UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 
 (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the fiscal year ended December 31, 2009
 
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934
 Commission
File Number: 001-12941
 
 EASTERN
LIGHT CAPITAL, INCORPORATED
 (Exact
Name of Registrant as Specified in Its Charter)
 
 Delaware
              
              94-3240473(State
      or other jurisdiction
                of
      incorporation or organization)
              
              (I.R.S.
      Employer
                Identification
      Number)100 Pine Street, Suite 560,   San Francisco,
      California
              94111(Address
      of principal executive office)
              (zip
      code)(415)
      693-9500(Registrant’s
      Telephone Number, including Area Code)
 
 Securities
      registered pursuant to Section 12(b) of the Act:Title
      of each class
              
              Name
      of each exchange on which registeredCommon
      Stock $0.01 par value
              
              American
      Stock ExchangeSecurities
      registered pursuant to Section 12(g) of the Act:None(Title
      of Class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes o   No  x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes 
o   No  x
 
 Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes   x    No
o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   Yes  x    No
o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
  Large
      accelerated filer:   o
              Accelerated
      filer:    oNon-accelerated
      filer:   o
              Smaller
      reporting company:    x
 
 As of
February 24, 2010, the aggregate market value of the registrant’s outstanding
stock held by non-affiliates of the registrant was approximately $1,136,579. As
of February 24, 2010, approximately 351,882 shares of the registrant’s common
stock are outstanding.
 DOCUMENTS
INCORPORATED BY REFERENCE
 Portions
of the registrant’s Proxy Statement for the 2010 Annual Meeting of Shareholders
to be held on June 2, 2010 are incorporated by reference into Part III of this
Form 10-K.
 
 
 
 TABLE
OF CONTENTS
 
 PART
    I
                    4FORWARD
      LOOKING STATEMENTS
                    4ITEM 1.
      BUSINESS
                    4General
                    4MORTGAGE
      INVESTMENT BUSINESS
                    4General
                    4Mortgage Loan
      Portfolio
                    5Financing
                    5MORTGAGE
      BANKING BUSINESS
                    5General
                    5HEDGING
                    6SERVICING
                    6Servicing Portfolio
                    6Geographical Distribution
                    6Interest
                    6Maturity
                    7Delinquencies
                    7REGULATION
                    7STRATEGY
      AND COMPETITION
                    8EMPLOYEES
                    8ITEM 1A. RISK FACTORS
                    8ITEM 2.PROPERTIES
                    8ITEM 3. LEGAL PROCEEDINGS
                    8ITEM 4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                    8PART
      II
                    9ITEM 5.
      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
                    9ITEM 7.
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                    10OVERVIEW
                    10RECENT
      ACCOUNTING PRONOUNCEMENTS
                    11CRITICAL
      ACCOUNTING POLICIES
                    11Operating
      Strategy
                    12Loan
      Origination
                    12Asset
      Management
                    12Contingencies and
      Commitments
                    13RESULTS
      OF OPERATIONS
                    13YEAR
      ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31,
      2008
                    13LIQUIDITY AND CAPITAL
    RESOURCES
                    13
    
   1313LIQIDITY AND CAPITAL
      RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2009
                    14LIQIDITY
      AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2008
                    14ITEM
      7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                    15Market
Risk
                    15Asset and liability
      Management
                    15ITEM
      8.  FINANCIAL STATEMENTS
                    16ITEM
      9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                    16ITEM
      9A(T).  CONTROLS AND PROCEDURES
                    16Evaluation of
      Disclosure Controls and Procedures
                    16Management's Report
      on Internal Control Over Financial Reporting
                    16Changes in Internal
      Control Over Financial Reporting
                    17ITEM
      9B.  OTHER INFORMATION
                    17ITEM 10.
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                    17AUDIT
      COMMITTEE - FINANCIAL EXPERTS
                    17EXECUTIVE
      OFFICERS
                    17ITEM
      11.  EXECUTIVE COMPENSATION
                    17ITEM
      12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
                    17ITEM 13.
      CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
                    17ITEM
      14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
                    17PART
      IV.
                    18ITEM
      15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
                    18(a)  Financial
      Statements
                    18(b)  Financial
      Statement Schedules
                    18(c) 
      Exhibits
                    18(d)  Reports on
      Form 8-K
                    18(e) 
      Miscellaneous Exhibits
                    18SIGNATURES
                    19
   
 
 PART
      I
 
 FORWARD
LOOKING STATEMENTS
 
 Certain
statements made in this Annual Report on Form 10-K are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995) regarding the plans and objectives of management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of Eastern Light
Capital, Incorporated (the "Company") to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties. The
Company's plans and objectives are based, in part, on assumptions involving the
continued expansion of business. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance the forward-looking
statements included in this Annual Report will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
 
 ITEM 1.
BUSINESS
 
 General
 References
to the “Company” refer to Eastern Light Capital, Incorporated (the “Trust”) – a
Real Estate Investment Trust (“REIT”) – and WrenCap Funding Corporation
(“WCFC”), collectively.  The Trust was incorporated in Delaware on
December 12, 1995. On July 2, 2008, the Trust – formerly known as Capital
Alliance Income Trust, Ltd (“CAIT”) – was renamed Eastern Light Capital,
Incorporated.
 
 On April
15, 1997 the Trust formed, a taxable REIT subsidiary, Capital Alliance Funding
Corporation (“CAFC”). On April 20, 2007, the subsidiary was renamed to WrenCap
Funding Corporation. Both the Trust and WCFC are incorporated in Delaware. The
Trust owns all of WCFC’s common and preferred shares and the Trust and WCFC are
consolidated in the Company’s financial statements. Prior to December 29, 2006,
the Company was externally advised by Capital Alliance Advisors, Inc. (the
“Former Manager”, “CAAI”). On December 29, 2006, the Former Manager was
terminated and the Company became self-administered and
self-advised.
 
 The Trust
is a specialty mortgage finance company organized as a Real Estate Investment
Trust (“REIT”). Historically, the Trust has emphasized the Mortgage Investments
Business and CAFC had emphasized the Mortgage Banking Business.  On
March 31, 2006, CAFC suspended the origination of new investment mortgages for
the Trust and the origination of new mortgages for subsequent sale into the
secondary mortgage market. By year end 2006, CAFC’s unsold mortgages originated
for secondary market sale were sold to the Trust. WCFC has not originated any
loans since year end 2006 and has largely been inactive due to market
conditions. Due to continued deteriorating conditions in the real estate market,
approximately 28% of the Trust’s assets consist of primarily high loan-to-value,
collateral-oriented, non-conforming residential mortgage loans with limited
secondary market appeal while 71% consist of real estate owned (“REO”) as of
December 31, 2009.  Management is in the process of liquidating all
such non-performing assets, particularly real estate that it has acquired via
foreclosure, and managing its portfolio of mortgage notes
receivable.
 
 MORTGAGE
INVESTMENT BUSINESS
 
 General
 The
Trust’s Mortgage Investment Business, principally acquired non-conforming
residential mortgage loans, which at the time of investment had a maximum 75%
combined loan-to-value ratio. Both first and second mortgage loans were
acquired. Income is primarily earned from mortgage interest and mortgage fees.
These investments are financed with shareholders’ equity and institutional
borrowings. During 2009, all borrowings originated in the Trust’s name were
repaid. The Trust suspended mortgage origination in 2006 due to deteriorating
market conditions and has focused on loan servicing and liquidation of
non-performing assets.
    
 Mortgage Loan
Portfolio
 As a
matter of investment policy, all loans originated or purchased for the Trust’s
portfolio had a combined loan-to-value, at the time of acquisition, of not more
than 75% of the collateral’s value. Mortgage loans that defer part of the
interest payment (negative amortization) are not acquired if the maximum
deferred payment balance, when added to the original mortgage balance, exceeds
75% of the collateral’s value at the time of origination. The collateral’s value
is verified by independent appraisal or broker price opinions. During 2006, CAFC
transferred 12 loans to the Trust with a total nominal value of $6,108,330 that
did not satisfy the Trust’s standard underwriting criteria. As of December 31,
2009, only five of these loans with a value of $978,202 are still owned by the
Trust. Four of the loans are current while one is delinquent more than 60 days
and is scheduled for trustee sale.
 
 As of
December 31, 2009, the Mortgage Investment Business loan portfolio totaled
$2,690,737 with an average loan size of $206,980, an average weighted yield of
8.98%, a weighted average adjusted maturity of 31 months and a weighted average
combined loan-to-value ratio of 71% (based upon the collateral’s appraisal value
at funding).  First deeds of trust comprised 61% of the portfolio’s
dollar value and second deeds of trust comprised 39%. As of December 31, 2008,
the Mortgage Investment Business loan portfolio totaled $5,460,948 with an
average loan size of $287,418, an average weighted yield of 10.00%, a weighted
average adjusted maturity of 19 months and a weighted average combined
loan-to-value ratio of 80% (based upon the collateral’s appraisal value at
funding).  First deeds of trust comprised 42% of the portfolio’s
dollar value and second deeds of trust comprised 58%. The mortgage loans are
concentrated in California.
 
 Financing
 The
Mortgage Investment Business is currently financed by the shareholders’ equity.
The Trust’s bylaws restrict the encumbrance of the Company’s assets to four (4)
times its total shareholders’ equity after excluding financing obtained by WCFC.
Lines of credit consistent with the financing objectives described herein may be
sought.
 
 MORTGAGE
BANKING BUSINESS
 
 General
 The
Mortgage Banking Business consisted of the origination and the purchase and sale
of conforming and non-conforming mortgage loans secured by first liens and
second liens on single (one-to-four) family residential properties. The Mortgage
Banking Business provided a conduit between the originators of such mortgage
loans and permanent investors in such loans. On March 31, 2006, the Company’s
Board of Directors suspended its Mortgage Banking Business. Until December 29,
2006 CAAI contracted with CAFC to provide management, mortgage origination, loan
processing, underwriting, and secondary sales services.
 
 CAFC purchased or originated each loan
from mortgage bankers, mortgage brokers or existing borrower relationships. The
Mortgage Banking Business assumed the potential risk of delinquency and/or
credit losses as well as interest rate risk in the event of a delay in the sale
of such loans. Such on-going risks, upon the sale of a loan would pass to the
purchaser without recourse to CAFC. CAFC’s origination risk was minimized by the
relatively short period that such loans were held prior to sale. Loans not
purchased by the Trust for the Mortgage Investment Business were sold in the
secondary market through whole loan sales or to an affiliate of the Former
Manager. However, during 2006, twelve (12) loans with a total nominal value of
$6,108,330 were transferred to the Trust that did not satisfy the Trust’s
standard underwriting criteria or investment objectives. These loans had a lower
yield and/or a cumulative loan-to-value ratio greater than seventy-five
percent.
 
 The Mortgage Banking Business acquired
all of the servicing rights on loans it originated or purchased and such
servicing rights were relinquished when loans were sold into the secondary
market. The Mortgage Banking Business generally had no on-going risk of loss
after a whole loan sale other than liability with respect to normal warranties
and representations given in such sales, fraud in the origination process or
early default on such mortgage loan.
 
 Although the Company has suspended its
mortgage banking operations, the licenses to originate residential, multi-family
and commercial mortgage loans in California remains active. WCFC has not
originated any loans since year end 2006 and has largely been inactive due to
market conditions. Management has focused on managing the existing loan
portfolio and liquidating all non-performing assets, which is largely the REO
that the Company has acquired via foreclosure.
 
  
 
 HEDGING
 Most of
the Trust’s mortgage investments have relatively short maturities. Therefore,
the Trust has not implemented hedging strategies to protect against interest
rate risks. However, hedging strategies and transactions may in the future be
implemented by the Company based on various factors, including market
conditions, the expected volume of mortgage loan originations and purchases for
investment and the mortgage volume and period of time required to accumulate and
to sell mortgage loans.
 
 Hedging is complex and no hedging
strategy or combination of hedging strategies can completely insulate the
Company from interest rate risks. In addition, hedging involves transaction and
other costs, and such costs could increase as the period covered by the hedging
protection increases or in a period of rising and fluctuating interest rates.
Therefore, the Company may incur significant costs, remain ineffectively hedged
from interest rate risks, and obtain reduced return on equity than otherwise
achievable without hedging. As the Company’s assets are largely real estate
owned, the protection from a hedging strategy would likely have little to no
effect.
 
 SERVICING
 The Company acquired mortgage loans
with mortgage servicing rights. Any mortgage loan sold by the Company is sold
with the loan’s mortgage servicing rights released. The Company does not
separately acquire or maintain servicing rights.  Loan servicing
includes collecting and remitting loan payments, making required advances,
accounting for principal and interest, holding escrow or impound funds for
payment of improvement holdbacks, interest, taxes and insurance, if applicable,
making required inspections of the mortgaged property, contacting delinquent
borrowers and supervising foreclosures and property dispositions in the event of
unremedied defaults. The Company uses an unaffiliated third party to service its
loan portfolio.
 
