##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K [X ]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal year ended: December 31, 2003OR[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period fromto Commission file number: 333-44860 SPECIALTY TRUST, INC. (Formerly Specialty Mortgage Trust, Inc.)  Maryland
    
    88-0382463(State or other jurisdiction of
    
    (I.R.S. EmployerIncorporation or organization)
    
    Identification No.)
 6160 Plumas St.Reno, Nevada
    
    89509(Address of principal executive offices)
    
    (Zip Code)
 (775) 826-0809
(Registrants telephone number, including area code) Securities
registered pursuant to Section 12(b) or 12(g) of the Act None Indicate by check mark whether the Registrant (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes  [X]   No  [  ] Indicate
by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be
contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in
Part III of this Form 10-K or amendment to this
Form 10-K  [  ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  [  ]  
No  [X] APPLICABLE ONLY TO CORPORATE ISSUERS: The
aggregate market value of voting and non-voting stock held by
nonaffiliates of the registrant was $53,827,158 as of June 30,
2003. At March 15, 2004,
7,840,301 shares of common stock, par value $0.01, of the
registrant were outstanding.




---










INDEX

PagePART I.Item 1.
    
    Business
    
    
    2Item 2.
    
    Properties
    
    
    27Item 3.
    
    Legal Proceedings
    
    
    27Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27PART II.Item 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    27Item 6.
    
    Selected Financial Data
    
    
    30Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    31Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 8.
    
    Financial Statements and Supplementary Data
    
    
    F-1Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Earnings
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Income
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-7Notes to
Consolidated Financial Statements
    
    
    F-9Item 9.
    
    Changes and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    72Item 9A.
    
    Controls and Procedures
    
    
    72PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    72Item 11.
    
    Executive Compensation
    
    
    77Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    78Item 13.
    
    Certain Relationships and Related Transactions
    
    
    80Item 14.
    
    Principal Accountant Fees and Services
    
    
    84PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    85EXHIBIT 10.1.2EXHIBIT 10.2.1EXHIBIT 11.1EXHIBIT 21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2


1



---



##### Table of Contents










PART I.




Item 1. Business



| |  | Our business objective is to build and hold a portfolio of mortgage
loans for investment that generates net income for distribution to
stockholders. We finance our acquisitions of mortgage loans with
equity and secured borrowings. We are structured as a real estate
investment trust (REIT), thereby generally eliminating Federal
income taxes at the corporate level, the tax effect is passed to the
shareholders on income we distribute to stockholders in the form of
dividends. Because we are not structured as a traditional lender,
which accepts deposits, we are subject to substantially less
regulatory oversight and incur lower compliance expenses compared to
banks, thrifts and many other holders of mortgage loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 2, 2002, the Company changed its name from Specialty Mortgage
Trust, Inc. to Specialty Trust, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The Manager                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Specialty Financial, formerly Gonzo Financial, serves as our manager
(the Manager) and is responsible for loan originations, loan
servicing and our day-to-day operations, subject to the supervision
of our Board of Directors. Mr. Nello Gonfiantini, III, a director
and our chief executive officer, is also an executive officer,
director and the sole stockholder of Specialty Financial. We have no
separate employees from the Manager. We have no ownership interest
in the Manager. Specialty Financial has significant operating
discretion as to the implementation of our business strategy and
policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Specialty Financial is regulated as a mortgage company by the state
of Nevada Financial Institutions Division, Department of Business
and Industry, has filed annual reports with that agency and has been
profitable each year since commencing operations in 1995. The
Manager operates from office space located at 6160 Plumas Street,
Reno, Nevada 89509, telephone (775) 826-0809.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Our business strategies and policies are described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Investment Strategies and Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Mortgage Loan Acquisition Strategy. Our business involves acquiring
and holding loans to borrowers primarily in the Western United
States whose borrowing needs are generally not being served by
traditional financial institutions. Although the majority of our
loans are located in the states of Arizona and Nevada, we are also
acquiring loans in California, Utah, and Colorado. Our strategy is
to focus on land loans, construction loans, commercial building
loans and nonconforming single-family and small multifamily
residential loans. We generally limit the amount of our investment
in any single mortgage loan or in mortgage loans to one borrower to
10% of our total mortgage loans, although exceptions may be approved
by the board. As of December 31, 2003, there were two mortgage
loans, which exceeded the 10% threshold, and three borrowers whose
total loans exceeded the 10% threshold, which the board approved.
Most loans have terms of two to three years. At December 31, 2003,
less than 1% of our loan portfolio consisted of loans with
originally stated maturities of more than three years from the year
of issuance. Approximately 90% of our mortgage loan balances will at
any one time be secured by first deeds of trust on the

2



---



##### Table of Contents







| |  | underlying real property, with the remaining mortgage loan balances
secured primarily by second deeds of trust. Our mortgage loans may
be secured by mortgages on unimproved as well as improved real
property and non-income producing as well as income-producing real
property. Some mortgage loans may be secured by the borrowers
leasehold interest in real property. Our loans generally produce
higher yields than are obtained on traditional single-family
residential mortgage loans, but are subject to higher risks of
default and loss.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We acquire loans originated by our Manager. Our loans target as
potential customers borrowers with relatively significant equity
value in their property, but who either:                                                                                                                                                                                                                                                                                                                                                                             



|- |  | require a small commercial loan;                                                                                                                                      
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|- |  | own real property which is difficult to evaluate
under typical residential underwriting guidelines or unlikely
to support a mortgage saleable in the secondary market;
| 
|- |  | are self-employed, tend to experience some
volatility in their income or have difficult-to-document
sources of income; or                                             
| 
|- |  | are otherwise unable to qualify for traditional
mortgage loans.                                                                                                       



| |  | All loans provide for monthly payments of interest. Currently, the
majority of our loans are at fixed rates of interest. As part of
the acquisition or refinance of a particular mortgage loan, we may
acquire a shared appreciation interest or other participation in the
property securing the loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Risks by Type of Loan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Most of the loans we acquire and hold require the borrower to make a
balloon payment on the principal amount upon maturity of the loan.
At December 31, 2003, less than 1% of our loan portfolio consisted
of fully amortizing mortgage loans. To the extent that a borrower
has an obligation to pay a mortgage loan in a large lump sum
payment, its ability to satisfy this obligation may be dependent
upon its ability to obtain suitable refinancing, sell the underlying
property or otherwise raise a substantial cash amount. An increase
in interest rates over the mortgage rate applicable at the time the
loan was originated may have an adverse effect on the borrowers
ability to obtain refinancing or to pay the required monthly
payments. As a result, such loans may involve a higher risk of
default than fully amortizing loans.
|
| |  | We generally hold our mortgage loans to maturity. In addition, the
REIT provisions of the Internal Revenue Code (the Code) limit in
some respects our ability to sell mortgage loans. From time to time,
however, management may decide to sell mortgage loans. This could
occur for any number of reasons, for example, to dispose of a
mortgage loan as to which credit risk concerns have arisen, to
reduce interest rate risk, or generally to rebalance our portfolio
when management deems such action advisable. Management will select
any mortgage loans to be sold according to the particular purpose
such sale will serve. The Board of Directors has not adopted a
policy that would restrict managements authority to determine the
timing of sales or the selection of mortgage loans to be sold.                                       
|
| |  | Types of Mortgage Loans. The principal types of mortgage loans we
acquire are described below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



|- |  | Land Loans. Land loans are made against (a)
undeveloped or raw land zoned for either commercial or
residential use and (b) land prepared for commercial or
residential development, typically with entitlements obtained
and basic infrastructure such as
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3



---



##### Table of Contents







| |  | streets and utilities in place. An example of a residential land
development loan would be a loan secured by a residential
subdivision with residential lots ready for building. While land
loans are generally made at low loan-to-value ratios, usually
less than 50%, there is generally no cash flow from the property
and the borrowers other sources of income must be relied upon to
support the periodic interest payments due under the loans.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|- |  | Construction Mortgage Loans. Construction loans are
loans made for the renovation of developed property, and for
the construction of new structures on undeveloped property.
Construction loans acquired and held by us will generally be
secured by first deeds of trust on commercial or residential
real property. Most of our construction loans are to developers
building the property for sale. Such loans are typically for
terms of from six months to two years. Generally we do not
disburse funds with respect to a particular construction loan
until work in the previous phase of the project on which the
loan is being made has been completed, and until an independent
inspector has verified the quality of construction and
adherence to the construction plans and has reviewed the
estimated cost of completing the project. In addition, we
require the submission of signed labor and material lien
releases by the borrower in connection with each completed
phase of the project prior to making any periodic disbursements
of proceeds of the loan to the borrower.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|- |  | Commercial Building Loans. Commercial building
loans have distinct risk characteristics depending on the type
of structure on the property. Commercial building loans
generally lack standardized terms, which may complicate their
structure. Commercial buildings themselves tend to be unique
and are more difficult to value than residential properties. In
addition, commercial buildings, particularly industrial and
warehouse properties, are generally subject to relatively
greater environmental risks than non-commercial properties,
with corresponding burdens and costs of compliance with
environmental laws and regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |  | Commercial building loans are also subject to the effects of:
| |  | -------------------------------------------------------------



| |  | local and other economic conditions on real estate values;                                                                                                                                                                                                                                                                                                                                                                                                
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the ability of tenants to make lease payments;                                                                                                                                                                                                                                                                                                                                                                                                            
| 
| |  | the ability of a building to attract and
retain tenants, which may in turn be affected by local
conditions such as oversupply of space or a reduction in
demand for rental space in the area, the attractiveness of
properties to tenants, competition from other available
space, the ability of the owner to pay leasing commissions,
provide adequate maintenance and insurance, pay tenant
improvement costs and to make other tenant concessions; and
| 
| |  | increased operating costs, including energy
costs and real estate taxes.                                                                                                                                                                                                                                                                                                                                                                                  



| |  | While owners of commercial buildings generally will carry
comprehensive liability and casualty coverage, such coverage may
not provide full protection for the value of the underlying
property and may not protect against all casualty losses. If
underlying commercial buildings do not generate sufficient income
to meet operating expenses, debt service, capital expenditures
and tenant improvements, borrowers under commercial building
loans may be unable to make payments of principal and interest in
a timely fashion. Income from and values of commercial buildings
are also affected by
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



---



##### Table of Contents







| |  | such factors as applicable laws, including tax laws, interest
rate levels, the availability of financing for owners and
tenants, and the impact of and costs of compliance with
environmental controls and regulations. In the event of
foreclosure on a commercial building loan, there may be costs and
delays involved in enforcing rights of a property owner against
tenants in default under the terms of leases with respect to
commercial properties and such tenants may seek the protection of
the bankruptcy laws, which can result in termination of lease
contracts.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|- |  | Nonconforming Single-Family and Small Multifamily
Residential Mortgage Loans. The nonconforming single-family
residential mortgage loans are conventional mortgage loans that
vary in one or more respects from the requirements for
participation in Fannie Mae or Freddie Mac programs. Credit
risks associated with nonconforming mortgage loans may be
greater than those associated with mortgage loans that conform
to typical Fannie Mae and Freddie Mac guidelines. The principal
differences between nonconforming mortgage loans and conforming
mortgage loans include the applicable loan-to-value ratios, the
credit and income histories of the mortgagors, the
documentation required for approval of the mortgagors, the
types of properties securing the mortgage loans, loan sizes and
the mortgagors occupancy status with respect to the mortgaged
property. Nonconforming loans may include loans secured by
timeshare vacation property. As a result of these and other
factors which may cause these nonconforming mortgage loans to
experience higher risk of credit default and loss, the interest
rates charged on these loans are often higher than those

charged for conforming mortgage loans.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Small multifamily mortgage loans are generally secured by a first
lien on a 5-unit to 20-unit residential property. Multifamily
mortgage loans share many of the characteristics and risks
associated with commercial mortgage loans and are often
categorized as commercial loans rather than residential loans. We
also include loans on mobile home parks in this residential
category.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|- |  | Junior Mortgage Loans. Second, third and wraparound
mortgage loans are secured by deeds of trust on single-family
residences which are already subject to prior mortgage
indebtedness. A wraparound loan is a junior mortgage loan
having a principal amount equal to the outstanding balance
under the existing mortgage loans plus the amount actually to
be advanced under the wraparound mortgage loan. Under a
wraparound loan, we generally make principal and interest
payments on behalf of the borrower to the holders of the prior
mortgage loans. Junior mortgage loans generally have lower
qualifying loan-to-value ratios.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5



---



##### Table of Contents









Table 1: Mortgage Loan Portfolio
(as of December 31, 2003)

Current Loan
    
    SpecialtyST Net
    
    Original
    
    Principal
    
    Trust
    
    
    
    
    
    
    
    
    
    LienFootnotes
    
    Description of Loan
    
    Interest Rate
    
    Loan Amount *
    
    Amount
    
    Balance +
    
    Maturity
    
    LTV
    
    PositionLAND LOANSResidential Raw Land
    
    
    13.00
    %
    
    
    42,500
    
    
    
    42,500
    
    
    
    42,500
    
    
    
    1/1/05
    
    
    
    57
    %
    
    1stResidential Raw Land
    
    
    13.00
    %
    
    
    30,000,000
    
    
    
    27,300,000
    
    
    
    19,950,000
    
    
    
    9/1/05
    
    
    
    32
    %
    
    1stResidential Raw Land
    
    
    13.00
    %
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    1/1/06
    
    
    
    20
    %
    
    1stResidential Raw Land Total
    
    
    
    
    
    $
    40,042,500
    
    
    $
    37,342,500
    
    
    $
    29,992,5001
    
    
    Residential Land Development
    
    
    12.50
    %
    
    $
    10,000,000
    
    
    $
    6,498,198
    
    
    $
    6,498,198
    
    
    
    8/1/04
    
    
    
    93
    %
    
    1st1
    
    
    Residential Land Development
    
    
    12.50
    %
    
    
    5,560,000
    
    
    
    1,547,034
    
    
    
    1,547,034
    
    
    
    2/1/04
    
    
    
    93
    %
    
    1stResidential Land Development
    
    
    12.75
    %
    
    
    35,000,000
    
    
    
    22,500,000
    
    
    
    8,035,714
    
    
    
    11/1/04
    
    
    
    49
    %
    
    1st3
    
    
    Residential Land Development
    
    
    13.00
    %
    
    
    18,250,000
    
    
    
    18,250,000
    
    
    
    424,000
    
    
    
    2/1/06
    
    
    
    67
    %
    
    2ndResidential Land Development
    
    
    13.00
    %
    
    
    7,300,000
    
    
    
    4,573,640
    
    
    
    4,573,640
    
    
    
    10/1/04
    
    
    
    57
    %
    
    1stResidential Land Development
    
    
    13.00
    %
    
    
    2,185,000
    
    
    
    539,430
    
    
    
    539,430
    
    
    
    4/1/04
    
    
    
    11
    %
    
    1stResidential Land Development
    
    
    13.00
    %
    
    
    1,920,000
    
    
    
    160,000
    
    
    
    160,000
    
    
    
    9/1/04
    
    
    
    5
    %
    
    1stResidential Land Development Total
    
    
    
    
    
    $
    86,661,520
    
    
    $
    54,068,302
    
    
    $
    21,778,0164
    
    
    Commercial Raw Land
    
    
    13.00
    %
    
    $
    5,000,000
    
    
    $
    5,000,000
    
    
    $
    5,000,000
    
    
    
    4/1/04
    
    
    
    52
    %
    
    1st2
    
    
    Commercial Raw Land
    
    
    12.25
    %
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    2/1/06
    
    
    
    46
    %
    
    1st2
    
    
    Commercial Raw Land
    
    
    12.50
    %
    
    
    1,209,500
    
    
    
    1,209,500
    
    
    
    1,209,500
    
    
    
    1/1/05
    
    
    
    59
    %
    
    1st2
    
    
    Commercial Raw Land
    
    
    12.50
    %
    
    
    7,100,000
    
    
    
    7,100,000
    
    
    
    3,575,000
    
    
    
    5/1/05
    
    
    
    53
    %
    
    1st4
    
    
    Commercial Raw Land
    
    
    13.00
    %
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    3,000,000
    
    
    
    6/1/04
    
    
    
    59
    %
    
    1stCommercial Raw Land
    
    
    12.50
    %
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    5,000,000
    
    
    
    7/1/05
    
    
    
    23
    %
    
    1stCommercial Raw Land Total
    
    
    
    
    
    $
    24,309,500
    
    
    $
    24,309,500
    
    
    $
    20,784,500TOTAL
LAND LOANS
    
    
    
    
    
    $
    151,013,520
    
    
    $
    115,720,302
    
    
    $
    72,555,016CONSTRUCTION LOANS5/7
    
    
    Spec SFR Construction
    
    
    13.00
    %
    
    
    2,315,714
    
    
    
    2,315,714
    
    
    
    2,315,714
    
    
    
    7/1/03
    
    
    
    99
    %
    
    1st5/7
    
    
    Spec SFR Construction
    
    
    13.00
    %
    
    
    475,000
    
    
    
    390,212
    
    
    
    390,212
    
    
    
    7/1/03
    
    
    
    99
    %
    
    3rdSFR Construction Total
    
    
    
    
    
    $
    2,790,714
    
    
    $
    2,705,926
    
    
    $
    2,705,9263
    
    
    Golf Course Construction
    
    
    13.00
    %
    
    
    12,500,000
    
    
    
    10,708,000
    
    
    
    7,803,767
    
    
    
    7/1/04
    
    
    
    67
    %
    
    1st3
    
    
    Interval Construction
    
    
    13.00
    %
    
    
    3,380,000
    
    
    
    3,380,000
    
    
    
    3,380,000
    
    
    
    1/1/06
    
    
    
    65
    %
    
    1stSpec. Prof Office Const
    
    
    13.00
    %
    
    
    5,100,000
    
    
    
    5,100,000
    
    
    
    5,100,000
    
    
    
    5/1/04
    
    
    
    86
    %
    
    1stCommercial Construction Total
    
    
    
    
    
    $
    20,980,000
    
    
    $
    19,188,000
    
    
    $
    16,283,767TOTAL
CONSTRUCTION LOANS
    
    
    
    
    
    $
    23,770,714
    
    
    $
    21,893,926
    
    
    $
    18,989,693


6



---



##### Table of Contents





Table 1: Mortgage Loan Portfolio  Continued
(as of December 31, 2003)

Current Loan
    
    SpecialtyST Net
    
    Original
    
    Principal
    
    Trust
    
    
    
    
    
    
    
    
    
    LienFootnotes
    
    Description of Loan
    
    Interest Rate
    
    Loan Amount *
    
    Amount
    
    Balance +
    
    Maturity
    
    LTV
    
    PositionNON CONFORMING SINGLE FAMILY AND
MULTIFAMILY LOANS7
    
    
    SFR
    
    
    13.25
    %
    
    $
    2,750,000
    
    
    $
    2,750,000
    
    
    $
    2,750,000
    
    
    
    10/1/03
    
    
    
    57
    %
    
    2nd6
    
    
    SFR
    
    
    10.50
    %
    
    
    1,950,000
    
    
    
    1,071,481
    
    
    
    1,071,481
    
    
    
    7/1/03
    
    
    
    77
    %
    
    1st6
    
    
    SFR
    
    
    12.50
    %
    
    
    235,000
    
    
    
    235,000
    
    
    
    235,000
    
    
    
    7/2/04
    
    
    
    73
    %
    
    2ndSFR
    
    
    13.00
    %
    
    
    20,000
    
    
    
    8,974
    
    
    
    8,974
    
    
    
    12/1/06
    
    
    
    73
    %
    
    2ndSingle Family Total
    
    
    
    
    
    $
    4,955,000
    
    
    $
    4,065,455
    
    
    $
    4,065,455TOTALS
    
    
    
    
    
    $
    179,739,234
    
    
    $
    141,679,684
    
    
    $
    95,610,164


Footnotes: Loans to More Than One Borrower



|1 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $8,045,232                                                                                                   
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|2 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $7,784,500                                                                                                   
| 
|3 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $11,607,767                                                                                                  
| 
|4 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $8,000,000                                                                                                   
| 
|5 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $2,705,926                                                                                                   
| 
|6 |  | Loans to same borrower or related parties secured by different parcels of real estate aggregating to $1,306,482                                                                                                   
| 
|7 |  | Loans delinquent either in principal or interest past 30 days                                                                                                                                                     
| 
|* |  | Original loan amount includes future commitments on behalf of all investors of $6,201,802 at December 31, 2003                                                                                                    
| 
|+ |  | Specialty Trusts participation in current loan balance as of December 31, 2003 was $95,610,164. Specialty Trusts maximum commitment of additional funds under existing loans was $6,201,802 at December 31, 2003

7



---



##### Table of Contents









Table 2: Types and Maturities of Mortgage Investments
(as of December 31, 2003)

CarryingNumber
    
    AmountType of Loan
    
    of Loans
    
    of Mortgages
    
    Percent1st Mortgages
    
    
    20
    
    
    $
    91,801,978
    
    
    
    96.0
    %2nd Mortgages
    
    
    4
    
    
    
    3,417,974
    
    
    
    3.6
    %3rd Mortgages
    
    
    1
    
    
    
    390,212
    
    
    
    0.4
    %25
    
    
    $
    95,610,164
    
    
    
    100.00
    %Land
    
    
    16
    
    
    $
    72,555,016
    
    
    
    75.9
    %Construction
    
    
    5
    
    
    
    18,989,693
    
    
    
    19.9
    %Commercial
    
    
    
    
    
    
    
    
    
    
    0.0
    %Other
    
    
    4
    
    
    
    4,065,455
    
    
    
    4.2
    %25
    
    
    $
    95,610,164
    
    
    
    100.00
    %Maturing on or before
December 31, 2004
    
    
    15
    
    
    $
    49,020,189
    (1)
    
    
    51.3
    %Maturing on or between
January 1, 2005 and
December 31, 2007
    
    
    10
    
    
    
    46,589,975
    
    
    
    48.7
    %25
    
    
    $
    95,610,164
    
    
    
    100.0
    %




|(1) |  | Loans aggregating to $6,618,502 in principal and accrued interest were
153-364 days past due at December 31, 2003
|--- |  | -----------------------------------------------------------------------------------------------------------------



| |  | Other Investments. We may purchase our own stock or the debt or
equity of other mortgage REITs or other companies when we believe
that such purchases will yield attractive returns on capital
employed. Any such purchase would be for investment purposes and not
for short-term trading (turnover) gain. REIT or other debt or equity
securities may be undervalued at points in the economic cycle. When
the stock market valuation of companies are low in relation to the
market value of other assets, stock purchases can be a way for us to
acquire indirectly a beneficial interest in a pool of mortgage
assets or other types of assets at an attractive price. Also, REITs
and other companies may have attractive mortgage finance or other
businesses in which we may want to become a partial owner. We do
not, however, presently intend to invest in the securities of other
issuers for the purpose of exercising control or to underwrite
securities of other issuers. We do not limit the amount of
securities of other issuers we may acquire (beyond the limits
imposed by the REIT qualification requirements), although we do not
anticipate that such holdings will comprise a substantial portion of
our assets. At December 31, 2003, we did not own any such
securities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



---



##### Table of Contents











| |  | Leverage Strategies and Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We employ a debt financing strategy to increase our investment in
mortgage loans. By using our mortgage loans as collateral to borrow
funds, we are able to invest in mortgage loans with greater value
than our equity. We have a targeted ratio of debt-to-equity of
approximately 1 to 1. While there are no charter or bylaw
limitations on our use of leverage, we currently have a policy and
have agreed with our primary bank lenders not to exceed that target
by permitting our debt, whether under bank lines or our
Collateralized Note program, to exceed our equity. Our financing
strategy is designed to maintain a cushion of equity sufficient to
respond to short-term liquidity needs. We anticipate that all of our
borrowing arrangements will require us to pledge cash or additional
mortgage loans in the event the market or discounted value of
existing collateral declines. To the extent that cash reserves are
insufficient to cover such deficiencies in collateral, we may be
required to sell mortgage loans to reduce the borrowings.
|
| |  | We intend to finance our mortgage loan acquisitions through our
collateralized note program and bank warehouse credit lines. At
December 31, 2003, the amount of such credit lines was $19.5
million, with $0 outstanding at December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | On May 7, 2002, a registration statement was declared effective by
the Securities and Exchange Commission covering up to $269,312,000
of Collateralized Notes (including amounts remaining unsold under
the prior registration). The Collateralized Notes are secured by
mortgage loans at least one and one-half times the aggregate
principal amount outstanding on the Collateralized Notes. The
outstanding Collateralized Notes have maturities ranging from three
months to five years from the date of issue and bear fixed rates of
interest (2.25% to 7.5% at December 31, 2003). As of December 31,
2003 $33,410,279 of these Notes were outstanding.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Our goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the
over-utilization of leverage, which could reduce our ability to meet
our obligations during adverse market conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Operating Strategies and Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Origination and Underwriting. Specialty Financial continuously
evaluates prospective mortgage loans to be acquired by Specialty
Trust. The Manager generates mortgage loan originations from
referrals from real estate and mortgage loan brokers, referrals from
existing customers, new loans made to or refinancing of loans to
existing customers and personal solicitations of new borrowers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | All potential mortgage loans are evaluated to determine if the
mortgage loan is of a type eligible for acquisition by Specialty
Trust. Our policy generally limits the amount of loans to one
borrower or affiliated borrowers to less than 10% of total mortgage
loans and the loan-to-value ratio for any loan to a maximum of 80%,
although exceptions may be approved by the board. As the notes to
Table 1: Mortgage Loan Portfolio indicate, at December 31, 2003
there were six instances of loans to the same borrower or related
parties secured by different parcels of real property. One of these
loans to the same borrower represents more than 10% of the
portfolio. The Company had a total of two loans that exceeded 10% of
the portfolio. We generally seek personal guarantees from
affiliates of the borrower when possible. We do not have specific
requirements with respect to credit                                                                                                                                                         

