FIRSTCITY FINANCIAL CORP, 424B5, 1998-07-30

FIRSTCITY FINANCIAL CORP
424B5, 1998-07-30
STATE COMMERCIAL BANKS

Previous: FIRSTCITY FINANCIAL CORP, 8-K, 1998-07-30

Next: INSURED MUNICIPALS INCOME TRUST 47TH INSURED MULT SERIES, 497J, 1998-07-30

<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-59333

THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AND IS SUBJECT TO COMPLETION OR AMENDMENT.

SUBJECT TO COMPLETION, DATED JULY 29, 1998
PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 17, 1998

800,000 SHARES

[FIRSTCITY LOGO]

% CUMULATIVE PREFERRED STOCK, SERIES A

FirstCity Financial Corporation, a Delaware corporation (the "Company"), is
offering 800,000 shares of % Cumulative Preferred Stock, Series A, stated
value $100.00 per share (the "Series A Preferred Stock"). Cumulative cash
dividends on the Series A Preferred Stock will be payable, if declared by the
Board of Directors of the Company, quarterly on the fifteenth of January, April,
July and October of each year, commencing January 15, 1999, at a rate of % per
annum (equivalent to $ per annum per share). On and after September 30,
2004, the Series A Preferred Stock will be redeemable at the option of the
Company, in whole or in part, initially at a redemption price of $ per share
through October 14, 2005, at a redemption price of $ per share through
October 14, 2006, and thereafter at the stated value of $100.00 per share,
together in each case with accumulated and unpaid dividends thereon. The Series
A Preferred Stock is subject to mandatory redemption on September 30, 2008 at a
redemption price of $100.00 per share, together with accumulated and unpaid
dividends thereon. See "Certain Terms of the Series A Preferred Stock."

The Company expects that the Series A Preferred Stock will be purchased by
a limited number of investors and will therefore not qualify for listing on the
NASDAQ National Market upon completion of the offering. Although the Company has
applied for an exemption from the minimum holder and public float requirements
of The NASDAQ Stock Market to allow the Series A Preferred Stock to be listed on
the NASDAQ National Market, there can be no assurance that such exemption will
be granted.

SEE "RISK FACTORS" BEGINNING ON PAGE S-11 AND PAGE 3 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
PRICE PROCEEDS
TO UNDERWRITING TO
PUBLIC(1) DISCOUNTS(2) COMPANY(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................................... $ $ $
- --------------------------------------------------------------------------------------------------------------
Total.......................................... $ $ $
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Plus accrued dividends, if any, from the date of original issuance.

(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(3) Before deducting expenses payable by the Company estimated at $350,000.

The shares of Series A Preferred Stock to be distributed to the public are
offered by the Underwriters, subject to prior sale, when, as and if received and
accepted by the Underwriters, subject to approval of certain legal matters by
counsel for the Underwriters and certain other conditions. The Underwriters
reserve the right to withdraw or cancel such offer and to reject orders in whole
or in part. It is expected that delivery of the certificates for the shares of
Series A Preferred Stock will be made against payment thereon in New York, New
York on or about , 1998.

KEEFE, BRUYETTE & WOODS, INC. PIPER JAFFRAY INC.

The date of this Prospectus Supplement is , 1998
<PAGE> 2

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF
PREFERRED STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
PREFERRED STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

S-2
<PAGE> 3

SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements (including the Notes thereto) included elsewhere in this
Prospectus Supplement or incorporated by reference herein. Unless the context
otherwise requires, references in this Prospectus Supplement to the "Company'
and "FirstCity" shall mean FirstCity Financial Corporation, a Delaware
corporation, and its subsidiaries and predecessors. References to the Company
for periods prior to July 3, 1995 refer to the Company's predecessor, J-Hawk
Corporation.

THE COMPANY

GENERAL

The Company is a diversified financial services company headquartered in
Waco, Texas with over 100 offices throughout the United States and a presence in
France, Asia and Mexico. The Company began operating in 1986 as a specialty
financial services company focused on acquiring and resolving distressed loans
and other assets purchased at a discount relative to the aggregate unpaid
principal balance of the loans or the appraised value of the other assets ("Face
Value"). To date, the Company has acquired, for its own account and through
various affiliated partnerships, pools of assets or single assets (collectively
referred to as "Portfolio Assets" or "Portfolios") with a Face Value of
approximately $3.0 billion. In 1996, the Company adopted a growth strategy to
diversify and expand its financial services business. To implement its growth
strategy, the Company has acquired or established several businesses in the
financial services industry, building upon its core strength and expertise as
one of the earliest participants in the business of acquiring and resolving
distressed financial assets and other assets. The Company's servicing expertise,
which it has developed largely through the resolution of distressed assets, is a
cornerstone of its growth strategy. Today the Company is engaged in three
principal businesses: (i) residential and commercial mortgage banking; (ii)
Portfolio Asset acquisition and resolution; and (iii) consumer lending.

BUSINESS STRATEGY

The Company's business strategy is to continue to broaden and expand its
business within the financial services industry while building on its core
servicing strengths and credit expertise. The following principles are key
elements to the execution of the Company's business strategy:

- Expand the financial products and services offered by existing
businesses.

- Broaden its sources of revenue and operating earnings by developing or
acquiring additional businesses that leverage its core strengths and
management expertise.

- Cross-sell between the Company's businesses.

- Invest in fragmented or underdeveloped markets in which the Company has
the investment and servicing expertise to achieve attractive risk
adjusted rates of return.

- Pursue new business opportunities through joint ventures, thereby
capitalizing on the expertise of partners whose skills complement those
of the Company.

- Maximize growth in earnings, thereby permitting the utilization of the
Company's substantial tax net operating loss carryforwards.

MORTGAGE BANKING

The Company engages in the mortgage banking business through two principal
subsidiaries, FirstCity Financial Mortgage Corporation ("Mortgage Corp.") and FC
Capital Corporation ("Capital Corp."). Mortgage Corp. is a direct retail and
broker retail mortgage bank, which originates, purchases, sells and services
residential and commercial mortgage loans through more than 80 offices
throughout the United

S-3
<PAGE> 4

States. The Company acquired Mortgage Corp. (then named Harbor Financial Group,
Inc.) by merger in July 1997 (the "Harbor Merger").

Mortgage Corp. originates and purchases both fixed rate and adjustable rate
residential mortgage loans, primarily secured by first liens on single family
residences. The majority of the residential loans originated by Mortgage Corp.
are conventional conforming loans that qualify for sale to, or conversion into
securities issued by, various government agencies. Substantially all of the
conventional conforming loans are originated with loan-to-value ratios at or
below 80% unless the borrower obtains private mortgage insurance. Mortgage Corp.
retains the right to service substantially all of the residential loans that it
originates and, as of March 31, 1998, had a residential servicing portfolio of
approximately $5.8 billion in principal balance of loans. Mortgage Corp. ranks
among the 50 largest mortgage banks in the United States. The volume of
residential and commercial loans originated by Mortgage Corp. increased from
$523 million in the first quarter of 1997 to $1.9 billion in the first quarter
of 1998.

In 1996, Mortgage Corp. implemented a program to supplement its origination
of conventional conforming loans by offering residential mortgage loans to
borrowers who have significant equity in their homes and who generally do not
satisfy the more rigid underwriting standards of the traditional residential
mortgage lending market (referred to herein as "Home Equity Loans"). These loans
are extended to borrowers who demonstrate an ability and willingness to repay
credit, but who might have experienced an adverse event, such as job loss,
illness or divorce, or have had past credit problems such as delinquency,
bankruptcy, repossession or charge-offs. Such an event normally will temporarily
impair a borrower's credit rating so that the borrower will not qualify as a
prime borrower from a traditional mortgage lender. Mortgage Corp. currently
sells its Home Equity Loans, servicing released, principally to other mortgage
banking companies.

Mortgage Corp.'s commercial mortgage business consists of the origination
and servicing of commercial mortgage loans secured by commercial real estate
properties and single family residential construction loans. Through eight
offices located in California, Texas and Colorado, Mortgage Corp. originates
commercial loans that are funded by third parties, primarily insurance
companies, for which Mortgage Corp serves as the correspondent. The loans are
secured by multi-family residential projects, office buildings, shopping centers
and other income producing properties. Revenues derived from Mortgage Corp.'s
commercial lending business are principally origination fees based on a
percentage of the loan amount. In 1995, Mortgage Corp. began originating for its
own account and servicing residential construction loans through a construction
loan department headquartered in Houston, Texas. Construction loans are
currently originated in nine states.

The Company formed Capital Corp. in August 1997 to acquire, originate,
warehouse, securitize and service Home Equity Loans. The Company owns 80% of the
outstanding stock of Capital Corp. and Capital Corp.'s senior management owns
the remaining 20%. Capital Corp. acquires Home Equity Loans individually and in
bulk from several independent loan origination sources. Substantially all of the
Home Equity Loans acquired by Capital Corp. are secured by first liens on the
underlying collateral. From its first acquisition of loans in October 1997
through March 31, 1998, Capital Corp. acquired Home Equity Loans with principal
balances totaling $89.0 million from seven different sellers. Although Capital
Corp. has not acquired Home Equity Loans originated by Mortgage Corp., it may
acquire such loans in the future.

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

The Company engages in the Portfolio Asset acquisition and resolution
business and is beginning to originate niche commercial loans through FirstCity
Commercial Corporation and its subsidiaries ("Commercial Corp."). In the
Portfolio Asset acquisition and resolution business Commercial Corp. acquires
and resolves Portfolios of performing and nonperforming commercial and consumer
loans and other assets, including pools of real estate, which are generally
acquired at a discount to Face Value. Performing assets are those as to which
debt service payments are being made in accordance with the original or
restructured terms of such assets. Nonperforming assets are those as to which
debt service payments are not being made in accordance with the original or
restructured terms of such assets, or as to which no debt service payments are

S-4
<PAGE> 5

being made. A Portfolio is designated as nonperforming unless substantially all
of the assets comprising the Portfolio are performing. Purchases may be in the
form of pools of assets or single assets.

Portfolios are either acquired for Commercial Corp.'s own account or
through investment entities formed with Cargill Financial Services Corporation
("Cargill Financial") or one or more other co-investors (each such entity, an
"Acquisition Partnership"). Cargill Financial is a wholly owned subsidiary of
Cargill, Incorporated, which is generally regarded as one of the world's largest
privately-held corporations and has offices worldwide. The Company began its
relationship with Cargill Financial in 1991. Since that time, the Company and
Cargill Financial have formed a series of Acquisition Partnerships through which
they have jointly acquired over $2.2 billion in Face Value of distressed assets.

Historically, Commercial Corp. has leveraged its expertise in asset
resolution and servicing by investing in a wide variety of asset types in
virtually all 50 states, the Virgin Islands, Puerto Rico and France. Commercial
Corp. continues to follow this investment strategy and seeks expansion
opportunities into new asset classes and foreign markets when it believes it can
achieve attractive risk adjusted returns. In particular, Commercial Corp. is
pursuing a number of opportunities to purchase Portfolio Assets in Japan and
Thailand through affiliations with local investment and servicing partners.

The Company's development of a niche commercial lending business is a
logical extension of its extensive experience with the resolution of distressed
assets. In many cases, the resolution of such assets involves the modification
of an existing debt into a new or modified extension of credit more suited to
the borrower's needs, ability to pay and value of the underlying collateral. The
Company intends to use such experience as the foundation upon which Commercial
Corp. will seek niche commercial lending opportunities.

CONSUMER LENDING

The Company conducts all of its consumer receivable origination activities
through FirstCity Consumer Lending Corporation and its subsidiaries ("Consumer
Corp."). Consumer Corp.'s current focus is on the origination and servicing of
sub-prime consumer loans. Such loans are extended to borrowers who evidence an
ability and willingness to repay credit, but have experienced an adverse event,
such as a job loss, illness or divorce, or have had past credit problems such as
delinquency, bankruptcy, repossession or charge-offs. The significant majority
of Consumer Corp.'s current business is in the sub-prime automobile sector.
Consumer Corp.'s current practice is to individually underwrite and price each
loan prior to funding.

The Company's initial venture into the sub-prime automobile market involved
the acquisition in mid-1996 of a distressed sub-prime automobile loan portfolio
from a secured lender and the equity of the company that operated the program
through which the loans had been originated. This program involved the indirect
acquisition of automobile loans from financial intermediaries that had direct
contact with automobile dealerships. The Company was required to purchase loans
that satisfied minimum contractual underwriting standards and was not permitted
to negotiate purchase discounts for a loan based on the individual risk profile
of the loan and the borrower. After operating the program for approximately 15
months, the Company concluded that the contractual underwriting standards and
purchase discounts on which the program was based were insufficient to generate
sub-prime automobile loans that produced acceptable risk adjusted returns. As a
result, the Company terminated its obligations with the financial institutions
participating in such origination program effective as of January 31, 1998.

With the benefit of the experience gained by the Company through its
initial sub-prime automobile financing program, the Company formed FirstCity
Funding Corporation ("Funding Corp.") in the third quarter of 1997. Funding
Corp.'s business model is predicated upon the acquisition of newly originated
sub-prime automobile finance contracts directly from franchised dealerships at a
discount that is adjusted to reflect the aggregate expected losses on defaulted
contracts. From its inception in September 1997 through March 31, 1998, Funding
Corp. acquired approximately $25.7 million in principal balance of loans.

S-5
<PAGE> 6

SERVICING

The Company services substantially all of the assets it owns as well as the
assets in which it has an economic interest, such as assets owned by
securitization trusts. The Company conducts its asset servicing through
servicing divisions specializing in residential, commercial or consumer loans.
The Company provides overall coordination and direction to each of its servicing
divisions in an effort to maximize overall servicing efficiencies and economies,
while addressing the unique requirements inherent in servicing each asset class.
FirstCity Servicing Corporation ("Servicing Corp."), which services commercial
mortgage assets acquired by Commercial Corp., has been accorded an above average
service rating by Standard & Poor's ("S&P") as a special servicer of commercial
mortgage loans. The residential and commercial servicing activities of Mortgage
Corp. have received a verbal confirmation from S&P that such servicing
capabilities of Mortgage Corp. will be accorded an average rating. In addition,
Mortgage Corp. is an HUD approved seller/servicer of residential mortgage loans.

BACKGROUND

In July 1995, the Company acquired by merger (the "Merger") First City
Bancorporation of Texas, Inc. ("FCBOT"), a former bank holding company that had
been engaged in a proceeding under Chapter 11 of the Bankruptcy Code since
November 1992. As a result of the Merger, the Common Stock of the Company became
publicly held and the Company received $20 million of additional equity capital
and entered into an incentive-based servicing agreement to manage approximately
$300 million in assets for the benefit of the former equity holders of FCBOT. In
addition, as a result of the Merger, the Company retained FCBOT's rights to
approximately $596 million in net operating loss carryforwards ("NOLs").

The Company's principal executive offices are located at 6400 Imperial
Drive, Waco, Texas 76712, and its telephone number is (254) 751-1750. The
mailing address of the Company's principal executive offices is P.O. Box 8216,
Waco, Texas 76714-8216.

THE OFFERING

Series A Preferred Stock offered by
the
Company........................... 800,000 shares of % Cumulative
Preferred Stock, Series A, stated value
$100.00 per share.

Liquidation rights.................. The Series A Preferred Stock shall have
a liquidation preference of $100.00 per
share plus an amount equal to all
dividends accumulated and unpaid
thereon.

Rank................................ The Series A Preferred Stock shall rank
prior to the Company's common stock, par
value $.01 per share (the "Common
Stock") and to all other classes and
series of equity securities of the
Company now or hereafter authorized,
issued or outstanding, other than any
classes or series of equity securities
of the Company ranking on a parity with
or senior to the Series A Preferred
Stock as to dividend rights and rights
upon liquidation, dissolution or winding
up of the Company. The Company's
authorized Special Preferred Stock,
nominal stated value $21.00 per share
(the "Special Preferred Stock"), and
Adjusting Rate Preferred Stock,
redemption value of $21.00 per share
("Adjusting Rate Preferred Stock"),
shall each rank senior to the Series A
Preferred Stock as to dividend rights
and rights upon liquidation, dissolution
or winding up of the Company. The
approval of 66 2/3% of the outstanding
shares of the Series A Preferred Stock
shall be

S-6
<PAGE> 7

required in order to create or issue or
increase the authorized number of shares
of any additional class or classes or
series of stock ranking prior to the
Series A Preferred Stock either as to
dividends or upon liquidation,
dissolution or winding up of the
Company.

Use of proceeds..................... The Company expects to use the net
proceeds from the sale of the Series A
Preferred Stock to (i) repay outstanding
indebtedness under the Company's
revolving credit facility (the "Company
Credit Facility"); (ii) repay
outstanding indebtedness under
Commercial Corp.'s credit facility with
Cargill Financial (the "Cargill Credit
Facility"); (iii) redeem all of the
849,777 outstanding shares of the
Company's Special Preferred Stock for an
aggregate redemption price of $18.5
million, including accumulated and
unpaid dividends thereon; and (iv) to
the extent any proceeds remain, to repay
outstanding indebtedness under certain
other revolving credit facilities to
which subsidiaries of the Company are
parties. See "Use of Proceeds."

Dividends........................... Holders of shares of Series A Preferred
Stock shall be entitled to receive,
when, as and if declared by the Board of
Directors of the Company, an annual cash
dividend, payable quarterly, at a rate
of % per annum (equivalent to $ per
share per annum). Dividends on the
Series A Preferred Stock shall be
cumulative from the date of initial
issuance. Except for the pro rata
payment of dividends with respect to
stock ranking on a parity with the
Series A Preferred Stock, unless full
cumulative dividends on the Series A
Preferred Stock shall have been paid,
dividends (other than in stock) may not
be paid or declared and set aside for
payment and other distributions may not
be made upon the Common Stock or on any
other stock of the Company ranking
junior to or on a parity with the Series
A Preferred Stock as to dividends, nor,
with certain limited exceptions, may any
Common Stock or any other stock of the
Company ranking junior to or on a parity
with the Series A Preferred Stock as to
dividends be redeemed, purchased or
otherwise acquired for any consideration
by the Company. The Series A Preferred
Stock shall not participate in dividends
paid on the Company's outstanding Common
Stock. There are certain regulatory and
other restrictions that may apply to
payments of dividends on the Series A
Preferred Stock. See "Risk Factors."