 Servicing
Portfolio
 The
following tables set forth certain information regarding the Trust’s Mortgage
Investment Business servicing portfolio of loans for the years ended December
31.
  2009
              
              
              2008Beginning
      servicing portfolio
              
              $
              5,460,948
              
              
              $
              11,144,365Loans
      added to the servicing portfolio
              
              
              ---
              
              
              
              ---Loans
      sold, servicing released and principal paydowns (1)
              
              
              2,770,211
              
              
              
              5,683,417Ending
      servicing portfolio
              
              $
              2,690,737
              
              
              $
              5,460,948Number
      of loans serviced
              
              
              13
              
              
              
              19Average
      loan size
              
              $
              206,980
              
              
              $
              287,418
 
 (1)      Includes
normal loan payoffs, prepayments, principal amortization and
foreclosures.
 
 The decrease in interest income can be
partially attributed to the decrease in the servicing portfolio.
 
 Geographical
Distribution
 The following table sets forth the
geographic distribution of the Trust’s Mortgage Investment Business servicing
portfolio for the years ended December 31.
  2009
              
              
              2008State
              
              Number
      ofloans
              
              
              $-%
      ofPortfolio
              
              
              Number
      ofloans
              
              
              $-%
      ofPortfolioCA
              
              
              11
              
              
              
              86
              %
              
              
              16
              
              
              
              90
              %Other
              
              
              2
              
              
              
              14
              %
              
              
              3
              
              
              
              10
              %Totals:
              
              
              13
              
              
              
              100
              %
              
              
              19
              
              
              
              100
              %
 
 Interest
 The
weighted average interest for the Trust’s Mortgage Investment Business portfolio
of loans at December 31, 2009 was 8.98% and at December 31, 2008 was 10.00%. The
decrease in interest income can be partially attributed to the decrease in
weighted average interest.
   
 
 Maturity
 The
weighted average adjusted maturity of the Trust’s Mortgage Investment Business
portfolio of loans at December 31, 2009 was 31 months and at December 31, 2008
was 19 months. The following table shows the Trust’s maximum scheduled loan
maturities for the years ended December 31, none of which are past
maturity.
  2009
              
              
              2008Terms of Loans
              
              Amount
      of
                loans
              
              
              $-%
      of
                Portfolio
              
              
              Amount
      of
                loans
              
              
              $-%
      of
                Portfolio0-12
      months
              
              
              1,012,235
              
              
              
              38
              %
              
              
              3,004,856
              
              
              
              55
              %13-24
      months
              
              
              341,117
              
              
              
              13
              %
              
              
              856,539
              
              
              
              16
              %25-36
      months
              
              
              326,050
              
              
              
              12
              %
              
              
              347,813
              
              
              
              6
              %37-48
      months
              
              
              ---
              
              
              
              0
              %
              
              
              ---
              
              
              
              0
              %Over 48
              
              
              1,011,335
              
              
              
              37
              %
              
              
              1,251,740
              
              
              
              23
              %Totals:
              
              $
              2,690,737
              
              
              
              100
              %
              
              $
              5,460,948
              
              
              
              100
              %
 
 Delinquencies
 The following table shows the Trust’s
Mortgage Investment Business delinquency statistics for its servicing portfolio
for the years ended
December 31.
  2009
              
              
              2008Loans
      Delinquent For:
              
              Number
      ofloans
              
              
              $-%
      ofPortfolio
              
              
              Number
      ofloans
              
              
              $-%
      ofPortfolio31-60
      days
              
              
              0
              
              
              
              0%
              
              
              
              2
              
              
              
              5%61-90
      days
              
              
              0
              
              
              
              0%
              
              
              
              2
              
              
              
              14%91
      days +
              
              
              3 (1)
              
              
              
              39%
              
              
              
              6 (2)
              
              
              
              47%Totals:
              
              
              3.
              
              
              
              39%
              
              
              
              10.
              
              
              
              66%
 
 (1)
              None
      of the 91 days+ delinquent loans were satisfied or brought current by
      April 12, 2010 while two of the loans were scheduled for Trustee Sale in
      the second quarter of 2010.
 (2)
              None
      of the 91 days+ delinquent loans were was satisfied or brought current by
      February 27, 2009 while two of the loans were scheduled for Trustee Sale
      in the first six months of 2009 and another loan was foreclosed upon by
      the senior lienholder. Both of the loans set for Trustee Sale reverted to
      the Company.
 
 REGULATION
 
 The Company conducts its business so as
not to become regulated as an investment trust under the Investment Trust Act.
The Investment Trust Act exempts entities that are “primarily engaged in the
business of purchasing or otherwise acquiring mortgages and other liens on and
interests in real estate” (“Qualifying Interest”). In order to qualify for this
exemption, the Trust must maintain at least 55% of its assets directly in
mortgage loans, and certain other Qualifying Interests in real estate. If the
Trust fails to qualify for exemption from registration as an investment trust,
its ability to use leverage in its Mortgage Investment Business would be
substantially reduced, and it would be unable to conduct its business as
described herein. The Company has not requested a legal opinion from counsel
indicating that, it will be exempt from the Investment Trust Act.
 
 Because the Company’s business is
highly regulated, the laws, rules and regulations applicable to the Company are
subject to regular modifications and change. There are currently proposed
various laws, rules and regulations which, if adopted, could impact the Company.
There can be no assurance that these proposed laws, rules and regulations, or
other such laws, rules or regulations, will not be adopted in the future which
could make compliance much more difficult or expensive, restrict the Company’s
ability to originate, broker, purchase or sell loans, further limit or restrict
the amount of commissions, interest and other charges earned on loans
originated, brokered, purchased or sold by the Company, or otherwise affect the
business or prospects of the Company. Also, members of Congress and government
officials have from time to time suggested the elimination of the mortgage
interest deduction for federal income tax purposes, either entirely or in part,
based on borrower income, type of loan or principal amount. Because many of the
Company’s loans are made to borrowers for the purpose of consolidating consumer
debt or financing other consumer needs, the competitive advantages of tax
deductible interest, when compared with alternative sources of financing, could
be eliminated or seriously impaired by such government action. Accordingly, the
reduction or elimination of these tax benefits could have a material adverse
effect on the demand for loans of the kind offered by the Company.
    
 
 Additionally, there are various state
and local laws and regulations affecting the Company. Mortgage operations also
may be subject to applicable state usury statutes. The Company believes that it
is in material compliance with all rules and regulations to which it is
subject.
 
 STRATEGY
AND COMPETITION
 
 The Company’s management is reassessing
its ability to successfully compete in the high yielding Mortgage Investment
Business. The Mortgage Investment Business faces competition from other
financial institutions, including but not limited to banks, specialty finance
companies and private mortgage investors as well as government regulations. Most
of the institutions with which the Company competes have significantly greater
financial resources. The Company’s management has actively sought out new
investor capital in these difficult economic times but has been unsuccessful in
finding a partner that will not destroy shareholder value. For the current year,
the Company is focusing on improving its cash flow and financial condition by
liquidating non-performing assets and managing its portfolio.
 
 EMPLOYEES
 At December 31, 2009, the Company had
three full time and one part time employee. At December 31, 2008, the Company
had three employees. The Company’s employees are not subject to a collective
bargaining agreement and the relationship with its employees is
good.
 
 ITEM 1A.
RISK FACTORS
 
 The Company is not required to provide
the information required by this item as it is a smaller reporting
company.
 
 ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
 None
 
 ITEM 2.
PROPERTIES
 
 The Company’s principal office is
located at 100 Pine Street, Suite 560, San Francisco, California, 94111 where it
leases approximately 1,100 square feet under a lease that expires in July 2011.
The existing facilities are adequate for the Company’s current
needs.
 
 The Company owns nine properties due to
foreclosure. The properties are located throughout California and five of them
have senior liens. The properties are summarized in Note 8 to the Financial
Statements which is included in the Form 10-K under the caption “Real estate
owned”. The monetization of these non-performing assets is the most significant
source of liquidity for the Company in 2010.
 
 ITEM 3.
LEGAL PROCEEDINGS
 
 Legal
Proceedings are described in Note 16 to the Financial Statements which is
included in the Form 10-K under the caption “Contingencies”.
 
 ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None
 
 
 
 
 
 
 
 
 
 PART
      II
 
 ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 
 The
quarterly high and low sale prices of the Common Stock as quoted on the American
Stock Exchange for the last two years follows:
  Year
                Quarter
                High
                Low
                Dividend
      per
                  Common Share2008
                1st
                4.04
                2.56
                0.002nd
                4.56
                3.60
                0.003rd
                4.95
                4.13
                0.004th
                6.18
                4.08
                0.002009
                1st
                4.75
                4.12
                0.002nd
                5.44
                4.10
                0.003rd
                4.94
                3.53
                0.004th
                4.58
                3.80
                0.002010
                Jan.1
      – Mar.22
                4.00
                2.68
                0.00
   On December 31, 2009, there were
approximately 70 holders of record (including holders who are nominees for an
undetermined number of beneficial owners) of the Common Stock and approximately
135 holders of record (including holders who are nominees for an undetermined
number of beneficial owners) of the Preferred Stock, which is not publicly
traded.
 To
maintain its qualification as a REIT, annual distributions to stockholders of at
least 90% of its taxable income (which may not necessarily equal net income as
calculated in accordance with GAAP), determined after the application of any net
operating loss carry forward, without regard to the deduction for dividends paid
and excluding any net capital gains or loan loss reserves, are required. The
Board of Directors meets to determine Common and Preferred shared dividend
distributions. Any taxable income remaining after the distribution of the
dividends will be distributed annually on or prior to the date of the first
regular Common dividends payment date of the following taxable year. The
dividend policy is subject to revision at the discretion of the Board of
Directors. Any distributions in excess of those required to maintain REIT status
will be made at the discretion of the Board of Directors and will depend on the
financial condition of the Company and such other factors as the Board of
Directors deems relevant.
 
 The Board
of Directors has not established a minimum distribution level for the Common
Stock. During 2009 and 2008, no dividends per share on Preferred and Common
Stock were declared and paid. Distributions to stockholders are generally
taxable as ordinary income, although a portion of such distributions may be
designated as capital gain or may constitute a tax-free return of capital.
During 2005, 2006, 2007 and 2008, the Company incurred taxable losses, also
known as Net Operating Losses (“NOL”).  NOL’s may allow the Company to
retain future taxable income equal to the cumulative amount of its NOL
balance.  The Internal Revenue Service waives mandatory dividend
payments until prior year’s allowable NOLs are recovered. As of December 31,
2009, the Company’s cumulative NOL is undetermined, but is expected to
increase.  As of December 31, 2008, the Company had cumulative federal
NOLs of approximately $2,351,813.
 
 Holders of the Preferred Shares are
entitled to a dividend preference in an amount equal to an “annualized return”
on the Adjusted Net Capital Contribution of Preferred Shares at each dividend
record date during such year. The annualized return is the lesser of: (a)
10.25%, (b) 1.50% over the Prime Rate (determined on a not less than quarterly
basis), or (c) the rate set by the Board of Directors. The preferred dividend
preference is not cumulative.
 
 After declaring dividends for a given
year to the Preferred Shares in the amount of the dividend preference, no
further distributions may be declared on the Preferred Shares for the subject
year until the dividends declared on each Common Share for that year equals the
dividend preference for each Preferred Share for such year. Any Distributions
associated with a payment date that is declared after the Directors have
declared Distributions on Common Shares in the amount of the additional dividend
generally will be allocated such that the amount of dividends per share to the
Preferred Shares and Common Shares for the subject year is equal. The Preferred
Shares additional dividend is not cumulative.
     
 ITEM
6. SELECTED FINANCIAL DATA
 
 The
following table presents selected historical financial data derived from the
audited financial statements of the Company.
 
 The historical financial information is
not necessarily indicative of future operations and should not be so construed.
The selected financial data should be read in conjunction with “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.”
  Year
      Ended December 31Financial
      Summary
              
              2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Operations:Revenue
              
              $
              388,581
              
              
              $
              656,578
              
              
              $
              1,114,958
              
              
              $
              2,478,609
              
              
              $
              3,797,885Net
      loss
              
              
              (2,768,594
              )
              
              
              (619,718
              )
              
              
              (2,939,689
              )
              
              
              (1,631,428
              )
              
              
              (307,308
              )Per Share Data:Weighted
      average basic earnings
              
              $
              (7.73
              )
              
              $
              (1.64
              )
              
              $
              (7.73
              )
              
              $
              (4.28
              )
              
              $
              (1.13
              )Weighted
      average diluted earnings
              
              $
              (7.73
              )
              
              $
              (1.64
              )
              
              $
              (7.73
              )
              
              $
              (4.28
              )
              
              $
              (1.13
              )Consolidated Balance Sheet
      Data:Mortgage
      notes receivable
              
              $
              2,690,737
              
              
              $
              5,460,948
              
              
              $
              11,144,365
              
              
              $
              17,121,939
              
              
              $
              26,318,616Total
      assets
              
              
              9,431,732
              
              
              
              12,229,797
              
              
              
              12,169,179
              
              
              
              18,204,100
              
              
              
              30,956,866Total
      liabilities
              
              
              4,719,972
              
              
              
              4,687,254
              
              
              
              3,955,164
              
              
              
              7,049,874
              
              
              
              18,023,873Stockholders’
      equity
              
              
              4,711,760
              
              
              
              7,542,543
              
              
              
              8,214,015
              
              
              
              11,154,226
              
              
              
              12,932,993Common
      share equity
              
              
              (570,927
              )
              
              
              2,259,856
              
              
              
              2,931,328
              
              
              
              5,871,539
              
              
              
              7,522,516Common
      shares
              
              
              351,882
              
              
              
              366,532
              
              
              
              380,532
              
              
              
              380,532
              
              
              
              390,032Common
      share book value
              
              $
              (1.62
              )
              
              $
              6.17
              
              
              $
              7.70
              
              
              $
              15.43
              
              
              $
              19.29
 
 ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 OVERVIEW
 
 In May of 1997, the Trust registered
its common shares with the Securities and Exchange Commission under the
Securities Act of 1933. On September 30, 1998, the initial public offering of
Common Shares was completed. Since October 1, 1998, the common shares have been
listed on the NYSE Amex Stock Exchange.
 
