003.
8
(4) WilTel Communications Group, Inc. consolidated financial
statements as of November 5, 2003 (Successor Company),
and for the periods from January 1, 2003 through
November 5, 2003, and November 1, 2002 through December
31, 2002 (Successor Company) and the periods January 1,
2002 through October 31, 2002 (Predecessor Company)
(previously filed as financial statement schedule to the
Company's 2005 10-K).*
(5) Jefferies Partners Opportunity Fund II, LLC financial
statements as of December 31, 2005 and for the year
ended December 31, 2005.
-----------------------------
* Incorporated by reference.
** Furnished herewith pursuant to item 601(b) (32) of Regulation S-K.
9
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 24, 2006 By: /s/ Barbara L. Lowenthal
-----------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
10
FINANCIAL STATEMENTS
Berkadia LLC (a joint venture between Berkshire
Hathaway Inc. and Leucadia National Corporation)
Year ended December 31, 2004 (unaudited) and December 31, 2003
Berkadia LLC
Financial Statements
Years ended December 31, 2004 (unaudited) and 2003
CONTENTS
Report of Independent Auditors................................................1
Financial Statements
Balance Sheets................................................................2
Statements of Operations and Changes in Members' Equity (Deficit).............3
Statements of Cash Flows......................................................4
Notes to Financial Statements.................................................5
Report of Independent Auditors
The Members of Berkadia LLC
We have audited the accompanying statements of operations and changes in
members' equity and cash flows of Berkadia LLC (the "Company") for the year
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and changes in members' equity
and cash flows of Berkadia LLC for the year ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Phoenix, Arizona
February 20, 2004
1
Berkadia LLC
Statements of Operations and Changes in Members' Equity (Deficit)
YEAR ENDED
DECEMBER 31,
2004 2003
(UNAUDITED) (AUDITED)
--------------------------------
(In thousands)
REVENUE
Interest income and amortization of loan discount $ 2,428 $ 198,790
---------------- ---------------
Total revenue 2,428 198,790
EXPENSES
Interest expense 215 18,394
---------------- ---------------
Total expenses 215 18,394
---------------- ---------------
Net income 2,213 180,396
Members' equity (deficit), beginning of period 847 (147,035)
Distributions to members (3,060) (32,514)
---------------- ---------------
Members' equity (deficit), end of period $ - $ 847
================ ===============
See accompanying notes.
2
Berkadia LLC
Statements of Cash Flows
YEAR ENDED
DECEMBER 31,
2004 2003
(UNAUDITED) (AUDITED)
--------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 2,213 $ 180,396
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of loan discount (975) (149,522)
Net change in:
Receivables 2,392 3,763
Payables (570) (2,123)
---------------- ----------------
Net cash provided by operating activities 3,060 32,514
INVESTING ACTIVITIES
Loan repayment from FINOVA 525,000 1,650,000
---------------- ----------------
Net cash provided by investing activities 525,000 1,650,000
FINANCING ACTIVITIES
Repayment of long-term debt (525,000) (1,650,000)
Distributions to members (3,060) (32,514)
---------------- ----------------
Net cash used in financing activities (528,060) (1,682,514)
---------------- ----------------
Net increase (decrease) in cash - -
Cash and cash equivalents at beginning of period - -
---------------- ----------------
Cash and cash equivalents at end of period $ - $ -
================ ================
See accompanying notes.
3
Berkadia LLC
Notes to Financial Statements
December 31, 2004 (unaudited) and 2003
1. FORMATION AND NATURE OF OPERATIONS
Berkadia LLC (the "Company" or "Berkadia") was formed on February 26, 2001 as a
joint venture between Berkshire Hathaway Inc. ("Berkshire") and Leucadia
National Corporation ("Leucadia"). Berkshire and Leucadia through their
respective wholly owned affiliates hold the interests in the Company and are
referred to as the "Members".
The principal business purpose of the Company was to lend up to $6,000,000,000
on a senior secured basis to FINOVA Capital Corporation ("FINOVA Capital"), the
principal operating subsidiary of The FINOVA Group Inc. ("FINOVA"), to
facilitate a chapter 11 restructuring of the outstanding debt of FINOVA and its
principal subsidiaries. On August 10, 2001, the bankruptcy court confirmed the
Chapter 11 reorganization plan for the FINOVA companies (the "Plan"). On August
21, 2001, the effective date of the Plan, the Company loaned $5,600,000,000 par
amount on a senior secured basis to FINOVA Capital (the "Berkadia Loan").
Concurrent with the loan, the Company received 61,020,581 newly issued shares of
common stock of FINOVA (the "Shares"), representing 50 percent of the
outstanding stock of FINOVA.
The Berkadia Loan was fully repaid in February 2004. As a result, the Company
has discharged all of its obligations and distributed all remaining cash to its
members. The Company does not currently conduct any business activities.
The Berkadia Loan was collateralized by substantially all of the assets of
FINOVA and its subsidiaries and guaranteed by FINOVA and substantially all of
the subsidiaries of FINOVA. The Company borrowed the entire amount required to
finance the Berkadia Loan from a consortium of lenders led by Fleet Bank (the
"Fleet Loan"). The Fleet Loan was guaranteed, 90 percent by Berkshire Hathaway
and 10 percent by Leucadia (with Leucadia's guarantee being secondarily
guaranteed by Berkshire), and was also secured by the Company's pledge of the
Berkadia Loan.
The Company was paid a $60,000,000 commitment fee by FINOVA Capital upon
execution of the loan commitment in February 2001, and a $60,000,000 fee upon
funding of the Berkadia Loan on August 21, 2001. Under the operating agreement
governing the Company, Berkshire and Leucadia share equally in the commitment
fee, funding fee and any proceeds realized from the Shares. Interest on the
Berkadia Loan, after payment of interest on the Fleet Loan, is allocated 90
percent to Berkshire and 10 percent to Leucadia.
4
Berkadia LLC
Notes to Financial Statements (continued)
1. FORMATION AND NATURE OF OPERATIONS (CONTINUED)
The Members have not contributed any equity capital to the Company, and the
Company does not currently anticipate that any capital contributions will be
required in the future. Decisions concerning the management of the business and
affairs of the Company generally require the consent of all Members. However,
Berkshire makes any and all decisions with respect to the Berkadia Loan in its
sole and absolute discretion.
Upon FINOVA's emergence from bankruptcy in 2001, each of Berkshire and Leucadia
designated two persons to serve on FINOVA's reconstituted board of directors.
From and after the effective date of the Plan, the Company, Berkshire and
Leucadia are not entitled to designate FINOVA board members.
During 2002, several structural changes to the Company were executed, which were
intended to simplify the ownership structure of the Company and to provide a
debt-free vehicle for the Berkadia members to use to pursue other investments.