Optional redemption................. On and after September 30, 2004, at any
time or from time to time, the shares of
Series A Preferred Stock will be
redeemable in whole or in part at the
option of the Company, initially at a
redemption price of $ per share
through October 14, 2005, at a
redemption price of $ per share
through October 14, 2006, and thereafter

S-7
<PAGE> 8

at $100.00 per share, together in each
case with accumulated and unpaid
dividends thereon.

Mandatory redemption................ The Series A Preferred Stock is subject
to mandatory redemption on September 30,
2008 at a redemption price of $100.00
per share, together with accumulated and
unpaid dividends thereon.

Voting rights....................... If the Company fails to pay quarterly
dividends for any six consecutive or
nonconsecutive quarters, the holders of
the Series A Preferred Stock, voting as
a single class with all other series of
preferred stock having similar voting
rights then exercisable, shall be
entitled to elect two directors of the
Company until all cumulative dividends
accumulated on the Series A Preferred
Stock shall have been paid in full. The
Series A Preferred Stock will not
otherwise be entitled to vote in the
election of directors.

Market for the Series A Preferred
Stock............................... The Company expects that the Series A
Preferred Stock will be purchased by a
limited number of investors and will
therefore not qualify for listing on the
NASDAQ National Market upon completion
of the offering. Although the Company
has applied for an exemption from the
minimum holder and public float
requirements of The NASDAQ Stock Market
to allow the Series A Preferred Stock to
be listed on the NASDAQ National Market,
there can be no assurance that such
exemption will be granted.

Investment considerations........... See "Risk Factors" in this Prospectus
Supplement and the accompanying
Prospectus for a discussion of certain
risk factors that should be considered
by prospective purchasers of the Series
A Preferred Stock offered hereby.

SUMMARY FINANCIAL AND OTHER INFORMATION

The following summary financial information is derived from the financial
statements of the Company as of and for the periods presented. The summary
financial data for the three-month periods ended March 31, 1998 and 1997 are
derived from financial statements that are unaudited but include all
adjustments, consisting of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position and
results of operations for these periods. The results for the three months ended
March 31, 1998 are not necessarily indicative of the results for the full year.
The Harbor Merger, which occurred on July 1, 1997, was accounted for as a
pooling of interests. The Company's historical financial statements have
therefore been retroactively restated to include the financial position and
results of operations of Mortgage Corp. for all periods presented. Prior to the
Harbor Merger, Mortgage Corp.'s fiscal year end was September 30. As a result,
for years prior to 1997, the financial statements of Mortgage Corp. for its
prior fiscal year periods are consolidated with calendar year end data for the
Company. The summary financial information below should be read in conjunction
with "Capitalization" included elsewhere in this Prospectus Supplement and the
financial information contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and the Company's Quarterly Report or
Form 10-Q for the quarterly period ended March 31, 1998, each of which is
incorporated by reference herein.

S-8
<PAGE> 9

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ----------------------------
1998 1997 1997 1996 1995
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT
Revenues:
Gain on sale of mortgage loans..................... $20,269 $ 5,321 $ 36,496 $19,298 $ 7,864
Net mortgage warehouse income...................... 1,722 766 3,499 3,224 2,355
Gain on sale of mortgage servicing rights.......... -- 2,266 4,246 2,641 2,011
Servicing fees:
Mortgage......................................... 4,694 3,571 14,732 10,079 6,508
Other............................................ 1,113 7,862 12,066 12,456 10,903
Gain on resolution of Portfolio Assets............. 3,097 5,301 24,183 19,510 11,984
Equity in earnings of Acquisition Partnerships..... 3,214 1,541 7,605 6,125 3,834
Rental income on real estate Portfolios............ 81 70 332 3,033 1,277
Interest income.................................... 3,799 2,779 13,448 7,707 1,572
Other income....................................... 4,037 1,161 9,462 3,415 3,060
Interest income on Class A Certificate............. -- 1,659 3,553 11,601 8,597
------- ------- -------- ------- -------
Total revenues................................ 42,026 32,297 129,622 99,089 59,965
------- ------- -------- ------- -------
Expenses:
Interest on other notes payable.................... 3,418 2,862 12,433 10,403 4,721
Salaries and benefits.............................. 16,017 8,991 42,191 26,927 16,767
Amortization:
Mortgage servicing rights........................ 3,176 1,547 7,550 4,091 3,823
Other............................................ 432 953 2,563 3,113 1,534
Provision for loan losses.......................... 2,352 798 6,613 2,029 --
Occupancy, data processing, communication and
other............................................ 11,691 7,577 37,972 23,254 11,955
Interest on senior subordinated notes.............. -- -- -- 3,892 4,721
------- ------- -------- ------- -------
Total expenses................................ 37,086 22,728 109,322 73,709 43,521
------- ------- -------- ------- -------
Net earnings before minority interest, preferred
dividends and income taxes......................... 4,940 9,569 20,300 25,380 16,444
Benefit (provision) for income taxes............... 641 (352) 15,485 13,749 (1,200)
------- ------- -------- ------- -------
Net earnings before minority interest and
preferred dividends................................ 5,581 9,217 35,785 39,129 15,244
Minority interest.................................. (215) -- (157) -- --
Preferred dividends................................ (1,515) (1,659) (6,203) (7,709) (3,876)
------- ------- -------- ------- -------
Net earnings to common shareholders.................. $ 4,281 $ 7,558 $ 29,425 $31,420 $11,368
======= ======= ======== ======= =======
SUMMARY INCOME STATEMENT DATA FOR EACH BUSINESS
Mortgage Banking:
Revenues........................................... $28,689 $12,733 $ 65,726 $37,620 $20,442
Expenses........................................... 24,716 11,687 59,840 31,632 19,667
------- ------- -------- ------- -------
Operating contribution before direct taxes......... $ 3,973 $ 1,046 $ 5,886 $ 5,988 $ 775
======= ======= ======== ======= =======
Operating contribution, net of direct taxes........ $ 3,884 $ 658 $ 7,975 $ 3,724 $ 511
======= ======= ======== ======= =======
Portfolio Asset acquisition and resolution:
Revenues........................................... 9,038 15,785 47,703 44,667 30,926
Expenses........................................... 4,855 6,320 24,211 23,311 14,245
------- ------- -------- ------- -------
Operating contribution before direct taxes......... $ 4,183 $ 9,465 $ 23,492 $21,356 $16,681
======= ======= ======== ======= =======
Operating contribution, net of direct taxes........ $ 4,169 $ 9,365 $ 23,299 $21,210 $15,745
======= ======= ======== ======= =======
Consumer Lending:
Revenues........................................... 2,956 2,057 10,281 3,650 --
Expenses........................................... 5,451 2,803 16,019 5,480 --
------- ------- -------- ------- -------
Operating contribution before direct taxes......... $(2,495) $ (746) $ (5,738) $(1,830) $ --
======= ======= ======== ======= =======
Operating contribution, net of direct taxes........ $(2,495) $ (747) $ (5,741) $(1,830) $ --
======= ======= ======== ======= =======
</TABLE>

S-9
<PAGE> 10

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF ------------------------------
MARCH 31, 1998 1997 1996 1995
-------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA
Mortgage assets....................................... $1,191,418 $650,775 $193,823 $123,006
Portfolio acquisition and resolution assets........... 114,045 125,480 98,001 122,126
Consumer assets....................................... 61,491 64,135 31,397 --
Deferred tax asset.................................... 31,384 30,614 13,898 --
Total assets.......................................... 1,469,136 940,119 425,189 439,051
Notes payable......................................... 1,267,798 750,781 266,166 317,189
Preferred stock....................................... 41,908 41,908 53,617 55,555
Total shareholders' equity..................... 119,539 112,758 84,802 52,788
</TABLE>

<S> <C> <C> <C> <C> <C>
ORIGINATION AND OTHER FINANCIAL DATA
Mortgage Corp.
Origination of residential mortgage loans:
Conventional............................ $1,360,865 $410,096 $2,404,872 $1,432,614 $509,447
Agency.................................. 331,228 83,231 593,003 240,015 132,159
Home Equity............................. 58,261 11,045 178,492 6,583 --
Other................................... 19,913 7,903 63,155 20,062 32,940
---------- -------- ---------- ---------- --------
Total................................ 1,770,267 512,275 3,239,522 1,699,274 674,546
Origination of commercial mortgage loans:
Correspondent........................... 113,265 -- 348,060 35,600 53,405
Construction............................ 15,596 10,757 65,740 28,780 --
---------- -------- ---------- ---------- --------
Total................................ 128,861 10,757 413,800 64,380 53,405
Capital Corp.
Acquisition of Home Equity Loans........ 36,416 -- 53,624 -- --
Portfolio Asset acquisition and resolution
activity:(1)
Aggregate purchase price of assets
purchased................................. 51,971 47,237 183,229 205,524 213,187
Face Value of assets purchased.......... 162,298 75,076 504,891 413,844 699,662
Proceeds(2)............................. $ 16,976 $ 14,842 $ 246,297 $ 403,275 $341,065
Number of assets purchased.............. 1,399 91 5,503 5,921 19,031
Consumer Corp.
Acquisition of automobile and other
consumer receivables................. $ 33,375 $ 31,124 $ 89,845 $ 17,635 $ --
</TABLE>

- ---------------
(1) Includes activities of all Acquisition Partnerships and for Commercial
Corp.'s own account.

(2) Includes proceeds of $158 million and $107 million attributable to assets
owned by the Trust in 1996 and 1995, respectively.

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF ------------------------------------
MARCH 31, 1998 1997 1996 1995
-------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO DATA
Residential mortgage loans
Conventional.................................... $4,897,749 $4,280,315 $3,234,197 $ 894,840
Agency.......................................... 876,405 695,510 521,637 390,047
Other........................................... 22,109 20,688 66,815 68,802
---------- ---------- ---------- ----------
Total...................................... 5,796,263 4,996,513 3,822,649 1,353,689
Commercial mortgage loans......................... 1,400,287 1,691,939 124,379 94,706
Automobile receivables............................ 121,272 100,869 33,583 --
Portfolio acquisition and resolution (Face
Value).......................................... 865,622 837,376 975,190 930,757
</TABLE>

S-10
<PAGE> 11

RECENT DEVELOPMENTS

The Company reported net earnings before minority interest and preferred
dividends of $7.9 million and $13.4 million for the quarter and six months ended
June 30, 1998, respectively. Net earnings to common shareholders were $6.1
million and $10.4 million in the quarter and six months ended June 30, 1998,
respectively, compared to $2.9 million and $10.4 million in the comparable
periods of 1997. Diluted net earnings per common share were $0.83 and $1.47 in
the quarter and six months ended June 30, 1998, respectively, compared to $0.44
and $1.58 in the comparable periods of 1997. The Company's earnings for the
first half of 1997 reflect the positive effect of the $6.8 million cash payments
received by the Company for the early termination of a servicing agreement
between the Company and the First City Liquidating Trust (the "Trust"), an
affiliated liquidating trust created for the benefit of former FCBOT
shareholders.

During May 1998 the Company completed the sale of 1,201,150 shares of
Common Stock in a registered public offering. The shares were sold for $30.75
each and generated net proceeds to the Company of approximately $34.2 million.
The Company used such proceeds to repay outstanding indebtedness under the
Company Credit Facility. In May 1998 the Company also delivered notice of its
intention to repurchase, for $1.00 each, all outstanding warrants to purchase
shares of Common Stock that remained unexercised after June 25, 1998.
Approximately 96% of the warrants to purchase Common Stock were exercised
following delivery of such notice. The exercise of the warrants resulted in the
issuance by the Company of 471,380 shares of Common Stock and generated net
proceeds to the Company of approximately $11.8 million. The Company is in the
process of completing the purchase of the remaining outstanding warrants for one
dollar each. See "Capitalization."

FORWARD-LOOKING STATEMENTS

This Prospectus Supplement and the accompanying Prospectus may contain or
incorporate by reference forward-looking statements. The factors identified
under "Risk Factors" in this Prospectus Supplement and in the accompanying
Prospectus are important factors (but not necessarily all of the important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.

When any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, the Company
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. When, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect," "estimate," "project," "anticipate" and similar
expressions identify forward-looking statements.

RISK FACTORS

In addition to the other information contained in this Prospectus
Supplement and the accompanying Prospectus (including the "Risk Factors" section
contained therein) and incorporated herein by reference, prospective investors
in the Series A Preferred Stock should carefully consider the following risk
factors.

RIGHT OF SERIES A PREFERRED STOCK TO LIQUIDATION PREFERENCE; RESTRICTIONS ON
DIVIDENDS AND REDEMPTION

In the event of bankruptcy, liquidation, reorganization or winding up of
the Company, the assets of the Company will be available for distributions in
respect of the Series A Preferred Stock only after all liabilities of the
Company, including the indebtedness under the Company Credit Facility and the
liquidation preference under the Company's Special Preferred Stock and Adjusting
Rate Preferred Stock are satisfied. Accordingly, in such event there may not be
sufficient assets to make the required distributions in respect of the Series A
Preferred Stock. In addition, so long as the Company pays full cumulative
dividends on the Special Preferred Stock, Adjusting Rate Preferred Stock and
Series A Preferred Stock, it will generally not be restricted from declaring and
paying dividends on its Common Stock. The payment of dividends on the Common
Stock will

S-11
<PAGE> 12

reduce the amount available for distributions in respect of the Series A
Preferred Stock in the event of the bankruptcy, liquidation, reorganization or
winding up of the Company.

Unless full cumulative dividends are paid on the outstanding shares of the
Company's Special Preferred Stock and Adjusting Rate Preferred Stock, dividends
may not be paid or declared or set aside for payment on the Series A Preferred
Stock, nor may the Series A Preferred Stock be redeemed, purchased or otherwise
acquired by the Company. In addition, each declaration and payment of dividends
on the Series A Preferred Stock and each redemption of the Series A Preferred
Stock is subject to the requirement that under Delaware law, the Company must
have, at the time of such action, sufficient legally available funds therefor.
The determination of whether legally available funds exist will be made by the
Board of Directors of the Company on the basis of the Company's financial
condition at the time such actions are taken. In reaching such determination,
the Board of Directors is entitled to rely upon information provided by its
employees, officers or committees or by professional or expert advisors selected
with reasonable care. There can be no assurance, however, that a court would
agree with the Board's conclusion as to the financial condition of the Company
at such time. Should a declaration and payment of dividends on the Series A
Preferred Stock or a redemption of the Series A Preferred Stock be deemed to
have occurred in violation of applicable limitations, under certain conditions a
court could order that such dividends or payments be returned for the benefit of
creditors of the Company.

The Company Credit Facility prohibits the purchase or redemption of the
Series A Preferred Stock without the prior written consent of the lender
thereunder.

NO PRIOR PUBLIC TRADING MARKET FOR THE SERIES A PREFERRED STOCK

Prior to this offering, there was no public trading market for the Series A
Preferred Stock. Although the Company has applied for an exemption from the
minimum holder and public float requirements of The NASDAQ Stock Market to allow
the Series A Preferred Stock to be listed on the NASDAQ National Market, there
can be no assurance that such exemption will be granted or that a public trading
market for the Series A Preferred Stock will develop or, if developed, that it
will be sustained. If a public trading market for the Series A Preferred Stock
does develop, the market price may be volatile. The initial public offering
price of the Series A Preferred Stock is not based on any estimate of the market
value of the Series A Preferred Stock and no representation is made that the
Series A Preferred Stock offered hereby has a market value equivalent to, or
could be resold at, such price.

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the shares
of Series A Preferred Stock offered by the Company hereby will be approximately
$76.8 million after deducting underwriting discounts and estimated offering
expenses. The Company expects to use such net proceeds to (i) repay outstanding
indebtedness under the Company Credit Facility; (ii) repay outstanding
indebtedness under Commercial Corp.'s Cargill Credit Facility; (iii) redeem all
of the 849,777 outstanding shares of the Company's Special Preferred Stock for
an aggregate redemption price of $18.5 million, including accumulated and unpaid
dividends thereon; and (iv) to the extent any proceeds remain, to repay
outstanding indebtedness under certain other revolving credit facilities to
which subsidiaries of the Company are parties.

As of July 27, 1998, outstanding indebtedness under the Company Credit
Facility totaled $38.6 million. The Company Credit Facility is a $50 million
revolving credit facility. Indebtedness under the Company Credit Facility is
secured by substantially all of the assets of the Company, bears interest, at
the Company's option, at the applicable prime interest rate (8.5% as of July 27,
1998) or at LIBOR plus 2.625% (8.3% as of July 27, 1998), and matures on April
30, 1999. The Cargill Credit Facility is a $15 million term credit facility,
which was entered into as of July 24, 1998 and matures on October 30, 1998. As
of July 27, 1998, outstanding indebtedness under the Cargill Credit Facility
totaled $15 million. Commercial Corp. entered into the Cargill Credit Facility
to finance the purchase of interests in mortgage servicing rights from Mortgage
Corp. The Cargill Credit Facility bears interest at the applicable prime
interest rate plus 7% (15.5% as of July 27, 1998).

S-12
<PAGE> 13

CAPITALIZATION

The following table presents the capitalization of the Company (i) as of
March 31, 1998; (ii) on a pro forma basis as of March 31, 1998 after giving
effect to the issuance of 1,201,150 shares of Common Stock in May 1998 and the
exercise of warrants to purchase 471,481 shares of Common Stock at $25.00 per
share in the quarter ended June 30, 1998; and (iii) on a pro forma basis, as
adjusted as of March 31, 1998 to give effect to the issuance and sale of 800,000
shares of Series A Preferred Stock offered by the Company hereby, and the
application of the proceeds therefrom after deducting underwriting discounts and
estimated offering expenses. The information presented below should be read in
conjunction with financial information contained in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 and the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998,
each of which is incorporated by reference herein. See "Use of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
Notes payable, secured(1).............................. $1,267,798 $1,221,908 $1,163,573
---------- ---------- ----------
Total debt..................................... 1,267,798 1,221,908 1,163,573
---------- ---------- ----------
REDEEMABLE PREFERRED STOCK:
Special preferred stock, including dividends of $669
(nominal stated value of $21.00 per share);
2,500,000 shares authorized, 849,777 shares issued
and outstanding..................................... 18,515 18,515 --
Adjusting rate preferred stock, including dividends of
$846 (redemption value of $21.00 per share);
2,000,000 shares authorized, 1,073,704 shares issued
and outstanding..................................... 23,393 23,393 23,393
Series A Preferred Stock (stated value of $100.00 per
share); 1,000,000 shares authorized; 800,000 shares
issued and outstanding pro forma as adjusted........ -- -- 80,000
SHAREHOLDERS' EQUITY:
Optional preferred stock (par value $.01 per share);
98,000,000 shares authorized actual and pro forma
and 97,000,000 shares authorized pro forma as
adjusted; no shares issued and outstanding.......... -- -- --
Common stock (par value $.01 per share); 100,000,000
shares authorized, 6,573,433 shares issued and
outstanding and 8,246,064 shares issued and
outstanding pro forma and pro forma as adjusted..... 66 82 82
Paid in capital........................................ 31,811 77,685 77,685
Retained earnings...................................... 87,662 87,662 87,662
---------- ---------- ----------
Total shareholders' equity............................. 119,539 165,429 165,429
---------- ---------- ----------
Total capitalization........................... $1,429,245 $1,429,245 $1,432,395
========== ========== ==========
</TABLE>

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

(1) Each Acquisition Partnership generally is financed by separate senior debt
instruments, which are secured only by the assets of such Acquisition
Partnership and are nonrecourse to the Company, Commercial Corp., its
co-investors and the other Acquisition Partnerships. These borrowings are
not included in the capitalization table set forth above. See
"Business -- Portfolio Asset Acquisition and Resolution." At the date
indicated, the Acquisition Partnerships were obligated on an aggregate of
approximately $60 million of nonrecourse debt, secured by the assets of the
Acquisition Partnerships.