9



---



##### Table of Contents







| |  | scores or payment histories. For income producing properties, the
net annual estimated cash flow after vacancy, and operating expenses
must equal or exceed the annual payments required on the mortgage
loan. The Manager requires full documentation of all loan
application/requests, including complete organizational documents of
the borrowing entity, if applicable, credit reports on guarantors
and borrowers, current (within 60 days) financial statements, and a
minimum of two years tax returns. A flood zone determination must
be provided. A preliminary title report is obtained and reviewed by
the underwriter. ALTA surveys, Phase I environmental reports and
geotechnical reports are required on most loans but can be waived on
a case-by-case basis upon physical inspection and determination by
Mr. Nello Gonfiantini, III. Liability insurance is required on all
loans and hazard insurance is required on any structures. If the
loan is to finance a purchase, a copy of the purchase contract must
be submitted. If the loan is for refinance, a copy of the closing
statement when purchased is reviewed. If a loan is for construction,
a copy of plans, specifications and cost breakdown must be reviewed
and a construction control company retained. Our underwriting
guidelines are intended to evaluate the capacity and willingness of
the borrower to repay the loan and the adequacy of the collateral
securing the loan. On a case-by-case basis, exceptions to the
underwriting guidelines may be made by Nello Gonfiantini III,
President and the loan review committee where there are
compensating factors, for example, low loan-to-value ratios or
guarantees from parties with strong financial resources or pledges
of additional collateral.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Collateral valuation receives special attention in the Managers
underwriting of our mortgage loans. The Manager places great
emphasis on the ability of our collateral to protect against losses
in the event of default by borrowers. In determining the adequacy of
the mortgaged property as collateral, the Manager obtains
independent, on-site appraisals for each mortgage property and the
property is inspected by an officer or employee of the Manager. All
independent appraisers must be licensed or qualified as independent
fee appraisers and certified by the state in which the property
being appraised is located. The appraiser is required to inspect the
property and verify that it is in good condition and that
construction, if new, has been completed. The appraisal is based on
the market value of comparable properties, the estimated rental
income, if applicable, and the cost of replacement. The appraised
value of the property being financed must be such that it currently
supports, and is anticipated to support in the event of default, the
outstanding mortgage loan balance. The Manager generally relies on
its own independent analysis and not exclusively on such appraisals
in determining whether or not to arrange a particular mortgage loan.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Servicing. The Manager has established its own servicing operation
in order to service the mortgage loans. Servicing includes
collecting and remitting loan payments, making required advances,
accounting for principal and interest, holding escrow or impound
funds for payment of taxes and insurance, making required
inspections of the property, contacting delinquent borrowers and
supervising foreclosures and property dispositions in the event of
unremedied defaults in accordance with the Companys guidelines. The
focus of the Managers servicing operation is on managing credit
risk in order to protect our investment in the mortgage loans. The
Manager intends to use early intervention, aggressive collection and
loss mitigation techniques in the servicing process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Credit and Market Risk Management. We believe that proper
underwriting and efficient servicing of our mortgage loans are the
most effective methods of managing our credit risk. The Managers
focus as a servicer of mortgage loans it has originated is more on
effective credit risk management than on cost control. The Manager
does not intend to be a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

10



---



##### Table of Contents







| |  | low cost servicer, but instead puts the proper resources to work to
mitigate losses on the mortgage loans it services.
| |  | ----------------------------------------------------------------------------------------------------------------------
|
| |  | Set forth below is a table setting forth our recent delinquency,
foreclosure and loss experience:                     

Table 3: Delinquency, Foreclosure and Loss Experience

December 31, 2003
    
    December 31, 2002Principal
    
    % of
    
    Principal
    
    % of$ of Loans
    
    Portfolio
    
    $ of Loans
    
    PortfolioTotal Portfolio
    
    $
    95,610,164
    
    
    
    100.00
    %
    
    $
    96,245,394
    
    
    
    100.00
    %Period of Delinquency
(Interest and/or Principal):30-59 days
    
    
    
    
    
    
    0.00
    %
    
    
    6,570,000
    
    
    
    6.83
    %60 to 89 days
    
    
    
    
    
    
    0.00
    %
    
    
    1,579,915
    
    
    
    1.64
    %90 days or more
    
    
    3,777,407
    
    
    
    3.90
    %
    
    
    5,105,077
    
    
    
    5.30
    %Total Delinquencies
(excluding foreclosures)
    
    $
    3,777,407
    
    
    
    3.90
    %
    
    $
    13,254,992
    
    
    
    13.77
    %Foreclosures Pending
    
    
    2,841,094
    
    
    
    2.80
    %
    
    
    
    
    
    
    0.00
    %Foreclosures Completed
    
    $
    10,224,992
    
    
    
    
    
    
    $
    950,000Losses Sustained for Period
Ending on Such Date
    
    $
    171,324
    
    
    
    
    
    
    
    




| |  | Specialty Trust generally institutes foreclosure proceedings on
defaulted loans when that action is determined by the Manager to be
in the best interests of shareholders. Foreclosure may be
appropriate where the project planned for the property has
encountered slower than anticipated development or sales results or
where the developer/borrowers financial condition has deteriorated
such that completion of the project has been jeopardized. A loan
that is nearing maturity or has defaulted may be a candidate for
refinancing rather than foreclosure when management determines that
the project planned remains viable and the value of the property and
other sources of repayment such as personal guarantees are
sufficient to support a new loan. In such cases, management often
works with marketing and other real estate professionals to assist
the developer in modifying the original project to enhance its
likelihood of success.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### Table of Contents







| |  | Geographic Concentration.There are no limits on the geographic
concentration of the loans we may acquire and properties underlying
mortgage loans are located primarily in the states of Arizona and Nevada. In
order to reduce our market risk exposure from investing in mortgage
loans to borrowers located primarily in the states of Arizona and Nevada, we have
begun to acquire loans secured by properties in the states of
California, Utah and Colorado.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The percentage of geographic concentration by loan amount is as follows:
| |  | ------------------------------------------------------------------------

Nevada
    
    
    34
    %
    (approx. 22% in the Reno area and 12% in the Las Vegas area)Arizona
    
    
    52
    %Colorado
    
    
    6
    %Utah
    
    
    5
    %California
    
    
    3
    %




| |  | Interest Rate Risk Management. We seek to limit our exposure to
changes in interest rates in several ways. We generally acquire
short-term loans with fixed interest rates and maturities of less
than three years. While our loan terms exceed the terms for interest
rate adjustments on our borrowings, the resulting interest rate
exposure is mitigated by our leverage policy limits. Under our
targeted debt-to-equity ratio of approximately 1 to 1, at least 50%
of our earning assets will at all times be funded with equity. The
income from these assets will be available to cover increases in
interest expense on our borrowings, to the extent not covered by the
assets funded with such borrowings. In addition, the higher
yielding-higher risk nature of our loans provides a greater net
interest cushion that can withstand more interest rate increases on
borrowings than lower yielding-lower risk loans.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We do not hedge our interest rate risk by purchasing interest rate
caps, floors or other derivative instruments. We believe that the
cost of such hedging instruments would outweigh the potential
benefits to be gained by us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Prepayment Risk Management. The Manager seeks to minimize the
effects of faster than anticipated prepayment rates in our
portfolio, in part by originating mortgage loans with prepayment
penalties. The Manager also utilizes the production of new mortgage
loans as a hedge against prepayment risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Other Company Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | At the present time, we do not intend to invest directly in real
property or interests in real property. From time to time, however,
we may hold real estate owned (REO) as a result of foreclosure of
defaulted mortgage loans. Further, we do not intend to invest in
mortgage securities or to issue mortgage securities. We do not
anticipate to issue senior securities or to offer our securities in
exchange for property or stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Our Board of Directors has established the investment policies and
strategies summarized in this annual report. The Board of Directors
has the power to modify or waive such policies and strategies
without the consent of the stockholders to the extent that the Board
of Directors determines that such modification or waiver is in the
best interest of stockholders. Among other factors, developments in
the market, which affect the policies and strategies mentioned in
this annual report or which change our assessment of the market, may
cause the Board of Directors to revise our policies and strategies.                                                                                                                                                                                                                                                                                                        

12



---



##### Table of Contents











| |  | Certain Federal Income Tax Considerations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following discussion summarizes certain Federal income tax
considerations relevant to the Company and its investors. This
discussion is based on existing Federal income tax law, which is
subject to change, possibly retroactively. This discussion does not
address all aspects of Federal income taxation that may be relevant
to a particular investor in light of its personal investment
circumstances or to certain types of investors subject to special
treatment under the Federal income tax laws (including financial
institutions, insurance companies, broker-dealers and, except to the
extent discussed below, tax-exempt entities and foreign taxpayers)
and it does not discuss any aspects of state, local or foreign tax
law. This discussion assumes that investors will hold their
investment in common stock or our notes as a capital asset
(generally, property held for investment) under the Internal Revenue
Code (the Code). Investors are advised to consult their tax
advisors as to the specific tax consequences to them of purchasing,
holding and disposing of our common stock or notes, including the
application and effect of Federal, state, local and foreign income
and other tax laws to their investment.
|
| |  | General. We have elected for Federal income tax purposes to be
taxed as a REIT, commencing with the taxable year ending December
31, 1998. Management believes that we have operated, and
anticipates that we will continue to operate, in a manner that
permits us to maintain our qualifications as a REIT. As described
in more detail below, because the Code generally requires REITs to
distribute at least 90% of their tax earnings each year, and further
allows the REIT to deduct such distributions, qualification as a
REIT generally eliminates the double taxation that otherwise
results under current law when a regular corporation earns income
and distributes that income to its stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | There can be no assurance that we will continue to qualify as a REIT
in any particular tax year, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual
determinations and the possibility of future changes in the
circumstances of the Company. If we failed to qualify as a REIT in
any particular year, we would be subject to Federal income tax as a
regular, domestic corporation, and our stockholders would be subject
to tax in the same manner as stockholders of a regular corporation.
In this event, we could be subject to potentially substantial income
tax liability in respect of each taxable year that we fail to
qualify as a REIT and the amount of earnings and cash available for
distribution to our stockholders could be significantly reduced or
eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The following is a brief summary of certain technical requirements
that we must meet on an ongoing basis in order to qualify, and
remain qualified, as a REIT under the Code.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Stock Ownership Tests.Our capital stock must be held by at least
100 persons for at least 335 days of a twelve-month year, or a
proportionate part of a short tax year. In addition, no more than
50% of the value of our capital stock may be owned, directly or
indirectly, by five or fewer individuals at all times during the
last half of the taxable year. Under the Code, most tax-exempt
entities including employee benefit trusts and charitable trusts
(but excluding trusts described in 401(a) and exempt under 501(a))
are generally treated as individuals for these purposes. We must
satisfy these stock ownership requirements each taxable year. We
must solicit information from certain of our stockholders to verify
ownership levels and our Articles of Incorporation impose certain
repurchase obligations and restrictions regarding the transfer of
our shares in order to aid in meeting the stock                                                                                                                                                                                                                                                                                                                               

13



---



##### Table of Contents











| |  | ownership requirements. If we were to fail either of the stock
ownership tests, we would generally be disqualified from REIT
status, unless, in the case of the five or fewer requirement, the
good faith exemption is available.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Asset Tests.For tax years beginning after December 31, 2000, we
must generally meet the following REIT Asset Tests at the close of
each quarter of each taxable year:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(a) |  | the 75% Asset Test: at least 75% of the value of
our total assets must consist of Qualified REIT Real Estate
Assets, government securities, cash, and cash items; and                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | not more than 25% of the value of our total assets
is represented by securities (other than those includible under
the 75% Asset Test);                                                                                                                                                                                                              
|   
|(c) |  | not more than 20% of the value of our total assets
is represented by securities of one or more taxable REIT
subsidiaries; and                                                                                                                                                                                                                        
|   
|(d) |  | the value of securities held by us, other than
those of a taxable REIT subsidiary, or taken into account for
purposes of the 75% Asset Test, must not exceed either (i) 5%
of the value of our total assets in the case of securities of
any one non-government issuer, or (ii) 10% of the outstanding
vote or value of any such issuers securities.



| |  | In applying the above REIT Asset Tests, we are generally required to
re-value all of our assets at the end of any quarter in which we
acquire a substantial amount of new securities or other property
that is not a Qualified REIT Real Estate Asset. We intend to monitor
closely the purchase, holding and disposition of our assets in order
to comply with the REIT Asset Tests. We anticipate that
substantially all of our assets will be Qualified REIT Real Estate
Assets and intend to limit, diversify or hold through a taxable REIT
subsidiary our ownership of any assets not qualifying as Qualified
REIT Real Estate Assets so as to comply with the above REIT Asset
Tests. If it is anticipated that these limits would be exceeded, we
intend to take appropriate measures, including the disposition of
non-qualifying assets within the permitted time periods for cure, so
as to avoid exceeding such limits.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Gross Income Tests.We must generally meet the following gross
income tests (the REIT Gross Income Tests) for each taxable year:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|(a) |  | at least 75% of our gross income must be derived
from certain specified real estate sources including interest
income and gain from the disposition of Qualified REIT Real
Estate Assets, foreclosure property or qualified temporary
investment income (i.e., income derived from new capital
within one year of the receipt of such capital) (the 75% Gross
Income Test); and,                                                                                                                        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | at least 95% of our gross income for each taxable
year must be derived from sources of income qualifying for the
75% Gross Income Test, or from dividends, interest, and gains
from the sale of stock or other securities (including certain
interest rate swap and cap agreements, options, futures and
forward contracts entered into to hedge variable rate debt
incurred to acquire Qualified REIT Real Estate Assets) not held
for sale in the ordinary course of business (the 95% Gross
Income Test).

14



---



##### Table of Contents











| |  | We intend to maintain our REIT status by carefully monitoring our
income, including income from sales of mortgage assets, to comply
with the REIT Gross Income Tests. Under certain circumstances, for
example, (i) the sale of a substantial amount of mortgage assets to
repay borrowings in the event that other credit is unavailable or
(ii) unanticipated decrease in our qualifying income which results
in the non-qualifying income exceeding 5% of gross income, we may be
unable to comply with certain of the REIT Gross Income Tests.
Inadvertent failures to comply with the REIT Gross Income Tests will
not result in our disqualification as a REIT so long as certain
disclosure and reasonable cause criteria are met and we pay a 100%
tax on an amount generally equal to the qualified income shortfall.
See Taxation of the Company below for a discussion of the tax
consequences of failure to comply with the REIT Provisions of the
Code.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Distribution Requirement. We are generally required to distribute
to our stockholders an amount equal to at least 90% of our REIT
taxable income before deduction of dividends paid and by excluding
net capital gain. Such distributions must be made in the taxable
year to which they relate or, if declared before the timely filing
of our tax return for such year and paid not later than the first
regular dividend payment after such declaration, in the following
taxable year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Internal Revenue Service (IRS) has ruled generally that if a
REIT maintains a dividend reinvestment plan that allows stockholders
of the REIT to elect to have cash distributions reinvested in shares
of the REIT at a purchase price equal to at least 95% of the fair
market value of such shares on the distribution date, then such
distributions qualify under the above distribution requirement. We
maintain a Dividend Reinvestment Plan (DRIP) and intend that the
terms of our DRIP will comply with the IRS public ruling guidelines
for such plans.                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | If we fail to meet the distribution test as a result of an
adjustment to our taxable income by the IRS, we may be able to avoid
disqualification as a REIT by paying a deficiency dividend within a
specified time period and in accordance with other requirements set
forth in the Code. We would be liable for interest based on the
amount of the deficiency dividend. A deficiency dividend is not
permitted if the deficiency is due to fraud with intent to evade tax
or to a willful failure to file a timely tax return.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Taxation of the Company. In any year in which we qualify as a REIT,
we will generally not be subject to Federal income tax on that
portion of our REIT taxable income or capital gain that is
distributed to our stockholders. We will, however, be subject to
Federal income tax at normal corporate income tax rates upon any
undistributed taxable income or capital gain.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | In addition, notwithstanding our qualification as a REIT, we may
also be subject to tax in certain other circumstances as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



|(a) |  | if we fail to satisfy either of the REIT Gross
Income Tests, but nonetheless maintain our qualification as a
REIT because certain other requirements are met, we will
generally be subject to a 100% tax on the greater of the amount
by which we fail either the 75% or the 95% Gross Income Test;
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15



---



##### Table of Contents







|(b) |  | we will also be subject to a tax of 100% on net
income derived from any prohibited transaction (which
includes dispositions of property classified as dealer
property). In certain circumstances, a REO that is constructed
upon or developed by us, shared appreciation mortgages and
other equity-like interests coupled with a mortgage may be
deemed to give rise to income from dealer property. In such
event, such interests might give rise to non-qualifying income
for purposes of the REIT Gross Income Tests and the 100%
prohibited transaction tax. We do not believe that we have or
will engage in transactions at the REIT level that would result
in our being classified as a dealer. However, there cannot be
any assurance that the Internal Revenue Service will agree;
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(c) |  | if we have (i) net income from the sale or other
disposition of an REO that is not further developed by us but
which is deemed held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income
from foreclosure property, we will be subject to Federal income
tax on such income at the highest corporate income tax rate;
and                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(d) |  | in addition, a nondeductible excise tax, equal to
4% of the excess of required distributions over the amounts
actually distributed will be imposed on us for each calendar
year to the extent that dividends paid during the year, or
declared during the last quarter of the year and paid during
January of the succeeding year, are less than the sum of (1)
85% of our ordinary income, (2) 95% of our capital gain net
income, and (3) any undistributed income remaining from earlier
years. We may also be subject to the corporate alternative
minimum tax, as well as other taxes in certain situations not
presently contemplated.                                                                                                                                                     



| |  | If we fail any of the above-described REIT qualification tests in
any taxable year and the relief provisions available under the Code
do not apply, we would be subject to Federal income tax (including
any applicable alternative minimum tax) on our taxable income at the
regular corporate income tax rates. Distributions to stockholders
in any year in which we fail to qualify as a REIT would not be
deductible by us, nor would distributions generally be required to
be made under the Code. Further, unless entitled to relief under
certain other provisions of the Code, we would also be disqualified
from re-electing REIT status for the four taxable years following
the year in which we became disqualified.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We may also voluntarily revoke our election to be taxed as a REIT,
although we have no intention of doing so, in which event we will be
prohibited, without exception, from electing REIT status for the
year to which the revocation relates and the following four taxable
years.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | We intend to monitor on an ongoing basis our compliance with the
REIT requirements described above. In order to maintain our REIT
status, we may be required to limit the types of assets that we
might otherwise acquire, or hold certain assets at times when we
might otherwise have determined that the sale or other disposition
of such assets would have been more prudent.                                                                                                                                                                                                                                                                                                                                                

16



---



##### Table of Contents







| |  | Taxable REIT Subsidiaries. A Taxable REIT Subsidiary is any
corporation in which a REIT owns stock (directly or indirectly) and
for which the REIT and such corporation make an election to classify
the corporation as a Taxable REIT Subsidiary. On May 2, 2002,
Specialty Acquisition Corp (SAC) (wholly owned subsidiary created on
May 2, 2002) and the Company elected to treat SAC as a Taxable REIT
Subsidiary of the Company. Effective January 1, 2003, SAC formally
obtained Taxable REIT Subsidiary status.                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The aggregate value of SAC along with any other Taxable REIT
Subsidiary that the Company may form in the future must be limited
to 20% of the total value of the Companys assets. In addition, the
Company will be subject to a 100% penalty tax on any rent, interest
or other charges that it imposes on any Taxable REIT Subsidiary in
excess of an arms length price for comparable services. The
Company anticipates that any rents, interest or other charges
imposed on SAC (or any other Taxable REIT Subsidiary that it may
form in the future) will be at arms length prices.                                                           
|
| |  | The Company generally anticipates that it will derive income from
SAC by way of dividends. Such dividends are not real estate source
income for purposes of the 75% Gross Income Test. Therefore, when
aggregated with the Companys other non-real estate source income,
such dividends must be limited to 25% of the Companys gross income
each year. The Company intends to monitor the value of its
investment in and the distributions from its Taxable REIT
Subsidiaries to ensure compliance with all applicable income and
asset tests.                                                                                                     
|
| |  | A Taxable REIT Subsidiary doing business in the United States is
generally subject to corporate level tax on its net income and will
generally be able to distribute only net after-tax earnings to the
Company as dividend distributions. Such dividends may, however,
qualify for the reduced dividends rate made available due to recent
legislation (described below).                                                                                                                                                                                                                                                                           
|
| |  | Qualified REIT Subsidiary. A Qualified REIT Subsidiary is a
corporation in which the REIT owns 100 percent of the stock and that
is not a Taxable REIT Subsidiary. For federal income tax purposes,
the REIT is deemed to directly own the assets of the Qualified REIT
Subsidiary, and not the stock. For this reason, the assets and
income of the Qualified REIT Subsidiary are included with the REITs
assets and income for REIT qualification purposes. During 2003, the
Company formed SAC II as a Qualified REIT Subsidiary.                                                                                                                
|
| |  | Other Affiliates.At present, we have no other affiliates other
than SAC I and SAC II. The Manager is an S-Corporation whose
earnings are passed through to the sole proprietor, Mr. Gonfiantini,
as an individual. The Manager is not consolidated with the Company
for tax or accounting purposes. Fees paid to the Manager are
generally required to be reasonable and arms length; otherwise they
may be recharacterized by the IRS in ways that could have adverse
tax consequences for us. We believe that the fees payable to the
Manager, including any incentive or termination fees, are reasonable
compensation for the services provided.