These changes did not alter the ownership interests in the Company, ultimately
held by Berkshire and Leucadia, and resulted in no gains or losses or other
changes to member's accumulated deficit. Among the changes, the Company
effectively distributed all of its right, title and interest in and to the
Shares to an entity formed by the Members (Berkadia Equity Holdings LLC). As a
result, the Company no longer has any other financial interest in FINOVA.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States ("GAAP") requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities at the date of the financial
statements and (iii) the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Investment in FINOVA Shares: Berkadia accounted for its investment in the
Shares under the equity method. Under the equity method, Berkadia recognized its
proportionate share of FINOVA's net income or loss. For the period August 21
through September 30, 2001, FINOVA incurred significant operating losses
primarily as a result of the September 11 terrorist attack. Berkadia's share of
such losses far exceeded the cost allocated to the Shares, which was based upon
the relative fair values of the Shares and the Berkadia Loan as of August 21,
2001. The application of the equity method was suspended once the carrying
amount of Shares was reduced to zero. As a result of the structural changes to
the Company in 2002 discussed in Note 1, Berkadia possesses no financial
interests in the Shares.
5
Berkadia LLC
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Income taxes: The Company does not file an income tax return. Each Member is
responsible for the tax liability, if any, deriving from the taxable income
allocated to such Member. Accordingly, no provision for income taxes has been
reflected in these financial statements.
3. BERKADIA LOAN
While it was outstanding, the Berkadia Loan was carried net of unamortized
discount related to the commitment fee, the funding fee and the amount of the
Berkadia Loan allocated to Berkadia's investment in the Shares. The discount was
accreted into investment income over the life of the Berkadia Loan through the
effective interest method. The Berkadia Loan was fully repaid in February 2004.
While it was outstanding the Berkadia Loan bore interest payable monthly, at the
Eurodollar Rate plus 2.25 percent. For the year ended December 31, 2003, the
weighted-average interest rate was 3.55 percent.
On August 21, 2001, the Company transferred $5,540,000,000 in cash to FINOVA
Capital, representing the $5,600,000,000 loan reduced by the funding fee of
$60,000,000. As indicated above, in exchange for these funds, the Company
received a $5,600,000,000 note from FINOVA Capital and the Shares. The Company
allocated the $5,540,000,000 cash transferred, reduced further by the
$60,000,000 commitment fee received in February 2001, between its investment in
the Berkadia Loan and the Shares, based upon the respective relative fair values
of the Berkadia Loan and the Shares. As a result, the Berkadia Loan was recorded
at an initial value of $5,291,200,000, which is net of a discount related to the
commitment and funding fees of $120,000,000 and the cost allocated to the Shares
of $188,800,000.
6
Berkadia LLC
Notes to Financial Statements (continued)
3. BERKADIA LOAN (CONTINUED)
The terms of the Berkadia Loan permitted FINOVA to retain a reserve of cash and
cash equivalents in an amount not to exceed the sum of (a) 125 percent of the
projected operating expenses for the next fiscal quarter, (b) unfunded customer
commitments expected to be funded over the next two fiscal quarters, (c) taxes
payable during the next fiscal quarter, (d) interest, loan fees and other
amounts due on the Berkadia Loan during the next fiscal quarter, (e) an amount
equal to all payments of principal, interest or fees relating to other permitted
indebtedness that will, by their terms, become due and payable in cash during
the next fiscal quarter, and (f) such other reserves as are necessary in
FINOVA's good faith judgment and as approved in advance by the Company for the
operations of FINOVA. Any amount in excess of the cash reserve is paid to the
Company to reduce the principal amount of the loan on a quarterly basis.
During 2002, the Company gave its consent to FINOVA to use up to $300 million of
cash to repurchase certain subordinated notes rather than make mandatory
prepayments of the Berkadia Loan. In consideration for its consent, FINOVA and
the Company agreed that they would share equally in the net interest savings
resulting from any repurchase. As a result of repurchases made by FINOVA during
2003, the Company recognized approximately $6.8 million in interest income
related to the net interest savings.
For the year ended December 31, 2003, the Company received $1.650 billion in
loan repayments from FINOVA. On February 9, 2004, FINOVA prepaid the entire
remaining outstanding balance of the Berkadia Loan.
4. FLEET LOAN
While it was outstanding, the Fleet Loan bore interest payable monthly, at a
rate generally equal to the cost of funds for the lenders' conduit facilities
plus 0.25 percent. The lenders' cost of funds rate was substantially equal to
the Eurodollar Rate that was used to determine the interest rate on the Berkadia
Loan. For the year ended December 31, 2003, the weighted-average interest rate
was 1.54 percent. All unpaid principal and accrued interest was prepaid by
Berkadia in February 2004.
5. MEMBERS' CAPITAL
For the years ended December 31, 2004 and 2003, the Company distributed
substantially all of its available cash to its Members, aggregating $3.1 million
and $32.5 million, respectively. For the two-year period, $30.8 million was
distributed to Berkshire Members and $4.8 million to Leucadia Members.
7
OLYMPUS RE HOLDINGS, LTD.
(Incorporated in Bermuda)
Consolidated Financial Statements
DECEMBER 31, 2005, 2004 AND 2003
(expressed in U.S. dollars)
[PricewaterhouseCoopers logo]
--------------------------------------------------------------------------------
PricewaterhouseCoopers
Chartered Accountants
Dorchester House
7 Church Street
Hamilton HM 11
Bermuda
Telephone +1 (441) 295 2000
Facsmile +1 (441) 295 1242
www.pwc.com/bermuda
March 2, 2006
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
OLYMPUS RE HOLDINGS, LTD.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity, comprehensive income
and cash flows present fairly, in all material respects, the financial position
of OLYMPUS RE HOLDINGS, LTD. at December 31, 2005 and 2004, and the results
of its operations and its cash flows for the years ended December 31, 2005, 2004
and 2003 in conformity with accounting principles generally accepted in the
United States of America. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these consolidated statements 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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall consolidated 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 address.
PricewaterhouseCoopers refers to the members of the worldwide
PricewaterhouseCoopers organization.
OLYMPUS RE HOLDINGS, LTD.