S-13
<PAGE> 14

SELECTED FINANCIAL AND OTHER INFORMATION

The following table presents, as of the dates and for the periods
indicated, selected financial and other information for the Company. For
accounting purposes, the Merger was treated as an acquisition of FCBOT by
J-Hawk. Accordingly, financial data prior to July 3, 1995 reflects the
historical financial position and results of operations of J-Hawk. As a result
of the consummation of the transactions contemplated by the Merger, financial
data for the periods prior to the Merger are not comparable with financial data
for periods after the Merger. The Harbor Merger, which occurred on July 1, 1997,
was accounted for as a pooling of interests. The Company's historical financial
statements have therefore been retroactively restated to include the financial
position and results of operations of Mortgage Corp. for all periods presented.
Prior to the Harbor Merger, Mortgage Corp.'s fiscal year end was September 30.
As a result, for years prior to 1997, the financial statements of Mortgage Corp.
for its prior fiscal year periods are consolidated with calendar year end data
for the Company. The financial data as of and for each of the three years in the
period ended December 31, 1997 have been derived from the Consolidated Financial
Statements of the Company as of and for such period audited by KPMG Peat Marwick
LLP and incorporated by reference herein. The financial data for the three-
month periods ended March 31, 1998 and 1997 are derived from financial
statements that are unaudited but include all adjustments, consisting of normal
recurring adjustments, that the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. The results for the three months ended March 31, 1998 are not
necessarily indicative of the results for the full year. All data set forth in
the table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company (including the Notes thereto) incorporated
by reference herein.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------
1998 1997 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Revenues:
Gain on sale of mortgage loans............ $20,269 $ 5,321 $ 36,496 $19,298 $ 7,864
Net mortgage warehouse income............. 1,722 766 3,499 3,224 2,355
Gain on sale of mortgage servicing
rights................................. -- 2,266 4,246 2,641 2,011
Servicing fees:
Mortgage............................... 4,694 3,571 14,732 10,079 6,508
Other.................................. 1,113 7,862 12,066 12,456 10,903
Gain on resolution of Portfolio Assets.... 3,097 5,301 24,183 19,510 11,984
Equity in earnings of Acquisition
Partnerships........................... 3,214 1,541 7,605 6,125 3,834
Rental income on real estate Portfolios... 81 70 332 3,033 1,277
Interest income........................... 3,799 2,779 13,448 7,707 1,572
Other income.............................. 4,037 1,161 9,462 3,415 3,060
Interest income on Class A Certificate.... -- 1,659 3,553 11,601 8,597
------- ------- -------- ------- -------
Total revenues.................... 42,026 32,297 129,622 99,089 59,965
------- ------- -------- ------- -------
</TABLE>

S-14
<PAGE> 15

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ----------------------------
1998 1997 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Expenses:
Interest on other notes payable........... $ 3,418 $ 2,862 $ 12,433 $10,403 $ 4,721
Salaries and benefits..................... 16,017 8,991 42,191 26,927 16,767
Amortization:
Mortgage servicing rights.............. 3,176 1,547 7,550 4,091 3,823
Other.................................. 432 953 2,563 3,113 1,534
Provision for loan losses................. 2,352 798 6,613 2,029 --
Occupancy, data processing, communication
and other.............................. 11,691 7,577 37,972 23,254 11,955
Interest on senior subordinated notes..... -- -- -- 3,892 4,721
------- ------- -------- ------- -------
Total expenses.................... 37,086 22,728 109,322 73,709 43,521
------- ------- -------- ------- -------
Net earnings before minority interest,
preferred dividends and income taxes...... 4,940 9,569 20,300 25,380 16,444
Benefit (provision) for income taxes...... 641 (352) 15,485 13,749 (1,200)
------- ------- -------- ------- -------
Net earnings before minority interest and
preferred dividends.................... 5,581 9,217 35,785 39,129 15,244
Minority interest...................... (215) -- (157) -- --
Preferred dividends.................... (1,515) (1,659) (6,203) (7,709) (3,876)
------- ------- -------- ------- -------
Net earnings to common shareholders......... $ 4,281 $ 7,558 $ 29,425 $31,420 $11,368
======= ======= ======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF ------------------------------
MARCH 31, 1998 1997 1996 1995
-------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Mortgage assets.............................. $1,191,418 $650,775 $193,823 $123,006
Portfolio acquisition and resolution
assets.................................... 114,045 125,480 98,001 122,126
Consumer assets.............................. 61,491 64,135 31,397 --
Deferred tax asset........................... 31,384 30,614 13,898 --
Total assets................................. 1,469,136 940,119 425,189 439,051
Notes payable................................ 1,267,798 750,781 266,166 317,189
Preferred stock.............................. 41,908 41,908 53,617 55,555
Total shareholders' equity........... 119,539 112,758 84,802 52,788
</TABLE>

S-15
<PAGE> 16

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ORIGINATION AND OTHER FINANCIAL DATA
Mortgage Corp.
Origination of residential
mortgage loans:
Conventional................... $1,368,865 $410,096 $2,404,872 $1,432,614 $509,447
Agency....................... 331,228 83,231 593,003 240,015 132,159
Home Equity.................. 58,261 11,045 178,492 6,583 --
Other........................ 19,913 7,903 63,155 20,062 32,940
---------- -------- ---------- ---------- --------
Total..................... 1,770,267 512,275 3,239,522 1,699,274 674,546
Origination of commercial
mortgage loans:
Correspondent................ 113,265 -- 348,060 35,600 53,405
Construction................. 15,596 10,757 65,740 28,780 --
---------- -------- ---------- ---------- --------
Total..................... 128,861 10,757 413,800 64,380 53,405
Capital Corp.
Acquisition of Home Equity
Loans........................ 36,416 -- 53,624 -- --
Portfolio Asset acquisition and
resolution activity:(1)
Aggregate purchase price of
assets purchased............. 51,971 47,237 183,229 205,524 213,187
Face Value of assets
purchased.................... 162,298 75,076 504,891 413,844 699,662
Proceeds(2).................... $ 16,976 $ 14,842 $ 246,297 $ 403,275 $341,065
Number of assets purchased..... 1,399 91 5,503 5,921 19,031
Consumer Corp.
Acquisition of automobile and
other consumer receivables... $ 33,375 $ 31,124 $ 89,845 $ 17,635 $ --
</TABLE>

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

(1) Includes activities of all Acquisition Partnerships and for Commercial
Corp.'s own account.

(2) Includes proceeds of $158 million and $107 million attributable to assets
owned by the Trust in 1996 and 1995, respectively.

<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, ------------------------------------
1998 1997 1996 1995
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO DATA
Residential mortgage loans
Conventional............................ $4,897,749 $4,280,315 $3,234,197 $ 894,840
Agency.................................. 876,405 695,510 521,637 390,047
Other................................... 22,109 20,688 66,815 68,802
---------- ---------- ---------- ----------
Total.............................. 5,796,263 4,996,513 3,822,649 1,353,689
Commercial mortgage loans.................. 1,400,287 1,691,939 124,379 94,706
Automobile receivables..................... 121,272 100,869 33,583 --
Portfolio acquisition and resolution (Face
Value).................................. 865,622 837,376 975,190 930,757
</TABLE>

S-16
<PAGE> 17

BUSINESS

GENERAL

The Company is a diversified financial services company headquartered in
Waco, Texas with over 100 offices throughout the United States and a presence in
France, Asia and Mexico. The Company began operating in 1986 as a specialty
financial services company focused on acquiring and resolving distressed loans
and other assets purchased at a discount to Face Value. To date the Company has
acquired, for its own account and through Acquisition Partnerships, Portfolio
Assets with a Face Value of approximately $3.0 billion. In 1996, the Company
adopted a growth strategy to diversify and expand its financial services
business. To implement its growth strategy, the Company has acquired or
established several businesses in the financial services industry, building upon
its core strength and expertise as one of the earliest participants in the
business of acquiring and resolving distressed financial assets and other
assets. The Company's servicing expertise, which it has developed largely
through the resolution of distressed assets, is a cornerstone of its growth
strategy. Today the Company is engaged in three principal businesses: (i)
residential and commercial mortgage banking; (ii) Portfolio Asset acquisition
and resolution; and (iii) consumer lending.

The following chart depicts the businesses conducted by the Company and the
principal entities through which such businesses are conducted.

[CHART]

The Company services substantially all of the assets it owns as well as the
assets in which it has an economic interest, such as assets owned by
securitization trusts. The Company conducts its asset servicing through
servicing divisions specializing in residential, commercial or consumer loans.
The Company provides overall coordination and direction to each of its servicing
divisions in an effort to maximize overall servicing efficiencies and economies,
while addressing the unique requirements inherent in servicing each asset class.
Servicing Corp., which services commercial mortgage assets acquired by
Commercial Corp., has been accorded an above average service rating by S&P as a
special servicer of commercial mortgage loans. The residential and commercial
servicing activities of Mortgage Corp. have received a verbal confirmation from
S&P that such servicing capabilities of Mortgage Corp. will be accorded an
average rating. In addition, Mortgage Corp. is an HUD approved seller/servicer
of residential mortgage loans.

S-17
<PAGE> 18

BUSINESS STRATEGY

- Expand the financial products and services offered by existing
businesses.

- Broaden its sources of revenue and operating earnings by developing or
acquiring additional businesses that leverage its core strengths and
management expertise.

- Cross-sell between the Company's businesses.

- Invest in fragmented or underdeveloped markets in which the Company has
the investment and servicing expertise to achieve attractive risk
adjusted rates of return.

- Pursue new business opportunities through joint ventures, thereby
capitalizing on the expertise of partners whose skills complement those
of the Company.

- Maximize growth in earnings, thereby permitting the utilization of the
Company's NOLs.

BACKGROUND

The Company began operating in the financial service business in 1986 as a
purchaser of distressed assets from the Federal Deposit Insurance Corporation
("FDIC"). From its original office in Waco, Texas, with a staff of four
professionals, the Company's asset acquisition and resolution business grew to
become a significant participant in an industry fueled by the problems
experienced by banks and thrifts throughout the United States. In the late
1980s, the Company also began acquiring assets from healthy financial
institutions interested in eliminating nonperforming assets from their
portfolios. The Company began its relationship with Cargill Financial in 1991.
Since that time, the Company and Cargill Financial have formed a series of
Acquisition Partnerships through which they have jointly acquired over $2.2
billion in Face Value of distressed assets. By the end of 1994, the Company had
grown to nine offices with over 180 professionals and had acquired portfolios
with assets in virtually every state.

In July 1995, the Company acquired by merger FCBOT, a former bank holding
company that had been engaged in a proceeding under Chapter 11 of the Bankruptcy
Code since November 1992. As a result of the Merger, the Common Stock of the
Company became publicly held and the Company received $20 million of additional
equity capital and entered into an incentive-based servicing agreement to manage
approximately $300 million in assets for the benefit of the former equity
holders of FCBOT. In addition, as a result of the Merger, the Company retained
FCBOT's rights to approximately $596 million in NOLs, which the Company believes
it can use to offset taxable income generated by the Company and its
consolidated subsidiaries. See "Certain Federal Income Tax Considerations" in
the accompanying Prospectus.

Following the Merger, the Company adopted a growth and diversification
strategy designed to capitalize on its servicing and credit expertise to expand
into additional financial service businesses with management partners that have
distinguished themselves among competitors. To that end, in July 1997 the
Company acquired Harbor Financial Group, Inc., a company engaged in the
residential and commercial mortgage banking business since 1983. The Company has
also expanded into related niche financial services markets, such as consumer
finance and mortgage conduit banking.

MORTGAGE BANKING

General

The Company engages in the mortgage banking business through Mortgage Corp.
and Capital Corp. Mortgage Corp. is a direct retail and broker retail mortgage
bank, which originates, purchases, sells and services residential and commercial
mortgage loans through more than 80 offices throughout the United States. The
Company acquired Mortgage Corp. (then named Harbor Financial Group, Inc.) upon

S-18
<PAGE> 19

consummation of the Harbor Merger in July 1997. Mortgage Corp.'s senior
management team has extensive experience with all aspects of the residential,
construction and commercial mortgage banking business, including the direct
retail, broker retail, secondary marketing, servicing, financial and operating
expertise necessary to manage a growing business. This management team formed
Mortgage Corp. as a subsidiary of a savings and loan association in 1983,
completed a management led buy-out of the ownership of Mortgage Corp. in 1987
and continued to expand through acquisitions and internal growth. Many of
Mortgage Corp.'s acquisitions represented opportunistic situations whereby it
was able to acquire origination capability or servicing portfolios from the
FDIC, the Resolution Trust Corporation ("RTC") or other sellers of distressed
assets. Mortgage Corp. conducts its residential and commercial mortgage banking
and servicing business through its subsidiaries Harbor Financial Mortgage
Corporation ("Harbor") and New America Financial, Inc. ("New America"). Mortgage
Corp. ranks among the 50 largest mortgage banks in the United States.

Capital Corp. was formed in 1997 to acquire, originate, warehouse,
securitize and service Home Equity Loans to borrowers who have significant
equity in their homes and who generally do not satisfy the more rigid
underwriting standards of the traditional residential mortgage lending market.
These loans are extended to borrowers who demonstrate an ability and willingness
to repay credit, but who might have experienced an adverse event, such as job
loss, illness or divorce, or have had past credit problems such as delinquency,
bankruptcy, repossession or charge-offs. Such an event normally will temporarily
impair a borrower's credit rating such that the borrower will not qualify as a
prime borrower from a traditional mortgage lender that concentrates on prime
credit quality conventional conforming loans.

The Company owns 80% of the outstanding stock of Capital Corp. and the
remaining 20% was purchased by Capital Corp.'s senior management. This ownership
structure aligns the interests of the key management team of Capital Corp. with
those of the Company. The Company became acquainted with Capital Corp.'s
management team during their tenure as senior management for a Wall Street
firm's mortgage conduit and structured finance division. This team has
demonstrated to the Company a disciplined approach to growing a business where
the emphasis is on credit quality and sound operating standards. The Company and
the management shareholders of Capital Corp. entered into a shareholders'
agreement in connection with the formation of Capital Corp. in August 1997.
Commencing on the fifth anniversary of such agreement, the Company and the
management shareholders have put and call options with respect to the stock of
Capital Corp. held by the other party at a mutually agreed upon fair market
value.

Residential Mortgage Banking

Products and Services

Mortgage Corp. originates and purchases both fixed rate and adjustable rate
mortgage loans, primarily secured by first liens on single family residences.
The majority of the residential loans originated by Mortgage Corp. are
conventional conforming loans that qualify for sale to, or conversion into
securities issued by, Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC"). Additionally, Mortgage Corp.
originates loans insured by the Federal Housing Administration ("FHA") and the
Farmers Home Administration ("FMHA") and loans guaranteed by the Veterans
Administration ("VA"). These loans qualify for inclusion in guarantee programs
sponsored by the Government National Mortgage Association ("GNMA").
Substantially all the conventional conforming loans are originated with
loan-to-value ratios at or below 80% unless the borrower obtains private
mortgage insurance. The Company also originates a number of other mortgage loan
products to respond to a variety of customer needs. These products include:

- First lien residential mortgage loans that meet the specific underwriting
standards of private investors, issuers of mortgage backed securities,
and other conduits seeking to purchase loans originated by Mortgage Corp.
These loans do not meet the established standards of FNMA or FHLMC and
are generally referred to as non-conforming mortgage loans. The loans may
be non-conforming because, among other reasons, they exceed the dollar
limitations established by FNMA or FHLMC, are originated with an original
loan-to-value ratio in excess of 80%, or are made to a borrower who is
self-employed.

S-19
<PAGE> 20

- First and second lien residential mortgage Home Equity Loans to borrowers
who have some level of impaired credit.

- First and second lien residential home improvement loans.

Mortgage Corp. offers its customers a range of choices with respect to
repayment plans and interest rates on the loans that it originates. Most loans
originated by Mortgage Corp. have either 15 or 30 year terms and accrue interest
at fixed or variable rates. Quoted interest rates are a function of the current
interest rate environment and generally may be reduced at the option of the
customer by paying additional discount points at the time the loan is
originated. The adjustable rate mortgage ("ARM") products offered by Mortgage
Corp. reflect the current offerings of its agency or private investors. A basic
ARM loan could have an interest rate that adjusts on an annual basis throughout
its term with limits on the amount of the annual and aggregate lifetime
adjustments. A more complicated ARM loan could have a fixed rate of interest for
a stipulated period of time (for example, five years) with the annual adjustment
rate option commencing on an annual basis after the expiration of the initial
fixed term. Mortgage Corp. continuously monitors and adjusts its product
offerings and pricing so that it is able to sell the loans that it originates in
the secondary markets. To that end, price quotes and product descriptions are
distributed throughout its origination network on a daily basis.