17



---



##### Table of Contents







| |  | Taxation of Stockholders. For any taxable year in which we are
treated as a REIT for Federal income tax purposes, distributions
(including constructive distributions) made to holders of common
stock other than tax-exempt entities (and not designated as capital
gain dividends) will generally be subject to tax as ordinary income
to the extent of our current and accumulated earnings and profits as
determined for Federal income tax purposes. If the amount
distributed exceeds a stockholders allocable share of such earnings
and profits, the excess will be treated as a return of capital to
the extent of the stockholders adjusted basis in the common stock,
which will not be subject to tax, and thereafter as a taxable gain
from the sale or exchange of a capital asset.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Distributions designated by us as capital gain dividends can
generally be treated by shareholders as gain from the sale or
exchange of a capital asset held for more than one year, but only to
the extent that the designated distribution does not exceed our
actual net capital gain for the taxable year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Distributions by us, whether characterized as ordinary income or as
capital gain, are not eligible for the reduced dividend rate
available as a result of the enactment of the Jobs and Growth Tax
Relief Reconciliation Act of 2003. However, distributions will
qualify for the reduced rate to the extent they represent qualified
corporate dividends. A qualified corporate dividend is a dividend
attributable to income that was subject to corporate tax at the REIT
level or attributable to qualified dividend income received by the
REIT (such as dividends from a Taxable REIT Subsidiary).                                                                                                                                                                                           
|
| |  | In the event that we realize a loss for the taxable year,
stockholders will not be permitted to deduct any share of that loss.
Further, if we (or a portion of our assets) were to be treated as a
taxable mortgage pool, or if we were to hold residual interests in
REMICs (Residential Mortgage Insurance Corporation) or FASITs
(Financial Asset Security Trust), any excess inclusion income
derived there from and allocated to a stockholder would not be
allowed to be offset by a net operating loss of such stockholder.                                                                                                                                                                                                                                                             
|
| |  | Dividends declared during the last quarter of a taxable year and
actually paid during January of the following taxable year are
generally treated as if received by the stockholder on December 31
of the taxable year in which they are declared and not on the date
actually received. In addition, we may elect to treat certain other
dividends distributed after the close of the taxable year as having
been paid during such taxable year, but stockholders will be treated
as having received such dividend in the taxable year in which the
distribution is made.                                                                                                                                                                                                                         
|
| |  | Generally, a dividend distribution of earnings from a REIT is
considered for estimated tax purposes only when the dividend is
made. However, effective December 15, 1999, any person owning at
least 10% of the vote or value of a closely held REIT must
accelerate recognition of year-end dividends received from the REIT
in computing estimated tax payments. We are not currently, and do
not intend to be, a closely held REIT.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Upon a sale or other disposition of the common stock, a stockholder
will generally recognize a capital gain or loss in an amount equal
to the difference between the amount realized and the stockholders
adjusted basis in such stock, which gain or loss generally will be
long-term if the stock was held for more than twelve months.
However, where a shareholder holding common stock for six months or
less receives or is deemed to receive a capital gains dividend, any
subsequent loss on the sale of such shares will generally be                                                                                                                                                                                                                                                    

18



---



##### Table of Contents







| |  | treated as a long-term capital loss to the extent of such designated
capital gains dividend. If common stock is sold after a record date
but before a payment date for declared dividends on such stock, a
stockholder will nonetheless be required to include such dividend in
income in accordance with the rules above for distributions, whether
or not such dividend is required to be paid over to the purchaser.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Dividend Reinvestment Plan (DRIP) participants will generally be
treated as having received a dividend distribution, subject to tax
as ordinary income, in an amount equal to the fair market value of
the common stock purchased with the reinvested dividend proceeds
generally on the date we credit such common stock to the DRIP
participants account, plus brokerage commissions, if any, allocable
to the purchase of such common stock. DRIP participants will have a
tax basis in the shares equal to such value. DRIP participants may
not, however, receive any cash with which to pay the resulting tax
liability. Shares received pursuant to the DRIP will have a holding
period beginning on the day after their purchase by the plan
administrator.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We are required under Treasury Department regulations to demand
annual written statements from the record holders of designated
percentages of our capital stock disclosing the actual and
constructive ownership of such stock and to maintain permanent
records showing the information we received as to the actual and
constructive ownership of such stock and a list of those persons
failing or refusing to comply with such demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In any year in which we do not qualify as a REIT, distributions made
to our stockholders would be taxable in the same manner discussed
above, except that no distributions could be designated as capital
gain dividends, distributions would be eligible for the corporate
dividends received deduction, the excess inclusion income rules
would not apply, and stockholders would not receive any share of our
tax preference items. In such event, however, we would be subject
to potentially substantial Federal income tax liability, and the
amount of earnings and cash available for distribution to its
stockholders could be significantly reduced or eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Taxation of Tax-Exempt Stockholders. Subject to the discussion
below regarding a pension-held REIT, a tax-exempt stockholder is
generally not subject to tax on distributions from the Company or
gain realized on the sale of the shares, provided that such
stockholder has not incurred indebtedness to purchase or hold its
 shares, that its shares are not otherwise used in an unrelated trade
or business of such stockholder, and that we, consistent with our
stated intent, do not form taxable mortgage pools or hold residual
interests in REMICs or FASITs that give rise to excess inclusion
income as defined under the Code. However, if we were to hold
residual interests in a REMIC or FASIT, or if a pool of our assets
were to be treated as a taxable mortgage pool, a portion of the
dividends paid to a tax-exempt stockholder may be subject to tax as
unrelated business taxable income (UBTI). Although we do not
intend to acquire such residual interests or believe that we, or any
portion of our assets, will be treated as a taxable mortgage pool,
no assurance can be given that the IRS might not successfully
maintain that such a taxable mortgage pool exists.
|
| |  | If a qualified pension trust (i.e., any pension or other retirement
trust that qualifies under Section 401(a) of the Code) holds more
than 10% by value of the interests in a pension-held REIT at any
time during a taxable year, a substantial portion of the dividends
paid to the qualified pension trust by such REIT may constitute
UBTI. For these purposes, a                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

19



---



##### Table of Contents







| |  | pension-held REIT is a REIT (i) that would not have qualified as a
REIT but for the provisions of the Code which look through qualified
pension trust stockholders in determining ownership of stock of the
REIT and (ii) in which at least one qualified pension trust holds
more than 25% by value of the interest of such REIT or one or more
qualified pension trusts (each owning more than a 10% interest by
value in the REIT) hold in the aggregate more than 50% by value of
the interests in such REIT. Assuming compliance with the ownership
limit provisions in our Articles of Incorporation it is unlikely
that pension plans will accumulate sufficient stock to cause us to
be treated as a pension-held REIT.                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Distributions to certain types of tax-exempt stockholders exempt
from federal income taxation under Sections 501 (c)(7), (c)(9),
(c)(17), and (c)(20) of the Code may also constitute UBTI, and such
prospective investors should consult their tax advisors concerning
the applicable set aside and reserve requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Taxation of Note Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Characterization of Notes. Based on the advice of counsel, we treat
the Notes as debt for all tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | (a)     Status as Real Property Loans.Assuming the Notes are respected
as debt issued by us, for Federal income tax purposes: (i) Notes
held by a thrift institution taxed as a domestic building and loan
association will not constitute loans...secured by an interest in
real property within the meaning of Code Section 7701 (a) (19) (C)
(v) and (ii) interests on the Notes held by a real estate investment
trust will not be treated as interest on obligations secured by
mortgages on real property or on interest in real property within
the meaning of Code Section 856(c) (4) (B) and the Notes will not
constitute real estate assets or government securities within
the meaning of Code Section 856(c) (5) (A).                                                                                                        
|
| |  | (b)     Taxation of Interest Income on the Notes.Because all Notes are
anticipated to be issued at par, interest paid or accrued on the
Notes generally will be treated as ordinary income to the note
holders, and will be includible in income in accordance with the
note holders regular method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | (c)     Sale of Notes. Generally, if a note holder sells or otherwise
disposes of his Note, he will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and
his adjusted tax basis in the Note. Any such gain or loss recognized
will be capital gain or loss if the Note is held as a capital
asset (generally, property held for investment) with the meaning of
Code Section 1221, and will be short term capital gain or loss if
the investment has been held for not more than one year. However,
certain types of investors (such as banks, thrifts and other
financial institutions), and certain investors engaged in risk
reduction strategies with respect to the Notes, may not qualify to
treat the Notes as capital assets, or the gain or loss there from as
capital gain or loss.
|
| |  | In addition, someone that purchases a Note from a note holder at a
discount may become subject to the market discount rules of sections
1276-1278 of the Code. As a result, some or all of the principal
paid or the gain recognized upon the disposition of the Note by such
holder could be taxed as ordinary interest income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

20



---



##### Table of Contents







| |  | (d)     Foreign Investors. Assuming the Notes are respected as debt,
interest paid on the Notes to a holder that is a nonresident alien
individual, foreign corporation or other non-United States person,
referred to as a Foreign Person, will be exempt from United States
Federal income and withholding taxes under the portfolio interest
provisions so long as (i) the interest is not effectively connected
with a trade or business of the recipient in the United States and
(ii) the Foreign Person is not (a) a direct or indirect ten percent
or greater shareholder of the Company, (b) a controlled foreign
corporation, as that term is defined in the Code, related to the
Company, or (c) a bank receiving interest on an extension of credit
made pursuant to a loan agreement entered into in the ordinary
course of its trade or business. Interest paid to a Foreign Person
that is not engaged in a United States trade or business and that
does not qualify under the portfolio interest exemption will
generally be subject to a 30% United States withholding tax unless
the Foreign Person qualifies to claim a lower rate under an
applicable United States income tax treaty.                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In all events, a holder that is a Foreign Person must provide
required information certifications in order to claim any exemptions
or reductions from withholding tax. Foreign investors are urged to
consult their tax advisors concerning regulations on withholding and
related certification requirements generally applicable to payments
made after December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | If a Note were recharacterized as ownership of an equity interest in
the Company, or if exemptions from withholding tax are not
available, certain payments related to the Notes made to Foreign
Persons would become subject to withholding tax at the rate of 30%
and, in the hands of a corporate investor, could become subject to
the branch profits tax. We are not required to indemnify a note
holder, or gross-up payments on the Notes, for any withholding
taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Information Reporting and Backup Withholding. We will report to our
U.S. stockholders, noteholders and the IRS the amount of
distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, an investor
may be subject to backup withholding generally equal to the fourth
lowest rate of Federal income tax then in effect with respect to
distributions paid unless such investor (a) is a corporation or
comes within certain other exempt categories and, when required,
demonstrates that fact; or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of
the backup withholding rules. An investor that does not provide us
with its correct taxpayer identification number may also be subject
to penalties imposed by the IRS. Any amount paid as backup
withholding will be allowed as a credit against the investors
income tax liability. In addition, we may be required to withhold a
portion of dividends and capital gain distributions to any investors
that do not certify under penalties of perjury their non-foreign
status to us.
|
| |  | State and Local Taxes. The Company and its investors may be subject
to state or local taxation in various jurisdictions, including those
in which it or they transact business or reside. The state and
local tax treatment of the Company and its investors may not conform
to the Federal income tax consequences discussed above.
Consequently, prospective investors should consult their own tax
advisors regarding the effect of state and local tax laws on an
investment in the Companys stock or Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

21



---



##### Table of Contents









Management Agreements



| |  | Management Fees                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Pursuant to a management agreement, Specialty Financial receives a
management fee payable quarterly in arrears. For periods through
the end of fiscal year 2003, the management fee consisted of:



|(a) |  | The mortgage loan origination fees or points,
usually charged to a borrower for and upon the origination,
extension or refinancing of a mortgage loan, up to 2.5% of the
loan balance (i.e., 2.5 points) with any additional fees or
points paid to the benefit of us. The amount of this fee is
determined by competitive conditions, may vary and may have a
direct effect on the interest rate a borrower is willing to pay
to us.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | A fee for loan servicing, equal to one-half of one

percent of the total mortgage loan portfolio held by us.
Retention of this fee by the Manager, in effect, lowers the
yield retained by us on our loans.                                                                                                                                                                                                                          
|   
|(c) |  | All late payment charges from payments made by
borrowers.                                                                                                                                                                                                                                                                                                                                                                            



| |  | We also pay to Specialty Financial an incentive compensation for
each fiscal quarter. For periods through the end of fiscal year
2003, the incentive compensation was an amount equal to 50% of the
net tax-based income of Specialty Trust, before deduction of such
incentive compensation, in excess of the annualized return to
Specialty Trust equal to 12%. The incentive compensation calculation
and payment were made quarterly in arrears. The term return to
Specialty Trust was calculated for the quarter by dividing our
taxable income for the quarter by the net worth for the quarter. For
such calculations, our taxable income means our taxable income
before the Managers incentive compensation, the deduction for
dividends paid and net operating loss deductions arising from losses
in prior periods. A deduction for our interest expenses for borrowed
money is taken when calculating taxable income. Net worth for any
period means the sum of the gross proceeds from all prior offerings
of equity securities by us, after deducting expenses and costs
relating to the offering (or for any period in which new equity
securities are issued, the arithmetic weighted average on the prior
offering proceeds and the new proceeds for the period), plus our
beginning retained earnings (without taking into account any losses
incurred in prior periods and excluding amounts reflecting taxable
income to be distributed as dividends and amounts reflecting
valuation allowance adjustments). The definition return to
Specialty Trust was used only for purposes of calculating the
incentive compensation payable, and is not related to the actual
distributions received by stockholders. The incentive compensation
payments to Specialty Financial were made before any income
distributions were made to our stockholders.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Set forth below is a breakdown of the management fees actually paid
in 2001, 2002 and 2003.
| |  | -------------------------------------------------------------------------------------------

22



---



##### Table of Contents









Table 4: Components of Manager Compensation
For the years ended December 31,

BASE FEESLoan
    
    LateOrigination
    
    Servicing
    
    Payment
    
    Total Base
    
    Incentive
    
    TotalFees
    
    Fees
    
    Charges
    
    Fee
    
    Compensation
    
    Compensation2001
    
    $
    1,692,100
    
    
    $
    266,556
    
    
    $
    35,324
    
    
    $
    1,993,980
    
    
    $
    88,084
    
    
    $
    2,082,0642002
    
    $
    1,610,059
    
    
    $
    361,224
    
    
    $
    9,295
    
    
    $
    1,980,578
    
    
    $
    314,249
    
    
    $
    2,294,8272003
    
    $
    2,259,153
    
    
    $
    455,923
    
    
    $
    11,685
    
    
    $
    2,726,761
    
    
    $
    391,579
    
    
    $
    3,118,340




| |  | The loan origination fees were received by the Manager as part of the
initial funding of the loan. Loan servicing fees reduce the amount of
interest income recognized by the Company as the Manager withholds the
servicing fee from interest payments received from the borrower. Late
payment charges are received directly by the Manager from the borrower.
The incentive compensation was calculated in accordance with the agreement
and paid for or accrued in Manager and Directors fees in the Companys
financial statements.                                                                  
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In January 2004, the Company and the Manager entered into an amendment to
the management agreement which revised the Managers compensation. The
provisions for payment of origination fees, loan servicing fees and late
payment charges described above were removed from the management agreement
and inserted in the loan participation and servicing agreement pursuant to
which the Manager services the Companys mortgage assets. No change in
such fees and charges payable to the Manager was made. Under the amended
management agreement, the Manager will receive, beginning January 1, 2004:



|(a) |  | A monthly base management fee at a per annum rate equal to
one-half of one percent applied to the mortgage asset portfolio at
the end of the preceding calendar quarter.                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | An incentive fee for each fiscal quarter equal to 50% of the
taxable income of Specialty Trust, before deduction of such incentive
fee, in excess of an annualized Threshold Return times net worth for
the quarter. Threshold Return is a target percentage rate of return
to be set by mutual agreement between the Manager and the Company for
each calendar year beginning with 2004. The Threshold Return for
2004 has been set at 12%. Taxable income and net worth are
calculated as described above under the discussion of incentive
compensation for prior periods.

Administrative Services Provided by the Manager



| |  | Specialty Financial, as manager, is responsible for our day-to-day
operations and performs such services and activities relating to the
assets and operations of Specialty Trust as may be appropriate,
including:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(i)  |  | representing Specialty Trust in connection with the
origination or purchase of mortgage loans;                     
|---- |  | -------------------------------------------------------------------------------------------------------------------
|    
|(ii) |  | in accordance with the directions of the Board of
Directors, investing or reinvesting any money of Specialty
Trust;

23



---



##### Table of Contents







|(iii)  |  | furnishing reports and statistical and economic
research to Specialty Trust regarding Specialty Trusts real
estate lending activities and the performance of its portfolio
of mortgage loans;                                                                                                                                                          
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|(iv)   |  | administering the day-to-day operations of
Specialty Trust and performing administrative functions
necessary in the management of Specialty Trust, including the
collection of revenues, the payment of Specialty Trusts
expenses, debts and obligations and the maintenance of
appropriate computer services to perform such administrative
functions;
|      
|(v)    |  | counseling Specialty Trust in connection with
policy decisions to be made by the Board of Directors;                                                                                                                                                                                                                                                    
|      
|(vi)   |  | assisting Specialty Trust in its use of leverage to
finance mortgage loan acquisitions;                                                                                                                                                                                                                                                                 
|      
|(vii)  |  | overseeing the servicing of Specialty Trusts
mortgage loans;                                                                                                                                                                                                                                                                                           
|      
|(viii) |  | establishing underwriting, appraisal and quality control
procedures for the mortgage loans of Specialty Trust;                                                                                                                                                                                                                                          
|      
|(ix)   |  | conducting a legal document review of each mortgage
loan acquired to verify the accuracy and completeness of the
information contained in the mortgage loans, security
instruments and other pertinent documents in the mortgage file;                                                                                                                  
|      
|(x)    |  | providing Specialty Trust with data processing,
legal and administrative services to the extent required to
implement the business strategy of Specialty Trust;                                                                                                                                                                                         
|      
|(xi)   |  | providing all actions necessary for compliance by
Specialty Trust with all federal, state and local regulatory
requirements applicable to Specialty Trust in respect of its
business activities, including preparing or causing to be
prepared all financial statements required under applicable
regulations and contractual undertakings;             
|      
|(xii)  |  | providing all actions necessary to enable
Specialty Trust to make required federal, state and local tax
filings and reports and generally enable Specialty Trust to
maintain its status as a REIT, including soliciting
stockholders for required information to the extent required by
the REIT provisions of the Code;                                
|      
|(xiii) |  | communicating on behalf of Specialty Trust with the
stockholders of Specialty Trust as required to satisfy any
reporting requirements and to maintain effective relations with
such stockholders; and                                                                                                                                                   
|      
|(xiv)  |  | performing such other services as may be required
from time to time for management and other activities relating
to the assets of Specialty Trust as the Board of Directors
shall reasonably request or the Manager shall deem appropriate
under the particular circumstances.                                                                          



| |  | The Manager may enter into subcontracts with other parties to
provide us any such services.
| |  | -------------------------------------------------------------------------------------------



| |  | Expenses
| |  | --------



| |  | The operating expenses required to be borne by the Manager include
compensation and other employment costs, the cost of office space
and equipment and all other administrative costs incurred in our
day-to-day operations. Those expenses do not include
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24



---



##### Table of Contents







| |  | debt service or taxes. While most costs are paid through the Manager
from fees earned by the Manager, we do pay directly certain
REIT-related expenses such as directors fees, legal and accounting
fees, and foreclosure and real estate owned expenses. There are no
caps or ceilings on any category of fees, compensation or other
expenses payable by us except for compensation payable to the
Manager and expenses to be borne by the Manager as described above.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Term and Termination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The management agreement had an initial term of three years
beginning January 30, 1998 and is renewed automatically for
successive one-year periods unless we timely deliver a notice of
nonrenewal. Upon nonrenewal of the management agreement without
cause, a termination fee will be payable to the Manager in an amount
equal to the greater of (i) the fair value of the management
agreement as established by an independent appraiser, or (ii) 4% of
the mortgage loan portfolio of Specialty Trust. At December 31,
2003, 4% of our mortgage loan portfolio would be approximately $3.8
million. In addition, we have the right to terminate the management
agreement at any time for cause. A majority of our unaffiliated
directors (currently 6 of 7 directors are unaffiliated) may
determine that the Manager has violated the management agreement in
a material respect and, after notice and an opportunity to cure,
terminate the agreement. Upon such a termination for cause, no
termination fee will be payable to the Manager.
|
| |  | Potential Conflicts of Interest and Limits of Responsibility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Certain provisions of the management agreement raise and the loan
participation and servicing agreement raise potential conflicts of
interest or limit the Managers responsibilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Origination Fee.The first 2.5% (2 1/2 points) of any origination
fees (points) collected from the borrower is paid to the Manager as
part of the initial funding of the loan. The size of the mortgage
origination fees are market driven but may vary and may have a
direct impact upon the interest rate the borrower is willing to pay
and, therefore, on the interest income we would receive from the
loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Loan Servicing Fee. As part of the servicing fee, one-half of one
percent of the total mortgage loan portfolio is paid to the Manager
as a loan-servicing fee. Payment of this fee, in effect, lowers the
yield on our mortgage loans. An undue emphasis on increasing the
size of the mortgage loan portfolio, thereby increasing the
Managers compensation, could result in the acquisition of riskier
or more speculative loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Incentive Fee.We also pay our Manager an incentive fee equal to 50%
of our quarterly taxable income in excess of an annualized target
return on our net worth for that quarter. If the marketplace works
as expected, i.e., higher risk, higher reward, the incentive fee
structure to the extent it encourages an undue short-term emphasis
on the acquisition of higher yielding loans could result in the
acquisition of riskier or more speculative loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Services to Others. The management agreement does not limit or
restrict the right of the Manager to engage in any business or
render services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, mortgages
that meet our policies and criteria. The management agreement does
say that the Manager and its officers may not provide services to
another mortgage REIT unless a majority of our                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

25



---



##### Table of Contents







| |  | unaffiliated directors (currently 6 of 7 directors are unaffiliated)
confirm that the other mortgage REIT has operating policies and
strategies different from ours. Neither Specialty Financial nor its
sole owner provide or intend to provide services to any mortgage
REIT that is competitive to us or invests in mortgages, which we
might invest in, but there is nothing in the management agreement
that strictly precludes it.                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | No Minimum Time Commitment. The management agreement does not impose
a minimum time commitment that the Manager and its personnel must
devote to providing services to us. The ability of the Manager to
engage in other business activities could reduce the time and affect
spent by the Manager on our management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Limits of Manager Responsibility. The Manager assumes no
responsibility other than to render the services called for under
the management agreement in good faith and shall not be responsible
for any action of the Board of Directors in following or declining
to follow any advice or recommendations of the Manager. The Manager,
its directors, officers, stockholders and employees will not be
liable to us, any subsidiary of ours, our subsidiarys stockholders
or the unaffiliated directors for any acts or omissions by the
Manager, its directors, officers, stockholders or employees under or
in connection with the management agreement, except by reason of
acts or omissions constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under the
management agreement.
|
| |  | Indemnification.We have agreed to indemnify the Manager, its
directors, officers, stockholders and employees with respect to all
expenses, losses, damages, liabilities, demands, charges and claims
arising from any acts or omissions of the Manager made in good faith
in the performance of its duties under the management agreement and
not constituting bad faith, willful misconduct, gross negligence or
reckless disregard of its duties.                                                                                                                                                                                                                                                                                                                                                                                 

Available Information



| |  | We expect to file annual, quarterly and special reports, and other
information with the SEC. Our SEC filings will be available to the
public over the Internet at the SECs web site at
http://www.sec.gov. You may also read and copy any document we file
at the SECs public reference rooms in Washington, D.C., New York,
New York, and Chicago, Illinois. Please call the SEC at
1-800-SEC-0300 for further information on the public reference
rooms.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Our Manager maintains a website on the World Wide Web at
www.specialtyfi.com. You may also request a free copy of any of the
above filings by writing or calling:                                                                                                                                                                                                                                                                                           

Specialty Trust, Inc.
6160 Plumas Street
Reno, Nevada 89509
(775) 826-0809

26



---



##### Table of Contents








Item 2. Properties



| |  | Our manager, Specialty Financial, operates its executive offices
at 6160 Plumas Street, Reno, NV 89509. We do not have any
separate offices.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------




Item 3. Legal Proceedings



| |  | At December 31, 2003, other than litigation in the ordinary course
of business involving foreclosures or other exercise of our rights
as a creditor, there were no material pending proceedings to which
we were a party or of which any of our property was subject.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 4. Submission of Matters to a Vote of Security Holders



| |  | None.
| |  | -----




PART II.




Item 5. Market for Registrants Common Equity and Related Stockholder Matters



| |  | (a)      Market Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys Common Stock has not been registered under the
Securities act or any state securities laws, and is privately held.
The fair market value of the stock, as determined by the Board of
Directors, effective December 28, 2002 is $11.00 per share.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | (b)      Investors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The number of record holders of the Companys Common Stock as of
December 31, 2003 and 2002, was 319 and 304, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | (c)      Dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The Company currently pays cash dividends on a quarterly basis.
Total cash dividends declared by the Company to shareholders as of
December 31, 2003 and 2002 were $8,998,821 ($1.20 per share) and
$8,440,451 ($1.20 per share), respectively. In general, consistent
with the Companys underlying operational strategy, the Companys
dividends for the most part will be characterized as ordinary income
to its stockholders for federal tax purposes. However, a portion of
the Companys dividends may be characterized as capital gains or
return of capital. A portion of the Companys dividends for 2002 was
considered capital distributions.
|
| |  | The Company has a dividend reinvestment plan for shareholders who
choose to reinvest all or part of their distributions in additional
 shares of common stock instead of receiving cash payments. The
reinvestment price is the fair market value as determined by our
Board of Directors. Any future discount to the then current market
price, if there is a public market for our stock, cannot exceed 5%
of the fair market value of the stock to comply with REIT                                                                                                                                                                                   

27



---



##### Table of Contents







| |  | qualification requirements. The Company uses the proceeds for
mortgage loans, working capital and general corporate purposes.                                                                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has elected to be treated as a REIT for federal tax
purposes beginning with its 1998 taxable year and, as such, has
distributed and anticipates distributing annually at least 90% (95%
prior to January 1, 2001) of its taxable income, subject to certain
adjustments. Although the Company may borrow funds to make
distributions; cash for such distributions has generally been and is
anticipated to continue to be largely generated from the Companys
results of operations.
|
| |  | The Company declared the following dividends during the year ended
December 31, 2003 and 2002:                                                                                                                                                                                                                                                                                                                                                                                                   

Dividend
    
    Dividendsper Share
    
    Reinvested Common
    
    CommonDeclaration Date
    
    Record Date
    
    Payment Date
    
    Stock
    
    Stock2003April 28, 2003
    
    March 31, 2003
    
    April 30, 2003
    
    $
    0.30
    
    
    $
    1,263,231June 30, 2003
    
    June 30, 2003
    
    July 28, 2003
    
    $
    0.30
    
    
    $
    1,324,128October 27, 2003
    
    September 30, 2003
    
    October 29, 2003
    
    $
    0.30
    
    
    $
    1,368,792December 8, 2003
    
    December 31, 2003
    
    January 12, 2004
    
    $
    0.30
    
    
    $
    1,521,3832002April 29, 2002
    
    April 29, 2002
    
    April 29, 2002
    
    $
    0.30
    
    
    $
    606,412July 29, 2002
    
    July 29, 2002
    
    July 30, 2002
    
    $
    0.30
    
    
    $
    1,095,378October 30, 2002
    
    October 30, 2002
    
    October 31, 2002
    
    $
    0.30
    
    
    $
    1,170,725December 27, 2002
    
    December 27, 2002
    
    January 15, 2003
    
    $
    0.30
    
    
    $
    1,283,212




| |  | Dividends are declared by the Companys Board of Directors after
considering the Companys available cash for distribution, financial
condition, ability to maintain its REIT status, and such other
factors that may be deemed relevant. See Item 7, Managements
Discussion and Analysis of Financial Conditions and Results of
Operations, for information regarding the sources of funds used for
dividends and for a discussion of factors, if any, which may
adversely affect the Companys ability to pay dividends at the same
levels in 2004 and thereafter.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28



---



##### Table of Contents









The following table represents the number of securities to be issued and
available for future issuance at December 31, 2003.

