Document:

Exhibit 4.3

 

FORM
OF GLOBAL NOTE

 

UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC, ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.

 

UNLESS AND UNTIL THIS CERTIFICATE IS EXCHANGED IN
WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS CERTIFICATE MAY NOT BE
TRANSFERRED EXCEPT AS A WHOLE BY DTC TO A NOMINEE THEREOF OR BY A NOMINEE
THEREOF TO DTC OR ANOTHER NOMINEE OF DTC OR BY DTC OR ANY SUCH NOMINEE TO A
SUCCESSOR OF DTC OR A NOMINEE OF SUCH SUCCESSOR.

 

	
  REGISTERED

  	
  REGISTERED

  
	
  NO. 1

  	
  PRINCIPAL AMOUNT

  
	
  CUSIP NO. 828807 BV 8

  	
  $500,000,000

  

 

GLOBAL
SECURITY

SIMON PROPERTY GROUP, L.P.

 

5.875%
Note due 2017

 

Simon Property Group, L.P., a Delaware limited
partnership (the “Issuer,” which term includes any successor under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
Cede & Co. or its registered assigns, the principal sum of Five
Hundred Million dollars on March 1, 2017 (the “Maturity Date”), and to pay
interest thereon from August 29, 2006, semi-annually in arrears on March 1 and September
1 of each year (each, an “Interest Payment Date”), commencing on March 1, 2007,
and on the Maturity Date, at the rate of 5.875% per annum, until payment of
said principal sum has been made or duly provided for.

 

The interest so payable and punctually paid or duly
provided for on any Interest Payment Date and on the Maturity Date shall be
paid to the Holder in whose name this Note (or one or more predecessor
Notes) is registered in the Security Register applicable to this Note at
the close of business on the “Record Date” for such payment, which shall be the
15th calendar day immediately prior to such payment date or the
Maturity Date, as the case may be, regardless of whether such day is a Business
Day (as defined below). Any interest not so punctually paid or duly provided
for shall forthwith cease to be payable to the Holder on such Regular Record
Date, and may be paid to the Holder in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on a subsequent
record date for the payment of such defaulted interest (which shall be not less
than 10 calendar days prior to the date of the payment of such defaulted
interest) established by notice given by mail by or on behalf of the
Issuer to the Holders of the Notes not less than 10 calendar days preceding
such subsequent record date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in the Indenture (as defined below). Interest
on this Note shall be computed on the basis of a 360-day year of twelve 30-day
months.

 

 

Interest payable on this Note on any Interest Payment
Date and on the Maturity Date, as the case may be, shall be the amount of
interest accrued from and including the immediately preceding Interest Payment
Date (or from and including August 29, 2006, in the case of the initial Interest
Payment Date) to but excluding the applicable Interest Payment Date or the
Maturity Date, as the case may be. If any date for the payment of principal,
premium, if any, interest on, or any other amount with respect to, this Note
(each a “Payment Date”) falls on a day that is not a Business Day, the
principal, premium, if any, or interest payable with respect to such Payment
Date shall be made on the next succeeding Business Day with the same force and
effect as if made on such Payment Date, and no interest shall accrue on the
amount so payable for the period from and after such Payment Date to such next
succeeding Business Day. “Business Day” means any day, other than a Saturday or
a Sunday on which banking institutions in New York, New York are open for
business.

 

The principal of this Note payable on the Maturity
Date shall be paid against presentation and surrender of this Note at the
office or agency of the Issuer maintained for that purpose in The Borough of
Manhattan, The City of New York. The Issuer hereby initially designates the
Corporate Trust Office of the Trustee in The City of New York as the office to
be maintained by it where Notes may be presented for payment, registration of
transfer or exchange, and where notices to or demands upon the Issuer in
respect of the Notes or the Indenture referred to on the reverse hereof may be
served.

 

Payments of principal and interest in respect of this
Note shall be made by wire transfer of immediately available funds in such coin
or currency of the United States of America as at the time of payment is legal
tender for the payment of public and private debts.

 

Reference is made to the further provisions of this
Note set forth on the reverse hereof after the Trustee’s Certificate of
Authentication. Such further provisions shall for all purposes have the same
effect as though fully set forth at this place.

 

This Note shall not be entitled to the benefits of the
Indenture or be valid or obligatory for any purpose until the Certificate of
Authentication hereon shall have been signed by the Trustee under such
Indenture.

 

Capitalized terms used herein which are not otherwise
defined shall have the respective meanings assigned to them in the Indenture
and the Eighteenth Supplemental Indenture hereinafter referred to.

 

2

 

IN WITNESS WHEREOF, the Issuer
has caused this instrument to be signed manually or by facsimile by its
authorized officers.

 

Dated:  August 29, 2006

 

	
   

  	
  SIMON PROPERTY GROUP, L.P.

  
	
   

  	
  as Issuer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  SIMON PROPERTY GROUP, INC.

  	
   

  
	
   

  	
   

  	
  its sole General
  Partner

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

Attest:

 

	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

3

 

TRUSTEE’S
CERTIFICATE OF AUTHENTICATION

 

This is one of the Securities of the series designated
herein referred to in the within-mentioned Indenture.

 

	
   

  	
  JPMORGAN CHASE BANK, N.A.

  
	
   

  	
  as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Authorized Officer

  

 

4

 

[REVERSE
OF NOTE]

 

SIMON
PROPERTY GROUP, L.P.