In 1996, Mortgage Corp. implemented a program to supplement its
conventional conforming loans by offering Home Equity Loans. Mortgage Corp.'s
customers use the proceeds of Home Equity Loans to finance home purchases and
improvements, debt consolidation, education and other consumer needs.
Approximately 74% of the Home Equity Loans originated by Mortgage Corp. in 1997
were secured by first mortgages. In addition to originating Home Equity Loans,
as a result of the formation of Capital Corp. in the third quarter of 1997, the
Company also operates a mortgage conduit business, which acquires Home Equity
Loans individually and in bulk from several independent loan origination
sources.

The Home Equity Loans originated and acquired by Mortgage Corp. and Capital
Corp. are similar in nature. Home Equity Loans have repayment options and
interest rate options that are similar to the options available for conventional
conforming loans. The primary difference between Home Equity Loans and
conventional conforming loans is the underwriting guidelines that govern the two
types of loans. Various underwriting criteria are evaluated to establish
guidelines as to the amount and type of credit for which the prospective
borrower is eligible. These factors also determine the interest rate and
repayment terms to be offered to the borrower. Interest rates on Home Equity
Loans are generally in excess of rates of interest charged on agency or
conforming residential loans. The underwriting guidelines and interest rates
charged for Home Equity Loans are revised as necessary to address market
conditions, the interest rate environment, general economic conditions and other
factors. See "-- Underwriting."

Through various other subsidiaries and affiliates, Mortgage Corp. conducts
business in a number of areas related to its principal mortgage business. Harbor
Financial Property Management, Inc. manages residential properties throughout
the United States for institutional investors. Dungey and Associates, Inc. is a
property appraisal and inspection company that provides services to Mortgage
Corp. and third parties in the Texas market. Hamilton, Carter, Smith & Co. is a
financial advisory firm that provides services to the mortgage industry in the
areas of portfolio/corporate evaluations, risk management and hedging advisory
services, marketing of loan servicing portfolios, and mergers and acquisitions
advisory services. Under management contracts, an affiliate of Mortgage Corp.
provides management and administrative services to Harbor Financial Insurance
Agency, which offers complete lines of personal, commercial and property
insurance products, and to JMC Title, Inc., which provides outside services for
title escrow and insurance services. None of these businesses contributes a
significant portion of the Company's earnings.

Loan Origination

General. Mortgage Corp. originates and acquires mortgage loans through a
direct retail group ("Direct Retail") that operates principally within Harbor,
and a broker retail group ("Broker Retail") whose activities are conducted
through New America. Mortgage Corp. believes that the Direct Retail and Broker
Retail origination channels offer distinct advantages and seeks to expand the
operations of both channels. A customer

S-20
<PAGE> 21

of the Direct Retail business works with an employee of Mortgage Corp.
throughout the entire loan origination process. Direct Retail loan origination
offers the advantage of greater fee retention to compensate for higher fixed
operating costs. It also facilitates the formation of direct relationships with
customers, which tends to create a more sustainable loan origination franchise
and results in increased control over the lending process and the refinance
activity that is becoming more prevalent in the mortgage industry. As of March
31, 1998, Direct Retail employed 153 loan officers, who were supported by 91
loan processing staff and 10 loan underwriting staff, all of whom are employees
of Mortgage Corp. The Direct Retail group operates through 37 branches located
in 11 states.

In the Broker Retail business, customers conduct a substantial portion of
their business with an independent broker who will present a relatively complete
loan application to the Broker Retail account executives for consideration.
Broker Retail mortgage loan origination is cost effective because it does not
involve fixed overhead costs for items such as offices, furniture, computer
equipment and telephones, or additional personnel costs, such as loan officers
and loan processors. By limiting the number of offices and personnel needed to
generate production, Mortgage Corp.'s Broker Retail business transfers the
overhead burden of mortgage origination to the independent mortgage loan
brokers. As a result, through its Broker Retail network Mortgage Corp. is able
to match its loan origination costs more closely with loan origination volume so
that a substantial portion of its loan origination costs are variable rather
than fixed. In addition, Broker Retail affords management the flexibility to
expand or contract production capacity as market conditions warrant. As of March
31, 1998, Broker Retail employed 112 account executives working in 27 offices
and operating in 42 states. Broker Retail account executives work with and
through a group of approximately 6,500 independent mortgage loan brokers,
approximately 2,700 of whom closed loans through the Broker Retail network in
1997.

As a complement to its Direct Retail and Broker Retail businesses, the
Company operates a mortgage conduit business through Capital Corp. Capital Corp.
acquires Home Equity Loans from third-party origination sources for
securitization. Capital Corp. was formed in August 1997 and, as of March 31,
1998, had 21 employees.

Direct Retail. The Direct Retail group originates mortgage loans using
direct contact with consumers and operates through a network of 37 branches
located in Texas, Oklahoma, Pennsylvania, Virginia, West Virginia, Maryland,
Florida, Washington, Arizona, Colorado and Illinois. The marketing efforts of
the Direct Retail group are focused on the loan origination activities of retail
loan officers located in the branch offices. These loan officers identify
prospective customers through contacts within their local markets by developing
relationships with real estate agents, large employers, home builders,
commercial bankers, accountants, attorneys and others who would have contact
with prospective home owners seeking financing or refinancing. Over time,
successful loan officers develop a reputation for being able to provide quick
and accurate service to the customer and often generate new customers through
referrals from existing customers. The marketing efforts of the loan officers
are supported by print media advertising in selected local markets to target
prospects with featured product types or to highlight Mortgage Corp.'s broad
range of service capabilities. Mortgage Corp. has expanded its Direct Retail
network of loan officers by hiring experienced lenders in targeted markets and
by acquiring successful retail mortgage origination businesses.

S-21
<PAGE> 22

The following table presents the number and dollar amount of loan
originations through Direct Retail for the periods indicated.

DIRECT RETAIL RESIDENTIAL MORTGAGE LOAN ORIGINATIONS

<TABLE>
<CAPTION>
FISCAL YEAR(1)
THREE MONTHS ENDED ------------------------------
MARCH 31, 1998 1997 1996 1995
------------------ -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Conventional Loans:
Volume of loans.......................... $102,494 $182,640 $162,117 $145,398
Number of loans.......................... 810 1,425 1,374 1,354
FHA/VA/FMHA Loans:
Volume of loans.......................... $117,470 $319,667 $184,098 $108,074
Number of loans.......................... 1,178 3,300 2,073 1,474
Home Improvement Loans:(2)
Volume of loans.......................... $ -- $ 631 $ 211 $ 141
Number of loans.......................... -- 14 12 7
Brokered Loans:(3)
Volume of loans.......................... $ 19,913 $ 62,524 $ 19,851 $ 32,799
Number of loans.......................... 181 532 99 133
Total Originations:
Volume of loans.......................... $239,877 $565,462 $366,277 $286,412
Number of loans.......................... 2,169 5,271 3,558 2,968
</TABLE>

- ---------------
(1) 1997 data is for the 12 months ended December 31; data for all other years
is for the 12 months ended September 30, which was the fiscal year end for
Mortgage Corp. prior to the Harbor Merger.

(2) Home Improvement Loans are loans that are used by borrowers to finance
various home improvement projects and are generally secured by second liens.

(3) Brokered Loans are originated through the Direct Retail process but are
closed and funded by a third-party correspondent.

Broker Retail. Mortgage Corp. entered into the Broker Retail business
through the acquisition of New America in July 1994. At the time of the
acquisition, New America had offices in Dallas, Texas and Fort Lauderdale,
Florida. Since becoming a part of Mortgage Corp., New America has expanded to
its present complement of 27 offices. Broker Retail account executives work with
and through independent mortgage loan brokers to identify lending opportunities
for the various loan products offered by Mortgage Corp.

In arranging mortgage loans, independent mortgage loan brokers act as
intermediaries between prospective borrowers and Mortgage Corp. Mortgage Corp.
is an approved FHMA, FHLMC and GNMA seller/servicer and has access to private
investors as well. As a result, Mortgage Corp. provides brokers access to the
secondary market for the sale of mortgage loans that they otherwise could not
access because they do not meet the applicable seller/servicer net worth
requirements. Mortgage Corp. attracts and maintains relationships with mortgage
brokers by offering a variety of competitive and responsive services as well as
a variety of mortgage loan products at competitive prices. Mortgage Corp.'s
relationship with these independent mortgage brokers differs from traditional
wholesale purchases in that Mortgage Corp. underwrites and funds substantially
all of the loans funded through the Broker Retail channel in its own name.

Separately, the Broker Retail channel conducts a whole loan pool
acquisition business. In most cases, the loans purchased in bulk are
underwritten by the seller-originator to FHA, FMHA, VA, FNMA or FHLMC
underwriting standards, with the seller warranting that such loans comply with
such standards. Mortgage Corp. employs quality review procedures prior to
purchase in an effort to ensure that the loans acquired in bulk purchases meet
such standards. See "-- Underwriting." During 1997, bulk acquisitions of loans
constituted less than 1% of Broker Retail production.

S-22
<PAGE> 23

The following table presents the number and dollar amount of Broker Retail
production, including bulk acquisitions, for the periods indicated.

BROKER RETAIL RESIDENTIAL MORTGAGE LOAN PRODUCTION

<TABLE>
<CAPTION>
FISCAL YEAR(1)
THREE MONTHS ENDED --------------------------------------
MARCH 31, 1998 1997 1996 1995
------------------ ---------- -------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Conventional Loans:
Volume of loans...................... $1,258,371 $2,222,232 $1,270,497 $364,049
Number of loans...................... 9,713 18,332 11,665 3,506
FHA/VA/FMHA Loans:
Volume of loans...................... $ 213,758 $ 273,336 $ 55,917 $ 24,085
Number of loans...................... 1,942 2,741 632 315
Home Equity Loans:
Volume of loans...................... $ 58,261 $ 178,492 $ 6,583 $ --
Number of loans...................... 742 2,423 183 --
Total Production:
Volume of loans...................... $1,530,390 $2,674,060 $1,332,997 $388,134
Number of loans...................... 12,397 23,496 12,480 3,821
</TABLE>

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

(1) 1997 data is for the 12 months ended December 31; data for all other years
is for the 12 months ended September 30, which was the fiscal year end for
Mortgage Corp. prior to the Harbor Merger.

Characteristics of Retail Loan Production. As a result of Mortgage Corp.'s
extensive Direct Retail and Broker Retail origination networks, the portfolio of
retail mortgage loans originated by Mortgage Corp. on an annual basis is
comprised of loans with a variety of characteristics that are offered to
borrowers who are geographically dispersed. Based upon production data
maintained by Mortgage Corp., the following table sets forth, as a percentage of
aggregate principal balance, the geographic distribution and other data for the
loans originated through the retail network of Mortgage Corp. for the 12-month
periods ended December 31, 1997 and September 30, 1996 and the three-month
period ended March 31, 1998.

<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997 SEPTEMBER 30, 1996
-------------- ----------------- ------------------
<S> <C> <C> <C>
Production by State:
California.................................. 33% 23% 9%
Texas....................................... 7 13 25
Florida..................................... 7 7 7
Oregon...................................... 6 7 --
Washington.................................. 6 7 5
Georgia..................................... 3 6 9
Arizona..................................... 4 5 7
All others.................................. 34 32 38
--- --- ---
Total............................... 100% 100% 100%
Interest rate characteristics:
Fixed rate loans............................ 97% 93% 93%
Variable rate loans......................... 3 7 7
--- --- ---
Total............................... 100% 100% 100%
Loan purpose:
Purchase transactions....................... 35% 61% 69%
Refinance transactions...................... 65 39 31
--- --- ---
Total............................... 100% 100% 100%
</TABLE>

S-23
<PAGE> 24

Substantially all of the retail mortgage production of Mortgage Corp. represents
loans secured by first liens on the underlying collateral.

Mortgage Conduit. The Company organized Capital Corp. in August 1997 to
acquire Home Equity Loans from third-party origination sources for
securitization. Capital Corp. acquires existing pools of Home Equity Loans in
individually negotiated transactions from several loan origination sources. From
its inception through March 31, 1998, Capital Corp. acquired 831 Home Equity
Loans in 25 pools with principal balances totaling $89.0 million from seven
different sellers, including one pool for $35.1 million purchased from the
former employer of Capital Corp.'s management. In addition to acquiring pools of
Home Equity Loans from third-party origination sources for securitization,
Capital Corp. intends to acquire loans originated by New America's extensive
Broker Retail network.

In addition to the acquisition of Home Equity Loans, Capital Corp. intends
to originate Home Equity Loans on a retail basis or through broker referrals.
Capital Corp. recently signed a letter of intent to acquire three existing
retail branch offices. In selected instances, Capital Corp. will seek
opportunities to extend secured warehouse lines of credit to certain approved
sellers of Home Equity Loans and will consider originating mezzanine loans to,
or making equity investments in, selected sellers. The objectives of such loans
and investments are to diversify and solidify the flow of product from selected
mortgage banks who provide Home Equity Loans to Capital Corp.

Characteristics of Mortgage Conduit Production. The loans acquired by
Capital Corp. have been acquired from Home Equity Loan originators who originate
loans throughout the United States. The following table sets forth, as a
percentage of aggregate principal balance, the geographic distribution and other
data for the portfolio of loans acquired by Capital Corp. from its first
acquisition of loans in October 1997 through March 31, 1998.

<TABLE>
<S> <C>
Production by state:
New York.................................................. 35%
Georgia................................................... 18
Florida................................................... 12
Illinois.................................................. 10
New Jersey................................................ 6
All others (28 states).................................... 19
---
Total............................................. 100%
Interest rate characteristics:
Fixed rate loans.......................................... 57%
Variable rate loans....................................... 43
---
Total............................................. 100%
Lien status:
First liens............................................... 95%
Subordinate liens......................................... 5
---
Total............................................. 100%
</TABLE>

Underwriting

Direct Retail and Broker Retail. Loan underwriting in both the Direct
Retail and Broker Retail groups is performed on a regional basis in larger
branch locations. Substantially all Direct Retail and Broker Retail loans are
processed and individually underwritten by Mortgage Corp. personnel and are
directly funded by Mortgage Corp. Mortgage Corp. believes that having
underwriters in each market area enables these personnel to remain abreast of
changing conditions in property values, employment conditions and various other
conditions in each market. Furthermore, in order to ensure compliance with
Mortgage Corp.'s underwriting guidelines, the underwriters operate independently
of origination personnel.

Mortgage Corp.'s guidelines for underwriting conventional conforming loans
comply with the criteria employed by FHLMC and FNMA, as applicable. Mortgage
Corp.'s guidelines for underwriting FHA and

S-24
<PAGE> 25

FMHA insured loans and VA guaranteed loans comply with the criteria established
by these agencies. Mortgage Corp.'s guidelines for underwriting conventional
non-conforming loans are based on the underwriting standards employed by private
mortgage insurers and private investors that purchase such loans. Mortgage
Corp.'s guidelines for underwriting Home Equity Loans are based on the
underwriting standards employed by the private and conduit investors that
purchase such loans and are similar to the underwriting standards employed by
Capital Corp. for acquired Home Equity Loans. Such private investors (i) have
given Mortgage Corp. delegated underwriting authority for approval to close and
sell such loans based on policy and guidelines established by the investor; (ii)
require that the loan be underwritten on a contract basis for the closing and
sale of such loans by an independent third party approved by the investor,
typically a mortgage insurance company; or (iii) are approved directly by the
investor before closing and sale of such loans.

Mortgage Corp. performs a quality control review of loans originated by
having approximately 10% of its loans re-underwritten by independent third
parties that contract with Mortgage Corp. to perform this service. This practice
is designed to ensure that the loan origination practices and decisions are
acceptable to Mortgage Corp.'s loan pool investors and are in compliance with
regulatory requirements. Mortgage Corp. believes that its quality control review
meets or exceeds the review requirements of FNMA, FHLMC and applicable laws and
regulations.

Home Equity Loans are extended to borrowers who, for some reason, do not
qualify for an agency or conventional mortgage loan. In most cases, borrowers
seeking Home Equity Loans have experienced some level of historical credit
difficulty. Through a tiered underwriting system, Mortgage Corp. subjects
borrowers seeking Home Equity Loans to limits based, among other things, on the
loan-to-value ratio applicable to the particular transaction. The maximum
allowed loan-to-value ratio varies depending upon whether the collateral is
classified as a primary, secondary or investor residence. Maximum loan amounts
established for each classification of collateral generally do not exceed
$500,000 for a primary residence with a loan-to-value ratio of less than 80%. At
the low end of the credit spectrum for qualified Home Equity Loan borrowers, the
maximum loan-to-value ratios cannot exceed 65%, with security limited to a
primary residence and the loan amount limited to $100,000. Sub-limits within the
underwriting guidelines also place loan-to-value and borrowing amount
limitations on the Home Equity Loan based upon whether the loan is a purchase
money or cash-out refinance loan. Through March 31, 1998, Mortgage Corp. has
sold, on a servicing released basis, substantially all of its Home Equity Loan
production.

Mortgage Conduit. Capital Corp. acquires existing Home Equity Loans from
several loan origination sources under a tiered underwriting system. Capital
Corp. acquires each loan pool in an individually negotiated transaction from the
seller after a full underwriting review by Capital Corp. prior to the offer to
purchase. The underwriting review is performed to determine that the loans to be
acquired meet the various underwriting criteria for each credit grade.
Generally, the underwriting grade is a function of the prospective borrower's
credit history, which, in turn, will drive the loan-to-value relationship, the
debt to income ratio, and other credit criteria to be applied by Capital Corp.
in evaluating a loan.

S-25
<PAGE> 26

Capital Corp.'s categories and general criteria for grading the credit
history of potential Home Equity Loan borrowers are set forth in the table
below.