Number of securities remainingNumber of securities to be
    
    Weighted average exercise
    
    available for future issuanceissued upon exercise of
    
    price of outstanding
    
    under equity compensation plansoutstanding options,warrants
    
    options, warrants and
    
    (excluding securities reflected inand rights (a)
    
    rights (b)
    
    column (a))Equity compensation
plans approved by
security holders
    
    
    137,695
    
    
    $
    9.19
    
    
    
    523,981Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    137,695
    
    
    $
    9.19
    
    
    
    523,981




| |  | The total number of securities remaining for future issuance
at December 31, 2003.
| |  | ----------------------------------------------------------------------------------

10% of outstanding stock
    
    
    768,481Less:Number of shares to be issued upon
Exercise of outstanding stock options
    
    
    137,695Number of shares previously granted
and exercised
    
    
    106,805Number of securities remaining available
    
    
    523,981


29



---



##### Table of Contents








Item 6. Selected Financial Data



| |  | The information in this table should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and
Results of Operations and with the financial statements and the
notes thereto included elsewhere in this annual report.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the years ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Statement of Earnings Data:Interest and Dividend Income
    
    $
    11,694,227
    
    
    $
    9,726,660
    
    
    $
    7,797,169
    
    
    $
    5,715,590
    
    
    $
    4,450,193Interest Expense
    
    
    1,741,831
    
    
    
    828,566
    
    
    
    744,020
    
    
    
    626,332
    
    
    
    263,633Net Revenues
    
    
    9,857,574
    
    
    
    8,167,593
    
    
    
    6,582,893
    
    
    
    4,689,258
    
    
    
    3,936,560Net Earnings
    
    
    8,252,745
    
    
    
    7,144,707
    
    
    
    6,085,129
    
    
    
    4,543,772
    
    
    
    3,809,424Preferred Stock Dividend
    
    
    
    
    
    
    
    
    
    
    4,540,231
    
    
    
    5,070,963
    
    
    
    4,039,923Net Earnings (Loss) attributable to Common Stock
    
    $
    8,252,745
    
    
    $
    7,144,707
    
    
    $
    1,544,898
    
    
    $
    (527,191
    )
    
    
    (230,499
    )Basic Earnings (Loss) Per Share
    
    $
    1.11
    
    
    $
    1.02
    
    
    $
    0.79
    
    
    $
    (1.62
    )
    
    $
    (0.73
    )Diluted Earnings (Loss) Per Share
    
    $
    1.10
    
    
    $
    1.01
    
    
    $
    0.77
    
    
    $
    (1.62
    )
    
    $
    (0.73
    )Dividends - Preferred Stock
    
    
    
    
    
    
    
    
    
    $
    4,540,231
    
    
    $
    5,070,963
    
    
    $
    4,039,923Dividends - Common Stock
    
    $
    8,998,821
    
    
    $
    8,440,451
    
    
    $
    2,046,810
    
    
    
    
    
    
    
    Balance Sheet Data (Shown as of period end)Mortgage Loans
    
    $
    95,610,164
    
    
    $
    96,245,394
    
    
    $
    73,331,659
    
    
    $
    55,863,036
    
    
    $
    36,105,670Allowance for Loan Losses
    
    
    (1,424,256
    )
    
    
    (1,815,576
    )
    
    
    (1,020,321
    )
    
    
    (750,000
    )
    
    
    (350,000
    )Unearned Discount
    
    
    (103,966
    )
    
    
    (120,489
    )
    
    
    (78,144
    )
    
    
    (8,187
    )
    
    
    (24,237
    )Total Mortgage Loans, net
    
    $
    94,081,942
    
    
    $
    94,309,329
    
    
    $
    72,233,194
    
    
    $
    55,104,849
    
    
    $
    35,731,433Real Estate Owned
    
    $
    7,913,160
    
    
    $
    950,000
    
    
    $
    445,424
    
    
    
    
    
    
    
    Land Held for Residential Development
    
    $
    2,377,457
    
    
    $
    2,448,579
    
    
    $
    2,782,715
    
    
    
    
    
    
    
    Total Assets
    
    $
    108,458,694
    
    
    $
    99,323,596
    
    
    $
    77,667,422
    
    
    $
    58,659,056
    
    
    $
    44,108,463Short-Term Borrowings
    
    $
    33,410,279
    
    
    $
    29,107,031
    
    
    $
    9,475,441
    
    
    $
    11,005,960
    
    
    $
    5,217,467Number of Preferred Shares Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,624,276
    
    
    
    3,799,700Number of Common Shares Outstanding
    
    
    7,684,813
    
    
    
    7,183,004
    
    
    
    6,822,703
    
    
    
    334,400
    
    
    
    320,200


30



---



##### Table of Contents








Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations



| |  | The following discussion should be read in conjunction with the
consolidated Financial Statements and Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Safe Harbor Statement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements in this discussion regarding
Specialty Trust, Inc., and our business, which are not historical
facts are forward-looking statements that involve risks and
uncertainties. For a discussion of such risks and uncertainties,
which could cause actual results to differ from those contained in
the forward-looking statements, we refer you to Risk Factors
commencing on Page 13 of our prospectus included in the Registration
Statement on Form S-11 (File No. 333-86962) filed on April 25, 2002,
relating to our collateralized investment notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Company Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company is a mortgage finance company specializing in acquiring
nonconforming residential and commercial real estate mortgage loans
for the purpose of holding the loans in its portfolio. We fund our
loans chiefly through equity and to a lesser degree with short-term
debt. This short-term debt is in the form of secured bank lines of
credit or collateralized notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Our business objective and strategy is to build and hold a portfolio
of mortgage loans for investment that generates net income for
distribution to stockholders. Loans are made principally to
borrowers in the states of Nevada, Arizona, California, Utah, and
Colorado whose needs are generally not being served by traditional
financial institutions. Our strategy is to focus on land loans,
construction loans, commercial building loans and nonconforming
single-family and small multifamily residential loans. We generally
limit the amount of our investment in any single mortgage loan or in
mortgage loans to one borrower to 10% of Specialty Trust, Inc.s
total mortgage loans, although the Board of Directors may approve
exceptions. As of December 31, 2003, there were two mortgage loans,
and three borrowers whose total loans exceeded the 10% threshold
that the board approved. Most loans will have terms of one to three
years. Our mortgage loans may be secured by mortgages on unimproved
as well as improved real property and non-income producing as well
as income-producing real property. Some mortgage loans may be
secured by borrowers leasehold interest in real property. Our
loans generally produce higher yields than are obtained on
traditional single-family residential mortgage loans, but are
subject to higher risks of default and loss.
|
| |  | We are structured as a real estate investment trust (REIT), thereby
generally eliminating Federal taxes at the corporate level on income
we distribute to stockholders. Because we are not structured as a
traditional lender that accepts deposits, we are subject to
substantially less regulatory oversight and incur lower compliance
expenses compared to banks, thrifts and many other holders of
mortgage loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

31



---



##### Table of Contents







| |  | Specialty Financial serves as our manager and is responsible for
loan originations, loan servicing and our day-to-day operations,
subject to the supervision of our Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Significant Aspects of Years Ended 2003, 2002 and 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | At December 31, 2003, we owned approximately $95.6 million of
mortgage loans and approximately $10.3 million of land held for
residential development and foreclosure property. Our total assets
were approximately $108.5 million. These assets were financed with
approximately $33.4 million of collateralized notes, and
approximately $72.1 million of equity.                                                                                                                                                                                                                                                                                                                                         
|
| |  | At December 31, 2003, our equity-to-assets ratio was 66.5% and our
debt-to-equity ratio was 46.3%, our average quarterly return on
equity for the year ended December 31, 2003 was 11.4%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | At December 31, 2002, we owned approximately $96.2 million of
mortgage loans and approximately $3.4 million of land held for
residential development and foreclosure property. Our total assets
were approximately $99.3 million. These assets were financed with
approximately $19.8 million of collateralized notes, approximately
$9.3 million of lines of credit, and approximately $67.5 million of
equity.                                                                                                                                                                                                                                                                                            
|
| |  | At December 31, 2002, our equity-to-assets ratio was 68.0% and our
debt-to-equity ratio was 43.1%, our average quarterly return on
equity for the year ended December 31, 2002 was 10.8%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The increase in assets was the result of an increase in cash
received from operating activities and net cash received from the
collateralized note program of approximately $12.5 million. The
increase in liabilities was a result of the increased use in the
collateralized note program. Finally, we had approximately $2.6
million in cash deposits on December 31, 2003 whereas we held cash
deposits of less than $100,000 on December 31, 2002. The increase
in stockholders equity was primarily the result of stockholders
reinvesting dividends from earnings in the dividend reinvestment
program for the year ending December 31, 2003.                                                       
|
| |  | Critical Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Management has the obligation to insure that its policies and
methodologies are in accordance with generally accepted accounting
principles. During 2003, management reviewed and evaluated its
critical accounting policies and believes them to be appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The Companys consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, SAC and SAC II. The
preparation of consolidated financial statements in accordance with
generally accepted accounting principals requires management to make
estimates and assumptions in certain circumstances that affect
amounts reported in the accompanying consolidated financial
statements. These estimates are based, in part, on our judgment and
assumptions regarding various economic conditions that we believe
are reasonable based on facts and circumstances existing at the time
of reporting. In preparing these consolidated financial statements,
management has

32



---



##### Table of Contents







| |  | made its best estimates and judgments of certain amounts included in
the consolidated financial statements, giving due consideration to
materiality. The Company does not believe that there is a great
likelihood that materially different amounts would be reported
related to accounting policies described below. However,
application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following summarizes the components of our consolidated
financial statements where understanding accounting policies is
critical to understanding and evaluating our reported financial
results, especially given the significant estimates used in applying
the policies. The discussion is intended to demonstrate the
significance of estimates to our financial statements and the
related accounting policies. Detailed accounting policies are
described in Note 1 to the Companys consolidated financial
statements, included in Item 8. Management has discussed the
development and selection of these critical accounting estimates
with the audit committee of our Board of Directors and the audit
committee has reviewed our disclosure.                                                                                                                                                  
|
| |  | Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Revenue is recognized on performing loans when interest has been
earned according to the terms of the loan. However, revenue is no
longer recognized when the loan has become delinquent after 90 days,
when foreclosure proceedings have been initiated, or when the
Loan-to-Value exceeds 100% whichever event occurs first. Management
believes the Companys revenue recognition policies are appropriate
to reflect the substance of the underlying transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Allowance for Loan Loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | The Company maintains an allowance for possible loan losses on
mortgage loans. Additions to the allowance are based on an
assessment of certain factors including, but not limited to review
of collateral values, borrower payment ability and general economic
conditions. Management believes that the Companys policies and
methodology are appropriate to reflect the potential loss on the
current loan portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Impairment of Long-Lived Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Real estate investments held represent long-lived assets for
accounting purposes. The Company periodically reviews long-lived
assets for impairment in value whenever any events or changes in
circumstances indicate that the carrying amount of the assets may
not be recoverable. In managements opinion, and based on their
estimates, real estate owned and land held for development are
considered to be held for investment and are not carried at amounts
in excess of their estimated fair value. Land held for residential
development is carried at the lower of cost or fair market value
less cost to sell. Fair market value is derived using estimates and
assumptions relating to eventual sales prices and estimates for
costs to complete. Management believes the assumptions used in
determining the fair value are based on the best information
available at the time of analysis.

33



---



##### Table of Contents











| |  | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Companys financial results generally do not reflect provisions
for current or deferred taxes. Management believes that the Company
has and intends to continue to operate in a manner that will
continue to allow it to be taxed as a REIT and as a result, does not
anticipate to pay substantial corporate level taxes. Many of these
requirements, however, are highly technical and complex. If the
Company were to fail to meet these requirements, the Company would
be subject to federal income tax.
|
| |  | Off-Balance Sheet Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The majority of our assets are funded with long-term debt issued in
securitizations. We consolidate the assets and liabilities of these
securitizations and therefore these transactions do not create
off-balance sheet commitments.                                                                                                                                                                                                                                                                            
|
| |  | Our only category of off-balance sheet commitments is the forward
purchase commitments we enter into to purchase real estate loan
assets. At December 31, 2003, pursuant to the ordinary course of
business, we had future commitments to purchase $6.2 million real
estate loan investments on behalf of all investors.                                                                                                                                                                                         
|
| |  | Changes in Financial Condition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |  | 2003 Compared to 2002
| |  | ---------------------



| |  | Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash and Cash Equivalents. Cash and cash equivalents increased by
approximately $2.5 million as of December 31, 2003, compared to
December 31, 2002. The timing of loan funding and the timing of debt
or equity issues generally determine the amount of cash held by the
Company. It is our goal to keep cash invested in loans or other
financial instruments and therefore keep cash balances low whenever
possible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Accrued Interest Receivable.Accrued interest receivable decreased
by approximately $248,000 (22%). This decrease is primarily due to
a decrease in delinquent and past due loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Land Held for Residential Development.Land held for residential
development decreased by approximately $71,000 (3%) as a result of
the sale of 14 completed homes. The decrease is partially offset by
the capitalization of additional costs of approximately $197,000.
Land held for residential development represents three phases of
undeveloped lots (the Project), which were obtained by the Company
through foreclosure in February 2001 of the collateral securing a
mortgage loan. This Project includes 117 lots, which were in
various stages of completion at the time of foreclosure. An
appraisal was obtained at the time of foreclosure which provided an
allocation of the fair value as follows: (i) phase Is 15 lots at
$30,000 each, (ii) phase IIs 61 lots at approximately $15,000 each
and (iii) phase IIIs 41 lots at approximately $15,000 each. The
appraisal was based on the current condition of the lots and did not
consider costs, which the Company or its assignee would incur to
prepare these lots for the commencement of homebuilding. The
Company subsequently assigned the Project to Specialty Acquisition
Corp. (SAC), its wholly owned taxable REIT subsidiary formed in May
2002.

34



---



##### Table of Contents







| |  | In June 2002, SAC entered into an agreement with a third-party
homebuilder to transfer title to the lots to the homebuilder in
exchange for an upfront payment, in cash, equal to a portion of the
original appraised value of the uncompleted lots. Additionally the
homebuilder is responsible to pay SAC the difference between the
agreed value per lot and the cash previously received, upon sale of
the homes to third parties. SAC is also entitled to 50% of the
profits, if any, realized by the homebuilder upon closing of the
sale of each home built, as well as repayment of infrastructure
costs borne by the Company prior to the agreement. SAC also
receives a security interest in each lot transferred to the
homebuilder, subordinate to the senior interest held by the
homebuilders construction lender. SAC is not obligated for any
future costs of the Project once a completed lot is delivered to the
homebuilder. This arrangement is accounted for as a real estate
investment by which cash received upfront upon delivery of the
completed lots reduces SACs investment in the land held for
residential development. Upon the sale of completed homes by the
homebuilder to an independent third-party, SAC will reduce land held
for residential development based on all cash proceeds received
under the cost recovery method.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On June 20, 2003, the homebuilder neglected to exercise his option
to purchase Phase III of the Project. The Company has subsequently
listed the property for sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | All 76 lots in phases I and II were transferred to the homebuilder
in 2002 upon payment to SAC of $565,943. In order to complete
delivery of the lots, SAC incurred site mapping costs, engineering
costs, real estate taxes and insurance fees, in 2002, all of which
were capitalized. 14 homes were sold during the fiscal year ended
December 31, 2003. The following provides a roll-forward of this
account:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Balance at December 31, 2002
    
    $
    2,448,579Capitalized costs
    
    
    197,438Net proceeds from sale of homes
    
    
    (268,560
    )Balance at December 31, 2003
    
    $
    2,377,457




| |  | Real Estate Owned (Held for Sale).Real Estate Owned increased by
approximately
$7 million (733%) as a result of the acquisition of property,
net of related sales. The properties acquired were as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A personal residence in Telluride, Colorado
acquired on September 25, 2003 with a loan balance of
approximately $1.7 million.                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Two parcels of raw land in Mesquite, Nevada
acquired in August of 2003 with loan balances of
approximately $2.6 million and $2.5 million.                                                                                                                           
| 
| |  | A speculative home in Aspen, Colorado with a
loan balance of approximately $1.9 million. During the
third quarter, the property was sold. As a result, the
Company recognized a profit of approximately $90,000 and has
a note receivable in the amount of $125,000.



| |  | The Company had write-downs of $250,000 related to the Mesquite,
Nevada properties in the net balance of Real Estate Owned.
| |  | ---------------------------------------------------------------------------------------------------------------------------

35



---



##### Table of Contents











| |  | On April 4, 2003, the Company acquired real estate owned property
through a foreclosure on a mortgage loan whose outstanding balance
at the time of foreclosure was approximately $1.6 million, including
principal and accrued interest. The properties consisted of a hotel
and three parcels of land, which were transferred from mortgage
loans to real estate owned upon foreclosure. The Company sold the
hotel and two of the parcels of land resulting in a loss of
approximately $144,000 and $27,000, respectively.                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | LiabilitiesDividends Payable.Dividends Payable increased by approximately
$151,000 (7%). This increase was primarily due to the increase in
the number of common shares outstanding, which have been issued
through the Dividend Reinvestment Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Lines of Credit. Borrowings under lines of credit decreased by
approximately $9.3 million to $0 at December 31, 2003. The decrease
was primarily due to loan pay-offs of approximately $12 million in
December 2003. The Company used the cash to pay-off the borrowings
under the lines of credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Collateralized Notes and Collateralized Notes  Related Party.
Collateralized Notes increased by approximately $13.6 million (69%)
because of increased issuance of such notes due to increased demand.
The Companys stated interest rates are higher than the average
rates paid by state and federal banks. Increased advertising and
marketing efforts have allowed more investors to become aware of the
interest rate differences and as a result have moved their deposits
from state and federal banks to the Companys collateralized note
program. The collateralized notes were approved for public sale on
January 18, 2001 in our initial registration statement.                                                                                                                 
|
| |  | 2002 Compared to 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Cash and Cash Equivalents and Restricted Cash. Cash and cash
equivalents and restricted cash decreased by approximately $970,000
(91%) as of December 31, 2002, compared to December 31, 2001.
Restricted cash decreased because the Company had previously
recorded restricted cash held for the purchase and sale of stock on
January 1, 2002. In 2002, the Company no longer facilitated these
transactions. Rather, the Manager, Specialty Financial, handled
stock transactions related to the stock matching program. The
timing of loan funding and the timing of debt or equity issues
generally determine the amount of cash held by the Company. It is
our goal to keep cash invested in loans or other financial
instruments and therefore keep cash balances low whenever possible.
|
| |  | Accrued Interest Receivable.Accrued interest receivable increased
by approximately $287,000 (34%). This increase is primarily due to
the fact that mortgage loans held for investment increased during
the year by approximately 31%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

36



---



##### Table of Contents







| |  | Land Held for Residential Development.Land Held for Residential
Development decreased by approximately $334,000 (12%). As of
December 31, 2002, the homebuilder sold no homes. The following
provides a roll-forward of this account in 2002:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 2001
    
    $
    2,782,715Capitalized costs
    
    
    231,807Net proceeds from sale of lots
    
    
    (565,943
    )Balance at December 31, 2002
    
    $
    2,448,579




| |  | Real Estate Owned (Held for Sale).Real estate owned increased by
approximately $505,000 (113%). This increase was due to the
acquisition of an office building through foreclosure in July 2002.
This increase was offset by the sale of another office building in
early June 2002. The net gain on the sale was approximately
$36,000. Specialty Trust also had a single-family residence, which
was acquired through foreclosure in May 2002. The property was
subsequently sold in June 2002 and the Company financed 100% of the
sale. The net gain on sale was approximately $102,900, which was
deferred and will be recognized as cash principal payments are
received under the installment method.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Mortgage Loans.Mortgage loans held for investment net of allowance
for loan losses and discount of loans increased by approximately
$22.1 million (31%). This increase in mortgage loans was due
primarily to new loans being underwritten and funded faster than
loans were maturing.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | LiabilitiesDividends Payable.Dividends Payable increased by approximately
$108,000 (5%). This was primarily due to the increase in the number
of common shares outstanding, which have been issued through the
Dividend Reinvestment Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Accounts Payable and Accrued Expense and Accounts Payable  Related
Party.Accounts Payable and Accrued Expense and Accounts Payable 
Related Party increased by approximately $323,000. This increase
was primarily due to the management fee of approximately $220,000
due to the Manager at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Lines of Credit.Borrowings under lines of credit increased by
approximately $9.3 million from $0 at December 31, 2001. The
increase was primarily due to the Company funding additional
mortgage loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Collateralized Notes and Collateralized Notes  Related Party.
Collateralized Notes increased by approximately $10.3 million (101%)
because of increased issuance of such notes due to increased demand.
Demand increase primarily due to the stated interest rates of the
notes being higher than the average interest rate paid by state and
federal banks. Our collateralized notes were authorized for public
sale January 19, 2001. A new registration statement was filed and
declared effective on May 7, 2002.                                                                                                                                                                                      

37



---



##### Table of Contents







| |  | Results of Operations                                                                                                                                             
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The rate / volume analysis set forth in the following table analyzes
changes in net interest income for the periods indicated by their
rate and volume components.

Year Ended
    
    Year EndedDecember 31, 2003
    
    December 31, 2002Over/Under
    
    Over/UnderDecember 31, 2002
    
    December 31, 2001Net
    
    
    
    
    
    
    
    
    
    NetChange
    
    Rate
    
    Volume
    
    Change
    
    Rate
    
    VolumeInterest IncomeMortgage Loans
    
    $
    2,005,441
    
    
    $
    (614,808
    )
    
    $
    2,620,249
    
    
    $
    1,931,454
    
    
    $
    (179,223
    )
    
    $
    2,110,677Cash Accounts
    
    
    (55,374
    )
    
    
    (22,116
    )
    
    
    (33,258
    )
    
    
    5,134
    
    
    
    (33,230
    )
    
    
    38,364Total
    
    $
    1,950,067
    
    
    $
    (636,924
    )
    
    $
    2,586,991
    
    
    $
    1,936,588
    
    
    $
    (212,453
    )
    
    $
    2,149,041Interest ExpenseLine of Credit
    
    $
    305,212
    
    
    $
    2,697
    
    
    $
    302,515
    
    
    $
    (5,035
    )
    
    $
    (41,220
    )
    
    $
    36,185Notes Payable
    
    
    (4,623
    )
    
    
    
    
    
    
    (4,623

    )
    
    
    4,623
    
    
    
    
    
    
    
    4,623Collateralized
Notes
    
    
    612,676
    
    
    
    32,359
    
    
    
    580,317
    
    
    
    84,958
    
    
    
    (279,129
    )
    
    
    364,087Total
    
    $
    913,265
    
    
    $
    35,056
    
    
    $
    878,209
    
    
    $
    84,546
    
    
    $
    (320,349
    )
    
    $
    404,895Change in Net
Interest Income
    
    $
    1,036,802
    
    
    $
    (671,980
    )
    
    $
    1,708,782
    
    
    $
    1,852,042
    
    
    $
    107,896
    
    
    $
    1,744,146




| |  | Our operating results include all of the reported income of our
mortgage finance operation. The comparison of the year ended
December 31, 2003 and 2002 is as follows:                                                                                                                                                                                                                                          
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2003 Compared to 2002                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Interest Income, Mortgage Assets.Interest income increased
approximately $2.0 million (20%) for the year ended December 31,
2003 as compared to 2002. This increase was due primarily to
additional funds invested in mortgage loans as a result of increased
cash available from dividend reinvestments during the period and the
use of short-term borrowings to fund a corresponding increase in
loan demand.
|
| |  | Total Interest Expense.Interest expense increased by approximately
$913,000 (110%) for the year ended December 31, 2003 as compared to
2002. The increase is primarily due to an increase in
collateralized notes from the prior year, as well as significantly
more line of credit borrowings during 2003 versus 2002.                                                                                         
|
| |  | Provision for Loan Losses:Provision for Loan Losses decreased by
approximately $770,000 (97%) primarily due to a decrease in high
risk or problem loans, some of which were transferred to real estate
owned upon foreclosure. The overall LTV on the current portfolio
decreased from 62% to 49% from December 31, 2002 to 2003,
respectively.                                                                 
|
| |  | Other Income.Other income decreased by approximately $49,000 for
the year ended December 31, 2003 as compared to 2002. This decrease
was primarily due to the gain on sale of real estate owned in fiscal
year ended December 31, 2002 in addition to operating income
generated from one of the foreclosure properties.                                                                                        

38



---



##### Table of Contents







| |  | Total Expenses.Total expenses increased by approximately $582,000
(57%) for the year ended December 31, 2003 as compared to 2002.
Other expenses increased by approximately $332,000, which primarily
represents foreclosure fees paid by the Company. In addition, there
was an increase in professional fees from the prior year due to
increased audit and tax fees. Management and Directors fees also
increased as the Company incurred a management incentive bonus of
approximately $392,000 in 2003 compared to $314,000 in 2002 and
directors stock compensation fees of approximately $66,000 in 2003
compared to $0 in 2002.           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 2002 Compared to 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Interest Income, Mortgage Loans.Interest income from mortgage
loans increased approximately $1.9 million (25%) for the year ended
December 31, 2002 as compared to 2001. The increase was due
primarily to additional funds invested in mortgage loans as a result
of increased cash available from dividend reinvestments during the
period, and the use of short-term borrowings to fund a corresponding
increase in loan demand.                                                                                                                                                                                                                
|
| |  | Total Interest Expense.Interest expense increased approximately
$85,000 (11%) for the year ended December 31, 2002 as compared to
2001. The increase is primarily due to the increase in
collateralized notes from the prior year offset by lower interest
rates.                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Provision for Loan Losses:Provision for Loan Losses increased by
approximately $299,000 (60%). This increase is primarily due to the
fact that the loan portfolio increased by approximately 31% while
delinquencies increased by approximately $9.4 million from the prior
year. Further, the overall LTV on the current portfolio increased
from 51% to 62% from December 31, 2001 to 2002, respectively.                                                                                                                                                                                                                                        
|
| |  | Other Income.Other income increased by approximately $49,000 for
the year ended December 31, 2002 as compared to 2001. This increase
was primarily due to the gain on sale of real estate owned of
approximately $36,000 and the net operating income generated from
one of the foreclosure properties was approximately $26,000. The
property was subsequently sold.                                                                                                                                                                                                                                                                              
|
| |  | Total Expenses.Total expenses increased approximately $525,000
(106%) for the year ended December 31, 2002 as compared to 2001.
The increase was in part due to an increase in professional fees
from the prior year due to increased legal fees and increased audit
and tax fees due to a change in audit firm. In addition, Management
and Directors fees increased as the Company incurred a management
incentive bonus of approximately $314,000, while the incentive bonus
fee incurred in 2001, was approximately $88,000. Finally, other
expenses increase by approximately $151,000, which represents
foreclosure fees paid by the Company.
|
| |  | Interest Rate/Market/Credit Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | We seek to manage the interest rate, credit and market risk of our
portfolio. By originating short-term loans (generally less than
three years), we can significantly reduce the risk of changing
interest rates. Although the majority of our loans are in the
states of Arizona and Nevada, we are also acquiring loans in
California, Utah, and Colorado.                                                                                                                                                                                                                                                                                       

