(A CALIFORNIA LIMITED LIABILITY COMPANY) FINANCIAL STATEMENTS DECEMBER 31, 2005
TABLE OF CONTENTS Page No. Independent Auditors' Report 1 Balance Sheet 2 Statement of Income and Changes in Members' Equity 3 Statement of Cash Flows 4 5-11
ARMANINO McKENNA LLP Certified Public Accountants & Consultants 12667 Alcosta Blvd., Suite 500 San Ramon, CA 94583-4427 ph: 925.790.2600 fx: 925.790.2600 www.amllp.com INDEPENDENT AUDITORS' REPORT To the Members LCGI Mortgage Fund, LLC Lafayette, California We have audited the accompanying balance sheet of LCGI Mortgage Fund, LLC (the "Fund") (a California limited liability company) as of, and the related statement of income and changes in members' equity and cash flows for the period from May 25, 2005 through December 31, 2005. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LCGI Mortgage Fund, LLC as of, and the results of its operations and cash flows for the period from May 25, 2005 through in conformity with accounting principles generally accepted in the United States of America. January 6, 2006 ARMANINO McKENNA LLP San Francisco San Jose San Leandro San Diego
LCGI Mortgage Fund, LLC Balance Sheet ASSETS Cash and cash equivalents $ 55,660 Mortgage loans receivable 8,817,000 Less: allowance for loan losses (10,000) Mortgage loans receivable, net 8,807,000 Mortgage interest receivable 73,334 Total assets $ 8,935,994 LIABILITIES AND MEMBERS' EQUITY Liabilities Asset management fees payable $ 7,408 Loan servicing fees payable 7,064 Income tax and LLC fees payable 1,700 Deferred interest 38,342 Total liabilities 54,514 Members' equity 8,881,480 Total liabilities and members' equity $ 8,935,994 The accompanying notes are an integral part of these financial statements. - 2 -
LCGI Mortgage Fund, LLC Statement of Income and Change in Members' Equity For the Period from May 25, 2005 through Revenues Mortgage interest income $ 391,999 Operating expenses Asset management fees 35,441 Loan servicing fees 32,545 Provision for losses on loans 10,000 Total operating expenses 77,986 Income before income tax and LLC fees 314,013 Income tax and LLC fees 1,700 Net income 312,313 Members' equity, beginning of period - Members' contributions 8,809,833 Members' distributions (240,666) Members' equity, end of period $ 8,881,480 The accompanying notes are an integral part of these financial statements. - 3 -
LCGI Mortgage Fund, LLC Statement of Cash Flows For the Period from May 25, 2005 through Cash flows from operating activities Net income $ 312,313 Adjustments to reconcile net income to net cash provided by operating activities Provision for losses on loans 10,000 Change in operating assets and liabilities Mortgage interest receivable (73,334) Asset management fees payable 7,408 Loan servicing fees payable 7,064 Income tax and LLC fees payable 1,700 Deferred interest 38,342 Net cash provided by operating activities 303,493 Cash flows from investing activities Loans originated (8,817,000) Cash flows from financing activities Members' contributions 8,809,833 Members' distributions (240,666) Net cash provided by financing activities 8,569,167 Net increase in cash and cash equivalents 55,660 Cash and cash equivalents at beginning of period - Cash and cash equivalents at end of period $ 55,660 Supplemental disclosures of cash flow information Cash paid for interest $ - Cash paid for taxes $ - The accompanying notes are an integral part of these financial statements. - 4 -
1. Organization LCGI Mortgage Fund, LLC (the "Fund") is a California limited liability company that was organized on April 20, 2005 and commenced operations on May 25, 2005. The Fund was organized to engage in business as a mortgage lender for the purpose of making or investing in loans secured by deeds of trust primarily on California real estate, both commercial and residential. The Fund is managed and loans are serviced by Lafayette Capital Group, Inc., a California corporation (the "Manager" and "Servicer"). Term of the Fund The Fund will continue until dissolved by majority vote of the members or by court order. 2. Summary of Significant Accounting Policies Management 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 about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses. Actual results could differ significantly from these estimates. Cash and cash equivalents The Fund considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Mortgage loans receivable Mortgage loans generally are stated at their outstanding unpaid principal balance with interest thereon accrued as earned. If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement, and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral. - 5 -
2. Summary of Significant Accounting Policies (continued) Mortgage loans receivable (continued) If events and or changes in circumstances cause management to have serious doubts about the further collectibility of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances. At, there were no loans categorized as impaired by the Fund. Allowance for loan losses Loans and the related accrued interest are analyzed on a continuous basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, accrued interest and advances on loans. The Fund writes off uncollectible loans and related receivables directly to the allowance account once it is determined that the full amount is not collectible. Since its inception, the Fund has not written off any loans. Activity in the allowance for loan losses is as follows for the period ended : Beginning balance $ - Provision for loan losses 10,000 Write-offs - Ending balance $10,000 Real estate held for sale In the event a Fund mortgage loan receivable goes into default, the Manager will commence foreclosure proceedings on behalf of and for the benefit of the Fund. Real estate held for sale is stated at the lower of the recorded investment in the loan or at the property's estimated fair value, less estimated costs to sell. The Fund had no real estate held for sale at. - 6 -