UNDERWRITING GUIDELINES(1)

<TABLE>
<CAPTION>
A1 PROGRAM A2 PROGRAM B PROGRAM C PROGRAM D PROGRAM
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Existing mortgage
history............ Maximum one 30- Maximum two 30- Maximum three 30- Maximum five 30- No more than three
day late payment day late payments day late payments day and two 60-day months delinquent
within last 12 and no 60-day late and no 60-day late late payments at closing
months and two payments within payments within within last 12
30-day late last 12 months; last 12 months; months; must be
payments in last must be current at must be current at current at
24 months; must be application time application time application time
current at
application time
Other credit
history............ No more than one No more than two Over 12 month Significant prior Significant
30-day late 30-day late prior defaults defaults defaults
payment in last 12 payments in last acceptable; not acceptable if over acceptable; not
months or two 12 months. Minor more than $5,000 two years old; more than $5,000
30-day late derogatory items in open collection generally, not in open or
payments in last allowed; no more accounts or open more than $5,000 collection amounts
24 months; must be than $2,500 in after funding; in open collection may remain open
current at open collection some 30-and 60-day accounts or open after funding;
application time accounts or open delinquencies after funding; applicant has
after funding, all some 60- and sporadic payment
current credit 90-day history
must be current delinquencies
Bankruptcy filings... Generally, no Generally, no Generally, no Generally, no Bankruptcy, notice
notice of default bankruptcy or bankruptcy or bankruptcy or of sale filing,
filings in last notice of default notice of default notice of default notice of default
two years filings in last filings in last filings in last filing or
three years and two years and two years foreclosure
credit has been credit has been permitted if over
reestablished reestablished 12 months old
subsequent to subsequent to
bankruptcy bankruptcy
Employment history... Two years stable Two years stable Two years stable Two years stable One year stable
Debt service to
income ratio....... 45% or less 45% or less 50% or less 50% or less 50% or less
Maximum loan-to-
value ratio:
Owner occupied;
single family...... 85% 85% 80% 75% 65%
condo/two-to-four
unit............. 85% 80% 75% 75% 60%
Non-owner occupied... 75% 75% 70% 70% N.A.
</TABLE>

- ---------------
(1) The letter grades applied to each risk classification reflect Capital
Corp.'s internal standards and do not necessarily correspond to the
classifications used by other home equity lenders. The data presented are
for first lien mortgages. More stringent requirements apply to mortgages
secured by second liens.

The following table presents, for each of Capital Corp.'s underwriting
grades, for the period from Capital Corp.'s formation in August 1997 to March
31, 1998, the aggregate principal balance of loans acquired, the aggregate
number of loans acquired, the weighted average coupon rate of loans acquired,
and the relationship of amount financed to the estimated appraised value of the
mortgaged collateral. Because of the short time period reflected in the
following table, the characteristics of the loans reflected therein are not
necessarily indicative of future loans that may be acquired or originated by
Capital Corp.

S-26
<PAGE> 27

CAPITAL CORP.'S LOAN PRODUCTION

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AGGREGATE LOAN NUMBER WEIGHTED AVERAGE LOAN-TO-VALUE
CAPITAL CORP.'S GRADE BALANCE OF LOANS COUPON RATIO
--------------------- -------------- -------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
A1....................................... $28,619 238 9.6% 76.1%
A2....................................... 30,474 277 10.1 77.4
B........................................ 14,281 151 10.7 71.3
C........................................ 9,170 100 11.0 71.2
D........................................ 6,429 65 12.1 64.0
------- --- ---- ----
Total or Weighted Average...... $88,973 831 10.3% 74.4%
======= === ==== ====
</TABLE>

Financing Strategy

Direct Retail and Broker Retail. Mortgage Corp. finances originated
mortgage loans primarily through its warehouse credit facilities provided by a
group of commercial bank lenders. Loans are generally held in inventory by
Mortgage Corp. for up to 45 days pending their sale to investors or agencies.
From the stage of initial application by the borrower through the final sale of
the loan, Mortgage Corp. bears interest rate risk.

In order to offset the risk that a change in interest rates will result in
a decrease in the value of Mortgage Corp.'s current mortgage loan inventory or
its commitments to purchase or originate mortgage loans ("Committed Pipeline"),
Mortgage Corp. enters into hedging transactions. Mortgage Corp.'s hedging
policies generally require that substantially all of its inventory of
conventional conforming and agency loans and the maximum portion of the
Committed Pipeline that Mortgage Corp. believes may close be hedged with forward
contracts for the delivery of mortgage-backed securities ("MBS") or options on
MBS. The inventory is then used to form the MBS that will fill the forward
delivery contracts and options. Mortgage Corp. hedges its inventory and
Committed Pipeline of jumbo (generally loans in excess of $227,200) and other
non-conforming mortgage loans, by using whole-loan sale commitments to ultimate
buyers or, because such loans are ultimately sold based on a market spread to
MBS, by selling a like amount of MBS. Because the market value of the loan and
the MBS are both subject to interest rate fluctuations, Mortgage Corp. is not
exposed to significant risk and will not derive any significant benefit from
changes in interest rates on the price of the inventory net of gains or losses
in associated hedge positions.

The correlation between price performance of the hedging instruments and
the inventory being hedged is very high as a result of the similarity of the
asset and the related hedge instrument. Mortgage Corp. is exposed to
interest-rate risk to the extent that the portion of loans from the Committed
Pipeline that actually closes at the committed price is different from the
portion expected to close and hedged in the manner described. Mortgage Corp.
determines the portion of its Committed Pipeline that it will hedge based on
numerous assumptions, including composition of the Committed Pipeline, the
portion of such Committed Pipeline likely to close, the timing of such closings
and anticipated changes in interest rates.

Mortgage Corp. customarily sells all loans that it originates or purchases.
Conventional conforming and agency loans are generally sold servicing retained
and non-conforming loans are generally sold servicing released. Mortgage Corp.
packages substantially all of its FHA- and FMHA-insured and VA-guaranteed
mortgage loans into pools of loans. It sells these pools to national or regional
broker-dealers in the form of modified pass-through MBS guaranteed by GNMA. With
respect to loans securitized through GNMA programs, Mortgage Corp. is insured
against foreclosure loss by the FHA or FMHA or partially guaranteed against
foreclosure loss by the VA (at present, generally 25% to 50% of the loan, up to
a maximum amount of $50,750, depending upon the amount of the loan).
Conventional conforming loans are also pooled by Mortgage Corp. and exchanged
for securities guaranteed by FNMA or FHLMC, which securities are then sold to
national or regional broker-dealers. Loans securitized through FNMA or FHLMC are
sold on a nonrecourse basis whereby foreclosure losses are generally the
responsibility of FNMA and FHLMC, and not Mortgage Corp. Alternatively, Mortgage
Corp. may sell FHA- and FMHA-insured and VA-guaranteed mortgage loans and
conventional conforming loans, and consistently sells its jumbo loan production
to large

S-27
<PAGE> 28

buyers in the secondary market (which can include national or regional
broker-dealers) on a nonrecourse basis. These loans can be sold either on a
whole-loan basis or in the form of pools backing securities which are not
guaranteed by any governmental instrumentality but which generally have the
benefit of some form of external credit enhancement, such as insurance, letter
of credit, payment guarantees or senior/subordinated structures. Substantially
all loans sold by Mortgage Corp. are sold without recourse, subject, in the case
of VA loans, to the limits of the VA guaranty described above. To date, losses
on VA loans in excess of the VA guaranty have not been material to Mortgage
Corp.

Mortgage Conduit. Capital Corp. currently finances the purchase of Home
Equity Loans with cash flow from the Company, a $200 million repurchase
facility, a sub-line under Mortgage Corp.'s warehouse credit facility and other
short-term credit facilities. Typically, under these credit facilities, Capital
Corp. is only permitted to finance a portion of the purchase price of loans,
which are generally purchased at prices that exceed their par value. Capital
Corp. is in the process of negotiating additional nonrecourse warehouse credit
facilities in its own name for an aggregate amount of $300 million.

Capital Corp. intends to securitize substantially all of the Home Equity
Loans it acquires or originates. The securitization transactions are expected to
be consummated through the creation of special purpose trusts. The Home Equity
Loans will be transferred to a trust in exchange for certificates representing
the senior interest in the securitized loans held by the trust and, if
applicable, a subordinated interest in the securitized loans. The subordinated
interests generally consist of the excess spread between the interest and
principal paid by the borrowers on the loans pooled in the securitization and
the interest and principal of the senior interests issued in the securitization,
and other unrated interests issued in the securitization. The senior interests
are subsequently sold to investors for cash. Capital Corp. may elect to retain
the subordinated interests or may sell all or some portion of the subordinated
interests to investors for cash. Capital Corp. anticipates that it will retain
the rights to the excess spreads.

Upon the sale of Home Equity Loans in securitization transactions, the sum
of the cash proceeds received, and the estimated present values of the
subordinated interests less the costs of origination and securitization and, the
basis in the Home Equity Loans sold results in the gain recognized at the time
of the securitization transaction. The present values of the subordinated
interests recognized by Capital Corp. are determined based upon prepayment, loss
and discount rate assumptions that are determined in accordance with the unique
underlying characteristics of the Home Equity Loans comprising each
securitization.

Servicing

Direct Retail and Broker Retail. Generally, it is Mortgage Corp.'s strategy
to build and retain its servicing portfolio. With the exception of Home Equity
Loans, Mortgage Corp. services substantially all of the mortgage loans that it
originates. In addition, Mortgage Corp. may, from time to time, purchase bulk
servicing contracts for servicing of single family residential mortgage loans
originated by other lenders. Following Mortgage Corp.'s acquisition by the
Company in July 1997, it has retained substantially all of the newly originated
mortgage servicing rights when the option to retain such rights existed.
Mortgage Corp. has been able to retain such rights as a result of the capital
support available from the Company to fund the cash investment required to grow
the servicing portfolio.

The servicing of mortgage loans generally includes collecting and remitting
loan payments, making advances when required, accounting for principal and
interest, holding custodial (escrow) funds for payment of property taxes and
hazard insurance, making necessary physical inspections of the property,
counseling delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, and generally administering
the loans. Mortgage Corp. receives a fee for servicing mortgage loans ranging
generally from 1/4% to 1/2% per annum on the declining principal balances of
the loans. The servicing fee is collected by Mortgage Corp. out of monthly
mortgage payments.

Currently, a large portion of Mortgage Corp.'s costs of servicing loans are
incurred as a result of the labor intensive data entry process required in
connection with each new loan. Mortgage Corp. is currently implementing a system
that will automate a large portion of the data entry process for serviced loans.

S-28
<PAGE> 29

Mortgage Corp. expects that this system will be fully implemented by the third
quarter of 1998 and will significantly decrease the variable costs associated
with servicing loans.

Mortgage Corp.'s servicing portfolio is subject to reduction by scheduled
amortization or by prepayment or foreclosure of outstanding loans. In addition,
Mortgage Corp. has sold, and may sell in the future, a portion of its portfolio
of loan servicing rights to other mortgage servicers. In general, the decision
to sell servicing rights is based on management's assessment of the market value
of servicing rights and other factors.

The following table presents certain information regarding Mortgage Corp.'s
residential servicing portfolio, including loans held for sale as of the dates
indicated.

RESIDENTIAL SERVICING PORTFOLIO BALANCES

<TABLE>
<CAPTION>
FISCAL YEAR(1)
AS OF ------------------------------------
MARCH 31, 1998 1997 1996 1995
-------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHA-insured mortgage loans................. $ 549,340 $ 429,216 $ 342,694 $ 240,217
VA-guaranteed mortgage loans............... 327,065 266,294 178,943 149,830
Conventional mortgage loans................ 4,897,749 4,280,315 3,234,197 894,840
Other...................................... 22,109 20,688 66,815 68,802
---------- ---------- ---------- ----------
Total residential servicing
portfolio...................... $5,796,263 $4,996,513 $3,822,649 $1,353,689
========== ========== ========== ==========
</TABLE>

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

(1) 1997 data is as of December 31; data for all other years is as of September
30, which was the fiscal year end for Mortgage Corp. prior to the Harbor
Merger.

Mortgage Corp.'s contractual right to subservice approximately $930 million
of residential mortgages at March 31, 1998 is included in the data presented in
the preceding table. Of the total subservicing portfolio, approximately $771
million (82.9%) represents subservicing for loans in California. No other state
accounts for more than 5% of Mortgage Corp.'s subservicing portfolio. These
subservicing rights represent Mortgage Corp.'s right to service loans as to
which third parties own the servicing rights. Such parties have contracted with
Mortgage Corp. to service the portfolio of loans under short-term contracts
(generally for original terms of less than five years) for a fixed dollar amount
of servicing fee per year (generally approximately $75.00 per loan per year).

Mortgage Corp.'s residential servicing portfolio (excluding subserviced
loans), stratified by interest rate, was as follows as of the dates indicated:

RESIDENTIAL SERVICING PORTFOLIO
INTEREST RATE STRATIFICATION

<TABLE>
<CAPTION>
PERCENTAGE OF PRINCIPAL
BALANCE SERVICED
--------------------------------
FISCAL YEAR(1)
AS OF ---------------
MARCH 31, 1998 1997 1996
-------------- ------ ------
<S> <C> <C> <C>
Under 7.0%.................................................. 9.3% 7.9% 9.8%
7.0 to 7.49................................................. 19.6 15.2 14.7
7.5 to 7.99................................................. 28.6 28.1 21.1
8.0 to 8.49................................................. 19.7 22.4 18.0
8.5 to 8.99................................................. 12.5 15.0 15.8
9.0 to 9.49................................................. 3.1 3.4 6.7
9.5 to 9.99................................................. 3.6 4.0 6.9
10% and over................................................ 3.6 4.0 7.0
----- ----- -----
Total residential servicing portfolio............. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

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

(1) 1997 data is as of December 31; 1996 data is as of September 30, which was
the fiscal year end for Mortgage Corp. prior to the Harbor Merger.

S-29
<PAGE> 30

At March 31, 1998, 94% of the principal balance of loans in the servicing
portfolio bore interest at fixed rates and 6% bore interest at adjustable rates.
The weighted average servicing fee of the portfolio was 0.34% of the principal
balance of serviced loans at March 31, 1998.

The following table presents the geographic distribution of Mortgage
Corp.'s residential servicing portfolio (excluding subserviced loans), as of the
dates indicated.

RESIDENTIAL SERVICING PORTFOLIO GEOGRAPHIC DISTRIBUTION

<TABLE>
<CAPTION>
PERCENTAGE OF PRINCIPAL
BALANCE SERVICED
--------------------------------
FISCAL YEAR(1)
AS OF ---------------
MARCH 31, 1998 1997 1996
-------------- ------ ------
<S> <C> <C> <C>
California.................................................. 27.5% 27.8% 29.5%
Texas....................................................... 15.6 17.3 40.3
Florida..................................................... 7.2 7.1 4.2
Washington.................................................. 6.5 6.7 2.4
Maryland.................................................... 6.0 5.2 1.7
Other states (none more than 5%)............................ 37.2 35.9 21.9
----- ----- -----
Total residential servicing portfolio............. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

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

(1) 1997 data is as of December 31; 1996 data is as of September 30, which was
the fiscal year end for Mortgage Corp. prior to the Harbor Merger.

The following table presents, as a percentage of aggregate principal
balance, the delinquency statistics of Mortgage Corp.'s residential servicing
portfolio (excluding subserviced loans and GNMA defaulted loans purchased while
in default) as of the dates indicated.

RESIDENTIAL SERVICING PORTFOLIO DELINQUENCY STATISTICS

<TABLE>
<CAPTION>
FISCAL
YEAR(1)
AS OF -----------
MARCH 31, 1998 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Delinquencies at period end:
30 days................................................... 3.3% 2.4% 2.1%
60 days................................................... 0.5 0.5 0.6
90 days or more........................................... 0.5 0.2 0.3
--- --- ---
Total delinquencies............................... 4.3% 3.1% 3.0%
=== === ===
Foreclosures pending.............................. 0.7% 0.7% 0.9%
=== === ===
</TABLE>

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

(1) 1997 data is as of December 31; 1996 data is as of September 30, which was
the fiscal year end for Mortgage Corp. prior to the Harbor Merger.

The delinquency data included in the preceding table include the results of
three distressed servicing portfolios acquired by Mortgage Corp. At March 31,
1998, the distressed portfolios totaled approximately $153.9 million of
servicing, of which approximately 6.5% represented delinquent principal
balances. In addition, approximately 3.8% of the principal balance of these
distressed portfolios was in foreclosure as of March 31, 1998.

Mortgage Corp. has increased its servicing portfolio by retaining the
servicing rights on the loans it originates and by acquiring servicing rights
from other mortgage banks. In particular, Mortgage Corp. has sought to acquire
servicing rights from other mortgage banks at a substantial discount to the
market value of currently originated servicing. Such servicing is available at
discounts because of high delinquency levels or other characteristics deemed
unattractive to other servicers seeking more traditional servicing portfolios.
Mortgage Corp. has been able to acquire these servicing portfolios at prices
that, in its view, are attractive

S-30
<PAGE> 31

compared to the market value of currently originated servicing. Mortgage Corp.
has devoted substantial attention to improving the overall quality of these
distressed servicing portfolios and, as a result, has developed particular
expertise in servicing loans evidencing some level of distress.

To capitalize further on its distressed servicing expertise, Mortgage Corp.
has initiated a trial program whereby it will acquire delinquent FHA and VA
loans from other mortgage bankers' GNMA securitizations. Mortgage Corp. believes
that a financial and business incentive exists for some mortgage banks to sell
the targeted loans and, therefore, a significant amount of such loans are
available for sale. The GNMA seller-servicers are required to pass through to
the holder of the GNMA security the scheduled principal and interest payments on
all loans in the security pool, even though the borrower may not be making such
payments. The mortgage banker is, therefore, making corporate advances to the
security holder from its own funds. By removing the delinquent loans from the
securitization by a sale to Mortgage Corp., the selling mortgage banker is
relieved from further obligations to make such advances to the GNMA security
holder. Through March 31, 1998, Mortgage Corp. has acquired approximately $98
million of such loans. Mortgage Corp. intends to securitize substantially all of
such loans.

Residential mortgage loans are serviced from facilities located in Houston,
Texas and Scottsbluff, Nebraska. The Scottsbluff center, a newly renovated
21,000 square foot facility, was acquired as part of Mortgage Corp.'s 1996
acquisition of Hamilton Financial Services Corporation ("Hamilton"). This
service center has advantageous lease terms and an efficient cost structure as
compared to metropolitan servicing centers. The addition of Hamilton's servicing
and subservicing portfolios almost doubled Mortgage Corp.'s consolidated
servicing portfolio.

In order to track information on its mortgage servicing portfolio, Mortgage
Corp. utilizes a data processing system provided by Alltel Information Systems,
Inc. ("Alltel"). Alltel is one of the largest mortgage banking service bureaus
in the United States. Management believes that this system gives Mortgage Corp.
sufficient capacity to support the anticipated expansion of its residential
mortgage loan servicing portfolio.