Consolidated Balance Sheets
AS OF DECEMBER 31, 2005 AND 2004
------------------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004
$ $
-------------------------------------
ASSETS
Cash and cash equivalents (note 3) 57,817,230 50,929,556
Investments (note 3) 894,649,371 839,138,959
Investment income accrued 9,528,640 9,262,091
Investments trade pending 5,036,070 -
Accounts and premiums receivable 204,081,053 179,417,972
Deferred acquisition costs 35,459,806 48,406,242
Deferred capital raise expenditures (note 11) 1,434,635 -
Other assets 369,730 288,897
-------------------------------------
1,208,376,535 1,127,443,717
=====================================
LIABILITIES
Loss and loss adjustment expense reserves (note 4) 1,025,993,782 301,021,728
Unearned premiums 120,607,036 156,827,274
Share subscriptions received in advance (note 11) 32,740,242 -
Accounts payable and accrued expenses 553,985 424,940
Advisory fees payable (note 6) 6,519,798 15,758,183
Accrued capital raise expenditures 653,552 -
-------------------------------------
1,187,068,395 474,032,125
-------------------------------------
SHAREHOLDERS' EQUITY
Capital stock (note 8) 35,193 37,164
Contributed surplus (note 8) 351,893,807 371,600,636
Accumulated other comprehensive income 2,132,591 2,978,377
Retained (deficit) earnings (332,753,451) 278,795,415
-------------------------------------
21,308,140 653,411,592
-------------------------------------
1,208,376,535 1,127,443,717
=====================================
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, 2004 AND 2003
----------------------------------------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004 2003
$ $ $
------------------------------------------------------
REVENUES
Gross premiums written 518,811,790 521,031,407 523,178,240
------------------------------------------------------
Net premiums written 518,811,790 521,031,407 523,178,240
Net change in unearned premiums 36,220,238 (14,034,538) (68,427,525)
------------------------------------------------------
Net premiums earned 555,032,028 506,996,869 454,750,715
Net investment income 34,531,532 25,373,016 20,897,961
Net realized (losses) gains on investments (16,882,643) 1,005,365 5,130,298
------------------------------------------------------
TOTAL REVENUES 572,680,917 533,375,250 480,778,974
======================================================
EXPENSES
Losses and loss expenses (note 4) 1,026,331,103 296,732,651 104,344,698
Commissions 128,348,583 160,686,894 165,860,912
Premium taxes and fees 4,341,284 4,419,724 4,141,391
Other underwriting expenses 7,882,461 3,070,531 3,629,805
General and administrative expenses 2,383,140 2,336,496 2,059,983
------------------------------------------------------
TOTAL EXPENSES 1,169,286,571 467,246,296 280,036,789
======================================================
NET (LOSS) INCOME FOR THE YEAR (596,605,654) 66,128,954 200,742,185
======================================================
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, 2004 AND 2003
------------------------------------------------------------------------------------------------------------------------------------
(expressed in U.S. dollars)
ADDITIONAL ACCUMULATED OTHER RETAINED TOTAL
COMMON VOTING PAID-IN COMPREHENSIVE EARNINGS SHAREHOLDERS'
SHARES CAPITAL INCOME (DEFICIT) EQUITY
$ $ $ $ $
-------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 51,000 509,949,000 16,105,280 96,546,677 622,651,957
Net income for the year - - - 200,742,185 200,742,185
Change in unrealized depreciation
on marketable investments - - (4,589,630) - (4,589,630)
Repurchase of common voting
shares (7,143) (71,421,457) - (28,571,395) (99,999,995)
------------------------------------------------------------------------------------------
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, 2004 AND 2003
----------------------------------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004 2003
$ $ $
------------------------------------------------------
NET (LOSS) INCOME FOR THE YEAR (596,605,654) 66,128,954 200,742,185
OTHER COMPREHENSIVE LOSS
Change in unrealized depreciation on marketable
investments (845,786) (8,537,273) (4,589,630)
------------------------------------------------------
COMPREHENSIVE (LOSS) INCOME FOR THE YEAR (597,451,440) 57,591,681 196,152,555
======================================================
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, 2004 AND 2003
-------------------------------------------------------------------------------------------------------------------------------
(expressed in U.S. dollars)
2005 2004 2003
$ $ $
-------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income for the year (596,605,654) 66,128,954 200,742,185
Adjustments to reconcile net (loss) income to net cash provided
by operating activities
Loss (gain) on sale of investments 16,882,643 (1,005,365) (5,130,298)
Net amortization of premium on fixed maturities 2,324,210 5,337,495 5,936,259
Investment income accrued (266,549) (894,718) (1,682,462)
Accounts and premiums receivable (24,663,081) (11,959,972) (90,968,391)
Deferred acquisition costs 12,946,436 (1,673,918) (23,414,237)
Other assets (80,833) (29,379) (101,330)
Loss and loss adjustment expense reserves 724,972,054 186,704,587 69,609,547
Unearned premiums (36,220,238) 14,034,537 68,427,523
Accounts payable and accrued expenses 129,047 (166,368) 10,019
Advisory fees payable (9,238,385) (31,259,124) 21,847,079
-------------------------------------------------------
Cash provided by operating activities 90,179,650 225,216,729 245,275,894
-------------------------------------------------------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of investments (911,493,880) (698,087,800) (735,713,760)
Proceeds from sales of investments (net of investments
trade pending) 830,894,757 610,701,636 562,364,699
-------------------------------------------------------
Cash used in investing activities (80,599,123) (87,386,164) (173,349,061)
-------------------------------------------------------
CASH FLOWS FOR FINANCING ACTIVITIES
Repurchase of common shares (34,652,012) (122,984,606) (99,999,995)
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) (99,999,995)
-------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,887,674 14,845,959 (28,073,162)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 50,929,556 36,083,597 64,156,759
-------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR 57,817,230 50,929,556 36,083,597
=======================================================
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, 2004 AND 2003
--------------------------------------------------------------------------------
(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.
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.
(1)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
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.
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.
(2)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
(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
GROSS UNREALIZED 2005
COST OR GROSS LOSS ESTIMATED
AMORTIZED COST UNREALIZED GAIN $ FAIR 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, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
GROSS 2004
COST OR GROSS UNREALIZED ESTIMATED
AMORTIZED COST UNREALIZED GAIN LOSS FAIR VALUE
$ $ $ $
-----------------------------------------------------------------------------
U.S. Government 146,969,861 1,605,351 1,125,641 147,449,571
U.S. Government-Sponsored
Enterprises 347,715,100 1,919,481 762,368 348,872,213
Corporate 300,062,897 2,729,585 1,180,976 301,611,506
Mortgage-backed securities 41,412,724 23,962 231,017 41,205,669
-----------------------------------------------------------------------------
836,160,582 6,278,379 3,300,002 839,138,959
-----------------------------------------------------------------------------
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% and 1.6% of total fixed interest
securities as of December 31, 2005 and 2004, respectively.
The following table sets forth certain information regarding the
investment ratings of the company's fixed interest securities
portfolio as of December 31, 2005 and 2004.