 

5.875%
Note due 2017

 

This security is one of a duly authorized issue of
debt securities of the Issuer (hereinafter called the “Securities”), issued or
to be issued under and pursuant to an Indenture dated as of November 26,
1996 (herein called the “Indenture”), duly executed and delivered by the Issuer
to JPMorgan Chase Bank, N.A. (as successor to The Chase Manhattan Bank), as
Trustee (herein called the “Trustee,” which term includes any successor trustee
under the Indenture with respect to the series of Securities of which this Note
is a part), to which Indenture and all indentures supplemental thereto relating
to this Note (including, without limitation, the Eighteenth Supplemental
Indenture, dated as of August 29, 2006, between the Issuer and the
Trustee) reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee, the Issuer and the Holders of the Securities, and of the terms upon
which the Securities are, and are to be, authenticated and delivered and for
the definition of capitalized terms used hereby and not otherwise defined. The
Securities may be issued in one or more series, which different series may be
issued in various aggregate principal amounts, may mature at different times,
may bear interest (if any) at different rates, may be subject to different
redemption provisions (if any), and may otherwise vary as provided in the
Indenture or any indenture supplemental thereto. This Security is one of a
series designated as the Simon Property Group, L.P. 5.875% Notes due 2017,
initially limited in aggregate principal amount to $500,000,000 (the “Notes”).

 

In case an Event of Default with respect to the Notes
shall have occurred and be continuing, the principal amount of the Notes and
the Make-Whole Amount may be declared accelerated and thereupon become due and
payable, in the manner, with the effect, and subject to the conditions provided
in the Indenture.

 

The Notes may be redeemed at any time at the option of
the Issuer, in whole or from time to time in part, at a redemption price equal
to the sum of (i) 100% of the principal amount of the Notes being redeemed
plus accrued interest thereon to the Redemption Date and (ii) the
Make-Whole Amount, if any, with respect to such Notes. If the Notes are
redeemed on or after 90 days prior to the Maturity Date, the redemption price
shall not include the Make-Whole Amount. Notice of any optional redemption
shall be given to Holders at their addresses, as shown in the Security Register
for the Notes, not more than 60 nor less than 30 days prior to the date fixed
for redemption. The notice of redemption shall specify, among other items, the
redemption price and the principal amount of the Notes to be redeemed.

 

The Indenture contains provisions permitting the
Issuer and the Trustee, with the consent of the Holders of not less than a
majority of the aggregate principal amount of the Securities at the time
Outstanding of all series to be affected (voting as one class), evidenced as
provided in the Indenture, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or modifying in any manner the
rights of the Holders of the Securities of each series; provided, however, that
no such supplemental indenture shall, without the consent of the Holder of each
Outstanding Security so affected, (i) change the Stated Maturity of the
principal of, or premium, (if any) or any installment of principal of or
interest on, any Security, or reduce the principal amount thereof or the rate
or amount of interest thereon or any premium payable upon the redemption or
acceleration thereof, or adversely affect any right of repayment at the option
of the Holder of any Security, or change any Place of Payment where, or the
currency or currencies, currency unit or units or composite currency or
currencies in which, the principal of any Security or any premium or interest
thereon is payable, or impair the right to institute suit for the enforcement
of any such payment on or after the Stated Maturity thereof, or
(ii) reduce the aforesaid 

 

5

 

percentage of Securities the Holders of which are
required to consent to any such supplemental indenture, or (iii) reduce
the percentage of Securities the Holders of which are required to consent to
any waiver of compliance with certain provisions of the Indenture or any waiver
of certain defaults and consequences thereunder or to reduce the quorum or
voting requirements set forth in the Indenture, or (iv) effect certain
other changes to the Indenture or any supplemental indenture or in the rights
of Holders of the Securities. The Indenture also permits the Holders of a
majority in principal amount of the Outstanding Securities of any series (or,
in the case of certain defaults or Events of Default, all series of
Securities), on behalf of the Holders of all the Securities of such series (or
all of the Securities, as the case may be), to waive compliance by the Issuer
with certain provisions of the Indenture and certain past defaults or Events of
Default under the Indenture and their consequences, prior to any declaration
accelerating the maturity of such Securities, or subject to certain conditions,
rescind a declaration of acceleration and its consequences with respect to such
Securities. Any such consent or waiver by the Holder of this Note (unless
revoked as provided in the Indenture) shall be conclusive and binding upon
such Holder and upon all future Holders of this Note and of any Note that may
be issued in exchange or substitution hereof, irrespective of whether or not
any notation thereof is made upon this Note or such other Note.

 

No reference herein to the Indenture and no provision
of this Note or of the Indenture shall alter or impair the obligation of the
Issuer, which is absolute and unconditional, to pay the principal of, premium,
if any, and interest on this Note in the manner, at the respective times, at
the rate and in the coin or currency herein prescribed.

 

Notwithstanding any other provision of the Indenture
to the contrary, no recourse shall be had, whether by levy or execution or
otherwise, for the payment of any sums due under the Securities, including,
without limitation, the principal of, premium, if any, or interest payable
under the Securities, or for the payment or performance of any obligation
under, or for any claim based on, the Indenture or otherwise in respect
thereof, against any partner of the Issuer, whether limited or general,
including Simon Property Group, Inc. or such partner’s assets or against any
principal, shareholder, officer, director, trustee or employee of such partner.
It is expressly understood that the sole remedies under the Securities and the
Indenture or under any other document with respect to the Securities, against
such parties with respect to such amounts, obligations or claims shall be
against the Issuer.

 

This Note is issuable only in registered form without
Coupons in denominations of $2,000 and integral multiples of $1,000 in excess
thereof. This Note may be exchanged for a like aggregate principal amount of
Notes of other authorized denominations at the office or agency of the Issuer
in The Borough of Manhattan, The City of New York, in the manner and subject to
the limitations provided in the Indenture, but without the payment of any
service charge, except for any tax or other governmental charge imposed in
connection therewith.