Mortgage Conduit. The loans acquired by Capital Corp. to date are being
subserviced by Advanta Mortgage Corp. USA. Capital Corp. owns the servicing
rights to its loans as master servicer and intends to assign collection and
resolution responsibilities to a subsidiary of the Company as special servicer
when its loans reach certain stages of delinquency, thus placing the final
decisions as to collection management under the control of the Company. Having
acquired and managed consumer portfolios totaling in excess of $580 million in
Face Value in its Portfolio Asset acquisition and resolution business, the
Company believes that the servicing experience and skills it has gained are
valuable to support the unique collection and resolution needs of a Home Equity
Loan portfolio. Capital Corp. intends within the next 12 months to replace
Advanta Mortgage Corp. USA with the combined capabilities of Mortgage Corp. and
the Company to service Capital Corp.'s portfolio of Home Equity Loans and the
loans within its securitized pools. The Company and Mortgage Corp. are in the
process of seeking the approval of the servicer rating agencies as a preliminary
step in the process of retaining the servicing of all new Home Equity Loans
in-house.

STRATEGY

Direct Retail and Broker Retail. Mortgage Corp. intends to pursue the
following strategies in an effort to continue growth in earnings in all aspects
of its residential mortgage business:

- Maintain steady growth in earnings by increasing the size of Mortgage
Corp.'s servicing portfolio.

- Continue opportunistic geographic expansion.

- Increase the range of mortgage products offered.

- Expand the Direct Retail and Broker Retail origination channels.

- Acquire distressed servicing portfolios and delinquent FHA, FMHA and
VA loans from other seller-servicers' GNMA securitizations.

S-31
<PAGE> 32

Mortgage Conduit. Capital Corp. intends to implement the following
strategies as it continues to develop and grow its mortgage conduit business:

- Capitalize on the existing Home Equity Loan origination network of
Mortgage Corp. to generate loans for securitization.

- Form strategic relationships with selected small originators of Home
Equity Loans by extending secured warehouse lines of credit or
mezzanine loans to, or making equity investments in, such entities.

- Capitalize on the distressed asset collection experience of
Commercial Corp. to address the collection and resolution challenges
inherent in Home Equity Loan servicing.

- Establish an internal servicing platform to service the Home Equity
Loans originated or acquired by Capital Corp.

Commercial Mortgage Banking

Mortgage Corp.'s commercial mortgage banking business consists of
commercial loans secured by commercial real estate properties and single family
residential construction loans. The following table presents the number and
dollar amount of Mortgage Corp.'s commercial loan production for the periods
indicated.

COMMERCIAL MORTGAGE LOAN ORIGINATIONS

<TABLE>
<CAPTION>
FISCAL YEAR(1)
THREE MONTHS ENDED ----------------------------
MARCH 31, 1998 1997 1996 1995
------------------ -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Correspondent Loans:
Volume of loans............................ $113,265 $348,060 $35,600 $53,405
Number of loans............................ 21 86 3 9
Construction Loans:
Volume of loans............................ $ 15,596 $ 65,740 $28,780 --
Number of loans............................ 96 466 263 --
Total Loans:
Volume of loans............................ $128,861 $413,800 $64,380 $53,405
======== ======== ======= =======
Number of loans............................ 117 552 266 9
======== ======== ======= =======
</TABLE>

- ---------------
(1) 1997 data is for the 12 months ended December 31; data for all other years
is for the 12 months ended September 30, which was Mortgage Corp.'s fiscal
year end prior to the Harbor Merger.

Correspondent Loan Business

Through eight offices located in California, Texas and Colorado, Mortgage
Corp. originates commercial loans that are funded by third parties for which
Mortgage Corp. serves as the correspondent. The loans are secured by
multi-family residential projects, office buildings, shopping centers and other
income producing properties. Revenues derived from Mortgage Corp.'s commercial
lending business are principally origination fees based on a percentage of the
loan amount and, in certain instances, application fees assessed at the time a
loan application is processed by Mortgage Corp. During 1997 Mortgage Corp.
generated $2.7 million in origination fees from its commercial mortgage
origination business. Mortgage Corp. did not generate any such fees during the
three months ended March 31, 1998. Mortgage Corp.'s commercial lending offices
are staffed by 34 loan officers and eight servicing personnel.

Mortgage Corp. originates commercial loans in accordance with the
underwriting guidelines of its investors. These investors include life insurance
companies, commercial mortgage conduits, real estate investment trusts, and
others. Commercial loans are funded by investors at closing. Mortgage Corp.
originated

S-32
<PAGE> 33

a substantial portion of its 1997 commercial production for a single large
insurance company. In addition, a substantial portion of its commercial
servicing portfolio consists of servicing for such company.

At March 31, 1998, Mortgage Corp. serviced a portfolio of commercial loans
for 39 investors totaling approximately $1.4 billion representing 479 loans. At
March 31, 1998, the commercial servicing portfolio represented loans in 15
states with California (71%), Texas (11%), Colorado (8%) and Minnesota (5%)
representing the largest concentrations of the principal balance of loans
serviced.

Commercial loans are serviced in a servicing center located in Walnut
Creek, California. Mortgage Corp. owns the rights to service its correspondent's
loans, with termination rights by the correspondent on a 30-day notice basis.
Servicing fees for such loans range from five to eight basis points per annum of
the principal balance of the loans.

Construction Loans

In 1995, Mortgage Corp. began originating for its own account and servicing
single-family residential construction loans through a construction loan
department headquartered in Houston, Texas. Mortgage Corp. serves customers in
nine states with construction loan products tailored to its builder and
individual customers. Mortgage Corp. extends construction lines of credit to
approximately 57 builders for the construction of custom and speculative homes.
Generally, builders are limited to no more than 50% of the committed line for
speculative homes. Total commitments outstanding at March 31, 1998 were
approximately $34 million with a maximum extended to any one builder of
approximately $2.5 million. During 1997 and the three months ended March 31,
1998, approximately 70% and 71%, respectively, of total construction loan volume
was conducted with builder borrowers.

In addition to its builder customer base, Mortgage Corp. offers a
construction-to-permanent loan package to individual customers who are building
or remodeling their own home. Under this program, the customer has one
application and loan approval process to provide for both the interim
construction and permanent financing. During 1997 and the three months ended
March 31, 1998, approximately 30% and 29%, respectively, of total construction
loan volume was conducted with individual borrowers.

The underwriting and servicing of the construction loans is conducted in
Houston, Texas with the construction progress inspection support provided by the
branch office personnel or outside vendors specializing in property inspections
for construction lenders. Construction loans are extended for up to 90% of the
cost of construction for a period of up to nine months with one three month
renewal option on the part of the builder. If the loan remains unpaid after the
first renewal, amortization of at least 10% of the principal balance is required
for any further renewals. Substantially all construction loans bear interest at
variable rates of interest at margins over a base lending rate.

Mortgage Corp. solicits construction loan builder and individual customers
through its major Direct Retail offices and, as a result, conducts most of its
business in Texas (72% in 1997), Maryland (8% in 1997), Virginia (5% in 1997)
and Tennessee (5% in 1997).

Strategy

In its commercial mortgage banking business, Mortgage Corp. intends to
continue to serve its correspondent clients by sourcing opportunities through
its retail offices and its home builder clients. It is the Company's intention
to explore and develop cross-selling opportunities between the commercial
mortgage capability of Mortgage Corp. and the commercial lending business of
Commercial Corp.

In its construction lending business, Mortgage Corp. intends to expand its
customer base by continuing to emphasize the construction-to-permanent loan
product. To that end, a regional construction loan product specialist resides in
the mid-Atlantic regional retail office to introduce the construction loan
product to borrowers in the region. The balance of Mortgage Corp.'s expansion
efforts in the construction lending business are focused on providing a larger
volume of construction loan products to Mortgage Corp.'s existing builder
customers.

S-33
<PAGE> 34

PORTFOLIO ASSET ACQUISITION AND RESOLUTION

The Company engages in the Portfolio Asset acquisition and resolution
business and is beginning to originate commercial loans through its wholly owned
subsidiary, Commercial Corp. and its subsidiaries. In the Portfolio Asset
acquisition and resolution business Commercial Corp. acquires and resolves
portfolios of performing and nonperforming commercial and consumer loans and
other assets, which are generally acquired at a discount to Face Value.
Purchases may be in the form of pools of assets or single assets. Performing
assets are those as to which debt service payments are being made in accordance
with the original or restructured terms of such assets. Nonperforming assets are
those as to which debt service payments are not being made in accordance with
the original or restructured terms of such assets, or as to which no debt
service payments are being made. A Portfolio is designated as nonperforming
unless substantially all of the assets comprising the Portfolio are performing.
Once a Portfolio has been designated as either performing or nonperforming, such
designation is not changed regardless of the performance of the assets
comprising the Portfolio. Portfolios are either acquired for Commercial Corp.'s
own account or through Acquisition Partnerships. See "-- Portfolio Asset
Acquisition and Resolution Business -- Relationship with Cargill Financial." To
date, Commercial Corp. and the Acquisition Partnerships have acquired over $3.0
billion in Face Value of assets.

Portfolio Asset Acquisition and Resolution Business

Background

In the early 1990s large quantities of nonperforming assets were available
for acquisition from the RTC and the FDIC. Since 1993, most sellers of
nonperforming assets have been private sellers, rather than government agencies.
These private sellers include financial institutions and other institutional
lenders, both in the United States and in various foreign countries, and, to a
lesser extent, insurance companies in the United States. As a result of mergers,
acquisitions and corporate downsizing efforts, other business entities
frequently access the market served by the Company to dispose of excess real
estate property or other financial assets not meeting the strategic needs of a
seller. Sales of such assets improve the seller's balance sheet, reduce overhead
costs, reduce staffing requirements and avoid management and personnel
distractions associated with the intensive and time-consuming task of resolving
loans and disposing of real estate. Consolidations within a broad range of
industries, especially banking, have augmented the trend of financial
institutions and other sellers packaging and selling asset portfolios to
investors as a means of disposing of nonperforming loans or other surplus
assets.

Portfolio Assets

Commercial Corp. acquires and manages Portfolio Assets, which are generally
purchased at a discount to Face Value by Commercial Corp. or through Acquisition
Partnerships. The Portfolio Assets are generally nonhomogeneous assets,
including loans of varying qualities that are secured by diverse collateral
types and foreclosed properties. Some Portfolio Assets are loans for which
resolution is tied primarily to the real estate securing the loan, while others
may be collateralized business loans, the resolution of which may be based
either on business or real estate or other collateral cash flow. Consumer loans
may be secured (by real or personal property) or unsecured. Portfolio Assets may
be designated as performing or nonperforming. Commercial Corp. generally expects
to resolve Portfolio Assets within three to five years after purchase.

To date, a substantial majority of the Portfolio Assets acquired by
Commercial Corp. have been designated as nonperforming. Commercial Corp. seeks
to resolve nonperforming Portfolio Assets through (i) a negotiated settlement
with the borrower in which the borrower pays all or a discounted amount of the
loan; (ii) conversion of the loan into a performing asset through extensive
servicing efforts followed by either a

S-34
<PAGE> 35

sale of the loan to a third party or retention of the loan by Commercial Corp.
or (iii) foreclosure of the loan and sale of the collateral securing the loan.
Commercial Corp. generally retains Portfolio Assets that are designated as
performing for the life of the loans comprising the Portfolio.

Commercial Corp. has substantial experience acquiring, managing and
resolving a wide variety of asset types and classes. As a result, it does not
limit itself as to the types of Portfolios it will evaluate and purchase. The
main factors determining Commercial Corp.'s willingness to acquire Portfolio
Assets include the information that is available regarding the assets in a
portfolio, the price at which such portfolio can be acquired and the expected
net cash flows from the resolution of such assets. Commercial Corp. has acquired
Portfolio Assets in virtually all 50 states, the Virgin Islands, Puerto Rico and
France. Commercial Corp. believes that its willingness to acquire nonhomogeneous
Portfolio Assets without regard to geographical location provides it with an
advantage over certain competitors that limit their activities to either a
specific asset type or geographical location. Although Commercial Corp. imposes
no constraints on geographic locations of Portfolio Assets, the majority of
assets acquired to date have been in the Northeastern and Southern areas of the
United States.

Commercial Corp. also seeks to capitalize on emerging opportunities in
foreign markets where the market for nonperforming loans of the type generally
purchased by Commercial Corp. is less efficient than the market for such assets
in the United States. Through March 31, 1998, Commercial Corp. has acquired,
with affiliates of Cargill Financial and a local French partner, four Portfolios
in France, consisting of approximately 7,900 assets, for an aggregate purchase
price of approximately $187 million. Such assets had a Face Value of
approximately $616 million. Commercial Corp.'s share of the equity interest in
the Portfolios acquired in France ranges from 10% to 33 1/3% and Commercial
Corp. has made a total equity investment therein of approximately $13 million.
The underlying assets and debt are denominated in French francs and Commercial
Corp.'s equity investments are funded with a French franc line of credit,
thereby mitigating against foreign currency translation risks with respect to
Commercial Corp.'s equity investments. Commercial Corp. does not otherwise
attempt to hedge any profits that might be derived from its equity investments.

Commercial Corp. has an established presence in Paris, France and is
actively pursuing opportunities to purchase additional pools of distressed
assets in France and other areas of Western Europe. Commercial Corp. has also
established an office in Mexico City, Mexico to explore asset acquisition
opportunities in Mexico. Additionally, Commercial Corp. recently began pursuing
opportunities to purchase pools of distressed assets in Japan and Thailand and
is contemplating the formation of various affiliations with local investment and
servicing partners to jointly pursue such acquisition opportunities.

The following table presents, for each of the years in the three-year
period ended December 31, 1997 and for the three months ended March 31, 1998,
selected data for the Portfolio Assets acquired by Commercial Corp.

PORTFOLIO ASSETS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED ------------------------------
MARCH 31, 1998 1997 1996 1995
------------------ -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Face Value................................... $162,298 $504,891 $413,844 $699,662
Total purchase price......................... 51,971 183,229 205,524 213,187
Total equity invested........................ 18,610 54,764 92,937 26,534
Commercial Corp. equity invested............. $ 8,662 $ 37,109 $ 35,973 $ 24,603
Total number of Portfolio Assets... 1,399 5,503 5,921 19,031
</TABLE>

Sources of Portfolio Assets

Commercial Corp. develops its Portfolio Asset opportunities through a
variety of sources. The activities or contemplated activities of expected
sellers are publicized in industry publications and through other similar
sources. Commercial Corp. also maintains relationships with a variety of parties
involved as sellers or as

S-35
<PAGE> 36

brokers or agents for sellers. Many of the brokers and agents concentrate by
asset type and have become familiar with Commercial Corp.'s acquisition criteria
and periodically approach Commercial Corp. with identified opportunities. In
addition, repeat business referrals from Cargill Financial or other co-investors
in Acquisition Partnerships, repeat business from previous sellers, focused
marketing by Commercial Corp. and the nationwide presence of Commercial Corp.
and the Company are important sources of business.

Commercial Corp. has identified and seeks to continue to identify foreign
partners that have contacts within each foreign market and can bring Portfolio
Asset opportunities to Commercial Corp. Commercial Corp. expects that it will
only pursue acquisitions in foreign markets in conjunction with a local foreign
partner. Commercial Corp. has in the past pursued, and expects in the
foreseeable future to pursue, foreign acquisition opportunities in markets where
Cargill Financial or another strategic partner has a presence.

Asset Analysis and Underwriting

Prior to making an offer to acquire any Portfolio, Commercial Corp.
performs an extensive evaluation of the assets that comprise the Portfolio. If,
as is often the case, the Portfolio Assets are nonhomogeneous, Commercial Corp.
will evaluate all individual assets determined to be significant to the total of
the proposed purchase. If the Portfolio Assets are homogenous in nature, a
sample of the assets comprising the Portfolio is selected for evaluation. The
evaluation of an individual asset generally includes analyzing the credit and
collateral file or other due diligence information supplied by the seller. Based
upon such seller-provided information, Commercial Corp. will undertake
additional evaluations of the asset which, to the extent permitted by the
seller, will include site visits to and environmental reviews of the property
securing the loan or the asset proposed to be purchased. Commercial Corp. will
also analyze relevant local economic and market conditions based on information
obtained from its prior experience in the market or from other sources, such as
local appraisers, real estate principals, realtors and brokers.

The evaluation further includes an analysis of an asset's projected cash
flow and sources of repayment, including the availability of third party
guarantees. Commercial Corp. values loans (and other assets included in a
portfolio) on the basis of its estimate of the present value of estimated cash
flow to be derived in the resolution process. Once the cash flow estimates for a
proposed purchase and the financing and partnership structure, if any, are
finalized, Commercial Corp. can complete the determination of its proposed
purchase price for the targeted Portfolio Assets. Purchases are subject to
purchase and sale agreements between the seller and the purchasing affiliate of
Commercial Corp.

Servicing

After a Portfolio is acquired, Commercial Corp. assigns it to an account
servicing officer who is independent of the officer that performed the due
diligence evaluation in connection with the purchase of the Portfolio. Portfolio
Assets are serviced either at the Company's headquarters or in one of Commercial
Corp.'s other offices. Commercial Corp. generally establishes servicing
operations in locations in close proximity to significant concentrations of
Portfolio Assets. Most of such offices are considered temporary and are reviewed
for closing after the assets in the geographic region surrounding the office are
substantially resolved. The assigned account servicing officer develops a
business plan and budget for each asset based upon an independent review of the
cash flow projections developed during the investment evaluation, a physical
inspection of each asset or the collateral underlying the related loan, local
market conditions and discussions with the relevant borrower. Budgets are
periodically reviewed and revised as necessary. Commercial Corp. employs loan
tracking software and other operational systems that are generally similar to
systems used by commercial banks, but which have been enhanced to track both the
collected and the projected cash flows from Portfolio Assets.

To date, the net present value of Commercial Corp.'s cash flows from
serviced assets has exceeded initial projections. Because of this success,
Commercial Corp. has been able to structure securitization and structured
financing transactions based upon cash flow projections expected to be derived
from Portfolio Assets. The basis for such transactions differs from traditional
securitization structures in which the execution levels are predicated upon the
existence of an underlying contractual stream of cash flows from periodic

S-36
<PAGE> 37

payments on underlying loans. Transactions completed by Commercial Corp. to date
have been based not only on the cash flow from performing assets but also the
projected cash flows from nonperforming assets such as unoccupied real estate
and raw land parcels. Commercial Corp. believes that its success in predicting
cash flows from Portfolio Assets has permitted it to access the securitization
markets on attractive terms.