39



---



##### Table of Contents







| |  | The following table sets forth the weighted average yield earned on
our assets and the weighted average expense of our liabilities for
the periods shown.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------





Interest Rate/ Market/ Credit Risk
For the years ended December 31,

2003
    
    2002
    
    2001Interest IncomeMortgage Loans
    
    
    11.77
    %
    
    
    12.53
    %
    
    
    12.65
    %Cash Accounts
    
    
    0.64
    %
    
    
    1.63
    %
    
    
    2.14
    %Interest ExpenseLine of Credit
    
    
    4.19
    %
    
    
    4.67
    %
    
    
    8.81
    %Notes Payable
    
    
    
    
    
    
    0.50
    %
    
    
    Collateralized Notes
    
    
    5.54
    %
    
    
    5.33
    %
    
    
    7.22
    %Net Interest Spread
    
    
    6.52
    %
    
    
    7.09
    %
    
    
    4.95
    %




| |  | Liquidity and Capital Resources                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We manage our short-term liquidity (that is, our funding needs to
cover commitments and anticipated uses occurring over the next 12
months) in a number of ways. First, the scheduled interest payments
from our mortgage portfolio produce monthly cash flow, which can be
used to originate new loans, service debt and pay dividends to
stockholders. This source provided approximately $11.7 million
during 2003. We generally have the ability to apply this cash flow
as needed.                                                                                                                                                                                                                                      
|
| |  | Secondly, the payoff and prepayment of loans provides additional
liquidity to our portfolio. Historically, we have experienced annual
loan payoffs and prepayments of approximately 30% to 35% of our
outstanding portfolio. Since our loan terms are usually one to three
years, the rate of principal payoffs is significant. With a current
portfolio of approximately $95.6 million we would anticipate annual
cash flows from principal pay downs of approximately $33.5 million
in 2004. As we continue to issue collateralized notes, our portfolio
will increase as will the cash flow from principal pay downs. Again,
normally these funds are used to originate new mortgage loans, but
can be used in other ways.
|
| |  | The following table illustrates the scheduled maturities of mortgage
loan investments subsequent to December 31, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Maturity
    
    Amount2003
    
    $
    6,527,4082004
    
    
    42,492,7822005
    
    
    29,777,0002006
    
    
    16,812,974$
    95,610,164




| |  | Under existing loans, the Company is required to fund additional
loan amounts totaling $6,201,802 as of December 31, 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------

40



---



##### Table of Contents







| |  | Thirdly, we have the ability to issue collateralized notes to
provide additional liquidity to our portfolio. As of May 7, 2002,
we were able to offer collateralized notes with maturities of up to
five years. Although not a committed source, we can utilize
collateralized notes to meet a portion of our short-term funding
needs under normal market conditions. The following table reflects
the maturities of collateralized notes as of December 31, 2003:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Maturity Year
    
    Amount2004
    
    $
    31,590,6582005
    
    
    644,1372006
    
    
    2007
    
    
    342,9132008
    
    
    832,571$
    33,410,279


Lastly, we had four committed lines of credit with commercial banks
to provide another level of liquidity as of December 31, 2003. We
can borrow $6.5 million, $3.5 million, $7.0 million, and $2.5
million on four separate lines of credit to provide funding for new
mortgage loans, for an aggregate of $19.5 million in available
credit. The $6.5 million line is available through June 15, 2004.
The $3.5 million line is available through April 15, 2004. The $7.0
million line is available through October 15, 2004. The $2.5
million line matured January 23, 2004 (extended to April 23, 2004). All four of the lines are
collateralized by mortgage loans and borrowings under the lines bear
interest at the applicable banks prime or reference rate. We are
required to comply with various operating and financial covenants in
the lines. Such covenants include restrictions on (i) any change in
business activities from those we are presently engaged in, and (ii)
any change in executive and management personnel that would result
in reduced qualifications and experience compared to present
personnel. Such covenants also contain requirements for (i) minimum
tangible net worth, (ii) maximum debt-to-equity ratio, and (iii) a
maximum amount allowable for lines of credit of $20 million. We are
in compliance with these covenants. The Company had a zero
outstanding balance on these lines of credit as of December 31,
2003.We believe the combination of these four sources of capital allows
us to manage our short-term liquidity needs in virtually any
business situation and thereby efficiently use our capital
resources.With respect to our long-term liquidity (funding needs during
periods beyond the next 12 months), our only commitments that
require funding are those arising from our construction loans. We
do not have any commitments for material capital expenditures or
payments due on long-term debt obligations. We believe the same
four sources we rely on for short-term liquidity needs will be
sufficient to fund our long-term needs as well.Contractual Obligations and Commitments as of
December 31, 2003




|                     |  |                                                 |            |                  |  |           |            |  |  |   |           | 
|-------------------- |  | ----------------------------------------------- | ---------- | ---------------- |  | --------- | ---------- |  |  | - | --------- | 
|                     |  | Payments Due or
Commitment Expiration by Period
|                     |  | Total                                           |            | Less Than 1 year |  | 1-5 years |           
|Short-Term Debt      |  |                                                 |            |                  |  |           |            |  |  |   |           | 
|Collateralized Notes |  | $                                               | 33,410,279 |                  |  | $         | 31,590,658 |  |  | $ | 1,819,621 | 
|                    
|Commitments          |  |                                                 |            |                  |  |           |            |  |  |   |           | 
|Mortgage Loans       |  | $                                               | 6,201,802  |                  |  | $         | 3,501,802  |  |  | $ | 2,700,000 | 



| |  | Risk Management and the Allowance for Loan Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The loan portfolio is the Companys primary asset subject to credit
risk. To reflect this credit risk, the Company records an allowance
for loan losses through periodic charges to earnings. These charges
are shown in the Companys Statement of Earnings as provision for
loan losses. Credit risk is managed and monitored through the use
of lending standards, a thorough review of potential borrowers, and
an on-going review of payment performance. Asset quality
administration, including early identification of problem loans

41



---



##### Table of Contents







| |  | and timely resolution of problems, further informs management of
credit risk and helps minimize loan losses. All specifically
identifiable and quantifiable losses are immediately charged-off
against the allowance. Charged-off loans are subject to periodic
review, and specific efforts are taken to achieve maximum recovery
of principal and interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Management reviews the adequacy of the Allowance for Loan Losses on
a quarterly basis to determine whether the allowance is adequate to
provide for probable losses inherent in the loan portfolio as of the
balance sheet date. Evaluation of the adequacy of the allowance for
loan losses is based primarily on managements periodic assessment
and grading of the loan portfolio as described below. Additional
factors considered by management include the consideration of past
loan loss experience, trends in past due and nonperforming loans,
risk characteristics of the various classifications of loans,
current economic conditions, the fair value of underlying
collateral, and other regulatory or legal issues that could affect
loan losses.                                                                                               
|
| |  | Loans are initially risk  graded when originated. They are
re-graded on a quarterly basis and numerous factors are considered
such as renewal, loans to the same borrower, identified facts
demonstrating heightened risk of nonpayment, and delinquency. The
loan review process attempts to identify and measure problem and
watch list loans. Problem loans are those loans with higher than
average risk with workout and/or legal action probable within one
year. These loans are reported quarterly to the directors on
actions to be taken. Watch list loans are those loans considered as
having weakness detected in character, capacity to repay or balance
sheet concerns and prompt management to take corrective action at
the earliest opportunity. Problem and watch list loans generally
exhibit one or more of the following characteristics:



|- |  | Adverse financial trends and condition                                               
|- |  | -------------------------------------------------------------------------------------
| 
|- |  | Decline in the entire industry                                                       
| 
|- |  | Managerial problems                                                                  
| 
|- |  | Customers failure to provide financial information or other
collateral documentation
| 
|- |  | Repeated delinquency or renewals.                                                    



| |  | The loan review process reviews every significant problem loan and
assessments are performed quarterly to confirm the risk rating to
that loan and the adequacy of loan loss reserve assigned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | After reviewing the loan portfolio, management evaluates the loan
portfolio and identifies those loans which they believe require a
specific allowance. After considering loans which require a
specific allowance, the Company then allocates or assigns a portion
of the allowance for loan loss to groups of loans and individual
loans to cover managements estimate of probable loss. Allocation
is related to the grade of the loan and includes a component
resulting from the application of the measurement criteria of
Statements of Financial Accounting Standards No 114 (SFAS 114)
Accounting by Creditors for Impairment of a Loan and No 118 (SFAS
118) Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. Management then compares the amounts
allocated for probable losses to the current allowance. To the
extent that the current allowance is insufficient to cover
managements best estimate of probable losses, management records
additional provision for loan loss. If the allowance is greater
than required at that point in time, provision expense is adjusted
accordingly.

42



---



##### Table of Contents







| |  | While management uses available information to recognize losses on
loans, future adjustments to the allowance for loan loss may be
necessary based on changes in economic conditions and the impact of
such changes on the Companys borrowers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Consistent with US GAAP and with the methodologies used in
estimating the unidentified losses in the loan loss portfolio, the
allowance for loan loss consists of two components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | First the allowance includes a component resulting from the
application of the measurement criteria of SFAS 114 and SFAS 118.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The second or general component of the allowance for loan loss is
a component that is intended to absorb losses that may not be
provided for by the other component. There are several reasons that
the other components discussed above might not be sufficient to
absorb the losses present in the loan portfolio, and the unallocated
portion of the allowance for loan loss is used to provide for the
losses that have occurred because there are limitations to any
credit risk grading process. Even for experienced loan reviewers,
grading loans and estimating losses involves a significant degree of
judgment regarding the present situation with respect to individual
loans and the portfolio as a whole. In addition, it is possible
that grading and loan review may be done without knowing whether all
relevant facts are at hand. For example, troubled borrowers may
inadvertently or deliberately omit important information from
correspondence with lending officers regarding their financial
condition and the diminished strength of repayment sources.
|
| |  | While there exists probable asset quality problems in the loan
portfolio, management believes sufficient reserves have been
provided in the allowance for loan loss to absorb probable losses in
the loan portfolio at December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Non-Performing Loans, Potential Problem Loans, and Other Real Estate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The accrual of interest income is discontinued when a loan becomes
90 days past due as to principal or interest. If collectibility is
in doubt, cash receipts on non-accrual loans are used to reduce
principal rather than recorded as interest income. Accrued interest
recorded during the 90-day period remains accrued if management
determines that the underlying collateral supports recovery of the
Notes, principal and accrued interest. At December 31, 2003 the
Company had two loans which were 306 to 364 days past due totaling
approximately $5.5 million in principal and accrued interest. As of
December 31, 2002, there were eight loans totaling approximately
$13.3 million in principal and accrued interest, which were past
due.                                                                                                                                                                                                                                                                                                                          
|
| |  | Land Held for Residential Development and Real Estate Owned (Held
for Sale)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Land Held for Residential Development and Real Estate Owned (Held
for Sale) includes real estate acquired through foreclosure and is
carried at the lower of the recorded investment in the loan,
inclusive of any senior indebtedness, or the propertys estimated
fair value, less estimated costs to sell. Costs related to the
improvements to the property are capitalized to the extent that the
additional basis does not exceed the fair value of the asset. All
other costs are expensed. We use our taxable REIT subsidiary to
hold all land held for development, as the REIT rules generally
impose prohibited transaction taxes on income earned by a REIT from
development activities.                                                                                                                                                                                                                                                                                                                                                                                

43



---



##### Table of Contents







| |  | Inflation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Virtually all of the Companys assets and liabilities are financial
in nature. As a result, interest rates and other factors drive the
Companys performance far more than does inflation. Changes in
interest rates do not necessarily correlate with inflation rates and
changes in inflation rates. The Companys consolidated financial
statements are prepared in accordance with generally accepted
accounting principles while dividends are based on net income as
calculated for tax purposes; in each case, the Companys Statements
of Operations and Balance Sheets are measured with reference to
historical cost or fair market value without considering inflation.                                                                         
|
| |  | Forward Looking Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | When used in this Annual Report on Form 10-K, in future SEC filings,
or in other written or oral communications, the words or phrases
will likely result, are expected to, will continue, is
anticipated, estimate, project, or similar expressions are
intended to identify forward-looking statements for purposes of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the 1934 Act, as amended, and as such may involve known and
unknown risks, uncertainties and assumptions.                                                                                                                                                                                                                                  
|
| |  | These forward-looking statements are subject to various risks and
uncertainties, including, but not limited to, those relating to:
increases in prepayment rates on the mortgage loans; changes in
short-term interest rates; the Companys ability to use borrowings
to finance its assets; risks associated with investing in real
estate, including changes in business conditions and the general
economy; changes in government regulations affecting the Companys
business; and the Companys ability to maintain its qualification as
REIT for federal income tax purposes. These risks, uncertainties,
and factors could cause the Companys actual results to differ
materially from those projected in any forward-looking statements
its makes.
|
| |  | All forward-looking statements speak only as the date they are made
and the Company does not undertake, and specifically disclaims any
obligation to update any forward looking statements to reflect
events or circumstances after the date of such statements. Readers
are cautioned that the Companys actual results could differ
materially from those set forth in such forward-looking statements.                                                                                                                                                                                                                                                                                                                                                  




Item 7A. Quantitative and Qualitative Disclosures About Market Risk



| |  | Market risk includes risks that arise from changes in interest
rates, foreign currency exchange rates, commodity prices, equity
prices and other market changes that affect market sensitive
instruments. We are a party to various financial instruments that
are subject to market risk. These instruments include commercial
mortgage loans, land loans, nonconforming single-family and small
multifamily residential mortgage loans, lines of credit and
collateralized notes. Our financial instruments involve elements of
interest rate risk. Our loan portfolio is also subject to real
estate market risk.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44



---



##### Table of Contents







| |  | None of our financial instruments have been entered into for trading
purposes. We have not entered into, nor do we intend to enter into,
any financial instruments for trading or speculative purposes. As we
have no investments outside of the United States, we are not subject
to foreign currency exchange rate risk. We do not hedge our exposure
to changes in the fair value of our loans through the use of
derivative instruments. Instead, we have managed these exposures
through careful underwriting and servicing of our loans. Further,
we target as potential customers borrowers with relatively
significant equity value in their property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the most part, our loans provide for either monthly payments of
interest only and a payment of principal in full at the end of the
loan term, principal and interest payments with a balloon payment at
the end of the loan term, or interest only with principal payments
upon lot releases and principal in full at the end of the loan term.
Because of the high yield of our loans, we do not believe that a 5%
increase or decrease in general interest rates (from those
prevailing at December 31, 2003) would have a significant impact on
the fair value of our fixed rate loan portfolio. A significant
increase in interest rates could, however, make it more difficult
for our borrowers to sell or refinance their respective properties.
This could have a material adverse effect on us, either through loan
defaults or the need to grant extensions of the maturity dates,
thereby delaying repayment. Additionally, a real estate market
decline in Nevada, Arizona, Colorado, Utah, or California could have
a material adverse impact on us. If real estate values were to
decline, borrowers might find it difficult, if not impossible, to
repay some or all of the principal and accrued interest in
connection with a sale or refinancing of the underlying properties.
A number of factors could lead to a real estate market decline
including, but not limited to, a slowdown in the growth of the
economy, increasing commercial interest rates and supply and demand
factors. It is not possible for us to quantify the potential loss in
earnings or cash flows that might result from a real estate market
decline.
|
| |  | We have attempted to mitigate these risk exposures through our
manager. The Manager carefully underwrites and services our loans.
The underwriting decision to provide a loan to an applicant is based
primarily upon the loan-to-value ratio for the underlying
collateral. Thereafter, our manager uses early intervention,
aggressive collection and loss mitigation techniques in the
servicing process. While we have attempted to mitigate these risk
exposures, there can be no assurance that these efforts will be
successful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

45



---



##### Table of Contents












Item 8. Financial Statements and Supplementary Data

Independent Auditors Report

Board of Directors
Specialty Trust, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance
sheets of Specialty Trust, Inc. and Subsidiaries as of December
31, 2003 and 2002, and the related consolidated statements of earnings, stockholders
equity and comprehensive income, and cash flows for each of the years
in the two-year period ended December 31, 2003. 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 consolidated
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 Specialty Trust,
Inc. and Subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the two-year
period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Sacramento, California
March 12, 2004

F - 1



---



##### Table of Contents







| |  | Report of Independent Certified Public Accountants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Board of Directors
Specialty Trust, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | We have audited the accompanying consolidated statements of earnings,
stockholders equity and comprehensive income and cash flows of
Specialty Trust, Inc. for the year ended December 31, 2001. These
financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our 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 consolidated statements of earnings,
stockholders equity and comprehensive income and cash flows are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated statements of income, stockholders equity and
comprehensive income, and cash flows. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of
the results of operations. We believe that our audit of the
consolidated statements of income, stockholders equity and
comprehensive income, and cash flows provides a reasonable basis for
our opinion.
|
| |  | In our opinion, the consolidated statements of income, stockholders
equity and comprehensive income, and cash flows referred to above
present fairly, in all material respects, the results of operations
of Specialty Trust, Inc. for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | /s/ Grant Thornton LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Reno, Nevada
January 25, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 2



---



##### Table of Contents









SPECIALTY TRUST INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


December 31,


2003
    
    2002ASSETSASSETSCash and Cash Equivalents
    
    $
    2,593,407
    
    
    $
    92,684Accrued Interest Receivable
    
    
    875,474
    
    
    
    1,123,865Accounts Receivable
    
    
    70,313
    
    
    
    Land Held for Residential Development
    
    
    2,377,457
    
    
    
    2,448,579Real Estate Owned (Held for Sale)
    
    
    7,913,160
    
    
    
    950,000Mortgage Loans Held for Investment, net of
allowance for loan losses of $1,424,256 and $1,815,576 and
unearned discount of $103,966 and $120,489 at December 31,
2003 and 2002, respectively
    
    
    94,081,942
    
    
    
    94,309,329Other Assets
    
    
    546,941
    
    
    
    399,139Total Assets
    
    $
    108,458,694
    
    
    $
    99,323,596LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESDividends Payable
    
    $
    2,305,444
    
    
    $
    2,154,901Accounts Payable  Related Party
    
    
    119,284
    
    
    
    241,824Accounts Payable and Accrued Expenses
    
    
    326,844
    
    
    
    159,726Accrued Interest Payable
    
    
    56,952
    
    
    
    37,523Deferred Revenue and Other Liabilities
    
    
    113,400
    
    
    
    102,900Lines of Credit
    
    
    
    
    
    
    9,336,000Collateralized Notes
    
    
    31,881,866
    
    
    
    19,074,906Collateralized Notes - Related Party
    
    
    1,528,413
    
    
    
    696,125Total Liabilities
    
    
    36,332,203
    
    
    
    31,803,905STOCKHOLDERS EQUITYCommon
Stock; $0.01 par value; 50,000,000 Shares authorized; 7,684,813 and 7,183,004
Issued and outstanding as of December 31, 2003
and 2002, respectively
    
    
    76,848
    
    
    
    71,830Additional Paid-in Capital
    
    
    71,828,838
    
    
    
    67,447,861Retained Earnings
    
    
    220,805
    
    
    
    Total Stockholders Equity
    
    
    72,126,491
    
    
    
    67,519,691Total Liabilities and Stockholders Equity
    
    $
    108,458,694
    
    
    $
    99,323,596


The accompanying notes are an integral part of the statements.

F - 3



---



##### Table of Contents





SPECIALTY TRUST INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF EARNINGS


Years ended December 31,


2003
    
    2002
    
    2001RevenuesInterest and Dividend IncomeMortgage Loans
    
    $
    11,674,776
    
    
    $
    9,669,335
    
    
    $
    7,737,881Cash Accounts
    
    
    1,951
    
    
    
    57,325
    
    
    
    52,191Dividends
    
    
    
    
    
    
    
    
    
    
    7,097Rental Income
    
    
    17,500
    
    
    
    
    
    
    
    Total Interest and Dividend Income
    
    
    11,694,227
    
    
    
    9,726,660
    
    
    
    7,797,169Interest ExpenseLines of Credit
    
    
    342,949
    
    
    
    37,737
    
    
    
    42,772Notes Payable  Related Parties
    
    
    
    
    
    
    4,623
    
    
    
    Collateralized Notes
    
    
    1,398,882
    
    
    
    786,206
    
    
    
    701,248Total Interest Expense
    
    
    1,741,831
    
    
    
    828,566
    
    
    
    744,020Net Interest and Dividend Income
    
    
    9,952,396
    
    
    
    8,898,094
    
    
    
    7,053,149Provision for Loan Losses
    
    
    25,137
    
    
    
    795,255
    
    
    
    496,427Net Interest and Dividend Income after
Provision for Loan Losses
    
    
    9,927,259
    
    
    
    8,102,839
    
    
    
    6,556,722Real Estate Owned (Loss) Gain
    
    
    (84,998
    )
    
    
    
    
    
    
    10,392Other Income
    
    
    15,313
    
    
    
    64,754
    
    
    
    15,779Net Revenues
    
    
    9,857,574
    
    
    
    8,167,593
    
    
    
    6,582,893ExpensesGeneral and Administrative
    
    
    594,122
    
    
    
    480,995
    
    
    
    389,757Management
and Directors Fees (including incentive compensation bonus)
    
    
    527,613
    
    
    
    390,903
    
    
    
    108,007Other Expense
    
    
    483,094
    
    
    
    150,988
    
    
    
    Total Expenses
    
    
    1,604,829
    
    
    
    1,022,886
    
    
    
    497,764NET EARNINGS
    
    
    8,252,745
    
    
    
    7,144,707
    
    
    
    6,085,129Preferred Stock Dividend
    
    
    
    
    
    
    
    
    
    
    4,540,231NET EARNINGS ATTRIBUTABLE
TO COMMON STOCK
    
    $
    8,252,745
    
    
    $
    7,144,707
    
    
    $
    1,544,898Basic Earnings Per Share
    
    $
    1.11
    
    
    $
    1.02
    
    
    $
    0.79Diluted Earnings Per Share
    
    $
    1.10
    
    
    $
    1.01
    
    
    $
    0.77


The accompanying notes are an integral part of the statements.

F - 4



---



##### Table of Contents





SPECIALTY TRUST INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME


Years ended December 31,


AccumulatedClass A Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherPreferred Stock
    
    Common Stock
    
    AdditionalPaid-in
    
    Retained
    
    Compre-hensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Loss
    
    TotalBalance, January 1, 2001
    
    
    4,624,276
    
    
    $
    46,243
    
    
    
    334,400
    
    
    $
    3,344
    
    
    $
    45,242,156
    
    
    $
    
    
    
    $
    (957
    )
    
    $
    45,290,786Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,085,129
    
    
    
    
    
    
    
    6,085,129Net unrealized loss on
investment available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,349
    
    
    
    11,349Reclassification
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,392
    )
    
    
    (10,392
    )Total Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,086,086Stock options exercised
    
    
    
    
    
    
    
    
    
    
    20,218
    
    
    
    202
    
    
    
    21,250
    
    
    
    
    
    
    
    
    
    
    
    21,452Non-employee stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,558
    
    
    
    
    
    
    
    
    
    
    
    70,558Collateralized notes received
for Preferred Stock
    
    
    270,284
    
    
    
    2,703
    
    
    
    
    
    
    
    
    
    
    
    2,970,425
    
    
    
    
    
    
    
    
    
    
    
    2,973,128Dividends reinvested for
Preferred Stock
    
    
    176,588
    
    
    
    1,766
    
    
    
    
    
    
    
    
    
    
    
    1,851,982
    
    
    
    
    
    
    
    
    
    
    
    1,853,748Preferred Stock issued (net of
offering costs of $48,982)
    
    
    1,396,937
    
    
    
    13,969
    
    
    
    
    
    
    
    
    
    
    
    15,303,352
    
    
    
    
    
    
    
    
    
    
    
    15,317,321Conversion of Preferred Stock
to Common Stock
    
    
    (6,468,085
    )
    
    
    (64,681
    )
    
    
    6,468,085
    
    
    
    64,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared on
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,540,231
    )
    
    
    
    
    
    
    (4,540,231
    )Dividends declared on
Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (501,912
    )
    
    
    (1,544,898
    )
    
    
    
    
    
    
    (2,046,810
    )Balance, December 31, 2001
    
    
    
    
    
    $
    
    
    
    
    6,822,703
    
    
    $
    68,227
    
    
    $
    64,957,811
    
    
    $
    
    
    
    $
    
    
    
    $
    65,026,038Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,144,707
    
    
    
    
    
    
    
    7,144,707Stock options exercised
    
    
    
    
    
    
    
    
    
    
    32,684
    
    
    
    327
    
    
    
    104,267
    
    
    
    
    
    
    
    
    
    
    
    104,594Non-employee stock option
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,013
    
    
    
    
    
    
    
    
    
    
    
    81,013Dividends Reinvested on
Common Stock
    
    
    
    
    
    
    
    
    
    
    327,617
    
    
    
    3,276
    
    
    
    3.600,514
    
    
    
    
    
    
    
    
    
    
    
    3,603,790Dividends declared on
Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,295,744
    )
    
    
    (7,144,707
    )
    
    
    
    
    
    
    (8,440,451
    )Balance, December 31, 2002
    
    
    
    
    
    $
    
    
    
    
    7,183,004
    
    
    $
    71,830
    
    
    $
    67,447,861
    
    
    $
    
    
    
    $
    
    
    
    $
    67,519,691


F - 5



---



##### Table of Contents





SPECIALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME 
Continued
Years ended December 31,

Class A Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedPreferred Stock
    
    Common Stock
    
    AdditionalPaid-in
    
    Retained
    
    OtherComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Earnings
    
    Loss
    
    TotalBalance, December 31, 2002
    
    
    
    
    
    $
    
    
    
    
    7,183,004
    
    
    $
    71,830
    
    
    $
    67,447,861
    
    
    $
    
    
    
    $
    
    
    
    $
    67,519,691Net Earnings and
Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,252,745
    
    
    
    
    
    
    
    8,252,745Stock Options Exercised
    
    
    
    
    
    
    
    
    
    
    19,503
    
    
    
    195
    
    
    
    47,318
    
    
    
    
    
    
    
    
    
    
    
    47,513Dividends Reinvested on
Common Stock
    
    
    
    
    
    
    
    
    
    
    476,306
    
    
    
    4,763
    
    
    
    5,234,600
    
    
    
    
    
    
    
    
    
    
    
    5,239,363Stock Granted
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    60
    
    
    
    65,940
    
    
    
    
    
    
    
    
    
    
    
    66,000Dividends Declared on
Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (966,881
    )
    
    
    (8,031,940
    )
    
    
    
    
    
    
    (8,998,821
    )Balance, December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    7,684,813
    
    
    $
    76,848
    
    
    $
    71,828,838
    
    
    $
    220,805
    
    
    $
    
    
    
    $
    72,126,491


The accompanying notes are an integral part of the statements.