2005 2004
------------------------------------ ----------------------------------
RATINGS AMORTIZED % AMORTIZED %
COST COST
$ $
--------------------------------------------------------------------------
U.S. Government 120,498,280 14 146,969,861 18
U.S. Government-Sponsored Enterprises 369,580,139 41 347,715,100 41
AAA 132,929,361 15 64,265,227 8
AA 53,027,563 6 45,157,940 5
A 178,350,334 20 227,941,843 27
BBB 38,131,103 4 4,110,611 1
--------------------------------------------------------------------------
892,516,780 100 836,160,582 100
--------------------------------------------------------------------------
(4)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
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 FAIR
COST 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
-------------------------------------
The components of net investment income are as follows:
2005 2004 2003
$ $ $
------------------------------------------------------
Interest on fixed maturities 37,085,044 30,403,659 27,758,971
Net amortization of premium on fixed maturities (2,324,210) (5,337,495) (5,936,259)
Interest on cash and cash equivalents 749,044 1,047,368 557,713
------------------------------------------------------
35,509,878 26,113,532 22,380,425
Net investment expenses (978,346) (740,516) (1,482,464)
------------------------------------------------------
34,531,532 25,373,016 20,897,961
------------------------------------------------------
During 2005, 2004 and 2003, proceeds from sales of available-for-sale
securities were $835,930,827, $610,701,636 and $564,819,740
respectively. Gross realized gains were $1,217,826, $2,990,444 and
$5,548,574 and gross realized losses were $18,100,469, $1,985,079 and
$418,276 for the years ended December 31, 2005, 2004 and 2003
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 and 2003 the annual rate was 0.1% and 0.2%
respectively.
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 $2,840,794 and investments of
$752,348,653 and $287,839,361 in trusts, as of December 31, 2005 and
2004, respectively, 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
(5)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
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:
2005 2004
$ $
-----------------------------------------
BALANCE - BEGINNING OF YEAR 301,021,728 114,317,141
-----------------------------------------
Net claims and claims expenses incurred for the year related to:
Current year 987,678,228 306,534,301
Prior year 38,652,875 (9,801,650)
-----------------------------------------
1,026,331,103 296,732,651
-----------------------------------------
Net paid claims and claims expenses for the year related to:
Current year 89,881,651 38,156,364
Prior year 211,477,398 71,871,700
-----------------------------------------
301,359,049 110,028,064
-----------------------------------------
BALANCE - END OF YEAR 1,025,993,782 301,021,728
=========================================
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 and 2004 year end balance is comprised of provisions
for reported claims of $676,149,004 and $115,474,945 and provisions for
claims incurred but not reported of $349,844,778 and $185,546,783,
respectively.
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)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
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 and December 31, 2004 the
total amount of the underwriting loss applicable to the advisory agreements
was $576,764,961 and $0 respectively.
7. MAJOR CUSTOMERS
During the years ended December 31, 2005, 2004 and 2003, the Company
derived 75%, 86% and 90%, 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 and 2003, the Company derived 11%, 9% and 8%
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 years ended December 31, 2005 and 2004 were amounts of
$148,335,494 and $166,798,822, respectively, due from Folksamerica
and $31,444,740 and $5,613,406 respectively from Sirius.
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 and 2004, the total issued and outstanding common
shares of the Company were 3,519,289 and 3,716,378, respectively, 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.
(7)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
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.
Olympus Re exceeded the minimum solvency margin as at December 31, 2004 and
2003.
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 years ended December 31, 2005, 2004 and 2003.
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.
(8)
OLYMPUS RE HOLDINGS, LTD.
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
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.
(9)
EAGLEROCK CAPITAL PARTNERS (QP), LP
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2005
EAGLEROCK CAPITAL PARTNERS (QP), LP
================================================================================
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2005
1
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 10-13
EAGLEROCK MASTER FUND, LP 14
INDEPENDENT AUDITORS' REPORT 15
FINANCIAL STATEMENTS:
Statements of assets and liabilities 16
Condensed schedule of investments - December 31, 2005 17-23
Condensed schedule of investments - December 31, 2004 24-29
Statements of operations 30
Statements of changes in partners' capital 31
Statements of changes in net assets 32
Summary of business and significant accounting policies 33-36
Notes to financial statements 37-40
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,
2005 and 2004, 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, 2005. 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.
As more fully discussed in Note 3(b), pursuant to the terms of its agreements
with its limited partners and assuming the General Partner enters no agreements
to the contrary going forward, the interests of the existing limited partners of
EagleRock Capital Partners (QP), LP will be redeemed in 2006.
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, 2005 and 2004, 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, 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
New York, New York
February 17, 2006
3
EAGLEROCK CAPITAL PARTNERS (QP), LP
STATEMENTS OF ASSETS AND LIABILITIES
=====================================================================================================================
December 31, 2005 2004
---------------------------------------------------------------------------------------------------------------------
ASSETS
Investment in EagleRock Master Fund, LP $122,938,768 $163,520,126
Cash 556 556
Other assets 4,766 -
---------------------------------------------------------------------------------------------------------------------
122,944,090 163,520,682
LIABILITIES
Capital withdrawal payable (Note 3(a)) 1,805,269 -
Due to EagleRock Master Fund, LP (Note 2) - 1,974,347
----------------------------------------------------------------------------------------------------------------------
NET ASSETS (PARTNERS' CAPITAL) (NOTE 3) $121,138,821 $161,546,335
======================================================================================================================
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, 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
INVESTMENT (LOSS) INCOME:
Net investment (loss) income allocated from
EagleRock Master Fund, LP:
Interest $ 7,019,216 $ 4,326,725 $ 4,401,712
Dividends 942,273 1,024,367 2,020,980
Expenses (10,675,122) (7,186,079) (4,281,435)
---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT (LOSS) INCOME FROM (2,713,633) (1,834,987) 2,141,257
EAGLEROCK MASTER FUND, LP
Interest income - 556 -
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT (LOSS) INCOME (2,713,633) (1,834,431) 2,141,257
---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2) 1,501,405 1,068,296 584,522
Other 4,400 - -
---------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,505,805 1,068,296 584,522
---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT (LOSS) INCOME (4,219,438) (2,902,727) 1,556,735
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
ALLOCATED FROM EAGLEROCK MASTER FUND, LP:
Net realized gain on investments 6,012,886 5,606,973 9,686,036
Net change in unrealized gain on investments (40,395,693) 37,703,722 44,227,782
---------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (NOTE 1) $(38,602,245) $40,407,968 $55,470,553
=====================================================================================================================
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, 2005
---------------------------------------------------------------------------------------------------------------------
General Limited
partner partners (Note 3(b)) Total
---------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 $ 885,194 $ 45,515,172 $ 46,400,366
Net income (Note 1):
Pro rata allocation 1,074,563 54,395,990 55,470,553
Performance allocation 4,991,114 (4,991,114) -
Profit participation allocation (521,806) 521,806 -
---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 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
=====================================================================================================================
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, 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment (loss) income $ (4,219,438) $ (2,902,727) $ 1,556,735
Net realized gain on investments 6,012,886 5,606,973 9,686,036
Net change in unrealized gain on investments (40,395,693) 37,703,722 44,227,782
---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN NET ASSETS (38,602,245) 40,407,968 55,470,553
RESULTING FROM OPERATIONS
---------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS FROM CAPITAL
TRANSACTIONS:
Capital contributions - 23,000,000 -
Capital withdrawals (1,805,269) (3,732,552) -
---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM CAPITAL TRANSACTIONS (1,805,269) 19,267,448 -
---------------------------------------------------------------------------------------------------------------------
TOTAL (DECREASE) INCREASE (40,407,514) 59,675,416 55,470,553
NET ASSETS, BEGINNING OF YEAR 161,546,335 101,870,919 46,400,366
---------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $121,138,821 $161,546,335 $101,870,919
=====================================================================================================================
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 a significant portion 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.