Commercial Corp. services all of the Portfolio Assets owned for its own
account, all of the Portfolio Assets owned by the Acquisition Partnerships and,
to a very limited extent, Portfolio Assets owned by related third parties. In
connection with the Acquisition Partnerships, Commercial Corp. earns a servicing
fee of between 3% and 8% of gross cash collections generated in the Acquisition
Partnerships rather than a periodic management fee based on the Face Value of
the asset being serviced. The rate of servicing fee charged is a function of the
average Face Value of the assets within each pool being serviced (the larger the
average Face Value of the assets in a Portfolio, the lower the fee percentage
within the prescribed range).

Commercial Corp. believes that a key to its successful acquisition and
resolution of Portfolio Assets in foreign countries is its ability to transfer
its servicing capabilities and operational systems to such countries. Such
systems must be adapted and enhanced to be compatible with the local language,
currency and regulatory market. Commercial Corp. has completed the transfer and
adaptation of its servicing capabilities and operational systems to its
operations in France and has plans to do the same with respect to its operations
in Mexico and Asia.

Structure and Financing of Portfolio Asset Purchases

Portfolio Assets are acquired for the account of a subsidiary of Commercial
Corp. and through the Acquisition Partnerships. Portfolio Assets owned directly
by a subsidiary of Commercial Corp. are financed with cash contributed by
Commercial Corp. and secured senior debt that is recourse only to such
subsidiary.

Each Acquisition Partnership is a separate legal entity, generally formed
as a limited partnership. Commercial Corp. and an investor typically form a
corporation to serve as the corporate general partner of each Acquisition
Partnership. Generally, Commercial Corp. and the investor each own 50% of the
general partner and a 49% limited partnership interest in the Acquisition
Partnership (the general partner owns the other 2% interest). Cargill Financial
or its affiliates are the investor in the vast majority of the Acquisition
Partnerships currently in existence. See "-- Relationship with Cargill
Financial." Certain institutional investors have also held limited partnership
interests in the Acquisition Partnerships and may hold interests in the related
corporate general partners. Acquisition Partnerships may also be formed as a
trust, corporation or other type of entity.

The Acquisition Partnerships generally are financed by debt secured only by
the assets of the individual entity and are nonrecourse to the Company,
Commercial Corp., its co-investors and the other Acquisition Partnerships.
Commercial Corp. believes that such legal structure insulates it, the Company
and the other Acquisition Partnerships from certain potential risks, while
permitting Commercial Corp. to share in the economic benefits of each
Acquisition Partnership. Prior to the Merger, a significant portion of the
funding for each Acquisition Partnership was provided in the form of
subordinated debt provided by Cargill Financial. Because the Merger increased
the capital available to Commercial Corp., the need for subordinated debt has
been substantially eliminated, enabling Commercial Corp. to commit a larger
portion of its own funds to the Acquisition Partnerships. In addition, the
Merger has enhanced Commercial Corp.'s capacity to invest in Portfolios without
the participation of an investment partner.

Senior secured acquisition financing currently provides the majority of the
funding for the purchase of Portfolios. Commercial Corp. and the Acquisition
Partnerships have relationships with a number of senior lenders including
Nomura, Cargill Financial and others. Senior acquisition financing is obtained
at variable interest rates ranging from LIBOR to prime based pricing with
negotiated spreads to the base rates. The final maturity of the senior secured
acquisition debt is normally two years from the date of funding of each advance
under the facility. The terms of the senior acquisition debt of the Acquisition
Partnerships generally allow, under certain conditions, distributions to equity
partners before the debt is repaid in full.

S-37
<PAGE> 38

Prior to maturity of the senior acquisition debt, the Acquisition
Partnerships typically refinance the senior acquisition debt with long-term debt
secured by the assets of partnerships or transfer assets from the Portfolios to
special purpose entities to effect structured financings or securitization
transactions. Such long-term debt generally accrues interest at a lower rate
than the senior acquisition debt, has collateral terms similar to the senior
acquisition debt, and permits distributions of excess cash flow generated by the
partnership to the equity partners so long as the partnership is in compliance
with applicable financial covenants.

Relationship with Cargill Financial

Cargill Financial, a diversified financial services company, is a wholly
owned subsidiary of Cargill, Incorporated, which is generally regarded as one of
the world's largest privately-held corporations and has offices worldwide.
Cargill Financial and its affiliates provide significant debt and equity
financing to the Acquisition Partnerships and, from time to time, provide debt
financing to the Company and its subsidiaries. In addition, Commercial Corp.
believes its relationship with Cargill Financial significantly enhances
Commercial Corp.'s credibility as a purchaser of Portfolio Assets and
facilitates its ability to expand into other businesses and foreign markets.

Under a Right of First Refusal Agreement and Due Diligence Reimbursement
Agreement effective as of January 1, 1998 (the "Right of First Refusal
Agreement") among the Company, Servicing Corp., Cargill Financial and its wholly
owned subsidiary CFSC Capital Corp. II, if the Company receives an invitation to
bid on or otherwise obtains an opportunity to acquire interests in domestic
loans, receivables, real estate or other assets in which the aggregate amount to
be bid exceeds $4 million, the Company is required to follow a prescribed notice
procedure pursuant to which Cargill Financial has the option to participate in
the proposed purchase by requiring that such purchase or acquisition be effected
through an Acquisition Partnership formed by the Company and Cargill Financial
(or an affiliate). The Right of First Refusal Agreement does not prohibit the
Company from holding discussions with entities other than Cargill Financial
regarding potential joint purchases of interests in loans, receivables, real
estate or other assets, provided that any such purchase is subject to Cargill
Financial's right to participate in the Company's share of the investment. The
Right of First Refusal Agreement further provides that, subject to certain
conditions, Cargill Financial will bear 50% of the due diligence expenses
incurred by the Company in connection with proposed asset purchases. The Right
of First Refusal Agreement is an amendment and extension of a similar agreement
entered into among the Company, certain members of the Company's management and
Cargill Financial in 1992. The Right of First Refusal Agreement terminates on
January 1, 2000.

Business Strategy

Historically, Commercial Corp. has leveraged its expertise in asset
resolution and servicing by investing in a wide variety of asset types across a
broad geographic scope. Commercial Corp. continues to follow this investment
strategy and seeks expansion opportunities into new asset classes and geographic
areas when it believes it can achieve attractive risk adjusted returns. The
following are the key elements of Commercial Corp.'s business strategy in the
portfolio acquisition and resolution business:

- Niche markets. Commercial Corp. will continue to pursue profitable
private market niches in which to invest. The niche investment
opportunities that Commercial Corp. has pursued to date include (i) the
acquisition of improved or unimproved real estate, including excess
retail sites; (ii) periodic purchases of single financial or real estate
assets from banks and other financial institutions with which Commercial
Corp. has established relationships, and from a variety of other sellers
that are familiar with the Company's reputation for acting quickly and
efficiently; and (iii) the purchase of charged-off credit card
receivables.

- Emphasis on smaller Portfolios. Generally, Commercial Corp. seeks
purchases of Portfolio Assets with a purchase price of less than $100
million in order to avoid large portfolio offerings that attract larger
institutional purchasers and hedge funds, which have lower threshold
return requirements and lower funding costs than Commercial Corp.

S-38
<PAGE> 39

- Foreign markets. Commercial Corp. believes that the foreign markets for
distressed assets are less developed than the U.S. market, and therefore
provide a greater opportunity to achieve attractive risk adjusted
returns. Commercial Corp. has purchased Portfolio Assets in France and
expects to continue to seek purchase opportunities outside of the United
States. Commercial Corp. intends to transfer its servicing capabilities
and operational systems to each foreign country in which it purchases
Portfolio Assets and to adapt such capabilities and systems to the local
market.

Commercial Lending Opportunities

Commercial Corp.'s extensive experience in the asset acquisition and
resolution business has led to numerous opportunities to originate commercial
loans. In most cases, the prospective borrower was unwilling or unable to meet a
traditional lenders' requirements or found that a traditional lender could not
or would not be responsive within a short time frame. In some cases, the
prospective borrower was already aware of Commercial Corp.'s familiarity and
comfort with a particular type of collateral, such as lodging properties, small
commercial real estate developments, franchisee properties or small multi-family
projects. In Commercial Corp.'s view, its extensive experience in servicing
difficult distressed asset credits qualifies it to originate, and service,
commercial loans. To that end, Commercial Corp. is currently evaluating the
possibility of making debtor-in-possession loans to borrowers in bankruptcy
reorganization proceedings, mezzanine loans or venture capital investments in
emerging growth company situations and commercial loans meeting the underwriting
and other standards of qualification for a Small Business Administration
guarantee. Commercial Corp. is also analyzing the special funding needs of
borrowers who are franchisees, and is considering the factoring of receivables.

Commercial Corp. expects that it will analyze other commercial lending
opportunities as they arise. In some cases, the opportunity might be a unique
and defined lending opportunity. In others, an attractive opportunity would be
characterized by a flow of lending opportunities, such as in the factoring
business. Commercial Corp. will also entertain the opportunity to joint venture
with businesses already in the targeted business activity but which need
additional capital or funding and the servicing expertise of Commercial Corp.

CONSUMER LENDING

The Company conducts all of its consumer receivable origination activities
through Consumer Corp. and its subsidiaries. Consumer Corp.'s current focus is
on the origination and servicing of sub-prime consumer loans. Such loans are
extended to borrowers who evidence an ability and willingness to repay credit,
but have experienced an adverse event, such as a job loss, illness or divorce,
or have had past credit problems, such as delinquency, bankruptcy, repossession
or charge-offs. The significant majority of Consumer Corp.'s current business is
focused on the sub-prime automobile sector, with each loan funded after
individual underwriting and pricing of each proposed extension of credit.

Market Background

The sub-prime automobile finance business has been characterized by several
factors that the Company believes increase its likelihood of being able to build
a successful sub-prime automobile finance business. Within the past several
years, significant amounts of new capital have become available, thereby
allowing a large number of new market participants to originate loans to
sub-prime automobile borrowers. This increase in competition led to reduced
credit underwriting standards and lower dealer discounts as lenders sought to
maintain earnings by increasing loan origination levels. In the Company's view,
too little attention was paid to both the importance of matching the discount to
the expected loss per occurrence and the special effort required to service a
sub-prime automobile loan. Because of many notable failures, especially among
mono-line automobile finance businesses, the Company believes that the
opportunity now exists to increase market share by providing a fully
underwritten loan product that utilizes risk-adjusted pricing to franchised
automobile dealerships that seek a steady source of funding supported by
meaningful and responsive service.

S-39
<PAGE> 40

Consumer Corp. Background

Through its Portfolio Asset acquisition and resolution business, the
Company has acquired approximately $580 million in Face Value of distressed
consumer loans. In addition, through its wholly owned subsidiary, FirstCity
Servicing Corporation of California ("Consumer Servicing") the Company has
extensive experience in the servicing of distressed sub-prime automobile loans.

The Company's initial venture into the sub-prime automobile market involved
the acquisition in mid-1996 of a distressed sub-prime automobile loan portfolio
from a secured lender. In addition to acquiring the distressed loans, the
Company acquired the equity of the company that operated the program through
which the loans had been originated. This program involved the indirect
acquisition of automobile loans from financial intermediaries that had direct
contact with automobile dealerships. The Company was required to purchase loans
that satisfied minimum contractual underwriting standards and was not permitted
to negotiate purchase discounts for a loan based on the individual risk profile
of the loan and the borrower. After operating this program for approximately 15
months, the Company concluded that the contractual underwriting standards and
purchase discounts on which the program was based were insufficient to generate
sub-prime automobile loans of acceptable quality to the Company. As a result,
the Company terminated its obligations with the financial institutions
participating in such origination program effective as of January 31, 1998.

With the benefit of the experience gained by the Company through its
initial attempt at originating acceptable sub-prime automobile loans, the
Company began, in early 1997, to explore other business models that it felt
would be successful in the current market environment. This investigation and
research resulted in the formation, during the third quarter of 1997, of Funding
Corp., 80% of which is owned by the Company and 20% of which is owned by Funding
Corp.'s management team. Funding Corp.'s management team is experienced in the
automobile finance business, with significant prior experience in the sales and
finance activities of franchised dealerships. Funding Corp.'s business model is
predicated upon the acquisition of newly originated sub-prime automobile finance
contracts at a price that is adjusted to reflect the expected loss per
occurrence on defaulted contracts. The approach emphasizes service to the
dealership and a steady source of funding for contracts that meet Funding
Corp.'s underwriting and pricing criteria. In addition, all loans are serviced
by Consumer Servicing, which is dedicated exclusively to the servicing of
consumer loans originated or acquired by Consumer Corp.

Consumer Corp. and the management shareholders of Funding Corp. entered
into a shareholders' agreement in connection with the formation of Funding Corp.
in September 1997. Commencing on the fifth anniversary of such agreement,
Consumer Corp. and the management shareholders have put and call options with
respect to the stock of Funding Corp. held by the other party, which will be
priced at a mutually agreed upon fair market value.

Product Description

Consumer Corp. currently acquires and originates loans, secured by
automobiles, to borrowers who have had past credit problems or have little or no
credit experience. Such loans are individually underwritten to Consumer Corp.'s
underwriting and credit guidelines. See "-- Loan Acquisition and Underwriting."
The collateral for the loan generally is a used automobile purchased from a
franchised automobile dealership. The loans generally have a term of no more
than 60 months and generally accrue interest at the maximum rate allowed by
applicable state law.

Origination Channels

Through a sales staff managed by professionals with an extensive automobile
dealership background, Funding Corp. markets its loan products and dealership
services directly to participating franchised automobile dealerships. Funding
Corp. currently maintains approximately 250 automobile dealership relationships
in Texas, Missouri, Oklahoma, North Carolina and Georgia. No particular dealer
accounts for more than 4% of the loans acquired by Funding Corp. through March
31, 1998. Near term plans call for expansion into other states as staffing
levels, licensing and training permit. Funding Corp. is targeting expansion into
states that

S-40
<PAGE> 41

offer attractive opportunities due to population growth, attractive consumer
lending rate environments and lender-friendly repossession and collection
remedies with respect to defaulting borrowers.

The dealership servicing and marketing staff of Funding Corp. consists of
eight marketing representatives who work with dealers that submit funding
applications to Funding Corp. These marketing representatives call upon new
dealership prospects within the current marketing territories and work with
existing dealerships to solicit additional loan acquisition opportunities. All
of the marketing staff are full time employees of Funding Corp. and have
completed an extensive training program. In addition to the initial training,
weekly updates with the marketing representatives and monthly meetings for the
entire staff are held to maintain current knowledge of the dealership programs
and product offerings.

Participating dealerships submit funding applications for each prospective
loan to Funding Corp.'s home office in Dallas, Texas. Applications are reviewed
and checked for completeness and all complete applications are forwarded to a
credit analyst for review. Within two hours after receipt of an application, a
representative of Funding Corp. will notify the dealership of the terms on which
it would acquire the loan, subject to confirmation of the application data. See
"-- Loan Acquisition and Underwriting."

In addition to Funding Corp.'s operations, FirstCity Consumer Finance
Corporation ("Consumer Finance"), a wholly owned subsidiary of Consumer Corp.,
originates loans with borrowers who have established payment records on recently
originated automobile receivables through direct marketing to the consumer.
Through contractual relationships with third parties, Consumer Finance
identifies loan prospects for underwriting, documentation and funding upon final
approval of a request for credit. The activities of Consumer Finance are not
significant to date, with 44 loans having an aggregate principal balance of
approximately $608,000 outstanding at March 31, 1998.

Loan Acquisition and Underwriting

Funding Corp. acquires sub-prime automobile loans originated by franchised
dealerships under a tiered pricing system. Under its pricing and underwriting
guidelines, each loan is purchased in an individually negotiated transaction
from the selling dealership only after it has been fully underwritten and
independently verified by Funding Corp. A staff of 22 credit and compliance
personnel in Funding Corp.'s home office completes the underwriting and due
diligence for each funding application. During the compliance phase of the
underwriting review, Funding Corp. verifies all pertinent information on a
borrower's credit application, including verification of landlord information
for borrowers without a mortgage. As an additional check on the quality of the
prospective loan, each borrower is personally contacted by Funding Corp. prior
to the acquisition of the loan. At such time, all of the details of the proposed
transaction are confirmed with the borrower, including the borrower's level of
satisfaction with the purchased vehicle.

Each transaction is individually priced to achieve a risk-adjusted target
purchase price, which is expressed as a percentage of the par value of the loan.
The tiered pricing structure of Funding Corp. is designed as a guideline for
establishing minimum underwriting and pricing standards for the loans to be
acquired. The minimum amount of the discount from par for the four tiers ranges
from no discount for tier 1 loans to a 10% discount for tier 4 loans. Funding
Corp.'s underwriting standards do not permit the purchase of a loan for more
than its par value. Other factors impacting the tier level of a loan include,
but are not limited to, prior credit history, repossession and bankruptcy
history, open credit account status, income minimums, down payment requirements,
payment ratio tests and the contract advance amount as a percentage of the
wholesale value of the collateral vehicle. The purpose of the tiered
underwriting and pricing structure is to acquire loans that are priced in
accordance with risk characteristics and the underlying value of the collateral.
The process is designed to approve loan applications for borrowers who are
likely to pay as agreed, and to minimize the risk of loss on the disposition of
the underlying collateral in the event that a default occurs.

Funding Corp. seeks to acquire loans that have the following
characteristics:

- Loans originated by a new automobile franchised dealership.

- Loans secured by automobiles that have established resale values and a
targeted age of approximately two years.

S-41
<PAGE> 42

- The borrower has made a substantial down payment on the automobile, which
evidences a significant equity commitment.

- The loan is underwritten to provide a debt to income ratio permitting the
borrower to comfortably afford the monthly payments.

- The borrower evidences a tendency toward repairing impaired credit.

- Funding Corp.'s purchase price of the contract from the dealership is
less than the published wholesale value of the automobile.

From its inception in September 1997 through March 31, 1998, Funding Corp.
acquired a total of 1,977 automobile loans representing an aggregate of
approximately $25.7 million in Face Value. Through March 31, 1998, the average
Face Value of the loans acquired was approximately 100.6% of the published
wholesale value of the financed automobile, the loans carried a weighted average
coupon rate of 19.3% and were purchased at a discount averaging 12.8% of their
Face Value. As a result, the average amount advanced by Funding Corp. for a
particular loan was equal to approximately 87.8% of the published wholesale
value of the financed automobile. The average downpayment on the automobile by
the borrower was, as a percentage of purchase price, approximately 19%. The
monthly production during March 1998 exceeded $9 million.

