Document:

EXHIBIT 4.2

FORM OF SUBORDINATED 5 YEAR NOTE

OF CS FINANCING CORPORATION

5 Year Note — Series A

                    , 2005

 

Minneapolis, Minnesota

 

Subject to the restrictions in Section 4 below,
five (5) years from the date hereof, for value received, CS Financing
Corporation (the “Company”) promises to pay
                                        
                                        
                            
at the home office of the Company, 45 San Clemente Drive, Suite B210,
Corte Madera, California 94925 , the principal amount of this 5 Year Note (“5
Year Note”), as represented from time to time on the books and records of the
Company, and to pay interest thereon at the rate of ten percent (10%) per
annum. The interest rate payable on this 5 Year Note is a fixed rate. Interest
on this 5 Year Note will be paid monthly commencing on the date of the month
following the date of this 5 Year Note.

This 5 Year Note is one of a duly authorized issue of
5 Year Notes of the Company issued under and subject in all respects to the
terms of an Indenture dated as of
            ,
2005 (the “Indenture”), between the Company and U.S. Bank National Association,
as trustee (the “Trustee”). Reference is hereby made to the Indenture and all
supplemental indentures for a statement of the respective rights of the
Company, the Trustee, the agents of the Company and the Trustee. All
capitalized terms used, but not defined, in this 5 Year Note have the meanings
assigned to them in the Indenture. No reference herein to the Indenture and no
provision of this 5 Year Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and interest on this 5 Year Note in the manner herein prescribed.

1.                                       Interest Rate. The holder will receive interest at the
rate of ten percent (10%) per annum.

2.                                       Redemption. The Company can call this 5 Year Note for redemption
at any time after two years without penalty subject to the subordination
provisions contained in Section 4 below and pursuant to procedures set
forth in Article 3 of the Indenture, for a redemption price equal to the
principal amount plus any unpaid interest thereon to the date of redemption.
Notice of redemption shall be given by mail to the holder of this 5 Year Note
at his last address as it appears on the records of the Company not less than
30 nor more than 60 days prior to the date fixed for redemption. Once notice of
redemption is mailed, 5 Year Notes called for redemption become due and payable
on the date of redemption set forth in the notice of redemption at the
redemption price. On or before the redemption date, the Company shall set aside
money sufficient to pay the redemption price of all 5 Year Notes to be redeemed
on that date. If the Company has mailed a notice of redemption to the
registered holder and this 5 Year Note is not presented for redemption within
60 days of the redemption date or such longer period set forth in the notice of
redemption, then the Company may transfer the money distributable upon
redemption to a separate bank account, for the benefit of the registered
holders whose 5 Year Notes are redeemed, and thereupon this 5 Year Note shall
be deemed as of the date of redemption to have been redeemed and no longer
outstanding.

 

3.                                       Redemption if Balance Falls Below $25,000 The Company may, in its sole discretion,
redeem any 5 Year Note in full if the principal balance of such 5 Year Note
falls below $25,000 at any time. The redemption price shall be equal to 100% of
the principal amount of the 5 Year Note plus accrued interest on a daily basis
to the redemption date. This redemption right of the Company is automatic and
no advance notice is required.

4.                                       Subordination. This 5 Year Note is subordinated, in
all rights to payment and in all other respects, to Senior Debt, which means
all Debt (present or future) created, incurred, assumed or guaranteed by the
Company (and all renewals, extensions or refundings thereof), except such Debt
that by its terms expressly provides that such Debt is not senior or superior
in right of payment to the 5 Year Notes. Senior Debt shall include without
limitation (i) the guarantee by the Company of any Debt of any other
person (including, without limitation, subordinated Debt of another person),
unless such Debt is expressly subordinated to any other Debt of the Company,
and (ii) all Debt of the Company currently maintained with banks and
finance companies and any line of credit to be obtained by the Company in the
future. Notwithstanding anything herein to the contrary, Senior Debt shall not
include debt of the Company to any of its subsidiaries or affiliates or under
the 5 Year Notes. Debt means any indebtedness, contingent or otherwise, in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of the Company or only to a portion thereof), or evidenced
by bonds, notes, debentures or similar instruments or letters of credit, or
representing the balance deferred and unpaid on the purchase price of any
property or interest therein, except any such balance that constitutes a trade
payable, and shall include any guarantee of any indebtedness described above.
The Company agrees, and the 5 Year Noteholder by accepting this 5 Year Note
agrees, to the subordination provisions set forth in Article 10 of the
Indenture.

