ALTIVA FINANCIAL CORP, 10-K, 1999-12-15

ALTIVA FINANCIAL CORP
10-K, 1999-12-15
MISCELLANEOUS BUSINESS CREDIT INSTITUTION

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED AUGUST 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION FILE NUMBER 0-21689
ALTIVA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 88-0286042
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification no.)

1000 PARKWOOD CIRCLE, SUITE 600, ATLANTA, 30339
GEORGIA (Zip code)
(Address of principal executive offices)
</TABLE>

Registrant's telephone number, including area code:
770-952-6700
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)

Indicate by check mark whether the registrant: (1) has 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 [ ]

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 the 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 [ ] NO [X]

As of December 13, 1999, 3,995,347 shares of the registrant's Common Stock
were outstanding. The aggregate market value of Common Stock held by
non-affiliates of the registrant as of December 13, 1999 was approximately
$3,546,747 based on a closing price of $2.19 for the Common Stock as reported on
the NASDAQ SmallCap market on such date. For purposes of the foregoing
computation, all executive officers, directors and 5 percent beneficial owners
of the registrant are deemed to be affiliates. Such determination should not be
deemed to be an admission that such executive officers, directors or 5 percent
beneficial owners are, in fact, affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE
None
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ALTIVA FINANCIAL CORPORATION

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
ITEM NO. NO.
- -------- ----
<C> <S> <C>
PART I
1. Business.................................................... 1
2. Properties.................................................. 15
3. Legal Proceedings........................................... 15
4. Submission of Matters to a Vote of Security Holders......... 16

PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 17
6. Selected Financial Data..................................... 18
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
8. Financial Statements and Supplementary Data................. 47
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 47

PART III
10. Directors and Executive Officers of the Registrant.......... 48
11. Executive Compensation...................................... 50
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 54
13. Certain Relationships and Related Transactions.............. 56

PART IV
14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................. 59
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K and other statements issued or made from
time to time by Altiva Financial Corporation or its representatives contain
statements which may constitute "Forward-Looking Statements" within the meaning
of the Securities Act of 1933 and the Securities Exchange Act of 1934, as
amended by the Private Securities Litigation Reform Act of 1995. Such statements
include statements regarding our intent, belief or current expectations as well
as the assumptions on which such statements are based. Prospective investors are
cautioned that any such Forward-Looking Statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those contemplated by such Forward-Looking Statements.
Important factors currently known to management that could cause actual results
to differ materially from those in Forward-Looking Statements are set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward Looking Statements" below. We undertake no obligation to
update or revise Forward-Looking Statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operating results over
time. Unless otherwise indicated, all information in this report gives effect to
a 1,600-for-1 stock split that occurred in October 1996 and a 1-for-10 reverse
stock split that occurred in March 1999.

GENERAL

Altiva Financial Corporation (formerly, Mego Mortgage Corporation) (the
"Company") is a specialized consumer finance company that funds, purchases,
makes and sells consumer loans secured by deeds of trust on single-family
residences. Historically, the Company retained the right to service a
substantial portion of the loans it has sold. The Company's borrowers generally
do not qualify for traditional "A" credit mortgage loans. Typically, their
credit histories, income or other factors do not conform to the lending criteria
of government-chartered agencies (including GNMA, FNMA, FHLMC) that traditional
lenders rely on in evaluating whether to make loans to potential borrowers. The
Company has one wholly-owned operating subsidiary, The Money Centre, Inc.

The Company makes sub-prime residential mortgage loans for the purpose of
debt consolidation or creating liquidity from the borrower's home equity. The
type of loan products offered by the Company are determined by their
profitability and the liquidity of the after-market for loan sales. As such, the
Company's current product mix is comprised primarily of first and to a lesser
extent second mortgage products which have combined loan-to-value of up to 100%.
The Company exited the home improvement and Equity + loan markets (described
below) because they failed to meet targeted returns and after-market liquidity.

The Company's current loan products are first mortgage loans and home
equity loans ("Home Equity loans") typically secured by first liens, and in some
cases by second liens, on the borrower's residence. In making Home Equity loans,
the Company relies primarily on the appraised values of the borrowers'
residences. The Company determines the loan amount based on the appraised values
and the creditworthiness of the borrowers. These loans generally are used to
purchase residences and refinance existing mortgages.

In prior years, the Company also made high loan-to-value loans ("Equity +
loans") based on the borrowers' credit. These loans typically were secured by
second liens on the borrowers' primary residences. The initial amount of an
Equity + loan, when added to other outstanding senior or secured debt on the
residences, resulted in a combined loan-to-value ratio that averaged 112% during
fiscal 1997 and 1998. The loan-to-value ratios on these loans might have been as
high as 125%. These loans generally were used to consolidate debt and make home
improvements.

The Company's loans are produced by its wholesale and retail divisions. The
wholesale division underwrites and funds loans originated by a network of
pre-approved mortgage brokers which numbered approximately 460 as of August 31,
1999. These brokers submit loan packages to the Company, which in turn funds
loans made to approved borrowers. The loans are made directly by the Company to
the borrower. Historically, the Company produced substantially all of its loans
by purchasing previously closed loans from approved mortgage bankers and other
financial intermediaries and purchasing closed loans insured under the
<PAGE> 4

Title I credit insurance program of the Federal Housing Administration ("Title
I" loans") from its network of home improvement contractors. All loans funded or
purchased by the Company are underwritten and graded by the Company's personnel.
The Company's current operating strategy is to sell all of the loans it produces
for cash to institutional purchasers. The Company currently does not intend to
produce a material amount of Title I loans in the future. The Company's retail
division make loans directly to consumers and charges loan fees to the borrowers
that are intended to offset the total cost of making the loan.

Since the Company began operations in March 1994, it has substantially
changed its business strategy. The timeline below summarizes the changes to its
business.

TIME PERIOD ACTION

From March 1994 through
May 1996 The Company purchased home improvement contracts
Title I loans from mortgage bankers and home
improvement contractors. The Company began
purchasing Equity + loans from mortgage bankers.

March 1996 through
August 1997 The Company sold substantially all of the loans it
purchased in securitization transactions. These
securitization transactions resulted in substantial
negative cash flow, because the cash proceeds from
the sale of the loans were substantially less than
the total cost of producing the loans sold.

September 1997 The Company established a retail division that
began making Equity + loans directly to consumers.

December 1997 The Company began making Home Equity loans, through
its retail division, directly to consumers.

January through June 1998 The Company substantially reduced its loan
production (fundings and purchases) because its
warehouse lender stopped making advances on the
Company's warehouse line of credit after the
Company violated certain borrowing agreements with
its warehouse lender. The Company had used these
warehouse loan advances to fund new loan
production. The Company funded and purchased $68.8
million of loans from January 1998 through June
1998 as compared to $312.0 million of loans in
January 1997 through June 1997.

The Company implemented cost savings primarily
through a 32% reduction in personnel initiated in
January 1998. The Company closed its dealer
division, which traditionally had purchased Title I
and Equity + loans from its network of home
improvement contractors.

The Company substantially increased the sale of its
loan portfolio to generate cash to repay
outstanding indebtedness under its warehouse line,
to pay general and administrative expenses for
personnel retention and to maintain its systems
while it explored alternatives for raising new
capital.

July 1, 1998 The Company completed a recapitalization described
on page 5, (the "Recapitalization") which raised
approximately $84.5 million in additional equity.
By using the $50.0 million in cash proceeds from
the recapitalization, the Company began to increase
the funding and purchase of mortgage loans.

September 1998 A liquidity shortage and a focus by the buyers of
asset backed bonds on U.S. treasury securities
impacted the specialty finance industry.

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<PAGE> 5

October 1998 The Company formulated its recent strategic
initiatives (described on page 5 of this report),
which are designed to return the Company to a
positive cash flow position and to profitability.

January 1999 The Company purchased substantially all of the
assets of a retail production platform in Las
Vegas, Nevada for approximately $3.3 million in
cash.

July 1999 The Company purchased 100% of the outstanding stock
of The Money Centre, Inc., a retail lending
platform located in Charlotte, North Carolina. A
portion of the purchase price was financed by the
issuance of $7,000,000 principal amount 12% Secured
Convertible Notes (the "Convertible Notes") to
Value Partners, Ltd.

THE RECAPITALIZATION

General

Deficits in cash flow combined with a $11.7 million loss recognized by the
Company for the three months ended November 30, 1997 and a $32.5 million loss
recognized by the Company for the six months ended February 28, 1998 resulted in
the Company's violation of certain covenants contained in agreements with its
warehouse lender and some of its other lenders. From January 1998, when the
company violated these covenants with its lenders, until the completion of the
recapitalization on July 1, 1998, the Company's principal activities consisted
of liquidating its portfolio of loans to reduce the Company's borrowings,
maintaining the systems and personnel necessary to enable the Company to resume
operations and exploring alternatives to raise new capital.

Private Placements

In an effort to resume operations, the Company explored a number of
alternatives to raise new capital. These activities resulted in the Company's
recapitalization, completed on July 1, 1998, which provided the Company with
approximately $84.5 million of new equity. Two strategic partners, City National
Bank and Sovereign Bancorp, Inc. ("Sovereign"), each purchased 10,000 shares of
the Company's newly designated Series A Convertible Preferred Stock ("Preferred
Stock") at a price of $1,000 per share. In addition, City National Bank and
Sovereign granted an option, which expires on December 15, 2000, to acquire
666,667 shares of common stock at $15.00 per share. Each of City National Bank
and Sovereign Bancorp were granted a right of first refusal to purchase the
Company in the event the Company's Board of Directors determines to sell the
Company. In addition, one other private investor purchased an aggregate of 5,000
shares of Preferred Stock at a purchase price of $1,000 per share and several
other investors purchased an aggregate of 1.67 million shares of Common Stock at
a purchase price of $15.00 per share. An additional 160,000 shares of Common
Stock were issued to Friedman, Billings, Ramsey & Co., Inc. ("FBR") as the
placement agent's fees for the recapitalization. In addition, the Company paid
FBR an advisory fee of $416,667 in connection with the recapitalization and
reimbursed FBR for out-of-pocket expenses of approximately $250,000. These sales
were made pursuant to private placements.

The net cash proceeds from the recapitalization were approximately $50.0
million. Approximately $5.1 million was used to pay interest on the Company's
outstanding subordinated notes, $2.4 million was used to retire an outstanding
warehouse line, $1.6 million was used for the payment of loan and management
fees and other miscellaneous charges due Mego Financial Corp., the Company's
former parent ("Mego Financial"), and approximately $428,000 was used for the
payment of a portion of the costs of the recapitalization. The balance was used
to originate new loans, for general and administrative expenses and other
corporate purposes.

Exchange Offer

As part of the Recapitalization, the Company completed an exchange offer
(the "Exchange Offer") of 12 1/2% subordinated notes due 2001 (the "New Notes")
and Preferred Stock for any and all of the outstanding $80.0 million principal
amount of the Company's 12 1/2% Subordinated Notes due 2001 (the "Old Notes").
Pursuant to the Exchange Offer, the Company issued approximately 37,500 shares
of Preferred Stock at a price of $1,000 per share and $41.5 million principal
amount of New Notes in exchange for approximately
3
<PAGE> 6

$79.0 million principal amount of the Old Notes. The Company completed the
purchase of all of the remaining Old Notes on October 1, 1998.

STRATEGIC INITIATIVES

The Company's strategic initiatives have been substantially impacted by
recent events in the capital markets and their effect on the specialty finance
industry. There has been a significant reduction in the number of institutions
willing to provide warehouse facilities to mortgage lenders producing home
equity and high loan-to-value loans. Additionally, there has been a reduction in
the number of buyers of senior interests issued in securitization transactions
backed by home equity and high loan-to-value loans, and a concurrent increase in
the yield (and a reduction in the price) demanded by such buyers on the senior
interests they purchase. Finally, the number of institutional investors
acquiring loans similar to the loans the Company produces has declined, along
with the premiums, if any, these investors are willing to pay for these loans.
These events have substantially reduced the liquidity available to companies in
the specialty finance industry to make new loans. With these events in mind the
Company redefined its strategic initiatives in October 1998.

The Company's Primary Focus Is To Produce Home Equity Loans. The Company
has reduced its reliance on Equity + loans with high loan-to-value ratios and
significantly increased the percentage and amount of our business devoted to the
production of Home Equity loans by expanding its network of brokers and
acquiring other entities that produce Home Equity loans. The Company produces
Home Equity loans solely for sale for cash, generally at premiums to their
principal amounts, to institutional purchasers in the secondary market without
recourse for credit losses or risk of prepayment.

Dual Production Platforms Should Lower The Company's Total Loan Production
Costs. While pursuing its mortgage broker wholesale loan programs, the Company
has purchased the assets of a retail loan production facility in January 1999.
Using this facility, the Company is pursuing loan production on a retail
(direct-to-consumer) basis. The Company's wholly owned subsidiary, The Money
Centre, Inc., acquired in July 1999, also produces approximately 20% of its
loans through retail channels. Although a retail loan platform is relatively
expensive, the Company expects it to produce loans at a lower cost than its
wholesale platform. When the Company makes a loan directly to a consumer, it
typically receives loan fees and avoids any premium due when the Company
purchases a loan from its network of mortgage brokers. The Company expects its
dual loan production platform strategy to lower its overall cost of producing
mortgage loans and improve its cash flow.

The Company Intends to Increase Production by Acquiring Other Mortgage
Lending Companies. The Company intends to increase its loan production by
acquiring companies that produce mortgage loans. The Company expects the current
lack of liquidity available in the specialized consumer finance industry to
create acquisition opportunities.

Selling Loans for Cash will be the Company's Primary Method of Loan
Disposition. The Company sells substantially all of the loans it produces for
cash to institutional purchasers in the secondary market. The Company expects
this method of loan sales to generate positive cash flow, because Home Equity
loans can generally be sold for more than their principal amount. To this end,
the Company has expanded the number of institutions with which it has loan
purchase and sale relationships.

The Company Intends to Continue to Implement Cost Saving Measures. The
Company has reduced its workforce from a peak of 475 employees in January 1998
to 267 employees as of November 30, 1999. This reduction and other cost saving
measures have significantly reduced the Company's monthly recurring general and
administrative expenses.

MORTGAGE INDUSTRY

Home Equity

A substantial number of residential homeowners are unable or unwilling to
obtain mortgage financing from conventional financing sources, whether for
reasons of credit impairment, income qualification, credit history, or a desire
to receive loan approval and funding more quickly than that offered by
conventional

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sources. Many of these homeowners have credit scores or debt ratios that
prohibit them from meeting the requirements of lenders who sell loans to FNMA or
FHLMC. Such borrowers seek loans that rely more heavily upon the borrower's
equity in their home, and to a lesser extent, upon the borrower's credit scores
or debt ratios. Because the properties securing such loans are the borrower's
primary residence, the borrower is less likely to default on payment than might
be the case with unsecured debt -- and in the event of the borrower's
bankruptcy, the loan is fully secured. Such loans rely more heavily on accurate
appraisals of the property prior to funding, and are generally made in
loan-to-value ratios of less than 80%.

Home Improvement

As the costs of home improvements escalate, homeowners are seeking
financing as a means to improve their property and maintain and enhance its
value. The National Association of Home Builders Economics Forecast in 1995
estimated that home improvement expenditures will exceed $200.0 billion by the
year 2003. Lenders of home improvement financing typically rely more heavily on
the borrowers' creditworthiness, and ability to pay their debts than on the
value of the collateral. These loans are secured by a real estate mortgage lien
on the improved property. The market for Equity + loans and Home Equity loans
continues to grow, as many homeowners have limited access to traditional
financing sources due to insufficient home equity, limited or impaired credit
history or high ratios of debt service-to-income. The loan proceeds can be used
for a variety of improvements such as large remodeling projects. Borrowers also
have the opportunity to consolidate a portion of their outstanding debt in order
to reduce their monthly debt service.

Debt Consolidation

An increasing number of financial institutions are originating loans to
borrowers who use the proceeds to reduce outstanding consumer finance
obligations. These loans may also be made in conjunction with a home improvement
project where the borrower seeks to enhance the value of his residence and
ultimately reduce his monthly debt service obligations. These consumer finance
obligations are often in the form of unsecured credit card debt, which have high
interest rates and relatively short-term maturities. Under this type of loan,
the consumer uses the loan proceeds to consolidate multiple outstanding
obligations into a single loan. In turn, the consumer receives the benefit of a
lower interest rate and extended loan maturity date, often as high as 25 years,
reducing the amount of monthly debt service payments, and in certain instances
the interest paid may be tax deductible. These loan products are secured by a
mortgage lien on the consumer's primary residence. These liens are typically in
a junior position and when combined with first mortgage liens may exceed the
market value of the subject residence. Debt consolidation loans are made to high
creditworthy borrowers who have a credit history of honoring their financial
obligations on a timely basis. Within the specialty finance industry it is
typical for loans to qualified borrowers to be limited to the amount which, when
added to the outstanding senior debt on the property, will not exceed 125% of
the market value of the property.

COMPANY LOAN PRODUCTS

The Company originates Home Equity loans and, in prior years, Equity +
loans. Home Equity loans generally have a lower loan-to-value ratio than Equity
+ loans. When combined with other outstanding senior secured indebtedness on the
residence, Equity + loans may result in a combined loan-to-value ratio of up to
125%. During fiscal 1998, the Company's Equity + loans had an average
loan-to-value ratio of 112%. The Company lends to borrowers of varying degrees
of creditworthiness. See "-- Loan Processing and Underwriting." The Company's
primary loan products include the following:

<TABLE>
<CAPTION>
HOME EQUITY LOANS EQUITY + LOANS (NONE PRODUCED IN FISCAL YEAR 1999)
- ----------------- --------------------------------------------------
<S> <C>
- - fixed and adjustable rate - fixed rate
- - typically secured by first liens, and to a - secured by a junior lien on the borrowers'
lesser extent, second mortgage liens on the principal residence
borrowers' principal residence
- - terms up to 360 months - terms from 60 to 300 months
- - principal amounts up to $350,000 - principal amounts up to $50,000
</TABLE>

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Home Equity Loans

In furtherance of its strategy to expand its loan products, in December
1997 the Company commenced the production of Home Equity loans to borrowers with
a credit grade ranging from "A" to "D". Loan amounts may range up to a maximum
of $350,000 for "A" credit borrowers with maturities of up to 360 months. The
Company expects the average loan amount to be less than $100,000. The average
loan amount in this program for the fiscal year ended August 31, 1999 was
$65,000. In making Home Equity loans, the Company places increased emphasis on
the underlying collateral value of the residence which is fully supported by an
independent appraisal. The Company intends to pool its Home Equity loans for
eventual sale in the secondary market to institutional purchasers on a
servicing-released basis, without recourse for credit losses or risk of
prepayment, for cash premiums over the principal amount of the loan. The company
believes that there are several advantages to producing Home Equity loans
including:

- the existence of a more liquid secondary market than for Equity + loans

- the larger average principal amount of such loans which are typically two
times greater than that of a Equity + loan

- the lower total costs of producing Home Equity loans from mortgage
brokers than the Company's Equity + loans

Equity + Loans

An Equity + loan is a non-insured debt consolidation or home improvement
loan typically used to retire consumer debt and/or pay for a home improvement
project. All of the Equity + loans produced by the Company are secured by a
mortgage lien on the borrower's principal residence. The Company began producing
Equity + loans through its wholesale division in May 1996. Debt consolidation
loans account for a major portion of the Company's Equity + loan production.
Currently, the Company is not making any Equity + loans.

Historically, the Company focused its Equity + loan program on higher
credit quality borrowers who may have limited equity in their residence after
giving effect to other debt secured by the residence. Most of the Company's
Equity + loans have loan-to-value ratios greater than 100% and, accordingly, the
value of the residence securing the loan generally will not be sufficient to
cover the principal amount of the loan in the event of default. The Company
relied principally on the creditworthiness and income stability of the borrower
and, to a lesser extent, on the underlying value of the borrower's residence for
repayment of its Equity + loans.

LENDING OPERATIONS

Mortgage Brokers

The Company produces loans through its wholesale and retail divisions. The
wholesale division represents the Company's largest source of loan production.
Through its wholesale division, the Company funds loans originated through a
nationwide network of licensed mortgage brokers. Mortgage brokers initiate the
loan application and process necessary underwriting documentation. Mortgage
brokers ordinarily do not fund loans with their own money, but work as agents on
behalf of investors, including mortgage bankers, banks, savings and loans or
investment bankers. The Company funds loans originated by mortgage brokers by
lending the Company's funds to the borrower and closing the loan to the borrower
in the Company's name.

The Company funds loans originated by mortgage brokers on an individual
loan basis, pursuant to which each loan is underwritten by the Company and is
closed in the Company's name. The Company's network of mortgage brokers earn
fees which are paid by the borrower at closing, and which are disclosed and
agreed to by the borrower as required by law. The wholesale division conducts
operations from Atlanta, Georgia and Charlotte, North Carolina. To build and
maintain its networks of mortgage brokers, the wholesale division uses account
executives responsible for developing and maintaining relationships with
mortgage brokers. At August 31, 1999, the Company had a network of 460 active
mortgage brokers.

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Mortgage brokers qualify to participate in the Company's programs only
after a review by the Company's management of the mortgage brokers' reputations
and expertise, including a review of references and financial statements. The
Company's compliance department performs a periodic review of each mortgage
broker, recommending suspension or continuance of a relationship with the
mortgage broker based upon the results of the review. The Company does not
believe that the loss of any particular mortgage broker would have a material
adverse effect upon the Company.

None of the Company's arrangements with its mortgage brokers is on an
exclusive basis. Each relationship is documented by a written agreement,
pursuant to which the Company agrees to fund or purchase loans that comply with
the Company's underwriting guidelines. On each loan produced, the mortgage
broker makes customary representations and warranties regarding, among other
things, the credit history of the borrower, the status of the loan, and its lien
priority, if applicable, and agrees to indemnify the Company for breaches of any
representation or warranty. In the agreements, the mortgage broker makes
customary representations and warranties regarding, among other things, their
corporate status, as well as regulatory compliance, title to the property,
enforceability, status of payments and advances on the loans to be originated.
The mortgage brokers agree, among other things, not to disclose confidential
information of the Company, to provide supplementary financial and licensing
information, maintain government approvals, and to refrain from soliciting the
Company's borrowers. Each agreement also contains provisions requiring that the
mortgage broker indemnify the Company against material misrepresentations or
non-performance of its obligations.

Retail Loans

The Company began making direct-to-consumer Equity + loans in September
1997 and Home Equity loans in December 1997. As previously discussed, the
Company curtailed its retail loan production in January, 1998 due to liquidity
problems. With the purchases of the retail production platforms in Las Vegas in
January 1999 and the purchase of The Money Centre in July 1999, the Company is
now actively pursuing its retail loan production channels. The Company's
marketing strategies are typical of those used in retail production including,
telemarketing, direct mail, television and radio advertising, third-party loan
programs and consumer trade shows. Telemarketing services, both inbound and
outbound, are outsourced to keep the cost of originations to a minimum. A
Company website is currently under construction and may be used to provide
consumer loan applications and information to the public about the Company's
products and services.

By making direct-to-consumer loans, the Company avoids the payment of
premiums that it pays when it purchases closed loans from its network of
mortgage brokers. The loan fees charged by the Company to consumers on the
direct loans are expected to cover the Company's total cost of the underwriting
and making the loan and place the Company on a positive cash flow basis with
respect to the production of direct-to-consumer loans.

The following table provides information about the Company's loan
applications processed and loans produced during the periods indicated. As a
result of recent changes to the Company's business strategy, we do not believe
that this information is indicative of future loan applications and loans
produced.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Principal balance of loans produced:
Wholesale (includes Bankers/Brokers):
Title I loans........................ $ 50,815 9.7% $ 7,081 2.1% $ -- 0.0%
Equity + loans....................... 409,603 77.7 289,354 85.4 236 0.2
Home Equity loans.................... -- 0.0 -- 0.0 97,070 81.5
-------- ----- -------- ----- -------- -----
Total Wholesale................. 460,418 87.4% 296,435 87.5 97,306 81.7
-------- ----- -------- ----- -------- -----
</TABLE>

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<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Dealers(1):
Title I loans........................ $ 47,270 9.0% $ 11,619 3.4% $ -- 0.0%
Equity + loans....................... 19,229 3.6 14,051 4.2 -- 0.0
Home Equity loans.................... -- 0.0 8,940 2.6 -- 0.0
-------- ----- -------- ----- -------- -----
Total Dealers................... 66,499 12.6% 34,610 10.2 -- 0.0
-------- ----- -------- ----- -------- -----
Retail:
Equity + loans....................... $ -- 0.0% $ 7,114 2.1% $ 1,986 1.7%
Home Equity loans.................... -- 0.0 783 0.2 19,820 16.6
-------- ----- -------- ----- -------- -----
Total Retail.................... -- 0.0 7,897 2.3 21,806 18.3%
-------- ----- -------- ----- -------- -----
Total principal amount of loans
produced...................... $526,917 100% $338,942 100% $119,112 100.0%
======== ===== ======== ===== ======== =====
Number of loans produced:
Wholesale (includes Bankers/Brokers):
Title I loans........................ 2,445 12.0% 327 2.9% -- 0.0%
Equity + loans....................... 12,831 62.7 8,848 78.6 7 0.4
Home Equity loans.................... -- 0.0 -- 0.0 1,620 84.1
-------- ----- -------- ----- -------- -----
Total Wholesale................. 15,276 74.7% 9,175 81.5 1,627 84.5
-------- ----- -------- ----- -------- -----
Dealers(1):
Title I loans........................ 3,893 19.0% 975 8.7% -- 0.0%
Equity + loans....................... 1,296 6.3 744 6.6 -- 0.0
Home Equity loans.................... -- 0.0 145 1.2 -- 0.0
-------- ----- -------- ----- -------- -----
Total Dealers................... 5,189 25.3% 1,864 16.5 -- 0
-------- ----- -------- ----- -------- -----
Retail:
Equity + loans....................... -- 0.0% 208 1.8% 52 2.7%
Home Equity loans.................... -- 0.0 17 0.2 247 12.8
-------- ----- -------- ----- -------- -----
Total Retail.................... -- 0.0 225 2.0 299 15.5
-------- ----- -------- ----- -------- -----
Total number of loans
produced...................... 20,465 100.0% 11,264 100.0% 1,926 100.0%
======== ===== ======== ===== ======== =====
Loans serviced at end of fiscal year
(including loans securitized, sold to
investors with servicing retained and
held for sale):
Title I loans........................... $255,446 40.7% $ 23,005 73.7% $ -- 0.0%
Conventional(2)......................... 372,622 59.3 8,217 26.3 -- 0.0
-------- ----- -------- ----- -------- -----
Total loans serviced at end of
fiscal year................... $628,068 100.0% $ 31,222 100.0% $ -- 0.0%
======== ===== ======== ===== ======== =====
</TABLE>

- ---------------

(1) The Company closed its dealer division, which purchased loans from home
improvement contractors, in February 1998.
(2) Conventional loans include Equity + and Home Equity loans.

LOAN PROCESSING AND UNDERWRITING

The Company's loan application and approval process generally is conducted
over the telephone with applications usually received from mortgage brokers and
consumers at the Company's processing facilities located in Atlanta, Georgia;
Las Vegas, Nevada and The Money Centre, Inc. in Charlotte, North Carolina.

8
<PAGE> 11

Upon receipt of an application, the information is entered into the Company's
system and processing begins. The information provided in loan applications is
first verified by, among other things the following:

- written confirmations of the applicant's income and, if necessary, bank
deposits

- a formal credit bureau report on the applicant from a credit reporting
agency

- a title report

- a real estate appraisal, if necessary

- evidence of flood insurance, if necessary

Loan applications are then reviewed to determine whether or not they
satisfy the Company's underwriting criteria, including loan-to-value ratios,
occupancy status, borrower income qualifications, employment stability,
purchaser requirements and necessary insurance and property appraisal
requirements.

The Company has developed its credit index profile ("CIP") as a statistical
credit based tool to predict likely future performance of a borrower. A
significant component of the CIP system is the credit evaluation score
methodology developed by Fair, Issacs & Co. ("FICO"), a consulting firm
specializing in creating default predictive models using a number of variable
components. A FICO score is calculated by a system of scorecards. FICO uses
actual credit data on millions of consumers, and applies complex mathematical
methods to perform extensive research into credit patterns that attempt to
forecast consumer credit performance. The principal components of the FICO
predictive model include a consumer's credit payment history, outstanding debt,
availability and pursuit of new credit, and types of credit in use. Through this
scorecard process, FICO identifies distinctive credit patterns, which correspond
to a likelihood that a consumer will make their future loan payments. The score
is based on all the credit-related data in the credit report. The other major
components of the CIP include debt-to-income analysis, employment stability,
self-employment criteria, residence stability, and whether the applicants use
the premises as their primary residence. By using both scoring models together,
all applicants are considered on the basis of their ability to repay the loan
obligation while allowing the Company to price the loan based on the extent of
the evaluated risk.

The Company's underwriters review the applicant's credit history, based on
the information contained in the application as well as reports available from
credit reporting bureaus, to determine the applicant's acceptability under the
Company's underwriting guidelines. Based on the underwriter's approval authority
level, certain exceptions to the guidelines may be made when there are
compensating factors subject to approval from a more senior designated
authority. The underwriter's decision is communicated to the broker or consumer
depending on the source of the loan and, if approved, the proposed loan terms
are fully explained. The Company attempts to respond to the loan source within
24 hours of receipt of a loan application.

Loan commitments are generally issued for periods of up to 30 days. Prior
to disbursement of funds, all loans are carefully reviewed by funding auditors
to ensure that all documentation is complete, all contingencies specified in the
approval have been met and the loan complies with Company and regulatory
procedures.

Home Equity Loans

The Company produces Home Equity loans through a mortgage broker loan
source network as well as through the Company's retail division. Home Equity
loan mortgages produced under this program are limited to a first or second lien
position. Loan amounts are determined by taking a specific amount of the
collateral value of the property and adjusting the percentage based on the
creditworthiness of the borrower. For example, if the Company's guidelines set a
minimum loan-to-value ratio of 75% ($75,000 for a home with a collateral value
of $100,000), a more creditworthy borrower may be able to borrow in excess of
$75,000, and a less credit worthy borrower may only be able to borrow $65,000.
Full appraisals generated by approved licensed appraisers are required on all
loans within the Uniform Standards of Professional Appraisal Practice (the
"Uniform Standards of Appraisal"). Any loan amount of $250,000 or more would
require two independent appraisals. In connection with Home Equity loans, the
Company seeks commitments from third party

9
<PAGE> 12

financial institutions to purchase the loans in accordance with their respective
guidelines, without recourse for credit losses or risk of prepayment.

As part of the underwriting process, the Company requires an appraisal of
the residence that will be the collateral for the loan. The Company requires the
independent appraiser to be state licensed and certified. The Company requires
that all independent appraisals be completed within the Uniform Standards of
Appraisal as adopted by the Appraisal Standards Board of the Appraisal
Foundation. The Company audits the appraisal for accuracy to ensure that the
appraiser used sufficient care in analyzing data to avoid errors that would
significantly affect the appraiser's opinion and conclusion. This audit includes
a review of housing demand, physical adaptability of the real estate,
neighborhood trends and the highest and best use of the real estate. In the
event the audit reveals any discrepancies as to the method and technique that
the Company believes are necessary to produce a credible appraisal, the Company
will perform additional property data research or may request a second appraisal
to be performed by an independent appraiser selected by the Company in order to
further substantiate the value of the subject property.

The Company may require a full title insurance policy substantially in
compliance with the requirements of the American Loan Title Association. The
applicant also is required to secure hazard insurance and may be required to
secure flood insurance if the mortgaged property has been identified by the
Federal Emergence Management Agency as having special flood hazards.

Equity + Loans

In prior years when the Company was producing Equity + loans, the Company
implemented policies for its Equity + loan program that were designed to
minimize losses by adhering to high credit quality standards. Based on FICO
score default predictors, borrowers were classified by the Company based on its
belief of their credit risk and quality, from "A" credits to "D" credits.
Quality is a function of both the borrowers' creditworthiness and the extent of
the value of the collateral, which was typically a second lien on the borrowers'
primary residence. "A+" credits generally have a FICO score greater than 700. An
applicant with a FICO score of less than 640 would be rated a "C" credit. The
Company did not approve an Equity + loan to a borrower with less than an "A" or
"B" credit grade. All of the Equity + loans originated by the Company were
secured by first or second mortgage liens on single-family, owner occupied
properties.

Terms of Equity + loans produced by the Company, as well as the maximum
combined loan-to-value ratios and debt service to income coverage (calculated by
dividing fixed monthly debt payments by gross monthly income), varied depending
upon the Company's evaluation of the borrower's creditworthiness. In general,
Equity + loans have higher interest rates than Home Equity loans, but are
generally lower than rates changed on credit cards. Borrowers with lower
creditworthiness generally pay higher interest rates and loan origination fees.

QUALITY CONTROL

The Company employs various quality control personnel and procedures in
order to ensure that loan product standards are adhered to and regulatory
compliance is maintained.

In accordance with Company policy, the quality control department reviews a
statistical sample of loans produced each month. This review is generally
completed within 60 days of funding and circulated to appropriate department
heads and senior management. Finalized reports are maintained in the Company's
files for a period of two years from completion. Typical review procedures
include reverification of employment and income, re-appraisal of the subject
property, obtaining separate credit reports and recalculation of debt-to-income
ratios. The statistical sample is intended to cover 10% of all new loan
products. Emphasis is also placed on those loan sources where higher levels of
delinquency are experienced or payment defaults occur within the first six
months of funding. On occasion, the quality control department may review all
loans generated from a particular loan source in the event an initial review
determines a higher than normal number of exceptions. The account selection of
the quality control department is also designed to include a statistical sample
of loans by each processor, closer and underwriter, and thereby provide
management with information as to any material difference from Company policies
and procedures in the loan production process.
10
<PAGE> 13

On a daily basis, a sample of recently approved loans is reviewed to insure
compliance with underwriting guidelines. Particular attention may be focused on
those underwriters who have developed a higher than normal level of exceptions.

