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