 

Upon due presentment for registration of transfer of
this Note at the office or agency of the Issuer in The Borough of Manhattan,
The City of New York, one or more new Notes of authorized denominations in an
equal aggregate principal amount shall be issued to the transferee in exchange
therefor, subject to the limitations provided in the Indenture, without charge,
except for any tax or other governmental charge imposed in connection
therewith.

 

The Issuer, the Trustee and any authorized agent of
the Issuer or the Trustee may deem and treat the Person in whose name this Note
is registered as the absolute owner of this Note (whether or not this Note
shall be overdue and notwithstanding any notation of ownership or other writing
hereon), for the purpose of receiving payment of, or on account of, the
principal and any premium hereof or hereon, and subject to the provisions on
the face hereof, interest hereon, and for all other purposes, and neither the
Issuer nor the Trustee nor any authorized agent of the Issuer or the Trustee
shall be affected by any notice to the contrary.

 

6

 

This Note, including the validity hereof, and the
Indenture shall be governed by and construed in accordance with the laws of the
State of New York, and for all purposes shall be construed in accordance with
the laws of such state, except as may otherwise be required by mandatory
provisions of law.

 

Capitalized terms used herein which are not otherwise defined shall
have the respective meanings assigned to them in the Indenture and the Eighteenth
Supplemental Indenture referred to herein.

 

7

 

[ABBREVIATIONS]

 

The following abbreviations, when used in the
inscription on the face of this Note, shall be construed as though they were
written out in full according to applicable laws or regulations:

 

TEN COM – as tenants in common

UNIF GIFT MIN ACT –            
Custodian          (Cust)

(minor) under Uniform Gifts to Minors Act                         
(State)

TEN ENT – as tenants by the entireties

JT TEN – as joint tenants with right of survivorship and not as tenants
in common

 

Additional abbreviations may also be used though not
in the above list.

 

 

ASSIGNMENT

 

FOR VALUE RECEIVED, the undersigned hereby sell(s),
assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE 

 

(Please print or typewrite name and address including postal zip code
of assignee.)

 

This Note and all rights thereunder hereby irrevocably constituting and
appointing Attorney to transfer this Note on the books of the Trustee, with
full power of substitution in the premises.

 

 

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Notice:           The
  signature(s) on this Assignment must correspond with the name(s) as
  written upon the face of this Note in every particular, without alteration or
  enlargement or any change whatsoever

  

 

8EXHIBIT 10.2

HENNESSEY FINANCIAL, LLC AND SUBSIDIARIES

St.
Paul, Minnesota

December
31, 2005 and 2004

 

 

 

CONSOLIDATED
FINANCIAL STATEMENTS

Including
Independent Auditors’ Report

HENNESSEY FINANCIAL, LLC AND SUBSIDIARIES

TABLE OF
CONTENTS

	
  

  	
   

  	
   

  
	
  Independent Auditors’ Report

  	
   

  	
  1

  
	
   

  	
   

  	
   

  
	
  Financial Statements

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Consolidated
  Balance Sheets

  	
   

  	
  2

  
	
   

  	
   

  	
   

  
	
  Consolidated
  Statements of Operations

  	
   

  	
  3

  
	
   

  	
   

  	
   

  
	
  Consolidated
  Statements of Members’ Equity

  	
   

  	
  4

  
	
   

  	
   

  	
   

  
	
  Consolidated
  Statements of Cash Flows

  	
   

  	
  5

  
	
   

  	
   

  	
   

  
	
  Notes
  to Consolidated Financial Statements

  	
   

  	
  6 - 13

  

 

 

[VIRCHOW KRAUSE &
COMPANY LOGO]

INDEPENDENT
AUDITORS’ REPORT

To
the Members

Hennessey Financial, LLC

St. Paul, Minnesota

We have audited the accompanying consolidated balance sheets
of Hennessey Financial, LLC (a Minnesota limited liability company) and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of operations, members’ equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits 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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

As more fully described in Note 12 to the consolidated
financial statements, the accounts of variable interest entities for which the
Company is the primary beneficiary have not been consolidated into the
Company.  In our opinion, the Company’s
consolidated financial statements should include the accounts of these variable
interest entities to conform with accounting principles generally accepted in
the United States of America.

In our opinion, except for the effects on the 2005
consolidated financial statements of the matter discussed in the preceding
paragraph, the consolidated financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Hennessey Financial, LLC and subsidiaries as of December 31, 2005 and 2004, and
the results of their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in the United
States of America.

/s/ Virchow & Krause &
Company, LLP

Minneapolis,
Minnesota

January 21, 2006

(except for Notes 6 and 12, as

to which the date is July 21, 2006)

 1
 

HENNESSEY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

 

	
   

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
  ASSETS

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash

  	
   

  	
  $

  	
  153,618

  	
   

  	
  $

  	
  91,625

  	
   

  
	
  Finance
  receivables

  	
   

  	
  41,965,919

  	
   

  	
  21,231,059

  	
   

  
	
  Accrued interest
  receivable - related parties

  	
   

  	
  6,475,415

  	
   

  	
  1,091,066

  	
   

  
	
  Investment
  subscriptions receivable

  	
   

  	
  287,094

  	
   

  	
  —

  	
   

  
	
  Prepaid expenses

  	
   

  	
  7,340

  	
   

  	
  —

  	
   

  
	
  Due from
  affiliate

  	
   

  	
  399,130

  	
   

  	
  236,699

  	
   