5.                                       Amendments and Waivers As permitted in the Indenture, the
Indenture, other than subordination provisions, may be amended and the rights
and obligations of the Company and the rights of the holders of the 5 Year
Notes under the Indenture modified at any time by the Company with the consent
of the Trustee and holders of a majority in principal amount of the then
outstanding 5 Year Notes. The Company and the Trustee may not modify the
Indenture without the consent of each holder affected if the modification (i) affects
the terms of payment of, the principal of, or any interest on, any 5 Year Note;
(ii) changes the percentage of 5 Year Note holders who consent to a waiver
or modification as required; (iii) affects the subordination provisions of
the Indenture in a manner that adversely affects the right of any holder; or (iv) waives
any Event of Default in the payment of principal of, and interest on, any 5
Year Note. As permitted by the Indenture, the Trustee and holders of a majority
in principal amount of the then outstanding 5 Year Notes, on behalf of the
holders of all 5 Year Notes, may waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences, except an Event of Default in the payment of principal or
of interest on the 5 Year Notes.

6.                                       Defaults and Remedies. If an Event of Default, as defined in
the Indenture, occurs and is continuing, the principal of and accrued interest
on all 5 Year Notes may be declared due and payable in the manner and with the
effect provided in the Indenture. The Indenture generally provides that an
Event of Default occurs if: (i) the Company fails to pay the principal of
any 5 Year Note when the same is presented for payment, upon redemption or
otherwise, and the failure to pay continues for a period of thirty (30) days
after receipt of written notice from the holder of the 5 Year Note or the
Trustee; (iii) the Company becomes subject to certain events of bankruptcy
or insolvency; or (iv) the Company fails to comply with any of its other
agreements in, or the provisions of, the 5 Year Note or the Indenture and such
failure is not cured or waived within sixty (60) days after receipt by the
Company of a specific written notice from the Trustee or the holders of at
least a majority in principal amount of the then outstanding 5 Year Notes.

 2
 

 

7.                                       Transfer. As provided
in the Indenture, this 5 Year Note is transferable only on the 5 Year Note
register maintained by the Registrar, upon surrender of this 5 Year Note for
transfer at the office of the Registrar, duly endorsed by, or accompanied by a
written instrument of transfer in a form satisfactory to the Company and the
Registrar duly executed by, the registered holder hereof or his attorney duly
authorized in writing, a copy of which authorization must be delivered with any
such instrument of transfer, and thereupon one or more new 5 Year Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees. A service fee may be
charged to replace a lost or stolen 5 Year Note, to transfer this 5 Year Note
or to issue a replacement payment check. The Company, the Trustee and any agent
of the Company or the Trustee may treat the person in whose name this 5 Year
Note is registered as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary. The
Company currently serves as the Registrar and Paying Agent for the 5 Year
Notes.

8.                                       Owners. The registered 5 Year Noteholder shall be treated as
the owner of the 5 Year Note for all purposes.

9.                                       No Recourse A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under this 5 Year Note or for any claim based on, or
in respect of such obligations or their creation. The 5 Year Noteholder by
accepting this 5 Year Note waives and releases all such liability. The waiver
and release are part of the consideration for the issue of this 5 Year Note.

THIS 5 YEAR NOTE IS NOT A BANK DEPOSIT NOR A BANK
OBLIGATION AND IS NOT INSURED BY THE FDIC.

IN WITNESS WHEREOF, the Company has caused this 5 Year
Note to be signed in its corporate name by its President or Vice President and
by its Treasurer or Secretary, at                                        ,
                              , on
the date first written above.

	
  

  	
   

  	
  CS FINANCING CORPORATION

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  President

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Treasurer

  	
   

  	
  Secretary

  

 

 3
 

 

For Payment or Redemption

The
within 5 Year Note is hereby presented to the Company by the undersigned for
payment this
                    ,
20    .