 During
the first quarter of 2006, the Trust announced its intent to suspend mortgage
banking loan originations and to monetize its mortgage banking loan portfolio.
By year end 2006, mortgage banking loans (mortgages originally originated for
sale into the secondary market) were transferred to the Trust. Prior to December
29, 2006, the Company was externally advised by Capital Alliance Advisors, Inc.
(the “Former Manager”, “CAAI”). On December 29, 2006, the Former Manager was
terminated and the Company became self-administered and
self-advised.
 
 The
current real estate market is characterized by both a lack of available credit
and instability in residential property valuations.  Due to these
conditions the Company’s focus on selling REO is highly challenging. The current
conditions are expected to extend through calendar year 2010.  REO
properties are either held for sale or temporarily for investment. All REO held
for sale are listed with a realtor while REO held for investment are generally
leased to tenants. The Company’s management will continue to focus on servicing
its loan portfolio and liquidating all non-performing assets.
 
 On April
20, 2007, the Company’s 100% owned taxable subsidiary changed its name from
Capital Alliance Funding Corporation (“CAFC”) to WrenCap Funding Corporation
(“WCFC”). The transition agreement with the Former Manager required the Company
to remove the name “Capital Alliance” from the Trust’s name by June 30, 2008 and
from CAFC’s name by April 30, 2007. Since 2006, WCRC has not originated any
loans and has been largely inactive due to market conditions.
    
 Mortgage
investment loans are reported as mortgage notes receivable and held until
prepayment, maturity or foreclosure. As of December 31, 2009, the Mortgage
Investment Business portfolio totaled $2,690,737, consisting of 13 loans, of
which 3 loans totaling $1,064,984, or 39% of the portfolio loan value were
delinquent over 60 days. As of April 12, 2010, none of the delinquent loans was
brought current or paid off and two had notices of trustee sale published. Thus,
three loans totaling $1,064,984 or 39% of the December 31, 2009 portfolio
balance remained delinquent.  As of December 31, 2009, the Trust held
nine properties as REO. During 2010, the Company is focusing on liquidating its
REO assets. The monetization of REO assets is an important source of liquidity
for the Company in 2010.
 
 As of
December 31, 2008, the Mortgage Investment Business portfolio totaled
$5,460,948, consisting of 19 loans, of which 8 loans totaling $3,353,673 or 61%
of the portfolio loan value were delinquent over 60 days. As of February 27,
2009, two of the delinquent loans were brought current, one loan was modified,
one loan was foreclosed upon by the senior lien holder and one loan became REO.
Thus, three loans totaling $1,624,933 or 30% of the December 31, 2008 portfolio
balance remained delinquent.  As of December 31, 2008, the Trust held
five properties as REO.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 These are incorporated by reference in
the Notes to Consolidated Financial Statements.
 
 CRITICAL
ACCOUNTING POLICIES
 
 The accounting and reporting policies
of the Company are in accordance with accounting principles generally accepted
in the United States of America.  The Company’s significant accounting
policies are described in the notes to the consolidated financial
statements.  Certain accounting policies require management to make
significant estimates and assumptions, which have a material impact on the
carrying value of certain assets and liabilities, and the Company considers
these to be critical accounting policies.  The estimates and
assumptions used are based on historical experience and other factors, which
management believes to be reasonable under the circumstances.  Actual
results could differ significantly from these estimates and assumptions, which
could have a material impact on the carrying value of assets and liabilities at
the balance sheet dates and results of operations for the reporting
periods.
 
 The following are considered critical
accounting policies that require the most significant estimates and assumptions
and are particularly susceptible to a significant change in the preparation of
the financial statements and are not presented in their relative order of
importance.
 
 Revenue
recognition.Interest income accrues as it is
earned.  Loans are placed on a nonaccrual status when any portion of
the principal or interest is two scheduled payments past due or earlier when
concern exists as to the ultimate collectability of principal or
interest.  Nonaccrual status loans are returned to an accrual status
when principal and interest become current and are anticipated to be fully
collectible.
 
 Allowance for Loan Losses. A
provision for loan losses is based on management’s evaluation of an amount that
is adequate to absorb losses inherent in the existing loan
portfolio.  The evaluation, which includes a review of all loans on
which full collection may not be reasonably assumed, considers among other
matters, general economic conditions, the fair value of underlying collateral,
past loan loss experience, borrower economic resources, trends in loan
delinquency and other factors that warrant recognition in providing for an
adequate loan loss allowance.
 
 Allowance for Doubtful
Accounts. An allowance for doubtful accounts receivable is based on
management’s evaluation of the likelihood of collection of outstanding amounts.
The evaluation is based on the payee’s ability and willingness to pay the
receivable in full as well as the costs associated with possible legal
action.
 
 Real estate
owned.REO represents property acquired in foreclosure of
mortgage notes receivable.  The real estate is carried at the lower of
the value of the mortgage note receivable less selling costs on the real estate
or fair value.  Certain estimates and assumptions are required in
determining the cost to sell or in estimating the fair value of the real estate.
Independent third parties perform annual appraisals of the REO. If necessary,
impairment losses are recorded to recognize deteriorating market conditions and
unusual property characteristics.
    
 
 Stock
options.Stock options granted prior to December 15, 2005 were
issued with exercise prices equal to the market price of the Trust’s common
stock on the dates of grant. Because the exercise price is fixed at or above
market price and other key terms are fixed, use of the intrinsic-value method
was utilized and the Trust did not recognize an expense for these options. If
the terms of these options were changed, the Trust might then need to begin
recognizing compensation expense for the options.  Options granted
after December 15, 2005 were issued with exercise prices of 110% of the market
price of the Trust’s common stock on the dates of grant. These options are
subject to a mandatory expense calculation and recognized over the option’s
vesting period.
 
 The Audit
Committee of the Trust’s Board of Directors has discussed and approved the
critical accounting policies and the development, selection and disclosure of
the estimates and alternatives prior to filing this report with the Securities
and Exchange Commission.
 
 Operating
Strategy
 Mortgage
investment loans are reported as mortgage notes receivable and are held until
prepayment, maturity or foreclosure. The Company owns non-conforming mortgage
loans on one-to-four unit residential properties secured by first and second
deeds of trust.  These loans are primarily secured by California real
estate. Historically, the Trust limited its mortgage investments to a cumulative
loan to value ratio (“CLTV”) that did not exceed 75% of the underlying
collateral at the time of investment.  The Company seeks to maximize
the value of its loan portfolio through active asset management.
 
 During
2009, the Company reduced institutional borrowings by $2,000,000 to
$0.  During 2008, the Company reduced its institutional borrowings by
$1,620,000 to $2,000,000. The 2009 repayment in full was initiated by the FDIC
takeover of the creditor which allowed the early retirement of the $2,000,000
liability for $1,600,000, resulting in a $400,000 gain to the
Trust.
 
 During
2010, the Company is focusing on liquidating its REO assets. The monetization of
REO assets is an important source of liquidity for the Company in
2010.
 
 The
Company’s current investment policies include other REIT permissible assets in
addition to residential mortgage loans. Since May 1, 2007, WCFC has traded
exchange listed marketable securities. The Company may consider reorganizing as
a non-REIT entity to enhance shareholder value. The Company has also announced
its intention to propose a Preferred to Common Stock conversion.
 
 Loan
Origination
 Until
March 31, 2006, the Company’s mortgage banking subsidiary originated loans in
excess of the Trust’s 75% CLTV investment standard for subsequent sale into the
secondary mortgage market. During 2006, the Former Manager was unable to sell
$6,108,330 of these mortgage banking loans at an acceptable
price.  Although these loans did not satisfy the Trust’s investment
standards, during 2006 these loans were transferred to the Trust and are
reported as mortgage notes receivable.
 
 Pursuant
to the Shareholder’s vote, on December 29, 2006, the Board of Directors
terminated the Former Manager. The Former Manager and the Company’s mortgage
banking operations accounted for 100% of the loans acquired by the Trust in
2006.  Subsequently, the Company has not acquired any loans from third
parties or the Former Manager.
 
 Asset
Management
 Asset
management is mortgage loan servicing and REO disposition and
leasing.  Loan servicing consists of collecting payments from
borrowers, making required advances, accounting for principal and interest
payments, holding borrowed proceeds in escrow until fulfillment of mortgage loan
requirements, contacting delinquent borrowers, and in the event of unremedied
defaults performing other administrative duties including supervising
foreclosures. On June 30, 2007 the Loan Servicing Agreement with the Former
Manager was cancelled. Subsequently, the Company engaged a subservicer to
provide loan servicing. On December 31, 2009, the Company took over the
servicing of its own loan portfolio.
 
 The
Company only services loans that it owns. It does not acquire loan servicing
rights nor does it maintain a loan’s servicing rights at disposition. REO
dispositions include all of the supervisory and administrative processes of
preparing a foreclosed asset for sale.
    
 
 Contingencies and
Commitments
 The
allowance for loan losses is based on estimates, primarily on the borrower’s
payment record and the Company’s loan, lien position and the fair value of the
real property securing the loan. The Company analyzes the anticipated sales
price of the foreclosed property that includes a discount from the latest
appraised value of the property, less the sum of priority liens, costs of
disposition, the face amount of the Company’s mortgage loan and accrued interest
receivable. As of December 31, 2009 and 2008, the Company reserved an allowance
for loan losses of $310,000 and $720,000, respectively.
 
 Allowances for doubtful accounts are
estimated reserves for the collectability of other receivables. As of December
31, 2009 and 2008, the Company reserved an allowance for doubtful accounts of
$453,974 and $550,808, respectively.
 
 RESULTS
OF OPERATIONS
 
 YEAR
ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
 
 Revenues for the year ended December
31, 2009 decreased to $388,581 as compared to $656,578 for
2008.  During 2009, interest income declined $399,033 due to ELC’s
smaller loan portfolio as well as lower interest yields. During 2009, the
Company earned $137,931 in rental income from REO held for investment. Due to
the suspension of mortgage banking operations in 2006, there was no loan
origination income and service release premiums in 2009 and 2008.
 
 Expenses for the year ended December
31, 2009 increased to $3,724,229 as compared to $1,426,119 for the previous
year. The increase in 2009 compared to 2008 is primarily due to expenses of real
estate owned of $2,605,018, of which $2,269,128 was recognized from impairments.
A decrease of $239,436 from $404,230 to $164,794 in the provision for loan
losses and a decrease of $102,118 from $126,287 to $24,169 in interest expense
on loans partially offset this increase.
 
 During 2009, there was a gain from the
retirement of debt of $400,000 and a net gain of $167,054 from marketable
securities. During 2008, there was a gain from real estate owned of $168,240 and
a net loss of $18,417 from marketable securities.
 
 Net Loss
for the year ended December 31, 2009 was $2,768,594. Net Loss for the year ended
December 31, 2008 was $619,718.
 
 At year
ended December 31, 2009, the Company’s mortgage notes receivable balance was
$2,770,211 less than the mortgage notes receivable balance for the year ended
December 31, 2008.  At year ended December 31, 2008, the real estate
owned balance was $3,704,364 greater than the year ended December 31, 2007
balance.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 The
monetization of REO assets is the most significant source of liquidity for the
Company in 2010. Management believes that existing cash balances, the cash flow
from operations, the mortgage loans that are paid off, the net proceeds of REO
sales, additional credit facilities that may be obtained during 2010 and the
limited sale of investment mortgages will be sufficient to meet the liquidity
needs of the company’s businesses for the next twelve months.
 
 LIQUIDITY
AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2009
 
 As of January 1, 2009, the Trust had
$1,974,687 of cash and cash equivalents. After taking into effect the various
transactions discussed below, cash and cash equivalents at December 31, 2009
were $227,944. The following summarizes the changes in net cash used in
operating activities, net cash provided by investing activities and net cash
used in financing activities.
 
 The
Trust’s liquidity decreased in 2009. The principal source of the Trust’s
liquidity was from investing activities and the primary use of cash was
operating and financing activities.
 
 Net cash used in operating activities
during the year ended December 31, 2009 was $283,469. A change in accounts
receivable provided $209,476 and a change in other liabilities provided
$181,658. There were other adjustments that did not use cash but are reported in
the statements of cash flows.
     
 Net cash of $206,243 was provided by
investing activities.  Decreased mortgage notes receivable provided
$200,112, marketable securities provided net cash of $78,031 and investments in
real estate owned used $71,900.
 Net cash used in financing activities
during the year ended December 31, 2009 was $1,669,517.  Paying down
bank lines of credit of $1,605,184 and treasury stock purchases of $65,786 were
the uses of cash from financing activities.
 