  
	
  Property and
  equipment, net

  	
   

  	
  2,023

  	
   

  	
  3,916

  	
   

  
	
  Debt issuance
  costs, net

  	
   

  	
  448,112

  	
   

  	
  222,516

  	
   

  
	
  Other asset

  	
   

  	
  —

  	
   

  	
  25,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL ASSETS

  	
   

  	
  $

  	
  49,738,651

  	
   

  	
  $

  	
  22,901,881

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LIABILITIES AND MEMBERS’ EQUITY

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LIABILITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Line of credit - bank

  	
   

  	
  $

  	
  700,000

  	
   

  	
  $

  	
  —

  	
   

  
	
  Notes payable

  	
   

  	
  40,755,775

  	
   

  	
  17,421,416

  	
   

  
	
  Interest payable

  	
   

  	
  1,100,216

  	
   

  	
  578,981

  	
   

  
	
  Accrued payroll and related taxes

  	
   

  	
  154,639

  	
   

  	
  4,554

  	
   

  
	
  Accounts payable

  	
   

  	
  58,484

  	
   

  	
  82,829

  	
   

  
	
  Capital lease obligation

  	
   

  	
  787

  	
   

  	
  2,270

  	
   

  
	
  Deferred fee income

  	
   

  	
  59,398

  	
   

  	
  78,540

  	
   

  
	
  Total Liabilities

  	
   

  	
  42,829,299

  	
   

  	
  18,168,590

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MEMBERS’
  EQUITY

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Membership units:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Class A

  	
   

  	
  1,942,717

  	
   

  	
  1,167,717

  	
   

  
	
  Class B

  	
   

  	
  —

  	
   

  	
  200,246

  	
   

  
	
  Class C

  	
   

  	
  1,090,960

  	
   

  	
  2,090,960

  	
   

  
	
  Capital contribution receivable

  	
   

  	
  (630

  	
  )

  	
  (630

  	
  )

  
	
  Retained earnings

  	
   

  	
  3,876,305

  	
   

  	
  1,274,998

  	
   

  
	
  Total Members’ Equity

  	
   

  	
  6,909,352

  	
   

  	
  4,733,291

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL
  LIABILITIES AND MEMBERS’ EQUITY

  	
   

  	
  $

  	
  49,738,651

  	
   

  	
  $

  	
  22,901,881

  	
   

  

 

See accompanying notes to consolidated financial statements.

 2
 

HENNESSEY
FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2005 and 2004

 

	
  

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
  REVENUES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest income

  	
   

  	
  $

  	
  7,901,232

  	
   

  	
  $

  	
  3,007,608

  	
   

  
	
  Loan origination and servicing income

  	
   

  	
  617,593

  	
   

  	
  216,573

  	
   

  
	
  Loan premium income

  	
   

  	
  287,132

  	
   

  	
  —

  	
   

  
	
  Total Revenues

  	
   

  	
  8,805,957

  	
   

  	
  3,224,181

  	
   

  
	
  Interest expense

  	
   

  	
  4,631,873

  	
   

  	
  1,574,020

  	
   

  
	
  Net Revenues

  	
   

  	
  4,174,084

  	
   

  	
  1,650,161

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXPENSES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Salaries and related expenses

  	
   

  	
  629,437

  	
   

  	
  205,488

  	
   

  
	
  Operating expenses

  	
   

  	
  813,398

  	
   

  	
  454,219

  	
   

  
	
  Total Expenses

  	
   

  	
  1,442,835

  	
   

  	
  659,707

  	
   

  
	
  NET INCOME

  	
   

  	
  $

  	
  2,731,249

  	
   

  	
  $

  	
  990,454

  	
   

  

 

See accompanying notes to consolidated financial statements.

 3
 

HENNESSEY
FINANCIAL, LLC AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

Years Ended December 31, 2005 and 2004

 

	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Capital

  	
   

  	
   

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
  Membership Units

  	
   

  	
  Contribution

  	
   

  	
  Retained

  	
   

  	
  Members’

  	
   

  
	
   

  	
   

  	
  Class A

  	
   

  	
  Class B

  	
   

  	
  Class C

  	
   

  	
  Class D

  	
   

  	
  Receivable

  	
   

  	
  Earnings

  	
   

  	
  Equity

  	
   

  
	
  BALANCES,
  December 31, 2003

  	
   

  	
  $

  	
  30,000

  	
   

  	
  $

  	
  369,977

  	
   

  	
  $

  	
  2,090,960

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  (630

  	
  )

  	
  $

  	
  405,177

  	
   

  	
  $

  	
  2,895,484

  	
   

  
	
  Net income

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  990,454

  	
   

  	
  990,454

  	
   

  
	
  Reclassification of Class B membership units to Class
  D membership units

  	
   

  	
  —

  	
   

  	
  (169,731

  	
  )

  	
  —

  	
   

  	
  169,731

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Redemption of Class D membership units

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (169,731

  	
  )

  	
  —

  	
   

  	
  (120,633

  	
  )

  	
  (290,364

  	
  )

  
	
  Issuance of Class A membership units

  	
   

  	
  1,192,636

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,192,636

  	
   

  
	
  Distributions to member

  	
   

  	
  (54,919

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (54,919

  	
  )

  
	
  BALANCES,
  December 31, 2004

  	
   

  	
  1,167,717

  	
   

  	
  200,246

  	
   

  	
  2,090,960

  	
   

  	
  —

  	
   

  	
  (630

  	
  )

  	
  1,274,998

  	
   

  	
  4,733,291

  	
   

  
	
  Net income

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  2,731,249

  	
   