F - 6



---



##### Table of Contents





SPECIALTY TRUST INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


Years ended December 31,


2003
    
    2002
    
    2001Cash Flows from Operating Activities:Net Earnings
    
    $
    8,252,745
    
    
    $
    7,144,707
    
    
    $
    6,085,129Adjustment to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:Amortization and Depreciation
    
    
    57,347
    
    
    
    91,135
    
    
    
    54,117Provision for Loan Losses
    
    
    25,137
    
    
    
    795,255
    
    
    
    496,427Charge Off of Bad Debt
    
    
    
    
    
    
    
    
    
    
    (1,107
    )Amortization of Loan Points on Mortgage Loans
    
    
    (91,521
    )
    
    
    (68,628
    )
    
    
    (24,527
    )Non-cash Stock Compensation
    
    
    66,000
    
    
    
    81,013
    
    
    
    70,558Gain on Investments
    
    
    
    
    
    
    
    
    
    
    (10,392
    )Loss (Gain) on Sale of Real Estate Owned, net
    
    
    84,998
    
    
    
    (32,776
    )
    
    
    Changes in Assets and Liabilities:Deferred Charges
    
    
    85,500
    
    
    
    
    
    
    
    8,391Accrued Interest Receivable
    
    
    5,998
    
    
    
    (287,028
    )
    
    
    (318,497
    )Other Assets and Accounts Receivable
    
    
    (85,277
    )
    
    
    (93,604
    )
    
    
    (588
    )Accounts Payable (including Related Party) and Accrued Interest
Payable
    
    
    64,007
    
    
    
    323,141
    
    
    
    64,310Net Cash Provided by Operating Activities
    
    
    8,464,934
    
    
    
    7,953,215
    
    
    
    6,423,821Cash Flows from Investing Activities:Investment in Real Estate Owned
    
    
    (298,576
    )
    
    
    
    
    
    
    (404,577
    )Proceeds from Sales of Real Estate Owned
    
    
    3,176,346
    
    
    
    473,022
    
    
    
    Investment in Land Held for Residential Development
    
    
    (197,438
    )
    
    
    (231,807
    )
    
    
    Proceeds on Land Held For Residential
Development
    
    
    268,560
    
    
    
    565,943
    
    
    
    Purchase of Mortgage Loans Held for Investment
    
    
    (86,070,063
    )
    
    
    (70,550,293
    )
    
    
    (40,091,628
    )Principal Repayments of Mortgage Loans Held for
Investment
    
    
    76,480,299
    
    
    
    46,900,431
    
    
    
    19,668,928Proceeds from Investments
    
    
    
    
    
    
    
    
    
    
    259,866Net Cash Used in Investing Activities
    
    
    (6,640,872
    )
    
    
    (22,842,704
    )
    
    
    (20,567,411
    )Cash Flows from Financing Activities:Proceeds from Preferred Stock Offering, Net
    
    
    
    
    
    
    
    
    
    
    15,317,321Proceeds from Common Stock Options Exercised
    
    
    47,513
    
    
    
    104,594
    
    
    
    21,452Deposits received for Preferred Stock Offering
    
    
    
    
    
    
    
    
    
    
    79,794Deposits paid out relating to Common Stock Transactions
    
    
    
    
    
    
    (1,003,200
    )
    
    
    Cash Dividends Paid
    
    
    (3,608,915
    )
    
    
    (4,728,571
    )
    
    
    (4,073,765
    )Net (payments)/ proceeds on Line of Credit
    
    
    (9,336,000
    )
    
    
    9,336,000
    
    
    
    (4,452,500
    )Proceeds on Collateralized Notes
    
    
    18,976,326
    
    
    
    15,458,602
    
    
    
    9,104,634Interest Reinvested in Collateralized Notes
    
    
    1,128,357
    
    
    
    683,056
    
    
    
    611,855Principal Payments on Collateralized Notes
    
    
    (6,465,435
    )
    
    
    (5,846,068
    )
    
    
    (3,821,379
    )Debt Issuance Costs
    
    
    (65,185
    )
    
    
    (84,429
    )
    
    
    (201,350
    )Net Cash Provided by Financing Activities
    
    
    676,661
    
    
    
    13,919,984
    
    
    
    12,586,062NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    2,500,723
    
    
    
    (969,505
    )
    
    
    (1,557,528
    )Cash and Cash Equivalents at Beginning of Year
    
    
    92,684
    
    
    
    1,062,189
    
    
    
    2,619,717Cash and Cash Equivalents at end of Year
    
    $
    2,593,407
    
    
    $
    92,684
    
    
    $
    1,062,189


The accompanying notes are an integral part of the statements.

F - 7



---



##### Table of Contents





SPECIALTY TRUST INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Years ended December 31,

2003
    
    2002
    
    2001Supplemental Cash Flow Information:Cash paid for interest
    
    $
    1,722,402
    
    
    $
    807,742
    
    
    $
    151,649Supplemental Disclosure of Non-cash Investing
and Financing Activities:Mortgage Loan Foreclosure Transfer to Real Estate Owned
    
    $
    10,224,992
    
    
    $
    1,883,000
    
    
    $
    2,823,562Collateralized Notes Exchanged for the Issuance
of Preferred Stock
    
    $
    
    
    
    $
    
    
    
    $
    2,973,128Dividends Declared but Not Paid
    
    $
    2,305,444
    
    
    $
    2,154,901
    
    
    $
    2,046,811Dividends Reinvested for Preferred Stock
    
    $
    
    
    
    $
    
    
    
    $
    1,853,748Dividends Reinvested for Common Stock
    
    $
    5,239,363
    
    
    $
    3,603,790
    
    
    $
    Reclassification of Allowance For Loan Losses to Real Estate
Owned
    
    $
    250,000
    
    
    $
    
    
    
    $
    Charge-off of Accrued Interest
    
    $
    166,457
    
    
    $
    
    
    
    $
    Note Received For Sale of Foreclosed Property
    
    $
    125,000
    
    
    $
    
    
    
    $
    Accrued Interest Transferred to Real Estate Owned
    
    $
    75,936
    
    
    $
    
    
    
    $
    Mortgage Loans issued to facilitate sale of real estate owned:Investment in Real Estate Owned
    
    $
    
    
    
    $
    933,000
    
    
    $
    Deferred Revenue
    
    
    
    
    
    
    102,900
    
    
    
    Mortgage Loans
    
    $
    
    
    
    $
    1,035,900
    
    
    $
    


The accompanying notes are an integral part of the statements.

F - 8



---



##### Table of Contents





SPECIALTY TRUST INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2003, 2002 and 2001


NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Specialty Trust, Inc.,
formerly Specialty Mortgage Trust, and Subsidiaries (the
Company) is a Maryland corporation, which acquires and holds interests in
mortgage loans secured by property located in Nevada, Arizona, Colorado,
California, and Utah. Our strategy is to focus on land loans, construction
loans, commercial building loans and nonconforming single-family and small
multifamily residential loans. The Company has elected to be a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended.
The mortgage loans are originated and serviced by Specialty Financial (the
Manager), a private mortgage finance business operating in Nevada and wholly
owned by Nello Gonfiantini III, the Companys President and Chairman of the
Board of Directors. The Company was incorporated on October 21, 1997 and began
operations on January 31, 1998, following the closing of the Companys initial
private placement of its preferred stock.

The consolidated financial statements for the year ended December 31, 2003,
include the accounts of the Company and its wholly owned subsidiaries, Specialty
Acquisition Corporation (SAC), a taxable REIT subsidiary and
Specialty Acquisition Corporation II (SAC II), a qualified REIT
subsidiary. SAC was formed on
May 2, 2002 to enable the Company to perform development activities to land it
foreclosed upon (Note 2), and to maintain the Companys qualified REIT status.
SAC II was formed as a qualified REIT subsidiary for a
particular piece of REO property acquired through foreclosure during
2003. All inter-company accounts and transactions have been eliminated upon
consolidation.

The prior year financial statements contain certain reclassifications to
conform to the current year classifications. These reclassifications had no
effect on net earnings.

Cash and Cash Equivalents

The Company considers money market accounts to be cash equivalents.

Land Held for Residential Development

Land Held for Residential Development includes real estate acquired through
foreclosure and is carried at the lower of the cost or the propertys estimated
fair value, less estimated costs to sell.

Real Estate Owned

Real estate owned includes real estate acquired through foreclosure and is
carried at the lower of the cost or the propertys estimated fair value, less
estimated costs to sell.

Stock Options

The Company accounts for stock based compensation under SFAS No. 123,
Accounting for Stock-Based Compensation, which calls for companies to measure
stock compensation expense based upon the fair value method of accounting.

F - 9



---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Advertising The Company expenses the costs of advertising as incurred. Total advertising
expense for the years ended December 31, 2003, 2002 and 2001 was $176,811,
$7,080 and $59,610, respectively. Mortgage Loans The Company has both the intent and ability to hold mortgage loans until
maturity and, therefore, mortgage loans are classified and accounted for as
held for investment and are carried at cost. The mortgage loans are originated by the Manager, in the name of the Manager,
and simultaneously sold, in whole or in part, to the Company while servicing is
retained by the Manager. A majority of the Companys loans
include a participating interest in which the Company and third party
investors share in the ownership of the loans. The Company follows the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) 114 Accounting by Creditors for
Impairment of a Loan, and SFAS No. 118 Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures. Under SFAS No. 114, a loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect the contractual interest and principal
payments of a loan according to the contractual terms of the loan agreement.
SFAS No. 114 requires that impaired loans be measured on the present value of
expected future cash flows discounted at the loans effective interest rate or,
as a practical expedient, at the loans observable market price or the fair
value of the collateral if the loan is collateral dependent. The Company
generally obtains a third party appraisal on the underlying collateral for
impaired loans to determine the amount of impairment, if any. SFAS No. 118
clarifies interest income recognition and disclosures of SFAS No. 114. The Company does not recognize interest income on loans once they are
determined to be impaired until the interest is collected in cash. Cash
receipts are allocated to interest income, except when such payments are
specifically designated as principal reduction or when management does not
believe the Companys investment in the loan is fully recoverable. Revenue Recognition Revenue is recognized on performing loans when interest has been earned
according to the terms of the loan. However, revenue is no longer recognized
when the loan has become 90 days delinquent, when foreclosure proceedings have
been initiated, or when the Loan-to-Value ratio exceeds 100%, whichever event
occurs first. F - 10




---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Mortgage loan origination fees or points charged to a borrower for and upon the
origination, extension or refinancing of a mortgage loan, in excess of 2.5% are
paid to the Company effectively discounting the purchase price of the loan and
are amortized by the effective interest method over the contractual life of the
loan. These amounts are classified as unearned discounts. Mortgage loan
origination fees or points up to 2.5% are earned by the Manager, prior to the
purchase of the mortgage loans by the Company. Deferred Charges

Deferred charges are costs associated with origination of collateralized notes
and lines of credit fees, which are amortized by the effective interest method
over the contractual life of the related obligation. Earnings per Share (EPS) Basic EPS is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted EPS is computed
by dividing net income by the weighted-average common shares and
potentially dilutive securities outstanding during the period. For the diluted EPS
calculation, the weighted average common shares and potentially dilutive securities
outstanding include the average number of shares of common stock outstanding
adjusted for the dilutive effect of unexercised stock options using the
treasury method. No common share equivalents are included in the computation
of any diluted per share amount for a period in which a net operating loss is
reported. Allowance for Loan Losses The Company maintains an allowance for loan losses on mortgage loans.
Additions to the allowance are based on an assessment of certain factors
including, but not limited to, review of collateral values, borrower payment
ability and general economic conditions. Additions to the allowance are
provided through a charge to earnings. Actual losses on loans are recorded as
a charge-off or a reduction to the loan loss allowance. Subsequent recoveries
of amounts previously charged off are added back to the allowance. Evaluation of the adequacy of the allowance for loan losses is based primarily
on managements periodic assessment and grading of the loan portfolio.
Additional factors considered by management include the consideration of past
loan loss experience, trends in past due and nonperforming loans, risk
characteristics of the various classifications of loans, current economic
conditions, the fair value of underlying collateral, and other regulatory or
legal issues that could affect loan losses. While management uses available
information to recognize losses on loans, future adjustments to the allowance
for loan losses may be necessary based on changes in economic conditions and
the impact of such changes on the Companys borrowers. F - 11




---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) Use
of Estimates in the Preparation of Financial Statements
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 reported period. On an on-going basis, the Company evaluates its
estimates, including those related to the adequacy of the allowances
for loan losses and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions. The one accounting estimate that
materially affects the financial statements is the allowance for loan
losses. Income
Taxes
The Company believes it has qualified as a REIT and generally is not subject to Federal
income taxes on the portion of taxable income which is distributed to its
stockholders. The Company is, however, subject to Federal income taxes for
taxable income not distributed. Taxable income that is distributed is taxable to the stockholders as ordinary
income. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of
financial statements included in the following categories:  (a)
    
    Cash and Cash Equivalents. The carrying amount approximates
fair value because of the relatively short maturity of these
instruments.(b)
    
    Mortgage Loans Held for Investment Including Accrued
Interest Receivable and Accounts Receivable. The carrying value of these
instruments approximates the fair value. The fair value is estimated
based upon projected cash flows discounted at the estimated current
interest rates at which similar loans would be made.(c)
    
    Lines of Credit and Collateralized Notes. The fair value of the
Companys lines of credit and collateralized notes are estimated
based on the quoted market prices for the same or similar issues or
on the current rates offered to the Company for debt of the same
remaining maturities. The fair value approximates the carrying value
of the Companys lines of credit given the variable interest
rate on the lines of credit. The fair value of the collateralized
notes approximates carrying values due to their short term nature.(d)
    
    Accounts Payable and Accrued Expenses, Accounts
Payable  Related Party, and Accrued Interest
Payable. Due to the short term nature of the balance sheet items,
the fair market value approximates the carrying value of these
liabilities. Recent Accounting Pronouncements In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of SFAS Statement No. 13, and Technical Correction, SFAS
145 eliminates extraordinary accounting treatment for reporting a loss on debt
extinguishments, and amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, and describe applicability
under changed conditions. The provisions of SFAS 145 were effective for the
Company at the beginning of fiscal year 2003; however, early application of
SFAS 145 is encouraged. Debt extinguishments reported as extraordinary items
prior to scheduled or early adoption of SFAS 145 would be reclassified in most
cases following adoption. The adoption of SFAS 145 had no effect on the
Companys financial statements. In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 requires the recording of costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon managements commitment to an exit plan, which is generally before
an actual liability has been incurred. Adoption of SFAS 146 was required for
the Companys fiscal year beginning January 1, 2003. The adoption of SFAS 146
had no impact on the Companys financial statements. F - 12




---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 also includes required disclosures for financial instruments within
its scope. For the Company, SFAS 150 was effective for instruments entered into
or modified after May 31, 2003 and otherwise will be effective as of January 1,
2004, except for mandatorily redeemable financial instruments. For certain
mandatorily redeemable financial instruments, SFAS 150 will be effective for
the Company on January 1, 2005. The effective date has been deferred
indefinitely for certain other types of mandatorily redeemable financial
instruments. The Company currently does not have any financial instruments
that are within the scope of this Statement. On December 31, 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS 148 amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The disclosure requirements of SFAS 148 for interim financial
statements containing consolidated financial statements were effective for
interim periods beginning in 2003. The Company has previously adopted the fair
value method of accounting for stock-based compensation of SFAS 123, and
accordingly, SFAS 148 did not have a material impact on the Companys reported
results of operations or financial position in 2003. FASB Interpretation No. 45 Guarantors Accounting and Disclosure Requirements
for Guarantees Including Indirect Guarantees of Indebtedness of Others,
(Interpretation 45), requires disclosures in interim and annual financial
statements about obligations under certain guarantees issued by the Company.
Furthermore, it requires recognition at the beginning of a guarantee of a
liability for the fair value of the obligation undertaken in issuing the
guarantee, with limited exceptions including: i) a parents guarantee of a
subsidiarys debt to a third party, and ii) a subsidiarys guarantee of the
debts owed to a third party by either its parent or another subsidiary of that
parent. The interpretation was effective for the Company on January 1, 2003;
however, this interpretation had no impact on the Company, as the Company does
not guarantee any indebtedness. FASB Interpretation No. 46, revised December 2003 (FIN 46R), Consolidation of
Variable Interest Entities addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means
other than voting rights and accordingly should consolidate the entity. FIN
46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, (VIEs), that was issued in January 2003. The Company will be
required to apply FIN 46R to variable interests in VIEs created after December
31, 2003. For variable interests in VIEs created before January 1, 2004, the
FIN 46R will be applied beginning on January 1, 2005. For any VIEs that must
be consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining
the carrying amounts is not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, F - 13




---



##### Table of Contents



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) liabilities and noncontrolling interest of the VIE. The Company currently does
not have any VIEs. NOTE 2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK Financial instruments with concentrations of credit and market risk include
cash and mortgage loans. The Company maintains cash deposit accounts in banks, which, at times, may
exceed Federally insured limits. Substantially all of the loans purchased by the Company are fixed rate loans
secured by the first deed of trust on commercial, land, nonconforming, and
multi-family properties. Maturities on the mortgage loans range from one to
three years. Concentration of mortgage loans exists in Arizona and northern Nevada of
approximately 52% and 22%, respectively in 2003. As such, the Company has a
significant geographic concentration of credit risk that may be adversely
affected by periods of economic decline. Concentration of mortgage loan products exists primarily in land loans. As
such, the Company has a significant product concentration of credit risk that
may be adversely affected by periods of economic decline. The following table
illustrates the concentration percentages by product type: As of December 31, 2003
    
    2002Land
    
    $
    72,555,016
    
    
    
    76
    %
    
    $
    52,247,282
    
    
    
    55
    %Construction
    
    
    18,989,693
    
    
    
    20
    %
    
    
    37,898,459
    
    
    
    39
    %Commercial Building
    
    
    
    
    
    
    
    
    
    
    1,954,915
    
    
    
    2
    %Other
    
    
    4,065,455
    
    
    
    4
    %
    
    
    4,144,738
    
    
    
    4
    %$
    95,610,164
    
    
    
    100
    %
    
    $
    96,245,394
    
    
    
    100
    %
 A significant portion of the Companys mortgage loans will require the borrower
to make a balloon payment of the principal at maturity. To the extent that a
borrower has an obligation to pay a mortgage loan in a large lump sum payment,
its ability to satisfy this obligation may be dependent upon its ability to
refinance or raise a substantial amount of cash. An increase in interest rates
over the mortgage rate applicable at origination of the loan may have an
adverse effect on the borrowers ability to refinance the loan. F - 14




---



##### Table of Contents



NOTE 2. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK (CONTINUED) The following table illustrates the scheduled maturities of mortgage loan
investments subsequent to December 31, 2003: Maturity
    
    Amount2003
    
    $
    6,527,4082004
    
    
    42,492,7822005
    
    
    29,777,0002006
    
    
    16,812,974$
    95,610,164
 Group concentration of credit risk exists in borrowers of mortgage loans. At
December 31, 2003 and 2002, 38% and 51%, respectively, of mortgage loans were
concentrated in multiple loans to five borrowers. The amount of loss is
limited to the recorded amounts of the loans of $36,743,049 and $48,684,614 at
December 31, 2003 and 2002, respectively. Multiple loans to one borrower or to
related entities generally contain cross default provisions. At December 31,
2003, there was one loan with a cross default provision in excess of 10% of the
portfolio. There were no instances of loans with cross default provisions in
excess of 10% of the portfolio as of December 31, 2002. As of December 31,
2003 the portfolio contained two loans totaling $29,950,000, which exceeded 10%
of total mortgage loans. Additionally, one borrower had loans totaling
$11,607,768, which exceeded 10% of total mortgage loans at December 31, 2003.
As such, the Company has a significant borrower concentration of credit risk
that may be adversely affected by periods of economic decline. The significant
borrower concentration of credit risk related to the top 10 borrowers of the
portfolio represent approximately 92% and 65% of the portfolio, as of December
31, 2003 and 2002, respectively. The amount of loss is limited to the recorded
amounts of the loans of $88,096,854 and $62,523,890 at December 31, 2003 and
2002, respectively. NOTE 3. LAND HELD FOR RESIDENTIAL DEVELOPMENT In February 2001, the Company foreclosed on a mortgage loan in default and
obtained ownership of the residential land development project (the Project)
securing the loan. The Companys recorded investment in the loan at the time
of foreclosure was approximately $2.7 million. The Company obtained a
third-party appraisal of the Project at the time of the foreclosure, which was
used by management to value the Project at approximately $2.5 million, net of
estimated costs to sell. A loss of $225,000 was recorded upon recording the
initial carrying value of the Project upon foreclosure. The three phases
comprising this Project, which totaled 117 lots, were in various stages of
completion. The appraisal provided an allocation of the fair value as follows:
(i) phase Is 15 lots at $30,000 each, (ii) phase IIs 61 lots at approximately
$15,000 each, and (iii) phase IIIs 41 lots at approximately $15,000 each. The
appraisal was based on the current condition of the lots and did not consider
costs, which the Company or its assignee would incur to prepare these lots for
the commencement of homebuilding. The Company subsequently assigned the
Project to SAC, its wholly owned taxable REIT subsidiary. F - 15




---



##### Table of Contents



NOTE 3. LAND HELD FOR RESIDENTIAL DEVELOPMENT (CONTINUED) In June 2002, SAC entered into an agreement with a third-party homebuilder to
transfer title to the lots to the homebuilder in exchange for an upfront
payment, in cash, equal to a portion of the original appraised value of the
uncompleted lots. Additionally, the homebuilder is responsible to pay SAC the
difference between the agreed value per lot and the cash previously received,
upon sale of the homes to third parties. SAC is also entitled to 50% of the
profits, if any, realized by the homebuilder upon closing of the sale of each
home, as well as repayment of infrastructure costs borne by the Company prior
to the agreement. SAC receives a security interest in each lot transferred to the homebuilder,
subordinate to the senior interest held by the homebuilders construction
lender. SAC is not obligated for any future costs of the Project once a
completed lot is delivered to the homebuilder. This arrangement is accounted
for as a real estate investment by which cash received upfront upon delivery of
the completed lots reduces SACs investment in the land held for residential
development. Upon the sale of completed homes by the homebuilder to an
independent third-party, SAC reduces land held for residential development
based on all cash proceeds received under the cost recovery method. After the
investment has been fully recovered SAC will recognize revenue equal to its
share of the profits realized and received from home sales and may record a
provision for income taxes if SAC is anticipated to generate taxable income for
the year. On June 20, 2003, the homebuilder neglected to exercise his option to purchase
Phase III of the Project. The Company has subsequently listed the property for
sale. All 76 lots in phases I and II were transferred to the homebuilder in 2002 upon
payment to SAC of $565,943. In order to complete the lots, SAC incurred site
mapping and other engineering costs and real estate taxes, and insurance fees,
all of which were capitalized. 14 homes were sold during fiscal year ended
December 31, 2003. The following provides a roll-forward of this account: Balance at December 31, 2001
    
    $
    2,782,715Capitalized costs
    
    
    231,807Net proceeds from sale of lots
    
    
    (565,943
    )Balance at December 31, 2002
    
    
    2,448,579Capitalized costs
    
    
    197,438Net proceeds from sale of homes
    
    
    (268,560
    )Balance at December 31, 2003
    
    $
    2,377,457
 NOTE 4. REAL ESTATE OWNED (HELD FOR SALE) As of December 31, 2003 and 2002, real estate owned totaled $7.9 million and
$950,000, respectively. The properties acquired were as follows:  
    
    A personal residence in Telluride, Colorado
acquired on September 25, 2003 with a loan balance of
approximately $1.7 million.  
    