 LIQUIDITY
AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2008
 
 As of January 1, 2008, the Trust had
$962,190 of cash and cash equivalents. After taking into effect the various
transactions discussed below, cash and cash equivalents at December 31, 2008
were $1,974,687. The following summarizes the changes in net cash used in
operating activities, net cash provided by investing activities and net cash
used in financing activities.
 
 The Trust’s liquidity increased in
2008. The principal source of the Trust’s increased liquidity was from investing
activities.   The primary use of cash was operating and financing
activities.
 
 Net cash used in operating activities
during the year ended December 31, 2008 was $773,872. The change in accounts
receivable of $123,133 was the primary source of cash. A net loss of $619,718
and the change in other liabilities of $453,566 were the primary uses of cash.
There were other adjustments that did not use cash but are reported in the
statements of cash flows.
   
 
 Net cash of $3,485,154 was provided by
investing activities.  Decreased mortgage notes receivable provided
$1,352,345 and the sale of real estate owned provided $2,378,334 while
investment in real estate owned used $128,927 and investments in marketable
securities used $116,598.
 
 Net cash used in financing activities
during the year ended December 31, 2008 was $1,698,785.  Paying down
bank lines of credit of $1,636,644 and treasury stock purchases of $62,141 were
the uses of cash from financing activities.
 
 ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Market
Risk
 Market
risk is the exposure to loss resulting from changes in interest rates, credit
spreads, foreign exchange rates, commodity prices, and equity prices. The
Company’s primary market risks are interest rate risk and credit risk of the
Mortgage Investment Business.
 
 Interest Risk.Interest rate
risk is highly sensitive to many factors, including governmental, monetary and
tax policies, domestic and international economic and political considerations
and other factors beyond the control of the Company. Changes in the general
level of the U.S. Treasury yield curve can have significant effects on the
market value of the Trust’s portfolio. The majority of the Company’s assets are
fixed-rate loans. The Company’s loans are valued on the December 31, 2009
balance sheet at the lower of cost or fair value, if impaired.
 
 As U.S. Treasury securities are priced
to a lower yield and/or the spread to U.S. Treasuries used to price the
Company’s assets are decreased, the market value of its mortgage loans may
increase. Conversely, as U.S. Treasury securities are priced to a higher yield
and/or the spread to U.S. Treasuries used to price the Company’s assets is
increased, the market value of its mortgage loans may
decline.  Changes in the level of the U.S. Treasury yield curve can
also affect, among other things, the prepayment assumptions used to value
certain loans. In addition, changes in the general level of the United States
Prime Rate can affect the Company’s net interest income. The majority of the
Trust’s liabilities are floating rate based on a spread over the daily 1 Month
London Inter Bank Offered Rate (“LIBOR”). As the level of LIBOR increases or
decreases, the Company’s interest expense will move in the same
direction.
 
 On account of the relatively short
adjusted weighted average maturity of the mortgage investment portfolio (19
months), a variety of financial instruments available to limit the effects of
interest rate fluctuations on its operations have not been utilized. The use of
these types of derivatives (such as interest rate swaps, caps, floors and other
interest rate exchange contracts) to hedge interest-earnings assets and/or
interest-bearing liabilities carry risks, including the risk that the net losses
on a hedge position may exceed the amount invested in such
instruments.  As the level of variable rate mortgage financing of the
portfolio increases or the weighted average maturity of the portfolio increases,
the Company may utilize a variety of financial instruments to limit the effects
of interest rate fluctuations.
   
 
 Credit Risk. Credit risk is
the exposure to loss from loan defaults and foreclosures.  Default and
foreclosure rates are subject to a wide variety of factors, including, but not
limited to, property values, supply/demand factors, construction trends,
consumer behavior, regional economics, interest rates, the strength of the
American economy and other factors beyond the control of the Trust.
 
 All loans are subject to a certain
probability of default and foreclosure. An increase in the Company’s default
rates may reduce the book value of the Company’s assets, earnings and cash flow
available to fund operations or pay dividends. The Company manages credit risk
through the underwriting process, limiting loans in the mortgage investment
portfolio (including the maximum deferral of interest), establishing loss
assumptions and carefully monitoring loan performance. Nevertheless, the Company
assumes that a certain portion of its loan originations will default and adjusts
the allowance for loan losses based on that assumption.
 
 Concentration Risk.
Concentration risk is the exposure to loss associated with declines in assets
that are geographically homogenous. As 90% of the Company’s real estate is
located in California, the Company is subject to economic risks associated with
their physical concentration within the state of California as well as risks
associated with the state’s economy.
 
 Asset and Liability
Management
 Asset and
liability management is concerned with the timing and magnitude of the maturity
of assets and liabilities. In general, management’s strategy is to approximately
match the term of the mortgage investment portfolio’s liabilities to the
portfolio’s adjusted weighted average maturity (31 months).
 
 The majority of the investment mortgage
loans pay a fixed rate and the income from such assets are relatively unaffected
by interest rate changes. The associated liabilities are currently under
variable rate lines of credit that reset monthly. Given this relationship
between assets and liabilities, the interest rate sensitivity gap is highly
negative. This implies that a period of falling short term interest rates will
tend to increase net interest income, while a period of rising short term rates
will tend to reduce the net interest income.
 
 ITEM 8.
FINANCIAL STATEMENTS
 
 The audited consolidated Financial
Statements and their accompanying notes are presented with the Independent
Registered Public Accounting Firm’s Report in Appendix F. The unaudited 2009 and
2008 fourth quarter statements of operation is presented on page
21.
 
 ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 On May 11, 2009, Rothstein Kass (“RK”)
resigned as the independent registered public accounting firm the Company for
the fiscal year ending December 31, 2008. RK’s audit reports on the Company’s
consolidated financials for the fiscal years ended December 31, 2008 and 2007
did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting
principles.
 
 During
the fiscal years ended December 31, 2008 and 2007 and in the subsequent interim
period through May 11, 2009, there were no disagreements between the Company and
RK on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which if not resolved to the
satisfaction of RK, would have caused RK to make reference to the subject matter
of the disagreement in their report on the financial statement for such years
and there were no “reportable events” as defined in Item 304(a)(1)(v) of
Regulation S-K.
 
 The Audit
Committee of the Company approved Armanino McKenna LLP (“AM”) to serve as the
Company’s independent registered public accounting firm for the fiscal year
ending December 31, 2009. The Company’s Audit Committee reviewed auditor
independence and concluded that there is nothing to impair the independence of
AM. During the fiscal years ended December 31, 2008 and 2007, respectively, and
in the subsequent interim period through May 11, 2009, neither the Company nor
anyone acting on its behalf has consulted with AM on any of the matters or
events set forth in Item 304(a)(2) of Regulation S-K.
 
  
 
 ITEM
9A(T). CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure
Controls and Procedures
 Under the
supervision and with the participation of our Company’s management, including
our Chief Executive Officer and Principal Accounting Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Our
management has concluded that our disclosures controls and procedures as of the
end of the period covered by this report are effective.  Effective
disclosure controls and procedures means that the material information required
to be included in our Securities and Exchange Commission reports is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and regulations for the period of time
covered by this report.
 
 Management’s Report on
Internal Control Over Financial Reporting
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act).  Our internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our Company’s assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America and that receipts and expenditures of the Company are
being made only in accordance with the authorization of the Company’s management
and directors; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
Company’s assets that could have a material effect on the financial
statements.
 
 Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Therefore, even those systems
determined to be effective can provide only reasonable assurance of achieving
their control objectives.  Further, the evaluation of the
effectiveness of internal control over financial reporting was made as of a
specific date, and continued effectiveness in future periods is subject to the
risks that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies and procedures may
decline.
 
 Under the
supervision and with the participation of our Company’s management, including
our Chief Executive Officer and Principal Accounting Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO").  Based on our evaluation under the
framework, management has concluded that our internal control over financial
reporting is effective as of December 31, 2009.
 
 Our
management, with the participation of the Chief Executive Officer and Principal
Accounting Officer, has maintained internal procedures to continually improve
the effectiveness of the Company’s internal control over financial
reporting.  Based on these procedures, which includes the
participation of the Chief Executive Officer and Principal Accounting Officer,
our management expects that our internal control over financial reporting will
continue to be effective.
 
 This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this annual report.
 
 Changes in Internal Control
Over Financial Reporting
 There
were no changes in our internal control over financial reporting during the
fourth quarter of fiscal 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 ITEM 9B.
OTHER INFORMATION
 
 None
   
 
 PART
      III
 
 Certain
information required by Part III is omitted from this Annual Report in that the
registrant will file its definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 2, 2010 pursuant to Regulation 14A of the
Exchange Act (the Proxy Statement) not later than 120 days after the end of the
fiscal year covered by this Annual Report, and certain information included in
the Proxy Statement is incorporated herein by reference.
 
 ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 DIRECTORS
 The
information required by this Item is incorporated herein by reference to the
section entitled “Election of Directors” in the Proxy
Statement.
 
 AUDIT
COMMITTEE – FINANCIAL EXPERTS
 Certain
information required by this Item is incorporated herein by reference to the
section entitled “Report of the Audit Committee” in the Proxy Statement. The
board of directors has determined that Mr. James L. Grainer is an “audit
committee financial expert” and “independent” as defined under applicable SEC
and exchange rules.
 
 EXECUTIVE
OFFICERS
 The
information required by this Item is incorporated herein by reference to the
section entitled “Executive Officers” in the Proxy Statement.
 
 The
Company’s “Code of Ethics” applies to all employees and officers. A copy of the
Code of Ethics is posted at www.caitreit.com. Any amendment or waiver granted to
a provision of the Code of Ethics that applies to the principal executive
officer, principal financial officer, or principal accounting officer that
requires disclosure under applicable SEC rules, shall be fully disclosed on the
Company’s website.
 
 Section
16(a) Beneficial Ownership Reporting Compliance – The information
required by this Item is incorporated herein by reference to the section
entitled “Other Matters – Section 16(a)
Beneficial Ownership Reporting Compliance” in the Proxy Statement.
 
 ITEM 11.
EXECUTIVE COMPENSATION
 The
information required by this Item is incorporated herein by reference to the
sections entitled “Executive Compensation” and “Directors’ Compensation” in the
Proxy Statement.
 
 ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
 The
information required by this Item is incorporated herein by reference to the
sections entitled “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in the Proxy
Statement.
 
 ITEM 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
 The
information required by this Item is incorporated herein by reference to the
section entitled “Certain Relationships and Related Transactions” in the Proxy
Statement.
 
 ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
 The
information required by this Item is incorporated herein by reference to the
section entitled “Principal Accounting Fees and Services” in the Proxy
Statement.
 
 
 
 
 
 
 
 
 PART
      IV
 
 ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a)           Financial
Statements
 
 The
following financial statements of the Company included in Appendix F are
incorporated by reference in Item 8 of this report:
 
 Report
      of Independent Registered Public Accounting Firm .....................
              FS-1Consolidated
      Balance Sheets .......................................................
              FS-3Consolidated
      Statements of Operations ...........................................
              FS-4Consolidated
      Statements of Changes in Stockholders’ Equity ..................
              FS-5Consolidated
      Statements of Cash Flows ..........................................
              FS-6Notes
      to Consolidated Financial Statements ......................................
              FS-7
 
 (b)           Financial Statement
Schedules
 
 Schedule II – Valuation and Qualifying
Accounts
 Schedule IV – Mortgage Loans on Real
Estate
 
 (c)           Exhibits
  Exhibit
      No.
                Description3.1
                Certificate
      of Incorporation and Amendment No. 1 (1)3.2
                Bylaws
      of the Registrant (1)3.3
                Certificate
      of Amendment of Certificate of Incorporation (3)4.1
                Form
      of Stock Certificate of Common Shares of the Registrant
  (2)10.2
                Form
      of Indemnity Agreement between the Registrant and its Directors and
      Officers (1)24.7
                Power
      of Attorney of Richard J. Wrensen (4)31.1
                Sarbanes Certification of Richard J
      Wrensen31.2
                Sarbanes Certification of Andrea
    Barney32.1
                Sarbanes
Certification
 
 (1)
              These
      exhibits were previously contained in Registrant’s Registration Statement
      filed on Form S-11 with the Commission on September 9, 1996, and are
      incorporated by reference herein.
 
 (2)
              These
      exhibits were previously contained in Amendment No. 1 to the Registrant’s
      Registration Statement filed on Form S-11 with the Commission on January
      15, 1997, and are incorporated by reference
  herein.
 
 (3)
              These
      exhibits were previously contained in Form 10-Q for the period ending June
      30, 1997 filed with the Commission on August 14, 1997, and are
      incorporated by reference herein.
 
 (4)
              This
      exhibit was previously contained in Form 10-K for the period ending
      December 31, 1998 filed with the Commission on April 10, 1999, and are
      incorporated by reference herein.
 
 (d)           Reports on Form
8-K
 
 Form 8-K
was filed on:
 ·
              November
      13, 2009 due to the press release regarding earnings for the third quarter
      of 2009.
 
 (e)           Miscellaneous
Exhibits
 
 None
       
 SIGNATURES
 
 Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, hereunto duly
authorized.
  