  	
  2,731,249

  	
   

  
	
  Reclassification of Class C membership units to Class
  A membership units

  	
   

  	
  1,000,000

  	
   

  	
  —

  	
   

  	
  (1,000,000

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Redemption of Class B membership units

  	
   

  	
  —

  	
   

  	
  (200,246

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (129,942

  	
  )

  	
  (330,188

  	
  )

  
	
  Contribution from member

  	
   

  	
  135,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  135,000

  	
   

  
	
  Distributions to member

  	
   

  	
  (360,000

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (360,000

  	
  )

  
	
  BALANCES, December 31, 2005

  	
   

  	
  $

  	
  1,942,717

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  1,090,960

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  (630

  	
  )

  	
  $

  	
  3,876,305

  	
   

  	
  $

  	
  6,909,352

  	
   

  

See accompanying
notes to consolidated financial statements.

 4
 

HENNESSEY
FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005 and 2004

	
   

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
  CASH FLOWS FROM OPERATING
  ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income

  	
   

  	
  $

  	
  2,731,249

  	
   

  	
  $

  	
  990,454

  	
   

  
	
  Adjustments to
  reconcile net income to net cash flows from operating activities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation and
  amortization

  	
   

  	
  297,969

  	
   

  	
  74,909

  	
   

  
	
  Changes in
  operating assets and liabilities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accrued interest
  receivable - related parties

  	
   

  	
  (5,384,349

  	
  )

  	
  (353,580

  	
  )

  
	
  Prepaid expenses

  	
   

  	
  (7,340

  	
  )

  	
  —

  	
   

  
	
  Due from
  affiliate

  	
   

  	
  (162,431

  	
  )

  	
  (236,699

  	
  )

  
	
  Due from member

  	
   

  	
  —

  	
   

  	
  4,819

  	
   

  
	
  Other asset

  	
   

  	
  25,000

  	
   

  	
  (25,000

  	
  )

  
	
  Interest payable

  	
   

  	
  521,235

  	
   

  	
  (3,353

  	
  )

  
	
  Accrued payroll
  and related taxes

  	
   

  	
  150,085

  	
   

  	
  80,443

  	
   

  
	
  Accounts payable

  	
   

  	
  (24,345

  	
  )

  	
  341,491

  	
   

  
	
  Deferred fee
  income

  	
   

  	
  (19,142

  	
  )

  	
  29,752

  	
   

  
	
  Net Cash Flows
  from Operating Activities

  	
   

  	
  (1,872,069

  	
  )

  	
  903,236

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM INVESTING
  ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Increase in
  finance receivables

  	
   

  	
  (20,734,860

  	
  )

  	
  (10,765,397

  	
  )

  
	
  Purchase of
  property and equipment

  	
   

  	
  —

  	
   

  	
  (582

  	
  )

  
	
  Net Cash Flows
  from Investing Activities

  	
   

  	
  (20,734,860

  	
  )

  	
  (10,765,979

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM FINANCING
  ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net advances on
  line of credit - bank

  	
   

  	
  700,000

  	
   

  	
  —

  	
   

  
	
  Payments for
  debt issuance costs

  	
   

  	
  (521,672

  	
  )

  	
  (179,406

  	
  )

  
	
  Proceeds from
  notes payable

  	
   

  	
  25,817,260

  	
   

  	
  9,261,695

  	
   

  
	
  Payments on
  notes payable

  	
   

  	
  (2,769,995

  	
  )

  	
  (549,497

  	
  )

  
	
  Payments on
  capital lease obligation

  	
   

  	
  (1,483

  	
  )

  	
  (1,370

  	
  )

  
	
  Redemption of
  Class B membership units

  	
   

  	
  (330,188

  	
  )

  	
  —

  	
   

  
	
  Proceeds from
  issuance of Class A membership units

  	
   

  	
  —

  	
   

  	
  1,192,636

  	
   

  
	
  Contribution
  from member

  	
   

  	
  135,000

  	
   

  	
  —

  	
   

  
	
  Distributions to
  member

  	
   

  	
  (360,000

  	
  )

  	
  (54,919

  	
  )

  
	
  Net Cash Flows
  from Financing Activities

  	
   

  	
  22,668,922

  	
   

  	
  9,669,139

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net
  Change in Cash

  	
   

  	
  61,993

  	
   

  	
  (193,604

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH -
  Beginning of Year

  	
   

  	
  91,625

  	
   

  	
  285,229

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH -
  END OF YEAR

  	
   

  	
  $

  	
  153,618

  	
   

  	
  $

  	
  91,625

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Supplemental cash flow
  disclosures:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash paid for
  interest

  	
   

  	
  $

  	
  4,110,638

  	
   

  	
  $

  	
  1,232,529

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Noncash investing and financing
  activities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issuance of note
  payable for redemption of Class D membership units

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  290,364

  	
   

  
	
  Note payable issued for
  investment subscriptions receivable

  	
   

  	
  $

  	
  287,094

  	
   

  	
  $

  	
  —

  	
   

  

 

See accompanying notes to consolidated financial statements.

 5
 

HENNESSEY FINANCIAL, LLC AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005 and 2004

NOTE 1 - Summary
of Significant Accounting Policies

Nature of Operations

Hennessey Financial, LLC
provides secured mezzanine financing to companies engaged in residential
building construction, land development, commercial real estate investments,
and other business ventures throughout the central United States. The members
of the LLC have limited liability for the obligations or debts of the Company.