TECHNOLOGY SYSTEMS

The Company uses a computerized loan production tracking system that allows
us to monitor the performance of our wholesale and retail divisions. The system
automates various other functions such as Home Mortgage Disclosure Act and HUD
reporting requirements and routine tasks such as decline letters and the flood
certification process. The system also affords management access to a wide range
of decision support information such as data on the approval pipeline, loan
delinquencies by source, and the activities and performance of underwriters and
funders. The Company uses intercompany electronic mail for internal
communications and for receiving loan servicing, collection and delinquency
information from City Mortgage Services on each group of loans being serviced.

The Company's existing loan production system provides for the automation
of the loan production as well as loan file indexing and routing. This system
includes automated credit report inquiries and consumer credit scoring, along
with on-screen underwriting and approval functions. The Company also uses a
system which allows for electronic routing of loan application facsimiles. The
Company recognizes that there have been significant advances made by a number of
mortgage production software vendors in the last year and intends to review a
number of the solutions provided by these vendors. It is the intention of the
Company to upgrade its automation infrastructure by the purchase of a new
software system.

LOAN SERVICING

In connection with the Recapitalization, the Company and City Mortgage
Services, a division of City National Bank, entered into agreements for City
Mortgage Services to purchase the Company's existing loan servicing rights and
service all of the Company's loans held for sale and loans sold on a servicing
retained basis. The Company obtained an option, contingent upon the delivery to
City Mortgage Services of servicing on $1.0 billion of loans under the Flow
Servicing Agreement, to purchase an equity position of up to 20% in any new
entity created should City National Bank determine to spin-off City Mortgage
Services into a separate entity. This option has been terminated by an agreement
between the Company and City National Bank. In the past,the Company's strategy
had been to retain the bulk of the servicing rights associated with the loans it
originated. When the Company sold its loan servicing portfolio to City Mortgage,
the Company eliminated substantially all of its collections and claims staff.

Among the Company's loan servicing activities sold to City Mortgage
Services are processing and administering loan payments, reporting and remitting
principal and interest to the loan purchasers who own interests in the loans and
to the trustee and others with respect to securitizations, collecting delinquent
loan payments, processing Title I insurance claims, conducting foreclosure
proceedings and disposing of foreclosed properties and other administration
duties. In addition, under the loan servicing agreements, the Company is
entitled to receive a certain portion of the servicing fees collected by City
Mortgage Services. The Company will retain responsibility for certain functions
related to initial customer service and continued tax and insurance monitoring.

11
<PAGE> 14

The following table sets forth the Title I Loan and Home Equity and Equity
+ delinquency as of the dates indicated. The Company is not producing a
significant amount of Title I Loans.

<TABLE>
<CAPTION>
AUGUST 31,
------------------------
1997 1998 1999
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Home equity and Equity + delinquency data(1):
31-60 days past due....................................... 0.40% 7.14% 7.23%
61-90 days past due....................................... 0.20 1.52 2.24
91 days and over past due................................. 0.34 24.83 13.50
Total past due.............................................. 0.94 33.49 22.97
Title I loan delinquency data(1):
31-60 days past due....................................... 3.19 7.88 --
61-90 days past due....................................... 1.68 2.39 --
91 days and over past due................................. 7.06 25.00 4.36
Total past due.............................................. 11.93 35.27 4.36
</TABLE>

- ---------------

(1) Represents the dollar amount of delinquent loans as a percentage of the
total dollar amount of each respective type of loan serviced by the Company
(including loans owned by the Company but excluding loans repurchased and
loans contained in securitization 1998-1) as of period end.

SALE OF LOANS

Sales of loans in securitization transactions had historically been the
main source of the Company's revenues and income. In a securitization
transaction, a specific group of the Company's mortgage loans having similar
characteristics, loan type (Equity + or Title I) and loan amounts are pooled for
sale. As part of its new business strategy, the Company is no longer pursuing
securitization transactions but is instead focusing on the sale of whole loans.
The following table sets forth the principal balance of loans sold or
securitized and related gain (loss) on sale data for the twelve months ended
August 31, 1998 and 1999.

<TABLE>
<CAPTION>
COMPONENTS OF GAIN (LOSS)
ON THE SALE OF LOANS
----------------------------------------
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Gain (loss) on the sale of loans in securitization
transactions................................................ $ 62,014 $ (6,187) $ 0
Gain on the sale of loans for cash.......................... 833 11,775 4,403
Mark-to-market adjustment to loans held for sale............ -- (13,674) (3,462)
Write off of loan origination costs......................... (12,573) (12,541) 266
Write off of commitment fee................................. -- (2,849) 0
Amortization of commitment fee.............................. (817) (734) 0
Write off of placement fee.................................. (4,129) (1,153) 0
Interest expense............................................ (205) 0 0
Write off of servicing...................................... -- (1,215) 0
-------- -------- -------
Total............................................. $ 45,123 $(26,578) $ 1,207
======== ======== =======
</TABLE>

The gain (loss) on sale of loans can vary for several reasons, including
the relative amounts of Equity +, Home Equity, and Title I loans, each of which
type of loan had different (i) estimated prepayment rates, (ii) weighted average
interest rates, (iii) weighted-average maturities, and (iv) estimated future
default rates. Typically, the gain on sale of loans through securitizations is
higher than on whole loan sales; however, engaging in securitizations requires
an up-front cash expenditure and can have an adverse effect on a company's
financial condition due to unanticipated write downs in the value of the
residual securities retained by the company which may be caused by, among
things, unanticipated changes in prepayment and default rates assumed by the
company. The Company did no securitizations during the twelve months ended
August 31, 1999.

12
<PAGE> 15

As the holder of the residual securities issued in securitizations, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are calculated as the difference between (a) principal and interest paid
by borrowers and (b) the sum of (i) pass-through interest and principal to be
paid to the holders of the regular securities and interest only securities, (ii)
trustee fees, (iii) third-party credit enhancement fees, (iv) servicing fees,
and (v) estimated loan pool losses. The Company's right to receive the excess
cash flows is subject to the satisfaction of certain reserve or
over-collateralization requirements that are specific to each securitization and
are used as a means of credit enhancement.

COMPETITION

The Company faces intense competition in the business of originating and
selling Home Equity loans and, in the past, to a lesser extent, Equity + loans.
The Company's competitors include other consumer finance companies, mortgage
banking companies, commercial banks, credit unions, thrift institutions, credit
card issuers and insurance companies. Many of these entities are substantially
larger, have lower costs of capital and have considerably greater financial,
technical and marketing resources than the Company. In addition, many of the
financial services organizations that are much larger than the Company have
formed national loan production networks offering loan products that are
substantially similar to the Company's loan programs. The Company believes that
The Money Store, Associates First Capital Corporation, RFC and Household Finance
Corporation are some of its largest direct competitors. The Company competes
principally by providing prompt, professional service to its mortgage brokers
and retail customers and, depending on circumstances, by providing competitive
lending rates.

Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
Additional competition may lower the rates the Company can charge borrowers,
potentially lowering the gain on future loan sales. The Company may face
competition from, among others, government-sponsored entities, such as FNMA,
FHLMA, and GNMA. The Company's competitors may expand their existing or new loan
purchase programs to include Home Equity loans. Entries of government-sponsored
entities into the Home Equity loan market could lower the interest the Company
is able to charge its borrowers and reduce or eliminate premiums on loan sales.
To the extent any of these competitors significantly expand their activities in
the Company's market, the Company could be materially adversely affected.
Fluctuations in interest rates and general economic conditions may also affect
the Company's competition. During periods of rising rates, competitors that have
locked in low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the company's customers to refinance
their loans.

If the Company is unable to remain competitive in these areas, the volume
of the Company's loan production may be materially adversely affected as
borrowers seek out other lenders for their financing needs. Lower loan
production may have an adverse effect on the Company's ability to negotiate and
obtain sufficient financing under warehouse lines of credit upon acceptable
terms. Establishing a broker-sourced loan business typically requires a
substantially smaller commitment of capital and personnel resources than a
direct-sourced loan business. This relatively low barrier to entry permits new
competitors to enter the broker-sourced loan market quickly, particularly
existing direct-sourced lenders which can draw upon existing branch networks and
personnel seeking to sell products through independent brokers. Competition may
be affected by fluctuations in interest rates and general economic conditions.
During periods of rising rates, competitors which have locked in low borrowing
costs may have a competitive advantage.

The Company has historically been dependent on certain of its competitors
to purchase loans it has originated. If such competitors refrained from
purchasing the Company's loans and the Company was unable to replace such
purchasers, the Company's financial condition and results of operations could be
materially adversely affected. The Company continues to seek other purchasers
who are not competitors of the Company.

13
<PAGE> 16

GOVERNMENT REGULATION

The Company's lending activities are subject to the Truth in Lending Act
and Regulation Z (including the Home Ownership and Equity Protection Act of
1994), the Equal Credit Opportunity Act and Regulation B, the Fair Credit
Reporting Act, as amended, the Real Estate Settlement Procedures Act and
Regulation X, the Home Mortgage Disclosure Act of 1975, the Fair Debt Collection
Practices Act and the Fair Housing Act, as well as other federal and state
statutes and regulations affecting the Company's activities. Failure to comply
with these requirements can lead to loss of approved status, demands for
indemnifications of mortgage loan repurchasers, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.

The Company is subject to the rules and regulations of, and examinations
by, HUD, VA and other federal and state regulatory authorities with respect to
originating, underwriting, funding, acquiring, selling and, to the extent that
it engages in servicing activities, servicing consumer and mortgage loans. In
addition, there are other federal and state statutes and regulations affecting
the Company's activities. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria for
loans, prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
The Company is required to submit annual audited financial statements to various
governmental regulatory agencies that require the maintenance of specified net
worth levels. The Company's affairs are also subject to examination, at all
times, by the Federal Housing Commissioner to assure compliance with FHA
regulations, polices, and procedures.

Although the Company is no longer originating a significant volume of Title
I Loans, the Company is a HUD approved Title I mortgage lender and is subject to
the supervision of HUD. In addition, the Company's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities), many of which generally require that the Company be licensed to
conduct its business. This normally requires state examinations and reporting
requirements on an annual basis.

The Federal Consumer Credit Protection Act ("FCCPA") requires a written
statement showing an annual percentage rate of finance charges and requires that
other information be presented to debtors when consumer credit contracts are
executed. The Fair Credit Reporting Act requires certain disclosures to
applicants concerning information that is used as a basis for denial of credit.
The Equal Credit Opportunity Act prohibits discrimination against applicants
with respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from
public assistance program, or the good faith exercise of a right under the
FCCPA.

The interest rates, which the Company may charge on its loans, are subject
to state usury laws, which specify the maximum rate that may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that the Company disclose to its customers prior to execution of the
loans, all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. The Company believes that it is
in compliance in all material respects with such regulations.

SEASONALITY

The Company's production of Home Equity and Equity + loans is seasonal to
the extent that borrowers use the proceeds for home improvement contract work.
The Company's production of loans for this purpose tends to build during the
spring and early summer months, particularly where the proceeds are used for
pool installations. A decline is typically experienced in late summer and early
fall until temperatures begin to drop. This change in seasons precipitates the
need for new siding, window and insulation contracts. Peak volume is experienced
in November and early December and declines dramatically from the holiday season
through the winter months.

14
<PAGE> 17

EMPLOYEES

As of November 1, 1999 the Company had 267 employees. None of the Company's
employees is represented by a collective bargaining agreement. The Company
believes that its relations with its employees are satisfactory.

ITEM 2. PROPERTIES

The Company leases 45,950 square feet of office space at 1000 Parkwood
Circle, Atlanta, Georgia, consisting of two full floors. The Company's corporate
headquarters have been consolidated into 22,975 square feet, consisting of one
floor at this location. The Company has subleased the other floor at this
location. The Company's lease is for an initial six-year term expiring August
2002 with a conditional option to extend the term to August 2007. In addition,
the Company also leases 5,000 square feet of office space for the facilities in
Las Vegas, Nevada on a month-to-month basis and 17,900 square feet of office
space for the facilities in Charlotte, North Carolina for The Money Centre, Inc.
The Company also leases office space on short-term or month-to-month leases in
Waldwick, New Jersey; Blue Springs, Missouri; Austin, Texas; Seattle,
Washington; Waterford, Michigan; Columbus, Ohio; Elmhurst, Illinois;
Bridgeville, Pennsylvania; Denver, Colorado; Phoenix, Arizona; Patchogue, New
York; Woburn, Massachusetts; Dublin, California; Tallahassee, Florida;
Brentwood, Tennessee; Las Vegas, Nevada; Charlotte, North Carolina and Atlanta,
Georgia. The Company believes that all of its facilities are suitable and
adequate for its current operations.

ITEM 3. LEGAL PROCEEDINGS

On October 8, 1998, the Office of the Consumer Credit Commissioner of the
State of Texas issued a denial of the Company's application for licensing as a
secondary mortgage lender. On October 20, 1998, the Company filed an appeal of
the Commissioner's decision. As a result of settlement terms reached with the
Commissioner on May 13, 1999, the Company's secondary mortgage license
application was granted.

On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia by Robert J. Feeney, as a purported
class action against the Company and Jeffrey S. Moore, the Company's former
President and Chief Executive Officer. The complaint alleges, among other
things, that the defendants violated the federal securities laws in connection
with the preparation and issuance of certain of the Company's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the Company's Common Stock between April 11, 1997 and December 18,
1997, and seeks damages in an unspecified amount, costs, attorney's fees and
such other relief as the court may deem proper. On June 30, 1998, the plaintiff
amended the complaint to add additional plaintiffs, and to add as a defendant
Mego Financial, the Company's former parent On September 18, 1998, the Company,
Jeffrey S. Moore, and Mego Financial filed motions to dismiss the complaint. On
April 8, 1999, the court granted each of these motions. In the court's order
dismissing the complaint, the plaintiffs were permitted, upon proper motions, to
serve and file a second amended and redrafted complaint within 30 days. On May
10, 1999, the Plaintiffs moved for leave to file and serve the second amended
and redrafted complaint contemplated in the earlier order. On July 19, 1999, the
Company, Jeffrey S. Moore and Mego Financial filed motions to dismiss the second
amended and redrafted complaint. Those motions are still pending. The Company
believes that it has meritorious defenses to this lawsuit and that resolution of
this matter will not result in a material adverse effect on the business or
financial condition of the Company.

15
<PAGE> 18

same date granted the Company's request for interlocutory appeal to the United
States Court of Appeals for the Sixth Circuit on the question of jurisdiction.
On July 15, 1999, the Company filed an interlocutory appeal to the Court of
Appeals. On September 28, 1999, the Court of Appeals agreed to accept the
Company's interlocutory appeal on the jurisdictional question, and docketed the
appeal. That interlocutory appeal is still pending. The Company believes it has
meritorious defenses to this lawsuit and that resolution of this matter will not
result in a material adverse effect on the business or financial condition of
the Company.

In the ordinary course of its business, the Company is, from time to time,
named in lawsuits. The Company believes that it has meritorious defenses to
these lawsuits and that resolution of these matters will not have a material
adverse effect on the business or financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

16
<PAGE> 19

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company completed its initial public offering on November 19, 1996 and,
until March 23, 1999, the Common Stock traded on the Nasdaq National Market
under the symbol "MMGC". The common stock currently under the symbol "ATVA." On
June 4, 1999 the Common Stock began trading on the Nasdaq SmallCap Market. The
following table sets forth the high and low sales prices of the Common stock as
reported on the Nasdaq National Market or the Nasdaq Small Cap Market for the
periods indicated. The information set forth in the table below has been
adjusted to reflect a one-for-ten reverse stock split that was completed on
March 22, 1999.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1997:
First Quarter (November 19, 1996 to November 30, 1996)...... $120.00 $107.50
Second Quarter.............................................. 157.50 101.25
Third Quarter............................................... 146.25 80.00
Fourth Quarter.............................................. 135.00 90.00
FISCAL YEAR 1998:
First Quarter............................................... $150.00 $ 95.64
Second Quarter.............................................. 102.50 30.00
Third Quarter............................................... 33.75 18.75
Fourth Quarter.............................................. 20.62 10.00
FISCAL YEAR 1999:
First Quarter............................................... $ 15.31 $ 3.75
Second Quarter.............................................. 8.13 3.75
Third Quarter............................................... 8.50 1.00
Fourth Quarter.............................................. 5.50 4.06
</TABLE>

As of December 13, 1999, there were 1,664 holders of record of the
Company's Common stock.

The Company has never paid cash dividends on its Common Stock, and the
Board of Directors currently intends to retain any earnings for use in the
Company's business for the foreseeable future. Any future determination as to
the payment of such cash dividends would depend on a number of factors including
future earnings, results of operations, capital requirements, the Company's
financial condition and any restrictions under credit agreements or the terms of
the Company's outstanding debt securities existing from time to time, as well as
such other factors as the Board of Directors might deem relevant. No assurance
can be given that the Company will pay any dividends in the future.

17
<PAGE> 20

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below has been derived from our
audited financial statements. The financial data as of August 31, 1998 and 1999
and for each of the three years in the period ended August 31, 1999 have been
derived from financial statements audited by the Company's independent auditors
and are included elsewhere in this Annual Report. The financial data as of
August 31, 1995, 1996 and 1997, and for the years ended August 31, 1995 and 1996
have been derived from audited financial statements not included herein. We have
reclassified certain items to conform to prior years. You should read the
selected financial information set forth below in conjunction with the financial
statements, the related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". However, due to substantial
changes to our business and operating strategy, we believe that our historical
financial and operating data are not likely to be indicative of our future
performance, and our results of operation for fiscal 1999, are not comparable to
fiscal 1998.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------------ ----------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain (loss) on sale of loans...... $12,233 $ 16,539 $ 45,123 $ (26,578) $ 1,207
Net unrealized gain (loss) on
mortgage related
securities(1).................. -- 2,697 3,518 (70,024) (3,317)
Loan servicing income, net........ 873 3,348 3,036 999 375
Interest income................... 941 2,104 9,507 14,786 7,569
Less: interest expense............ (468) (1,116) (6,374) (13,162) (7,958)
------- ------------ ----------- ---------- ----------
Net interest income
(expense)............... 473 988 3,133 1,624 (389)
------- ------------ ----------- ---------- ----------
Total revenues (losses)... 13,579 23,572 54,810 (93,979) (2,124)
------- ------------ ----------- ---------- ----------
Expenses:
Provision for credit losses
(benefit), net................. 864 55 6,300 (3,198) --
Depreciation and amortization..... 403 394 672 1,013 1,188
Other interest.................... 187 167 245 439 124
General and administrative:
Payroll and benefits........... 4,163 6,328 13,052 18,582 7,481
Supplies and postage........... 84 284 289 1,281 424
Rent and lease expenses........ 249 338 1,199 1,616 1,407
Professional services.......... 1,043 1,771 2,271 4,783 3,251
Insurance...................... 231 572 558 1,017 853
Sub-servicing fees............. 232 709 1,874 2,160 325
Taxes and licensing fees....... 1,352 164 413
Communications................. 256 293 617 752 499
Bank and wire fees............. -- 422 356
Travel and entertainment....... 107 677 1,005 1,159 571
Legal settlement............... -- -- 1,305
Other.......................... (159) 829 1,566 1,820 1,216
------- ------------ ----------- ---------- ----------
Total costs and
expenses................ 7,660 12,417 31,000 32,010 19,413
------- ------------ ----------- ---------- ----------
Income (loss) before income taxes
and extraordinary item(2)......... 5,919 11,155 23,810 (125,989) (21,537)
Income tax expense (benefit) before
extraordinary item(2)............. 2,277 4,235 9,062 (6,334) (8,249)
------- ------------ ----------- ---------- ----------
Net income (loss) before
extraordinary item................ 3,642 6,920 14,748 (119,655) (13,288)
</TABLE>

18
<PAGE> 21

<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents.................... $ 752 $ 443 $ 6,104 $ 36,404 $ 10,475
Loans held for sale, net (4)................. 3,676 4,610 9,523 10,975 54,844
Mortgage related securities (1).............. 14,483 35,065 106,299 34,830 31,757
Mortgage servicing rights.................... 1,076 3,827 9,507 83 --
Total assets....................... 24,081 50,606 156,554 104,535 135,386
Allowance for credit losses on loans sold
with recourse.............................. 886 920 7,014 2,472 --
Subordinated debt (5)........................ -- -- 40,000 42,693 30,724
Total liabilities.................. 13,300 32,905 103,447 77,941 114,267
Stockholders' equity......................... 10,781 17,701 53,107 26,594 21,119
OPERATING DATA:
Loan production.............................. $87,751 $139,367 $526,917 $338,942 $119,112
Weighted-average interest rate on loan
production................................. 14.55% 14.03% 13.92% 13.89% 11.29%
Loans in servicing portfolio (end of period)
Company-owned
Equity +................................ $ -- $ 922 $ 8,661 $ 8,217 $ --
Home Equity............................. --
Title I................................. 3,720 3,776 902 4,233 --
------- -------- -------- -------- --------
Total Company-owned................ 3,720 4,698 9,563 12,450 --
Securitized
Equity +................................ -- 10,501 363,961 -- --
Home Equity.............................
Title I................................. 88,566 198,990 254,544 18,772 --
------- -------- -------- -------- --------
Total securitized.................. 88,566 209,491 618,505 18,772 --
------- -------- -------- -------- --------
Total servicing portfolio.......... $92,286 $214,189 $628,068 $ 31,222 $ --
======= ======== ======== ======== ========
Cash used in operations...................... $ 3,619 $ 12,440 $ 72,438 $ 39,723 $ 34,984
======= ======== ======== ======== ========
</TABLE>

- ---------------

(1) Mortgage related securities are junior subordinated interests retained by
the Company in pools of mortgage loans sold by the Company in securitization
transactions. SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," required the Company,
as of January 1, 1997, to reclassify excess servicing rights (junior
subordinate interests retained by the

19
<PAGE> 22

Company in pools of mortgage loans sold in transactions similar to a
securitization) to mortgage related securities. The fair value (the dollar
amount on the Company's balance sheet) of the Company's mortgage related
securities was written down from $106.3 million at the end of fiscal 1997 to
$34.8 million at the end of fiscal 1998 and $31.8 million at the end of
fiscal 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations: and Notes 2, 5 and 17 to the Company's
financial statements."
(2) The results of operations of the Company's operations were included in the
consolidated federal income tax returns filed by Mego Financial, through
September 2, 1997, the date the shares of Common Stock of the Company were
distributed by Mego Financial to shareholders in a tax free spin-off. For
more details on this and other transactions with Mego Financial and its
affiliates, see "Certain Relationships and Related Transactions".
(3) Earnings per share for the fiscal years ended August 31, 1995 and 1996 are
not presented because, during these years, the company was a wholly owned
subsidiary of Mego Financial.
(4) Loans held for sale, net includes a valuation reserve which reflects the
company's best estimate of the amount that we expect to receive on the sale
of these loans.
(5) The Company sold $40.0 million principal amount of Old Notes in November
1996 and an additional $40.0 million principal amount of Old Notes in
October 1997. As part of the recapitalization, the Company issued $37.5
million of Preferred Stock and $41.5 million principal amount of New Notes
in exchange for $79.0 million of Old Notes. The Company purchased all of the
Old Notes remaining outstanding as of October 31, 1998. In February 1999,
the Company repurchased $11 million principal amount of New Notes which
resulted in an extraordinary gain, net of income tax, of $4.8 million.

20
<PAGE> 23

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The purpose of Management's Discussions and Analysis of Financial Condition
and Results of Operations is to provide a detailed explanation of the Company's
financial performance in fiscal 1997, 1998, and 1999, the factors that had a
significant impact on the Company's performance in those periods and a
description of any trends affecting financial performance during the periods
discussed. We also describe the amount of the Company's cash on hand at the end
of fiscal 1999, the amount that the Company owed to its lenders on that date,
and the additional amounts, if any, available to be borrowed by the Company. You
should read this section in conjunction with the Company's financial statements,
including the notes to the financial statements.

During the last eight months of fiscal 1998, the Company's operations
consisted principally of (1) liquidating its portfolio of loans to repay
outstanding debt; (2) maintaining its systems and retaining personnel necessary
to resume operations while exploring alternatives to locate new capital; and (3)
designing and beginning to implement its strategic initiatives. During fiscal
year 1999, the Company continued to pursue its strategic initiatives, including
the purchase of lending platforms in Las Vegas, Nevada and Charlotte, North
Carolina.

Due to the substantial changes to the Company's business and operating
strategy effected during the year, we believe that the Company's historical
financial and operating data are not likely to be indicative of the Company's
future performance and the Company's results of operations for fiscal 1999,
1998, and 1997 are not comparable.

GENERAL

The Company substantially expanded its operations during fiscal 1997 and
the first four months of fiscal 1998. During these periods the Company's loan
production was $139.4 million (fiscal 1996), $526.9 million (fiscal 1997) and
$268.5 million (first four months of fiscal 1998). As it expanded its business,
the Company's general and administrative expenses increased from $11.8 million
in fiscal 1996 to $23.8 million in fiscal 1997 and $13.8 million in the first
four months of fiscal 1998.

During these periods, a substantial majority of the Company's loan
production was sold in securitization transactions. The sale of loans by the
Company in securitization transactions, as described below, typically results in
substantial negative cash flow, because the cash proceeds from the sale of loans
in a securitization transaction is substantially less than the Company's total
costs of producing the loans sold. The combination of negative cash flow from
the sale of loans in securitization transactions and increases in general and
administrative expenses caused the Company, historically, to operate on a
substantial negative cash flow basis. The Company's negative cash flow from
operations was $12.4 million for fiscal 1996, $72.4 million for fiscal 1997, and
$49.7 million for the first four months of fiscal 1998.

As a result of a $11.7 million loss in the first quarter of fiscal 1998 and
continuing cash flow deficits, the Company violated certain provisions of its
warehouse line. In February 1998, the warehouse lender requested that the
Company repay a significant portion of the principal balance of the line or be
declared in default. Since a default on the warehouse line would have triggered,
among other things, a default on the Company's $80 million principal amount of
outstanding Old Notes, the Company agreed to reduce the outstanding balance of
the warehouse line from $55.0 million periodically. The Company repaid the
balance on June 29, 1998.

To generate cash to reduce the outstanding balance of the warehouse line
and continue to operate, the Company began to liquidate, through sales for cash,
its mortgage loan portfolio, and the warehouse lender refused to make further
advances under the line. In addition, because the Company's old warehouse line
was used to fund loans produced by the Company prior to their sale, the Company
substantially curtailed its loan production beginning in January 1998. The cash
received from the Company's sale of loans from its loan portfolio was used to
pay down the old warehouse line and other Company borrowings and to pay
substantial general and administrative expenses to retain personnel and maintain
the Company's operations while it sought to locate new capital.

21
<PAGE> 24

On July 1, 1998, the Company completed the recapitalization. A part of the
recapitalization, the Company received $50.0 million in proceeds from the
private placement of approximately 1.67 million shares of common stock at a
price of $15.00 per share and 25,000 shares of Preferred Stock at a price of
$1,000 per share. In addition, the Company issued $37.5 million of Preferred
Stock and $41.5 million principal amount of New Notes in exchange for
approximately $79.0 million principal amount of Old Notes. The recapitalization
resulted in approximately $84.5 million of new equity.

In January 1999, the Company purchased substantially all of the assets of a
retail production platform in Las Vegas, Nevada for approximately $3.3 million
in cash. On July 15, 1999, the Company purchased all of the outstanding stock of
The Money Centre, Inc., a retail production platform headquartered in Charlotte,
North Carolina. The principal components of the purchase price were $7.0 million
of cash, $3.0 million of the Company's Common Stock (600,000 shares valued at $5
per share), and 20% of the pre-tax net cash flow of the post-acquisition
division, for a period not to exceed 48 months. The Company believes these
purchases fit well with its strategic initiatives, and will provide the Company
with a low cost production platform for its retail and direct-to-consumer loans.

In February 1999, the Company repurchased $11 million principal amount of
New Notes which resulted in an extraordinary gain, net of income tax, of $4.8
million.

Although the Company is no longer entering into any securitization
transactions, the following discussion is provided to help the reader understand
the Company's historical results of operations.

SECURITIZATION TRANSACTIONS

Securitization transactions historically had been the main source of the
Company's revenue and income. In a securitization transaction, a specific group
of the Company's mortgage loans having similar characteristics, loan type
(Equity + or Title 1) and loan amounts are pooled for sale. By selling loans in
a securitization transaction, the Company could sell a very large group of loans
at one time. The Company sold an average of $79.7 million of mortgage loans in
each of the five securitizations completed in fiscal 1997. However, the sale of
loans in a securitization transaction generates a significant cash flow deficit,
because the cash received by the Company from the sale of the loans is
significantly less than the Company's total cost of producing the loans sold.

The purchaser of the loans in a securitization transaction is a special
trust created:

(1) to purchase and hold title to the loans;

(2) to sell debt securities or ownership interests backed by the cash
flow to be received on the loans owned by the trust, i.e., the
principal and interest payments from the Company's borrowers; and

(3) to distribute payments over time to the holders of securities
issued by the trust.

Once the trust purchases the loans from the Company it generally has no
recourse against the Company other than for breaches of certain representations
and warranties made by the Company at the time the loans were sold. Likewise,
after the trust purchases the loans from the Company, creditors of the Company
have no recourse against the loans in the event the Company experiences
financial difficulties. The trust purchases the loans from the Company with
money it obtains by selling the securities.

The trust sells both senior "rated" securities and issues an unrated
subordinate residual security to the Company. Only qualified institutional
investors, such as insurance companies, banks and thrifts, can purchase the
senior securities sold by the trust.

Because the Company's Equity + loans are not insured and its Title I loans
have only limited FHA insurance, the trust, as the owner of these mortgage
loans, has credit risk. If the borrowers default on their loans, the trust (as
the owner of the loans) typically will lose its entire investment (except to the
extent of the limited FHA insurance on Title I loans). As a result of these
potential losses, the purchasers of the trust's senior securities are willing to
buy the securities only if they receive additional assurance that they will get

22
<PAGE> 25

paid. This assurance is provided by a rating from the national rating agencies,
such as Standard & Poor's and Moody's.

As a general matter, the more predictable the cash flow to the senior
securities, the higher the rating on the senior securities and the lower the
yield that will be demanded by purchasers of the senior securities relative to
prevailing market yields. The lower the yield paid to the senior security
holders, the greater the positive spread (the "spread") between the interest
paid by the Company's borrowers on the mortgage loans in the trust and (i) the
interest costs of the senior securities sold and (ii) fees paid to the trustee
and the servicer for servicing the mortgage loans. In general, the greater the
spread, the greater the amount of cash flow in excess of the principal and
interest payments to the senior security holders the Company anticipates it will
receive on the mortgage related securities issued to the Company in the
securitization, and the greater their fair value. During fiscal 1997, the
Company sold $398.4 million principal amount of loans in securitization
transactions that had a weighted-average interest rate of 14.0% and in which the
senior securities sold had an initial weighted-average yield of 6.88%.

In order for the senior securities to gain a sufficiently high rating to
attract investors, the rating agencies require that the trust create various
forms of credit enhancement to increase the likelihood that the loans in the
trust will generate sufficient cash flow to pay the interest and principal
payments on the senior securities. Credit enhancement may be achieved in several
ways. The trust may purchase the loans the Company sells in the securitization
transaction for a combination of cash and by issuing the Company a subordinated
residual interest in the securitization. The security issued by the trust to the
Company receives cash flow only after required payments of interest and
principal have been made to the senior security holders, and absorbs any losses
from defaults or foreclosures on the loans in the trust. The junior subordinated
interests issued to the Company in securitization transactions are called
mortgage related securities. Another credit enhancement is a "guaranty," a form
of insurance issued by an insurance company. While some of the Company's
securitizations have included guaranty insurance, the Company has always
received a subordinate mortgage related security and has provided
over-collateralization as credit enhancement in order to achieve acceptable
ratings.

Credit enhancement may also be achieved through "over-collateralization".
National rating agencies will give higher ratings if the senior securities
receive assurance that they will be paid. This is achieved by requiring an
initial level of over-collateralization and by building more
over-collateralization through the trust's retaining cash flow (from the spread)
that would otherwise be paid to the Company on its mortgage related securities.
The initial over-collateralization is created by having the principal amount of
loans sold to the trust be greater than the principal amount (and cash proceeds
from the sale) of senior interests sold. In the five securitization transactions
during fiscal 1997, the trusts purchased $398.4 million principal amount of
loans from the Company, but the trusts sold only $379.2 principal amount of
senior securities.

As borrowers make their monthly mortgage loan payments to the servicer of
the loans in the trust, the payments are remitted by the servicer to a trustee
that collect these payments and make payments of interest and principal to the
holders of the senior securities pursuant to a pre-established schedule. The
priority of the payments is determined by the terms of an indenture.

The mortgage related securities owned by the Company, while offering the
potential of a substantially higher yield than the senior securities, have very
high credit risk. The Company's mortgage related securities absorb all losses
caused by defaults on the mortgage loans backing the securitization. The
Company's mortgage related securities are highly speculative and are subject to
the special risks.

Sample Securitization Transaction

In order to make the concept of negative cash flow that results from the
sale of mortgage loans in a securitization transaction more understandable, the
Company has provided the following example.

THE EXAMPLE BELOW ILLUSTRATES THE MECHANICS OF A SECURITIZATION AND THE
RESULTING NEGATIVE CASH FLOW BUT DOES NOT REFLECT (1) AN ACTUAL SALE OF MORTGAGE
LOANS BY THE COMPANY IN A SECURITIZATION TRANSACTION OR (2) THE ACTUAL AMOUNT OF
NEGATIVE CASH FLOW FROM THE DISPOSITION OF LOANS IN THIS MANNER. ACTUAL RESULTS
WILL BE MATERIALLY DIFFERENT FROM THE EXAMPLE.