 

	
  

  	
   

  	
  Signed

  	
   

  
	
   

  	
   

  	
  by

  	
   

  
					

 

For Transfer

For value received, the undersigned 5 Year Noteholder
hereby sells, assigns and transfers the within 5 Year Note to
                                        
                                        
         whose address is
                                       
                                        
                                        
                 
and does hereby authorize and appoint
                                        
                                        
         his attorney to make the
necessary transfer on the books of the Company, with full powers of
substitution in the premises.

Under
my hand and seal this
                    ,
20    .

 

	
  

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature of 5 Year Noteholder

  

 

 

	
  Executed in the presence of:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (NOTARY SEAL)

  	
   

  	
   

  

 

 

 4EXHIBIT 10.2

 

 

HENNESSEY FINANCIAL, LLC AND SUBSIDIARY

 

St. Paul, Minnesota

 

December 31, 2004 and
2003

 

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

Including Independent Auditors’ Report

 

 

 

HENNESSEY
FINANCIAL, LLC AND SUBSIDIARY

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

  	
   

  	
  6-12

  

 

 

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
subsidiary as of December 31, 2004 and 2003, 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.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Hennessey Financial, LLC and subsidiary as of December 31,
2004 and 2003, 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.

Virchow, Krause & Company, LLP

Minneapolis, Minnesota

January 21, 2005

Virchow,
Krauss & Company, LLP

Certified Public Accountants & Consultants + An
independent Member of Baker Tilly International

 

 1
 

HENNESSEY
FINANCIAL, LLC AND SUBSIDIARY

CONSOLIDATED
BALANCE SHEETS

December 31, 2004 and 2003

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  ASSETS

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash

  	
   

  	
  $

  	
  91,625

  	
   

  	
  $

  	
  285,229

  	
   

  
	
  Finance receivables

  	
   

  	
  21,231,059

  	
   

  	
  10,465,663

  	
   

  
	
  Accrued interest receivable—related parties

  	
   

  	
  1,091,066

  	
   

  	
  737,486

  	
   

  
	
  Due from affiliate

  	
   

  	
  236,699

  	
   

  	
  —

  	
   

  
	
  Property and equipment, net

  	
   

  	
  3,918

  	
   

  	
  5,290

  	
   

  
	
  Due from member

  	
   

  	
  —

  	
   

  	
  4,819

  	
   

  
	
  Debt issuance costs, net

  	
   

  	
  222,516

  	
   

  	
  116,063

  	
   

  
	
  Other asset

  	
   

  	
  25,000

  	
   

  	
  —

  	
   

  
	
  TOTAL ASSETS

  	
   

  	
  $

  	
  22,901,881

  	
   

  	
  $

  	
  11,614,550

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LIABILITIES
  AND MEMBERS’ EQUITY

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LIABILITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable

  	
   

  	
  $

  	
  17,421,416

  	
   

  	
  $

  	
  8,418,855

  	
   

  
	
  Capital lease obligation

  	
   

  	
  2,270

  	
   

  	
  3,640

  	
   

  
	
  Accrued payroll and related taxes

  	
   

  	
  4,554

  	
   

  	
  7,907

  	
   

  
	
  Accounts payable

  	
   

  	
  82,829

  	
   

  	
  2,388

  	
   

  
	
  Interest payable

  	
   

  	
  578,981

  	
   

  	
  237,490

  	
   

  
	
  Deferred fee income

  	
   

  	
  78,540

  	
   

  	
  48,788

  	
   

  
	
  Total Liabilities

  	
   

  	
  18,168,590

  	
   

  	
  8,719,066

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MEMBERS’ EQUITY

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Membership
  units:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Class A

  	
   

  	
  1,167,717

  	
   

  	
  30,000

  	
   

  
	
  Class B

  	
   

  	
  200,246

  	
   

  	
  369,977

  	
   

  
	
  Class C

  	
   

  	
  2,090,960

  	
   

  	
  2,090,960

  	
   

  
	
  Investment subscription receivable

  	
   

  	
  (630

  	
  )

  	
  (630

  	
  )

  
	
  Retained earnings

  	
   

  	
  1,274,998

  	
   

  	
  405,177

  	
   

  
	
  Total Members’ Equity

  	
   

  	
  4,733,291

  	
   

  	
  2,895,484

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL
  LIABILITIES AND MEMBERS’ EQUITY

  	
   

  	
  $

  	
  22,901,881

  	
   

  	
  $

  	
  11,614,550

  	
   

  

 

 

See accompanying
notes to consolidated financial statements.