As more fully discussed in Note 3(b), pursuant to the terms
of its agreements with its limited partners and assuming the
General Partner enters no agreements to the contrary going
forward, the interests of the existing limited partners of
the Partnership will be redeemed in 2006.
SIGNIFICANT
ACCOUNTING
POLICIES INVESTMENT IN EAGLEROCK MASTER FUND, LP
The investment in the Master Fund is accounted for under the
equity method, which reflects 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, 2005 and 2004 was
approximately 65% and 72%, 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.
9
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. ALLOCATION OF NET
INCOME (LOSS) AND
PERFORMANCE
ALLOCATION
AND PROFIT
PARTICIPATION
ALLOCATION The net income (loss) for the three years ended December 31,
2005 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.
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, waive or alter
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 years ended December 31, 2004
and 2003, the performance allocation was $4,427,330 and
$4,991,114, respectively. There was no performance
allocation for the year ended December 31, 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"). Prior to June 1, 2003, the
limited partner was entitled to 5% of any performance
allocation paid to the General Partner by the Partnership.
The General Partner may, at its discretion, increase this
fee. For the years ended December 31, 2004 and 2003, the
Profit Participation Allocation was $581,663 and $521,806,
respectively. There was no profit participation allocation
for the year ended December 31, 2005.
10
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. DUE TO EAGLEROCK
MASTER FUND, L.P. MANAGEMENT FEES
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% 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% of
the capital account balance of the limited partner
as of the close of the preceding quarter. For the
years ended December 31, 2005, 2004 and 2003, the
Partnership's management fees were $1,501,405,
$1,068,296 and $584,522, respectively. As of
December 31, 2005 and 2004 an aggregate amount of
$0 and $1,974,347 was due to the Master Fund.
3. CAPITAL TRANSACTIONS (a) CAPITAL WITHDRAWAL PAYABLE
As of December 31, 2005, $1,805,269 was
payable to a limited partner for a
capital withdrawal and was paid during
January 2006.
11
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
(b) SUBSEQUENT CAPITAL TRANSACTIONS
Pursuant to the terms of its agreements
with its limited partners, the General
Partner began to redeem the interests of
the existing limited partners of the
Partnership during the first quarter of
2006. During the period January 1 to
February 17, 2006, the General Partner
made redemption payments totaling
approximately $18 million to the limited
partners. Pursuant to the terms of its
agreements with its limited partners,
the General Partner intends to make
payments in respect of the remaining
approximately $93 million to the limited
partners on a quarterly basis. Until the
limited partners' interests are redeemed
in full, the Partnership's capital
remains invested at the discretion of
the General Partner.
4. FINANCIAL HIGHLIGHTS The financial highlights table represents the
Partnership's financial performance for the three
years ended December 31, 2005 are as follows:
Limited partner 2005 2004 2003
--------------------------------------------------------------------------------
Total return before performance
allocation and profit
participation allocation (23.96)% 34.11% 119.51%
Performance allocation, net of
profit participation allocation - (3.45) (9.82)
--------------------------------------------------------------------------------
Total return after performance
allocation and profit
participation allocation (a) (23.96)% 30.66% 109.69%
================================================================================
Operating expense ratio (b) 3.23% 3.19% 4.33%
Performance allocation, net of
profit participation allocation - 3.45 9.82
--------------------------------------------------------------------------------
Total expenses and performance
allocation, net of profit
participation allocation 3.23% 6.64% 14.15%
================================================================================
Net investment (loss) income
ratio (c) (3.02)% (2.60)% 3.33%
================================================================================
12
EAGLEROCK CAPITAL PARTNERS (QP), LP
NOTES TO FINANCIAL STATEMENTS
================================================================================
__________________
The financial highlights are calculated based on the following
criteria:
(a) Total return is computed based on the change in value during the
year of a theoretical investment made at the beginning of the
year. The total return is shown net of operating expenses,
management fees and the performance allocation, net of profit
participation allocation.
An individual partner's return may vary from the above returns
based on different management fee and performance arrangements
and the timing of capital transactions.
(b) The operating expense ratio is calculated by dividing the total
operating expenses by the average net assets of a theoretical
investment made at the beginning of the year. The operating
expense ratio is based on the expenses allocated to each limited
partner prior to the effects of any performance allocation, net
of profit participation allocation.
The expense ratios attributable to an individual partner's
account may vary based on different management fee and
performance arrangements and the timing of capital transactions.
(c) The net investment (loss) income ratio is calculated by dividing
the net investment (loss) income by the average net assets of a
theoretical investment made at the beginning of year. The net
investment (loss) income ratio is based on the net investment
income allocated to a limited partner prior to the effects of a
performance allocation, net of profit participation allocation.
The net investment (loss) income ratio attributable to an
individual partner's account may vary based on different
management fee and performance arrangements and based on timing
of capital transactions.
13
EAGLEROCK MASTER FUND, LP
================================================================================
FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2005
14
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, 2005 and 2004, 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, 2005. 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.
As more fully discussed in Note 6, and pursuant to agreements with existing
limited partners of its Feeder Funds, a significant portion of the interests of
the existing limited partners in its Feeder Funds will be redeemed. The
Partnership commenced making such redemption payments in the first quarter of
2006.
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, 2005 and 2004, 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, 2005, in conformity with accounting principles
generally accepted in the United States of America.