23
<PAGE> 26

This example is based on five assumptions:

(1) mortgage bankers originated $100.0 million of mortgage loans
having a weighted average interest rate of 13.98%;

(2) the Company purchased the loan from mortgage bankers for a premium
of $4.0 million (the mortgage bankers received an aggregate of $104.0
million for the loans);

(3) the Company sells the loans to the securitization trust for $97.0
million in cash, the trust sells $97.0 million of senior securities having
a weighted average interest rate of 6.88% and issues a subordinate mortgage
related security to the Company;

(4) the securitization process costs $1.0 million in fees and costs
paid to investment bankers, attorneys, accountants and others; and

(5) Standard & Poor's and Moody's require (A) an initial level of
"over-collateralization" of 3% ($3.0 million) of the original amount of
loans sold in the securitization and (B) that the level of over-
collateralization must reach 6% of the original principal amount of loans
($6.0 million) before the cash flow will be paid by the trustee to the
holder of the subordinate mortgage related security.

In this example, the sale of this pool of $100.0 million of mortgage loans
would result in negative cash flow of $8.0 million. The negative cash flow
results from the following factors:

- $104.0 million, representing the total cost of producing the loans sold
in the securitization minus

- $97.0 million is received by the trust from the sale of the senior
securities, all of which is paid to the Company, minus

- $1.0 million of fees and expenses.

The $3.0 million difference between the $100.0 million of mortgage loans
purchased by the trust and the $97.0 million of senior securities sold by the
trust creates the 3.0% initial over-collateralization. The senior securities
have the "protection" or credit enhancement of the cash flow, principal and
interest received on the $3.0 million of loans plus the spread initially equal
to $7.4 million per year. The spread represents 7.1% (the difference between
13.98%, the interest paid by borrower on the loans in the trust, and 6.88%, the
interest paid by the trust on the senior securities) on the $97.0 million of
loans plus 13.98% on the $3.0 million of loans in the over-collateralization
account. The trust would retain the spread until the over-collateralization
reaches $6.0 million.

After the required level of over-collateralization is achieved, the trustee
pays all of the cash flow, after the payment of interest and principal to the
holders of the senior securities, to the Company's mortgage related securities.
Loan delinquencies and defaults reduce this over-collateralization. If the
amount in the account falls below 6.0% of the amount of loans sold to the trust,
the trustee stops the payment of cash to the Company's mortgage related
securities and retains it until the 6.0% level is again achieved.

ACCOUNTING FOR A SECURITIZATION TRANSACTION

Under generally accepted accounting principles, the sale of mortgage loans
by the Company in securitization transactions requires the Company to recognize
revenue on the completion of the securitization transaction based on the
discounted present value of the estimated future cash flow stream ("gain on sale
accounting") to be received by the Company on its mortgage related securities.
As described in more detail later in this "Management's Discussion and Analysis
of Financial Condition and Results of Operation", the Company determines the
fair value of each of its mortgage related securities using prepayment,
delinquency, default and credit loss assumptions on the mortgage loans backing
each of its mortgage related securities that the Company believes to be
appropriate for the particular mortgage loans. The anticipated cash to be
received by the Company's mortgage related securities from the mortgage loans is
discounted to present value to establish the fair value of the mortgage related
securities shown on the Company's balance sheet.

24
<PAGE> 27

Accounting for specialty finance companies that sell assets in
securitization transactions is particularly complex. The most complex item is
the source of the Company revenues. The Company gets its revenues from the
following items:

- Gain (loss) on the sale of loans;

- Unrealized gain (loss) on mortgage related securities retained in
securitization transactions;

- Interest income, net; and

- Loan servicing income, net.

Gain (Loss) on the Sale of Loans. Historically, the most significant
portion of the Company's revenues comes from Gain (Loss) on the sale of loans.

One component is the Gain (Loss) resulting from the sale of loans in
securitization transactions. Refer to the example the Company used earlier,
where the sale of $100.0 million of our loans in the securitization transaction
resulted in negative cash flow of $8.0 million. Assume the mortgage related
security issued by the trust to the seller of the loans from that securitization
had a fair value of $18.0 million (see discussion on "gain on sale" accounting
above). The seller then would have received a total $115.0 million from the
securitization, consisting of $97.0 million in cash and a mortgage related
security having a fair value of $18.0 million. The total cost of the loans sold
in the securitization were $105.0 million, consisting of the total cost of
producing the loans of $104.0 million and $1.0 million in fees and expenses for
the securitization. In this example, the revenues recorded from this
securitization would be $10.0 million. This amount is divided between two
revenue items, Gain (loss) on sale of loans and Net unrealized gain (loss) on
mortgage related securities. The division of the revenues between these two
items is determined by allocating the total revenues of $10.0 million,
proportionately between the cash proceeds from the sale of the loans, in this
case $97.0 million (allocated to revenues from "Gain (Loss) on the Sale of
Loans"), and the fair value of the mortgage related security issued by the trust
to the seller of the loans in the securitization, in this case $18.0 million
(allocated to revenues from "Unrealized gain (loss) on mortgage related
securities").

Another component represents the gain (loss) on the sale of loans for cash.
It is equal to the Company's total cost (expense) of producing loans including
any premiums paid when the Company purchases loans from its network of mortgage
bankers, minus the amount received by the Company at the time the loans are sold
for cash to an institutional purchaser. For example, if the Company purchased a
$100,000 principal balance loan from a mortgage banker for $104,000 and sold
that loan to an institutional purchaser for $107,000, the Company would
recognize $3,000 of revenue from gain on the sale of loans.

Unrealized Gain (Loss) on Mortgage Related Securities Retained in
Securitization Transactions. Revenues from "Unrealized gain (loss) on mortgage
related securities results from the allocation of total revenues from the sale
of mortgage loans in securitization transactions described immediately above and
from two other sources. Revenues from the amortization on the Company's mortgage
related securities generally, is equal to the amount of cash flow received on
the Company's mortgage related securities. In addition, Unrealized gain (loss)
on mortgage related securities generates negative revenues equal to (i) the
write down, if any, of the fair value of the Company's mortgage related
securities; and (ii) positive revenues from the write up, if any, of those
securities.

Interest Income, Net. Interest income, net, is the interest received by
the Company on its portfolio of mortgage loans prior to their sale plus
accretion interest on its mortgage related securities minus the Company's
interest expense on its borrowings including its subordinated debt, warehouse
line of credit and other borrowings.

Loan Servicing Income, Net. "Loan servicing income, net", are the fees
paid to the Company for servicing loans owned by the Company or loans sold with
servicing retained. The prepayment penalties, if any, received from the
Company's borrowers who repay their loan prior to their scheduled maturity date
are included in Loan servicing income, net. As discussed earlier, the Company
historically retained the servicing on a substantial majority of loans it sold.
The Company uses "net" as a part of the revenues from loan servicing because,
under generally accepted accounting principles, the amount of servicing fees
earned is
25
<PAGE> 28

reduced by the amortization of the Company's servicing rights. The Company
values the anticipated maturity and discounts the anticipated cash flow to its
present value similar to the way the Company determines the fair value of its
mortgage related securities. Historically, the Company's fee for servicing a
loan was 1% of the loan's outstanding principal balance. The fair value of the
anticipated cash flow is recorded on the Company's balance sheet as "Mortgage
servicing rights". As servicing revenues are received, the discounted present
value of the future cash flow is reduced. The amount of the reduction is the
"amortization". Revenue from mortgage servicing rights will not be significant
in the future, because the Company sold all of its rights to City Mortgage
Servicing as part of the recapitalization.

REVISION OF ASSUMPTIONS

The most significant source of the Company's revenues and income
historically has resulted from the sale of loans produced by the Company and
sold in securitization transactions and the fair value of the mortgage related
security issued to the Company by the trusts. The Company projects the
anticipated cash flow to be received from the loans backing its mortgage related
securities based on assumptions of voluntary prepayment speeds and losses. When
prepayments, delinquencies, default and credit losses on the mortgage loans
backing the Company's mortgage related securities exceed the Company's
assumptions, the Company is required to modify its assumptions as to the
prepayments, delinquencies, defaults, and credit loss rates on the mortgage
loans backing its mortgage related securities. This generally reduces the
anticipated cash flow to be received from the mortgage loans and results in a
write down in the fair value of the particular mortgage related securities. The
amount of the write down is treated as negative revenues from unrealized gain
(loss) on mortgage related securities.

The fair value of the Company's mortgage related securities are affected
by, among other things, changes in market interest rates and prepayment and loss
experience of these and similar securities. The Company estimates the fair value
of its mortgage related securities using prepayment and credit loss assumptions
on the mortgage loans backing these securities that the Company believes to be
appropriate for the characteristics (weighted-average interest rate, weighted
average maturity date, etc.) of the mortgage loans backing each particular
securitization. The Company discounts the projected cash flow at the rate it
believes an independent third-party would require as a rate of return.

During the fiscal year ended August 31, 1998, the Company experienced
prepayment activity and delinquencies with respect to its securitized Equity +
loans, which substantially exceeded the levels that had been assumed for the
applicable time frame. As a result of this increase, the Company adjusted the
assumptions previously utilized in calculating the carrying value of its
mortgage related securities. The application of these revised assumptions to the
Company's portfolio of Equity + and Title I loans backing its mortgage related
securities caused the Company to adjust the carrying value of the securities by
approximately $72.1 million during fiscal 1998. The changes in prepayment and
credit loss assumptions also caused the Company to write down the fair value of
its mortgage servicing rights by $1.1 million during fiscal 1998. The fair value
of the Company's mortgage related securities and the fair value of its mortgage
servicing rights are determined in a similar manner.

The Company's assumptions are based on information from a variety of
sources including, among other things, the Company's experience with its own
portfolio of loans, pertinent information from a variety of market sources and
consultations with its financial advisors. However, the Company has not obtained
an independent evaluation of the assumptions utilized in calculating the
carrying value of its mortgage related securities for any period subsequent to
August 31, 1997. To the Company's knowledge, there is not active market for the
sale of these securities. During the year ended August 31, 1998, negative
adjustments of approximately $72.1 million were recognized. During the year
ended August 31, 1999, negative adjustments of approximately $3.3 million were
recognized.

Although the Company believes that it has made reasonable estimates of the
prepayment and default rates in determining the fair value of the Company's
mortgage related securities, the rate of prepayments and defaults utilized are
estimates, and actual experience will vary from these estimates and such
variances may be material. There can be no assurance that the prepayment and
loss assumptions used to determine the fair

26
<PAGE> 29

value of the Company's mortgage related securities and mortgage servicing rights
will remain appropriate for the life of the loans backing such securities. If
actual loan prepayments or credit losses vary from the Company's estimates, the
fair value of the Company's mortgage related securities and mortgage servicing
rights, if any, may have to be adjusted through a charge or credit to earnings.

The Company's revised prepayment assumptions used for Title I loans at
August 31, 1999 reflect an annualized rate of 23% of the life of the portfolio.
Actual annualized prepayment rates of the Title I loans backing the Company's
mortgage related securities were 17.46% for the fiscal year ended August 31,
1999 and 22.5% for the fiscal year ended August 31, 1998. These loss assumptions
for Title I loans at August 31, 1999 are based on a historical "migration"
analysis of delinquent loans that the Company anticipates will become "defaulted
loans." The assumed default rate and the restricted rates are shown below in the
following model and historical default rates:

<TABLE>
<CAPTION>
HISTORICAL DEFAULT RATES
FOR THE PERIODS ENDED
AUGUST 31, 1999
ASSUMED DEFAULT -------------------------------
DELINQUENCY (DAYS) STATUS RATES 12 MONTHS 6 MONTHS 3 MONTHS
- ------------------------- --------------- --------- -------- --------
<S> <C> <C> <C> <C>
31-60................................... 2-10% 1.85% 1.49% 1.98%
61-90................................... 20-25 14.69 12.83 16.82
91-120................................... 50 40.58 38.09 43.09
121-150................................... 80 62.56 59.33 68.47
151-180................................... 95 82.25 80.40 90.92
Over 180................................... 100 97.68 97.25 100.00
</TABLE>

The Company assumes that a defaulted Title I loan will result in loss of
95.0% of the loan balance and that all Title I insurance has been exhausted. On
a cumulative basis, the assumptions anticipate aggregate losses of 11.9% of the
original principal balance of Title I loans.

The prepayment assumptions for Equity + loans were also increased at the
end of fiscal 1998 to reflect an annualized prepayment rate of 4.5% in the first
month following the completion of the securitization with the annualized rate
increases in level monthly increments so that by the 18th month the annualized
prepayment rate is 18.75%. The annualized prepayment rate is maintained at that
level through the 36th month at which time it is assumed to decline in level
monthly increments to 15.25% by the 43rd month, and is maintained at 15.25% for
the remaining life of the portfolio. The weighted average annualized prepayment
speed for the loans backing the Company's mortgage related securities was 14.89%
during fiscal 1999 and 17.4% during fiscal 1998.

The loss assumptions for the Equity + loans backing the Company's mortgage
related securities have also been increased to reflect losses commencing in the
second month following a securitization and building in level monthly increments
until a 4.25% annualized loss rate is reached in the 15th month. The annualized
loss rate is maintained at that level through the 43rd month at which time it is
assumed to decline in level monthly increments to 4.0% at month 48 and is
maintained for the life of the portfolio. On a cumulative basis this model
assumes aggregate losses of approximately 16% of the initial principal balance
of Equity + loans backing the Company's mortgage related securities. The actual
losses on Equity + loans backing the Company's mortgage related securities
during fiscal 1999 and 1998 were approximately 3.53% and 2.5% or the original
principal balance, respectively.

The Company utilized a 16% discount rate at August 31, 1998 and 1999 to
discount to their present sale of the cash flow streams to be received by the
Company on its mortgage related securities. During fiscal 1997, the Company used
an annual weighted average discount rate of 12% for Title I and Equity + loans
and generally utilized annual prepayment assumptions ranging from 1% to 15%,
annual estimated losses of up to 1.75% of Equity + loans resulting in an
aggregate loss of 15%, and estimated losses on Title I loans based on the then
current migration analysis and assuming recoveries of 20% after exhaustion of
insured reserves.

27
<PAGE> 30

RESULTS OF OPERATIONS

Fiscal Year Ended August 31, 1999 Compared to Fiscal Year Ended August 31,
1998

The Company substantially reduced its loan production after January 1, 1998
as compared to the first four months of fiscal 1998. In the last eight months of
fiscal 1998, the Company focused on (1) liquidating its loan portfolio for cash
to reduce its indebtedness while it explored alternatives to raise new capital
and (2) initiating new strategic initiatives to return the Company to
profitability. The Company did not begin to produce significant loan volume
until July 1999. Such production was attributable to production by The Money
Centre, Inc. which was acquired by the Company in July 1999. As a result, the
Company does not believe that its results for the fiscal year ended August 31,
1999 are comparable to the Company's results for the fiscal year ended August
31, 1998.

The Company produced $119.1 million of loans during fiscal 1999 compared to
$338.9 million in fiscal 1998 and $526.9 in fiscal 1997.

The Company's loan production by month during fiscal 1997, 1998 and 1999 is
illustrated in the chart below:

[Chart reflecting monthly loan production in fiscal 1997, fiscal 1998 and fiscal
1999 (in millions of dollars) as follows:]

fiscal year 1997 fiscal year 1998 fiscal year 1999
<S> <C> <C> <C>
September $13.6 $62.5 $ 0.9

October $24.0 $71.2 $ 1.1

November $24.9 $66.2 $14.2

December $32.7 $68.6 $ 8.1

January $34.5 $34.2 $ 6.0

February $44.0 $24.5 $ 3.3

March $52.9 $ 7.9 $ 5.6

April $59.5 $ 1.4 $ 1.9

May $61.6 $ 0.5 $ 2.0

June $59.5 $ 0.2 $ 1.8

July $55.4 $ 1.0 $33.3

August $64.3 $ 0.6 $43.4
</TABLE>

Net Revenues. Net losses decreased $91.9 million to $2.1 million in fiscal
year ending August 31, 1999 from net losses of $94.0 million during fiscal year
ending August 31, 1998. The loss for the twelve months ended August 31, 1998 was
primarily the result of continued low loan production and difficulty in selling
closed loans. The decrease in net losses for the twelve months ending August 31,
1999 resulted from the reduction in the Company's business while the Company
pursued its new strategic initiatives and from a substantially lower mark down
on the Company's mortgage related securities during this period. Additionally,
during fiscal year 1998, sales of loans were generally made for cash, and were
for less than par value, thus contributing to losses. Loan originations during
the fiscal year ended August 31, 1999 were $119.1 million, as compared to
originations of $338.9 million during the twelve months ended August 31, 1998.
Sales of loans during the twelve months ended August 31, 1999 were $106.1
million, while during the fiscal year ended August 31, 1998 they were $347.6
million.

Gain (loss) on sale of loans totalled $1.2 million during the twelve months
ended August 31, 1999 from a loss of $26.6 million during the twelve months
ended August 31, 1998, representing a total increase of $27.8 million. The gain
was primarily the result of higher premiums received on a lower volume of loans
sold in the twelve months ended August 31, 1999 compared to the twelve months
ended August 31, 1998.

28
<PAGE> 31

Net unrealized loss on mortgage related securities decreased to a loss of
$3.3 million during the twelve months ended August 31, 1999 from a loss of $70.0
million during the twelve months ended August 31, 1998, a change of $66.7
million. The valuation adjustments recorded for the fiscal year ended August 31,
1999 were $3.3 million.

Loan servicing income, net, decreased $624,000 to $375,000 during the
twelve months ended August 31, 1999 from $999,000 during the twelve months ended
August 31, 1998. This decline was the result of the elimination of most of the
servicing revenue previously earned by the Company due to the sale of its
servicing rights to City Mortgage Services in fiscal 1998.

Interest income on loans held for sale and mortgage related securities, net
of interest expense, decreased $2.0 million to an expense of $389,000 during the
twelve months ended August 31, 1999 from income of $1.6 million during the
twelve months ended August 31, 1998. The decline was primarily the result of a
decrease in the average balance of loans held for sale during the fiscal year
ended August 31, 1999 to $26.9 million compared to the average during the fiscal
year ended August 31, 1998 of $41.9 million.

Total General and Administrative Expenses. General and administrative
expenses decreased $14.2 million to $18.1 million for the twelve months ended
August 31, 1999 from $33.8 million for the twelve months ended August 31, 1998.
This decline can be attributed to reductions in business activity, along with
the cost reductions implemented by management since the Company's
Recapitalization in June 1998.

Payroll and benefits expense decreased $11.1 million to $7.5 million for
the twelve months ended August 31, 1999 from $18.6 million for the twelve months
ended August 31, 1998. This reduction can be attributed to staff reductions
which have occurred over the past year.

Supplies and postage expense declined $857,000 to $424,000 during the
fiscal year ended August 31, 1999 from $1.3 million during the fiscal year ended
August 31, 1998. This decrease can be attributed to the reduction in business
between the two periods and to steps taken to control costs.

Professional services expense decreased $1.5 million to $3.3 million during
the twelve months ending August 31, 1999 from $4.8 million during the twelve
months ended August 31, 1998. This decline is attributed to the elimination of
the management overhead fees formerly paid to Preferred Equities Corporation
("PEC"), reduced expenditures for inspection fees due to the reduction of loan
originations and reduced employee recruiting costs, offset, in part, by
increased legal and audit fees.

Sub-servicing fees paid decreased $1.8 million to $325,000 during the
twelve months ended August 31, 1999 from $2.2 million during the twelve months
ended August 31, 1998. This decline resulted from a decrease in loan volume.

During the twelve months ending August 31, 1999, travel and entertainment
expenses decreased $588,000, to $571,000 during the twelve months ending August
31, 1999 from $1.26 million during the twelve months ended August 31, 1998. This
reduction can be attributed to reductions in business and to cost control
measures implemented over the past year.

Net Loss. The Company incurred a net loss before taxes and extraordinary
items of $21.5 million during the twelve months ended August 31, 1999, compared
with a net loss before taxes of $126.0 million for the twelve months ended
August 31, 1998. An income tax benefit of $6.3 million and $8.2 million was
recorded in fiscal 1998 and 1999, respectively. In February 1999, the Company
repurchased $11.0 million of the Company's outstanding New Notes, which resulted
in a gain, net of tax, of $4.8 million. As a result of the above, the Company
incurred a net loss of $8.5 million in fiscal 1999 compared to a loss of $119.7
million for fiscal 1998.

Fiscal Year Ended August 31, 1998 Compared to Fiscal Year Ended August 31,
1997

Net Revenues. Net revenues were negative $94.0 million during fiscal 1998
compared with positive $54.8 million during the fiscal year ended August 31,
1997. The Company's revenues were determined largely by special accounting
requirements that required the Company to recognize significant revenue on loans
sold in securitization transactions ("gain on sale") even though these
transactions generated negative cash flow.
29
<PAGE> 32

Gain (loss) on sale of loans decreased from a gain of $45.1 million for the
fiscal year ending August 31, 1997 to a loss of $26.6 million for the fiscal
year ending August 31, 1998. This decline was primarily attributable to the
substantially lower amount of loans sold in securitization transactions in
fiscal 1998 due to the continuing cash flow deficits of the Company. The Company
also experienced a decline in the revenues from loans sold for cash. This
decline may have been attributed in part by the market's knowledge that the
Company was liquidating its loan portfolio to pay down the Company's lenders.
The Company's revenues from gain (loss) on the sale of loans for cash in fiscal
1998 were also impacted by a lower of cost or market write down of $13.7 million
of the Company's $21.9 million principal amount of loans in its portfolio at the
end of fiscal 1998. The loans in the Company's portfolio at August 31, 1998
primarily had document deficiencies or the borrowers were delinquent in their
loan payments. The lower of cost or market adjustment is based on the Company's
estimate of the proceeds to be received when these loans are sold. The Company
believes that liquidity shortages in the specialty finance industry may have
also hurt the market value of these loans. In fiscal year ended August 31, 1998,
the Company also had a loss of $4.0 million when it terminated its master
warehouse line as part of the Recapitalization.

Revenues from net unrealized gain (loss) on mortgage related securities
were negative $70.0 million in fiscal 1998 compared with a positive $3.5 million
in fiscal 1997. Substantially all of fiscal 1998's negative revenues resulted
from a write down of $73.0 million in the value of the Company's mortgage
related securities. The write down was required because prepayment, delinquency,
default and credit loss rates of the Equity + and Title I loans backing these
securities substantially exceeded the assumptions the Company used to value its
mortgage related securities at the end of fiscal 1997. These loans were produced
by the Company in prior periods. Additionally, in response to recent adverse
changes in the liquidity and market value of these and other similar asset
backed residual interests, the Company increased the rate used to discount to
present value the anticipated cash flow to be received on its mortgage related
securities from 12% the end of fiscal 1997 to 16% at the end of fiscal 1998.

Loan servicing income, net, decreased from $3.0 million in fiscal 1997 to
$1.0 million is fiscal 1998. The decrease was a result of negative revenues of
$1.1 million from a write down in the fair value of the Company's mortgage
servicing rights in the third quarter of fiscal 1998 due to an increase in the
Company assumptions of prepayment, delinquency, default, and credit loss rates
on the loans in the Company's servicing portfolio, which reduced the discounted
present value of the Company's anticipated servicing revenues on those loans. In
addition, in fiscal 1998 the Company had negative loan servicing revenues of
$703,000 from the loss on the sale of the Company's servicing rights to City
Mortgage Services as part of the recapitalization.

Revenues from net interest income decreased from $3.1 million is fiscal
1997 to $1.6 million in fiscal 1998. Interest income increased from $9.5 million
in fiscal 1997 to $14.8 million in fiscal 1998. The increase was due to the sale
of the Company's 1998 loan production in cash transactions over a period of
time, compared with the sale of fiscal 1997 loan production in quarterly
securitization transactions. In addition, the Company earned approximately
$304,600 in interest in fiscal 1998 from the short-term investment of $50.0
million in proceeds from the recapitalization.

Interest expense in fiscal 1998 was substantially higher than interest
expense in fiscal 1997 due primarily to additional interest expense of $3.5
million on the Company's Old Notes as a result of the October 1997 issuance of
$40.0 million principal amount of 12 1/2% subordinated notes. In addition, the
Company borrowed an aggregate of $15.0 million secured by certain of its
mortgage related securities in the first quarter of fiscal 1998. The principal
amount of these borrowings were outstanding for all of fiscal 1998 and for only
a portion of fiscal 1997.

Provision for Credit Losses. The net provision for credit losses decreased
$9.5 million to income of $3.2 million for fiscal 1998 from losses of $6.3
million for fiscal 1997. The decrease in the provision for credit losses was due
to the decrease in the volume of loans produced and the ratio of Equity + loans
to Title I loans produced during fiscal 1998 compared to fiscal 1997. An
allowance for credit losses is not established on loans sold in securitization
transactions, because the Company typically does not have recourse obligations
for these losses. Estimated credit losses on loans sold in securitization
transactions are considered in the Company's determination of the fair value of
its mortgage related securities. The provision for credit losses is based upon

30
<PAGE> 33

periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, borrowers' ability to repay, collateral values, and
estimated FHA insurance recoveries on Title I loans originated and sold.

Total General and Administrative Expenses. Total general and
administrative expenses increased $10.0 million or 42.0%, to $33.8 million
during fiscal 1998 from $23.8 million during fiscal 1997. The increase was
primarily a result of increase costs of professional services due to (1)
increased outside legal and audit expenses associated with additional securities
filings; (2) the recapitalization; (3) amendments to existing debt agreements;
(4) increased loan servicing expenses due to an increase in loans serviced; and
(5) increased payroll and benefits related to the hiring of additional personnel
to support the Company's expansion in the first quarter of fiscal 1998.

Payroll and benefits expense increase $5.5 million, or 42.4% to $18.6
million during fiscal 1998 from $13.1 million during fiscal 1997 primarily due
to an increased number of employees prior to January 1998 and expenses
associated with the reduction in the Company's workforce. Although the number of
employees decreased to 134 at August 31, 1998 from 405 at August 31, 1997, the
average number of employees was higher during fiscal 1998 than fiscal 1997.

Rent and lease expenses increased $417,000 or 34.8% to $1.6 million for
fiscal 1998 from $1.2 million for fiscal 1997 due to annual escalation in rent
and expiration of tenant discounts the Company enjoyed in fiscal 1997 for office
space at the Company's corporate offices.

Professional services increased $2.5 million or 110.6%, to $4.8 million for
fiscal 1998 from $2.3 million for fiscal 1997 due to increased outside legal and
audit expenses associated with the Company's private placement of $40.0 million
principal amount of Old Notes in fiscal 1998, additional securities filings,
amendments to existing debt agreements and higher consulting and management
services expenses. A substantial portion of the increase in professional
services was due to actions taken by the Company subsequent to January 1, 1998
as a result of its adverse financial position and the recapitalization.

Sub-servicing fees increased $286,000, or 15.3% to $2.2 million for fiscal
1998 from $1.9 million for fiscal 1997 due primarily to a larger average loan
servicing portfolio, partially offset by a lower sub-servicing rate paid to the
sub-servicer in the latter part of fiscal 1998.

Other general and administrative expenses increased $1.3 million, or
125.6%, to $2.4 million during fiscal 1998 from $1.1 million during fiscal 1997
due primarily to increased expenses related to the expansion of facilities
related to the Company's business expansion at the beginning of fiscal 1998.

Net Loss. The Company had a $126.0 million loss before income taxes for
fiscal 1998 compared to income of $23.8 million for fiscal 1997. An income tax
expense of $9.1 million was provided for in fiscal 1997 while an income tax
benefit of $6.3 million has been provided for in fiscal 1998.

As a result of the above, the Company incurred a net loss of $119.7 million
for fiscal 1998 compared to net income of $14.7 million for fiscal 1997.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Sources

Cash and cash equivalents were $10.5 million at August 31, 1999, compared
to $36.4 million at August 31, 1998. The Company's principal cash requirements
arise from loan production and payments of operating and interest expenses.

As of December 10, 1999, the Company's cash and cash equivalents were
$909,000. During the period from August 31, 1999 to December 10, 1999, the
Company's cash and cash equivalents decreased from $10.5 million to $909,000.
This decrease was attributable to operating performance being less than forecast
and unexpected losses on the sale of loans during the period. As a result of the
decrease, the Company's cash and cash equivalents currently on hand will not be
sufficient to enable to Company to sustain operations past December 31, 1999. In
addition, as a result of this decrease, the Company currently lacks sufficient
liquidity to pay its outstanding debts, including accrued interest on the
Company's outstanding indebtedness.

31
<PAGE> 34

In order to improve its liquidity situation, the Company has obtained
commitments from the holders of $28 million principal amount of its outstanding
New Notes to exchange such outstanding New Notes for $12.0 million principal
amount of new 12% Secured Notes due August 2006 (the "Exchange Notes") and for
the equivalent of 22 1/2% of the Company's outstanding Common Stock based on the
number of fully-diluted shares of Common Stock (excluding out-of-the money
options). In addition, the holders of such New Notes have agreed to waive the
payment of approximately $2.0 million of accrued interest payable to them in
December 1999 under the terms of the Indenture governing the New Notes. Under
the terms of the Exchange Notes, no interest will be payable to the noteholders
by Altiva until June 15, 2001, although interest will accrue from the date of
issuance. Completion of the exchange is contingent on the finalization of
documentation related to the exchange, and the issuance of Common Stock to the
current holder of New Notes may require the approval of the Company's
stockholders under the rules of the Nasdaq Stock Market. Altiva expects that the
discount in the principal amount of notes outstanding and the waiver of the
interest payment will result in the reduction of the Company's projected cash
expenditure by $3.4 million over the next twelve months.

In addition, the Company has received a commitment from Value Partners,
Ltd. to purchase an additional $7.0 million principal amount of Convertible
Notes. Consummation of this sale of Convertible Notes is subject to the
execution of mutually agreed upon amendments to the Secured Note Purchase
Agreement between the parties and other related agreements.

Assuming completion of both the exchange and the issuance of the additional
Convertible Notes, the Company expects to have sufficient cash and cash
equivalents to fully fund its operations and meet its obligations until August
1999. On an ongoing basis, the Company expects to generate additional liquidity
through increased production and controlling expenses.

There can be no assurances that the exchange of the New Notes and the
issuance of the additional Convertible Notes will be consummated. A failure to
consummate these transactions may cause defaults with respect to the Company's
outstanding indebtedness or lead the Company to become insolvent. In addition,
there is no guarantee that the Company will not suffer additional unforeseen
events that will cause further liquidity shortages.

During fiscal 1999 the Company had five significant sources of financing
and liquidity: (1) the balance of the cash proceeds from the sale of preferred
stock and common stock in the recapitalization which totaled approximately $4.2
million at August 31, 1999; (2) a warehouse line of $25.0 million with Sovereign
(the "Sovereign Warehouse Line"); (3) a warehouse line of $25 million with First
Collateral; (4) a warehouse line of $30 million with Centura Bank; and (5) sales
of loans in the institutional whole loan market. The Sovereign Warehouse Line
was reduced to $25.0 million from $50.0 million as of March 31, 1999.

The Company's liquidity and capital resources are impacted by certain
material covenant restrictions existing in the Indenture governing the Company's
outstanding New Notes. These covenants include limitations on the Company's
ability to incur certain types of additional indebtedness, grant liens on its
assets and to enter into extraordinary corporate transactions. The Company may
not incur certain additional indebtedness if, on the date of such incurrence and
after giving effect thereto, the Consolidated Leverage Ratio would exceed 1.5:1,
subject to certain exceptions. At August 31, 1999, the Consolidated Leverage
Ratio was 1.62:1.

The Sovereign Warehouse Line had an original termination date of December
29, 1998 and was renewable, at Sovereign's option, in six-month intervals for up
to five years. During December 1998, the Sovereign Warehouse Line was renewed at
$50.0 million and was reduced to $25.0 million on March 31, 1999 through
December 31, 1999. The Sovereign Warehouse Line may be increased with certain
consents and contains pricing/fees which vary by product and the dollar amount
outstanding. The Sovereign Warehouse Line is secured by specific loans held for
sale and includes certain material covenants including maintaining books and
records, providing financial statements and reports, maintaining its properties,
maintaining adequate insurance and fidelity bond coverage and providing timely
notice of material proceedings. As of August 31, 1999, the Company had
approximately $19.3 million outstanding under the Sovereign Warehouse Line.

32
<PAGE> 35

to 1.75%, depending on the age of the loan, and expired on November 30, 1999 and
was not renewed as the Company feels it can obtain another or extend the
existing facility with equal or more favorable terms. The First Collateral
facility provides for a warehouse line of credit of up to $25.0 million, accrues
interest at LIBOR rate 2.25% + .375%. The Company is currently negotiating an
extension on the First Collateral warehouse line. There have been no
restrictions on the use of this facility during these negotiations. The
facilities are secured by specific loans held for sale and includes certain
material covenants including maintaining books and records, providing financial
statements and reports, maintaining its properties, maintaining adequate
insurance and fidelity bond coverage and providing timely notice of material
proceedings. The outstanding balance of these facilities as of August 31, 1999
totaled $23.2 million and $19.0 million, respectively.

In April 1997, the Company entered into a pledge and security agreement
with Greenwich Capital Financial Products for an $11.0 million revolving credit
facility. The amount that can be borrowed under the agreement was increased to
$15.0 million in June 1997 and $25.0 million in July 1997. This facility was
secured by a pledge of certain of the Company's interest only and residual class
certificates relating to securitizations carried as mortgage related securities
on the Company's Statements of Financial Condition, payable to the Company
pursuant to its securitization agreements. As of August 31, 1999, approximately
$1.7 million was outstanding under the agreement. The agreement, which was
originally scheduled to mature in December 1998 was extended until December
1999. On December 2, 1998, the Company obtained an amendment to the agreement
whereby the financial institution waived its right to declare an event of
default of borrower due to the Company's failure to comply with the minimum
required net worth and the debt to net worth ratio as of August 31, 1998.
Additionally, the minimum net worth test was amended such that the Company is
required to maintain a net worth equal to or greater than 75% of the Company's
net worth as of the end of the preceding fiscal quarter. Additionally, the
Company agreed to pay down the outstanding borrowings from $10.0 million at
August 31, 1998 to $6.0 million at December 31, 1998 and subsequently agreed to
pay the remaining $6.0 million in equal monthly payments during calendar 1999.
All remaining amounts outstanding under the agreement were paid off in December
1999.