Principles of Consolidation

The accompanying
consolidated financial statements include the accounts of the parent company,
Hennessey Financial, LLC (the Company) and its wholly-owned subsidiaries,
Hennessey Financial Note Holdings, LLC (formed November 2004 for the purposes
of originating loans and managing loan portfolios) and Hennessey Funding, LLC
(formed in March 2005 to provide mezzanine financing for certain land
development projects).  All significant
intercompany transactions and balances have been eliminated in the presentation
of the consolidated financial statements.

Concentration of Credit Risk

The Company maintains all
of its cash balances with a high quality financial institution. Balances, at
times, may exceed federally insured limits.

Finance Receivables

Finance
receivables that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal and accrued loan fee balances reduced by any chargeoff or
specific valuation accounts and net of any deferred fees or costs on originated
loans, or unamortized premiums or discounts on purchased loans.  The Company requires a security interest be
granted in real estate to secure the finance receivables.  Interest on loans is recognized over the term
of the loan and is calculated using the compounded interest or simple interest
methods on principal amounts outstanding. 
Accrual of interest income is suspended when collateral is acquired
through foreclosure or other proceedings. The typical term for loans is one to
five years, however, certain loans are subject to an annual renewal clause.
Loan origination and extension fees are recognized as income during the loan
term and unpaid loan fees accrue interest.

Allowance
for loan losses is increased by charges to expense and decreased by chargeoffs
(net of recoveries). Management’s periodic evaluation of the adequacy of the
allowance is based on the Company’s past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower’s ability to repay, the estimated value of any underlying collateral
and current economic conditions. Management has determined all loans are
collectible and therefore did not record an allowance at December 31, 2005 and
2004.

Property, Equipment and Depreciation

Property and equipment
are recorded at cost.  Depreciation is
provided for using straight-line and accelerated methods over periods
ranging from four to seven years. Maintenance, repairs and minor renewals are
expensed when incurred.

 6
 

Debt Issuance Costs

Costs incurred in
connection with obtaining financing are deferred and amortized over the term of
the related financing agreement using the straight-line method, which
approximates the interest method. Total costs were $770,652 and $307,101 and
accumulated amortization was $322,540 and $84,585 at December 31, 2005 and
2004. Amortization of debt issuance costs was $296,076 and $72,953 for the
years ended December 31, 2005 and 2004. The weighted average life of these
costs is approximately 2.3 years.

Future estimated
amortization expense is as follows for the years ending December 31:

	
  2006

  	
   

  	
  $

  	
  273,576

  	
   

  
	
  2007

  	
   

  	
  152,605

  	
   

  
	
  2008

  	
   

  	
  21,931

  	
   

  
	
  Total

  	
   

  	
  $

  	
  448,112

  	
   

  

 

Advertising

Advertising costs
are expensed as incurred.  Advertising
expense was $7,116 and $7,221 for the years ended December 31, 2005 and 2004.

Income Taxes

The
Company is treated as a partnership for federal and state income tax
purposes.  As such, the Company’s income,
losses, and credits are included in the income tax returns of its members.
Therefore, these consolidated financial statements do not include any provision
or liability for income taxes.

Management’s 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 period. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the
prior year consolidated financial statements have been reclassified for
comparative purposes to conform with the presentation in the current year
consolidated financial statements. These reclassifications had no effect on net
income or total members’ equity.

 7
 

NOTE 2 - Finance
Receivables

Finance
receivables consisted of the following at December 31:

	
  

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Finance
  receivables - related parties

  	
   

  	
  $

  	
  41,661,339

  	
   

  	
  $

  	
  21,211,059

  	
   

  
	
  Finance
  receivables

  	
   

  	
  304,580

  	
   

  	
  20,000

  	
   

  
	
  Total Finance
  Receivables

  	
   

  	
  $

  	
  41,965,919

  	
   

  	
  $

  	
  21,231,059

  	
   

  

 

Finance receivables -
related parties are loans to entities related by common ownership with the
majority member of the Company. Interest rates range from 18% to 25% at
December 31, 2005 and 18% to 20% at December 31, 2004. These loans are secured
by real estate and certain loans are personally guaranteed by a member and/or
former member of the Company. Interest and fee income from these entities was
$8,454,751 and $3,213,573 for the years ended December 31, 2005 and 2004.

NOTE 3 - Property
and Equipment, Net

Property and equipment consisted of the
following at December 31:

	
  

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Artwork

  	
   

  	
  $

  	
  3,212

  	
   

  	
  $

  	
  3,212

  	
   

  
	
  Computer
  equipment

  	
   

  	
  6,082

  	
   

  	
  6,082

  	
   

  
	
  Total Property and Equipment

  	
   

  	
  9,294

  	
   

  	
  9,294

  	
   

  
	
  Less:
  accumulated depreciation and amortization

  	
   

  	
  (7,271

  	
  )

  	
  (5,378

  	
  )

  
	
  Property and
  Equipment, Net

  	
   

  	
  $

  	
  2,023

  	
   

  	
  $

  	
  3,916

  	
   

  

 

Depreciation and
amortization expense was $1,893 and $1,956 for the years ended December 31,
2005  and 2004.

NOTE 4 - Related
Party Transactions

In 2005, the Company sold
four loans in their entirety and one partial loan with a total value of
$4,641,496 to the Hennessey Financial Monthly Income Fund, LP (HFMIF).  Hennessey Financial, LLC acts as the Servicer
and Placement Agent for these transactions. 
The Loan Purchase and Servicing Agreement provides that HFMIF has the
option to have the Company exchange loans of equal value in the event of default.
Total loan premium income earned on these transactions was $287,132 for the
year ended December 31, 2005.