 2
 

HENNESSEY
FINANCIAL, LLC AND SUBSIDIARY

CONSOLIDATED
STATEMENTS OF OPERATIONS

December 31, 2004 and 2003

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INTEREST
  AND FEE INCOME

  	
   

  	
  $

  	
  3,224,181

  	
   

  	
  $

  	
  1,400,034

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INTEREST
  EXPENSE

  	
   

  	
  1,574,020

  	
   

  	
  714,120

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net Interest Income

  	
   

  	
  1,650,161

  	
   

  	
  685,914

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXPENSES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Salaries, guaranteed payments and related expenses

  	
   

  	
  205,488

  	
   

  	
  164,590

  	
   

  
	
  Operating expenses

  	
   

  	
  454,219

  	
   

  	
  130,380

  	
   

  
	
  Total expenses

  	
   

  	
  659,707

  	
   

  	
  294,970

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET INCOME

  	
   

  	
  $

  	
  990,454

  	
   

  	
  $

  	
  390,944

  	
   

  

 

 

 

 

See accompanying
notes to consolidated financial statements.

 3
 

 

HENNESSEY FINANCIAL, LLC

 

CONSOLIDATED STATEMENTS
OF MEMBERS’ EQUITY

Years Ended December 31,
2004 and 2003

 

	
   

  	
   

  	
  Membership Units

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Class A

  	
   

  	
  Class B

  	
   

  	
  Class C

  	
   

  	
  Class D

  	
   

  	
  Investment

  Subscription

  Receivable

  	
   

  	
  Retained

  Earnings

  	
   

  	
  Total

  Members’

  Equity

  	
   

  
	
  BALANCES,
  December 31, 2002

  	
   

  	
  $

  	
  180,000

  	
   

  	
  $

  	
  1,078,607

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  (660,000

  	
  )

  	
  $

  	
  14,233

  	
   

  	
  $

  	
  1,612,840

  	
   

  
	
  Net income

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  390,944

  	
   

  	
  390,944

  	
   

  
	
  Payments on investment subscription receivable

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  660,000

  	
   

  	
  —

  	
   

  	
  660,000

  	
   

  
	
  Redemption of Class B membership units

  	
   

  	
  —

  	
   

  	
  (708,630

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (708,630

  	
  )

  
	
  Issuance of Class C membership units

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,090,960

  	
   

  	
  —

  	
   

  	
  (630

  	
  )

  	
  —

  	
   

  	
  1,090,330

  	
   

  
	
  Contribution from member

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  65,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  65,000

  	
   

  
	
  Distributions to members

  	
   

  	
  (150,000

  	
  )

  	
  —

  	
   

  	
  (65,000

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (215,000

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  BALANCES,
  December 31, 2003

  	
   

  	
  30,000

  	
   

  	
  369,977

  	
   

  	
  2,090,960

  	
   

  	
  —

  	
   

  	
  (630

  	
  )

  	
  405,177

  	
   

  	
  2,695,484

  	
   

  
	
  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

  	
   

  

 

 

See accompanying notes to
consolidated financial statements.

 

 4
 

 

HENNESSY FINANCIAL, LLC AND
SUBSIDIARY

 

CONSOLIDATED STATEMENTS
OF CASH FLOWS

Years Ended December 31,
2004 and 2003

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  CASH
  FLOWS FROM OPERATING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net Income

  	
   

  	
  $

  	
  990,454

  	
   

  	
  $

  	
  390,944

  	
   

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

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation and amortization

  	
   

  	
  74,909

  	
   

  	
  32,227

  	
   

  
	
  Changes in operating assets and liabilities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accrued interest receivable – related parties

  	
   

  	
  (353,380

  	
  )

  	
  (390,103

  	
  )

  
	
  Accrued loan fees

  	
   

  	
  (30,631

  	
  )

  	
  (82,427

  	
  )

  
	