In October 1997, the Company entered into a credit agreement with Textron
Financial which converted into a term loan in May 1998 with monthly amortization
derived from the cash flow generated from the respective mortgage related
securities pledged as collateral. This term loan bears interest at the prime
rate plus 2.5%, and matures in October 2002. The credit agreement governing the
October 1997 revolving line of credit includes certain material covenants. These
covenants include restrictions relating to extraordinary corporate transactions,
maintenance of adequate insurance and complying with certain financial tests.
These tests include complying with a minimal consolidated adjusted tangible net
worth and that the consolidated adjusted leverage ratio shall not exceed 3:1. As
of August 31, 1998, the Company's consolidated adjusted tangible net worth was
$54.1 million below the minimum required and the consolidated adjusted leverage
ratio was 0.53:1. On December 9, 1998, the parties agreed to temporarily amend
the borrowing base definition for the period from September 30, 1998 through
April 30, 1999 by increasing the borrowing base from 50% to 55%. On May 1, 1999,
the borrowing base returned to 50%. The minimum consolidated tangible net worth
covenant was also adjusted, commencing retroactively, as of September 30, 1998
and the Company agreed to paydown the line by approximately $405,000 (the amount
exceeding the applicable maximum amount of tranche credit) and pay an
accommodation fee of $10,000. As of August 31, 1999, the Company's consolidated
adjusted tangible net worth was $19.4 million above the minimum required and the
consolidated adjusted leverage ratio was 2.188:1. As of August 31, 1999,
approximately $3.8 million was outstanding under the agreement.

In August 1999, the Company million principal amount of Convertible Notes
$7.0 million in secured notes. The proceeds were used to acquire The Money
Centre, Inc. The facility is secured by a pledge of certain of the Company's
mortgage related securities. The loan balance under this agreement bears
interest at 12% and matures in August 2006. As of August 31, 1999, $7.0 million
was outstanding under the agreement. The credit agreement includes certain
material covenants. These covenants include restrictions relating to the
security, maintenance and existing credit and servicing agreements. The holders
of the notes may, per the provisions therein, convert to Common stock at a
specified conversion price if such right is granted at the next

33
<PAGE> 36

annual shareholder meeting. The Company may also, per the provisions of the
agreement, redeem the notes prior to maturity.

Liquidity Uses

The Company's liquidity is primarily used to originate loans, pay operating
and interest expenses and historically, to fund the negative cash flow from the
sale of loans in securitization transactions. Substantially all of the loans
produced by the Company are sold. The Sovereign Warehouse Line is to be repaid
primarily from the proceeds from the sale of loans collateralizing the line in
the secondary market. The Company resumed the production of new loans on July 1,
1998. The Company's cash requirements necessitate continued access to sources of
warehouse financing and sales of loans in the secondary market for premiums.

The Company generally expects to incur monthly operating expenses of
approximately $1.0 million. The Company currently does not have sufficient cash
or cash equivalents on hand to fund such expenses after December 1999.
Management expects that consummation of the sale of an additional $7.0 million
principal amount of Convertible Notes to Value Partners, Ltd., as described
above under "-- Liquidity Uses," will provide the Company with sufficient
liquidity to pay its operating and capital expenditures through May 31, 1999.
There can be no assurance that such funds will be sufficient to pay such
expenditures or that unforeseen events will not cause additional liquidity
shortages. The Company may effect a reduction in its real-estate lease
expenditures through the subletting of all or a portion of its current office
space. If the Company subleases all of its current office space, the Company
intends to relocate its corporate offices to another location suitable for the
Company's needs.

In January 1999, the Company purchased substantially all of the assets of a
retail production platform in Las Vegas, Nevada for approximately $3.3 million
in cash.

In February 1999, the Company repurchased $11.0 million of the Company's
New Notes, which resulted in an extraordinary gain, net of income tax, of $4.8
million.

In July 1999, the Company purchased all of the outstanding stock of The
Money Centre, Inc. The principal components of the purchase price were $7.0
million of cash, 600,000 shares of Common Stock valued at $5 per share, and 20%
of the pre-tax net cash flow of the post-acquisition divisions, for a period not
to exceed 48 months.

Net cash used in the Company's operating activities for the fiscal years
ended August 31, 1998 and 1999 was $39.7 million and $35.0 million,
respectively. During the fiscal year ended August 31, 1998 and 1999, cash
provided by financing activities amounted to $70.4 million and $16.5 million,
respectively.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's various business activities generate liquidity, market and
credit risk:

- Liquidity risk is the possibility of being unable to meet all present and
future financial obligations in a timely manner.

- Market risk is the possibility that changes in future market rates or
prices will make the Company's positions less valuable.

- Credit risk is the possibility of loss from a customer's failure to
perform according to the terms of the transaction.

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<PAGE> 37

Compensation for assuming these risks is reflected in interest income and
fee income. The following table provides information as of August 31, 1999 about
the Company's mortgage related securities and other financial instruments that
are sensitive to changes in interest rates. The table presents sensitivity
analysis associated with fluctuations in prepayment speeds, increase or decrease
in defaulted loans and the discount rates associated with valuing the
securities.

[Chart reflecting effect of changing interest rates on the Company's
assumptions with respect to default rates, discount rates and prepayment rates
on the Company's financial instruments with exposure to interest rate risk:]

<TABLE>
<CAPTION>
% Change in
Interest Rate Default Rate Discount Rate Prepayment Rate
- ------------- -------------- -------------- ---------------
<S> <C> <C> <C>
+5% $ 7,678,000.75 $24,502,324.16 $28,079,035.55
+3% $17,230,044.52 $26,723,705.46 $28,669,981.20
+1% $22,583,836.57 $29,221,756.53 $29,428,379.99
0% $30,588,224.28 $30,588,224.28 $30,588,224.28
-1% $34,876,203.91 $32,041,379.05 $30,948,614.74
-3% $43,865,266.46 $35,236,513.33 $31,591,046.09
-5% $53,352,139.24 $38,872,357.72 $32,185,336.84
</TABLE>

Although the Company is exposed to credit loss in the event of
non-performance by the borrowers, this exposure is managed through credit
approvals, review and monitoring procedures into the extent possible restricting
the period during which unpaid balances are allowed to accumulate.

As of August 31, 1999 the net fair value of all financial instruments held
by the Company with exposure to interest rate risk was approximately $31.8
million. The potential decrease in fair value resulting from a hypothetical 500
basis point increase in interest rates would be approximately $23.8 million.

There are certain shortcomings inherent to the Company's sensitivity
analysis. The model assumes interest rate changes are instantaneous parallel
shifts in the yield curve. In reality, changes are rarely instantaneous.
Although certain assets and liabilities may have similar maturities or periods
to repricing, they may not react in line with changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate with changes in market interest rates while interest rates on other
types of assets and liabilities may lag behind changes in market rates.
Prepayments on the Company's mortgage related instruments are directly affected
by a change in interest rates. However, in the event of a change in interest
rates, actual loan prepayments may deviate significantly from the Company's
assumptions. Further, certain assets, such as adjustable rate loans, have
features, such as annual and lifetime caps that restrict changing the interest
rates both on a short-term basis and over the life of the asset. Finally, the
ability of certain borrowers to make scheduled payments on their adjustable rate
loans may decrease in the event of an interest rate increase.

EFFECTS OF CHANGING PRICES AND INFLATION

The Company's operations are sensitive to increases in interest rates and
to inflation. Increased borrowing costs resulting from increases in interest
rates may not be immediately recoverable from prospective purchasers. The
Company's loans held for sale consist primarily of fixed-rate long-term
obligations the interest rates of which do not increase or decrease as a result
of changes in interest rates charged to the Company. In addition, delinquency
and loss exposure may be affected by changes in the national economy. See Note 5
to the Company's financial statements.

RECENT ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments

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<PAGE> 38

and for hedging activities. It requires the entity to recognize all derivatives
instruments as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in fair value of these designated derivatives ("hedge accounting") depends on
the intended use and designation. An entity that elects to apply hedge
accounting is required to establish at the inception of its hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity's approach to managing risk. In June
1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of SFAS No. 133" for fiscal
quarters within all fiscal years beginning after June 15, 2000. The Company has
not yet evaluated the effect of adopting SFAS 133.

In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by Mortgage Banking Enterprise" ("SFAS 134"), which allows the
reclassification of mortgage-related securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, as required by FASB 115, to either available for sale or held
to maturity based upon the Company's ability and intent to hold those
investments. SFAS 134 is effective for fiscal 1999. The Company is no longer
securitizing any of its mortgage loans and has continued to account for its
remaining securitized mortgages as trading securities.

IMPACT OF THE YEAR 2000 ISSUE

The term "Year 2000 Issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's". These problems
may also arise from other sources as well, such as embedded computer chips
contained in devices and special codes in software that make use of the date
field.

The Company has developed plans to address the Year 2000 issues. The
Company's present Year 2000 plan consists of five phases:

(1) Inventory of business critical information technology assets;

(2) Assessment of repair requirements:

(3) Repair or replacement;

(4) Testing of systems;

(5) Creation of contingency plans in the event of Year 2000 failures.

As of August 31, 1999, the Company had completed all five phases of the
Year 2000 plan for its own business critical information technology assets
including its accounting systems, loan origination systems, word and data
processing systems, customer telephone service center, and business machines.
The Company is relying upon the representations of third party vendors as to the
Year 2000 readiness of certain of its software, its business machines, such as
copiers and facsimile machines, and facilities, such as physical office
locations. The Company does not have plans for testing embedded computer chips
contained in devices, or in special codes in software that make use of the date
field incidental to their operations. A contingency plan has been created in the
event of Year 2000 failures.

As of August 31, 1999, the Company had spent approximately $99,000 to
purchase or upgrade portions of its own hardware/software. As part of its Year
2000 plan, the Company accelerated the schedule of implementation of certain of
the Company's previously planned information technology projects. Therefore, the
Company does not expect to defer any specific information technology project as
a result of the implementation of its Year 2000 plan.

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<PAGE> 39

The Company has completed an inquiry of substantially all of its strategic
partners, vendors and third party entities with which it has material
relationships, and compiled data related to their Year 2000 plans or assurances.
The Company's reliance upon certain third parties, vendors and strategic
partners, such as City Mortgage Services, for loan servicing, investor
reporting, document custody and other functions, means that their failure to
adequately address the Year 2000 issue could have a material adverse impact on
the Company's operations and financial results. The Company has received
assurances from its two major strategic partners, City Mortgage Services and
Sovereign Bancorp, that they have implemented plans to address the Year 2000
issue. The Company has not evaluated these assurances for their accuracy and
adequacy, or developed contingency plans in the event of their failure. The
Company has received general assurances from a substantial number of its current
vendors or other third parties. However, the Company has not evaluated these
assurances for their accuracy and adequacy, or developed contingency plans in
the event of their failure. Potential risks related to their failure to address
Year 2000 issues are not reasonably estimable by the Company.

The Company also relies upon certain government entities (such as U.S.
Department of Housing and Urban Development and various state regulatory
agencies), utility companies, telecommunication service companies and other
service providers outside of the Company's control. There can be no assurance
that such suppliers, government entities, or other third parties will not suffer
a Year 2000 business disruption. Such failures could have a material adverse
effect on the Company's financial condition and results of operations.

In addition, the Company's credit risk associated with its borrowers may
increase as a result of borrowers' individual Year 2000 issues. Negative impact
of Year 2000 issues upon borrowers may result in borrowers' inability to pay,
increases in delinquent loans, and a corresponding loss of residual income to
the Company. While at this time, it is not possible to calculate the potential
impact of such increased delinquent loans of defaults, it is believed that
increased delinquencies and defaults would have a material adverse impact on the
financial condition of the Company.

Because of uncertainties, the actual effects of the Year 2000 issue on the
Company may be different from the Company's current assessment. The effect on
the Company's results of operations if the Company, its strategic partners,
vendors or other third parties are not fully Year 2000 compliant is not
reasonably estimable.

FORWARD LOOKING STATEMENTS

This Form 10-K and other statements issued or made from time to time by Altiva
Financial Corporation or its representatives contain statements which may
constitute "Forward-Looking Statements" within the meaning of the Securities Act
of 1933 and the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. Such statements include statements
regarding our intent, belief or current expectations as well as the assumptions
on which such statements are based. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth in below. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
to future operating results over time.

Liquidity Risks

Our business operations require continued access to adequate cash to fund,
purchase and make mortgage loans, to pay interest on, and repay, our debts and
to pay general and administrative expenses. We are currently dependent on the
Sovereign Warehouse Line to fund, purchase and make mortgage loans before we
sell them. If we successfully increase loan production, we will need
increasingly larger amounts of cash for our operations.

- We are currently experiencing a liquidity shortage

During the period from August 31, 1999 to December 10, 1999, our cash and
cash equivalents decreased from $10.5 million to $909,000. This decrease was
attributable to operating performance being less than

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<PAGE> 40

forecast and unexpected losses on the rule of loans during the period. As a
result of the decrease, the Company's cash and cash equivalents currently on
hand will not be sufficient to enable the Company to sustain operations past
December 31, 1999. In addition, as a result of this decrease, the Company
currently lacks sufficient liquidity to pay its outstanding debts, including
accrued interest on the Company's outstanding indebtedness. While we are
attempting to relieve our current liquidity shortage through the refinancing of
our existing New Notes and the sale of additional Convertible Notes as described
above in " -- Liquidity and Capital Resources," there can be no assurances that
we will be successful in this effort. A failure to improve our current liquidity
position will have a serious adverse effects on the Company, which may include:

(1) defaults by the Company with respect to the Company's outstanding
indebtedness, including its New Notes and Convertible Notes;

(2) an inability by the Company to implement its strategic plan; and

(4) insolvency

Risks Related to the Sale of Loans

We historically have principally relied on selling loans in securitization
transactions to generate cash. As a major part of our strategic initiatives, we
intend to generate positive cash flow mainly by selling loans to institutional
purchasers in the secondary market. Under the terms of the Flow Purchase
Agreement with Sovereign Bancorp (the "Flow Purchase Agreement"), we have agreed
to sell, and Sovereign Bancorp has agreed to buy, up to $100.0 million of our
mortgage loans per quarter through September 2001. Sovereign Bancorp also has a
right of first refusal to buy the balance of our loans, subject to our mutual
agreement as to the purchase terms. The right of first refusal could make it
more difficult for us to sell our loans to others if Sovereign Bancorp decides
not to acquire some of our loans or if we cannot negotiate mutually acceptable
terms for the purchase of our loans.

The value of, and markets for, selling our loans are dependent on, among
other things:

(1) the willingness of banks, thrifts and other institutional purchasers to
acquire Home Equity and Equity + loans;

(2) the premiums over the principal amount of these loans that
institutional purchasers are willing to pay; and

(3) the resale market for our loans.

The markets also are affected by more general factors, including general
economic conditions, interest rates and government regulations. These factors
currently affect, and may continue to affect, our ability to sell loans in the
secondary market for acceptable prices within reasonable time frames. A
reduction in the secondary market for first mortgage loans, home equity loans
and high loan-to-value loans would hurt our ability to sell loans in the
secondary market as well as our liquidity and future loan production. We cannot
predict whether the liquidity of the secondary market will continue to diminish
in the future.

- Risks Associated with the Need For Alternative Financing

If the amounts available under the Sovereign Warehouse Line to fund our
loan production prior to its sale are insufficient to enable us to produce the
volume of loans necessary for us to operate profitably or on a positive cash
flow basis, we will have to seek out other sources of liquidity. This may
include additional warehouse financing and debt and/or equity securities
offerings. The Sovereign Warehouse Line terminates at the end of February 2000
and is renewable, at Sovereign's option, in six-month intervals for up to five
years. Sovereign may terminate the Sovereign Warehouse Line if we do not sell
them $100.0 million of loans in each fiscal quarter beginning with the calendar
quarter ending March 31, 1999. If that happens, we cannot guarantee that
additional financing will be available on favorable terms, or at all. If we are
not successful in maintaining or replacing existing financing or obtaining
additional financing, we would have to reduce our activities.

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<PAGE> 41

Except for certain financial covenants in a pledge and security agreement
entered into in April 1997, we are currently complying with the Sovereign
Warehouse Line and agreements with our other lenders.

As of December 1, 1999, we went into default with respect to our
outstanding New Notes due to our failure to make a scheduled interest payment.
We have 30 days to cure this default without penalty. As discussed above in
"-- Liquidity and Capital Resources" we are currently attempting to refinance
our New Notes. There can be no assurances that their refinancing will be
successful.

Before the recapitalization, we were in violation of our warehouse
agreement, the indenture governing the Old Notes and agreements with our other
lenders. If we breach or violate any covenant or condition contained in our
borrowing arrangements, we might be unable to obtain funding for our operations
which would have a material adverse effect on us.

Some of our borrowing arrangements limit the amount of advances that can be
made to us. These limitations are based on the value of, and the delinquency
experience relating to, our mortgage related securities pledged to the lender. A
decrease in the value of the pledged securities would reduce the amount of funds
that we can borrow under the facilities, requiring us to pay down the loans.

- Risk of Violation of Representations Made to Loan Purchasers

We make representations and warranties to the purchasers of our mortgage
loans regarding compliance with laws, regulations and program standards and the
accuracy of information. Under certain circumstances we could become liable for
damages or be required to repurchase a loan if there has been a breach of these
representations or warranties. We generally receive similar representations and
warranties from our loan sources. If these representations and warranties are
breached, we would be subject to the risk that a loan source will not have the
financial capacity to repurchase loans or that a loan source will not otherwise
respond to our demands. We cannot guarantee that we will not experience losses
due to breaches of representations and warranties in the future.

Risks Associated with Implementing Our New Strategic Plan

Since February 1998, our business strategy has been substantially revised.
Our new business strategy has three main components:

(1) focusing on producing Home Equity loans and reducing our historical
focus on the production of Equity + loans;

(2) increasing loan production by acquiring other mortgage lending
companies; and

(3) selling loans produced by us for cash to institutional purchasers in a
secondary market instead of selling loans in securitization transactions.

During the three months ended August 31, 1998, we produced only $1.9
million principal amount of mortgage loans. For the year ended August 31, 1999,
we produced only $ million principal amount of mortgage loans. Our ability to
increase loan production will depend on many factors, including our ability to:

- successfully acquire and integrate the operations of other mortgage
lending companies

- offer attractive loan products to prospective borrowers

- successfully market our loan products

- establish, maintain and expand relationships with mortgage brokers and
bankers

- obtain and maintain increasingly larger lines of credit to fund loans
prior to their sale

- access capital markets

- attract and retain qualified funding, quality control and other personnel

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<PAGE> 42

You should consider our future prospects in light of the risks, delays,
expenses and difficulties frequently encountered by an early-stage business in a
highly-regulated, competitive environment. We cannot guarantee that we will
implement successfully our new business strategy, develop our current operations
in a timely or effective manner, or generate significant revenues, positive cash
flow or profits.

Risks Associated with Our Management Team

We cannot guarantee that the our management team will be able to operate
effectively or implement successfully our new strategic plan. Our new management
team's ability to manage our growth as we implement our strategic initiatives
depends upon many factors, including their ability to:

(1) maintain appropriate procedures, policies and systems to ensure that
our loans perform at least in accordance with industry standards;

(2) satisfy our need for additional financing on reasonable terms;

(3) manage the costs associated with expanding our infrastructure,
including systems, personnel and facilities; and

(4) operate profitably and on a cash flow positive basis.

If management cannot execute successfully our new business strategy, it
will have a material adverse effect on our financial condition, results of
operations and cash flow.

Our expansion and development largely will be dependent upon the continued
services of the senior members of our new management team including Champ
Meyercord, our Chief Executive Officer, and J. Richard Walker, our Executive
Vice President and Chief Financial Officer. The loss of the services of Messrs.
Meyercord or Walker for any reason could have a material adverse effect on us.
In addition, our future success will require us to recruit and retain additional
key personnel, including additional sales and marketing personnel. We do not
maintain key person life insurance on any members of senior management.

Performance of Future Acquisitions

As part of our business strategy, we intend to acquire other mortgage
lending companies. By acquiring other mortgage lending companies, we believe we
can expand our loan production, while avoiding the time and expense required to
build new mortgage loan production platforms. The value of these companies
generally will be in their ability to immediately produce mortgage loans at a
low cost. This type of value will typically be a substantial portion of the
assets acquired and it is classified under generally accepted accounting
principles as an intangible. Generally acceptable accounting principles require
us to amortize (write off) expenses related to goodwill and other intangible
assets that we acquire. This will reduce our earnings. Future acquisitions may
also result in dilutive issuances of equity securities and our incurrence of
additional debt. All of these factors could have a material adverse effect on
our financial condition, results of operations and cash flows.

Future acquisitions would involve numerous additional risks, including:

- difficulties in the integration of the acquired company's operations,
services, products and personnel

- entry into markets in which we have little or no direct prior experience

- the potential loss of the acquired company's key employees

Mortgage lending companies that we acquire in the future may not perform in
accordance with our expectations. We cannot predict whether we will identify
acquisition opportunities, whether we can negotiate acquisitions on favorable
terms or whether any acquisition will result in profitable operations in the
future or be successfully integrated with our existing business.

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<PAGE> 43

Acquisitions in which all or a portion of the purchase price is in shares
of Common Stock would require, in certain cases, the written consent of each of
City National Bank and Sovereign. We cannot guarantee that we would be able to
obtain any such consent.

Risks Associated with Mortgage Backed Securities

- Risks Related to our Junior Interest

We historically have sold the greater portion of our Equity + and Title I
loans in securitization transactions. As a result, we are at risk because these
loans back our mortgage related securities. In a securitization transaction, the
cash flow from the mortgage loans backing the securitization, principal and
interest is first paid to the owners of the senior interests according to a
pre-established schedule of required interest and principal payments. Payment of
cash flow to our mortgage related securities is junior to the scheduled
principal and interest payments to the senior interests.

If the borrowers do not make their payments on the loans backing a
securitization or if the payments are insufficient to make required principal
and interest payments on the senior interests, the amounts that would be paid to
us will be used to cover the shortfall. This would reduce or in some cases
eliminate the stream of revenues that would have been paid to us on our mortgage
related securities. If payments received from the loans backing a securitization
are less than the amounts we anticipated at the time we sold the loans in a
securitization transaction, we may be required to write down the fair value of
our mortgage related securities retained in that securitization. This would
result in a charge to earnings. We cannot guarantee that estimates of future
losses on loans backing our mortgage related securities will be adequate in the
future.

- Risk of Write Down of the Value of Mortgage Backed Securities due to Poor
Performance of Mortgage Loans

We had to write down the fair value of our mortgage related securities
during fiscal 1998. This write down resulted from unexpectedly high rates of
prepayments, delinquencies, default, and credit losses. As a result, we
substantially increased the anticipated prepayment rates, delinquency rates,
default rates and credit losses on the mortgage loans backing our mortgage
related securities. The new assumptions significantly decreased the cash flow we
expected to receive on these securities in the future, which required us to
reduce the fair value of our mortgage related securities to $34.8 million on
August 31, 1998 compared to $106.3 million on August 31, 1997.

In the future, we may have to make additional reductions in the carrying
value of our mortgage related securities. We cannot guarantee that the
prepayment rate, delinquency rate, default rate, and credit losses on the
mortgage loans backing the securities will not increase above the levels we
currently anticipate. If we have to further write down these securities' value,
we may incur losses in the quarter when we write them down. We may then violate
the net worth covenants in our borrowing agreements. Any of these events could
have a material adverse effect on our financial condition and operations. For
additional details concerning the valuation of our mortgage backed securities,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Securitization Transactions" and Notes 2, 5 and 17 to our
financial statements located later in this prospectus.

- Risks Related to Over-Collateralization

As part of the sale of loans in securitization transactions, we are
required to establish over-collateralization and/or build over-collateralization
levels by retaining distributions of excess cash flow otherwise payable to us on
our mortgage related securities. Excess cash flow results from the positive
difference between the higher interest rate paid by our borrowers on the
mortgage loans sold in the securitization and the lower yield paid to the owners
of the senior interests in the trust established to own the loans sold by us.
Over-collateralization serves as credit enhancement for the owners of the senior
interests and is available to absorb losses realized on loans backing the
securitization. Were it not for these over-collateralization requirements, we
would be able to use the excess cash flow in our operations. Because of those
requirements, if borrowers default on principal and interest payments on their
loans, the securitization trust holding the

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<PAGE> 44

mortgages would have to use part of the over-collateralization to pay the owners
of the senior interests. This could delay, reduce or eliminate the excess cash
flow otherwise payable to us on our mortgage related securities.

- Risk Related to Interest Rate Spread

During fiscal 1997, we sold $398.4 million principal amount of mortgage
loans, that had a weighted-average interest rate of 14.0%, in securitization
transactions. The $390.1 million principal amount of senior interests sold to
institutional investors as part of these securitizations had an initial
weighted-average interest rate of 6.88%. The $8.3 million difference between the
amount of mortgage loans sold and the amount of senior interests sold creates
the initial over-collateralization. The 7.1% difference between the interest
paid by the borrowers and the interest paid to the owners of the senior
interests (the "spread") declines over time primarily because of payoffs
(including defaults) of the loans backing the securitization. The initial spread
would be equal to 7.1% times $390.1 million, or $27.7 million annually plus
interest at 14.0% on the $8.3 million principal amount of loans in the
over-collateralization account. We use the spread and the cash flow from the
loans in an initial over-collateralization to reduce the principal balances of
the senior interests or fund the additional over-collateralization.

The initial over-collateralization and retained amounts are determined by
the entity that, as a condition to obtaining insurance, issues any guarantee of
the related senior interests and/or by the rating agencies as a condition to
obtaining the desired rating on the senior interests. If we use the spread and
the cash flow from the loans in an initial over-collateralization in this
manner, we will continue to be subject to the risks of faster than anticipated
rates of voluntary prepayments, delinquencies, defaults and credit losses on
foreclosure on the mortgage loans backing our mortgage related securities that
we sold in prior securitizations.

In addition, using the spread to fund reserves delays or in some cases
eliminates cash distributions that we would be entitled to receive on our
mortgage related securities. For a detailed explanation of excess cash flow,
mortgage related securities and securitization transactions, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Securitization Transactions".

- Risks Related to Loan Repurchases

We agree to repurchase or replace loans that do not conform to our
representations and warranties at the time we sell the loans. If we were
required to repurchase or replace loans, we cannot guarantee that the loans
repurchased or replaced repurchased could be sold at a price equal to our total
cost of acquisition. For additional details, see "Business -- Loan Servicing"
and "-- Sale of Loans" and Note 2 to our financial statements.

Risks from the Sale of Servicing Rights

We historically have sold substantially all of our mortgage loans with
servicing retained. This means that we retained the right to service the loans.
As part of the recapitalization, we sold our existing mortgage loan servicing
rights, including the right to service all of the mortgage loans backing our
mortgage related securities, to City Mortgage Services. To the extent that City
Mortgage Services is ineffective in servicing these loans, we would experience
increased delinquencies, defaults and credit losses, which would have an adverse
effect on us. Consequences could include the additional write downs of the fair
value of our mortgage related securities and a restriction on our ability to
access capital markets for our future financing requirements.

The delinquency and default rates on the mortgage loans backing our
mortgage related securities has increased significantly since we sold the
servicing rights on these loans to City Mortgage Services. In the past, this
increase in delinquencies and defaults has caused us to write down the fair
value of these securities. We cannot guarantee that City Mortgage Services will
perform up to industry standards, which could result in the adverse consequences
described above. If City Mortgage Services does not perform well, we have the
right to terminate City Mortgage Services. However, we would have to find a new
servicer for these loans after such a

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<PAGE> 45

termination. We might be unable to find an appropriate servicer or, if
identified, we may not be able to hire such servicer on favorable terms.

Interest Rate Risks

Changes in interest rates affect our business by decreasing the demand for
loans during periods of higher interest rates and increasing prepayment rates
during periods of lower interest rates. The profits we realize from loans are,
in part, a function of the difference between the fixed long term interest rates
we charge to borrowers and the adjustable short term interest rates we pay on
the Sovereign Warehouse Line, which we use to fund loans until we sell them.

Generally, short-term rates are lower than long-term rates. We benefit from
the positive interest rate differential during the time we own the loans pending
their sale. During the period from 1994 to the present, the interest rate
differential was high. Interest rates are not predictable or controllable, and
we cannot predict whether the positive interest rate differential will continue
in the future. A change in the differential could have a material adverse effect
on our financial position, results of operations and cash flows.

Changes in interest rates during the period between the establishment of
the borrowers' interest rate on a loan and the sale of the loan affect the
revenues we realize. As part of our loan production process, we issue loan
commitments (sometimes referred to as "interest rate locks") for periods of up
to 30 days to mortgage bankers and brokers. The period of time between the
closing of a loan and the sale of the loan generally ranges from 10 to 90 days.
Increases in interest rates during these periods will result in lower gains (or
even losses) on loan sales than would be recorded if interest rates had remained
stable or had declined. We intend to expand our loan production, increase the
amount of our borrowings under the warehouse lines of credit and increase the
amount of loans held for sale, which will increase our exposure to the risk of
interest rate increases.

Increases in interest rates also may require us to write down the fair
value of our mortgage related securities, which could have a material adverse
effect on our financial condition, results of operations, and cash flows. This
interest rate is the rate we believe would be used by a third party in
determining the value of our mortgage related securities. Increasing the rate at
which we discount to present value the cash flow we expect to receive on our
mortgage related securities reduces their fair value. Decreases in interest
rates may result in increased prepayment rates which may require us to write
down the fair value of our mortgage related securities.

Risk of Variations in Quarterly Operating Results

Several factors affecting our business can cause significant variation in
our quarterly operating results. Variations in the volume of our production,
differences between our costs of borrowings and the average interest rates paid
by our borrowers, our inability to complete scheduled loan sale transactions and
the condition of the mortgage loan industry and the specialty finance industry
can result in significant increases or decreases in our revenues from quarter to
quarter. A delay in closing a particular loan sale transaction during a
particular quarter would postpone recognition of revenues and gain or loss on
the sale of those loans. In addition, unanticipated delays in closing a
particular loan sale transaction would also increase our exposure to interest
rate fluctuations by lengthening the period during which our variable rate
borrowings under the Sovereign Warehouse Agreement are outstanding. If we were
unable to sell a sufficient number of loans at a premium in a particular
reporting period, our revenues for that period would decline, resulting in lower
net income and possibly a net loss for that period. This could have a material
adverse effect on our financial condition and results of operations.

Risks Associated with Delinquencies and Defaults on Loans

Potential loan delinquencies and defaults by our borrowers expose us to
risks of loss and reduced net earnings. During economic slowdowns or recessions,
loan delinquencies, defaults and credit losses generally increase. In addition,
significant declines in market values of residences securing the loans reduce
homeowners' equity in their homes. The limited borrowing power of our customers
also increases the likelihood of delinquencies, defaults and credit losses on
foreclosure. For Home Equity loans, we rely primarily on the
43
<PAGE> 46

appraised value of the borrower's home and for Equity + loans we rely on the
creditworthiness of the borrower. We determine the amount of a loan based on the
loan-to-value ratio and the borrower's creditworthiness. After a default by a
borrower, we, or the servicer of the mortgage loan, evaluates the cost
effectiveness of foreclosing on the property. Such default may cause us to
charge our allowances for credit losses on loans held for sale, except to the
extent that FHA insurance proceeds are available. If we must take losses on a
loan backing our mortgage related securities or loans that exceed our
allowances, our financial position, results of operations and cash flows could
suffer.

Many of our borrowers have limited access to consumer financing for a
variety of reasons, including insufficient home equity value and unfavorable
past credit histories. We are subject to various risks associated with these
borrowers, including, but not limited to, the risk that borrowers will not pay
interest and principal due, and that the value received from the sale of the
borrower's residence in a foreclosure will not be sufficient to repay the
borrower's obligation to us.

The risks associated with the our business increase during an economic
downturn or recession. These periods also may be accompanied by decreased demand
for consumer credit and declining real estate values. Any material decline in
real estate values reduces the ability of borrowers to use the value of their
homes to support borrowings and increases the loan-to-value ratios of our loans
and the loans backing our mortgage related securities. This weakens collateral
values and the amount, if any, obtained upon foreclosures.

The frequency and severity of losses generally increases during economic
downturns or recessions. Because our borrowers generally do not satisfy criteria
of government agencies that traditional lenders rely on in evaluating whether to
make loans to potential borrowers, these borrowers do not qualify for
traditional "A" credit loans. The actual rate of delinquencies, foreclosures and
credit losses on these loans are often higher under adverse economic conditions
than those currently experienced in the mortgage loan industry in general
because of the lower credit quality of the borrower. Any sustained period of
increased delinquencies, foreclosures and losses could hurt our financial
condition, results of operations and cash flows.

Litigation; Risk of Claims

In the ordinary course of business, we are subject to claims made by
borrowers and private investors from, among other things, losses allegedly
incurred as a result of potentially breaches of fiduciary obligations and
misrepresentations, errors and omissions of our employees, officers and agents.
Industry participants are frequently named as defendants in litigation involving
alleged violations of federal and state consumer lending laws because of the
consumer-oriented nature of the industry and uncertainties with respect to the
application of various laws and regulations. Pending claims and any claims made
in the future may result in legal expenses or liabilities which could have a
material adverse effect on our financial condition, results of operations and
cash flows. For details about pending litigation, see "Business -- Legal
Proceedings" located elsewhere in this report.

Competition

We face intense competition in producing and selling Home Equity loans and
Equity + loans. Our competitors include other consumer finance companies,
mortgage banking companies, commercial banks, credit unions, thrifts, credit
card issuers and insurance finance companies. Many of these competitors are
substantially larger than we are. In addition, our competitors may have more
capital and other resources and a lower cost of capital than we do. In addition,
we may face competition from government-sponsored entities which have entered
the market for non-conforming mortgage loans. Existing mortgage loan purchase
programs may be expanded by the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), or the Government National
Mortgage Association ("GNMA") to include non-conforming mortgages, particularly
loans similar to our Home Equity loans. Entries of government-sponsored entities
into the non-conforming loan market may reduce the interest rate borrowers are
willing to pay on our mortgage loans and may reduce or eliminate premiums on
their sale.