BDO Seidman, LLP
New York, New York
February 17, 2006
15
EAGLEROCK MASTER FUND, LP
STATEMENTS OF ASSETS AND LIABILITIES
(EXPRESSED IN US DOLLARS)
=====================================================================================================================
December 31, 2005 2004
---------------------------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at fair value (cost $299,102,075 and
$377,657,524) (Notes 1 and 5) $326,074,156 $468,825,344
Investment in securities pledged to counterparty, at fair value (cost
$18,049,368 and $-0-) (Notes 1, 4 and 5) 17,866,699 -
Dividends and interest receivable 657,016 1,144,386
Due from affiliates (Note 3) - 2,302,938
Other - 9,166
---------------------------------------------------------------------------------------------------------------------
344,597,871 472,281,834
---------------------------------------------------------------------------------------------------------------------
LIABILITIES
Securities sold, not yet purchased, at fair value (proceeds
$138,444,811 and $81,968,106) (Notes 1 and 5) 133,421,837 79,791,970
Unrealized loss on open swap contracts (Notes 1 and 5) 871,148 -
Due to brokers, net (Note 1) 19,344,126 165,062,685
Dividends and interest payable 1,276,936 1,013,698
Accrued expenses and other liabilities (Note 3) 20,000 72,065
---------------------------------------------------------------------------------------------------------------------
154,934,047 245,940,418
---------------------------------------------------------------------------------------------------------------------
CONTINGENCY (NOTE 7)
NET ASSETS (PARTNERS' CAPITAL) (NOTE 6) $189,663,824 $226,341,416
=====================================================================================================================
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, 2005
-------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face 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 & death care 3.10 5,888,703
Housing .35 666,248
Index 3.24 6,146,436
Media, entertainment & leisure:
754,744 World Wrestling 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 & 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
Semis 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 STATES
(COST $227,046,587) 126.03 239,027,370
====================================================================================================================
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, 2005
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $189,663,824 Fair value
---------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (CONTINUED):
Common stock (continued):
Bermuda:
Telecommunications .08% $ 150,794
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - BERMUDA
(COST $153,086) .08 150,794
---------------------------------------------------------------------------------------------------------------------
Canada:
Energy .03 60,236
Software .02 45,360
Transportation and defense .16 295,723
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - CANADA
(COST $420,605) .21 401,319
---------------------------------------------------------------------------------------------------------------------
England:
Telecommunications 3.03 5,755,826
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - ENGLAND
(COST $1,895,474) 3.03 5,755,826
---------------------------------------------------------------------------------------------------------------------
France:
Chemicals .17 326,345
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - FRANCE
(COST $148,620) .17 326,345
---------------------------------------------------------------------------------------------------------------------
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
(COST $6,486,204) 2.64 4,995,173
---------------------------------------------------------------------------------------------------------------------
South Africa:
Mining and metals .44 825,613
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - SOUTH AFRICA
(COST $700,163) .44 825,613
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (COST $237,449,434) 132.77 251,813,540
=====================================================================================================================
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, 2005
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face 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 10% 12/1/04 Sr Nts 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 SECURITIES -
BERMUDA (COST $1,350,006) 1.73 3,275,250
---------------------------------------------------------------------------------------------------------------------
England:
Automotive .76 1,445,000
Telecommunications 2.67 5,059,672
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
ENGLAND (COST $6,686,967) 3.43 6,504,672
=====================================================================================================================
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, 2005
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face 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 SECURITIES - 1.20 2,278,943
MEXICO (COST $1,654,435)
----------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES
(COST $69,018,838) 39.26 74,453,248
----------------------------------------------------------------------------------------------------------------------
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 (COST $8,703,602) 8.47 16,056,293
----------------------------------------------------------------------------------------------------------------------
Options purchased (cost $1,979,569):
United States .83 1,617,774
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST $317,151,443) 181.33% $343,940,855
======================================================================================================================
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, 2005
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face 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
(PROCEEDS $279,130) .16 295,723
---------------------------------------------------------------------------------------------------------------------
England:
Telecommunications 2.29 4,343,345
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - ENGLAND
(PROCEEDS $4,024,423) 2.29 4,343,345
---------------------------------------------------------------------------------------------------------------------
Germany:
Food packaging .15 291,632
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - GERMANY
(PROCEEDS $299,456) .15 291,632
---------------------------------------------------------------------------------------------------------------------
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.
21
EAGLEROCK MASTER FUND, LP
CONDENSED SCHEDULE OF INVESTMENTS
(EXPRESSED IN US DOLLARS)
=====================================================================================================================
December 31, 2005
--------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face 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 (PROCEEDS $1,973,982) 1.08 2,044,250
--------------------------------------------------------------------------------------------------------------------
Options written:
United States .61 1,136,123
--------------------------------------------------------------------------------------------------------------------
TOTAL OPTIONS WRITTEN (PROCEEDS $1,066,836) .61 1,136,123
--------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD, NOT YET PURCHASED 70.36% $133,421,837
(PROCEEDS $138,444,811)
=====================================================================================================================
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, 2005
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $189,663,824 Fair value
---------------------------------------------------------------------------------------------------------------------
UNREALIZED LOSS ON OPEN SWAP CONTRACTS:
Credit default swaps .46% $ 871,148
---------------------------------------------------------------------------------------------------------------------
TOTAL UNREALIZED LOSS ON OPEN SWAP .46% $ 871,148
CONTRACTS
=====================================================================================================================
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, 2004
----------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $226,341,416 Fair value
----------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES:
Common stock:
United States:
Building materials .51% $ 1,161,807
Business services 2.48 5,627,465
Capital equipment 8.62 19,525,136
Chemicals:
10,702,820 Solutia Inc. 5.53 12,522,299
Other .68 1,529,712
Consumer products:
2,831,639 Interstate Bakeries Corp. 8.01 18,122,490
Other 7.35 16,637,751
Electronics 6.82 15,428,788
Energy 2.99 6,777,288
Financial services 4.33 9,791,463
Food processing:
4,267,101 Darling International Inc. 8.22 18,604,560
Other 0.00 2,306
Health & death care 5.99 13,550,291
Index .05 110,396
Media, entertainment & leisure 8.72 19,743,377
Mining and metals 2.78 6,301,479
Packaging and containers:
2,363,801 Constar International Inc. 8.06 18,248,544
Other .45 1,008,018
Pharmaceuticals .60 1,366,558
Retail 9.47 21,440,736
Software 16.06 36,347,918
Telecommunications 8.05 18,211,070
Transportation and defense 3.87 8,749,027
Utilities 4.15 9,387,387
Wireless Communications 4.11 9,299,492
----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - UNITED STATES
(COST $229,389,463) 127.90 289,495,358
======================================================================================================================
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, 2004
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $226,341,416 Fair value
---------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (CONTINUED):
Common stock (continued):
Canada:
Transportation and defense .12% $ 267,653
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - CANADA
(COST $150,554) .12 267,653
---------------------------------------------------------------------------------------------------------------------
China:
Software 1.40 3,172,433
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - CHINA
(COST $3,156,229) 1.40 3,172,433
---------------------------------------------------------------------------------------------------------------------
England:
Telecommunications .07 160,844
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - ENGLAND
(COST $229,485) .07 160,844
---------------------------------------------------------------------------------------------------------------------
France:
Chemicals .41 936,249
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - FRANCE
(COST $474,997) .41 936,249
---------------------------------------------------------------------------------------------------------------------
Germany:
Financial services .68 1,543,000
Health & death care .04 83,525
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - GERMANY
(COST $1,489,915) .72 1,626,525
---------------------------------------------------------------------------------------------------------------------