  Due from affiliate

  	
   

  	
  (236,699

  	
  )

  	
  —

  	
   

  
	
  Due from member

  	
   

  	
  4,819

  	
   

  	
  —

  	
   

  
	
  Other asset

  	
   

  	
  (25,000

  	
  )

  	
  —

  	
   

  
	
  Accrued payroll and related taxes

  	
   

  	
  (3,353

  	
  )

  	
  (6,965

  	
  )

  
	
  Accounts payable

  	
   

  	
  80,443

  	
   

  	
  (5,059

  	
  )

  
	
  Interest Payable

  	
   

  	
  341,491

  	
   

  	
  219,112

  	
   

  
	
  Due to related party

  	
   

  	
  —

  	
   

  	
  (102

  	
  )

  
	
  Deferred fee income

  	
   

  	
  29,752

  	
   

  	
  (25,600

  	
  )

  
	
  Net Cash Flows from Operating Activities

  	
   

  	
  872,605

  	
   

  	
  132,027

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH
  FLOWS FROM INVESTING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Increase in finance receivables – related parties

  	
   

  	
  (10,734,766

  	
  )

  	
  (6,590,729

  	
  )

  
	
  Purchase of property and equipment

  	
   

  	
  (582

  	
  )

  	
  —

  	
   

  
	
  Net Cash Flows from Investing Activities

  	
   

  	
  (10,735,348

  	
  )

  	
  (6,590,729

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH
  FLOWS FROM FINANCING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Payments for debt issuance costs

  	
   

  	
  (179,406

  	
  )

  	
  (45,800

  	
  )

  
	
  Proceeds from notes payable

  	
   

  	
  9,261,695

  	
   

  	
  6,271,855

  	
   

  
	
  Payments on notes payable

  	
   

  	
  (549,497

  	
  )

  	
  (400,000

  	
  )

  
	
  Payments on capital lease obligation

  	
   

  	
  (1,370

  	
  )

  	
  (1,264

  	
  )

  
	
  Redemption of Class B membership units

  	
   

  	
  —

  	
   

  	
  (708,630

  	
  )

  
	
   Proceeds from
  Class C investment subscription receivable

  	
   

  	
  —

  	
   

  	
  860,000

  	
   

  
	
  Proceeds from issuance of Class C membership units

  	
   

  	
  —

  	
   

  	
  1,090,330

  	
   

  
	
  Proceeds from issuance of Class A membership units

  	
   

  	
  1,192,636

  	
   

  	
  —

  	
   

  
	
  Contributions from member

  	
   

  	
  —

  	
   

  	
  65,000

  	
   

  
	
  Distributions to members

  	
   

  	
  (54,919

  	
  )

  	
  (215,000

  	
  )

  
	
  Net Cash Flows from Financing Activities

  	
   

  	
  9,669,139

  	
   

  	
  6,716,491

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net Change in Cash

  	
   

  	
  (193,604

  	
  )

  	
  257,789

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH – Beginning
  of Year

  	
   

  	
  285,229

  	
   

  	
  27,440

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH –
  End of Year

  	
   

  	
  $

  	
  91,625

  	
   

  	
  $

  	
  285,229

  	
   

  

 

 

See accompanying notes to
consolidated financial statements.

 

 5
 

 

HENNESSEY FINANCIAL, LLC AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004 and 2003

 

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
subsidiary, Hennessey Financial Note Holdings, LLC (the Subsidiary). The
Subsidiary was formed November 2004 for the purposes of originating loans and
managing loan portfolios. 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 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 average 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 over the life of the loan and unpaid
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, 2004 and
2003.

 

                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 $307,101 and $150,595
and accumulated amortization was $84,585 and $34,532 at December 31, 2004 and
2003, respectively. Amortization of debt issuance costs was $72,953 and $30,067
for the years ended December 31, 2004 and 2003, respectively. 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:

 

	
  2005

  	
   

  	
  $

  	
  90, 891

  	
   

  
	
  2006

  	
   

  	
  74,881

  	
   

  
	
  2007

  	
   

  	
  42,194

  	
   

  
	
  2008

  	
   

  	
  14,570

  	
   

  
	
  Total

  	
   

  	
  $

  	
  222,516

  	
   

  

 

                Advertising

 

Advertising
costs are expensed as incurred. Advertising expense was $7,221 and $1,550 for
the years ended December 31, 2004 and 2003, respectively.