Industry participants compete for business in many ways. Some provide
borrowers more convenience in obtaining a loan, some have better customer
service and others have strong marketing and distribution
44
<PAGE> 47

channels. This industry has a relatively low barrier to entry, which permits new
competitors to enter the broker-sourced loan market quickly. This may lower the
rates we can charge borrowers, potentially lowering gains on future loan sales.
If any of our competitors significantly expand their activities in our markets,
such action could have a material adverse effect on us.

Changes in interest rates and general economic conditions may also affect
our competition. During periods of increasing interest rates, competitors who
have locked in low borrowing costs may have a competitive advantage. During
periods of declining rates, competitors have solicited, and may in the future
solicit, our customers to refinance their loans. To the extent these
solicitations are successful, the prepayment rates on the loans backing our
mortgage related securities may increase beyond the levels currently anticipated
which may result in a write down in the fair value of these securities.

We depend on mortgage brokers and bankers for substantially all of our
mortgage loan production. These mortgage brokers and bankers generally deal with
multiple lenders for each prospective borrower. Our competitors also attempt to
establish relationships with these entities, none of which are contractually or
otherwise obligated to deal exclusively, or to continue to do business, with us.
In addition, we expect the volume of broker and mortgage banker-sourced loans
funded and purchased by us to increase significantly. Our future operating and
financial results may be more susceptible to fluctuations in the volume and cost
of our broker and mortgage banker-sourced loans from, among other things,
competition from other purchasers of these loans.

As we expand our retail, broker and mortgage banker-sourced loan production
into new geographic markets, we will face competition from lenders with
established positions in these markets. We cannot predict whether we will be
able to compete successfully with those established lenders.

Volatility of Stock Price

The price of our Common Stock has experienced significant volatility since
our initial public offering in November 1996. The market price of our common
stock, as adjusted to reflect a one-for-ten reverse stock split which became
effective on March 22, 1999, has ranged from a high of $157.50 per share to a
low of $1.00 per share through December 13, 1999. As of December 13, 1999, the
last sale price of our Common Stock as reported on the Nasdaq SmallCap Market
was $2.19 per share. The stock market recently has experienced extreme price and
volume fluctuations which may be unrelated to the operating performance of
particular companies. Market conditions in the specialty finance industry and
factors such as legislative and regulatory changes, announcements of new
products and services by us, our competitors or third parties, and changes in
earnings estimates by analysts may have a significant effect on the price of our
Common Stock.

Risk of Failing to Comply with the Listing Requirements of the Nasdaq SmallCap
Market

The Nasdaq SmallCap Market requires that all listed companies maintain
certain levels with respect to each of the following:

- net tangible assets
- number of publicly held shares
- value of capital stock traded in the Nasdaq SmallCap Market
- bid price
- number of stockholders
- number of market makers

If we fail to comply with any of these requirements, our shares of Common Stock
could be delisted from the Nasdaq SmallCap Market. If our Common Stock was
delisted, we cannot guarantee that there would be a market for you to trade in
the Common Stock.

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<PAGE> 48

Factors Inhibiting Takeover; Effect of Change of Control

Sovereign and City Holding Company each has a right of first refusal to
acquire us if our board of directors decides to offer us for sale. In addition,
the change of control provisions of the New Notes, as well as the change in for
sale control provisions of certain of our other credit arrangements and
employment agreements with our senior executives, could inhibit a takeover
attempt by a third party.

Certain provisions of our Certificate of Incorporation and Bylaws may
delay, defer or prevent a takeover attempt by a third party. Our Certificate of
Incorporation authorizes the board of directors to determine the rights,
preferences, privileges and restrictions of unissued series of preferred stock
and to fix the number of shares and designation of any series of preferred stock
without any vote or action by our stockholders. The issuance of preferred stock
may have the effect of delaying, deferring or preventing a change of control,
since the terms of the preferred stock that might be issued could potentially
prohibit or otherwise restrict our ability to consummate any merger,
reorganization, sale of substantially all of our assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of the preferred stock. Other provisions of our Certificate
of Incorporation and Bylaws provide that special meetings of the stockholders
may be called only by the board of directors or upon the written demand of the
holders of not less than 30% of the votes entitled to be cast at a special
meeting.

Legislative and Regulatory Risks

Our business is subject to extensive regulation, supervision and licensing
by federal, state and local governmental authorities. These rules and
regulations, among other things, impose licensing obligations on us, establish
eligibility criteria for mortgage loans, prohibit discrimination, provide for
inspections and appraisals of properties, govern credit reports on loan
applicants, regulate assessment, collection, foreclosure and claims handling,
investment and interest payments on escrow balances and payment features,
mandate disclosures and notices to borrowers and, in some cases, fix maximum
interest rates, fees and mortgage loan amounts. If we do not comply with these
requirements, many of which are highly technical, we could lose our approved
status, our servicing contracts could be terminated or suspended without
compensation to the servicer, we could face demands for indemnification or
mortgage loan repurchases, we may suffer the exercise of certain rights of
rescission for mortgage loans by our borrowers, and we may be subject to class
action lawsuits and administrative enforcement actions.

The Internal Revenue Service is considering a rule that would require
lenders to "flag" all of their high loan-to-value loans and to inform consumers
that some portion of their interest payments on high loan-to-value loans are not
tax-deductible. The adoption of this change could have an adverse affect on our
Equity + loan production. In addition, Congress is considering a recommendation
of the National Bankruptcy Review Commission that, if adopted, would treat in a
consumer bankruptcy proceeding the portion of a second mortgage loan that
exceeds the value of a house as unsecured debt. Adoption of these or more
restrictive laws, rules and regulations would have an adverse effect on our
financial condition, results of operations and cash flows.

Members of Congress and government officials periodically have suggested
the elimination of the mortgage interest as a deduction for federal income tax
purposes in certain situations, based on, among other things, borrower income,
type of loan or the principal amount of the loan. Because many of our loans are
used by borrowers to consolidate consumer debt, make home improvements or for
other consumer needs, the reduction or elimination of these tax benefits could
substantially reduce the demand for the type of loans that we offer.

Environmental Risks

In the course of our business, we have acquired, and may acquire in the
future, residences that are the collateral or security for loans that are in
default. There is a risk that hazardous substances or waste, contaminants,
pollutants or their sources could be discovered on-site after these residences
are acquired by us. In that event, we may be required by law to remove the
substances from the residences at our cost and

46
<PAGE> 49

expense. We cannot guarantee that: (1) the cost of removal would not
substantially exceed the value of the residence that is the collateral or
security for a loan; (2) we would have adequate remedies against the prior owner
or other responsible parties; or (3) we would be able to sell the residence
prior to or following the removal.

Year 2000

At August 31, 1998, the Company had begun to make inquiry of substantially
all of its strategic partners, vendors and third party entities with which it
has material relationships, and had begun to compile data related to their Year
2000 plans. The Company's reliance upon certain third parties, vendors and
strategic partners for loan servicing, investor reporting, document custody and
other functions, means that their failure to adequately address the Year 2000
issue could have a material adverse impact on the Company's operations and
financial results. The Company has received assurances from its two major
strategic partners, City Mortgage Services and Sovereign, that they have
implemented plans to address the Year 2000 issue. The Company has not evaluated
these plans or assurances for their accuracy and adequacy, or developed
contingency plans in the event of their failure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are listed under Item 14 (a) of this Annual Report
and are filed as part of this report on the pages indicated, and the
supplementary data are included in the notes thereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

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<PAGE> 50

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information with respect to the
directors and executive officers of the Company as of August 31, 1999.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Champ Meyercord................................. 59 Chairman of the Board and Chief Executive
Officer
J. Richard Walker............................... 53 Executive Vice President and Chief Financial
Officer
Spencer I. Browne............................... 49 Director
Hubert M. Stiles, Jr............................ 52 Director
David J. Vida, Jr............................... 33 Director
John D. Williamson, Jr.......................... 64 Director
</TABLE>

Edward B. "Champ" Meyercord has been Chairman and Chief Executive Officer
of the Company since July 1998 and, prior thereto, he was a special consultant
to the Company from May 1998 to July 1998. From 1994 to 1998, Mr. Meyercord was
a senior investment banker with Greenwich Capital Markets, most recently as a
co-head of the Mortgage and Asset Backed Finance Group. In addition to his
involvement with asset backed securities, Mr. Meyercord was involved in the
development of financing vehicles for specialty finance companies. Greenwich
Capital Markets has performed investment banking services for the Company since
1994. Prior to 1994, Mr. Meyercord was a co-managing partner of Hillcrest
Partners, a private investment bank specializing in mergers and acquisitions for
financial institutions. Mr. Meyercord is a member of the Board of Directors of
The National Home Equity Mortgage Association.

J. Richard Walker has been Executive Vice President and Chief Financial
Officer of the Company since October 1998. Since 1988, Mr. Walker has been
principal of Walker & Mikloucich, P.C., an accounting firm. Since 1986, Mr.
Walker has been managing director of Vulcan Capital, Inc., formerly TVG
Associates, Inc., a business advisory services firm.

Spencer I. Browne has been a Director of the Company since consummation of
the initial public offering in November 1996. For more than five years prior to
September 1996, Mr. Browne held various executive and management positions with
several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
Director of Asset Investors Corporation ("AIC"), a New York Stock Exchange
("NYSE") traded company he co-founded in 1986. He also served as President,
Chief Executive Officer and a Director of Commercial Assets, Inc., an American
Stock Exchange traded company affiliated with AIC, from its formation in October
1993 until September 1996. In addition, from June 1990 until March 1996, Mr.
Browne served as President and a Director of M.D.C. Holdings, Inc., a NYSE
traded company and the parent company of a major home builder in Colorado.

Hubert M. Stiles, Jr. Mr. Stiles has been a Director of the Company since
July 1998. Since September 1996, Mr. Stiles has been a money manager for and
President of T. Rowe Price Recovery Fund II Associates, L.L.C. Mr. Stiles has
been Vice President of T. Rowe Price Associates, Inc. and a money manager for
and President of T. Rowe Price Recovery Fund Associates, Inc. since May 1988.

David J. Vida, Jr. Mr. Vida has been a Director of the Company since June
1998. Since July 1996, Mr. Vida has been President of City Mortgage Services, a
division of City National Bank. Mr. Vida served as Chief Financial Officer of
Prime Financial Corp. from June 1994 until June 1996. From January 1992 to June
1994, Mr. Vida was a Senior Accountant for KPMG Peat Marwick LLP.

John D. Williamson, Jr. has been a Director of the Company since September
1998. Since January 1997, Mr. Williamson has been engaged in the corporate
practice of law and as a consultant. From 1983 to January 1997, Mr. Williamson
worked in various capacities at Transport Life Insurance Company (a subsidiary
of Travelers Group, Inc.) including Chief Executive Officer, Vice Chairman of
the Board, and Chairman of the Board.

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<PAGE> 51

ELECTION AND COMPENSATION OF DIRECTORS

The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board of Directors. The Company's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified. The Company reimburses all directors for
their expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company do not receive
additional compensation for their services as directors. Members of the Board of
Directors of the Company who are not employees of the Company receive an annual
retainer fee of $30,000. Directors are also reimbursed for their expenses
incurred in attending meetings of the board of directors and its committees.

MEETINGS OF THE BOARD OF DIRECTORS

During fiscal 1999, the Board of Directors held a total of 12 meetings. All
directors attended at least 75% of all Board and committee meetings during
fiscal 1999.

COMMITTEES OF THE BOARD OF DIRECTORS

The board of directors has delegated certain functions to the following
standing committees:

Audit Committee. The Audit Committee's functions include recommending to
the board the engagement of the Company's independent certified public
accountants, reviewing with the accountants the plan and results of their
auditor the Company's financial statements and determining the independence of
the accountants. The Audit Committee held SIX meetings in fiscal 1999. The Audit
Committee is currently composed of Messrs. Stiles, Browne and Vida.

Compensation Committee. The Compensation Committee has the authority to
approve the compensation of the Company's executive officers. The Compensation
Committee held THREE meetings in fiscal 1999. Currently, the Compensation
Committee consists of Messrs. Williamson and Browne.

Nominating Committee. The Company currently does not maintain a nominating
committee.

Plan Committee. The Plan Committee was established in January 1999 to
administer the Company's 1999 Incentive Stock Plan. The Plan Committee is
currently composed of Messrs. Stiles and Williamson. The Plan Committee met two
times during fiscal 1999.

SECTION 16 BENEFICIAL REPORTING

Based solely on the review of all forms required to be filed with the
Securities and Exchange Commission pursuant to Section 16(a) of the Securities
Exchange Act of 1934, the Company discloses the following: on October 26, 1998,
Messrs. Meyercord, Browne, Ralser and Vida filed each filed a late Form 5 with
respect to fiscal year 1998; on January 11, 1999, Mr. Walker filed a late Form 3
with respect to his appointment as Executive Vice President and Chief Financial
Officer of Altiva in October 1998.

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<PAGE> 52

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and the
other executive officer as of August 31, 1999 whose annual salary and bonus
during fiscal 1999 exceeded $100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION NUMBER OF
FISCAL --------------------- OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) COMPENSATION(3)
- --------------------------- ------ -------- ---------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Champ Meyercord(4)....... 1999 $306,627 $ 250,000 $ -- -- $ --
Chairman of the 1998 63,462 -- -- 481,859
Board and Chief 1997 -- -- -- -- --
Executive Officer
J. Richard Walker(5)..... 1999 $183,333 -- $ 1,000 50,000 --
Executive Vice 1998 -- -- -- -- --
Chief Financial 1997 -- -- -- -- --
Officer
Wm. Paul Ralser(6)....... 1999 $264,423 -- $ 1,547 -- --
President and Chief 1998 -- -- -- -- --
Operating Officer 1997 -- -- -- -- --
James L. Belter(7)....... 1999 $ 58,333 $120,000(8) $ 2,519 -- --
Executive Vice 1998 212,519 100,000(8) 9,919 135,868
President and 1997 180,003 100,000(8) 15,896 10,000 --
Treasurer
</TABLE>

- ---------------

(1) Other annual compensation consisted of car allowances, contributions to
401(k) plans and moving expenses.
(2) See "-- Employment Agreements" and "-- Company Stock Option Plans" below.
(3) All other compensation consisted of funds received from the Company to
repurchase outstanding SARs and stock options.
(4) Mr. Meyercord became Chief Executive Officer of the Company in August 1998.
(5) Mr. Walker became Executive Vice President and Chief Financial Officer of
the Company in October 1998.
(6) Mr. Ralser began employment with the Company on September 1, 1998 and
resigned from the Company on July 31, 1999.
(7) Mr. Belter resigned from the Company on November 30, 1998.
(8) Bonuses paid to Mr. Belter during fiscal years 1996 and 1997 were
discretionary bonuses determined by the Board of Directors. The bonus paid
during fiscal 1998 was paid pursuant to an employment contract entered into
with Mr. Belter in August 1997.

50
<PAGE> 53

The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended August 31, 1999 to the Named
Executive Officers.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION POTENTIAL
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) DATE REALIZABLE VALUE
- ---- ---------- ---------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Champ Meyercord.................... -- -- -- --
Chairman of the
Board and Chief
Executive Officer
James L. Belter.................... -- -- -- --
Executive Vice
President and
Treasurer (1)
J. Richard Walker.................. 50,000 12.7% $15.00 1/12/09 $250,000
Executive Vice
President and Chief
Financial Officer
</TABLE>

- ---------------

(1) Mr. Belter resigned from the Company on November 30, 1998.

The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of August 31, 1999. No
stock options were exercised by the Named Executive Officers during the fiscal
year ended August 31, 1999. See "-- Company Stock Option Plans."

AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS HELD AT HELD AT
AUGUST 31, 1999 AUGUST 31, 1999(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Champ Meyercord................................. 160,620 321,239 $ -- --
J. Richard Walker............................... -- 50,000 -- --
</TABLE>

- ---------------

(1) The closing sales price of the Company's common stock as reported on the
Nasdaq Small Cap Market on August 31, 1999 was $4.50, as adjusted to reflect
the one-for-ten reverse stock split. All options held by Messrs. Belter,
Meyercord and Walker as of August 31, 1999 were granted at exercise prices
in excess of such market price.

EMPLOYMENT AGREEMENTS

On June 23, 1998, the Company entered into an employment agreement with
Champ Meyercord pursuant to which Mr. Meyercord became the Chairman of the Board
and Chief Executive Officer of the Company. The Company and Mr. Meyercord
elected to renegotiate the original employment agreement and entered into a new
employment agreement (the "Meyercord Agreement") on February 12, 1999. The
initial term of the Meyercord Agreement terminates on December 31, 2001 and the
agreement will continue on a year-to-year basis unless terminated by either
party. The Meyercord Agreement provides for an initial annual base salary of
$300,000. From the date of the Meyercord Agreement until December 31, 1998, Mr.
Meyercord is entitled to a bonus of at least $250,000. For each subsequent
calendar year during the term of the agreement, Mr. Meyercord shall be entitled
to receive bonuses pursuant to a management incentive compensation plan for
senior management to be established by the Company. Pursuant to the Meyercord

51
<PAGE> 54

Agreement Mr. Meyercord was granted options to purchase 481,859 shares of common
stock upon approval by the Company's stockholders of the 1999 Plan.

Upon termination of the agreement for "cause," Mr. Meyercord will be
entitled to receive his base salary through the effective date of termination
and any determined but unpaid incentive compensation for any bonus period ending
on or before the date of termination. In the event of his termination by the
Company "without cause" or his voluntary termination on six months notice, Mr.
Meyercord will be entitled to (1) any unpaid base salary through the date of
termination, (2) accrued but unpaid incentive compensation, if any, for the
bonus period ending on or before the date of termination, (3) the continuation
of any benefits through the expiration of the Meyercord Agreement and (4) the
payment, through the date of expiration of the Meyercord Agreement, of his base
salary and incentive compensation (in an amount equal to the incentive
compensation paid to Mr. Meyercord for the calendar year immediately preceding
termination). In the event of a change of control of the Company accompanied
within two years by either (1) termination of Mr. Meyercord's employment by the
Company "without cause" or (2) Mr. Meyercord's voluntarily termination for "good
reason," Mr. Meyercord will be entitled to the amounts receivable upon a
termination "without cause." In addition, upon a change of control any vested
stock options granted to Mr. Meyercord will accelerate and become immediately
vested. The Meyercord Agreement contains a non-competition provision that
generally prohibits Mr. Meyercord from competing with the Company during his
employment by the Company and for the lesser of the two-year period following
the termination of his employment for any reason or the period of time during
which Mr. Meyercord is entitled to continuing payments from the Company due to a
termination of the Meyercord Agreement due to disability, voluntary termination,
termination "without cause" or change of control of the Company.

On September 1, 1999, the Company entered into an employment agreement with
J. Richard Walker, employing Mr. Walker as Executive Vice President and Chief
Financial Officer of the Company. The initial term of the employment agreement
(the "Walker Agreement") terminates on August 31, 2001 and the agreement will
continue on a year-to-year basis unless terminated by either party. The Walker
Agreement provides an initial annual base salary of $200,000. For each fiscal
year during the term of the agreement, Mr. Walker shall be entitled to receive
bonuses pursuant to a management incentive compensation plan to be established
by the Company. Pursuant to the terms of the Company's stock option plan and the
agreement, Mr. Walker is eligible to receive options to purchase shares of stock
at the discretion of the Company's stock option plan committee.

Upon termination of the agreement for "cause," Mr. Walker will be entitled
to receive his base salary through the effective date of termination and any
determined but unpaid incentive compensation for any bonus period ending on or
before the date of termination. In the event of his termination by the Company
"without cause" or termination by Mr. Walker for "good reason" on six months
notice, Mr. Walker will be entitled to (1) any unpaid base salary through the
date of termination, (2) accrued but unpaid incentive compensation, if any, for
the bonus period ending on or before the date of termination, (3) the
continuation of any benefits through the expiration of the Walker agreement, and
(4) the payment, through the date of expiration of the Walker Agreement, of his
base salary and incentive compensation (in amount equal to the incentive
compensation paid to Mr. Walker for the calendar year immediately preceding
termination). In the event of a change of control of the Company accompanied
within two years by either (1) termination of Mr. Walker's employment by the
Company "without cause" or (2) Mr. Walker's voluntary termination for "good
reason", Mr. Walker will be entitle to the amounts receivable upon a termination
"without cause". In addition, upon a change of control any vested stock options
granted to Mr. Walker will accelerate and become immediately vested. The Walker
Agreement contains a non-competitive provision that generally prohibits Mr.
Walker from competing with the Company during his employment by the Company and
for the one-year period following the termination of his employment for any
reason.

During fiscal 1999, James Belter, the Company's Executive Vice President
and Chief Financial Officer until November 30, 1998, was employed pursuant to an
employment agreement entered into in August 1997. The employment agreement
provided that Mr. Belter was entitled to receive discretionary performance
bonuses based on factors determined by the Committee and the board of directors
in accordance with the

52
<PAGE> 55

Company's executive bonus pool program. Notwithstanding the foregoing, Mr.
Belter was guaranteed to receive a bonus of $100,000 for each of the first two
years of his employment agreement.

COMPANY STOCK OPTION PLANS

1996 Plan

Under the Company's 1996 Employee Stock Option Plan (the "1996 Plan"),
1,000 shares of Common Stock remain reserved for issuance upon exercise of stock
options. The 1996 Plan was designed as a means to retain and motivate key
employees and directors. The Board of Directors, or a committee thereof,
administers and interprets the 1996 Plan and is authorized to grant options
thereunder to all eligible employees and directors of the Company, except that
no incentive stock options (as defined in Section 422 of the Code) may be
granted to a director who is not also an employee of the Company or a
subsidiary. The 1996 Plan provides for the granting of both incentive stock
options and nonqualified stock options. Options may be granted under the 1996
Plan on such terms and at such prices as determined by the Board of Directors,
or a committee thereof, except that the per share exercise price of incentive
stock options cannot be less than the fair market value of the Common Stock on
the date of grant. Each option is exercisable after the period or periods
specified in the related option agreement, but no option may be exercisable
after the expiration of ten years from the date of grant. Options granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all classes of stock of the Company must have an exercise price
of at least 110% of the fair market value of the Common Stock on the date of
grant and a term of no more than five years. The 1996 Plan also authorizes the
Company to make or guarantee loans to optionees to enable them to exercise their
options. Such loans must (1) provide for recourse to the optionee, (2) bear
interest at a rate no less than the prime rate of interest, and (3) be secured
by the shares of common stock purchased. The Board of Directors has the
authority to amend or terminate the 1996 Plan, provided that no such action may
impair the rights of the holder of any outstanding option without the written
consent of such holder, and provided further that certain amendments of the 1996
Plan are subject to stockholder approval. Unless terminated sooner, the 1996
Plan will continue in effect until all options granted thereunder have expired
or been exercised, provided that no options may be granted ten years after
commencement of the 1996 Plan. In connection with the spin-off of the Company,
all options outstanding under the 1996 Plan were converted into SARs in August
1997. In October 1997, the Company repurchased all SARs outstanding under the
1996 Plan.

1997 Plan

In August 1997, the Company's Board of Directors adopted the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan was approved by the
stockholders of the Company in June 1998. Under the 1997 Plan, as amended,
200,000 shares of Common Stock are reserved for issuance upon the exercise of
stock options and/or SARs. The Board of Directors, or a committee thereof,
administers and interprets the 1997 Plan and is authorized to grant options
and/or SARs thereunder to any person who has rendered services to the Company,
except that no incentive stock options may be granted to any person who is not
also an employee of the Company or any subsidiary. As of August 31, 1998, a
total of 12,000 options had been granted under the 1997 Plan, of which 6,325
were held by directors and executive officers.

1999 Plan

In February 1999, the Company's stockholders approved the Company's 1999
Incentive Stock Plan (the "1999 Plan"). 1,200,000 shares were reserved for
issuance under the 1999 Plan. The 1999 Plan provides for the issuance of options
and restricted stock to certain of the Company's employees and outside directors
and the issuance of SARs to certain of the Company's key employees. The 1999
Plan is administered by a committee of two or more of the Company's outside
directors each of whom must satisfy the requirements for a "non-employee"
director under Rule 16b-3 of the Securities Exchange Act of 1934 and an "outside
director" under Section 162(m) of the Code. No Key Employee of the Company (as
defined in the 1999 Plan) may be granted an option or SAR with respect to more
than 150,000 shares of the Company's Common Stock, except that an option to
purchase 481,859 shares of common stock may be granted to the Company's chief
executive officer in connection with the renegotiation of his June 23, 1998
employment agreement.

53
<PAGE> 56

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of December 1, 1999, information with
respect to the beneficial ownership of the Common Stock by (1) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (2) each director of the Company, (3) each of the Named
Executive Officers, and (4) all directors and executive officers of the Company
as a group. Unless otherwise noted, the Company believes that all persons named
in the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OWNERSHIP(2)
- --------------------------------------- ------------------ -------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Champ Meyercord(3).......................................... 163,120 8.1%
J. Richard Walker........................................... -- *
Spencer I. Browne(4)........................................ 70,976 1.8
Hubert M. Stiles, Jr.(5)(6)................................. 675,569 17.0
David J. Vida, Jr.(6)....................................... 1,666 *
John D. Williamson, Jr.(6).................................. 3,666 *
All executive officers and directors of the Company as a
group (6 persons)......................................... 856,842 21.4
OTHER LARGE STOCKHOLDERS:
Value Partners, Ltd.(7)..................................... 1,466,674 36.7
City National Bank(8)....................................... 1,333,336 33.4
Sovereign Bancorp(9)........................................ 1,333,336 33.4
Friedman, Billings, Ramsey Group, Inc.(10).................. 974,245 24.4
Emanuel J. Friedman(10)(11)................................. 666,666 16.7
T. Rowe Price Recovery Fund II, L.P.(5)..................... 675,569 16.9
First Fidelity Bancorp, Inc.(12)............................ 333,335 8.3
Merrill Lynch Phoenix Fund, Inc.(13)........................ 300,000 7.5
Premium Total Return Fund(14)............................... 266,667 6.7
Rodney D. Atkinson.......................................... 200,000 5.0
</TABLE>

- ---------------

* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus
upon the exercise of options and warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this prospectus have
been exercised. Unless otherwise stated, the address for each of the
following persons is 1000 Parkwood Circle, 6th Floor, Atlanta, Georgia
30339.
(2) Based on 3,995,347 shares of common stock outstanding as of December 1,
1999.
(3) Includes 160,620 shares issuable upon the exercise of currently outstanding
options.
(4) Includes 67,250 shares issuable upon the exercise of currently outstanding
options.
(5) The address of Mr. Stiles and T. Rowe Price Recovery Fund II, L.P. is 100
East Pratt Street, Baltimore, Maryland 21202. Represents shares
beneficially owned by T. Rowe Price Recovery Fund II, L.P., T. Rowe Price
Recovery Fund II Associates, L.L.C. and T. Rowe Price Associates, Inc. (of
which Mr. Stiles is a vice president). Mr. Stiles disclaims beneficial
ownership of these shares. Based on a Schedule 13G filed with the SEC on
July 10, 1998. Includes 3,151 shares currently issuable pursuant to the
conversion of Convertible Notes in which T. Rowe Price Recovery Fund II,
L.P. has a participation interest.
(6) Includes 1,666 shares issuable upon the exercise of currently outstanding
options.
(7) The address of Value Partners, Ltd. is 4514 Cole Avenue, Suite 808, Dallas,
Texas 75205. Represents shares issuable upon the conversion of 22,000
shares of Preferred Stock and 11,027 shares currently issuable upon the
conversion of Convertible Notes owned by Value Partners, Ltd..

54
<PAGE> 57

(8) City National Bank's address is 25 Gatewater Road, Charleston, West
Virginia 25313. Represents (i) 666,670 shares issuable upon conversion of
Preferred Stock and (ii) 666,666 shares issuable upon exercise of currently
outstanding options.
(9) Sovereign Bancorp's address is 1130 Berkshire Boulevard, P.O. Box 12646,
Reading, Pennsylvania 19612. Represents (i) 666,670 shares issuable upon
conversion of Preferred Stock and (ii) 666,666 shares issuable upon
exercise of currently outstanding options.
(10) The address of Friedman, Billings, Ramsey Group, Inc. ("FBRG") is 1001 19th
Street North, Arlington, Virginia 22209. As of March 31, 1999, FBRG,
through its two wholly-owned subsidiaries Friedman, Billings, Ramsey
Investment Management, Inc. ("Investment Management") and Orkney Holdings,
Inc. ("Orkney"), had sole voting and dispositive power with respect to
535,910 shares of Common Stock. This number does not include 666,666 shares
of Common Stock owned by Emanuel J. Friedman, as to which FBRG disclaims
beneficial ownership. Investment Management serves as general partner and
discretionary investment manager for FBR Ashton, L.P. ("Ashton") which, as
of March 31, 1999, owned 4,450 shares of Preferred Stock (which are
convertible into 296,668 shares of Common Stock). Investment Management
also serves as discretionary manager for FBR Opportunity Fund, Ltd.
("Opportunity Fund") which, as of March 31, 1999, owned 90,680 shares of
Common Stock. Orkney is a wholly-owned subsidiary of FBRG which, as of
March 31, 1999, owned 445,230 shares of Common Stock and 2,125 shares of
Preferred Stock (which are convertible into an aggregate of 141,667 shares
of Common Stock). Each of FBRG, Ashton, Investment Management, Opportunity
Fund and Orkney disclaims beneficial ownership of the shares of Common
Stock owned by the other four entities. In addition, Emanuel J. Friedman,
Eric F. Billings and W. Russell Ramsey are each control persons with
respect to FBRG.
(11) Mr. Friedman's address is 1001 19th Street, Arlington, Virginia 22209.
Excludes 535,910 shares beneficially owned by FBRG, as to which Mr.
Friedman disclaims beneficial ownership. Mr. Friedman has notified the
Company that, until the earlier of (i) the first date on which he, together
with FBR and its affiliates, holds shares of Common Stock representing less
than 20% of the total issued and outstanding Common Stock or (ii) the date
on which he deposits his shares of Common Stock in a voting trust to be
voted by an unaffiliated third party, he waives the right to vote his
shares of Common Stock.
(12) The address of First Fidelity Bancorp, Inc. is 2601 Main Street, Suite 100,
Irvine, California 72614. Represents shares issuable upon conversion of
Preferred Stock.
(13) The address of Merrill Lynch Phoenix Fund, Inc. is 4 New York Plaza, 11(th)
Floor, c/o Chase Manhattan Bank, New York, New York.
(14) Represents shares issuable upon the conversion of Preferred Stock.

55
<PAGE> 58

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Listed below are transactions the Company has entered into with its
affiliates in the past three years. An "affiliate" generally is a person or
entity that is (1) "controlled by the Company," such as an officer of the
Company, (2) that "controls the Company" such as a director of a company, and in
the case of the Company, Mego Financial Corp. ("Mego Financial") the Company's
former parent; or (3) entities under "common control" with a company. PEC, a
subsidiary of Mego Financial, is an affiliate of Mego Financial because it is
"controlled by" Mego Financial, and is an affiliate of the Company, because the
directors that controlled the Company until the completion of the Company's
recapitalization also controlled Mego Financial.

RELATIONSHIP WITH GREENWICH

Champ Meyercord, the Company's Chairman of the Board and Chief Executive
Officer, was formerly a senior investment banker at Greenwich Capital
Markets("Greenwich"). In October 1996, Greenwich agreed to purchase from the
Company $2.0 billion of loans over a five year period. The Company has sold
Greenwich approximately $800 million in loans from the inception of the
agreement. The agreement with Greenwich was terminated in June 1998 and the
Company has no further obligation under the agreement. In April 1997, the
Company entered into a pledge and security agreement with Greenwich for an $11.0
million revolving credit facility. The amount that can be borrowed under the
agreement was increased to $15.0 million in June 1997 and $25.0 million in July
1997. This facility is secured by a pledge of certain of the Company's interest
only and residual class certificates relating to securitizations carried as
mortgage related securities on the Company's Statements of Financial Condition,
payable to the Company pursuant to its securitization agreements. The agreement,
which was originally scheduled to mature in December 1998, was extended until
December 1999, and all amounts outstanding under the agreement have now been
repaid by the Company.

TAX SHARING AND INDEMNITY AGREEMENT

For taxable periods up to the date of the spin-off of the Company by Mego
Financial, the Company's results of operations were includable in the tax
returns filed by Mego Financials affiliated group for federal income tax
purposes. Under a tax allocation and indemnity agreement with Mego Financial,
the Company recorded a liability to Mego Financial for federal income taxes
calculated on a separate company basis. Under a prior tax sharing arrangement
with Mego Financial, the Company recorded a liability to Mego Financial for
federal income taxes applied to the Company's financial statement income after
giving consideration to applicable income tax law and statutory rates. In
addition, both the agreement and the arrangement provided that the Company and
Mego Financial each will indemnify the other under certain circumstances. The
Company no longer files consolidated returns with Mego Financial's affiliated
group. The Company believes that all obligations under the tax sharing agreement
have been satisfied.

MANAGEMENT SERVICES AGREEMENT WITH PEC

Until the recapitalization, PEC, a subsidiary of Mego Financial, supplied
the Company on an as-needed basis with certain executive, accounting, legal,
management information, data processing, human resources, advertising services
and promotional personnel. The Company paid management fees to PEC in an amount
equal to the direct and indirect expenses of PEC related to the services
supplied by its employees to the Company, including an allocable portion of the
salaries and expenses of these employees based upon the percentage of time these
employees spent performing services for the Company. This arrangement was
formalized on September 1, 1996 by execution of a management agreement (the
"Management Agreement"), in which PEC agreed to provide management services to
the Company for an aggregate annual fee of approximately $967,000. Effective
January 1, 1998, the annual fee payable by the Company under the Management
Agreement was reduced to $528,000. The Management Agreement was terminated on
June 29, 1998 and no fees have been paid to PEC pursuant to the Management
Agreement since that date. For the years ended August 31, 1997 and 1998,
approximately $967,000 and $617,000, respectively, of the salaries and expenses
of these employees of PEC were attributable to and paid by the Company in
connection with services supplied by these employees to the Company.