 Eastern
      Light Capital, IncorporatedBy:
                /s/
      Richard J. Wrensen
                
                By:
                /s/
      Andrea BarneyRichard
      J. Wrensen
                
                
                Andrea
      BarneyChairman
      and Chief Executive Officer
                
                
                Principal
      Accounting Officer andController
 
      
 
 
 
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
      /s/
      Richard J. Wrensen
                
                
                Dated: 
      April 14, 2010Richard
      J. WrensenChairman,
      Chief Executive Officer
                  President
      and Chief Financial Officer/s/
      James L. Grainer
                
                
                Dated: 
      April 14, 2010James
      L. GrainerDirector/s/
      Alan R. Jones
                
                
                Dated: 
      April 14, 2010Alan
      R. JonesDirector/s/
      Ace J. Blackburn
                
                
                Dated: 
      April 14, 2010Ace
      J. BlackburnDirector


Report
of Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors and Stockholders of
 Eastern
Light Capital, Incorporated:
 
 We have
audited the accompanying consolidated balance sheet of Eastern Light Capital,
Incorporated and subsidiary (the “Company”), as of December 31, 2009 and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for the year then ended.  These consolidated 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 the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting.  Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the 2009 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2009 and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
 
 Our audit
was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedules II and IV are presented for purposes of
additional analysis and are not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
 
 
 /s/    Armanino
McKenna LLP
 
 San
Francisco, California
 April 15,
2010
  FS-1
  Report
of Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors and Stockholders of
 Eastern
Light Capital, Incorporated:
 
 We have
audited the accompanying consolidated balance sheet of Eastern Light Capital,
Incorporated and subsidiary (the “Company”), as of December 31, 2008 and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for the year ended December 31, 2008. 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 audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the 2008 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2008 and the consolidated results of their operations
and their cash flows for the year ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America.
 
 
 /s/    Rothstein,
Kass & Company, P.C.
 
 Roseland,
New Jersey
 April 15,
2009
  FS-2
  EASTERN
LIGHT CAPITAL, INC.
 Consolidated
Balance Sheets
 December
31, 2009 and 2008
 
 2009
                
                
                2008ASSETSCash
      and cash equivalents
                
                $
                227,944
                
                
                $
                1,974,687Marketable
      securities
                
                
                147
                
                
                
                213,839Accounts
      receivable
                
                
                524,717
                
                
                
                734,193Allowance
      for doubtful accounts
                
                
                (453,974
                )
                
                
                (550,808
                )Net
      accounts receivable
                
                
                70,743
                
                
                
                183,385Notes
      receivable:Mortgage
      notes receivable
                
                
                2,690,737
                
                
                
                5,460,948Allowance
      for loan losses
                
                
                (310,000
                )
                
                
                (720,000
                )Net
      notes receivable
                
                
                2,380,737
                
                
                
                4,740,948Real
      estate owned, net
                
                
                6,714,174
                
                
                
                5,086,781Other
      assets (net of accumulated
      depreciation of $14,833 and $3,070)
                
                
                37,987
                
                
                
                30,157Total
      assets
                
                $
                9,431,732
                
                
                $
                12,229,797LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesBank
      loans payable
                
                $
                ---
                
                
                $
                2,005,184Senior
      debt
                
                
                4,487,940
                
                
                
                2,631,696Other
      liabilities
                
                
                232,032
                
                
                
                50,374Total
      liabilities
                
                
                4,719,972
                
                
                
                4,687,254Stockholders’
      equityPreferred
      stock, $.01 par value;1,600,000 shares authorized; 213,820 shares issued
      and outstanding at December 31, 2009 and 2008
                
                
                2,138
                
                
                
                2,138Additional
      paid in capital - preferred stock
                
                
                5,509,728
                
                
                
                5,509,728Less
      treasury stock: 16,919 preferred shares at December 31, 2009 and 2008 at
      cost
                
                
                (229,179
                )
                
                
                (229,179
                )Common
      stock, $.01 par value; 2,000,000 shares authorized; 500,432 and 500,032
      shares issued and outstanding at December 31, 2009 and
2008
                
                
                5,005
                
                
                
                5,000Additional
      paid in capital - common stock
                
                
                9,408,747
                
                
                
                9,404,245Less
      treasury stock: 148,550 and 133,500 common shares at December 31, 2009 and
      2008 at cost
                
                
                (1,827,698
                )
                
                
                (1,761,912
                )Accumulated
      other comprehensive income (loss)
                
                
                (576
                )
                
                
                334Accumulated
      deficit
                
                
                (8,156,405
                )
                
                
                (5,387,811
                )Total
      stockholders’ equity
                
                
                4,711,760
                
                
                
                7,542,543Total
      liabilities and stockholders’ equity
                
                $
                9,431,732
                
                
                $
                12,229,797
 
 
 See
accompanying notes to consolidated financial statements.
  FS-3
  EASTERN
LIGHT CAPITAL, INC.
 Consolidated
Statements of Operations
 For
the Years Ended December 31, 2009 and 2008
 
 2009
                
                
                2008REVENUESInterest
      income
                
                $
                220,632
                
                
                $
                613,665Rental
      income
                
                
                137,931
                
                
                
                ---Other
      income
                
                
                30,018
                
                
                
                42,913Total
      revenues
                
                
                388,581
                
                
                
                656,578EXPENSESInterest
      expense on loans
                
                
                24,169
                
                
                
                126,287Provision
      for loan losses
                
                
                164,794
                
                
                
                404,230Provision
      for (recovery of) doubtful accounts
                
                
                17,297
                
                
                
                (62,599
                )Expenses
      of real estate owned
                
                
                335,890
                
                
                
                272,237Impairment
      of real estate owned
                
                
                2,269,128
                
                
                
                ---Wages
      and benefits
                
                
                458,046
                
                
                
                385,396Non-income
      taxes
                
                
                39,204
                
                
                
                37,934General
      and administrative
                
                
                415,701
                
                
                
                262,634Total
      expenses
                
                
                3,724,229
                
                
                
                1,426,119LOSS
      FROM OPERATIONS
                
                
                (3,335,648
                )
                
                
                (769,541
                )OTHER
      INCOME (EXPENSE)Gain
      from retirement of debt
                
                
                400,000
                
                
                
                ---Gain
      (loss) on sale of real estate owned
                
                
                ---
                
                
                
                168,240Gain
      (loss) on securities transaction
                
                
                37,195
                
                
                
                (61,281
                )Gain
      on investments
                
                
                129,859
                
                
                
                42,864Other
      income, net
                
                
                567,054
                
                
                
                149,823NET
      LOSS
                
                $
                (2,768,594
                )
                
                $
                (619,718
                )PREFERRED
      DIVIDENDS
                
                
                ---
                
                
                
                ---NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERS
                
                $
                (2,768,594
                )
                
                $
                (619,718
                )NET
      LOSS PER COMMON SHARE, BASIC AND DILUTED
                
                $
                (7.73
                )
                
                $
                (1.64
                )NET
      LOSS PER PREFERRED SHARE, BASIC AND DILUTED
                
                $
                ---
                
                
                $
                ---DIVIDENDS
      PAID PER PREFERRED SHARE
                
                $
                ---
                
                
                $
                ---DIVIDENDS
      PAID PER COMMON SHARE
                
                $
                ---
                
                
                $
                ---WEIGHTED
      COMMON SHARES, BASIC AND DILUTED
                
                
                358,250
                
                
                
                377,014
 
 
 See
accompanying notes to consolidated financial statements.
  FS-4
  EASTERN
LIGHT CAPITAL, INC.
 Consolidated
Statements of Changes in Stockholders' Equity
 For
the Years Ended December 31, 2009 and 2008
 
 Preferred
                  Shares
                
                
                Preferred
                  Stock
                
                
                Preferred
                  Additional
                  Paid
      in
                  Capital
                
                
                Common
                  Shares
                
                
                Common
                  Stock
                
                
                Common
                  Additional
                  Paid
      in
                  Capital
                
                
                Treasury
                  Stock
                
                
                Accumulated
                  Other
                  Comprehensive
                  Income (Loss)
                
                
                Accumulated
                  Deficit
                
                
                Total
                
                
                Comprehensive
                  LossBALANCE,
                  JANUARY 1, 2008
                
                
                196,901
                
                
                $
                2,138
                
                
                $
                5,509,728
                
                
                
                380,532
                
                
                $
                5,000
                
                
                $
                9,394,577
                
                
                $
                (1,928,950
                )
                
                $
                (385
                )
                
                $
                (4,768,093
                )
                
                $
                8,214,015Acquisition
      of treasury stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (62,141
                )
                
                
                -
                
                
                
                -
                
                
                
                (62,141
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (619,718
                )
                
                
                (619,718
                )
                
                
                (619,718
                )Issuance
      of common stock options
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,668
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,668
                
                
                
                ---Unrealized
      gain
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                719
                
                
                
                -
                
                
                
                719
                
                
                
                719$
                (618,999
                )BALANCE,
      DECEMBER 31, 2008
                
                
                196,901
                
                
                
                2,138
                
                
                
                5,509,728
                
                
                
                366,532
                
                
                
                5,000
                
                
                
                9,404,245
                
                
                
                (1,991,091
                )
                
                
                334
                
                
                
                (5,387,811
                )
                
                
                7,542,543Acquisition
      of treasury stock
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (15,050
                )
                
                
                -
                
                
                
                -
                
                
                
                (65,786
                )
                
                
                -
                
                
                
                -
                
                
                
                (65,786
                )Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,768,594
                )
                
                
                (2,768,594
                )
                
                
                (2,768,594
                )Re-issuance
      of common stock options
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                400
                
                
                
                5
                
                
                
                4,502
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,507
                
                
                
                ---Unrealized
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (910
                )
                
                
                -
                
                
                
                (910
                )
                
                
                (910
                )$
                (2,769,504
                )BALANCE,
      DECEMBER 31, 2009
                
                
                196,901
                
                
                $
                2,138
                
                
                $
                5,509,728
                
                
                
                351,882
                
                
                $
                5,005
                
                
                $
                9,408,747
                
                
                $
                (2,056,877
                )
                
                $
                (576
                )
                
                $
                (8,156,405
                )
                
                $
                4,711,760
 
 
 See
accompanying notes to consolidated financial statements.
  FS-5
  EASTERN
LIGHT CAPITAL, INC.
 Consolidated
Statements of Cash Flows
 For
the Years Ended December 31, 2009 and 2008
 
 2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                
                $
                (2,768,594
                )
                
                $
                (619,718
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                47,581
                
                
                
                ---Gain
      from retirement of debt
                
                
                (400,000
                )
                
                
                ---Stock-based
      compensation expense
                
                
                3,054
                
                
                
                9,668Provision
      for loan losses
                
                
                164,794
                
                
                
                404,230Change
      in allowance for doubtful accounts
                
                
                (96,834
                )
                
                
                (62,599
                )Gain
      (loss) on marketable securities
                
                
                114,098
                
                
                
                (36,937
                )Impairment
      loss in real estate owned
                
                
                2,269,128
                
                
                
                ---Gain
      on sale of real estate
                
                
                ---
                
                
                
                (168,240
                )Change
      in accounts receivable
                
                
                209,476
                
                
                
                123,133Change
      in other assets, net
                
                
                (7,830
                )
                
                
                30,157Change
      in other liabilities, net
                
                
                181,658
                
                
                
                (453,566
                )Net
      cash used in operating activities
                
                
                (283,469
                )
                
                
                (773,872
                )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      from (investment in) marketable securities
                
                
                78,031
                
                
                
                (116,598
                )Proceeds
      from real estate owned
                
                
                ---
                
                
                
                2,378,334Capital
      improvements on real estate owned
                
                
                (71,900
                )
                
                
                (128,927
                )Principal
      collected on mortgage notes receivable
                
                
                200,112
                
                
                
                1,352,345Net
      cash provided by investing activities
                
                
                206,243
                
                
                
                3,485,154CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      for bank loans, net
                
                
                (1,605,184
                )
                
                
                (1,636,644
                )Purchase
      of treasury stock, common shares
                
                
                (65,786
                )
                
                
                (62,141
                )Issuance
      of Common Stock
                
                
                1,453
                
                
                
                ---Net
      cash used in financing activities
                
                
                (1,669,517
                )
                
                
                (1,698,785
                )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (1,746,743
                )
                
                
                1,012,497CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                1,974,687
                
                
                
                962,190CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                227,944
                
                
                $
                1,974,687SUPPLEMENTAL
      CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                29,353
                
                
                $
                142,463Cash
      paid for taxes
                
                $
                12,940
                
                
                $
                22,621NON-CASH
      INVESTING AND FINANCING ACTIVITIESForeclosures,
      net of reserves
                
                $
                2,570,099
                
                
                $
                4,331,072Assumption
      of senior debt upon foreclosure
                
                $
                1,856,244
                
                
                $
                2,631,696Writeoffs
      of uncollectable mortgage notes receivable
                
                $
                574,794
                
                
                $
                ---
 
 
 See
accompanying notes to consolidated financial statements.
  FS-6
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 1.
                Organization
 
 References
to the “Company” refer to Eastern Light Capital, Incorporated (the “Trust”) – a
Real Estate Investment Trust (“REIT”) – and its subsidiary WrenCap Funding
Corporation (“WCFC”), collectively.  The Trust was incorporated in
Delaware on December 12, 1995. On July 2, 2008, the Trust – formerly known as
Capital Alliance Income Trust, Ltd – was renamed Eastern Light Capital,
Incorporated.
 