    Two parcels of raw land in Mesquite, Nevada
acquired in August of 2003 with loan balances of
approximately $2.6 million and $2.5 million.  
    
    A speculative home in Aspen, Colorado with a
loan balance of approximately $1.9 million. During the
third quarter, the property was sold. As a result, the
Company recognized a profit of approximately $90,000 and has
a note receivable in the amount of $125,000.  
    
    A commercial property located in Las Vegas,
Nevada acquired in August 2002 with a loan balance of
$950,000. F - 16




---



##### Table of Contents



NOTE 4. REAL ESTATE OWNED (HELD FOR SALE) (CONTINUED) The Company had write-downs of $250,000 related to the Mesquite, Nevada
properties in the net balance of Real Estate Owned. On April 4, 2003, the Company acquired real estate owned property through a
foreclosure on a mortgage loan whose outstanding balance at the time of
foreclosure was approximately $1.6 million, including principal and accrued
interest. The properties consisted of a hotel and three parcels of land, which
were transferred from mortgage loans to real estate owned upon foreclosure.
The Company sold the hotel and two of the parcels of land resulting in a loss
of approximately $144,000 and $27,000, respectively. NOTE 5. MORTGAGE LOANS HELD FOR INVESTMENT Mortgage Loan Products The Company has four mortgage loan products consisting of land, construction,
commercial building and other. Substantially all mortgage loans have similar
effective interest rates ranging from 10.5% to 13.25%. Revenue by product will
fluctuate based upon relative balances during the period. Due to the similar
nature of the effective interest rates, the Company does not compile and report
revenues by product type. See Note 2 (Financial Instruments and Concentrations
of Credit Risk) for a table that sets forth balances by mortgage loan product
type. Under existing loans, the Company is required to fund additional loan amounts
totaling $6,201,802 as of December 31, 2003. Of the mortgage
loans outstanding as of December 31, 2003, 96% is
collateralized by first deeds of trust, while the remaining 4% is
collateralized by second and third deeds of trust. Allowance for Loan Losses The Company sets aside an allowance for loan losses through periodic charges to
earnings. While there exists probable asset quality problems in the loan
portfolio, management believes sufficient reserves have been provided in the
allowance to absorb probable losses in the loan portfolio at December 31, 2003
and 2002. During the years ended December 31, 2003, 2002 and 2001, the Company
has recorded a provision for loan losses of $25,137, $795,255 and $496,427,
respectively. At December 31, 2003 and 2002, Collateralized Notes were secured by $52,036,733
and $30,490,965, respectively, of mortgage loans pledged as collateral. F - 17




---



##### Table of Contents



NOTE 5. MORTGAGE LOANS HELD FOR INVESTMENT (CONTINUED) The following table presents a roll forward of the allowance for loan loss: Balance at January 1, 2001
    
    $
    750,000Provision for Loan Losses
    
    
    496,427Charge Offs
    
    
    (226,106
    )Balance at December 31, 2001
    
    
    1,020,321Provision for Loan Losses
    
    
    795,255Charge Offs
    
    
    Balance at December 31, 2002
    
    
    1,815,576Provision for Loan Losses
    
    
    25,137Charge Offs
    
    
    (416,457
    )Balance at December 31, 2003
    
    $
    1,424,256
 Delinquent Loans At December 31, 2003, the Company had three loans that were 153 to 364 days
past due, totaling approximately $6.6 million in principal and accrued
interest. The Company accrued interest on these three loans until the loans
were 90 days past due; however, in accordance with our revenue recognition
policy, the Company ceases to accrue additional interest income if these loans
become 90 days past due. Accrued interest recorded during the 90-day period
remains accrued if management determines that the underlying collateral
supports recovery of the Notes, principal and accrued interest. The accrued
interest on one delinquent loan was reversed because management determined that
the underlying collateral did not support recovery of the interest. The
accrued interest recorded on the other delinquent loans at December 31, 2003
was approximately $91,000. Management has evaluated the collectability of
these delinquent loans in light of the types and dollar amounts of the loans,
adverse situations that may affect the borrowers ability to repay, prevailing
economic conditions and the underlying collateral securing the loan and
determined that amounts are collectible. At December 31, 2002, the Company had eight loans that were 30 to 245 days past
due, totaling approximately $13.3 million in principal and accrued interest.
The Company accrued interest on these eight loans until the loans were 90 days
past due; however, in accordance with our revenue recognition policy, the
Company ceases to accrue additional interest income if these loans become 90
days past due. The accrued interest recorded on these eight delinquent loans
at December 31, 2002 was approximately $359,000. F - 18




---



##### Table of Contents



NOTE 6. BANK LINES OF CREDIT At December 31, 2003, the Company maintained four revolving lines of credit.
The first line of credit allows the Company to borrow up to $3.5 million and
matures April 15, 2004. The second line of credit allows the Company to borrow
up to $6.5 million and matures June 15, 2004. The third line of credit allows
the Company to borrow up to $7.0 million and matures on October 15, 2004. The
fourth line of credit allows the Company to borrow up to $2.5 million and
matured January 23, 2004 (extended to April 23, 2004). All four lines bear interest at the banks prime
rate (4.0% at December 31, 2003). On December 31, 2003, the outstanding
balance on all of the lines of credit was zero. Lines of credit all contain
renewal options for a nominal fee and management anticipates they will renew
these lines. All lines of credit are collateralized by a secured interest in
mortgage loans and require the Company to maintain certain financial covenants.
Such covenants include restrictions on (i) any change in business activities
from those we are presently engaged in, and (ii) any change in executive and
management personnel that would result in reduced qualifications and experience
compared to present personnel. Such covenants also contain requirements for
(i) minimum tangible net worth, (ii) maximum debt-to-equity ratio, (iii) fixed
charge coverage ratio, (iv) interest coverage ratio, and (v) a maximum
allowable for lines of credit of $20 million. The Company was in compliance
with these covenants as of December 31, 2003. At December 31, 2002, the Company maintained three revolving lines of credit.
The first line of credit allowed the Company to borrow up to $6.5 million. The
second line of credit allowed the Company to borrow up to $3.0 million, and the
third line of credit allowed the Company to borrow up to $5.0 million. These
lines bore interest at the banks prime rate (4.25% at December 31, 2002) and
matured July 1, 2003 and October 15, 2003. On December 31, 2002, the
outstanding balances on the lines of credit were $1,336,000, $3,000,000, and
$5,000,000 respectively. All lines of credit were collateralized by a secured
interest in mortgage loans and require the Company to maintain certain
financial covenants including maintaining a maximum debt to equity ratio. The
Company was in compliance with these covenants as of December 31, 2002. NOTE 7. COLLATERALIZED NOTES On May 7, 2002, a registration statement was declared effective by the
Securities and Exchange Commission increasing the amount of Collateralized
Notes available for sale up to $269,312,000 (including amounts remaining unsold
under the prior registration), from the original $250,000,000, which was
declared effective on January 18, 2001. The Collateralized Notes are secured
by mortgage loans at least one and one-half times the aggregate principal
amount outstanding on the Collateralized Notes. The outstanding Collateralized
Notes have maturities ranging from three months to five years from the date of
issue and bear a fixed rate of interest (2.25% to 7.5% at December 31, 2003).
The effective yield of Collateralized Notes outstanding at December 31, 2003
and 2002 was 5.58% and 4.76%, respectively. At December 31, 2003 and 2002, the
Collateralized Notes were secured by $52,036,733 and $30,490,965, respectively,
of mortgage loans pledged as collateral. F - 19




---



##### Table of Contents



NOTE 7. COLLATERALIZED NOTES (CONTINUED) The following table reflects the maturities of collateralized notes as
of December 31, 2003: Maturity Year
    
    Amount2004
    
    $
    31,590,6582005
    
    
    644,1372006
    
    
    2007
    
    
    342,9132008
    
    
    832,571$
    33,410,279
 SPACE INTENTIONALLY LEFT BLANK F - 20




---



##### Table of Contents



NOTE 9. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) 2003 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share amount)Interest and dividend income
    
    $
    2,836
    
    
    $
    2,910
    
    
    $
    2,905
    
    
    $
    3,043Interest expense
    
    
    395
    
    
    
    450
    
    
    
    451
    
    
    
    445Net interest/ dividend income
    
    
    2,441
    
    
    
    2,460
    
    
    
    2,454
    
    
    
    2,598Other Income (Loss)
    
    
    1
    
    
    
    (157
    )
    
    
    53
    
    
    
    34Provision for Loan Loss
    
    
    62
    
    
    
    421
    
    
    
    (359
    )
    
    
    (98
    )General and Administrative
    
    
    87
    
    
    
    168
    
    
    
    138
    
    
    
    201Management and Directors Fees
    
    
    192
    
    
    
    72
    
    
    
    108
    
    
    
    155Other Expenses
    
    
    56
    
    
    
    228
    
    
    
    174
    
    
    
    26Net Earnings
    
    $
    2,045
    
    
    $
    1,414
    
    
    $
    2,446
    
    
    $
    2,348Net Earnings per share  Basic
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.32
    
    
    $
    0.32Net Earnings per share  Diluted
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.32
    
    
    $
    0.31
 2002 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(In thousands, except per share amount)Interest and dividend income
    
    $
    2,155
    
    
    $
    2,485
    
    
    $
    2,413
    
    
    $
    2,674Interest expense
    
    
    155
    
    
    
    192
    
    
    
    210
    
    
    
    272Net interest/ dividend income
    
    
    2,000
    
    
    
    2,293
    
    
    
    2,203
    
    
    
    2,402Other Income
    
    
    11
    
    
    
    121
    
    
    
    4
    
    
    
    (71
    )Provision for Loan Loss
    
    
    130
    
    
    
    129
    
    
    
    131
    
    
    
    405General and Administrative
    
    
    92
    
    
    
    153
    
    
    
    100
    
    
    
    136Management and Directors Fees
    
    
    7
    
    
    
    110
    
    
    
    13
    
    
    
    261Other Expenses
    
    
    
    
    
    
    88
    
    
    
    25
    
    
    
    38Net Earnings
    
    $
    1,782
    
    
    $
    1,934
    
    
    $
    1,938
    
    
    $
    1,491Net Earnings per share  Basic
    
    $
    0.26
    
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    0.21Net Earnings per share  Diluted
    
    $
    0.26
    
    
    $
    0.28
    
    
    $
    0.27
    
    
    $
    0.20
 F - 21




---



##### Table of Contents



NOTE 10. EARNINGS PER SHARE Following is a reconciliation of earnings per share (in thousands, except per
share amounts): For the years ended December 31, 2003
    
    2002
    
    2001Basic:Net Earnings Applicable to Common Stock
    
    $
    8,253
    
    
    $
    7,145
    
    
    $
    1,545Weighted Average Number of Shares  Basic
    
    
    7,463
    
    
    
    7,033
    
    
    
    1,955Earnings Per Share  Basic
    
    $
    1.11
    
    
    $
    1.02
    
    
    $
    0.79Diluted:Net Earnings for Diluted Earnings Per Share
    
    $
    8,253
    
    
    $
    7,145
    
    
    $
    1,545Weighted Average Number of Shares  Basic
    
    
    7,463
    
    
    
    7,033
    
    
    
    1,955Additional Shares due to dilutive Stock Options
    
    
    23
    
    
    
    39
    
    
    
    52Weighted Average Number of Shares  Diluted
    
    
    7,486
    
    
    
    7,072
    
    
    
    2,007Earnings Per Share  Diluted
    
    $
    1.10
    
    
    $
    1.01
    
    
    $
    0.77Stock Options not included because they were
anti-dilutive
    
    
    
    
    
    
    
    
    
    
    25
 NOTE 11. STOCK OPTIONS In October 1997, the Company adopted the 1997 Executive and Non-Employee
Director Stock Option Plan (the Plan) pursuant to which 300,000 shares of the
Common Stock were reserved for issuance upon the exercise of options granted.
If the outstanding shares of Stock as reflected on the Companys balance sheet
exceeds 3,000,000, the total number of shares of Stock reserved and available
for issuance (inclusive of shares already issued) under the Plan shall
automatically be increased so as to equal 10% of the number of outstanding
shares of stock. Therefore, the total number of shares of Common Stock, which
are available for issuance upon the exercise of options granted, was 768,481.
Options granted may be designated as either (a) incentive stock options (ISOs)
under the Internal Revenue Code of 1986, as amended, at an exercise price equal
to the fair market value of the underlying stock, or (b) nonqualified options
at a Board of Directors determined option price. ISOs and nonqualified
options may be granted by the Board of Directors to participating directors,
officers, other employees of the Company or its Manager, agents and
consultants. Fair market value is determined periodically by the Board of
Directors. F - 22




---



##### Table of Contents



NOTE 11. STOCK OPTIONS (CONTINUED) 25% of the shares subject to such stock options shall become exercisable on the
first anniversary of the date of grant of the stock option, and an additional
25% shall become exercisable on each of the next three anniversaries of the
date of grant. In general, vested options must be exercised within three
months after an employee leaves the Company or 10 years after the stock options
become vested. Presented below is a summary of the Companys stock options and the related
transactions for the years ended December 31, 2003, 2002 and 2001: WeightedAverageExerciseShares
    
    PriceBalance at January 1, 2001
    
    
    113,850
    
    
    $
    2.62Granted
    
    
    55,000
    
    
    
    7.73Exercised
    
    
    (20,218
    )
    
    
    1.06Forfeited/ expired
    
    
    (30,000
    )
    
    
    5.00Balance at December 31, 2001
    
    
    118,632
    
    
    $
    4.65Granted
    
    
    85,000
    
    
    
    11.00Exercised
    
    
    (32,684
    )
    
    
    3.20Forfeited/ expired
    
    
    (11,250
    )
    
    
    5.00Balance at December 31, 2002
    
    
    159,698
    
    
    $
    8.30Granted
    
    
    
    
    
    
    Exercised
    
    
    (19,503
    )
    
    
    2.44Forfeited/expired
    
    
    (2,500
    )
    
    
    5.00Balance at December 31, 2003
    
    
    137,695
    
    
    $
    9.19
 F - 23




---



##### Table of Contents



NOTE 11. STOCK OPTIONS (CONTINUED) Stock Options Outstanding
    
    Stock Options ExercisableWeighedAverageExercise
    
    
    
    
    
    Contractual
    
    ExercisePrices
    
    Shares
    
    Life
    
    Price
    
    Shares
    
    Exercise PriceDecember 31, 2003$
    0.01
    
    
    
    14,648
    
    
    
    3.75
    
    
    $
    0.01
    
    
    
    14,648
    
    
    $
    0.013.15
    
    
    
    1,200
    
    
    
    4.58
    
    
    
    3.15
    
    
    
    1,200
    
    
    
    3.155.00
    
    
    
    13,047
    
    
    
    6.00
    
    
    
    5.00
    
    
    
    8,422
    
    
    
    5.0011.00
    
    
    
    108,800
    
    
    
    8.64
    
    
    
    11.00
    
    
    
    32,550
    
    
    
    11.00Totals
    
    
    137,695
    
    
    
    
    
    
    
    
    
    
    
    56,820December 31, 2002$
    0.01
    
    
    
    23,148
    
    
    
    4.81
    
    
    $
    0.01
    
    
    
    23,148
    
    
    $
    0.010.05
    
    
    
    2,500
    
    
    
    5.09
    
    
    
    0.05
    
    
    
    2,500
    
    
    
    0.053.15
    
    
    
    2,500
    
    
    
    5.59
    
    
    
    3.15
    
    
    
    2,500
    
    
    
    3.155.00
    
    
    
    21,550
    
    
    
    7.02
    
    
    
    5.00
    
    
    
    7,300
    
    
    
    5.0011.00
    
    
    
    110,000
    
    
    
    9.70
    
    
    
    11.00
    
    
    
    6,250
    
    
    
    11.00Totals
    
    
    159,698
    
    
    
    
    
    
    
    
    
    
    
    41,698December 31, 2001$
    0.01
    
    
    
    30,047
    
    
    
    5.81
    
    
    $
    0.01
    
    
    
    30,047
    
    
    $
    0.010.05
    
    
    
    5,000
    
    
    
    6.08
    
    
    
    0.05
    
    
    
    
    
    
    
    3.15
    
    
    
    9,000
    
    
    
    6.58
    
    
    
    3.15
    
    
    
    6,500
    
    
    
    3.155.00
    
    
    
    49,585
    
    
    
    8.12
    
    
    
    5.00
    
    
    
    9,700
    
    
    
    5.0011.00
    
    
    
    25,000
    
    
    
    9.75
    
    
    
    11.00
    
    
    
    
    
    
    
    Totals
    
    
    118,632
    
    
    
    
    
    
    
    
    
    
    
    46,247
 The fair value of the Companys stock options was estimated as of the grant
date using the Black-Scholes Option Pricing Model with the following weighted
average assumptions for the years ended December 31, 2003, 2002 and 2001:
Dividend yield of 12.0% for all years, expected volatility of 0.0%, 0.0% and 0.0%,
respectively, and an expected holding period of five years. There were no
stock grants issued in 2003, therefore no fair value calculation was performed.
The weighted average risk free interest rate of 1.8% and 2.2% was used as of
December 31, 2002 and 2001, respectively. Based on these assumptions,
compensation expense was $0, $81,013 and $70,558 for the years ended December
31, 2003, 2002 and 2001, respectively. The weighted average fair value of options granted during the years ended
December 31, 2003, 2002 and 2001 was $0, $0, and $0, respectively. F - 24




---



##### Table of Contents



NOTE 12. CAPITAL TRANSACTIONS On June 30, 2001, the Company completed the first closing of a private
placement for 1,000,000 shares of Class A Convertible Preferred Stock, at
$11.00 per share, for $11.0 million. On September 30, 2001, the Company
completed the second closing of the private placement for 667,221 shares of
Class A Convertible Preferred Stock, at $11.00 per share, for $7.3 million. Assets received for the purchase of Preferred Stock from officers, directors or
other related parties, are recorded at fair value. Assets received by
non-related parties are recorded at fair value. NOTE 13. RELATED PARTY On October 23, 1997, the Company entered into a Management Agreement with the
Manager. The Manager is responsible for the day-to-day operations of the
Company and will perform such services and activities relating to the assets
and operations of the Company as are provided for in the Management Agreement.
The Manager originates the mortgage loans in the name of the Manager and sells
the loans to the Company. The Manager retains the servicing of the mortgage
loans. The
management agreement had an initial term of three years beginning
January 30, 1998 and is renewed automatically for successive
one-year periods unless we timely deliver a notice of non-renewal.
Upon non-renewal of the management agreement without cause, a
termination fee will be payable to the Manager in an amount equal to
the greater of (i) the fair value of the management agreement as
established by an independent appraiser, or (ii) 4% of the
mortgage loan portfolio of Specialty Trust. At December 31,
2003, 4% of our mortgage loan portfolio would be approximately
$3.8 million. The Manager receives the mortgage placement fees or points, usually charged to
the borrower for and upon origination, extension or refinancing of loans, up to
2.5% of the loan balance with any additional fees or points paid to the
Company. The Manager will also receive a fee for loan servicing equal to
one-half of one percent per annum of the total mortgage loans serviced. These
fees are earned directly by the Manager and deducted from the interest or late
payments to cover costs to manage the portfolio, effectively reducing the yield
to the Company. In addition, the Manager will receive, as incentive
compensation for each fiscal quarter, an amount equal to 50% of the net income
before the dividend deduction of the Company in excess of an annualized return
to the Company equal to 12%. For the years ended December 31, 2003, 2002, and
2001 the Manager earned the following: 2003
    
    2002
    
    2001Loan Origination and
Extension Fees
    
    $
    2,259,153
    
    
    $
    1,610,059
    
    
    $
    1,692,100Loan Servicing Fees
    
    
    455,923
    
    
    
    361,224
    
    
    
    266,556Late Payment Charges
    
    
    11,685
    
    
    
    9,295
    
    
    
    35,324Total Base Fees
    
    
    2,726,761
    
    
    
    1,980,578
    
    
    
    1,993,980Incentive Compensation Bonus
    
    
    391,579
    
    
    
    314,249
    
    
    
    88,084Total Compensation
    
    $
    3,118,340
    
    
    $
    2,294,827
    
    
    $
    2,082,064
 F - 25




---



##### Table of Contents



NOTE 13. RELATED PARTY - CONTINUED The loan origination fees are received by the Manager as part of the initial
funding of the loan. Loan servicing fees reduce the amount of interest income
recognized by the Company as the Manager withholds the servicing fee from
interest payments received from the borrower. Late payment charges are
received directly by the Manager from the borrower. The incentive compensation
is calculated in accordance with the agreement and paid for or accrued in
Manager and Directors fees in the Companys financial
statements. In January 2004, the Company and the Manager entered into
an amendment to the management agreement which revised the
Managers compensation. There are several related parties who held collateralized notes with the
Company. As of December 31, 2003 and 2002, they owned approximately $1,528,000
and $696,000 in collateralized notes, which represents approximately 4.6% and
3.5% of the total balance, respectively. In addition, SAC currently has an agreement with a realtor related to the
development of the property at Wildcreek. SAC will pay the realtor a finders
fee of $300 per lot and a 3.5% brokers commission for each home sold. The
realtor is a real estate company in which an independent director and member of
the audit committee is a substantial owner and executive officer. As of
December 31, 2003 and December 31, 2002, SAC had an outstanding payable to the
realtor of $0 and $18,300, respectively, related to the finders fee on Phase
II. Total fees paid to the real estate company for the fiscal year ended
December 31, 2003 were $114,508. There were no home sales closed as of
December 31, 2002. NOTE 14. SUBSEQUENT EVENTS On January 2, 2004, the Company sold a portion of a residential raw land loan
totaling $9,450,000 to third party investors resulting in no gain or
loss. The loan had a balance of
$19,950,000 at December 31, 2003. SPACE INTENTIONALLY LEFT BLANK F - 26




---



##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  For information relating to a change of accountants during fiscal
year 2002, see the Companys Form 8-K filed October 17, 2002 and
Form 8-K/A filed October 25, 2002. 
 Item 9A. Controls and Procedures  (a)
    
    Evaluation of Disclosure Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer
conclude that the Companys disclosure controls and procedures
are effective based on their evaluation of these controls and
procedures as of the end of the period covered by this report.(b)
    
    Changes in Internal Control Over Financial
Reporting. During the period covered by this annual report,
there have been no changes in the Companys internal control
over financial reporting that have materially affected, or are
reasonably likely to materially affect the Companys internal
control over financial reporting. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant  The directors, executive officers and senior officers of Specialty
Trust and their positions are: Name
    
    PositionNello Gonfiantini III (1)
    
    Chairman of the Board of Directors, President, SecretaryGeorge E. Bull III (2)(3)
    
    DirectorRoger M. Peltyn (2)(4)
    
    DirectorStephen V. Novacek (2)(4)(6)
    
    DirectorErnest Martinelli (2)(3)(5)
    
    DirectorHarvey C. Fennell (2)(3)
    
    DirectorMark Combs (2)(5)(6)
    
    DirectorDonna Gagnon
    
    Chief Financial Officer and Principal Accountant
  (1)
    
    Founder and promoter of Specialty Trust.(2)
    
    Independent Director(3)
    
    Member of the Audit Committee(4)
    
    Member of the Manager Oversight Committee(5)
    
    Member of the Loan Review Committee(6)
    
    Member of the Corporate Governance Committee 72




---



##### Table of Contents



Information regarding the business background and experience of
Specialty Trusts directors and executive officers follows:  NELLO GONFIANTINI III, age 49, is the sole founder and promoter of
Specialty Trust and serves as its Chairman of the Board, President,
and Secretary. Mr. Gonfiantini has owned and managed Specialty
Financial, a private mortgage finance and real estate development
business in Reno, Nevada, since 1994. From 1986 until 1994, Mr.
Gonfiantini was the Chairman, CEO and President of Home Federal
Savings Bank of Nevada, where he oversaw the commercial and
residential real estate lending operations. Prior to taking that
position in 1986, Mr. Gonfiantini was the Executive Vice President
of Home Mortgage Company, a mortgage banking firm and predecessor to
Home Federal Savings Bank of Nevada. Mr. Gonfiantini has a BA and an
MBA from the University of Denver.GEORGE E. BULL III, age 55, is Chairman of the Board and Chief
Executive Officer and a founder in 1994 of Redwood Trust, Inc., Mill
Valley, California, a mortgage REIT. Mr. Bull was the President of
GB Capital until March 1997, and had served in that capacity since
he founded the predecessor of GB Capital in 1983. GB Capital
assisted banks, insurance companies and savings and loans in
managing portfolios of securitized and unsecuritized mortgage loans,
in arranging collateralized borrowings, in hedging balance sheet
risks and with other types of capital markets transactions. In
addition, GB Capital managed and advised troubled commercial real
estate and corporate investments. In 1991 and 1992, Mr. Bull served
as Acting Chief Investment Officer of First Capital Life Insurance
Company, managing its $4 billion securities portfolio and over $200
million in commercial real estate loans. He also worked during this
period in various aspects of fixed income portfolio management with
Wood Island Associates, Inc. From 1991 through 1993, Mr. Bull
oversaw the management of the $350 million portfolio of commercial
real estate investments and the $8 billion securities portfolio of
Executive Life Insurance Company (in Rehabilitation) on behalf of
the California Department of Insurance. Mr. Bull formerly served as
a director of Eureka Bank in San Francisco and as a director of Home
Federal Savings Bank in Nevada.ROGER M. PELTYN, age 61, has been President of the structural
engineering firm, Martin & Peltyn, Inc., Las Vegas, Nevada since
1981. Mr. Peltyn is a director of Southern Nevada Seismic Safety
Counsel; a director of Martin & Peltyn, Inc., Civil Engineers; and a
member of the American Society of Civil Engineers, American
Institute of Steel Construction, and the National Society of
Professional Engineers, Las Vegas, Nevada. He is a member of the
board of trustees of the Nevada Development Authority, President of
the Alliance for the Arts, and a director of the Clark County Public
Education Foundation.STEPHEN V. NOVACEK,age 58, has been a shareholder in the law firm,
Hale, Lane, Peek, Dennison, Howard and Anderson, located in Reno,
Las Vegas and Carson City, Nevada, since 1978. Mr. Novacek
specializes in real estate law and finance representing various
institutional lenders in residential and commercial transactions. He
is a member of the State Bar of Nevada and the American Bar
Association. 73