56
<PAGE> 59

SUB-SERVICING AGREEMENT WITH PEC

Prior to September 1, 1996, PEC sub-serviced the Company's loans pursuant
to which it paid servicing fees of 50 basis points on the principal balance of
loans serviced per year. For the years ended August 31, 1997, 1998 and 1999, the
Company paid sub-servicing fees to PEC of approximately $1.9 million, $2.1
million and $0, respectively. The Company entered into a servicing agreement
with PEC (the "Servicing Agreement"), effective as of September 1, 1996,
providing for the payment of servicing fees of 50 basis points on the principal
balance of loans serviced per year. For the years ended August 31, 1997 and
1998, the Company incurred interest expense in the amount of $16,000 and $0,
respectively, related to fees payable to PEC for these services. The interest
rates were based on PEC's average cost of funds and equaled 10.48% in 1997.
Effective September 1, 1997, the servicing fees were reduced to 40 basis points
per year and effective January 1, 1998, the servicing fees were further reduced
to 35 basis points per year. The Servicing Agreement has been terminated as the
mortgage servicing rights were transferred to City National Bank.

FUNDING AND GUARANTEES BY MEGO FINANCIAL

In order to fund the Company's past operations and growth, and in
conjunction with filing consolidated returns, the Company borrowed money from
Mego Financial. As of August 31, 1997, 1998 and 1999 , the amount of debt owed
to Mego Financial was $9.7 million, $0 and $0, respectively. Prior to the
initial public offering, Mego Financial had guaranteed the Company's obligations
under the Company's credit agreements and an office lease. The guarantees of the
Company's credit agreements were released on the completion of the initial
public offering. The Company did not pay any compensation to Mego Financial for
such guarantees. In November 1996, Greenwich agreed to purchase from the Company
$2.0 billion of loans over a five year period. Pursuant to the agreement, Mego
Financial issued to Greenwich four-year warrants to purchase 1.0 million shares
of Mego Financial's Common Stock. The value of the warrants, estimated at $3.0
million (0.15% of the commitment amount) as of the commitment date (the "Warrant
Value") plus a $150,000 fee has been written off as the commitment for the
purchase of loans has been terminated. On August 29, 1997, the Company and Mego
Financial entered into a payment agreement (the "Payment Agreement") for the
Company's repayment after the spin-off of (1) a portion of the debt owed by the
Company to Mego Financial as of May 31, 1997 and (2) debt owed by the Company to
Mego Financial as of August 31, 1997. Upon consummation of the sale of the Old
Notes in October 1997, $3.9 million was paid in accordance with the Payment
Agreement. In April 1998, the Company and Mego Financial entered into an
agreement (the "1998 Agreement") superseding the Payment Agreement. Pursuant to
the 1998 Agreement, the parties agreed to reduce the amounts owed to Mego
Financial and agreed to pay such amounts upon the occurrence of certain events.
In connection with the Recapitalization, the Company paid PEC $1.6 million to
satisfy fully all amounts owed to Mego Financial pursuant to the Payment
Agreement and the 1998 Agreement, and the 1998 Agreement was terminated.

RELATIONSHIPS WITH FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.

Friedman, Billings, Ramsey & Co, Inc. ("FBR") a subsidiary of FBRG served
as placement agent for the private placements pursuant to a placement agreement
(the "Placement Agreement"). Under the terms of the Placement Agreement, the
Company paid FBR a fee 160,000 shares of Common Stock equal to 6.0% of the gross
proceeds received by the Company from the sale of the shares of Common Stock and
Preferred Stock in the Recapitalization. The gross proceeds did not include
$10.0 million of Common Stock acquired by an affiliate of FBR. In addition, the
Company has agreed, pursuant to the Placement Agreement, to indemnify FBR
against certain liabilities, including liabilities under the Securities Act, and
other liabilities incurred in connection with the recapitalization.

In addition, FBR was a managing underwriter for the Company's initial
public offering and the Company's public offering of the Current Notes, and was
the purchaser of Current Notes. FBR received compensation for such services and
the Company agreed to indemnify FBR against certain liabilities, including
liabilities under the Securities Act, and other liabilities arising in
connection with such offerings. In addition, FBR has in the past provided
certain investment banking services to the Company and affiliates of the
Company.
57
<PAGE> 60

During fiscal 1998, the Company paid FBR 1.6 million shares of common stock
for its investment services in conjunction with the Recapitalization.
Additionally, the Company has reimbursed FBR for out of pocket expenses totaling
approximately $250,000 and paid FBR a cash fee of $416,667 in connection with
the recapitalization. The Company paid FBR $100,000 for its investment services
provided in connection with the purchase of the Las Vegas production platform.

THE RECAPITALIZATION

The Company completed a recapitalization on July 1, 1998, which provided
the Company with approximately $84.5 million of new equity. City National Bank
and Sovereign Bancorp, each purchased 10,000 shares of the Company's Preferred
Stock at a price of $1,000 per share. In addition, City National Bank and
Sovereign Bancorp were each granted an option, which expires in December 2000,
to acquire 666,667 shares of Common Stock at a price of $15.00 per share. City
National Bank and Sovereign Bancorp each has a right of first refusal to
purchase the Company in the event the Company's Board of Directors determines to
sell the Company. In addition, City National Bank and Sovereign Bancorp each
were granted the right to appoint one member to the Company's Board of Directors
and have the right to appoint an additional board member if they exercise their
option to purchase additional shares of Common Stock. Upon completion of the
recapitalization, David J. Vida, Jr. was appointed to the Board of Directors at
the request of City National Bank. Sovereign Bancorp has not exercised its right
to appoint a board member but has exercised its right to have a representative
attend each board meeting. In addition to the transactions described above, part
of the recapitalization, the Company and each of Sovereign Bancorp and City
Holding Company, the parent company of City National Bank, entered into the
following agreements: (1) Sovereign Bancorp agreed to provide the Company up to
$90.0 million in borrowings under a warehouse line to fund its loan production
prior the sale of the loans (this amount has subsequently been reduced to $25.0
million); (2) Sovereign Bancorp agreed to purchase up to $100.0 million of the
Company's loans per quarter and has a right of first refusal to purchase all
other loans produced by the Company; (3) City National Bank purchased the
Company's existing mortgage servicing rights; and (4) City Mortgage Services
agreed to service all of the Company's mortgage loans held for sale and loans
sold on a servicing retained basis by the Company.

58
<PAGE> 61

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements and Schedules

1. The following financial statements are filed with this report on the pages
indicated:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALTIVA FINANCIAL CORPORATION
Report of Independent Public Accountant..................... 62
Statements of Consolidated Financial Condition at August 31,
1998 and 1999............................................. 63
Statements of Consolidated Operations For the Years Ended
August 31, 1997, 1998 and 1999.............................. 64
Statements of Consolidated Cash Flows For the Years Ended
August 31, 1997, 1998 and 1999.............................. 65
Statements of Consolidated Stockholders' Equity For the
Years Ended August 31, 1997, 1998 and 1999.................. 67
Notes to Consolidated Financial Statements.................. 68
</TABLE>

2. The Company is not required to file any financial statement schedules.

3. Exhibits

See Item 14(c) below.

(b) None.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <C> <S>
2.1(1) -- Stock Purchase Agreement among the Company, The Money
Centre, Inc., Rodney D. Atkinson, Charles R. Cunningham,
Stuart A. Lewis, John Richard Love and Stephen L. Walker
dated July 7, 1999.
3.1(2) -- Amended and Restated Certificate of Incorporation of the
Company.
3.2(3) -- Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company dated March 17,
1999.
3.3(2) -- By-laws of the Company, as amended.
4.1(2) -- Specimen Common Stock Certificate.
10.1(2) -- 1996 Stock Option Plan.
10.2(2) -- Office Lease by and between Mass Mutual and the Company
dated April 1996.
10.3(4) -- Credit Agreement between the Company and Textron Financial
Corporation dated October 22, 1997.
10.4(4) -- Excess Yield and Servicing Rights and Assumption Agreement
between the Company and Greenwich Capital Markets, Inc.
dated January 22, 1998
10.5(4) -- Agreement between the Company and Preferred Equities
Corporation, dated February 9, 1998, regarding assignment of
rights related to the Loan Program Sub-Servicing Agreement
to Greenwich Capital Markets, Inc.
10.6(4) -- Amendment to Excess Yield and Servicing Rights and
Assumption Agreement between the Company and Greenwich
Capital Markets, Inc. dated February 10, 1998
</TABLE>

59
<PAGE> 62

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <C> <S>
10.7(4) -- Second Amendment to Excess Yield and Servicing Rights and
Assumption Agreement between the Company and Greenwich
Capital Markets, Inc. dated February, 1998
10.8(5) -- Preferred Stock Purchase Agreement dated as of June 9, 1998
between City National Bank of West Virginia and Mego
Mortgage Corporation
10.9(5) -- Stock Option Agreement dated as of June 29, 1998 by Mego
Mortgage Corporation in favor of City National Bank of West
Virginia
10.10(6) -- Registration Rights Agreement dated as of June 29, 1998
between Mego Mortgage Corporation and City National Bank of
West Virginia
10.11(5) -- Bulk Servicing Purchase Agreement dated as of June 26, 1998
between City National Bank of West Virginia and Mego
Mortgage Corporation
10.12(5) -- Servicing Agreement dated as of June 26, 1998 between Mego
Mortgage Corporation and City Mortgage Services
10.13(5) -- Subservicing Agreement dated as of June 29, 1998 between
Mego Mortgage Corporation and City Mortgage Services
10.14(5) -- City Mortgage Services Option Agreement dated as of June 29,
1998 between City National Bank of West Virginia and Mego
Mortgage Services
10.15(5) -- Right of First Refusal Agreement dated as of June 29, 1998
among City National Bank of West Virginia, Sovereign
Bancorp, Inc. and Mego Mortgage Corporation
10.16(5) -- Preferred Stock Purchase Agreement dated as of June 9, 1998
between Mego Mortgage Corporation and Sovereign Bancorp,
Inc.
10.17(5) -- Stock Option Agreement Dated as of June 29, 1998 by Mego
Mortgage Corporation in favor of Sovereign Bancorp, Inc.
10.18(6) -- Registration Rights Agreement dated as of June 29, 1998
between Mego Mortgage Corporation in favor of Sovereign
Bancorp, Inc.
10.19(6) -- Participation Agreement dated as of June 29, 1998 between
Mego Mortgage Corporation and Sovereign Bank
10.20(6) -- Master Mortgage Loan Purchase Agreement dated as of June 29,
1998 between Sovereign Bank and Mego Mortgage Corporation
10.21(6) -- Form of Custodian Agreement dated as of June 29, 1998 among
Sovereign Bank, State Street Bank and Trust Company and Mego
Mortgage Corporation
10.22(6) -- Common Stock Purchase Agreement dated as of June 9, 1998
between Mego Mortgage Corporation and Emanuel J. Friedman
10.23(6) -- Registration Rights Agreement dated as of June 29, 1998
between Mego Mortgage Corporation and Emanuel J. Friedman
10.24(6) -- Indenture dated as of June 29, 1998 between Mego Mortgage
Corporation and American Stock Transfer & Trust Company, as
Trustee
10.25(6) -- Form of Note issued pursuant to Indenture dated as of June
29, 1998 between Mego Mortgage Corporation and American
Stock Transfer & Trust Company, as Trustee
10.26(6) -- Registration Rights Agreement dated as of June 29, 1998
between Mego Mortgage Corporation and Friedman, Billings,
Ramsey & Co., Inc., as placement agent
10.27(6) -- Registration Rights Agreement dated as of June 29, 1998
between Mego Mortgage Corporation and Friedman, Billings,
Ramsey & Co., Inc., as placement agent
10.28(6) -- Certificate of Designations, Preferences and Rights of
Series A Convertible Preferred Stock of Mego Mortgage
Corporation
</TABLE>

60
<PAGE> 63

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<C> <C> <S>
10.29(5) -- Co-Sale Agreement dated as of June 29, 1998 among Mego
Mortgage Corporation, Emanuel J. Friedman, Friedman,
Billings, Ramsey & Co., Inc., City National Bank of West
Virginia and Sovereign Bancorp, Inc.
10.30(6) -- Employment Agreement dated June 23, 1998 between Mego
Mortgage Corporation and Edward B. "Champ" Meyercord
10.31(3) -- Employment Agreement dated February 12, 1999 between Mego
Mortgage Corporation and Edward B. "Champ" Meyercord
10.32(7) -- Form of Director Indemnification Agreement
10.33(1) -- Loan Agreement by and between the Company, Value Partners,
Ltd. and T. Rowe Price Recovery Fund II, L.P. dated as of
July 14, 1999.
10.34(1) -- Pledge Agreement by and between the Company and Value
Partners, Ltd. dated as of July 14, 1999
21.1 -- Subsidiaries of the Registrant
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>

- -------------------------

(1) Filed as part of the Form 8-K/A filed on August 17, 1999.
(2) Filed as part of the Registration Statement on Form S-1 filed by the
Company, as amended (File No. 333-12443), and incorporated herein by
reference.
(3) Filed as part of the Registration Statement on Form S-1 filed by the
Company, as amended (File No. 333-68995), and incorporated herein by
reference.
(4) Filed as part of the Form 10-Q for the quarter ended February 28, 1998 and
incorporated herein by reference.
(5) Filed as part of the Form 10-Q for the quarter ended May 31, 1998 and
incorporated herein by reference.
(6) Filed as part of the Form 10-Q/A for the quarter ended May 31, 1998.
(7) Filed as part of the Registration Statement on Form S-1 filed by the Company
(File No. 333-85525), and incorporated herein by reference.

61
<PAGE> 64

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Altiva Financial Corporation
Atlanta, Georgia

We have audited the accompanying consolidated statements of financial
condition of Altiva Financial Corporation (the "Company") as of August 31, 1998
and 1999, and the related consolidated financial statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Altiva Financial Corporation at
August 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended August 31, 1999 in conformity
with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Diego, California
December 14, 1999

62
<PAGE> 65

ALTIVA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1998 1999
---------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 36,404 $ 10,475
Cash deposits, restricted................................... 3,662 3,004
Loans held for sale, net of allowance for credit losses of
$76 and $0 and valuation allowance of $10,901 and
$3,462.................................................... 10,975 54,844
Mortgage related securities, at fair value.................. 34,830 31,757
Mortgage servicing rights................................... 83 --
Other receivables........................................... 5,078 5,260
Property and equipment, net of accumulated depreciation of
$1,181 and $1,793......................................... 1,813 3,068
Prepaid debt expenses....................................... 2,790 2,207
Deferred federal income tax asset........................... 5,376 11,229
Deferred state income tax asset............................. 3,064 1,053
Goodwill.................................................... -- 11,463
Other assets................................................ 460 1,026
-------- --------
Total assets...................................... $104,535 $135,386
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line............................................ $ -- $ 61,513
Secured revolving credit lines............................ 9,961 1,685
Notes and contracts payable............................... 6,384 12,292
Accounts payable and accrued liabilities.................. 16,431 8,054
Allowance for credit losses on loans sold with recourse... 2,472 --
Subordinated debt......................................... 42,693 30,724
-------- --------
Total liabilities................................. 77,941 114,268
-------- --------
Commitments and contingencies (see Note 16)
Stockholders' equity:
Convertible preferred stock, $.01 par value per share
(authorized -- 5,000,000 shares; issued and
outstanding -- 62,500 at August 31, 1998 and 1999......... 1 1
Common stock, $.01 par value per share
(authorized -- 400,000,000 shares: issued and
outstanding -- 3,056,667 at August 31, 1998 and 3,656,426
at August 31,1999)........................................ 31 37
Additional paid-in capital................................ 122,418 125,412
Accumulated deficit....................................... (95,856) (104,332)
-------- --------
Total stockholders' equity........................ 26,594 21,118
-------- --------
Total liabilities and stockholders' equity........ $104,535 $135,386
======== ========
</TABLE>

See notes to consolidated financial statements.

63
<PAGE> 66

ALTIVA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
REVENUE:
Gain (loss) on sale of loans............................... $ 45,123 $ (26,578) $ 1,207
Net unrealized gain (loss) on mortgage related
securities............................................... 3,518 (70,024) (3,317)
Loan servicing income, net................................. 3,036 999 375
Interest income............................................ 9,507 14,786 7,569
Less: interest expense..................................... (6,374) (13,162) (7,958)
---------- ---------- ----------
Net interest income (expense)............................ 3,133 1,624 (389)
---------- ---------- ----------
Total revenues (losses).......................... 54,810 (93,979) (2,124)
---------- ---------- ----------
COST AND EXPENSES:
Net provision (benefit) for credit losses.................. 6,300 (3,198) --
Depreciation and amortization.............................. 672 1,013 1,188
Other interest............................................. 245 439 124
General and administrative:
Payroll and benefits..................................... 13,052 18,582 7,481
Supplies and postage..................................... 289 1,281 424
Rent and lease expenses.................................. 1,199 1,616 1,407
Professional services.................................... 2,271 4,783 3,251
Insurance................................................ 558 1,017 853
Sub-servicing fees....................................... 1,874 2,160 325
Taxes and licensing fees................................. 1,352 164 413
Communications........................................... 617 752 499
Bank and wire fees....................................... -- 422 356
Travel and entertainment................................. 1,005 1,159 571
Legal settlement......................................... -- -- 1,305
Other.................................................... 1,566 1,820 1,216
---------- ---------- ----------
Total costs and expenses......................... 31,000 32,010 19,413
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item... 23,810 (125,989) (21,537)
Income tax expense (benefit) before extraordinary item..... 9,062 (6,334) (8,249)
---------- ---------- ----------
Net income (loss) before extraordinary item................ 14,748 (119,655) (13,288)
Extraordinary item, net of taxes ($2.9 million)............ -- -- 4,812
---------- ---------- ----------
Net income (loss)................................ $ 14,748 $ (119,655) $ (8,476)
========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic:
Net income (loss) before extraordinary item.............. $ 12.50 $ (77.18) $ (4.24)
Extraordinary gain....................................... -- -- 1.53
---------- ---------- ----------
Net income (loss)........................................ $ 12.50 $ (77.18) $ (2.71)
========== ========== ==========
Weighted-average number of common shares................. 1,180,219 1,550,293 3,137,136
========== ========== ==========
Diluted:
Net income (loss) before extraordinary item.............. $ 12.50 $ (77.18) $ (4.24)
Extraordinary gain....................................... -- -- 1.53
---------- ---------- ----------
Net income (loss)........................................ $ 12.50 $ (77.18) $ (2.71)
========== ========== ==========
Weighted-average number of common shares and assumed
conversions........................................... 1,180,219 1,550,293 3,137,136
========== ========== ==========
</TABLE>

See notes to consolidated financial statements.

64
<PAGE> 67

ALTIVA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1997 1998 1999
--------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 14,748 $(119,655) $ (8,476)
Adjustments to reconcile net income to net cash used in
operating activities:
Loans originated for sales, net of loan fees........... (526,917) (365,694) (108,321)
Proceeds from sale of loans............................ 514,413 360,303 106,077
Payments on loans held for sale........................ 431 2,191 2,505
Lower of cost or market adjustment..................... -- 10,901 (8,738)
Net provisions (benefit) for estimated credit losses... 6,300 (3,198) --
Additions to mortgage related securities............... (135,549) (22,469) (1,125)
Accretion of residual interest on mortgage related
securities........................................... (6,207) (8,467) (3,263)
Write-off/sale of mortgage related securities.......... 67,040 27,573 --
Market valuation of mortgage related securities........ 5,612 73,390 3,285
Payments on mortgage related securities................ 801 1,442 884
Additions to excess servicing rights................... (3,887) -- --
Amortization of excess servicing rights................ 956 -- --
Additions to mortgage servicing rights................. (7,184) (3,529) --
Amortization of mortgage servicing rights.............. 1,504 3,166 7
Proceeds from sale of mortgage servicing rights........ -- 4,137 --
Write-off/valuation of mortgage servicing rights....... -- 3,870 76
Gain (loss) on disposal of fixed assets................ -- (16) 289
Gain on retirement of debt............................. -- -- (7,700)
Depreciation and amortization expense.................. 672 1,013 1,188
Additions to prepaid debt expenses, net................ -- (4,066) (320)
Amortization of prepaid debt expense................... 684 1,387 903
Additions to prepaid commitment fee, net............... -- (1,250) --
Amortization/write-off of prepaid commitment fee....... 817 3,583 --
Changes in operating assets and liabilities:
Cash deposits, restricted............................ (2,416) 3,228 774
Deferred income taxes (benefit)...................... (3,267) (6,086) (4,763)
Other assets, net.................................... (1,813) 5,017 139
State income tax payable............................. (260) (649) 921
Other liabilities, net............................... 1,084 (5,845) (9,326)
--------- --------- --------
Total adjustments................................. (87,186) 79,932 (26,508)
--------- --------- --------
Net cash used in operating activities............. (72,438) (39,723) (34,984)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Money Centre, Inc., net of cash paid....... -- -- (4,072)
Acquisition of First Plus, net of cash paid............... -- -- (3,356)
Purchase of property and equipment........................ (1,688) (345) (161)
Proceeds from the sale of property and equipment.......... 4 16 175
--------- --------- --------
Net cash used in investing activities............. (1,684) (329) (7,414)
--------- --------- --------
</TABLE>

65
<PAGE> 68
ALTIVA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1997 1998 1999
--------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes and contracts payable... 511,878 334,143 136,590
Payments on notes and contracts payable................... (490,503) (353,370) (115,852)
Issuance of subordinated debt............................. 37,750 40,400 --
Repurchase of subordinated debt........................... -- (125) (3,300)
Payments on subordinated debt............................. -- -- (867)
Amortization of premium of subordinated debt.............. -- (82) (102)
Sale of common stock...................................... 20,658 25,000 --
Sale of preferred stock................................... -- 25,000 --
Payment of issuance costs................................. -- (614) --
--------- --------- --------
Net cash provided by financing activities......... 79,783 70,352 16,469
--------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ 5,661 30,300 (25,929)
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 443 6,104 36,404
--------- --------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 6,104 $ 36,404 $ 10,475
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 5,212 $ 12,380 $ 7,497
State income taxes..................................... $ 1,691 $ 506 $ --
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Mortgage related securities transferred in settlement of
liability.............................................. $ -- $ -- $ 3,292
Relief of liability to repurchase loans................... $ -- $ -- $ 2,236
Additional paid-in capital created from deferred tax
asset.................................................. $ -- $ 2,354 $ --
Forgiveness of due to Mego Financial liability............ $ -- $ 6,153 $ --
Record liability to repurchase loans from City Mortgage
Services............................................... $ -- $ 9,255 $ --
Exchange of Subordinated Notes for Subordinated Notes..... $ -- $ 41,500 $ --
Exchange of Subordinated Notes for Preferred Stock........ $ -- $ 37,500 $ --
Placement agent service fee paid in common stock.......... $ -- $ 2,400 $ --
Additional to prepaid commitment fee and due to Mego
Financial in connection with loan sale commitment
received............................................... $ 3,000 $ -- $ --
</TABLE>

See notes to financial statements.

66
<PAGE> 69

ALTIVA FINANCIAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999
(THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
$.01 PAR VALUE $.01 PAR VALUE ADDITIONAL RETAINED
--------------- ------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ --------- ------ ---------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
September 1, 1996....... 1,000,000 $ 10 $ 8,825 $ 9,051 $ 17,886
Sale of Common Stock,
net of issuance
costs................. 230,000 3 20,635 -- 20,638
Net income.............. 14,748 14,748
--------- ------ -------- -------- --------
Balance at August 31,
1997.................. 1,230,000 13 29,460 23,799 53,272
Increase in additional
paid-in capital due to
adjustment of deferred
federal income tax
asset related to
Spin-off.............. -- -- 2,354 -- 2,354
Increase in additional
paid-in capital due to
settlement of amount
payable to Mego
Financial Corp.
related to Spin-off... -- -- 6,153 -- 6,153
Sale of Common stock,
net of issuance
costs................. 1,826,667 18 26,854 -- 26,872
Sale of Series A
Convertible Preferred
Stock and exchange of
Senior Subordinated
Notes for Series A
Convertible Preferred
Stock, net of issuance
costs................. 62,500 $ 1 -- -- 57,597 -- 57,598
Net Loss................ -- -- -- -- -- (119,655) (119,655)
------ ------ --------- ------ -------- -------- --------
Balance at August 31,
1998.................. 62,500 1 3,056,667 31 122,418 (95,856) 26,594
Issuance of Common Stock
relating to the
acquisition of The
Money Centre, Inc..... -- -- 600,000 6 2,994 3,000
Retirement of Common
Stock due to 1 for 10
reverse split......... -- -- (241) -- -- -- --
Net loss................ -- -- -- -- -- (8,476) (8,476)
------ ------ --------- ------ -------- -------- --------
Balance at August 31,
1999.................. 62,500 $ 1 3,656,426 $ 37 $125,412 $(104,332) $ 21,118
====== ====== ========= ====== ======== ======== ========
</TABLE>

67
<PAGE> 70

ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999

1. NATURE OF OPERATIONS

Altiva Financial Corporation (the "Company") ( formerly known as Mego
Mortgage Corporation) was incorporated on June 12, 1992 in the State of
Delaware. The Company is a specialized consumer finance company that funds,
purchases, makes and sells consumer loans secured by deeds of trust on
single-family residences. The Company's borrowers generally do not qualify for
traditional "A" credit mortgage loans. Typically, their credit histories, income
or other factors do not conform to the lending criteria of government-sponsored
enterprises (including GNMA, FNMA, FHLMC) that traditional lenders rely on in
evaluating whether to make loans to potential borrowers. The Company has one
wholly owned subsidiary, The Money Centre, Inc. All intercompany accounts and
transactions have been eliminated in consolidation.

The Company's loan products are first mortgage loans and home equity loans
("Home Equity loans") typically secured by first liens, and in some cases by
second liens, on the borrower's residence. In making Home Equity loans, the
Company relies primarily on the appraised values of the borrowers' residences.
The Company determines the loan amount based on the appraised values and the
creditworthiness of the borrowers. These loans generally are used to purchase
residences and refinance existing mortgages.

The Company originates its loan products through two marketing
channels -- wholesale and retail. Retail loans are originated through the
Company's operations in Las Vegas, Nevada and The Money Centre, Inc.,
headquartered in Charlotte, North Carolina. Retail loans are made directly to
the borrower primarily through telemarketers. The Company charges loan fees to
the borrowers which should offset the total cost of making the loan. Wholesale
loans are originated by a network of preapproved mortgage brokers which numbers
approximately 460 as of August 31, 1999. These brokers submit loan packages to
the Company, which in turn funds these loans directly to the borrower through
their operations in Atlanta and Charlotte. All loans funded by the Company are
underwritten and graded by the Company's personnel.

In prior years, the Company made high loan-to-value loans ("Equity +
loans") based on the borrowers' credit. These loans typically were secured by
second liens on the borrowers' primary residences. The initial amount of an
Equity + loan, when added to other outstanding senior or secured debt on the
residences, resulted in a combined loan-to-value ratio that averaged 112% during
fiscal 1997 and 1998. The loan-to-value ratio on these loans could have been as
high as 125%. These loans were generally used to consolidate debt and make home
improvements. The Company is no longer producing these type of loans.

The Company's loan production during the fiscal year ended August 31, 1997
was comprised of 81.4% Equity + loans and 18.6% Title I loans. In December 1997,
the Company began originating Home Equity loans. The Company's loan production
during the fiscal year ended August 31, 1998 and 1999 was comprised of 91.6% and
1.9% Equity + loans, 5.5% and 0.0% Title I loans, and 2.9% and 98.1% Home Equity
loans, respectively.

The Company was a wholly owned subsidiary of Mego Financial Corp. ("Mego
Financial") until November 1996, when the Company issued 230,000 shares of its
Common Stock, $.01 par value per share (the "Common Stock"), in an underwritten
public offering (the "IPO") at $100.00 per share. As a result of the IPO, Mego
Financial's ownership in the Company was reduced from 100% at August 31, 1996 to
81.3%. Concurrently with the IPO, the Company issued $40 million of 12.5% Senior
Subordinated Notes due in 2001 in an underwritten public offering. The proceeds
from the offerings received by the Company were used to repay borrowings and
provide funds for production and securitizations of loans. In October 1997, the
Company issued an additional $40 million of 12.5% Senior Subordinated Notes due
in 2001 in a private placement (the "Private Placement"). The proceeds from the
Private Placement were used to repay borrowings, including borrowings from Mego
Financial, and to provide funds for loan production, the securitization of loans
and working capital. The $80.0 million of 12.5% Senior Subordinated Notes due in
2001 are herein referred to as old notes (the "Old Notes").

68
<PAGE> 71
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On September 2, 1997, Mego Financial distributed all of its 1 million
shares of the Company's Common Stock to its stockholders in a tax-free spin-off
("Spin-off").

On July 1, 1998, the Company completed a series of transactions to
recapitalize the Company (the "Recapitalization"). Pursuant to the
Recapitalization, the Company raised approximately $84.5 million of additional
equity, net of issuance costs. Two strategic partners each purchased 10,000
shares of the Company's newly designated Series A Convertible Preferred (the
"Preferred Stock") at a purchase price of $1,000 per share. The purchasers have
each been granted an option, which expires in December 2000, to acquire 666,667
shares of the Company's Common Stock. The number and price of the Company's
Common Stock purchasable upon exercise of the options is subject to adjustment
from time to time upon the occurrence of: (1) mergers and reclassifications; (2)
dividends, subdivisions, combinations; (3) adjustments for issuance below option
price; (4) adjustments for issuances below fair market value; (5) special rules
and (6) other actions affecting capital stock. The Preferred Stock will be
mandatorily converted into Common stock on June 18, 2000. Each purchaser has a
right of first refusal to purchase the Company in the event the Company's Board
of Directors determines to sell the Company. In addition, other private
investors purchased an aggregate of 5,000 shares of Preferred Stock at a
purchase price of $1,000 per share and 1.67 million shares of Common Stock at a
purchase price of $15.00 per share. All of the foregoing sales were made
pursuant to private placements.

As part of the Recapitalization, the Company completed an offer to exchange
(the "Exchange Offer") new subordinated notes and Preferred Stock, subject to
certain limitations, for any and all of the outstanding Old Notes. The Exchange
Offer was conditioned upon at least $76.0 million aggregate principal amount of
Old Notes being tendered for exchange and conditioned upon at least $30.0
million of Common Stock and preferred being sold in the offering. Pursuant to
the Exchange Offer, the Company issued approximately 37,500 shares of Preferred
Stock at an issuance price of $1,000 per share, and $41.5 million principal
amount of new 12.5% Subordinated Notes due 2001 (the "Current Notes") in
exchange for approximately $79.0 million principal amount of Old Notes. The
balance of the Old Notes was repurchased by the Company in September and October
1998. The cash proceeds from the Recapitalization were $50.0 million. The
proceeds were used to repay indebtedness, including $1.6 million to a subsidiary
of Mego Financial, $5.1 million of interest on the Old Notes and $2.4 million on
the warehouse line of credit, to provide capital to originate loans and for
other general corporate uses.

In January 1999, the Company purchased substantially all of the assets of a
retail production platform in Las Vegas, Nevada for approximately $3.3 million
in cash. In July 1999, the Company purchased all of the outstanding stock of The
Money Centre, Inc., a retail production platform in Charlotte, North Carolina.
The principal components of the purchase price were $7 million of cash, $3
million of the Company's Common stock (600,000 shares valued at $5 per share),
and 20% of the pre-tax net cash flow, for a period not to exceed 48 months.

The financial statements reflect a one-for-ten reverse stock split of its
Common stock, par value $0.01, effective March 22, 1999 with respect to shares
of the Company's Common stock outstanding as of that date.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents. Cash and cash equivalents consist of cash on
hand and on deposit at financial institutions and short term investments with
original maturities of 90 days or less when purchased.

Cash Deposits, Restricted. Restricted cash represents cash on deposit
which is restricted in accordance with the loan sale agreements and funds
received from collection of loans which have not yet been disbursed to the
purchasers of such loans in accordance with the loan sale agreements.

69
<PAGE> 72
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Loans Held for Sale. Loans held for sale are carried at the lower of
aggregate cost or market value in the accompanying Statements of Financial
Condition, net of allowance for credit losses and valuation allowance.

Valuation Allowance. Provision for decreases in the market value relating
to unsold loans is recorded as expense in amounts sufficient to maintain the
allowance at a level considered adequate to provide for anticipated probable
losses from liquidation of outstanding loans. The provision for valuation is
based upon the estimated fair market value of the portfolio primarily derived
from recent sale data in the marketplace.

Loan Origination Costs and Fees. Loan origination costs and fees including
non-refundable loan origination fees and incremental direct costs associated
with loan production are deferred in compliance with Statement of Financial
Accounting Standards ("SFAS") No. 91 "Accounting for Nonrefundable Fees and
Costs associated with Originating or Acquiring Loans and Indirect Direct Costs
of Leases". ("SFAS 91") and recorded as expense or income upon the sale of the
related loans.

Mortgage Related Securities. Prior to fiscal 1997, the Company securitized
a majority of loans produced into the form of a REMIC. A REMIC is a trust
issuing multi-class securities with certain tax advantages to investors and
which derives its cash flow from a pool of underlying mortgages. Certain of the
senior classes of the REMIC are sold, and an interest only strip and a
subordinated residual class are retained by the Company. The subordinated
residual class is in the form of residual certificates which are classified as
residual interest securities. The documents governing the Company's
securitizations require the Company to establish initial over-collateralization
or build over-collateralization levels through retention of distributions by the
REMIC trust otherwise payable to the Company as the residual interest holder.
This over-collateralization causes the aggregate principal amount of the
non-defaulted loans in the related pool and/or cash reserves to exceed the
aggregate principal balance of the outstanding investor certificates. Such
excess amounts serve as credit enhancement for the related REMIC trust. To the
extent that borrowers default on the payment of principal or interest on the
loans, losses will reduce the over-collateralization and cash flows otherwise
payable to the residual interest security holder to the extent that funds are
available. If the monthly collected amount is insufficient to cover the required
monthly payments to holders of the senior interests in the related REMIC trust,
because of payment defaults or otherwise, the securities insurer will pay the
shortfall. The Company does not have any recourse obligations for credit losses
in the REMIC trust.