 On April
15, 1997 the Trust formed, a taxable REIT subsidiary, Capital Alliance Funding
Corporation (“CAFC”). On April 20, 2007, the subsidiary was renamed to WrenCap
Funding Corporation. Both the Trust and WCFC are incorporated in Delaware. The
Trust owns all of WCFC’s common and preferred shares and the Trust and WCFC are
consolidated in the Company’s financial statements. Prior to December 29, 2006,
the Company was externally advised by Capital Alliance Advisors, Inc. (the
“Former Manager”, “CAAI”). On December 29, 2006, the Former Manager was
terminated and the Company became self-administered and
self-advised.
 
 2.
                Liquidity
 
 Management
has examined the Company’s 2010 cash requirements and believes that existing
cash balances, the cash flows from operations, mortgage loans that may be
prepaid, additional credit facilities that may be obtained, the sale of
investment mortgages and most importantly, the monetization of real estate
owned, will be sufficient to meet the Company’s operating requirements through
December 31, 2010.
 
 3.
                Summary of significant
      accounting policies
 
 Principles of
consolidation. The consolidated financial statements include the accounts
of the Trust and its wholly owned subsidiary, WCFC. All significant intercompany
balances and transactions have been eliminated in consolidation.
 
 Basis of
accounting.  The Company prepares its consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America and pursuant to the rules and regulations of the
Securities and Exchange Commission.
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) approved the FASB
Accounting Standards Codification (“ASC”) as the single source of authoritative
nongovernmental GAAP.  ASC does not change current GAAP, but
simplifies user access to all authoritative GAAP by providing all the
authoritative literature related to a particular topic in one
place.  All existing accounting standard documents have been
superseded and all other accounting literature not included in the ASC is
considered non-authoritative.  ASC is effective for interim and annual
periods ending after September 15, 2009.  The Company adopted the
standard on July 1, 2009 and discloses the ASC prescribed topic numbering
references on a primary basis.
 
 Use of
estimates.  The preparation of consolidated 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 dates of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. The most
significant estimates are the allowance for loan losses and the valuation of
real estate owned.
 
 Cash and cash
equivalents.  Cash and cash equivalents include cash and highly
liquid investments with maturities of three months or less when
purchased.  The Company deposits cash in financial institutions
insured by the Federal Deposit Insurance Corporation.  At times, the
Company’s account balances may exceed the insured limits. The Company has not
experienced losses on these accounts and management believes the Company is not
exposed to significant risks on such accounts.
  FS-7
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 3.
                Summary of significant
      accounting policies
(continued)
 
 Marketable
securities.  Marketable securities are classified as either
trading or available-for-sale. Trading securities represent investments in
exchange listed securities that are bought and held principally for the purpose
of selling them in the near term.  Available-for-sale securities
represent investments in exchange listed securities which the Trust intends to
hold for an indefinite period of time.
 
 Allowance for doubtful
accounts. Management reviews its accounts receivable periodically and the
Company has established an allowance for receivables that may not be
collectible. Management exercises judgment in establishing the allowance and the
Company’s actual losses may differ from the estimate.
 
 Fair Value
Measurements.  The Company has adopted ASC Topic 820, Fair Value
Measurements.  ASC Topic 820 establishes a framework for measuring
fair value and expands disclosure requirements for fair value measurements. In
April 2009, the FASB issued guidance now codified as part of ASC Topic 820,
Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions that Are
Not Orderly, which provides additional authoritative guidance to assist
both issuers and users of financial statements in determining whether a market
is active or inactive, and whether a transaction is distressed.
 
 The
Company determines the fair values of its assets and liabilities based on the
fair value hierarchy established in ASC Topic 820.  The standard describes
three levels of inputs that may be used to measure fair value (Level 1, Level 2
and Level 3).  Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to
access at the measurement date.  An active market is a market in which
transactions occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.  Level 2 inputs are inputs other than
quoted prices that are observable for the asset or liability, either directly or
indirectly.  Level 3 inputs are unobservable inputs for the asset or
liability.  Unobservable inputs reflect the Company’s own assumptions about
the assumptions market participants would use in pricing the asset or liability
(including assumptions about risk).  Unobservable inputs are developed
based on the best information available in the circumstances and may include the
Company’s own data.
 
 Mortgage Notes
Receivable. Mortgage notes receivable are carried at their origination
value less any amortized principal. Management regularly reviews the asset
securing the mortgage as well as the borrower’s payment history and ability to
repay the mortgage.
 
 Real estate
owned.  Real estate owned results from foreclosure of mortgage
notes receivable and at time of foreclosure is recorded at the lower of carrying
amount plus any senior indebtedness or fair value of the property minus
estimated costs to sell. Management may elect to lease foreclosed real estate
owned in lieu of immediately marketing it for sale. Subsequent to foreclosure,
the foreclosed asset value is periodically reviewed and adjusted to fair value
if a decline has occurred. Income and expenses related to real estate owned are
recorded as rental income, interest expense and operating expenses of real
estate owned and are included in the consolidated statements of operations.
Depreciation is taken on the leased real estate owned.
 
 Revenue
recognition.Interest income is
recorded on the accrual basis of accounting in accordance with the terms of the
loans.  Management reviews the likelihood that a loan will be repaid
when the payment of principal or interest is delinquent over two
payments.  For these delinquent loans, Management may establish a loan
loss reserve to protect against principal losses in the loan portfolio and an
allowance for doubtful accounts to protect against losses from accrued interest.
If the mortgage’s collateral is considered insufficient to satisfy the
outstanding balance, after estimated foreclosure and selling costs, additional
interest is not accrued.  Loan origination income and extension fees
are deferred and recognized over the remaining life of the loan as interest
income on the interest method. Rental income is recognized as it is
earned.
  FS-8
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 3.
                Summary of significant
      accounting policies
(continued)
 
 Allowance
for loan loss reserve.  Management reviews its loan loss provision
regularly and the Company maintains an allowance for losses on mortgage notes
receivable at an amount that management believes is sufficient to protect
against potential losses inherent in the loan portfolio.  A provision
for loan losses is based on management’s evaluation of an amount that is
adequate to absorb losses inherent in the existing loan
portfolio.  The evaluation, which includes a review of all loans on
which full collection may not be reasonably assumed, considers among other
matters, general economic conditions, the fair value of underlying collateral,
past loan loss experience, borrower economic resources, trends in loan
delinquency and other factors that warrant recognition in providing for an
adequate loan loss allowance. The Company’s actual losses may differ from the
estimate.   Notes receivable deemed uncollectible are written
off.  The Company does not accrue interest income on impaired
loans.
 
 Concentration of credit
risk.  The Company holds numerous mortgage notes
receivable.  These notes are secured by deeds of trust on residential
properties located primarily in California, which results in a concentration of
credit risk. The value of the loan portfolio may be affected by changes in the
economy or other conditions of the geographical area. As of December 31, 2009
and 2008, three loans representing approximately 14% and 10%, respectively, of
the loan portfolio are deeds of trust on residential properties not in
California.
 
 Stock-Based
Compensation. The Company measures the cost of a recipient’s services
received in exchange for an award of an equity instrument based on the award's
fair value on the grant date and recognizes the cost over the period during
which the recipient is required to provide service in exchange for the award,
generally the vesting period. No compensation costs are recognized for equity
instruments for which the recipient do not render the requisite service. For the
year ended December 31, 2009, no option awards were issued.  For the
year ended December 31, 2008, 84,655 options were re-issued. As the options were
re-issued, no further disclosure is required pursuant to ASC Topic
718.
 
 Earnings Per Share.
The Company presents both basic and diluted earnings per share. Basic earnings
per share excludes dilution and is computed by dividing net income available to
common stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock, where such exercise or conversion would result in a
lower earnings per share amount. At December 31, 2009, options to purchase
24,374 shares of common stock are not considered in the diluted earnings per
share calculation due to anti-dilution. This is disclosed in Note
14.
 
 Taxes.  The
Trust has elected to be taxed as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"). A REIT is generally not subject to federal income tax
on taxable income which is distributed to its stockholders, provided that at
least 90% of taxable income is distributed and provided that certain other
requirements are met. Certain assets of the Company that produce non-qualifying
income are held in taxable REIT subsidiaries. Unlike other subsidiaries of a
REIT, the income of a taxable REIT subsidiary is subject to federal and state
income taxes. Even as a REIT, the Company may be subject to certain state and
local taxes on its income and property, and to federal income and excise taxes
on its undistributable taxable income.  During 2009 and 2008, the
Company expensed $9,604 and $14,990, respectively, for payment of such taxes.
During 2005, 2006, 2007 and 2008, the Company incurred taxable losses, also
known as Net Operating Losses (“NOL”).  NOL’s may allow the Company to
retain future taxable income equal to the cumulative amount of its NOL
balance.  The Internal Revenue Service waives mandatory dividend
payments until prior year’s allowable NOLs are recovered. As of December 31,
2009, the Company’s cumulative NOL is undetermined, but is expected to
increase.  As of December 31, 2008, the Company had cumulative federal
NOLs of approximately $2,351,813.
 
 Reclassifications.  Certain
2008 amounts have been reclassified to conform to the 2009
presentation.  Such reclassifications had no effect on reported net
income or earnings per share.
  FS-9
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 3.
                Summary of significant
      accounting policies
(continued)
 
 Recent
Accounting Pronouncements.In April 2009,
the FASB issued FSP FAS 107-1 (ASC 825) and APB 28-1 (ASC 825), Interim Disclosure about Fair Value
of Financial Instruments, with an effective date for interim and annual
reporting periods ending after June 15, 2009, with early adoption being
permitted if one also early adopts FSP FAS 157-4.  The purpose of this
release is to require disclosure about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements and to require those disclosures in summarized financial
information at interim reporting periods.  The adoption of this release did
not have a material impact on the company’s disclosures.
 
 In
October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active, with an
immediate effective date.  The purpose of this release was to provide
further clarification regarding Level 3 inputs and the assumptions management
may make when the market for the asset is not active.  In April 2009, the
FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, with an
effective date for interim and annual reporting periods ending after June 15,
2009, with early adoption being permitted.  The purpose of this release was
to provide additional guidance for estimating fair value in accordance with SFAS
157, when the volume and level of activity for the asset or liability have
significantly decreased.  This release also includes guidance on
identifying circumstances that indicate a transaction is not orderly.  The
adoption of these releases did not have a material impact on the company’s
financial condition and results of operation.  These releases, along with
SFAS 157, FSP 157-1 and FSP 157-2 are now included in ASC 820.
 
 4.
                Marketable
      securities
 
 Available-for-sale
securities are reported at fair value with unrealized gains and losses excluded
from earnings and reported in accumulated other comprehensive income (loss). For
the years ended December 31, 2009 and 2008, the loss and gain in accumulated
other comprehensive income was $910 and $719, respectively. Trading securities
are reported at fair value with unrealized gains and losses reported in the
statements of operations.  Available-for-sale securities consist of
exchange traded REIT securities whereas trading securities consist of exchange
traded non-REIT securities. Both accounts utilize exchange listed derivative
securities to enhance performance and to hedge against risk. The trading account
also shorts exchange listed securities, including derivative
securities.
 
 As of
December 31, 2009 and 2008, the trading securities account balance was $0 and
$205,870, respectively. As of December 31, 2009 and 2008, the available for sale
securities account balance was $147 and $7,969, respectively. Realized gains and
losses on sales of both trading and available-for-sale securities are determined
on an average cost basis and are reported in the statements of
operations.
 
 The
accounts utilize margin borrowings and are separately maintained. The equity
balance in the account is sufficient to offset the risk from a potential margin
call. As of December 31, 2009 and 2008, the trading securities account had no
borrowings while the available-for-sale securities account also had no
borrowings. The interest in the available-for-sale margin account is charged at
an annual rate of Prime and 4.00% and is payable monthly. As of December 31,
2009 and 2008, interest of $6,425 and $0, respectively was charged and is
reported in the statements of operations.
 
 5.
                Accounts
      receivable
 
 Accounts
receivable consists of accrued interest on mortgage notes receivable, other
amounts due from borrowers and a receivable from a custodial account. As of
December 31, 2009 and 2008, accrued interest, other amounts due from borrowers
and the custodial account receivable were $524,717 and $734,193, respectively.
As of December 31, 2009 and 2008, Management believes that an allowance for
doubtful accounts of $453,974 and $550,808, respectively, is adequate protection
against the collectability of the receivables as well as the costs associated
with possible legal action. During 2009 and 2008, the Company reserved $17,297
and $0, which is reported in the statements of operations.
  FS-10
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 6.
                Mortgage notes
      receivable
 
 Reconciliation
of the mortgage notes receivable balances for the years ended December 31, 2009
and 2008 follows:
 
 2009
                
                
                2008Balance,
      beginning of yearAdditions:
                
                $
                5,460,948
                
                
                $
                11,144,365Originations
                
                
                ---
                
                
                
                ---Deductions:Collections
      of principal
                
                
                (53,252
                )
                
                
                (89,949
                )Repayments
                
                
                (146,860
                )
                
                
                (1,262,396
                )Sales
                
                
                ---
                
                
                
                ---Write-offs
      of uncollectible principal
                
                
                ---
                
                
                
                ---Foreclosures,
      net of reserve
                
                
                (2,570,099
                )
                
                
                (4,331,072
                )Balance,
      end of year
                
                $
                2,690,737
                
                
                $
                5,460,948
 
 The
mortgage notes receivable represent home equity loans primarily secured by deeds
of trust on one-to-four unit residential real estate. The Company is subject to
the risks inherent in finance lending including the risk of borrower default and
bankruptcy. Mortgage notes receivable are stated at the principal
outstanding.  Interest on the mortgages is due monthly and unamortized
principal is usually due as a balloon payment at loan maturity.
 