2. Summary of Significant Accounting Policies (continued) Income taxes The Fund is a limited liability company for federal and state income tax purposes. Under the laws pertaining to income taxation of limited liability companies, no income tax is paid by the Fund as an entity. Each individual member reports on their income tax returns their distributive share of Fund income, gains, losses, deductions and credits, whether or not any actual distribution is made to such member during a taxable year. Accordingly, no provision for income taxes besides the $800 minimum state franchise tax and the LLC gross receipts fees is reflected in the accompanying financial statements. 3. Fund Provisions The Fund is a California limited liability company. The rights, duties and powers of the members of the Fund are governed by the operating agreement and Chapter 3, Title 2.5 of the California Corporations Code. The following description of the Fund's operating agreement provides only general information. Members should refer to the Fund's operating agreement and offering circular for a more complete description of the provisions. The Manager is in complete control of the Fund business, subject to the voting rights of the members on specified matters. The Manager acting alone has the power and authority to act for and bind the Fund. Members representing a majority of the outstanding Fund membership interests may approve or disapprove any of the following matters: (i) dissolution and termination of the Fund; (ii) merger or consolidation of the Fund with one or more entities; (iii) amendment of the operating agreement; and (iv) removal of the Manager or Servicer and election of a successor manager. Election to receive distributions The Manager may, at its discretion, agree to provide cash distributions to a member in the amount and frequency as is mutually agreed upon. - 7 -
3. Fund Provisions (continued) Profits and losses Profits and losses accrued during any calendar month are allocated to the members in proportion to their capital accounts maintained throughout the month. Investors who become members of the Fund other than on the first day of a calendar month shall be allocated a proportionate share of the Fund's profits for that month reflecting the days during the month that the investor was a member. Liquidity, capital withdrawals and early withdrawals A member has no right to withdraw from the Fund or to obtain the return of all or any portion of sums paid for the purchase of membership interests (or reinvested earnings with respect thereto) for at least one year after the date such membership interests are purchased. After one year, members may withdraw all or part of their capital accounts from the Fund on the last day of a calendar month that is at least sixty days after notice of withdrawal is given, subject to certain restrictions described below. The amount that a withdrawing member will receive from the Fund is based on the withdrawing Member's capital account. The Fund will not establish a reserve from which to fund withdrawals and, accordingly, the Fund's capacity to return a member's capital account is restricted to the availability of Fund cash flow. If current cash flow of the Fund is inadequate to return a member's capital account within the time periods stated above, the Fund is not required to liquidate any loan prior to maturity for the purpose of liquidating the capital account of a withdrawing member and is merely required to continue paying whatever cash flow is available to withdrawing members until their liquidation schedules are adhered to once again. The Fund is not required, and does not intend, to allow withdrawal or redemption of more than 10% of the Fund's aggregate outstanding capital accounts during any twelve month period. Upon dissolution or termination of the Fund, a five-year winding up period is provided for liquidating the Fund's loan portfolio and distributing cash to members. The Manager also reserves the right to expel a member involuntarily at any time for any reason or no reason, by liquidating such member's capital account, subject only to any outstanding unfulfilled withdrawal requests from other members. - 8 -
4. Related Party Transactions Asset management fees Monthly asset management fees of up to.0833% (1% annually) of net assets under management, calculated as of the last day of each calendar month with respect to net assets under management as of the first day of the immediately preceding month, are payable to the Manager on a monthly basis. Asset management fees of $35,441 were incurred for the period ended. The Fund had payables to the Manager for asset management fees of $7,408 at. Loan servicing fees Loan servicing fees of.0833% (1% annually) of the principal amount of each Fund loan are payable monthly to the Servicer as interest is received by the Fund. Loan servicing fees of $32,545 were incurred for the period ended. The Fund had payables to the Servicer for loan servicing fees of $7,064 at. Other fees The operating agreement provides for other fees such as loan processing and documentation fees. Such fees are incurred by the borrowers and are paid to the Manager. Operating expenses The Manager is entitled to reimbursement of all organizational, syndication and operating expenses incurred on behalf of the Fund, including, but not limited to, out-of-pocket operating and administrative expenses of the Fund. The Manager has waived its right to reimbursement of any and all such expenses since the Fund's inception. - 9 -
5. Asset Concentrations and Characteristics The loans are secured by recorded deeds of trust. At, there were 16 secured loans outstanding, with the following characteristics: Number of secured loans outstanding 16 Total secured loans outstanding $8,817,000 Average secured loan outstanding $ 551,063 Average secured loan as percent of total 6.25% Average secured loan as percent of members' equity 6.20% Largest secured loan outstanding $1,230,000 Largest secured loan as percent of total 13.95% Largest secured loan as percent of members' equity 13.85% Number of counties where security is located 10 Largest percentage of loans in one county 18.37% Number of secured loans in foreclosure $ - Amount of secured loans in foreclosure $ - The following categories of secured loans were held at : First trust deeds $5,222,000 Second trust deeds 3,595,000 $8,817,000 Investments by type of property Residential $2,140,000 Land 2,855,000 Commercial 3,822,000 $8,817,000-10 -
5. Asset Concentrations and Characteristics (continued) Scheduled maturity dates of secured loans as of are as follows: Year Ending December 31, 2006 $3,235,000 2007 3,942,000 2008 1,640,000 Total $8,817,000-11 -