Mexico:
Media, entertainment & leisure .08 191,208
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - MEXICO
(COST $178,388) .08 191,208
---------------------------------------------------------------------------------------------------------------------
Norway:
Energy .26 578,516
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - NORWAY
(COST $201,021) .26 578,516
---------------------------------------------------------------------------------------------------------------------
Russia:
Energy .56 1,262,055
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - RUSSIA (COST .56 1,262,055
$1,346,876)
=====================================================================================================================
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, 2004
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $226,341,416 Fair value
---------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (CONTINUED):
Common stock (continued):
South Africa:
Mining and metals .96% $ 2,167,776
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - SOUTH AFRICA
(COST $2,328,853) .96 2,167,776
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK (COST $238,945,781) 132.48 299,858,617
---------------------------------------------------------------------------------------------------------------------
Long-term debt securities:
United States:
Building materials 1.03 2,329,875
Business services 1.49 3,380,600
Capital equipment 1.01 2,281,250
Chemicals .96 2,187,000
Consumer products .97 2,212,825
Electronics .46 1,057,500
Energy .83 1,870,750
Financial services 2.35 5,329,750
Index .40 900,000
Media, entertainment & leisure 9.53 21,557,505
Mining and metals:
26,100,000 WCI Steel Inc 10% 12/1/04 Sr Nts 8.65 19,575,000
Other 2.68 6,073,913
Packaging and containers 3.03 6,861,000
Pharmaceuticals .33 740,000
Retail 1.45 3,270,306
Telecommunications 2.55 5,767,215
Transportation and defense:
30,225,000 Delta Airlines 8.3% 12/15/29 6.01 13,601,250
Other 3.23 7,298,638
Utilities 8.52 19,278,000
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
UNITED STATES (COST $98,068,993) 55.48 125,572,377
=====================================================================================================================
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, 2004
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $226,341,416 Fair value
---------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (CONTINUED):
Long-term debt securities (continued):
Bermuda:
Telecommunications 3.60% $ 8,144,900
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
BERMUDA (COST $8,224,170) 3.60 8,144,900
---------------------------------------------------------------------------------------------------------------------
England:
Automotive .85 1,929,375
Telecommunications .02 50,000
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
ENGLAND (COST $1,236,855) .87 1,979,375
---------------------------------------------------------------------------------------------------------------------
Italy:
Consumer products 2.27 5,126,585
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
ITALY (COST $11,532,266) 2.27 5,126,585
---------------------------------------------------------------------------------------------------------------------
Mexico:
Wireless communications .78 1,778,688
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
MEXICO (COST $1,654,435) .78 1,778,688
---------------------------------------------------------------------------------------------------------------------
Norway:
Energy 1.08 2,435,543
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES -
NORWAY (COST $1,356,611) 1.08 2,435,543
---------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES
(COST $122,073,330) 64.08 145,037,468
---------------------------------------------------------------------------------------------------------------------
Preferred stock:
United States:
Building materials 2.86 6,480,000
Consumer products .11 243,000
Electronics 1.22 2,750,000
Financial services .61 1,378,000
Media, entertainment & leisure 1.43 3,235,255
Packaging and containers .65 1,483,920
Transportation and defense .28 648,659
Utilities .16 352,568
---------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (COST $8,322,031) 7.32 16,571,402
---------------------------------------------------------------------------------------------------------------------
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, 2004
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $226,341,416 Fair value
---------------------------------------------------------------------------------------------------------------------
INVESTMENTS IN SECURITIES (CONTINUED):
Options purchased (cost $8,316,382):
United States 3.25% $ 7,357,857
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST $377,657,524) 207.13% $468,825,344
=====================================================================================================================
SECURITIES SOLD NOT YET PURCHASED:
Common stock:
United States:
Automotive .30% $ 674,610
Capital equipment 1.52 3,447,267
Chemicals .72 1,619,352
Consumer products .35 789,654
Electronics .74 1,671,917
Energy .56 1,281,500
Financial services 1.14 2,571,204
Health & death care .15 340,800
Index .01 12,821
Mining and metals 1.14 2,589,750
Pharmaceuticals .78 1,757,610
Retail .69 1,559,000
Software .02 34,842
Telecommunications .03 77,412
Transportation and defense .04 95,563
---------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK - UNITED STATES
(PROCEEDS $18,421,290) 8.19 18,523,302
---------------------------------------------------------------------------------------------------------------------
Preferred stock:
United States:
Building Materials .80 1,800,000
---------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK (PROCEEDS $1,990,073) .80 1,800,000
=====================================================================================================================
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, 2004
---------------------------------------------------------------------------------------------------------------------
Number of % of net assets of
shares/face Description $226,341,416 Fair value
---------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD, NOT YET PURCHASED (CONTINUED):
Long-term debt securities:
United States:
Automotive 3.64% $ 8,240,940
Capital equipment 3.24 7,325,750
Chemicals 2.30 5,197,500
Consumer products 2.11 4,767,750
Energy .09 194,250
Financial services .88 1,998,000
Mining and metals 6.24 14,120,250
Packaging and containers 4.06 9,189,188
Retail .46 1,045,000
Transportation and defense 1.68 3,810,125
Utilities .67 1,525,000
--------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT SECURITIES
(PROCEEDS $58,666,374) 25.37 57,413,753
---------------------------------------------------------------------------------------------------------------------
Options written (proceeds $2,890,369):
United States: .91 2,054,915
---------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES SOLD, NOT YET PURCHASED
(PROCEEDS $81,968,106) 35.27% $ 79,791,970
=====================================================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
29
EAGLEROCK MASTER FUND, LP
STATEMENTS OF OPERATIONS
(EXPRESSED IN US DOLLARS)
=====================================================================================================================
Year ended December 31, 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 10,899,042 $ 5,053,958 $ 4,615,738
Dividends, net of withholding taxes 1,282,542 1,159,591 2,119,247
---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 12,181,584 6,213,549 6,734,985
---------------------------------------------------------------------------------------------------------------------
EXPENSES:
Interest on securities sold, not yet purchased 11,536,812 4,526,696 2,449,318
Margin interest 1,975,739 2,486,380 1,357,321
Dividends on securities sold, not yet purchased 425,658 900,263 557,251
Other (Note 4) 2,586,283 473,715 125,723
---------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 16,524,492 8,387,054 4,489,613
---------------------------------------------------------------------------------------------------------------------
NET INVESTMENT (LOSS) INCOME (4,342,908) (2,173,505) 2,245,372
NET REALIZED GAIN ON INVESTMENTS 10,430,167 4,381,952 10,157,003
NET CHANGE IN UNREALIZED GAIN ON INVESTMENTS (62,562,860) 52,979,588 46,378,281
---------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (NOTE 2) $(56,475,601) $55,188,035 $58,780,656
=====================================================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
30
EAGLEROCK MASTER FUND, LP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(EXPRESSED IN US DOLLARS)
===================================================================================================================================
Three years ended December 31, 2005
-----------------------------------------------------------------------------------------------------------------------------------
EagleRock EagleRock EagleRock Capital
Capital Capital Partners Offshore
Partners QP, L.P. Partners, L.P. Fund, Ltd. Total
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 $46,721,895 $ 352,723 $ $ 47,074,618
Capital contributions - 6,800,000 - 6,800,000
Capital withdrawals - (48,935) - (48,935)
Net income (Note 2):
Pro rata allocation 56,055,075 2,725,581 - 58,780,656
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 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 (NOTE 6) $122,938,768 $22,470,106 $44,254,950 $189,663,824
===================================================================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
31
EAGLEROCK MASTER FUND, LP
STATEMENTS OF CHANGES IN NET ASSETS
(EXPRESSED IN US DOLLARS)
=====================================================================================================================
Year ended December 31, 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment (loss) income $ (4,342,908) $ (2,173,505) $ 2,245,372
Net realized gain on investments 10,430,167 4,381,952 10,157,003
Net change in unrealized gain on investments (62,562,860) 52,979,588 46,378,281
---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS (56,475,601) 55,188,035 58,780,656
---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) 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 6,800,000
Capital withdrawals (21,401,991) (3,732,552) (48,935)
---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
CAPITAL TRANSACTIONS 19,798,009 58,547,042 6,751,065
---------------------------------------------------------------------------------------------------------------------
TOTAL (DECREASE) INCREASE (36,677,592) 113,735,077 65,531,721
NET ASSETS, BEGINNING OF YEAR 226,341,416 112,606,339 47,074,618
---------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR $189,663,824 $226,341,416 $112,606,339
---------------------------------------------------------------------------------------------------------------------
See accompanying summary of business and significant accounting policies
and notes to financial statements.