 In 2009,
the terms of certain mortgage notes receivable were modified. These changes did
not require the Company to recognize additional income or expense. As of
December 31, 2009, the Company had one loan with a carrying value of $302,709
which is considered to be impaired. Management has reviewed this loan and has
reserved a loan loss allowance sufficient enough to absorb any and all losses as
a result of foreclosure.
  FS-11
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 6.
                Mortgage notes
      receivable (continued)
 
 The
following is a summary of the Trust’s mortgage notes receivable balance at
December 31, 2009:
 
 Principal outstanding
                
                Interest rate
                
                
                Final
                  maturity date
                
                
                Monthlypayment
                
                Lien Priority
                
                Face
      amount ofmortgage(s)
                
                
                Carrying
      amount of mortgage(s)
                
                
                Amount
      of delinquent principal
                  (Note A)Individual
      loans greater than $499,999:
                
                11.50%
                
                
                10/01/10
                
                
                $
                7,187
                
                First
                
                $
                750,000
                
                
                $
                750,000
                
                
                $
                750,000Loans
      from $400,000-$499,999
                
                ---
                
                
                ---
                
                
                
                
                
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Loans
      from $300,000-$399,999
                
                6.25%
                
                
                13
      to 128 months
                
                
                
                
                
                
                
                
                674,200
                
                
                
                631,552
                
                
                
                302,709Loans
      from $200,000-$299,999
                
                6.38%
      to 13.50%
                
                
                2
      to 297 months
                
                
                
                
                
                
                
                
                1,167,243
                
                
                
                1,045,718
                
                
                
                ---Loans
      from $100,000- 199,999
                
                ---
                
                
                ---
                
                
                
                
                
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Loans
      up to $99,999
                
                7.00%
      to 17.75%
                
                
                10
      to160 months
                
                
                
                
                
                
                
                
                449,677
                
                
                
                263,467
                
                
                
                12,275Total
      Mortgage Notes Receivable at December 31, 2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                3,041,120
                
                
                $
                2,690,737
                
                
                $
                1,064,984
 
 (A)
Delinquent loans are loans where the monthly interest payments in arrears are
more than 60 days overdue.  As of December 31, 2009, there were three
(3) loans totaling $1,064,984 of principal and $5,016 of interest that were 61
to 180 days delinquent on interest payments. Two loans totaling $314,984 of
principal and $1,578 of interest were delinquent for over 180 days. Except for
one loan which has been fully reserved, Management believes that the fair value
(estimated selling price less cost to dispose) of the delinquent loan’s
collateral is equal to or greater than the carrying value of the loan including
accrued interest.
  FS-12
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 6.
                Mortgage notes
      receivable (continued)
 
 The
following is a summary of the Trust’s mortgage notes receivable balance at
December 31, 2008:
 
 Principal outstanding
                
                Interest rate
                
                Final
                  maturity date
                
                Monthly payment
                
                Lien Priority
                
                Face
      amount ofmortgage(s)
                
                
                Carrying
      amount of mortgage(s)
                
                
                Amount
      of delinquent principal
                  (Note A)Individual
      loans greater than $499,999:
                
                9.50%
                
                10/01/08
                
                $
                7,813
                
                Second
                
                $
                1,500,000
                
                
                $
                1,500,000
                
                
                $
                1,500,00011.50%
                
                10/01/10
                
                
                7,187
                
                First
                
                
                750,000
                
                
                
                750,000
                
                
                
                ---Loans
      from $400,000-$499,999
                
                12.00%
      to 12.75%
                
                16
      to 23 months
                
                
                
                
                
                
                
                905,000
                
                
                
                904,998
                
                
                
                904,999Loans
      from $300,000-$399,999
                
                6.38%
      to 7.50%
                
                25
      to 309 months
                
                
                
                
                
                
                
                1,381,443
                
                
                
                1,257,562
                
                
                
                ---Loans
      from $200,000-$299,999
                
                12.00%
      to 13.50%
                
                8
      to 37 months
                
                
                
                
                
                
                
                460,000
                
                
                
                458,752
                
                
                
                ---Loans
      from $100,000- 199,999
                
                7.75%
      to 11.00%
                
                8
      to 295 months
                
                
                
                
                
                
                
                337,038
                
                
                
                259,762
                
                
                
                109,259Loans
      up to $99,999
                
                7.00%
      to 17.75%
                
                22
      to 203 months
                
                
                
                
                
                
                
                505,676
                
                
                
                329,874
                
                
                
                71,517Total
      Mortgage Notes Receivable at December 31, 2008
                
                
                
                
                
                
                
                
                
                
                
                $
                5,839,157
                
                
                $
                5,460,948
                
                
                $
                2,585,774
 
 (A)
Delinquent loans are loans where the monthly interest payments in arrears are
more than 60 days overdue.  As of December 31, 2008, there were eight
(8) loans totaling $3,353,673 of principal and $85,482 of interest that were 61
to 180 days delinquent on interest payments. There were six loans that were
delinquent for over 180 days.  Management has reviewed all of the
delinquent loans and believes that the fair value (estimated selling price less
cost to dispose) of the collateral is equal to or greater than the carrying
value of the loan including any accrued interest.
  FS-13
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 7.
                Allowance for loan
      losses
 
 The
allowance for loan losses is based on the fair value of the related collateral
since all loans subject to this estimate are collateral
dependent.  Management believes a $310,000 and $720,000 loan loss
reserve is adequate protection against potential losses inherent in the mortgage
notes receivable balances as of December 31, 2009 and 2008, respectively. Actual
losses may differ from the estimate.
 
 A
reconciliation of the allowance for loan losses for the years ended December 31,
2009 and 2008 follows:
 
 2009
                
                
                2008Provision
      for loan losses
                
                $
                164,794
                
                
                $
                404,230Write-offs
      of uncollectible loans (net)
                
                
                (574,794
                )
                
                
                (1,839,230
                )Total
      adjustments to allowance
                
                
                (410,000
                )
                
                
                (1,435,000
                )Balance,
      beginning of year
                
                
                720,000
                
                
                
                2,155,000Balance,
      end of year
                
                $
                310,000
                
                
                $
                720,000
 
 8.
                Real estate
      owned
 
 As of
January 1, 2008, the Company owned three properties. During 2008, the company
foreclosed on eight properties, sold four properties, wrote off one property and
one property reverted to the senior lien holder. Two of the foreclosed
properties had senior liens in the amounts of $1,998,377 and $633,319. During
2009, the company foreclosed on four properties. Three of the foreclosed
properties had senior liens in the amounts of $950,000, $714,814, and $191,430.
As of December 31, 2009, the Company owned nine properties. As of December 31,
2009 and 2008, the senior mortgage’s principal balances were $4,487,940 and
$2,631,696, respectively. Management may elect to lease real estate assets in
lieu of immediately marketing real estate owned assets for sale.
 
 A
reconciliation of the real estate owned account shows its cash and non-cash
activities for the years ended December 31, 2009 and 2008:
 
 2009
                
                
                2008Balance,
      beginning of year
                
                $
                5,086,781
                
                
                $
                1,804,826Additions:Foreclosed
      mortgage notes, net of reserve (non-cash)
                
                
                4,135,468
                
                
                
                7,190,041Investments
                
                
                71,900
                
                
                
                128,928Deductions:Repayment
      of senior debt
                
                
                ---
                
                
                
                ---Write-downs
      of property (non-cash)
                
                
                (2,269,128
                )
                
                
                (580,000
                )Proceeds
      from sale of real estate owned (net of closing costs)
                
                
                ---
                
                
                
                (3,315,605
                )Depreciation
                
                
                (47,581
                )
                
                
                ---Deferred
      carrying costs
                
                
                (263,266
                )
                
                
                (141,409
                )Balance,
      as reported in Consolidated Balance Sheet
                
                $
                6,714,174
                
                
                $
                5,086,781
 FS-14
 EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 9.
                Fair Value
      Measurements
 
 The
following table presents information about the Company’s assets and liabilities
that are measured at fair value as of December 31, 2009:
 
 2009
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Asset:Marketable
      securities – Available for sale
                
                $
                147
                
                
                $
                147
                
                
                
                ---
                
                
                
                ---Mortgage
      notes receivable (non-recurring)
                
                $
                302,709
                
                
                
                ---
                
                
                $
                302,709
                
                
                
                ---Real
      estate owned (non-recurring)
                
                $
                2,821,279
                
                
                
                ---
                
                
                
                ---
                
                
                $
                2,821,279Total
                
                $
                2,124,135
                
                
                $
                147
                
                
                $
                302,709
                
                
                $
                2,821,279
 
 The
following table presents information about the Company’s assets and liabilities
that are measured at fair value as of December 31, 2008:
 
 2008
                
                
                Level 1
                
                
                Level 2
                
                
                Level 3Asset:Marketable
      securities – Available for sale
                
                $
                213,839
                
                
                $
                213,839
                
                
                
                ---
                
                
                
                ---Mortgage
      notes receivable (non-recurring)
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Real
      estate owned (non-recurring)
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Total
                
                $
                213,839
                
                
                $
                213,839
                
                
                $
                ---
                
                
                $
                ---
 
 The
following methods and assumptions were used to estimate the fair value of
financial instruments:
 
 Cash and cash
equivalents.  The carrying amounts reported in the balance
sheets approximate fair value due to the short term nature of these
accounts.
 
 Available-for-sale and trading
securities (included in marketable securities).  These investments
are reported on the balance sheets based on quoted market prices.
 
 Mortgage notes receivable.
The fair value of non-impaired loans is estimated based upon projected cash
flows discounted at the estimated current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued interest and advances related thereto should also be considered in
evaluating the fair value versus the carrying value. For loans in which a
specific allowance is established based on the fair value of the collateral, the
Company records the loan as nonrecurring Level 2 if the fair value of the
collateral is based on an observable market price or a current appraised
value.  If an appraised value is not available or the fair value of
the collateral is considered impaired below the appraised value and there is no
observable market price, the Company records the loan as nonrecurring Level
3.
 
 Real estate
owned.   At the time of foreclosure, real estate owned is
recorded at the lower of the recorded investment in the loan, plus any senior
indebtedness, or at the property’s estimated fair value, less estimated costs to
sell, as applicable. The Company periodically compares the carrying value of
real estate to expected undiscounted future cash flows for the purpose of
assessing the recoverability of the recorded amounts.  If the carrying
value exceeds future undiscounted cash flows, the assets are reduced to
estimated fair value.
 
 Line of credit and loan
commitments.  The carrying amount equals fair
value.  All amounts, including interest payable, are subject to
immediate repayment.
 
 10.
                Bank loans
      payable
 
 During
the second quarter of 2009, the Company recognized a $400,000 gain on the
disposition of previously issued debt. The Company had borrowed $2,000,000 from
a lender that was seized by the Federal Deposit Insurance Company. The borrowing
was satisfied for $1,600,000. The gain of $400,000 is reported in the
consolidated statements of operations.
  FS-15
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 11.
                Related party
      transactions
 
 During
2007, Mr. Wrensen independently engaged legal counsel on a shareholder matter.
Subsequently, the Board approved the expenditure and as of December 31, 2007,
the Company accrued a legal expense of $13,264 which was paid in
2008.
 
 On March
8, 2008, Thomas B. Swartz, a Non-Independent Director, resigned from the Trust’s
Board of Directors. Mr. Swartz received $21,100 in cash and his stock options
were allowed to continue until their scheduled maturity or June 3, 2009,
whichever date occurred earlier. The options expired unexercised.
 
 12.
                Preferred, common and
      treasury stock
 
 The
Preferred Shareholders are entitled to a dividend preference in an amount equal
to an annualized return on the adjusted net capital contribution of Preferred
Shares at each dividend record date during such year (or, if the Directors do
not set a record date, as of the first day of the month in which a dividend was
declared). The annualized return is the lesser of: (a) 10.25%, (b) 1.50 % over
the Prime Rate (determined on a not less than quarterly basis) or (c) the rate
set by the Board of Directors. The preferred dividend preference is
non-cumulative.
 