In 2004, the Company
entered into an office space lease from an entity related by common
ownership.  The lease requires monthly
base rent, which increased from $3,109 to $4,909 during 2005 and expires in May
2009. Rent expense was $44,369 and $27,697 for the years ended December 31,
2005 and 2004.

 8
 

Future minimum
rental payments are as follows for the years ending December 31:

	
  2006

  	
   

  	
  $

  	
  58,910

  	
   

  
	
  2007

  	
   

  	
  58,910

  	
   

  
	
  2008

  	
   

  	
  58,910

  	
   

  
	
  2009

  	
   

  	
  24,546

  	
   

  
	
  Total

  	
   

  	
  $

  	
  201,276

  	
   

  

 

NOTE 5 -  Notes Payable

Notes payable
consisted of the following at December 31:

	
  

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
  Note payable,
  unsecured, interest at 8%, due April 2006,personally guaranteed by a member
  of the Company.

  	
   

  	
  $

  	
  250,000

  	
   

  	
  $

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable,
  unsecured, interest at 10%, due October 2008, personally guaranteed by a
  member of the Company.

  	
   

  	
  1,000,000

  	
   

  	
  1,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable,
  unsecured, interest at 12%, various due dates through July 2009, certain
  notes are personally guaranteed by a member of the Company.

  	
   

  	
  19,278,415

  	
   

  	
  12,123,237

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Note payable,
  unsecured, interest at 12.5%, due November 2007.

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable,
  unsecured, interest at 13%, various due dates through December 2009, certain
  notes are personally guaranteed by a member of the Company.

  	
   

  	
  4,801,300

  	
   

  	
  787,595

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable,
  unsecured, interest at 14%, various due dates through December 2008, certain
  notes are personally guaranteed by a member of the Company.

  	
   

  	
  2,086,734

  	
   

  	
  1,594,700

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable,
  unsecured, interest at 15%, various due dates through June 2008, personally
  guaranteed by a member of the Company.

  	
   

  	
  11,478,471

  	
   

  	
  1,012,284

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable,
  unsecured, interest at 17%, due January 2006, personally guaranteed by a
  member of the Company.

  	
   

  	
  100,000

  	
   

  	
  100,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Note payable,
  unsecured, interest at 20%, due June 2006, personally guaranteed by a member
  of the Company.

  	
   

  	
  1,006,400

  	
   

  	
  —

  	
   

  
								

 

 9
 

 

	
  

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
  Note payable -
  former member, interest at 12% compounded quarterly, quarterly installments
  of $15,474, due July 2011, secured by 8,289 Class D membership units at
  December 31, 2004 and guaranteed by the sole owner of Class A (see Note 9).

  	
   

  	
  $

  	
  254,455

  	
   

  	
  $

  	
  283,600

  	
   

  
	
  Note payable -
  paid in full.

  	
   

  	
  —

  	
   

  	
  20,000

  	
   

  
	
  Total Notes
  Payable

  	
   

  	
  $

  	
  40,755,775

  	
   

  	
  $

  	
  17,421,416

  	
   

  

 

Future maturities
on notes payable are as follows for the years ending December 31:

	
  2006

  	
   

  	
  $

  	
  13,434,307

  	
   

  
	
  2007

  	
   

  	
  10,726,473

  	
   

  
	
  2008

  	
   

  	
  14,934,679

  	
   

  
	
  2009

  	
   

  	
  1,201,812

  	
   

  
	
  2010

  	
   

  	
  383,504

  	
   

  
	
  Thereafter

  	
   

  	
  75,000

  	
   

  
	
  Total

  	
   

  	
  $

  	
  40,755,775

  	
   

  

 

The
Company increased its funding during 2004 and 2005 by issuing debentures under
a private placement pursuant to rules under Regulation D as administered by the
United States Securities and Exchange Commission. These debentures are
reflected in the above notes payable schedule.

Notes Payable -
Related Parties

The
Company had a note payable of $3,709,880 and notes payable of $3,662,663 to
related parties at December 31, 2005 and 2004.  
These notes are included in the above notes payable schedule.  The interest rate on the note payable to a
related party at December 31, 2005 is 12% and is personally guaranteed by a
member of the Company.  Related party
interest payable was $2,473 and $318,801 at December 31, 2005 and 2004. Related
party interest expense was $449,164 and $392,500 for the years ended December
31, 2005 and 2004.

NOTE 6 - Line of
Credit - Bank

On March 4, 2005, the
Company entered into a $1,000,000 line of credit with a bank expiring March 4,
2006.  Interest is payable at the bank’s
base rate plus 1% (8.25% at December 31, 2005). 
The line of credit is secured by certain assets of the Company,
guaranteed by a Company member and entities majority owned by the same Company
member, and is subject to certain financial covenants.  Outstanding borrowings were $700,000 at
December 31, 2005.

In April 2006, the
line of credit was renewed and increased to $2,000,000, expiring April 19,
2007.  Interest is payable monthly at the
bank’s base rate plus .5%.

 10
 

NOTE 7 -  Capital Lease Obligation

The Company leases
computer equipment under a capital lease that expires in June 2006. Monthly
payments are $134, interest is discounted at 8%, and the obligation is secured by
the equipment under lease.  Total cost
was $5,500 at December 31, 2005 and 2004 and accumulated amortization was
$4,927 and $3,552 at December 31, 2005 and 2004.

Future minimum
lease payments for the year ending December 31, 2006 are $806.

NOTE 8 - Member
Classes and Rights

Classes

During 2004, the Company amended its member
control agreement which allowed the issuance of Class D membership units.