---



##### Table of Contents



ERNEST MARTINELLI, age 75, retired as Vice Chairman of Bank of
America Nevada in 1993 after a career in the banking business in
Nevada. He is Vice Chair of the Board of Directors of St. Marys
Healthcare Network and President of Martinelli Properties, Inc., a
commercial real estate development and investment company.HARVEY C. FENNELL, age 56, is the Chief Financial Officer of Dickson
Realty, Inc., Reno, Nevada, and has been a realtor since 1987. Mr.
Fennell specializes in land and commercial real estate sales. He has
been a member of the Reno/Sparks Association of Realtors and has
served on its Board of Directors. He is a member of the Nevada Real
Estate Commission, a state regulatory agency. Prior to 1987, Fennell
was a partner in the accounting firm of KPMG. He formerly served as
a director of Home Federal Savings Bank in Reno, Nevada.MARK COMBS,age 57, is a private lender and investor specializing in
large commercial loans for land development and commercial
construction. Mr. Combs has completed numerous development projects
including Saddlehorn, a 532 lot subdivision, in Reno, Nevada. In
1978, after obtaining his real estate brokers license, Mr. Combs
joined his wife Fianna in Dickson Realty, a real estate company
located in Reno, Nevada. Over the next twelve years, Dickson Realty
had grown to over 70 agents. In 1990, Mr. Combs sold his interest
in Dickson Realty to pursue the private lending business. Mr. Combs
is a native Nevadan and graduated from the University of Nevada with
a finance degree in 1969.DONNA M. GAGNON, age 48, has been the Chief Financial Officer and
Principal Accountant of Specialty Trust and Specialty Financial
since December 2003. Ms. Gagnon is a Certified Public Accountant.
Ms. Gagnon has a BS from the University of Massachusetts. She also
has an MBA with an emphasis in Finance and Economics from Babson
College. She was formerly CFO for Peppermill Casinos, Inc. in Reno,
Nevada.Terms of Directors and OfficersSpecialty Trusts Board of Directors consists of such number of
persons as shall be fixed by the Board of Directors from time to
time by resolution to be divided into three classes, designated
Class I, Class II and Class III, with each class to be as nearly
equal in number of directors as possible. Currently there are seven
directors. At each annual meeting, the successors to the class of
directors whose term expires at that time are to be elected to hold
office for a term of three years, and until their respective
successors are elected and qualified, so that the term of one class
of directors expires at each such annual meeting. Class I DirectorsNello Gonfiantini III
    
    Term Expires 2005Stephen Novacek
    
    Term Expires 2005Class II Directors
 74




---



##### Table of Contents



George Bull III
    
    Term Expires 2004Ernest Martinelli
    
    Term Expires 2004Mark Combs
    
    Term Expires 2004Class III DirectorsRoger Peltyn
    
    Term Expires 2006Harvey Fennell
    
    Term Expires 2006
  In the case of a vacancy on the Board of Directors, including a
vacancy created by an increase in the number of directors, the
vacancy may be filled by election of the Board of Directors or the
stockholders, with the director so elected to serve until the next
annual meeting of stockholders if elected by the Board of Directors.
If elected by the stockholders, the elected director may serve the
remainder of the term of the director being replaced. Any newly
created directorships or decreases in directorships are to be
assigned by the Board of Directors so as to make all classes as
nearly equal in number as possible. Directors may be removed only
for cause and then only by vote of a majority of the combined voting
power of stockholders entitled to vote in the election for
directors. Subject to the voting rights of the holders of the common
stock, the Charter may be amended by the vote of a majority of the
combined voting power of stockholders, provided that amendments to
the Article dealing with directors may only be amended if it is
advised by at least two-thirds of the Board of Directors and
approved by vote of at least two-thirds of the combined voting power
of stockholders. The effect of the foregoing as well as other
provisions of Specialty Trusts Charter and Bylaws may discourage
takeover attempts and make more difficult attempts by stockholders
to change management. Prospective investors are encouraged to review
the Charter and Bylaws in their entirety.Officers are elected annually and serve at the discretion of the
Board of Directors. There are no family relationships between the
executive officers or directors.Committees of the BoardAudit Committee. The Audit Committee is composed of Messrs. Bull,
Martinelli and Fennell. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews
with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the
independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and
non-audit fees and reviews the adequacy of the Companys internal
accounting controls.Audit Committee Financial Expert.The Board of Directors of the
Company has determined that Harvey Fennell qualifies as an Audit
Committee Financial Expert as that term is defined by the SEC under
Item 401(h) of Regulation SK.The Audit Committee Financial Expert is independent as that term is
used for the determination of audit committee member independence
under the NYSE Listed Company Manual. 75




---



##### Table of Contents



Manager Oversight Committee. The Manager Oversight Committee is
composed of Messrs. Peltyn and Novacek. The Committee reviews
periodically the Management Agreement and the Managers performance
under that Agreement.Loan Review Committee. The Loan Review Committee is composed of
Messrs. Martinelli and Combs. The Committee reviews all loans and
the risk rating assignments.Corporate Governance Committee. The Corporate Governance Committee
is composed of Messrs. Combs and Novacek. The Committee will help
to review and establish the corporate standards for ethics.Other Committees. The Board of Directors may establish other
committees as deemed necessary or appropriate from time to time,
including, but not limited to, an Executive Committee of the Board
of Directors.In 2003, the Board of Directors met four times, one member was
absent on the February 10, 2003 meeting. The audit committee met
three
times, the loan review committee met three times, the manager
oversight committee met two times, and the corporate governance
committee did not meet.Compensation Committee InterlocksNo interlocking relationship exists between our Board of Directors
or officers responsible for compensation decisions and the Board of
Directors or compensation committee of any other company.Code of EthicsThe Company has adopted a Code of Ethics that applies to its
principal executive officer, its principal financial officer and its
principal accounting officer, or persons performing similar
functions. The Companys Code of Ethics is made available on its
website at www.specialtyfi.com.The Company intends to post on its website any future amendment or
change to its Code of Ethics as well as any waiver from a provision
of such Code granted to any of the officers subject to it, as
required by applicable law. 76




---



##### Table of Contents



Item 11. Executive Compensation  Compensation of DirectorsNone of our employee directors has received any separate
compensation for service on the Board of Directors or on any
committee thereof. We pay directors (Independent Directors) who are
not employed by Specialty Trust $1,500 for each meeting attended in
person and $250 for each teleconference meeting in addition to a
directors stock compensation fee of 500 shares for each six months
of service. Committee members receive $500 for each meeting
attended in person and $250 for each teleconference meeting. In
addition, each Director referred to as an Independent Director is
granted options to purchase 10,000 shares of common stock at the
fair market value of the common stock upon becoming a director. All
directors receive reimbursement of reasonable out-of-pocket expenses
incurred in connection with meetings of the Board of Directors. No
director who is an employee of Specialty Trust or the Manager will
receive separate compensation for services rendered as a director.Executive CompensationEmployee salaries and bonuses are paid through the Manager,
Specialty Financial, as part of and not in addition to the
management fee. For the years ended December 31, 2003, 2002 and
2001, Specialty Financial earned $2,726,761, $1,980,578 and
$1,993,980, respectively, in total base fees. Specialty Financial
also received an incentive compensation bonus of $391,579, $314,249
and $88,084 for the years ended 2003, 2002 and 2001, respectively.
The incentive compensation bonus is recorded in Management and
Directors Fees in the Consolidated Statement of Earnings. 77




---



##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information known to Specialty Trust
with respect to beneficial ownership of the Companys Capital Stock as of
December 31, 2003, by each person other than members of management known to
Specialty Trust to beneficially own more than five percent (5%) of the
Companys Capital Stock. Unless otherwise indicated in the footnotes to the
table, the beneficial owners named have, to the knowledge of the Company, sole
voting and investment power with respect to the shares beneficially owned,
subject to community property laws where applicable. Beneficial Ownership ofCapital Stock(1)Name of Beneficial Owner
    
    Number
    
    PercentRaymond J. Poncia (1)
    
    
    587,604
    
    
    
    7.65
    %Angelo Petrini (2)
    
    
    460,440
    
    
    
    5.99
    %Julius and Joanne Ballardini (3)
    
    
    424,590
    
    
    
    5.53
    %
  (1)
    
    Consists of 293,802 shares of Common Stock held by the Raymond
J. Poncia, Jr. Family Trust and 293,802 shares of Common Stock held
by Hotel-Casino Management, Inc. of which Mr. Poncia is President.  (2)
    
    Consists of 415,120 shares of Common Stock held by the 1987
Petrini Family Trust of which Mr. Petrini is co-trustee with his wife
Joan and 45,320 shares of Common Stock held by Delta Saloon Profit
Sharing Plan of which Mr. Petrini is trustee.  (3)
    
    Consists of 424,590 shares of Common Stock held by the Julius
and Joanne Ballardini Family Trust Dated 4/14/92 of which Mr. & Mrs.
Ballardini are trustees. Beneficial Ownership of Capital Stock by Directors and Management The following table sets forth certain information known to Specialty Trust
with respect to beneficial ownership of the Companys Capital Stock as of
December 31, 2003, by each director and by all directors and executive officers
as a group. Unless otherwise indicated in the footnotes to the table, the
beneficial owners named have, to the knowledge of the Company, sole voting and
investment power with respect to the shares beneficially owned, subject to
community property laws where applicable. 78




---



##### Table of Contents



Beneficial Ownership ofCapital Stock (1)Name of Beneficial Owner
    
    Number
    
    PercentNello Gonfiantini III (2)
    
    
    636,371
    
    
    
    8.28
    %Ernest Martinelli (3)
    
    
    201,000
    
    
    
    2.62
    %George E. Bull III (4)
    
    
    63,500
    
    
    
    *Roger M. Peltyn (5)
    
    
    33,492
    
    
    
    *Stephen V. Novacek (6)
    
    
    19,094
    
    
    
    *Harvey Fennell (7)
    
    
    68,522
    
    
    
    *Mark Combs (8)
    
    
    3,556
    
    
    
    *Donna M. Gagnon
    
    
    0
    
    
    
    *All Directors and Executive Officers as a Group (8 persons)
    
    
    1,025,535
    
    
    
    13.34
    %
   *
    
    Less than one percent.(1)
    
    Assuming no exercise of the non-employee director options
(except by the Security holder named, separately).(2)
    
    Consists of 6,250 shares of Common Stock issuable upon the
exercise of options, 586,939 shares of Common Stock held in the Nello
Gonfiantini III 1981 Trust of which Nello Gonfiantini III is trustee,
43,182 shares of Common Stock held by Gonzo Properties of which Nello
Gonfiantini III is a partner, but does not include 615,833 shares of
Common Stock beneficially owned by persons related by blood or
marriage to Mr. Gonfiantini with respect to which he has neither
voting nor investment power.(3)
    
    Consists of 151,000 shares of Common Stock held in the Ernest
Martinelli Family Trust of which Mr. Martinelli is trustee, and
50,000 shares of Common Stock held in the Martinelli Family
Partnership of which Mr. Martinelli is a partner.(4)
    
    Consists of 63,500 shares of Common Stock held in the Bull
Trust of which Mr. Bull is trustee.(5)
    
    Consists of 33,492 shares of Common Stock held in the Roger and
Sandy Peltyn Family Trust of which Mr. Peltyn is co-trustee.(6)
    
    Consists of 19,094 shares of Common Stock held in the
Novecek/Gruenewald 2002 Trust, which Mr. Novacek is co-trustee.(7)
    
    Consists of 21,400 shares of Common Stock held in the Harvey
and Nancy Fennell Family Trust of which Mr. Fennell is co-trustee,
42,122 shares of Common Stock held in the Dickson Realty Profit
Sharing Plan of which Mr. Fennell is co-trustee and 5,000 shares of
Common Stock issuable upon the exercise of options.(8)
    
    Consists of 2,500 shares of Common Stock issuable upon the
exercise of options, 1,056 shares of Common Stock held in the Mark
and Fianna Combs Family Trust, which Mr. Combs is co-trustee. 79




---



##### Table of Contents



Item 13. Certain Relationships and Related Transactions  The ManagerSpecialty Financial serves as our manager and is responsible for
loan originations, loan servicing and our day-to-day operations. Mr.
Gonfiantini, a director and our sole executive officer, is also an
executive officer, director and the sole stockholder of Specialty
Financial. We have no separate employees from the Manager and we
share its facilities. We have no ownership interest in the Manager.
Specialty Financial has significant operating discretion as to the
implementation of our business strategy and policies.Administrative Services Provided by the ManagerSpecialty Financial, as Manager, is responsible for our day-to-day
operations and performs such services and activities relating to the
assets and operations of Specialty Trust (the Company) as may be
appropriate, including:  (i)
    
    representing the Company in connection with the
origination or purchase of mortgage loans;(ii)
    
    in accordance with the directions of the Board of
Directors, investing or reinvesting any money of the Company;(iii)
    
    furnishing reports and statistical and economic
research to the Company regarding the Companys real estate
lending activities and the performance of its portfolio of
mortgage loans;(iv)
    
    administering the day-to-day operations of the
Company and performing administrative functions necessary in
the management of the Company, including the collection of
revenues, the payment of the Companys expenses, debts and
obligations and the maintenance of appropriate computer
services to perform such administrative functions;(v)
    
    counseling the Company in connection with policy
decisions to be made by the Board of Directors;(vi)
    
    assisting the Company in its use of leverage to
finance mortgage loan acquisitions;(vii)
    
    overseeing the servicing of the Companys mortgage
loans;(viii)
    
    establishing underwriting, appraisal and quality control
procedures for the mortgage loans of the Company;(ix)
    
    conducting a legal document review of each mortgage
loan acquired to verify the accuracy and completeness of the
information contained in the mortgage loans, security
instruments and other pertinent documents in the mortgage file;(x)
    
    providing the Company with data processing, legal
and administrative services to the extent required to implement
the business strategy of the Company;(xi)
    
    providing all actions necessary for compliance by
the Company with all federal, state and local regulatory
requirements applicable to the Company in 80




---



##### Table of Contents



respect of its business activities, including preparing or
causing to be prepared all financial statements required under
applicable regulations and contractual undertakings;(xii)
    
    providing all actions necessary to enable the
Company to make required federal, state and local tax filings
and reports and generally enable the Company to maintain its
status as a REIT, including soliciting stockholders for
required information to the extent required by the REIT
Provisions of the Code;(xiii)
    
    communicating on behalf of the Company with the stockholders
of the Company as required to satisfy any reporting
requirements and to maintain effective relations with such
stockholders; and(xiv)
    
    performing such other services as may be required
from time to time for management and other activities relating
to the assets of the Company as the Board of Directors shall
reasonably request or the Manager shall deem appropriate under
the particular circumstances.  The Manager may enter into subcontracts with other parties to
provide us any such services.Management Agreement CompensationUnder the management agreement, the Manager will receive, beginning
January 1, 2004:  (a)
    
    A monthly base management fee at a per annum rate
equal to one-half of one percent applied to the mortgage asset
portfolio at the end of the preceding calendar quarter.(b)
    
    An incentive fee for each fiscal quarter equal to
50% of the taxable income of Specialty Trust, before deduction
of such incentive fee, in excess of an annualized Threshold
Return times net worth for the quarter. Threshold Return is a
target percentage rate of return to be set by mutual agreement
between the Manager and the Company for each calendar year
beginning with 2004. The Threshold Return for 2004 has been
set at 12%. Taxable income and net worth are calculated as
described above under the discussion of incentive compensation
for prior periods.  For the years ended December 31, 2003, 2002 and 2001, we incurred
management incentive fees of $391,579, $314,249, and $88,084,
respectively.Servicing FeeLoan Servicing Fee. As part of the servicing fee, one-half of one
percent of the total mortgage loan portfolio is paid to the Manager
as a loan-servicing fee. Loan servicing fees reduce the amount of
interest income recognized by the Company as the Manager withholds
the servicing fee from interest payments received from the borrower.
Payment of this fee, in effect, lowers the yield on our mortgage
loans. An undue emphasis on increasing the size of the mortgage loan
portfolio, thereby increasing the Managers compensation, could
result in the acquisition of riskier or more speculative loans. 81




---



##### Table of Contents



For the years ended December 31, 2003, 2002 and 2001 we incurred
loan-servicing fees of $455,923, $361,224 and $ 266,556,
respectively.Loan Origination FeesOrigination Fee. The first 2.5% (2 1/2 points) of any origination
fees (points) collected from the borrower is paid to the Manager as
part of the initial funding of the loan. The size of the mortgage
origination fees are market driven but may vary and may have a
direct impact upon the interest rate the borrower is willing to pay
and, therefore, on the interest income we would receive from the
loan.For the years ended December 31, 2003, 2002 and 2001, the Manager
retained loan origination fees of $2,259,153, $1,610,059 and
$1,692,100, respectively.Late Payment ChargesLate Payment Charges. Any loan payment which is past due 10 days is
charged a late payment charge of 10% of the total payment. Late
payment charges are received directly by the Manager from the
borrower. The late fee may be waived at the discretion of the
Companys Manager.For the years ended December 31, 2003, 2002 and 2001 the Manager
retained late charges of $11,685, $9,295, and $35,324, respectively.Other ExpensesThe operating expenses required to be borne by the Manager include
compensation and other employment costs, the cost of office space
and equipment and all other administrative expenses incurred in our
day-to-day operations. Those expenses do not include debt service or
taxes. While most costs are paid through the Manager from fees
earned by the Manager, we do pay directly certain REIT-related
expenses such as directors fees and legal and accounting fees.
There are no caps or ceilings on any category of fees, compensation
or other expenses payable by us except for compensation payable to
the Manager and expenses to be borne by the Manager as described
above.Transactions with Management and OthersSpecialty Financial serves as our manager and is responsible for
loan originations, loan servicing and our day-to-day operations. Mr.
Gonfiantini, a director and our sole executive officer, is also an
executive officer, director and the sole stockholder of Specialty
Financial. We have no separate employees from the Manager and we
share its facilities. We have no ownership interest in the Manager.
Specialty Financial has significant operating discretion as to the
implementation of our business strategy and policies. 82




---



##### Table of Contents



Term and TerminationThe management agreement had an initial term of three years
beginning January 30, 1998 and is renewed automatically for
successive one-year periods unless we timely deliver a notice of
non-renewal. Upon non-renewal of the management agreement without
cause, a termination fee will be payable to the Manager in an amount
equal to the greater of (i) the fair value of the management
agreement as established by an independent appraiser, or (ii) 4% of
the mortgage loan portfolio of Specialty Trust. At December 31,
2003, 4% of our mortgage loan portfolio would be approximately $3.8
million. In addition, we have the right to terminate the management
agreement at any time for cause. A majority of our unaffiliated
directors (currently 6 of 7 directors are unaffiliated) may
determine that the Manager has violated the management agreement in
a material respect and, after notice and an opportunity to cure,
terminate the agreement. Upon such a termination for cause, no
termination fee will be payable to the Manager.Collateralized NotesThere are several related parties who hold collateralized notes with
Specialty Trust. As of December 31, 2003, there were six (6)
related parties who owned approximately $1,528,413 in collateralized
notes, which represents approximately 4.6% of the total balance. 83




---



##### Table of Contents



Item 14. Principal Accountant Fees and Services  The aggregate fees and expenses billed by KPMG LLP and Grant
Thornton, LLP for professional services rendered for the fiscal
years ended December 31, 2003 and 2002 are set forth below. 2003
    
    2002Audit fees
    
    $
    96,633
    
    
    $
    123,504Audit related fees
    
    $
    18,789
    
    
    $
    12,534Tax fees
    
    $
    27,090
    
    
    $
    9,013All other fees
    
    $
    10,815
    
    
    $
    1,350
  Audit fees were for the audits of the Companys annual consolidated
financial statements, review of the financial statements included in
the Companys quarterly reports on Form 10-Q, and other assistance
required to complete the year-end audits.Audit related fees were for review of Form S-11 in 2003 and 2002, in
addition to 8-K termination letters and KPMGs review of Grant
Thorntons workpapers in 2002.Tax fees were for services rendered related to tax compliance and
reporting.All other fees were rendered for general consultation relating to
foreclosure properties and dividends distributions.Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services of Independent AuditorsIt is the Audit Committees policy to review and pre-approve the
scope, terms, and related fees of all auditing services and
permitted non-audit services provided by the auditors, subject to
the de minimus exceptions for non-audit services which are approved
by the Audit Committee prior to the completion of the audit. 84




---



##### Table of Contents



PART IV 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits Exhibit No.
    
    Document3.1*
    
    Articles of Incorporation3.3*
    
    Bylaws3.3.1*
    
    Amendment to Bylaws4.1**
    
    Indenture dated as of January 1, 2001 between
Specialty Mortgage Trust, Inc. and Bankers Trust Company of
California, a national banking association, as Trustee4.1at
    
    Supplement No. 1 to Indenture4.1btt
    
    Supplement No. 2 to Indenture10.1*
    
    Amended and Restated Management Agreement10.1.2
    
    Second Amended and Restated Management Agreement10.2*
    
    Master Loan Participation Agreement10.2.1
    
    Amendment No.1 to Master Loan Participation Agreement11.1
    
    Schedules IV for the years ended December 31, 2003, 2002 and 200121
    
    Subsidiaries of the Registrant31.1
    
    Certification of the principal executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the principal financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Incorporated by reference to the correspondingly
numbered exhibit to the Registration Statement on Form S-11
(Registration No. 333-44860) filed by 85




---



##### Table of Contents



Specialty Mortgage Trust, Inc. with the Securities and Exchange
Commission on August 30, 2000.**
    
    Incorporated by reference to the correspondingly
numbered exhibit to the Form 8-K filed by Specialty Mortgage
Trust, Inc. with the Securities and Exchange Commission on
February 2, 2001.t
    
    Incorporated by reference to the correspondingly
numbered exhibit to the Registration Statement on Form S-11
(Registration Statement No. 333-86972) filed by Specialty
Trust, Inc. with the Securities and Exchange Commission on
April 25, 2002.tt
    
    Incorporated by reference to the correspondingly
numbered exhibit to the Registration Statement on Form S-11
(Registration Statement No. 333-86972) filed by Specialty
Trust, Inc. with the Securities and Exchange Commission on July
28, 2003.  (b)
    
    Reports on Form 8-KOn October 11, 2002, the Company filed a current report on Form 8-K
under Item 4 that Grant Thornton LLP was dismissed as principal
accountant and KPMG LLP was selected as the Companys independent
public accountants for the fiscal year ending December 31, 2002.On October 25, 2002, The Company filed a current report on Form 8-K/A
Amendment No. 1 to the current report on Form 8-K dated October 11,
2002 to make certain technical corrections to the original Form 8-K
filed. SPACE INTENTIONALLY LEFT BLANK 86




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. SPECIALTY TRUST, INC.Dated: March 29, 2004
    
    By:
    
    /s/ Nello Gonfiantini IIINello Gonfiantini IIIChairman, President, and Secretary(Signed in the capacity of (i) dulyauthorized officer of the registrantDated: March 29, 2004
    
    By:
    
    /s/ Donna M. GagnonDonna M. GagnonChief Financial Officer(Signed in the capacity of (i) dulyauthorized officer of the registrant and(ii) Principal Financial Officer of the registrant)
 87




---



##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ Nello Gonfiantini, III
    
    Nello Gonfiantini, III
    
    March 29, 2004Chairman of the BoardPresident Secretary/s/ Donna M. Gagnon
    
    Donna M. Gagnon
    
    March 29, 2004Chief Financial OfficerPrincipal Accountant/s/ George E. Bull III
    
    George E. Bull III
    
    March 29, 2004Director/s/ Roger M. Peltyn
    
    Roger M. Peltyn
    
    March 29, 2004Director/s/ Stephen V. Novacek
    
    Stephen V. Novacek
    
    March 29, 2004Director/s/ Ernest Martinelli
    
    Ernest Martinelli
    
    March 29, 2004Director/s/ Harvey Fennell
    
    Harvey Fennell
    
    March 29, 2004Director/s/ Mark Combs
    
    Mark Combs
    
    March 29, 2004Director
 88