In fiscal 1997, the Company completed five securitizations, including two
non-monoline securitizations, two owner's trust securitizations and a combined
REMIC grantor trust securitization.

The two non-monoline securitizations completed in June and August 1997,
were accomplished on a senior subordinated basis without insurance as a credit
enhancement and were generally collateralized by Equity + home improvement and
debt consolidation mortgage loans with typically high loan-to-value ratios. The
other three securitization transactions were insured and collateralized by a
combination of Title I and Equity + loans. The two monoline owner's trust
securitizations were completed in March and May 1997. The REMIC/grantor trust
securitization, completed in December 1996, placed all secured Title I loans and
those Equity + loans which qualified with a loan-to-value ratio of 125% or less,
into the REMIC pool. The grantor trust pool was comprised of unsecured Title I
loans and other Equity + loans which did not qualify for the REMIC pool.

In August 1998, the Company pooled approximately $90.5 million (27.4%) of
its loans with an additional $239.6 million (72.6%) from a second party to
create a home loan owner trust securitization. The Company received a residual
interest in this securitization calculated on a pro rata share of the Company
loans originated in the total pool. This residual interest is two-thirds owned
by the Company and one-third by the financial institution that facilitated the
securitization. Cashflow on the Company's residual interest is subordinated to
recovery by the financial institution of: (1) premium paid for in the
acquisition of the pool; (2) upfront over-collateralization of 1.25% of the
total pool; (3) the financial institution's underwriting fee and

70
<PAGE> 73
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) transaction costs. The total of these recoveries accrued interest at a 12%
per annum rate until recovered. The target over-collateralization level of 6%
must be achieved prior to the financial institution receiving any recoveries. In
December 1998, the Company purchased an 18.28% interest in the Senior Trust
Certificates of this same securitization. This interest entitles the Company to
a pro-rata share of the interest-only income generated by these certificates.
These certificates are senior to the residual interest and subordinate to all
other classes of notes created in the securitization.

Pursuant to these securitizations, various classes of mortgage-backed notes
and certificates were issued and sold to the public. The Company received
residual interest securities, servicing rights and, in some of the transactions,
interest only strip securities, all of which (except for the servicing rights)
were recorded as mortgage related securities on the Statements of Financial
Condition. The residual interest securities and the servicing rights represent
the excess differential (after payment of any subservicing, interest and other
fees, and the contractual obligations payable to the note and certificate
holders) between the interest paid by the obligors of the sold loans and the
yield on the sold notes, certificates and interest only strip securities. The
Company received interest only strip securities from the first two
securitizations completed in fiscal 1996 and the first two securitizations
completed in fiscal 1997. These interest only securities yield annual rates
between 0.45% and 1.00% calculated on the principal balances of loans not in
default. The Company may be required to repurchase loans that do not conform to
the representations and warranties made by the Company in the securitization
agreements and when acting as servicer, may have been required to advance
interest in connection with the securitizations. Effective January 1, 1997, the
Company prospectively adopted SFAS 125 (as defined below).

In accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities: ("SFAS 115"), the Company classifies
residual interest securities, interest only strip securities and interest only
receivables as trading securities which are recorded at fair value with any
unrealized gains or losses recorded in the results of operations in the period
of the change in fair value. Valuations at origination and at each reporting
period are based on discounted cash flow analyses. The cash flows are estimated
as the excess of the weighted-average coupon on each pool of loans securitized
over the sum of the pass-through interest rate, servicing fees, a trustee fee,
an insurance fee and an estimate of annual future credit losses, net of Federal
Housing Administration ("FHA") insurance recoveries, related to the loans
securitized, over the life of the loans. These cash flows are projected over the
life of the loans using prepayment, default, and loss assumptions that the
Company believes market participants would use for similar financial instruments
and are discounted using an interest rate that the Company believes a purchaser
unrelated to the seller of such a financial instrument would require. The
valuation includes consideration of characteristics of the loans including loan
type and size, interest rate, origination date, and term. The Company also uses
other available information such as externally prepared reports on prepayment
rates and industry default rates of the type of loan portfolio under review. To
the Company's knowledge, there is no active market for the sale of these
mortgage related securities. The range of values attributable to the factors
used in determining fair value is broad. Although the Company believes that it
has made reasonable estimates of the fair value of the mortgage related
securities, the rate of prepayments, discount and default rates utilized are
estimates, and actual experience may differ. The Company is no longer selling
loans on a securitized basis.

Revenue Recognition -- Gain (Loss) on Sale of Loans. Gain on sale of loans
includes the gain on sale of mortgage related securities and in prior years, the
gain (loss) on sale of loans held for sale. In accordance with SFAS 125 (as
discussed below) the gain on sale of mortgage related securities is determined
by an allocation of the cost of the securities based on the relative fair value
of the securities sold and the securities retained. In sales of loans through
securitization transactions, the Company retains residual interest securities
and may retain interest only strip securities. The fair value of the interest
only strip securities and residual interest securities is the present value of
the estimated cash flow to be received after considering the effects of
estimated prepayments and credit losses. The interest only strip securities and
residual interest securities are included in mortgage related securities on the
Company's Statements of Financial Condition. Market
71
<PAGE> 74
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

valuation adjustments on loans held for sale and loans reacquired under recourse
provisions are included in the gain (loss) on sale of loans.

In discounting cash flows related to loan sales with servicing retained,
the Company defers servicing income at annual rates of 1% to 1.25% and discounts
cash flows on its sales at the rate it believes a purchaser would require as a
rate of return. The cash flows were discounted to present value using discount
rates which approximated 12% for the year ended August 31, 1997 and 16% for the
years ended August 31, 1998 and 1999. The Company developed its assumptions
based on experience with its own portfolio, available market data and ongoing
consultation with its investment bankers. As a result of the Recapitalization,
the Company sold all of its servicing rights to City Mortgage Services, Inc. and
has sold substantially all loans on a servicing released basis therefrom.

In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates may be
revised as necessary using the original discount rate, and any losses arising
from prepayment and loss experience will be recognized as realized.

Mortgage Servicing Rights. The fair value of capitalized mortgage
servicing rights is estimated by calculating the present value of expected net
cash flows from mortgage servicing rights using assumptions the Company believes
market participants would use in their estimates of future servicing income and
expense, including assumptions about prepayment, default and interest rates.
Mortgage servicing rights are amortized in proportion to and over the period of
estimated net servicing income. The estimate of fair value was based on a 125
and 100 basis points per annum, respectively, servicing fee reduced by estimated
costs of servicing for the years ended August 31, 1997 and 1998. The estimated
net cash flow from servicing utilized a discount rate of 12% and 16% for the
years ended August 31, 1997 and 1998, respectively. At August 31, 1997 and 1998,
the book value of mortgage servicing rights approximated fair value. The
Company's servicing rights were sold to City Mortgage Services, Inc. as part of
the Recapitalization.

Property and Equipment. Property and equipment is stated at cost and is
depreciated over its estimated useful life (generally five years) using the
straight-line method. Costs of maintenance and repairs that do not improve or
extend the life of the respective assets are recorded as expense.

Goodwill. Goodwill represents the excess of purchase price over net assets
at date of acquisition goodwill is amortized over 15 years on a straight line
basis.

Impairment of Long-Lived Assets. The Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity expects
to hold and use is based on the fair value of the asset. Based on an evaluation
of existing long-lived assets and identifiable intangibles, the Company has
determined that no impairment has occurred for the year ended August 31, 1999.

Allowance for Credit Losses on Loans Sold with Recourse. Recourse to the
Company on sales of loans is governed by the agreements between the purchasers
and the Company. The allowance for credit losses on loans sold with recourse
represents the Company's estimate of the fair value of its probable future
credit losses to be incurred, considering estimated future FHA insurance
recoveries on Title I loans. No allowance for credit losses on loans sold with
recourse is established on loans sold with servicing released, as the Company
has no recourse obligation for credit losses under those whole loan sale
agreements. Estimated credit losses on loans sold through securitizations are
considered in the Company's valuation of its mortgage related securities.
Proceeds from the sale of loans with recourse provisions were $415.5 million,
$146.4 million and $0 during the years ended August 31, 1997, 1998 and 1999.

72
<PAGE> 75
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Loan Servicing Income. Fees for servicing loans produced or acquired by
the Company and sold with servicing rights retained are generally based on a
stipulated percentage of the outstanding principal balance of such loans and are
recognized when earned. Interest received on loans sold, less amounts paid to
investors, is reported as loan servicing income. Capitalized mortgage servicing
rights are amortized in proportion to an over the period of estimated servicing
income. Late charges and other miscellaneous income are recognized when
collected. Costs to service loans are recorded to expenses as incurred.

Interest Income. Interest income is recorded as earned. Interest income
represents the interest earned on loans held for sale during the period prior to
their securitization or other sale, mortgage related securities, and short term
investments. The Company computes an effective yield based on the carrying
amount of each mortgage related security and its estimated future cash flow.
This yield is then used to accrue interest income on the mortgage related
security.

During the period that a Title I loan is 30 days through 270 days
delinquent, the Company previously accrued interest at the HUD guaranteed rate
of 7% in lieu of the contractual rate of the loan. When a Title I loan becomes
over 270 days contractually delinquent, it is placed on non-accrual status and
interest is recognized only as cash is received. As HUD reserves were depleted
in fiscal 1998, the Company ceased the accrual of interest on delinquent Title I
loans. During the year ended August 31, 1997, interest income on Equity + and
Home Equity loans greater than 90 days delinquent was recognized on a cash
basis. During the year ended August 31, 1998 and 1999, interest income on Equity
+ and Home Equity loans greater than 30 days delinquent was recognized on a cash
basis.

Income Taxes. The Company has historically filed consolidated federal
income tax returns with its former parent, Mego Financial. Income taxes for the
Company were provided on a separate return basis. As part of a tax sharing
arrangement, the Company recorded a liability to Mego Financial for federal
income taxes applied to the Company's financial statement income after giving
consideration to applicable income tax law and statutory rates. This liability
was forgiven by Mego Financial at the time of the Recapitalization. The Company
accounts for taxes under SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"), which requires an asset and liability approach. The Company now files its
own federal tax returns.

The provision for income taxes includes deferred income taxes, which result
from reporting items of income and expense for financial statement purposes in
different accounting periods than for income tax purposes. The Company also
provides for state income taxes at the rate of 6% of income before income taxes.

Recently Issued Accounting Standards. In June 1998, the FASB issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires the entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in fair value of these derivatives ("hedge accounting") depends on the intended
use and designation. An entity that elects to apply hedge accounting is required
to establish at the inception of its hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspects of the hedge. Those methods must be
consistent with the entity's approach to managing risk. In June 1999, the FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133" to all fiscal
quarters within all fiscal years beginning after June 15, 2000. The Company has
not yet evaluated the effect of adopting SFAS 133.

In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by Mortgage Banking Enterprise" (SFAS 134"), which allows the
reclassification of mortgage-related securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, as required by SFAS 115, to either available for sale or held
to maturity based upon the Company's ability and intent to hold these

73
<PAGE> 76
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investments. SFAS 134 became effective during the fiscal year ended August 31,
1999. The Company is no longer securitizing any of its mortgage loans and plans
to continue to account for its remaining securitized mortgages as trading
securities.

Stock Split. The accompanying financial statements reflect a one-for-ten
reverse stock split of its Common stock, par value $0.01, effective March 22,
1999 with respect to shares of the Company's Common Stock outstanding as of that
date.

Reclassification. Certain reclassifications have been made to conform
prior years with the current year presentation.

Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

3. ACQUISITION OF THE MONEY CENTRE, INC.

On July 15, 1999, the Company acquired all of the outstanding shares of The
Money Centre, Inc. for $7.0 million cash, $3.0 million of the Company's Common
stock (600,000 shares valued at $5 per share), $2.1 million of forgiveness of
debt, $1.3 million in various contractual obligations, and 20% of the pre-tax
net cash flow of the acquired company through May 2003 up to a maximum of $6.6
million. The result of The Money Centre's operations have been consolidated with
those of the Company since the date of acquisition.

The acquisition is accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net assets
acquired based on their estimated fair values. The fair value of tangible assets
acquired and liabilities assumed was $44.7 million and $41.3 million,
respectively. The balance of the purchase price, $10.6 million, was recorded as
excess of cost over net assets acquired (goodwill) and is being amortized over
fifteen years on a straight-line basis.

The following unaudited supplemental pro forma operating data is presented
for the years ended August 31, 1998 and 1999 as if the acquisition had occurred
as of the beginning of the respective periods.

<TABLE>
<CAPTION>
FISCAL YEAR ENDING
AUGUST 31,
--------------------
1998 1999
--------- --------
<S> <C> <C>
Total revenues (losses)..................................... $ (79,662) $ 13,315
Costs and expenses.......................................... 43,654 29,886
--------- --------
Loss before taxes and extraordinary item.................... (123,316) (16,571)
Income tax (benefit) before extraordinary item.............. (6,306) (6,882)
--------- --------
Net income loss before extraordinary item................... (117,010) (9,689)
Extraordinary gain.......................................... 0 4,812
--------- --------
Net (loss)........................................ $(117,010) $ (4,877)
========= ========
Loss per share:
Basic..................................................... $ (76.05) $ (1.55)
Diluted................................................... $ (76.05) $ (1.55)
</TABLE>

In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of fiscal 1998 or at the
beginning of fiscal 1999 or of future operations of the consolidated entities
under the ownership and management of the Company.

74
<PAGE> 77
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LOANS HELD FOR SALE, ALLOWANCE FOR CREDIT LOSSES AND LOAN ORIGINATIONS

Loans held for sale, net of allowance for credit losses and allowance for
valuation, consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1999
-------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Loans held for sale......................................... $ 21,860 $56,920
Deferred loan costs......................................... 93 783
Less allowance for credit losses............................ (76) --
Less allowance for valuation to lower of cost or market..... (10,902) (3,463)
Real estate owned........................................... -- 604
-------- -------
Total............................................. $ 10,975 $54,844
======== =======
</TABLE>

The Company provides an allowance for credit losses in an amount that the
Company believes will be adequate to absorb probable losses after FHA insurance
recoveries on the Title I loans. The Company bases its belief on its continual
review of its portfolio of loans, historical experience and current economic
factors. These reviews take into consideration changes in the nature and level
of the portfolio, historical rates, collateral values current and future
economic conditions which may affect the obligors' ability to pay and overall
portfolio quality. Changes in the allowance for credit losses and the allowance
for credit losses on loans sold with recourse consist of the following:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------
1997 1998 1999
--------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year............................. $ 1,015 $ 7,114 $ 2,548
Net provision (benefit) for credit losses................ 23,048 (3,198) --
Reductions to the provision due to securitizations or
loans sold without recourse............................ (16,748) -- --
Reductions due to charges to allowance for credit
losses................................................. (201) (1,368) (2,548)
-------- ------- -------
Balance at end of year................................... $ 7,114 $ 2,548 $ --
======== ======= =======
Allowance for credit losses.............................. $ 100 $ 76 $ --
Allowance for credit losses on loans sold with
recourse............................................... 7,014 2,472 --
-------- ------- -------
Total.......................................... $ 7,114 $ 2,548 $ --
======== ======= =======
</TABLE>

During 1997, $398.3 million of loans sold under recourse provisions were
repurchased and securitized as further described in Note 2. Reductions to the
provision due to securitizations or loans sold without recourse represent
amounts transferred to the valuation basis of the mortgage related securities
and reductions in the allowance due to a lack of recourse provisions on loans
sold without recourse. Loans are produced and serviced consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1998 1999
--------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Loan production:
Title I................................................... $ 18,701 $ --
Equity +.................................................. 310,518 2,222
Home Equity............................................... 9,723 116,890
-------- --------
Total............................................. $338,942 $119,112
======== ========
</TABLE>

75
<PAGE> 78
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of August 31, 1999, The Money Centre, Inc. holds property acquired
through foreclosure. Such real estate is recorded at fair value on the
acquisition date.

5. MORTGAGE RELATED SECURITIES

Mortgage related securities consist of interest only strips and residual
interest certificates of FHA Title I and Equity + mortgage-backed securities
collateralized by loans produced, purchased and serviced by the Company prior to
September 1, 1999. During fiscal 1999, City Mortgage Services, Inc. serviced
substantially all loans under the mortgage related securities and loans held for
sale.

Mortgage related securities are classified as trading securities and are
recorded at estimated fair value. Changes in the estimated fair value are
recorded in current operations. Mortgage related securities consist of the
following:

<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1998 1999
----------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Interest only strip securities.............................. $ 2,748 $ 1,770
Residual interest securities................................ 28,189 28,818
Interest only receivables (formerly excess servicing
rights)................................................... 3,893 1,169
------- -------
Total............................................. $34,830 $31,757
======= =======
</TABLE>

Activity in total mortgage related securities consist of the following:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1998 1999
--------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Balance at beginning of year................................ $106,299 $34,830
Additions due to securitizations and purchases, at cost..... 22,469 1,125
Net unrealized (loss)....................................... (73,390) (3,285)
Accretion of residual interest.............................. 8,467 3,263
Write-off/sale of mortgage related securities............... (27,573) (3,292)
Principal reductions........................................ (1,442) (884)
-------- -------
Balance at end of year............................ $ 34,830 $31,757
======== =======
</TABLE>

The Equity + loan prepayment speed assumptions reflect an annualized rate
of 4.5% in the first month following securitization with that annualized rate
building in level monthly increments so that by the 18th month the annualized
rate is 18.75%. The annualized prepayment rate is maintained at that level
through the 36th month at which time it is assumed to decline in level monthly
increments to 15.25% by the 43rd month, and is maintained at 15.25% for the
remaining life of the portfolio. The loss assumptions for Equity + loans have
also been increased to reflect losses commencing in the second month following a
securitization and building in level monthly increments until a 4.25% annualized
loss rate is achieved in the 15th month. The annualized loss rate is maintained
at that level through the 43rd month at which time it is assumed to decline in
level monthly increments to 4.0% at month 48 and is maintained for the life of
the portfolio. On a cumulative basis this model assumes aggregate losses of
approximately 16% of the original portfolio balance.

76
<PAGE> 79
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The estimated loss on Title I loans is reduced by recoveries on defaulted
loans of 5%-10% assuming the Title I insurance has been exhausted. The
prepayment speed utilized for Title I loans is 23% for the remaining life of the
portfolio. The loss assumptions for Title I loans are based on the aging of each
portfolio and a historical migration analysis resulting in the following
estimated default rates:

<TABLE>
<CAPTION>
DELINQUENCY STATUS (IN DAYS) ESTIMATED DEFAULT RATES
- ---------------------------- -----------------------
<S> <C>
Current..................................................... 2-5%
01-30.................................................... 2-5
31-60.................................................... 2-5
61-90.................................................... 20-25
91-120.................................................... 50
121-150.................................................... 80
151-180.................................................... 95
Over 180.................................................... 100
</TABLE>

The Company utilized a 16% discount rate at August 31, 1998 and 1999 to
calculate the present value of cash flow streams. Taken in conjunction with the
above prepayment and loss assumptions, management believes these valuations
reflect current market values. Because of the inherent uncertainty of the
valuations, those estimated market values may differ from values that would have
been used had a ready market for the securities existed, and the difference
could be material.

The Company has pledged certain of its interest only and residual class
certificates that are included in its mortgage related securities, pursuant to
the pledge and security agreements with a financial institutions.

6. MORTGAGE SERVICING RIGHTS

Activity in mortgage servicing rights consist of the following:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
------------------------
1997 1998 1999
------- ------- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 3,827 $ 9,507 $ 83
Plus additions.............................................. 7,184 3,529 --
Less amortization........................................... (1,504) (3,166) (7)
Less write-down of valuation................................ -- (3,870) (76)
Less sale of servicing rights............................... -- (5,917) --
------- ------- ----
Balance at end of year...................................... $ 9,507 $ 83 $ --
======= ======= ====
</TABLE>

7. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1998 1999
--------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
EDP equipment and software.................................. $ 1,226 $ 2,750
Office equipment and furnishings............................ 1,768 1,984
Leasehold improvements...................................... 0 127
------- -------
2,994 4,861
Less accumulated depreciation............................... (1,181) (1,793)
------- -------
Total............................................. $ 1,813 $ 3,068
======= =======
</TABLE>

77
<PAGE> 80
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in property and equipment as of August 31, 1998 and 1999 are
various capitalized leases totaling $1.8 million and $3.1 million, net of
accumulated amortization of approximately $1.1 million and $1.8 respectively.

8. OTHER ASSETS

Other assets consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1998 1999
------ --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Offering costs for debt issued.............................. $221 $ 437
Deposits and impounds....................................... 81 158
Prepaid expenses............................................ 22 102
Organizational costs, net................................... 96 --
Other....................................................... 40 329
---- ------
Total............................................. $460 $1,026
==== ======
</TABLE>

9. NOTES AND CONTRACTS PAYABLE

Notes and contracts payable consist of the following:

<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1998 1999
--------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Warehouse lines of credit................................... $ -- $61,513
Secured revolving credit lines.............................. 9,961 1,685
Notes and contracts payables................................ 6,384 12,292
------- -------
Total............................................. $16,345 $75,490
======= =======
</TABLE>

Warehouse Lines

As part of the Recapitalization, the Company executed a new warehouse line
of credit for up to $90.0 million with Sovereign Bancorp (the "Sovereign
Warehouse Line"), which replaced the Company's then existing warehouse line of
credit. The Sovereign Warehouse Line was renewed in December 1998 at $50.0
million and reduced to $25.0 million on March 31, 1999. The Sovereign Warehouse
Line terminates on December 31, 1999 and is renewable in six-month intervals for
up to five years and may be increased with certain consents and contains
pricing/fees which vary by product and the dollar amount outstanding. The
agreements contain certain financial covenants which limits additional
indebtedness and state that the Company shall be in compliance with its
subordinated debt financial covenants at all times. The interest rate is based
on LIBOR (5.3% at August 31, 1999) plus 2.25 to 2.50% depending upon the type of
loan funded. As of August 31, 1999, the Company was in compliance with the
covenants discussed above and $19.3 million was outstanding on this warehouse
line of credit.

The Money Centre, Inc. utilizes two warehouse lines with Centura and First
Collateral Bank. The Centura Bank facility provides for a warehouse line of up
to $30 million, accrues interest at a prime rate + .5% to 1.75%, depending on
the age of the loan, and expires on November 30, 1999. The Company does not
intend to renew the facility as it feels it can obtain another or extend the
existing facility with equal or more favorable terms. The First Collateral
facility provides for a warehouse line of credit of up to $25.0 million, accrues
interest at Libor rate 2.25% + .375%. The Company is currently negotiating an
extension on the First Collateral warehouse line. There have been no
restrictions on the use of this facility during these negotiations.

78
<PAGE> 81
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The facilities are secured by specific loans held for sale and includes certain
material covenants including maintaining books and records, providing financial
statements and reports, maintaining its properties, maintaining adequate
insurance and fidelity bond coverage and providing timely notice of material
proceedings. The outstanding balance of these facilities as of August 31, 1999
totaled $23.2 million and $19.0 million, respectively.

Secured Revolving Credit Lines

The Company has entered into a pledge and security agreement with a
financial institution for a $25.0 million revolving credit facility. This
facility is secured by a pledge of certain of the Company's interest only and
residual class certificates relating to securitizations carried as mortgage
related securities on the Company's Statements of Financial Condition, payable
to the Company pursuant to its securitization agreements. A portion of the
borrowings under the credit line agreement accrues interest at one-month LIBOR +
3.5% (9.1% at August 31, 1998 and 8.86% at August 31, 1999). The remaining
borrowings under the credit line accrues interest at one-month LIBOR + 2.0%
(7.6% at August 31, 1998 and 7.36% at August 31, 1999), expiring one year from
the initial advance. The agreement, which was originally scheduled to mature in
December 1998, was extended until December 1999. Certain material covenant
restrictions exist in the credit agreement governing the revolving line of
credit. These covenants include limitations to incur additional indebtedness,
provide adequate collateral and achieve certain financial tests. These tests
include achieving a minimum net worth (as defined therein) and that the
debt-to-net worth ratio (as defined therein) shall not exceed 2.5:1. The minimum
required net worth and the debt to net worth ratio as of August 31, 1998.
Additionally, the minimum net worth test was amended such that the Company is
required to maintain a net worth equal to or greater than 75% of the Company's
net worth as of the end of the preceding fiscal quarter. As part of the
amendment, the Company agreed to pay down the outstanding borrowings from $10.0
million at August 31, 1998 to $6.0 million at December 31, 1998 and subsequently
agreed to pay the remaining $6.0 million in equal monthly payments during
calendar 1999. As of August 31, 1999, the Company's net worth was $6.1 million
above the minimum required and the debt-to-net worth ratio was 2.50. As of
August 31, 1999, the Company was in compliance with the covenants discussed
above and approximately $1.7 million was outstanding.

Notes and Contracts Payable

In October 1997, the Company entered into a credit agreement with another
financial institution which converted into a term loan in May 1998 with monthly
amortization derived from the cash flow generated from the respective mortgage
related securities pledged as collateral. This term loan bears interest at the
prime rate (8.25% at August 31, 1999) plus 2.5% and matures in October 2002. The
credit agreement includes certain material covenants which include restrictions
relating to extraordinary corporate transactions, maintenance of adequate
insurance and complying with certain financial tests. These tests include
complying with a minimal consolidated adjusted tangible net worth (as defined
therein) and that the consolidated adjusted leverage ratio (as defined therein)
shall not exceed 3:1. On December 9, 1998, the parties agreed to temporarily
amend the borrowing base definition for the period from September 30, 1998
through April 30, 1999 by increasing the borrowing base from 50% to 55%. On May
1, 1999, the borrowing base returned to 50%, the minimum consolidated tangible
net worth covenant was adjusted, commencing retroactively, as of September 30,
1998 and the Company agreed to paydown the line by approximately $405,000 (the
amount exceeding the applicable maximum amount of tranche credit) and pay an
accommodation fee of $10,000. As of August 31, 1999, the Company's consolidated
adjusted tangible net worth was $20.6 million above the minimum required and the
consolidated adjusted leverage ratio was 2.188:1. As of August 31, 1999, the
Company was in compliance with the covenants discussed above and approximately
$3.8 million was outstanding under the agreement.

79
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ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 1999, the Company entered into a credit agreement with another
financial institution for $7.0 million in secured convertible notes. The
proceeds of which were used to acquire The Money Centre, Inc. The facility is
secured by a pledge of certain of the Company's mortgage related securities. The
loan balance under this agreement bears interest at 12% and matures in August
2006. The credit agreement includes certain material covenants. These covenants
include restrictions relating to the security, maintenance and existing credit
and servicing agreements. The holders of the notes may, per the provisions
therein, convert the Common stock at a specified conversion price. The Company
may also, per the provisions of the agreement, redeem the notes prior to
maturity. As of August 31, 1999, the Company was in compliance with the
covenants discussed above and $7.0 million was outstanding under the agreement.

At August 31, 1998 and 1999, capital leases consisted of $1.8 million and
$1.5 million, respectively, in obligations under lease purchase arrangements
secured by property and equipment, bearing a weighted-average interest rate of
9.22% at August 31, 1999.

Scheduled maturities of the Company's capital leases of $1.5 million at
August 31, 1999 are as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
TOTAL 2000 2001 2002 2003 2004
- ----- ---- ---- ---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
$1,499................................................. $666 $564 $269 $-- $--
</TABLE>

10. SUBORDINATED DEBT

In November 1996, the Company consummated the IPO, pursuant to which it
issued 230,000 shares of Common Stock at $100.00 per share. Concurrently with
the IPO, the Company issued $40.0 million of its Old Notes in an underwritten
public offering. The Company used approximately $13.9 million of the aggregate
net proceeds from these offerings to repay intercompany debt due to Mego
Financial and Preferred Equities Corporation ("PEC") and approximately $24.3
million to reduce the amounts outstanding under the Company's line of credit.
The balance of the net proceeds has been used to originate loans. In October
1997, the Company issued an additional $40.0 million of Old Notes in a private
placement, which increased the aggregate principal amount of outstanding Old
Notes from $40.0 million to $80.0 million. The Company used the net proceeds to
repay $3.9 million of debt due to Mego Financial, to reduce by $29.0 million the
amounts outstanding under the Company's lines of credit, and to provide capital
to originate and securitize loans. The Old Notes were subject to the Indenture
governing all of the Company's subordinated notes.

As part of the Recapitalization, the Company completed an offer to exchange
(the "Exchange Offer") new subordinated notes and Preferred Stock, subject to
certain limitations, for any and all of the outstanding $80.0 million principal
amount of the Company's Old Notes. The Exchange Offer was conditioned upon at
least $76.0 million aggregate principal amount of Old Notes being tendered for
exchange and conditioned upon at least $30.0 million of Common Stock and
Preferred Stock being sold in the offerings. The Company would not have
consummated the Exchange Offer if less than $30.0 million was raised in the
offerings. Pursuant to the Exchange Offer, the Company issued approximately
37,500 shares of Preferred Stock at $1,000 per share, and $41.5 million
principal amount of new 12.5% Subordinated Notes due 2001 (the "Current Notes")
in exchange for approximately $79.0 million principal amount of Old Notes. The
balance of the Old Notes were retired in September and October 1998. In February
1999, the Company purchased $11.0 million of the Current Notes, which resulted
in an extraordinary gain, net of income tax, of $4.8 million.

Certain material covenant restrictions exist in the Indenture governing the
Current Notes. These covenants include limitations on the Company's ability to
incur indebtedness, grant liens on its assets and to enter into extraordinary
corporate transactions. The Company may not incur indebtedness if, on the date
of such incurrence and after giving effect thereto, the Consolidated Leverage
Ratio would exceed 1.5:1, subject

80
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ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to certain exceptions. At August 31, 1999, the Consolidated Leverage Ratio, as
defined herein, was 1.62:1 and the Company could not incur any additional
indebtedness other than permitted indebtedness.

11. INCOME TAXES

As described in Note 2, prior to the Spin-off, the Company recorded a
liability to Mego Financial for federal income taxes at the statutory rate
(currently 34%). State income taxes are computed at the appropriate state rate
(6%) net of any available operating loss carryovers and are recorded as state
income taxes payable. Income tax expense (benefit) has been computed as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1997 1998 1999
------- --------- --------
(THOUSAND OF DOLLARS)
<S> <C> <C> <C>
Income (loss) before income taxes...................... $23,810 $(125,989) $(21,537)
======= ========= ========
Federal income taxes at 34% of income.................. $ 8,095 $ (40,683) $ (7,333)
Lost benefits due to change in control................. -- 27,142 --
Increase in Valuation allowance........................ -- 7,715 --
State income taxes, net of federal income tax
benefit.............................................. 943 (553) (852)
Goodwill and acquisition costs......................... -- -- 273
Other.................................................. 24 45 (337)
------- --------- --------
Income tax expense (benefit)........................... $ 9,062 $ (6,334) $ (8,249)
======= ========= ========
Income tax expense (benefit) is comprised of the
following:
Current.............................................. $12,319 $ (405) $ --
Deferred............................................. (3,257) (5,929) (8,249)
------- --------- --------
Total........................................ $ 9,062 $ (6,334) $ (8,249)
======= ========= ========
</TABLE>

81
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ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred income taxes reflect the net effects of (a) temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, (b) temporary differences
between the timing of revenue recognition for book purposes and income tax
purposes and (c) operating loss and tax credit carry forwards. The tax effects
of significant items comprising the Company's net deferred tax asset are as
follows:

<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1998 1999
------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Deferred tax assets:
Realized gain on mortgage related securities.............. $ 9,838 $ --
Net operating loss carry forward.......................... 6,002 18,622
Receivable due from carrybacks and payments............... 2,511 --
Other..................................................... 0 --
------- -------
18,351 18,622
Deferred tax liabilities
Provision for loan loss................................... 2,196 --
Difference between book and tax carrying value of
assets................................................. 0 --
------- -------
2,196 --
------- -------
Net deferred tax asset before valuation..................... 16,155 18,622
------- -------
Less valuation allowance.................................... (7,715) (6,340)
------- -------
Net deferred tax asset............................ $ 8,440 $12,282
======= =======
</TABLE>

Beginning September 1, 1997, the Company filed a separate tax return for
both federal and state tax purposes. On July 1, 1998, the Company had a change
in control as defined by Section 382 of the Internal Revenue Code. As a result
of this change in control, no material tax benefit is available to the Company
for the losses incurred prior to July 1, 1998. Accordingly, a deferred tax asset
has not been recorded for losses incurred prior to this date.

The Company has provided a partial valuation allowance against the net
deferred tax assets recorded as of August 31, 1998 and 1999 due to uncertainties
as to their ultimate realization. The net operating loss generated subsequent to
July 1, 1998 will expire in the year 2019. In the event of any future ownership
changes, Section 382 of the Internal Revenue Code imposes certain restrictions
on the amount of net operating loss carry forwards that can be used in any year
by the Company.

12. STOCKHOLDERS' EQUITY

General. In November 1996, additional paid-in capital was increased by
$20.6 million due to the sale of 230,000 shares of Common stock, net of issuance
cost, in the IPO.

Prior to the Spin-off, the Company filed a consolidated federal income tax
return with Mego Financial's affiliated group under a Tax Allocation and
Indemnity Agreement ("Tax Agreement"). As a result of the Spin-off, $2.4 million
due to Mego Financial under the Tax Agreement was recorded as a deferred tax
asset and as additional paid-in capital. Additionally, in April 1998, an
agreement was made to adjust by $6.2 million the income tax portion of a payable
that the Company owed Mego Financial under the Tax Agreement. The final
settlement of the $6.2 million was recorded as an additional capital
contribution as if the settlement occurred on the date of Spin-off.