 After
declaring dividends for a given year to the Preferred Shareholders in the amount
of the dividend preference, no further dividends may be declared on the
Preferred Shares for the subject year, until the dividends declared on each
Common Share for that year equals the dividend preference for each Preferred
Share for such year.  Any additional dividends generally will be
allocated such that the amounts of dividends per share to the Preferred
Shareholders and Common Shareholders for the subject year are
equal.  The Preferred Shareholder’s additional dividends, if any, are
non-cumulative. Preferred Shareholders are entitled to receive all liquidating
distributions until they have received an amount equal to their aggregate
adjusted net capital contribution.  Thereafter, Common Shareholders
are entitled to all liquidation distributions until the aggregate adjusted net
capital contributions of all Common Shares have been reduced to
zero.  Any subsequent liquidating distributions will be allocated
among Common Shareholders and Preferred Shareholders pro rata.
 
 The
Preferred Shares are redeemable by a shareholder, subject to the consent of the
Board of Directors, annually on June 30 for written redemption requests received
by May 15 of such year.  The Board of Directors may in its sole
discretion deny, delay, postpone or consent to any or all requests for
redemption.  The redemption amount to be paid for redemption of such
Preferred Shares is the adjusted net capital contribution plus unpaid accrued
dividends, divided by the aggregate net capital contributions plus accrued but
unpaid dividends attributable to all Preferred Shares outstanding, multiplied by
the net asset value of the Trust attributable to the Preferred Shares which
shall be that percentage of the Trust’s net asset value that the aggregate
adjusted net capital contributions of all Preferred Shares bears to the adjusted
net capital contributions of all Shares outstanding.
 
 The Trust
has the power to redeem or prohibit the transfer of a sufficient number of
Common and/or Preferred Shares or the exercise of warrants and/or options and to
prohibit the transfer of shares to persons that would result in a violation of
the Trust’s shareholding requirements.  The Bylaws provide that only
with the explicit approval of the Trust’s Board of Directors may a shareholder
own more than 9.8% of the total outstanding shares.
 
 As of
January 1, 2008, the Trust’s net Preferred Stock balance was 196,901. During
2008 and 2009, no Preferred Stock shares were purchased. As of December 31,
2009, the Trust’s net Preferred Stock balance was 196,901.
 
 As of
January 1, 2008, the Trust’s net Common Stock balance was 380,532. During 2008,
the Trust’s cumulative Common Stock purchases totaled 14,000 shares and 84,655
options were re-awarded. As December 31, 2008, the Trust’s net Common Stock
balance was 366,532. During 2009, the Trust’s cumulative Common Stock purchases
totaled 15,050 shares and 400 shares were exercised. As of December 31, 2009,
the Trust’s net Common Stock shares outstanding were
351,882.
  FS-16
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 13.
                Common stock
      options
 
 The 1998
Incentive Stock Option Plan (“Plan”) adopted by the Board of Directors and
approved by stockholders, provide qualified and non-qualified Common Stock
options for the purchase of 247,500 Common Shares of the
Trust.  Company officers, employees, agents, contractors and Directors
of the board are the eligible recipients of the options. The options may have a
term of up to 10 years with a first exercise date generally within twelve (12)
months after the date of the grant.  Under the terms of the Plan, the
exercise price of each option cannot be less than 100% of the Common Shares
closing stock price on the date of grant. In February of 2008, the Board of
Directors approved the reissuance of 84,655 options at 110% of the Common Shares
closing stock price. The Plan expired on April 16, 2008. Therefore, the Company
can no longer re-issue or re-price the outstanding options.
 
 The
activity in the Plan for the years ended December 31, 2009 and 2008 are as
follows:
 
 Options
                
                
                Weighted
      average exercise
priceOutstanding
      at January 1, 2008
                
                
                118,260
                
                
                $
                10.64Granted
                
                
                84,655
                
                
                $
                3.63Exercised
                
                
                ---
                
                
                
                ---Forfeited
                
                
                (56,820
                )
                
                $
                (13.50
                )Outstanding
      at December 31, 2008
                
                
                146,095
                
                
                $
                5.90Granted
                
                
                ---
                
                
                
                ---Exercised
                
                
                (400
                )
                
                $
                (3.63
                )Forfeited
                
                
                (37,066
                )
                
                $
                (9.00
                )Outstanding
      at December 31, 2009
                
                
                108,629
                
                
                $
                4.85Outstanding
      options exercisable as ofJanuary
      1, 2008
                
                
                118,260
                
                
                $
                10.64December
      31, 2008
                
                
                146,095
                
                
                $
                5.90December
      31, 2009
                
                
                108,629
                
                
                $
                4.85
 
 The
following table summarizes information with respect to stock options outstanding
at December 31, 2009:
 
 Options
      outstandingRange
      of exercise prices
                
                Number
      of shares
                
                
                Weighted-average
      remaining contractual life (years)
                
                
                Weighted-
      average exercise price$3.63
                
                
                84,255
                
                
                
                7.88
                
                
                $
                3.63$9.00
      - $9.06
                
                
                24,374
                
                
                
                0.58
                
                
                $
                9.03108,629
                
                
                
                4.65
                
                
                $
                4.85
 
 14.
                Earnings per
      share
 
 The
following table represents a reconciliation of the numerators and denominators
of the basic and diluted earnings per common share for the years ended December
31, 2009 and 2008. At December 31, 2009 and 2008, options to purchase 24,374 and
61,440 shares of common stock are not considered in the diluted earnings per
share calculation due to anti-dilution, respectively.
 
 Numerator:
                
                2009
                
                
                2008Net
      loss
                
                $
                (2,768,594
                )
                
                $
                (619,718
                )Preferred
      dividends attributable to income
                
                
                ---
                
                
                
                ---Numerator
      for basic and diluted Earnings per share Net loss available to common
      stockholders
                
                $
                (2,768,594
                )
                
                $
                (619,718
                )Denominator:Basic
      weighted average shares
                
                
                358,250
                
                
                
                377,014Dilutive
      effect of options
                
                
                ---
                
                
                
                ---Diluted
      weighted average shares
                
                
                358,250
                
                
                
                377,014Basic
      loss per common share
                
                $
                (7.73
                )
                
                $
                (1.64
                )Diluted
      loss per common share
                
                $
                (7.73
                )
                
                $
                (1.64
                )
 FS-17
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 15.
                Selected quarterly
      financial data – unaudited
 
 Selected
quarterly financial data by quarter for the year ended December 31,
2009:
 
 Total
                
                
                4thQtr
                
                
                3rdQtr
                
                
                2ndQtr
                
                
                1stQtrRevenue
                
                $
                388,581
                
                
                $
                67,238
                
                
                $
                114,385
                
                
                $
                128,185
                
                
                $
                78,773Gain
      (loss) from other items
                
                
                567,054
                
                
                
                29
      410
                
                
                
                14,164
                
                
                
                243,552
                
                
                
                279,928Net
      income (loss)
                
                
                (2,768,594
                )
                
                
                (2,372,458
                )
                
                
                (470,602
                )
                
                
                45,958
                
                
                
                25,508Preferred
      dividends
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Net
      loss applicable to common stockholders
                
                $
                (2,768,594
                )
                
                $
                (2,372,458
                )
                
                $
                (470,602
                )
                
                $
                45,958
                
                
                $
                28,508Gain
      (loss) per share, basic and diluted
                
                $
                (7.73
                )
                
                $
                (6.60
                )
                
                $
                (1.33
                )
                
                $
                0.12
                
                
                $
                0.08
 
 Selected
quarterly financial data by quarter for the year ended December 31,
2008:
 
 Total
                
                
                4thQtr
                
                
                3rdQtr
                
                
                2ndQtr
                
                
                1stQtrRevenue
                
                $
                656,578
                
                
                $
                131,337
                
                
                $
                159,187
                
                
                $
                125,048
                
                
                $
                241,610Gain
      (loss) from other items
                
                
                149,823
                
                
                
                84,101
                
                
                
                30,225
                
                
                
                (13,438
                )
                
                
                48,935Net
      income (loss)
                
                
                (619,718
                )
                
                
                (636,328
                )
                
                
                5,244
                
                
                
                2,098
                
                
                
                9,268Preferred
      dividends
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Net
      loss applicable to common stockholders
                
                $
                (619,718
                )
                
                $
                (636,328
                )
                
                $
                5,244
                
                
                $
                2,098
                
                
                $
                9,268Gain
      (loss) per share, basic and diluted
                
                $
                (1.64
                )
                
                $
                (1.68
                )
                
                $
                0.01
                
                
                $
                0.01
                
                
                $
                0.02
 
 16.
                Contingencies
 
 The
Company is involved in three legal proceeding as of December 31, 2009, of which
two were resolved in the first quarter of 2010.
 
 On April
14, 2006, CAIT and CAFC were served a summons alleging that the Company was
involved with misleading a former mortgage holder. Upon the satisfaction of
their mortgage claim from the proceeds of a Company provided mortgage, the
former mortgage holder released their escrow settlement to the new purchaser
without re-recording their subordinate mortgage claim. On July 14, 2006, the
property was sold at a Trustee sale and the Company’s loan was paid in full. The
former mortgage holder’s unrecorded claim was not satisfied at the
aforementioned Trustee sale. The case was resolved in the first quarter of
2010.
 
 On
November 1, 2007, CAFC was served a summons dated September 5, 2007 from a
former borrower alleging that the Company assisted the replacement lender to
unlawfully and illegally foreclose on the former borrower’s property. The case
was resolved in the first quarter of 2010.
 
 In March
2008, CAIT was named as a defendant in a complaint alleging breach of contract,
fraud and negligence relating to two foreclosed properties. The Company believes
the former mortgage holder’s action is without merit and is seeking
dismissal.
  FS-18
  EASTERN
LIGHT CAPITAL, INC.
 Notes
to Consolidated Financial Statements
 For
the Years Ended December 31, 2009 and 2008
 
 17.
                Wages and
      Benefits
 
 Every
January 1, full time employees with at least 12 months of full time employment
qualify for a Company sponsored Simple IRA. Employee contributions are governed
by Internal Revenue Code limitations. The Company may contribute up to 3.0% of
the employee’s annual compensation, but not in excess of the lesser of the
employee’s contribution or the maximum IRS employer’s contribution. Employer
contributions vest upon funding.
 
 18.
                Subsequent
      Events
 
 On March
26, 2010, the Company obtained a shareholder loan in the amount of $50,000. The
loan has an interest rate of 9.99%, is repayable at any time and has a term of
55 days. The loan is collateralized by real estate owned.
 
 On April
5, 2010, the Company sold an asset classified as real estate owned. The Company
received net proceeds of $87,750 and recorded a loss of $8,529 which shall be
recognized in the first quarter of 2010.
  FS-19
  EASTERN
LIGHT CAPITAL, INC.
 
 FINANCIAL
STATEMENT SCHEDULES
 
 SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
 
 Description
                
                Balance
                  Beginning of Year
                
                
                Costs and Expenses
                
                
                Deductions
                
                
                Balance
                  End of YearAllowance
      for Loan Losses
                
                $
                720,000
                
                
                $
                164,794
                
                
                $
                (574,794
                )
                
                $
                310,000Allowance
      for Doubtful Accounts
                
                $
                550,808
                
                
                $
                ---
                
                
                $
                (98,834
                )
                
                $
                453,974
 
 
 
 SCHEDULE
IV – MORTGAGE LOANS ON REAL ESTATE
 Principal outstanding
                
                Interest rate
                
                
                Final
                  maturity date
                
                
                Monthlypayment
                
                Lien Priority
                
                Face
      amount ofmortgage(s)
                
                
                Carrying
      amount of mortgage(s)
                
                
                Amount
      of delinquent
    principalIndividual
      loans greater than $499,999:
                
                11.50%
                
                
                10/01/10
                
                
                $
                7,187
                
                First
                
                $
                750,000
                
                
                $
                750,000
                
                
                $
                750,000Loans
      from $400,000-$499,999
                
                ---
                
                
                ---
                
                
                
                
                
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Loans
      from $300,000-$399,999
                
                6.25%
                
                
                13
      to 128 months
                
                
                
                
                
                
                
                
                674,200
                
                
                
                631,552
                
                
                
                302,709Loans
      from $200,000-$299,999
                
                6.38%
      to 13.50%
                
                
                2
      to 297 months
                
                
                
                
                
                
                
                
                1,167,243
                
                
                
                1,045,718
                
                
                
                ---Loans
      from $100,000- 199,999
                
                ---
                
                
                ---
                
                
                
                
                
                
                
                
                ---
                
                
                
                ---
                
                
                
                ---Loans
      up to $99,999
                
                7.00%
      to 17.75%
                
                
                10
      to160 months
                
                
                
                
                
                
                
                
                449,677
                
                
                
                263,467
                
                
                
                12,275Total
      Mortgage Notes Receivable at December 31, 2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                3,041,120
                
                
                $
                2,690,737
                
                
                $
                1,064,984
 
 
 
 Description
                
                Balance
                  Beginning
      of Year
                
                
                Originations
                
                
                Collections
      of Principal
                
                
                Repayments
                
                
                Sales
                
                
                Write-offs
                
                
                Foreclosures
      (net of reserve)
                
                
                Balance
                  End of YearMortgage
      Notes Receivable
                
                $
                5,460,948
                
                
                $
                ---
                
                
                $
                (53,252
                )
                
                $
                (146,860
                )
                
                $
                ---
                
                
                $
                ---
                
                
                $
                (2,570,099
                )
                
                $
                2,690,737
 
  FS-20