 

                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 financial statements have been reclassified for
comparative purposes to conform with the presentation in the current year
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:

 

	
  

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  Finance
  receivables – related parties

  	
   

  	
  $

  	
  21,026,357

  	
   

  	
  $

  	
  10,291,592

  	
   

  
	
  Accrued loan
  fees – related parties

  	
   

  	
  184,702

  	
   

  	
  154,071

  	
   

  
	
  Accrued loan
  fees

  	
   

  	
  20,000

  	
   

  	
  20,000

  	
   

  
	
  Total Finance
  Receivables

  	
   

  	
  $

  	
  21,231,059

  	
   

  	
  $

  	
  10,465,663

  	
   

  

 

Finance
receivables – related parties are loans from entities related by common
ownership with the majority member of the Company. Interest rates range from
18% to 20% at December 31, 2004 and 17% to 20% at December 31, 2003,
respectively. 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 $3,213,573 and $1,365,035 for the years
ended December 31, 2004 and 2003, respectively.

 

NOTE 3 – Property and Equipment, Net

 

Property
and equipment consisted of the following at December 31:

 

	
  

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  Artwork

  	
   

  	
  $

  	
  3,212

  	
   

  	
  $

  	
  3,212

  	
   

  
	
  Computer
  equipment

  	
   

  	
  6,082

  	
   

  	
  5,500

  	
   

  
	
  Total Property and Equipment

  	
   

  	
  9,294

  	
   

  	
  8,712

  	
   

  
	
  Less:
  accumulated depreciation and amortization

  	
   

  	
  (5,378

  	
  )

  	
  (3,422

  	
  )

  
	
  Property and
  Equipment, Net

  	
   

  	
  $

  	
  3,915

  	
   

  	
  $

  	
  5,290

  	
   

  

 

Depreciation
and amortization expense was $1,956 and $2,160 for the years ended December 31,
2004 and 2003, respectively.

 

NOTE 4 – Related Party Transactions

 

The
balance due from member of $4,819 at December 31, 2003 was received in full
during 2004.

 

In
2004, the Company entered into a office space lease from an entity related by
common ownership. The lease requires monthly base rent of $3,109 and expires in
September 2009. Rent expense was $27,697 and $18, 788 for the years ended
December 31, 2004 and 2003, respectively.

 8
 

 

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

 

	
  2005

  	
   

  	
  $

  	
  37,302

  	
   

  
	
  2006

  	
   

  	
  37,302

  	
   

  
	
  2007

  	
   

  	
  37,302

  	
   

  
	
  2008

  	
   

  	
  37,302

  	
   

  
	
  2009

  	
   

  	
  24,868

  	
   

  
	
  Total

  	
   

  	
  $

  	
  174,076

  	
   

  

 

NOTE 5 – Notes Payable

 

Notes
payable consisted of the following at December 31:

 

	
  

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

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

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  87,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Note payable, unsecured, interest at 11%, due September 2005,
  personally guaranteed by a member of the Company.

  	
   

  	
  20,000

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  12,123,237

  	
   

  	
  6,298,655

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  787,595

  	
   

  	
  263,200

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable, unsecured, interest at 14%, various due dates through
  December 2006, certain notes are personally guaranteed by a member of the
  Company.

  	
   

  	
  1,594,700

  	
   

  	
  410,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable, unsecured, interest at 15%, various due dates through
  June 2006, personally guaranteed by a member of the Company.

  	
   

  	
  1,012,284

  	
   

  	
  1,260,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Notes payable, unsecured, interest at 17%, due January 2005,
  personally guaranteed by a member of the Company.