Membership units authorized and issued and
outstanding consisted of the following at December 31:

	
   

  	
   

  	
  2005

  	
   

  	
  2004

  	
   

  
	
   

  	
  
Class

  	
   

  	
   

  	
  

  Authorized

  	
   

  	
  Issued and

  Outstanding

  	
   

  	
  

  Authorized

  	
   

  	
  Issued and

  Outstanding

  	
   

  
	
  A

  	
   

  	
  2,000,000

  	
   

  	
  1,378,927

  	
   

  	
  2,000,000

  	
   

  	
  1,328,927

  	
   

  
	
  B

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  	
  500,000

  	
   

  	
  10,012

  	
   

  
	
  C

  	
   

  	
  500,000

  	
   

  	
  54,548

  	
   

  	
  500,000

  	
   

  	
  104,548

  	
   

  
	
  D

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  3,500,000

  	
   

  	
  1,433,475

  	
   

  	
  3,500,000

  	
   

  	
  1,443,487

  	
   

  
												

 

Rights

Owners of Class A
membership units have the sole and exclusive rights to manage the Company and
elect members of the Board of Governors. Class B, C and D owners have no
management rights. Net income is allocated as determined for federal income tax
purposes. Net income is first allocated to Class A and then to Class B, C and D
pursuant to the member control agreement. All net losses are allocated to Class
A members.

NOTE 9 -
Membership Control Agreement

Call Option

The Company
is obligated to purchase all of the Class C units on or before January 31, 2007
if the sole owner of Class A has not exercised an option to purchase the Class
C units by December 31, 2006.  At
December 31, 2005, the sole owner of Class A purchased 50,000 membership units
from a Class C member.  The purchase
price of Class C membership units is defined in the Membership Control
Agreement and at December 31, 2005 that price was $1,791,490 for all
outstanding Class C membership units.

 11
 

In December 2004, the Company reclassified
certain Class B units to Class D and entered into a membership redemption
agreement with the Class D member. The member sold 8,487 Class D membership
units for $290,364 (see Note 5).

NOTE 10 -
Commitments and Contingencies

Operating Lease

The Company had leased a
vehicle under an operating lease that expired in August 2005.  During August 2005, the Company entered into
a vehicle operating lease agreement that expires in July 2008, and requires
monthly payments of $654.  Operating lease
expense was $6,404 and $5,376 for the years ended December 31, 2005 and 2004.

Future minimum
lease payments are as follows for the years ending December 31:

	
  2006

  	
   

  	
  $

  	
  7,847

  	
   

  
	
  2007

  	
   

  	
  7,847

  	
   

  
	
  2008

  	
   

  	
  4,578

  	
   

  
	
  Total

  	
   

  	
  $

  	
  20,272

  	
   

  

 

Environmental
Protection Laws

The Company may be
subject to environmental protection laws with regards to the real estate
projects the Company finances. Although environmental laws are not initially
the Company’s responsibility, the Company would be subject to these laws if the
borrower were to default on the construction loan and the Company repossesses
the real estate.

NOTE 11 -
Concentrations

At December 31,
2005, the Company had loans with 5 related entities whose loan and accrued
interest balances (as a percentage of the total outstanding balances) were 20%,
16%, 13%, 13% and 12%.  Interest and fee
income from 4 related entities during 2005 (as a percentage of total interest
and fee income earned) were 27%, 22%, 15% and 12%.  At December 31, 2004, the Company had one
related entity whose loan and accrued interest balance (as a percentage of the
total outstanding balances) was 23%. 
Interest and fee income from this entity during 2004 (as a percentage of
total interest and fee income earned) was 11%. 
Due to the significance of these borrowers, the Company would incur
significant losses if these borrowers failed to perform according to the terms
of the contracts and the collateral or other security for the amount due proved
to be of no value to the Company.  The
Company requires a security interest be granted to secure funds that are loaned
to these borrowers.  This would enable
the Company to acquire rights in the collateral in the event of default.

 12
 

NOTE 12 -
Departure From Accounting Principles Generally Accepted in the United States of
America

In January 2003, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation 46, “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51” (FIN 46).  In December 2003, the FASB modified FIN 46 to
make certain technical corrections and address certain implementation issues
that had arisen.  FIN 46R (revised)
provides a new framework for identifying variable interest entities (VIEs) and
determining when a company should include the assets, liabilities,
noncontrolling interests and results of activities of a VIE in its consolidated
financial statements.  The effective date
for FIN 46R was January 1, 2005.

The Company is the
primary beneficiary of variable interest entities as determined under the
guidance of FIN 46R.  The guidance of FIN
46R calls for the consolidation of the accounts of Heritage Development, Inc.
and subsidiaries (HDI), Omni Investment Properties, LLC and affiliates (Omni),
Argus, LLC and subsidiaries (Argus), and Hennessey Financial Monthly Income
Fund, LP (HFMIF), in order for the Company’s consolidated financial statements
to be in conformity with accounting principles generally accepted in the United
States of America.

HDI develops and sells
residential lots for home construction; Omni invests in and manages residential
and commercial real estate; Argus is a builder of multifamily homes; and HFMIF
is a real estate financing company.

If the Company had
consolidated all of the entities for which it is the primary beneficiary at and
for the year ended December 31, 2005, total assets would have been
approximately $295 million and total liabilities would have been approximately
$283 million at December 31, 2005.  Total
equity at December 31, 2005 would have been approximately $12 million,
comprised of approximately $5 million of noncontrolling interests and
approximately $7 million of controlling interests.  Loss before eliminating noncontrolling
interests would have been approximately $700,000 and net income after
eliminating noncontrolling interests would have been approximately $2.7 million
for the year ended December 31, 2005.

 

 13

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