82
<PAGE> 85
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In July 1998, the Company issued 62,500 shares of Preferred Stock and
approximately 1.83 million shares of Common stock in the Recapitalization. As a
result, additional paid-in capital increased by $84.5 million.

Reverse Stock Split. On March 22, 1999, the Company effected a one-for-ten
reverse stock split of its common stock. All share and per share data have been
restated for comparison.

Earnings Per Share. Data utilized in calculating actual earnings per share
under SFAS 128 as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------------------
1997 1998 1999
----------- ------------- ------------
<S> <C> <C> <C>
BASIC:
Net income (loss) before extraordinary
item....................................... $14,748,000 $(119,655,000) $(13,288,000)
Extraordinary gain net of taxes of ($2.9
million)................................... -- -- 4,812,000
----------- ------------- ------------
Net income (loss)............................ $14,748,000 $(119,655,000) $ (8,476,000)
=========== ============= ============
Weighted-average number of common shares..... 1,180,219 1,550,293 3,137,136
=========== ============= ============
DILUTED:
Net income (loss) before extraordinary
item....................................... $14,748,000 $(119,655,000) $(13,288,000)
Extraordinary gain net of taxes of ($2.9
million)................................... -- -- 4,812,000
----------- ------------- ------------
Net income (loss)............................ $14,748,000 $(119,655,000) $ (8,476,000)
=========== ============= ============
Weighted-average number of common shares and
assumed conversions........................ 1,180,219 1,550,293 3,137,136
=========== ============= ============
</TABLE>

The following tables reconcile the net income applicable to Common
Stockholders, basic and diluted shares, and EPS for the following periods:

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998 YEAR ENDED AUGUST 31, 1999
------------------------------------- ------------------------------------
INCOME PER-SHARE INCOME PER-SHARE
(LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
------------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before
extraordinary item......... $(119,655,000) -- -- $(13,288,000) -- --
Extraordinary gain net of
taxes ($2.9 million)..... -- -- -- 4,812,000 -- --
------------- --------- ------- ------------ --------- -------
Net income
(loss)......... (119,655,000) -- -- (8,476,000) -- --
------------- --------- ------- ------------ --------- -------
BASIC EPS
Income (loss) applicable to
Common Stockholders...... (119,655,000) 1,550,293 $(77.18) (8,476,000) 3,137,136 $ (2.71)
Effect of dilutive
securities:
Warrants
Stock options............ -- -- -- -- -- --
------------- --------- ------- ------------ --------- -------
DILUTED EPS
Income (loss) applicable to
Common Stockholders and
assumed conversions...... $(119,655,000) 1,550,293 $(77.18) $ (8,476,000) 3,137,136 $ (2.71)
============= ========= ======= ============ ========= =======
</TABLE>

13. STOCK OPTIONS

The Company has several stock option plans ("1996 Stock Option Plan", "1997
Stock Option Plan" and "1999 Stock Option Plan", collectively the "Stock Option
Plans") for officers and employees which provide

83
<PAGE> 86
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for both incentive stock options and non-qualified incentive options. The
Company's Board of Directors (the "Board") determines the option price (not to
be less than fair value for incentive stock options) at the date of grant. The
options generally expire ten years from the date of grant and as a result of a
change in control of the Company, in conjunction with the Recapitalization, all
options outstanding on June 28, 1998 became fully exercisable. All other options
granted subsequent to the Recapitalization, are exercisable at various points in
time ranging from fully exercisable at grant date to 33% increments over 3
years. In addition, the Board is authorized to grant stock appreciation rights
("SARS") under the Stock Option Plans to any person who has rendered services to
the Company.

In October 1997, the Board voted to purchase all of the outstanding SARs
under the Stock Option Plans at $10.00 per share for SARs previously held at
$100.00 to $110.00 per share and $7.00 per share for SARs held at $120.00 per
share. During the year ended August 31, 1998, $761,250, (excluding payroll tax
items) was expensed related to the purchase of SARS.

Additionally, in October 1997, the Board voted, subject to stockholder
approval, to amend the Company's 1997 Stock Option Plan to increase the number
of shares of stock reserved for issuance upon the exercise of options to
purchase Common stock granted from 100,000 to 200,000 shares.

In February 1999, the Company's stockholders approved the Company's 1999
Incentive Stock Plan (the "1999 Stock Option Plan"), (1,200,000 shares were
reserved for issuance under the 1999 Stock Option Plan), which provides for the
issuance of options and restricted stock to certain of the Company's employees
and outside directors and the issuance of SARs to certain of the Company's key
employees. The 1999 Plan is administered by a committee of two or more of the
Company's outside directors each of whom must satisfy the requirements for a
"non-employee" director under Rule 16b-3 of the Securities Exchange Act of 1934
and an "outside director" under Section 162(m) of the Code. No Key Employee of
the Company (as defined in the 1999 Stock Option Plan) may be granted an option
or SAR with respect to more than 150,000 shares of the Company's common stock,
except that an option to purchase 481,859 shares of common stock may be granted
to the Company's chief executive officer in connection with the renegotiation of
his June 23, 1998 employment agreement.

A summary of stock options granted under the Stock Option Plans as of
August 31, 1997, 1998 and 1999 and the changes during the years ending on those
dates is presented below:

<TABLE>
<CAPTION>
AS OF AUGUST 31, 1998 AS OF AUGUST 31, 1999
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
SHARES AVERAGE SHARES AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 0 $ 0 1,873,442 $18.10
Granted............................... 1,935,442 22.30 392,500 15.00
Exercised............................. 0 0 0 0
Forfeited............................. 62,000 147.50 148,500 48.46
---------- ----------
Outstanding at end of year............ 1,873,442 18.10 2,117,442 15.42
========== ==========
Options exercisable at year end....... 58,250 115.70 1,465,584 15.61
Weighted-average fair value of options
granted during the year per share... $ 1.25 $ 4.04
</TABLE>

84
<PAGE> 87
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about stock options outstanding
at August 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 8/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 8/31/99 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
147.50............... 6,750 4.91 147.50 6,750 147.50
15.00................ 2,110,692 4.55 15.00 1,458,834 15.00
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
information follows (in thousands except for earnings per share information):

<TABLE>
<CAPTION>
1997 1998 1999
------- --------- --------
<S> <C> <C> <C>
Pro forma net income (loss) before extraordinary
item................................................... $14,136 $(122,079) $(14.875)
Pro forma extraordinary gain, net of taxes of $2.9
million.............................................. -- -- 4,812
------- --------- --------
Pro forma net income (loss)............................ $14,136 $(122,079) $(10,063)
======= ========= ========
Pro forma basic net (loss) income per share............ $ 11.97 $ (78.75) $ (3.21)
======= ========= ========
Pro forma diluted net (loss) income per share.......... $ 11.97 $ (78.75) $ (3.21)
======= ========= ========
</TABLE>

SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
considerations received or the fair value of the equity instruments issued,
whichever is more reliably measured. The Company elected to continue to apply
the provisions of Accounting Principals Bulletin ("APB") Opinion 25 as permitted
by SFAS 123 and accordingly, provides pro forma disclosure.

The fair value of each option granted during the year ended August 31, 1999
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: (1) dividend yield of zero; (2) expected
volatility of 396.3%; (3) risk-free interest rate of 5.5%% and: (4) expected
life of two to ten years. The weighted average fair value of the options granted
during the year ended August 31, 1999 was $1,587,152. As of August 31, 1999,
there were 2,117,442 options outstanding which have an exercise price ranging
from $147.50 to $15.00 per common share and a weighted average contractual life
of 5.27 years.

14. RETIREMENT PLAN

During fiscal 1997 and for a portion of fiscal 1998, the Company
participated in PEC's defined contribution plan. Effective January 1, 1998, the
Company established its own defined contribution plan (the "Plan") with a plan
year end of December 31 and all amounts previously held in the PEC contribution
plan were transferred therein. Employees may contribute between 1% and 15% of
their gross salary. The Company's matching contribution equals 25% of the first
6% of gross salary that the participant elects to contribute to the Plan. In
addition, the Company may elect to make an additional matching contribution or
qualified non-elective contribution, as defined in the Plan document, at its
discretion. For the years ended August 31, 1997, 1998 and 1999, the Company
contributed approximately $24,779, $80,391 and $31,235 respectively, to the
Plan.

15. RELATED PARTY TRANSACTIONS

Sovereign Bancorp and City Mortgage. As a result of their investment in
the Company in the Recapitalization, both Sovereign Bancorp and City Mortgage
Services have a substantial ownership position in the Company. As part of the
Recapitalization, the Company entered into agreements with Sovereign Bancorp,

85
<PAGE> 88
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for a new $90.0 million warehouse line. This original agreement terminated on
December 29, 1998, and was renewable, at Sovereign's option, in six-month
intervals for up to five years. During December 1998, the Sovereign Warehouse
Line was renewed at $50.0 million and was reduced to $25.0 million in March 1999
through December 1999. The Sovereign Warehouse Line may be increased with
certain consents and contains pricing/fees which vary by product and the dollar
amount outstanding. The Sovereign Warehouse Line is to be secured by specific
loans held for sale and includes certain material covenants including
maintaining books and records, providing financial statements and reports,
maintaining its properties, maintaining adequate insurance and fidelity bond
coverage and providing timely notice of material proceedings. As of August 31,
1999, the Company had approximately $19.3 million outstanding under the
Sovereign Warehouse Line.

The Company also entered into an agreement with City Mortgage services to
acquire and service all of the mortgage loans that the Company owned at the date
of the Recapitalization at 90% of its carrying value for approximately $5.9
million. The Company, as a result, recorded an impairment of $703,225, which is
reflected in the accompanying 1998 Statement of Operations as a charge to Loan
Servicing Income. In addition, the Company and City Mortgage Services entered
into an agreement for City Mortgage Services to acquire and service all of the
mortgage loans produced or purchased by the Company after the Recapitalization
on a servicing retained basis. During fiscal 1999, the Company paid City
Mortgage Services approximately $325,000 to service the Company's loans.

Friedman, Billings, Ramsey & Co., Inc. Friedman, Billings, Ramsey & Co.,
Inc. ("FBR") served as placement agent for the Old Notes pursuant to a placement
agreement (the "Placement Agreement"). Under the terms of the Placement
Agreement, the Company paid the placement agent a fee of 160,000 shares of
Common stock representing 6.0% of the gross proceeds received by the Company
from the shares of Common stock and Preferred stock in the Recapitalization. The
gross proceeds did not include $10.0 million of Common stock acquired by an
affiliate of FBR received by the Company from the shares of Common stock and
Preferred stock in the Recapitalization. In addition, the Company has agreed,
pursuant to the Placement Agreement, to indemnify the Placement Agreement
against certain liabilities, including liabilities under the Securities Act, and
other liabilities incurred in connection with the Recapitalization.

According to FBR, as of December 1, 1998 Friedman, Billings, Ramsey Group,
Inc. ("FBRG"), through its three wholly owned subsidiaries, Friedman, Billings,
Ramsey Investment Management, Inc. ("Investment Management"), FBR Offshore
Management, Inc. ("Offshore Management") and Orkney Holdings, Inc. ("Orkney"),
had sole voting and dispositive power with respect to 535,912 shares of Common
stock. FBR has advised the Company that it may at any time hold long or short
positions in such securities. Investment Management serves as general partner
and discretionary investment manager for FBR Ashton, L.P. ("Ashton") which as of
December 1, 1998 owned 82,419 shares of Common stock. Offshore Management serves
as discretionary manager for FBR Opportunity Fund, Ltd. ("Opportunity Fund")
which, as of December 1, 1998, owned 8,262 shares of Common stock. Each of FBRG,
Investment Management and Offshore Management disclaims beneficial ownership of
shares of Common stock owned by the other two entities. Orkney is a wholly owned
subsidiary of FBRG which, as of December 1, 1998, owned 445,231 shares of Common
stock and 2,125 shares of Preferred stock (which are convertible into an
aggregate of 141,667 shares of Common stock). Each of FBRG, Ashton, Opportunity
Fund and Orkney disclaims beneficial ownership of shares of Common stock owned
by the other three entities. In addition, Emmanuel J. Friedman, Eric F. Billings
and W. Russell Ramsey are each control persons with respect to FBR In addition,
Emmanuel J. Friedman owns and has shared voting and dispositive power with his
wife over an additional 676,667 shares of Common stock.

In addition, FBR was a managing underwriter for the Company's initial
public offering and the Company's offering of the Current Notes, and was the
purchaser of Current Notes. FBR received compensation for such services and the
Company agreed to indemnify FBR against certain liabilities, including
liabilities under the Securities Act, and other liabilities arising in
connection with such offerings. In

86
<PAGE> 89
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

addition, FBR has in the past provided certain investment banking services to
the Company and affiliates of the Company.

The Money Centre, Inc. The Money Centre, Inc., a wholly-owned subsidiary
of the Company, leases office space at fair market value from a shareholder. The
lease has a ten year term expiring in 2009. Total lease payments were $45,000
for the fiscal year ended August 31, 1999. During fiscal year 1999, The Money
Centre, Inc. originated first and second mortgages to the Company's strategic
partners totaling approximately $727,650. As of August 31, 1999, these mortgages
have been sold to other financial institutions. Advances were made to The Money
Centre employees totalling $366,051 are outstanding at August 31, 1999 and are
included in Other Receivables on the Statement of Financial Condition.

Value Partners. In August 1999, the Company sold 12% Secured Convertible
Notes (the "Convertible Notes") to Value Partners, Ltd. ("Value Partners") for
$7.0 million cash pursuant to a Secured Convertible Note Purchase Agreement. The
Convertible Notes mature in August 2006 and accrue interest at an annual rate of
12%. Interest on the Convertible Notes is payable semi-annually on February 15
and August 15 of each year beginning February 15, 2000. Pursuant to a
participation agreement between Value Partners and T. Rowe Price Recover Fund
II, L.P. ("T. Rowe Price"), T. Rowe Price purchased a participation interest in
Convertible Notes of $2.0 million.

Greenwich Capital Markets. Champ Meyercord, the Company's Chairman of the
Board and Chief Executive Officer, was formerly a senior investment banker at
Greenwich Capital Markets ("Greenwich"). In October 1996, Greenwich agreed to
purchase $2.0 billion of loans over a five year period from the Company. The
Company has sold Greenwich approximately $800.0 million in loans from the
inception of the agreement. The agreement with Greenwich was terminated in June
1998 and the Company has no further obligation under the agreement.

The Company has a pledge and security agreement with Greenwich for a $25.0
million revolving credit facility. Amounts borrowed under this facility are
secured by certain of the Company's mortgage related securities.

In December 1998, the Company purchased an additional 18.28% interest in
the Senior Trust Certificates of an existing securitization for $1.1 million.

Mego Financial Corporation. In April 1998, an agreement was made to reduce
by $5.3 million the income tax portion of a payable that the Company owed Mego
Financial under a Tax Allocation and Indemnity Agreement dated November 19,
1996. The Company filed a consolidated federal tax return with Mego Financial's
affiliated group prior to the Spin off under such Tax Allocation and Indemnity
Agreement. The final settlement of the amount payable is recorded as an
additional capital contribution as if the settlement occurred on the date of the
Spin off.

Preferred Equity Corporation (PEC). During the years ended August 31, 1997
and 1998, PEC, a wholly owned subsidiary of Mego Financial, provided certain
services to the Company including loan servicing and collection for a cost of
$1.9 million and $2.2 million respectively, which is included in general and
administrative expense. In addition, PEC provided services including executive,
accounting, legal, management information, data processing, human resources,
advertising and promotional materials (management services) totaling $967,000
and $617,000, which were included in general and administrative expenses for the

87
<PAGE> 90
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

years ended August 1997 and 1998, respectively. Included in other interest
expense for the years ended August 31, 1997 and 1998, are $16,000 and $0,
respectively, related to advances from PEC.

Management believes the allocation methodologies and contractual
arrangements for services performed by PEC have been reasonable and are
representative of an approximation of the expense the Company would have
incurred had it operated as a stand alone entity performing such services.

Other. In June 1998, the Company retained Spencer I Browne, a member of
the Company's Board of Directors, as a special consultant to the Company. In
addition, the Company granted Mr. Browne options to purchase 60,000 shares of
the Company's Common stock. The stock options have an exercise price of equal to
the cost of Common stock in the Recapitalization of $15.00 per share.

16. COMMITMENTS AND CONTINGENCIES

Leases. The Company leases office space and equipment under operating
leases that expire at various dates through June 2009. The office space lease is
subject to an annual rent escalation of 2 to 4%. During fiscal 1997, 1998 and
1999, the Company's rent expense totaled $1.2 million, $1.6 million and $1.5
million respectively. Future minimum payments at August 31, 1999 under these
operating leases are set forth below (thousands of dollars):

<TABLE>
<S> <C>
2000........................................................ $2,217
2001........................................................ 1,984
2002........................................................ 1,537
2003........................................................ 660
2004........................................................ 638
Thereafter.................................................. 1,715
------
Total............................................. $8,751
======
</TABLE>

Employment Agreements. On June 23, 1998 the Company entered into an
employment agreement with its chairman of the board and chief executive officer
which was amended on February 12, 1999. The term of the agreement is until
December 31, 2001 and is renewable on a year-to-year basis unless terminated by
one of the parties. The agreement calls for a base salary of $300,000 per year
and bonus.

The Company entered into employment agreements with four officers of The
Money Centre, Inc. on July 15, 1999. The agreements carry four-year terms and
are renewable thereafter on a year-to-year basis unless terminated by one of the
parties thereto. The base salary under the agreements is $300,000 each and the
employees are eligible to participate in a bonus plan.

The Company entered into an employment agreement with the director of
public relations of The Money Centre, Inc. on July 15, 1999. The agreement has a
term of two years. The annual base salary under the agreement is $200,000.

The Company entered into an employment agreement with the assistant vice
president -- operations of The Money Centre, Inc. on July 15, 1999. The
agreement has a term of two years. The annual base salary under the agreement is
$164,000.

Litigation. On October 8, 1998, the Office of the Consumer Credit
Commissioner of the State of Texas issued a denial of the company's application
for licensing as a secondary mortgage lender. On October 20, 1998, the Company
filed an appeal of the Commissioner's decision. As a result of settlement terms
reached with the Commissioner on May 13, 1999, the Company's secondary mortgage
license application remains valid and pending.

88
<PAGE> 91
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia by Robert J. Feeney, as a purported
class action against the Company and Jeffrey S. Moore, the Company's former
President and Chief Executive Officer. The complaint alleges, among other
things, that the defendants violated the federal securities law in connection
with the preparation and issuance of certain of the Company's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the Common stock between April 11, 1997 and December 18, 1997, and
seeks damages in an unspecified amount, costs, attorney's fees and such other
relief as the court may deem proper. On June 30, 1998, the plaintiff amended the
complaint to add additional plaintiffs, to add as a defendant Mego Financial,
the Company's former parent, and to extend the class period through and
including May 20, 1998. On September 18, 1998, the Company, Jeffrey S. Moore and
Mego Financial filed motions to dismiss the complaint. On April 8, 1999, the
court granted each of these motions. In the court's order dismissing the
complaint, the plaintiffs were permitted, upon proper motions, to serve and file
a second amended and redrafted complaint within 30 days. On May 10, 1999, the
Plaintiffs moved for leave to file and serve the second amended and redrafted
complaint contemplated in the earlier order. On July 19, 1999, the Company,
Jeffrey S. Moore and Mego Financial filed motions to dismiss the second amended
and redrafted complaint. Those motions are still pending. The Company believes
that it has meritorious defenses to this lawsuit and that resolution of this
matter will not result in a material adverse effect on the business or financial
condition of the Company.

On October 2, 1998, an action was filed in the United States District Court
for the Western Division of Tennessee by Traci Parris, as a purported class
action against Mortgage Lenders Association, Inc., the Company and City Mortgage
Services, Inc., one of the Company's strategic partners. The complaint alleges,
among other things, that the defendants charged interest rates, origination fees
and loan brokerage commissions in excess of those allowed by law. The complaint
alleges, among other things, that the defendants charged interest rates,
origination fees and loan brokerage commissions in excess of those allowed by
law. The named plaintiff seeks to represent a class of borrowers and seeks
damages in an unspecified amount, reform or nullification of loan agreements,
injunction, costs, attorney's fees and such other relief as the court may deem
just and proper. On October 27, 1998, the Company filed a motion to dismiss the
complaint for lack of jurisdiction, which the court denied on May 18, 1999. On
July 6, 1999, the court denied the Company's subsequent motion for
reconsideration and on the same date granted the Company's request for
interlocutory appeal to the United States Court of Appeals for the Sixth Circuit
on the question of jurisdiction. On September 28, 1999, the Court of Appeals
agreed to accept the Company's interlocutory appeal on the jurisdictional
question, and docketed the appeal. That interlocutory appeal is still pending.
The Company believes that it has meritorious defenses to this lawsuit and that
resolution of this matter will not result in a material adverse effect on the
business or financial condition of the Company.

In the ordinary course of its business, the Company is, from time to time,
named in lawsuits. The Company believes that resolution of these matters will
not have a material adverse effect on the business of financial condition of the
Company.

17. FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" ("SFAS
107"), requires disclosure of estimated fair value information for financial
instruments, whether or not recognized in the Statements of Financial Condition.
Fair values are based upon estimates using present value or other valuation
techniques in cases where quoted market prices are not available. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and in, many cases could not be realized in immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.

89
<PAGE> 92
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments at August 31, 1998 and 1999
are set forth below:

<TABLE>
<CAPTION>
AUGUST 31, 1998 AUGUST 31, 1999
------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
VALUE VALUE VALUE VALUE
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents(a).............. $36,404 $36,404 $10,475 $10,475
Loans held for sale, net(b)............... 10,975 10,975 54,844 56,489
Mortgage related securities(c)............ 34,830 34,830 31,757 31,757
Mortgage servicing rights(c).............. 83 83 -- --
FINANCIAL LIABILITIES:
Warehouse line(d)......................... -- -- 61,513 61,513
Secured revolving credit lines(d)......... 9,961 9,961 1,685 1,685
Notes and contracts payable(d)............ 6,384 6,384 12,292 12,292
Subordinated debt(e)...................... 42,693 32,020 30,724 16,284
</TABLE>

- ---------------

(a) Carrying value was used as the estimate of fair value.
(b) Since it is the Company's business to sell loans it makes, the fair value
was estimated by using outstanding commitments from investors adjusted for
non-qualified loans and the collateral securing such loans.
(c) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment assumptions
based upon available market data, opinions from investment bankers and
portfolio experience. As part of the Recapitalization, an agreement was
reached with City Mortgage Services for the sale of the Mortgage Servicing
Rights at 90% of their computed carrying value. The Company, as a result,
recorded an impairment of $703,225 for the year ended August 31, 1998, which
is reflected in the Statement of Operations as a charge to Loan Servicing
Income.
(d) The warehouse lines, secured revolving credit lines and notes payable
generally are adjustable rate, indexed to the prime rate or LIBOR;
therefore, carrying value approximates fair value. Contracts payable
represent capitalized equipment leases with a weighted-average interest rate
of 9.25% at August 31, 1998 and 9.38% at August 31, 1999, which approximates
fair value.
(e) The fair value was calculated based upon estimated market prices obtained
from investment bankers.

At August 31, 1998 and 1999, the Company had $3.6 million and $157.3
million respectively, in outstanding commitments to originate and purchase
loans. The fair value of the commitments was estimated at $145,000 at August 31,
1998 and $1.2 million at August 31, 1999. The fair values were calculated based
on a theoretical gain or loss on the sale of a funded loan adjusted for an
estimate of loan commitments not expected to fund, considering the difference
between investor yield requirements and the committed loan rates. The estimated
fair value is not necessarily representative of the actual gain to be recorded
on such loan sales in the future.

The fair value estimates made at August 31, 1998 and 1999 were based upon
pertinent market data and relevant information on the financial instruments at
that time. These estimates do not reflect any premium or discount that could
result from the sale of the entire portion of the financial instruments. Because
no market exists for a substantial portion of the financial instruments, fair
value estimates are based upon judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. The Company had no other off-balance sheet
instruments at August 31, 1998 and 1999.

90
<PAGE> 93
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Fair value estimates are based upon existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. [For instance, the Company has certain fee-generating
business lines (e.g., its loan servicing operations) that were not considered in
these estimates since these activities are not financial instruments.]

18. CONCENTRATIONS OF RISK

Availability of Funding Source. The Company funds substantially all of the
loans which it produces or purchases with borrowings through its financing
facilities and internally generated funds, as well as public and private sales
of debt and equity securities. These borrowings are in turn repaid with the
proceeds received by the Company from selling such loans through loan sales or
securitizations. Any failure to renew or obtain adequate financing under its
financing facilities, or other borrowings, or any substantial reduction in the
size of or pricing in the markets for the Company's loans, could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.

Credit Risk. The Company is exposed to on-balance sheet credit risk
related to its loans held for sale and mortgage related securities. The Company
is exposed to off-balance sheet credit risk related to loans which the Company
has committed to originate and loans sold under recourse provisions. The
outstanding balance of loans sold with recourse provisions totaled $87.4 million
and $0 million at August 1998 and 1999, respectively.

Off-Balance Sheet Activities. These financial instruments consist of
commitments to extend credit to borrowers and commitments to purchase loans from
others. As of August 31, 1998 and 1999, the Company had outstanding commitments
to extend credit or purchase loans in the amounts of $3.6 million and $157.3
million respectively. These commitments do not represent the expected total cash
outlay of the Company, as historically only 40% of these commitments result in
loan production or purchases. The prospective borrower or seller is under no
obligation as a result of the Company's commitment. The Company's credit and
interest rate risk is therefore limited to those commitments which result in
loan production and purchases. The commitments are made for a specified fixed
rate of interest, therefore the Company is exposed to interest rate risk, to the
extent changes in market interest rates change prior to the origination and
prior to the sale of the loan.

Interest Rate Risk. The Company's profitability is in part determined by
the difference, or "spread", between the effective rate of interest received on
the loans produced or purchased by the Company and the interest rates payable
under its financing facilities during the warehousing period and yield required
by investors on loan sales and securitizations. The spread can be adversely
affected after a loan is produced or purchased and while it is held during the
warehousing period by increases in the interest rate demanded by investors in
securitizations or sales. In addition, because the loans produced and purchased
by the Company have fixed rates, the Company bears the risk of narrowing spreads
because of interest rate increases during the period from the date the loans are
produced or purchased until the closing of the sale or securitization of such
loans. Additionally, the fair value of mortgage related securities and mortgage
servicing rights owed by the Company maybe adversely affected by changes in the
interest rate environment which could effect the discount rate and prepayment
assumptions used to value the assets. Any such adverse change in assumptions
could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.

20. SUBSEQUENT EVENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and cash equivalents currently on hand will not be sufficient to enable to
Company to sustain operations past December 31, 1999. In addition, as a result
of this decrease, the Company currently lacks sufficient liquidity to pay its
outstanding debts, including accrued interest on the Company's outstanding
indebtedness.

In order to improve its liquidity situation, the Company has obtained
commitments from the holders of $28 million principal amount of its outstanding
New Notes to exchange such outstanding New Notes for $12.0 million principal
amount of new 12% Secured Convertible Notes due August 2006 (the "Exchange
Notes") and for an aggregate of 22 1/2% of the fully diluted shares of
outstanding Common Stock. In addition, the holders of such New Notes have agreed
to waive the payment of approximately $2,000,000 of accrued interest payable to
them in December 1999 under the terms of the Indenture governing the New Notes.
Under the terms of the Exchange Notes, no interest will be payable to the
noteholders by Altiva until June 15, 2001, although interest will accrue from
the date of issuance. Completion of the exchange is contingent on the
finalization of documentation related to the exchange, and the issuance of
Common Stock in the exchange may require the approval of the Company's
stockholders under the rules of the Nasdaq Stock Market. Altiva expects that the
discount in the principal amount of notes outstanding and the waiver of the
interest payment will result in the reduction of the Company's projected cash
expenditure by $3.4 million over the next twelve months.

In addition, the Company has received a commitment from Value Partners,
Ltd. to purchase an additional $7,000,000 principal amount of Convertible Notes.
Consummation of this sale of Convertible Notes is subject to the execution of
mutually agreed upon amendments to the Secured Note Purchase Agreement between
the parties and other related agreements.

There can be no assurances that the exchange of the New Notes and the
issuance of the additional Convertible Notes will be consummated. A failure to
consummate these transactions may lead the Company to become insolvent. In
addition, there is no guarantee that the Company will not suffer additional
unforeseen events that will cause further liquidity shortages.

92
<PAGE> 95
ALTIVA FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

21. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables reflect quarterly financial data for the Company.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1997 1998 1998 1998
-------------- -------------- ------------ ------------
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Loss on sale of loans and net unrealized gain
(loss) on mortgage related securities..... $ (9,387) $ (5,564) $ (44,731) $ (36,920)
Interest income (expense), net............... 1,210 684 132 (402)
Loan servicing income, net................... 1,194 1,310 (1,367) (138)
---------- ---------- ---------- ----------
Total revenues (losses).............. $ (6,983) $ (3,570) $ (45,966) $ (37,460)
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses........................... $ 10,198 $ 9,265 $ 7,984 $ 7,322
Net provision (benefit) for credit losses.... 1,590 706 108 (5,602)
Interest..................................... 77 150 103 109
---------- ---------- ---------- ----------
Total expenses....................... $ 11,865 $ 10,121 $ 8,195 $ 1,829
---------- ---------- ---------- ----------
Loss before income taxes....................... (18,848) (13,691) (54,161) (39,289)
Income tax expense (benefit)................... (7,153) 7,153 -- (6,334)
---------- ---------- ---------- ----------
Net loss....................................... $ (11,695) $ (20,844) $ (54,161) $ (32,955)
========== ========== ========== ==========
Loss per share:
Basic........................................ $ (9.51) $ (16.95) $ (44.03) $ (13.18)
========== ========== ========== ==========
Diluted...................................... $ (9.51) $ (16.95) $ (44.03) $ (13.18)
========== ========== ========== ==========
Weighted-average number of shares outstanding:
Basic........................................ 1,230,000 1,230,000 1,230,000 2,500,725
========== ========== ========== ==========
Diluted...................................... 1,230,000 1,230,000 1,230,000 2,500,725
========== ========== ========== ==========
</TABLE>

93
<PAGE> 96

ALTIVA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1998 1999 1999 1999
------------ ------------ ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Gain (loss) on sale of loans and net unrealized
gain (loss) on mortgage related securities... $ 442 $ (219) $ 3 $ (2,336)
Interest income (expense), net................. (162) (561) 70 264
Loan servicing income, net..................... 240 92 (102) 145
---------- ---------- ---------- ----------
Total revenues (losses).............. 520 (688) (29) (1,927)
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses............................. 4,397 4,874 4,378 5,640
Net provision (benefit) for credit losses...... 43 (340) 20 277
Interest....................................... 42 21 34 27
---------- ---------- ---------- ----------
Total expenses....................... 4,482 4,555 4,432 5,944
---------- ---------- ---------- ----------
Loss before income taxes and extraordinary
item......................................... (3,962) (5,243) (4,461) (7,871)
Income tax expense (benefit)................... (1,468) (2,120) (1,589) (3,072)
---------- ---------- ---------- ----------
Net (loss) before extraordinary item........... (2,494) (3,123) (2,872) (4,799)
Extraordinary gain, net of taxes of $2.9
million...................................... -- 4,812 -- --
Net income (loss).............................. $ (2,494) $ 1,689 $ (2,872) $ (4,799)
========== ========== ========== ==========
Earnings (loss) per share:
Basic........................................ $ (0.82) $ 0.55 $ (0.94) $ (1.42)
========== ========== ========== ==========
Diluted...................................... $ (0.82) $ 0.55 $ (0.94) $ (1.42)
========== ========== ========== ==========
Weighted-average number of shares outstanding:
Basic........................................ 3,056,666 3,056,666 3,056,588 3,376,000
========== ========== ========== ==========
Diluted...................................... 3,056,666 3,056,666 3,056,588 3,376,000
========== ========== ========== ==========
</TABLE>

94
<PAGE> 97

SIGNATURES

Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on this 14th day of
December, 1999.

MEGO MORTGAGE CORPORATION
(Registrant)

By: /s/ EDWARD B. MEYERCORD
---------------------------------------
Edward B. Meyercord,
Chairman and Chief Executive Officer

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 indicated on this 14th day of December, 1999.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ EDWARD B. MEYERCORD Chairman and Chief Executive Officer
- -------------------------------------------- (Principal Executive Officer)
Edward B. Meyercord

/s/ J. RICHARD WALKER Executive Vice President and Chief Financial
- -------------------------------------------- Officer (Principal Financial Officer)
J. Richard Walker

/s/ SPENCER I. BROWNE Director
- --------------------------------------------
Spencer I. Browne

/s/ HUBERT M. STILES Director
- --------------------------------------------
Hubert M. Stiles

/s/ DAVID J. VIDA Director
- --------------------------------------------
David J. Vida

/s/ JOHN D. WILLIAMSON, JR. Director
- --------------------------------------------
John D. Williamson, Jr.
</TABLE>

<PAGE> 1
EXHIBIT 21.1

Subsidiaries of the Registrant

Mego Mortgage Home Loan Acceptance Corp.

The Money Centre, Inc.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ALTIVA FINANCIAL CORPORATION FOR THE TWELVE MONTHS ENDED
AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 10,475
<SECURITIES> 0
<RECEIVABLES> 54,844
<ALLOWANCES> 3,462
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,068
<DEPRECIATION> 1,793
<TOTAL-ASSETS> 135,386
<CURRENT-LIABILITIES> 83,544
<BONDS> 30,724
0
1
<COMMON> 37
<OTHER-SE> 21,080
<TOTAL-LIABILITY-AND-EQUITY> 135,386
<SALES> 0
<TOTAL-REVENUES> (2,124)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> (21,537)
<INCOME-TAX> (8,249)
<INCOME-CONTINUING> (13,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,812
<CHANGES> 0
<NET-INCOME> (8,476)
<EPS-BASIC> (2.71)
<EPS-DILUTED> (2.71)

</TABLE>