  	
   

  	
  100,000

  	
   

  	
  100,000

  	
   

  
								

 

 9
 

 

	
  

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  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 8)

  	
   

  	
  283,600

  	
   

  	
  —

  	
   

  
	
  Total Notes
  Payable

  	
   

  	
  $

  	
  17,421,416

  	
   

  	
  $

  	
  8,418,855

  	
   

  
								

 

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

 

	
  2005

  	
   

  	
  $

  	
  4,457,845

  	
   

  
	
  2006

  	
   

  	
  9,317,288

  	
   

  
	
  2007

  	
   

  	
  1,382,257

  	
   

  
	
  2008

  	
   

  	
  1,803,049

  	
   

  
	
  2209

  	
   

  	
  364,769

  	
   

  
	
  Thereafter

  	
   

  	
  96,408

  	
   

  
	
  Total

  	
   

  	
  $

  	
  17,421,416

  	
   

  

 

The Company increased its
funding during 2004 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.

The Company had notes
payable of $3,662,663 and $2,292,734 to related parties at December 31,
2004 and 2003, respectively. These notes are unsecured and have various due
dates through November 2009. Interest rates range from 12% to 15% and
certain notes are personally guaranteed by a member of the Company. These notes
are included in the above notes payable schedule. Interest payable was $318,801
and $141,867 at December 31, 2004 and 2003, respectively. Interest expense
was $392,500 and $139,524 for the years ended December 31, 2004 and 2003,
respectively.

NOTE 6 – 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, 2004 and 2003 and accumulated amortization was $3,552 and
$2,177 at December 31, 2004 and 2003, respectively.

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

	
  2005

  	
   

  	
  $

  	
  1,811

  	
   

  
	
  2006

  	
   

  	
  806

  	
   

  
	
  Total lease payments

  	
   

  	
  2,417

  	
   

  
	
  Less amount
  representing interest at 8%

  	
   

  	
  (147

  	
  )

  
	
  Present value of
  minimum lease payments

  	
   

  	
  $

  	
  2.270

  	
   

  

 

 10
 

 

NOTE 7 – Member
Classes and Rights

Classes

During 2004, the Company
amended its member control agreement which allowed the issuance of Class D
membership units. The Company has 2,000,000 Class A, 500,000 Class B,
500,000 Class C, and 500,000 Class D membership units authorized, of
which 1,328,927, 10,012, 104,548 and 0 are issued and outstanding at
December 31, 2004.

The Company had 1,000,000
Class A, 500,000 Class B, and 500,000 Class C membership unites
authorized, of which 191,210, 18,499 and 104,548 were issued and outstanding at
December 31, 2003.

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 8 –
Membership Control Agreement

Call Option

The Company and sole
owner of Class A each have a call option that would require the owners of
Class B membership units to sell all of their membership units back to the
Company or Class A owner. The purchase price is defined in the Membership
Control Agreement and at December 31, 2004 that price was $311,598 for all
outstanding Class B membership units.

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. The purchase price is defined in the Membership Control
Agreement and at December 31, 2004 that price was $2,872,531 for all
outstanding Class C membership units.

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 9 –
Commitments and Contingencies

Operating Lease

The Company leases a
vehicle under an operating lease that expires in August 2005. Monthly
payments are $448 and rent expense was $5,376 and $5,036 for the years ended
December 31, 2004 and 2003, respectively. Future minimum lease payments
are $3,134 for the year ending December 31, 2005.

 

 11
 

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
10 – Concentrations

At December 31,
2004, the Company had one related party whose loans and accrued interest
balances totaled 22.7% of total outstanding balances. At December 31,
2003, the Company had four related parties whose loans and accrued interest
balances totaled 28.7%, 15.5%, 11.0% and 10.2% of total interest and fee income
for the year ended December 31, 2004. Interest and fee income from three
related parties represented 29.0%, 16.5% and 15.0% of total interest and fee
income for the year ended December 31, 2003. 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 to the
collateral in the event of default.

Note 11
– Supplemental Cash Flow Information

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  Supplemental
  cash flow disclosures:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash paid for interest

  	
   

  	
  $

  	
  1,232,529

  	
   

  	
  $

  	
  495,008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Noncash
  investing and financing activities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issuance of Class C membership units for
  investment subscription receivable

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  630

  	
   

  
	
  Issuance of note payable for redemption of
  Class D membership units

  	
   

  	
  290,364

  	
   

  	
  —

  	
   

  
	
  Other receivable
  reclassified to finance receivable - related party

  	
   

  	
  —

  	
   

  	
  50,723

  	
   

  

 

 12

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