32
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") are all entities under common
control and are the general and limited partners of the
Partnership. Mariel Capital Management, LLC is also a
general partner of the Partnership and had no capital
balance at December 31, 2005 and December 31, 2004.
As more fully discussed in Note 6, and pursuant to
agreements with existing limited partners of its Feeder
Funds, a significant portion of the interests of the
existing limited partners in its Feeder Funds will be
redeemed. The Partnership commenced making such redemption
payments in the first quarter of 2006.
SIGNIFICANT
ACCOUNTING
POLICIES BASIS OF PRESENTATION
The financial statements are presented in United States
("U.S.") dollars in accordance with accounting principles
generally accepted in the United States of America.
33
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
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.
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.
34
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.
CREDIT DEFAULT SWAPS
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.
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.
35
EAGLEROCK MASTER FUND, LP
SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(EXPRESSED IN US DOLLARS)
================================================================================
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.
36
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
1. BROKERAGE AGREEMENTS The Partnership has agreements with brokerage
firms 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 short.
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 NET The net income (loss) is allocated to each partner
INCOME (LOSS) 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
year.
3. MANAGEMENT FEES EagleRock Capital Management, LLC ("Investment
Manager") serves as the Investment Manager of the
Partnership. The Partnership pays a quarterly
management fee on behalf of its three Feeder
Funds. As of December 31, 2004, due from these
affiliates was $2,302,938 and was reimbursed by
the Feeder Funds in the form of a capital
withdrawal during January 2005. In addition, the
Partnership has a payable to the Investment
Manager of $-0- and $28,686 as of December 31,
2005 and 2004, respectively which is included in
accrued expenses and other liabilities. During the
year ended December 31, 2005, the Partnership paid
the 2005 management fee and was reimbursed by the
Feeder Funds in the form of a capital withdrawal
which amounted to $2,898,515.
37
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
4. INVESTMENTS IN Under Statement of Financial Accounting Standards
SECURITIES PLEDGED TO ("SFAS") No. 140, "Accounting for Transfers and
COUNTERPARTY Servicing of Financial Assets and Extinguishments
of Liabilities," the Partnership is required to
disclose the fair value of securities and cash
held at the broker that have been pledged. The
Partnership has entered into certain stock borrow
agreements to cover securities sold, not yet
purchased positions. At December 31, 2005, the
Partnership has also pledged $17,866,699 of
investments in securities related to stock borrow
transactions. For the years ended December 31,
2005, 2004 and 2003, stock borrow fees charged by
the broker amounted to $2,588,754, $636,581 and
$134,528, respectively, and are included in other
expenses.
5. FINANCIAL INSTRUMENTS The Partnership invests in marketable securities
WITH OFF-BALANCE SHEET and is exposed to market risks resulting from
RISK changes in the fair value of 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, 2005 and 2004
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 owned and securities sold, not yet
purchased include $32,633,954 and $22,663,677 of
identical securities held both long and short at
December 31, 2005 and 2004, respectively.
38
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
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. SUBSEQUENT CAPITAL Pursuant to the terms of its agreements with the
TRANSACTIONS existing limited partners of its Feeder Funds, the
Partnership has begun to redeem a significant
portion of the limited partners' interests in two
of its Feeder Funds. During the period January 1
to February 17, 2006, the Partnership paid
approximately $25 million of such limited
partners' interests. Absent agreement to the
contrary between the General Partner and such
limited partners, the Partnership intends to make
quarterly payments aggregating approximately $117
million to such limited partners.
7. CONTINGENCY The Partnership and its affiliates are involved in
a legal action arising in the ordinary course of
business. Management believes the ultimate
resolution of such legal action would not have a
material adverse effect on the financial
statements of the Partnership.
8. FINANCIAL HIGHLIGHTS The financial highlights table represents the
Partnership's financial performance for the three
years ended December 31, 2005 are as follows:
Partner 2005 2004 2003
--------------------------------------------------------------------------------
Total return (a) (23.13)% 34.99% 120.81%
================================================================================
Operating expense ratio (b) 2.06% 2.17% 3.05%
================================================================================
Net investment (loss) income
ratio (c) (1.96)% (1.60)% 7.66%
================================================================================
39
EAGLEROCK MASTER FUND, LP
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
================================================================================
--------------
The financial highlights are calculated based on
the following criteria:
(a) Total return is computed based on the change in
value during the year of a theoretical investment
made at the beginning of the year. The total
return is shown net of operating expenses. There
is no performance fee allocated to the
Partnership.
An individual partner's return may vary from the
above returns based on different fee arrangements
and the timing of capital transactions.
(b) The operating expense ratio is calculated by
dividing the total operating expenses by the
average net assets of a theoretical investment
made at the beginning of the year. The operating
expense ratio is based on the expenses allocated
to each limited partner. For the purpose of this
calculation, expenses do not include dividend and
interest expense on securities sold, not yet
purchased.
The expense ratios attributable to an individual
partner's account may vary based on different fee
arrangements and the timing of capital
transactions.
(c) The net investment (loss) income ratio is
calculated by dividing the net investment income
by the average net assets of a theoretical
investment made at the beginning of year. The net
investment (loss) income ratio is based on the net
investment (loss) income allocated to a limited
partner.
The net investment (loss) income ratio
attributable to an individual partner's account
may vary based on different fee arrangements and
timing of capital transactions.
40
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