The average automobile financed by Funding Corp. through March 31, 1998 was
two years old with approximately 32,700 miles. The average contractual repayment
term for the loans acquired by Funding Corp. was 52 months. The ratio of the
borrower's monthly debt service amount to the borrower's monthly gross income
was, on average, equal to 12.1%.

Through March 31, 1998, of the 1,977 loans originated by Funding Corp., 22
loans have defaulted resulting in the initiation of repossession proceedings. At
March 31, 1998, there were nine loans more than 60 days past due in the
Portfolio. Given the relatively short period over which Funding Corp. has been
operating its automobile finance program, the foregoing default data is not
indicative of the expected future performance of loans acquired through the
program.

Financing Strategy

Funding Corp. finances its operations with a warehouse credit facility
provided by ContiTrade, in connection with which ContiFinancial Services
Corporation, an affiliate of ContiTrade, has the right to provide advisory and
placement services to Funding Corp. for the securitization of acquired loans.
Funding Corp. has and plans to continue to provide permanent financing for its
acquired consumer loans through securitizations of pools of loans totaling
between $40 and $50 million.

The securitization transactions are consummated through the creation of
special purpose trusts. The loans are transferred to a trust in exchange for
certificates representing the senior interest in the securitized loans held by
the trust and, if applicable, a subordinated interest in the securitized loans.
The subordinated interests generally consist of the excess spread between the
interest and principal paid by the borrowers on the loans pooled in the
securitization and the interest and principal of the senior interests issued in
the securitization, and other unrated interests issued in the securitization.
The senior interests are subsequently sold to investors for cash. Consumer Corp.
may elect to retain the subordinated interests or may sell all or some portion
of the subordinated interests to investors for cash. Consumer Corp. anticipates
that it will retain the rights to the excess spreads.

Upon the sale of loans in securitization transactions, the sum of the cash
proceeds received and the estimated present values of the subordinated interests
less the costs of origination and securitization and the basis in the loans sold
results in the gain recognized at the time of the securitization transaction.
The present values of the subordinated interests recognized by Consumer Corp.
are determined based upon prepayment, loss and discount rate assumptions that
are determined in accordance with the unique underlying characteristics of the
loans comprising each securitization.

S-42
<PAGE> 43

Servicing

Consumer Servicing, an indirect wholly owned subsidiary of the Company
based in Tustin, California, is responsible for the loan accounting, collection,
payment processing, skip tracing and recovery activities associated with the
Company's consumer lending activities. Consumer Servicing has extensive
experience in servicing automobile loans and the Company believes that Consumer
Servicing is a critical element to the Company's ultimate success in the
consumer loan business. Consumer Servicing's activities are closely integrated
with the activities of Consumer Corp. This enables Consumer Servicing to take
advantage of the information regarding the quality of originated credit that is
available from a servicer in order to assist in the evaluation and modification
of product design and underwriting criteria.

The staffing of Consumer Servicing consists of 78 personnel, including 50
assigned to customer service and collections and 9 assigned to the special
recovery activities associated with assignments for repossession through the
liquidation of the collateral (in addition to two individuals at Funding Corp.
who work in asset liquidation). This group also coordinates any contract
reinstatements, notices of intent to dispose of collateral and recovery of any
insurance, warranty or other premium payments subject to recovery in the event
of cancellation. An additional staff of seven personnel is dedicated to asset
recovery, which includes tracing of individuals who cannot be located, seeking
to collect on deficiencies, managing the storage of repossessed vehicles prior
to their disposition and physical damage claims on collateral vehicles. An
administrative staff handles the special issues associated with borrowers in
bankruptcy and the more complicated issues associated with contracts involved in
other legal disputes.

The servicing practices associated with sub-prime loans are extensive. For
example, Consumer Servicing personnel contact each borrower three days prior to
the payment due date during each of the first three months of the contract. This
process assists in avoiding first payment defaults and confirms that the
customer can be located. If a borrower is delinquent in payment, an attempt to
contact the borrower is made on the first day of delinquency. Continual contact
is attempted until the borrower is located and payment is made, or a commitment
is made to bring the contract current. If the borrower cannot be contacted, the
account may be assigned to Consumer Servicing's asset recovery staff.

If the borrower does not meet a payment commitment and has not indicated a
verifiable and reasonable intention to bring the loan current, the account is
assigned to outside agents for repossession at the thirty-third day of
delinquency. At such time, the borrower has missed two payments and has not
indicated a willingness to enter into a repayment plan. After the collateral is
repossessed, the borrower has a limited opportunity to reinstate the obligation
under applicable state law by bringing the payment current and reimbursing
Consumer Servicing for its repossession expenses. If the loan is not reinstated
within the reinstatement period, the collateral is sold by the asset liquidation
group. Funding Corp. disposes of repossessed automobiles at auction after a
thorough inspection and detailing. A representative of Funding Corp. generally
will attend the auction to represent Funding Corp. and ensure that the
automobile is properly represented by the auction firm.

Strategy

The Company continues to evaluate a number of business opportunities in the
consumer sector, which have the capability of generating or acquiring consumer
loans that represent identifiable and predictable credit quality and whose
return thresholds match or exceed those targeted by the Company. These include
secured consumer loan products and certain aspects of direct and indirect
unsecured consumer lending. Through contacts with investment banks, business
brokers and others in the consumer lending field, the Company seeks acquisition
or merger candidates or qualified management teams with which to associate in
start-up ventures. As with other aspects of its business, the Company seeks to
be opportunistic in targeting additional consumer lending opportunities.

CREDIT FACILITIES

The Company and each of its major operating subsidiaries have entered into
one or more credit facilities to finance their respective operations. Each of
the credit facilities to which the operating subsidiaries are parties are
nonrecourse to the Company and the other operating subsidiaries, except as
discussed below.

S-43
<PAGE> 44

Excluding the term acquisition facilities of the unconsolidated Acquisition
Partnerships, as of March 31, 1998 the Company and its subsidiaries had credit
facilities providing for borrowings in an aggregate principal amount of $1,898
million and outstanding borrowings of $1,264 million. The following table
summarizes the material terms of the credit facilities to which the Company, its
major operating subsidiaries and the Acquisition Partnerships were parties as of
July 27, 1998 and the outstanding borrowings under such facilities as of March
31, 1998.

CREDIT FACILITIES

<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL BORROWINGS AS OF
AMOUNT MARCH 31, 1998 INTEREST RATE OTHER TERMS AND CONDITIONS
--------- ---------------- ------------- --------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FIRSTCITY
Company Credit $50 $ 33(1) Prime or LIBOR Secured by the assets of
Facility............ + 2.625% the Company, expires April
30, 1999
Term fixed asset 1 1 Fixed 9.25% Secured by certain fixed
facility............ assets, expires January 1,
2001
MORTGAGE CORP.
Warehouse facility..... 670 581 LIBOR + 0.5% Revolving line to
to 2.5% warehouse residential
mortgage loans, expires
March 31, 1999
Supplemental warehouse 36 9 LIBOR + 0.5% Revolving line to
facility............ to 2.25% warehouse residential
mortgage loans and related
receivables, expires March
31, 1999
FNMA warehouse 700 453 Fed Funds + Open facility to fund
facility............ 0.5% to 1.0% committed loans to FNMA
and others
Operating line......... 47 45 LIBOR + 2.25% Revolving operating line
secured by the
unencumbered assets of
Harbor, expires December
15, 2002
CAPITAL CORP.
Warehouse facility..... 200 -(2) LIBOR + 0.75% Repurchase agreement to
facilitate the acquisition
of Home Equity Loans,
expires March 30, 1998
Warehouse facility..... 36 35 Fixed 6.85% Repurchase agreement to
facilitate the acquisition
of Home Equity Loans,
expires July 31, 1998
COMMERCIAL CORP.
Portfolio acquisition 100 43 LIBOR + 2.5% Acquisition facility to
facility............ acquire Portfolio Assets,
expires February 28, 1999
(includes $25 million
advanced to unconsolidated
Acquisition Partnerships)
</TABLE>

S-44
<PAGE> 45

<TABLE>
<CAPTION>
OUTSTANDING
PRINCIPAL BORROWINGS AS OF
AMOUNT MARCH 31, 1998 INTEREST RATE OTHER TERMS AND CONDITIONS
--------- ---------------- ------------- --------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
French acquisition 15 9 French franc Acquisition facility to
facility............ LIBOR + 3.5% fund equity investments in
French Portfolio Assets,
expires March 31, 1999;
guaranteed by Commercial
Corp. and the Company
Term facility.......... 15 --(3) Prime + 7% Term facility to finance
the purchase of mortgage
servicing rights from
Mortgage Corp., expires
October 30, 1998;
guaranteed by the Company
Term acquisition 48 48 Fixed at 7% to Acquisition facilities for
facilities.......... 7.66% and existing Portfolio Assets;
LIBOR + 5% secured by assets of
Acquisition Partnerships,
various maturities
CONSUMER CORP.
Warehouse facility..... 70 32 LIBOR + 3% Revolving line secured by
automobile receivables,
expires May 31, 1999
UNCONSOLIDATED
ACQUISITION
PARTNERSHIPS
Term acquisition 60 60 Fixed at 7.51% Senior and subordinated
facilities.......... to 10.17%, loans secured by Portfolio
LIBOR + 3% to Assets, various maturities
6.5% and Prime
+ 2% to 7%
</TABLE>

- ---------------
(1) Outstanding borrowings as of March 31, 1998 represent borrowings under the
Company's $35.0 million revolving credit facility with Cargill Financial,
which terminated on April 9, 1998. Outstanding borrowings under the Company
Credit Facility as of July 27, 1998 were $38.6 million.

(2) The facility was entered into as of March 31, 1998. Outstanding borrowings
under the facility as of June 30, 1998 were $28.1 million.

(3) The facility was entered into as of July 24, 1998. Outstanding borrowings
under the facility as of July 27, 1998 were $15 million.

FirstCity. The Company Credit Facility is a revolving credit facility with
an international bank and is secured by the assets of the Company, including a
pledge of the stock of substantially all of its operating subsidiaries and its
equity interests in the Acquisition Partnerships. At July 27, 1998, the amount
outstanding under the facility totaled approximately $38.6 million. The Company
Credit Facility matures on April 30, 1999.

Mortgage Corp. Currently, Mortgage Corp. has a primary warehouse facility
of $670 million with a group of banks led by Chase Bank, Houston. The facility,
which matures in March 1999, is used to finance

S-45
<PAGE> 46

mortgage warehouse operations as well as other activities. The $670 million
facility is priced at LIBOR plus a different margin to LIBOR for each of the
sub-limits within the facility. The primary warehouse components of the facility
are priced at LIBOR plus from 1.375% to 1.625%, depending upon the status of the
warehouse collateral securing the loan. In addition to its primary warehouse
facility, Mortgage Corp. maintains a $36 million supplemental facility priced at
LIBOR plus 0.5% to 2.25%. In addition, Mortgage Corp. has an additional
revolving operating line with such banks of $47 million, which bears interest at
a rate of LIBOR plus 2.25%. The banks are obligated to fund loans under such
line through March 31, 1999, although final maturity of any then outstanding
loans may be extended, at Mortgage Corp.'s election, to December 15, 2002. In
addition, Mortgage Corp has a $700 million warehouse facility for loans to be
resold to FNMA and other investors. Mortgage Corp. considers these facilities
adequate for its current and anticipated levels of activity in its mortgage
operations.

The Company has executed a performance guarantee in favor of the lending
bank group in the event of overdrafts arising in Mortgage Corp.'s funding
accounts. An overdraft could occur in the event of the presentment of a loan
closing draft to the drawee bank prior to receipt of full closed loan
documentation from the closing agent. The receipt of documents by the lending
bank would release funds under the warehouse facility to cover the closing draft
prior to the presentment of the draft, in normal circumstances. The possibility
exists, therefore, for an overdraft in Mortgage Corp.'s funding account. The
performance guarantee by the Company in favor of the lending bank group is to
cover such overdrafts that are not cleared in a specified period of time.

Capital Corp. Capital Corp. funds its activities with equity investments
and subordinated debt from the Company and a $200 million repurchase facility
with a nationally recognized investment banking firm. The repurchase facility
funds the purchase of eligible Home Equity Loans acquired by Capital Corp. The
facility accrues at LIBOR plus 0.75% and matures on March 30, 1999. Capital
Corp. is in the process of negotiating for additional nonrecourse warehouse
credit and securitization facilities with other nationally recognized investment
banking firms totaling $300 million. Funding for Home Equity Loans purchased by
Capital Corp. is provided, in part, under Mortgage Corp.'s warehouse credit
facility and is subject to Mortgage Corp.'s sub-limit for Home Equity Loans
meeting the criteria established in Mortgage Corp.'s warehouse credit agreement.
The remainder of Capital Corp.'s Home Equity Loan warehouse is funded under a
loan repurchase agreement with Nomura Securities, Inc. ("Nomura"). The
repurchase agreement expires on July 31, 1998 and is expected to be replaced
with one of the warehouse credit facilities that Capital Corp. is currently
negotiating.

Commercial Corp. Commercial Corp. funds its activities with equity
investments and subordinated debt from the Company and nonrecourse financing
provided by a variety of bank and institutional lenders. Such lenders provide
funds to the special purpose entities formed for the purpose of acquiring
Portfolio Assets or to Acquisition Partnerships formed for the purpose of
co-investing in asset pools with other investors, principally Cargill Financial.
Commercial Corp. recently entered into a credit facility with Nomura in the
amount of $100 million, priced at LIBOR plus 2.50%, the proceeds of which fund
up to 85% of the purchase price of Portfolio Assets acquired by Commercial Corp.
or the Acquisition Partnerships. This facility matures on February 28, 1999.
Commercial Corp. believes that such facility, when combined with the cash flow
from its existing Portfolio Assets and its investment in equities of Acquisition
Partnerships, is adequate to meet its current and anticipated liquidity needs. A
Commercial Corp. subsidiary recently entered into a $15 million dollar
equivalent French franc facility for use in Portfolio purchases in France, which
facility accrues interest at French franc LIBOR plus 3.50%, matures on March 31,
1999 and is guaranteed by Commercial Corp. and the Company. Commercial Corp.
recently entered into a $15 million term credit facility with Cargill Financial
to finance the purchase of interests in mortgage servicing rights from Mortgage
Corp. Commercial Corp. entered into the facility and purchased such interests to
provide short-term liquidity to Mortgage Corp. The Company expects that Mortgage
Corp. will repurchase such interests from Commercial Corp. in the near future
for ultimate sale to third parties. The facility accrues interest at the
applicable prime interest rate plus 7%, matures on October 30, 1998 and is
guaranteed by the Company.

Consumer Corp. Consumer Corp. funds its activities with equity investments
and subordinated debt from the Company and a limited recourse $70 million
warehouse credit facility with ContiTrade Services

S-46
<PAGE> 47

L.L.C. ("ContiTrade"). Funds are advanced under the facility in accordance with
an eligible loan borrowing base with the facility priced at LIBOR plus 3.0%.
Loans are eligible for inclusion in the borrowing base if they meet documented
underwriting standards as approved by ContiTrade and are not delinquent beyond
terms established in the loan agreement. At various times, the size of the
facility has been in excess of the committed amount based upon approvals by the
lender. Under the terms of the credit facility, the Company guarantees 25% of
the amount outstanding under the facility from time to time in addition to an
undertaking by the Company to support the liquidity requirements required in
securitization transactions. The ContiTrade facility matures on May 31, 1999.

GOVERNMENT REGULATION

Mortgage Banking

The Company's mortgage banking business is subject to extensive and complex
rules and regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on loan originations, credit activities and secured transactions.
In addition, these rules limit the interest rates, finance charges and other
fees that Mortgage Corp. and Capital Corp. may assess, mandate extensive
disclosure to their customers, prohibit discrimination and impose multiple
qualification and licensing obligations. Failure to comply with these
requirements may result in, among other things, demands for indemnification or
mortgage loan repurchases, certain rights of rescission for mortgage loans,
class action lawsuits, administrative enforcement actions and civil and criminal
liability. The Company believes that its mortgage banking business is in
compliance with these rules and regulations in all material respects.

Loan origination activities are subject to the laws and regulations in each
of the states in which those activities are conducted. For example, state usury
laws limit the interest rates that can be charged on loans. Lending activities
are also subject to various federal laws, including those described below.
Mortgage Corp. and Capital Corp. are subject to certain disclosure requirements
under the Federal Truth-In-Lending Act ("TILA") and the Federal Reserve Board's
Regulation Z promulgated thereunder. TILA is designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loan and credit transactions. TILA also guarantees consumers a three day right
to cancel certain credit transactions, including loans of the type originated by
Mortgage Corp. and Capital Corp. Such three day right to rescind may remain
unexpired for up to three years if the lender fails to provide the requisite
disclosures to the consumer.

Mortgage Corp. and Capital Corp. are also subject to the High Cost Mortgage
Act ("HCMA"), which amends TILA. The HCMA generally applies to consumer credit
transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or transactions
under an open-end credit plan, in which the loan has either (i) total points and
fees upon origination in excess of the greater of eight percent of the loan
amount or $400 or (ii) an annual percentage rate of more than ten percentage
points higher than United States Treasury securities of comparable maturity
("Covered Loans"). The HCMA imposes additional disclosure requirements on
lenders originating Covered Loans. In addition, it prohibits lenders from, among
other things, (i) originating Covered Loans that are underwritten solely on the
basis of the borrower's home equity without regard to the borrower's ability to
repay the loan and (ii) including prepayment fee clauses in Covered Loans to
borrowers with a debt-to-income ratio in excess of 50% or Covered Loans used to
refinance existing loans originated by the same lender. The HCMA also restricts,
among other things, certain balloon payments and negative amortization features.

Mortgage Corp. and Capital Corp. are also required to comply with the Equal
Credit Opportunity Act ("ECOA") and the Federal Reserve Board's Regulation B
promulgated thereunder, the Fair Credit Reporting

S-47
<PAGE> 48

Act ("FCRA"), the Real Estate Settlement Procedures Act of 1974 ("RESPA"), the
Home Mortgage Disclosure Act ("HMDA") and the Federal Fair Debt Collection
Procedures Act. Regulation B restricts creditors from requesting certain types
of information from loan applicants. FCRA requires lenders, among other things,
to supply an applicant with certain disclosures concerning settlement fees and
charges and mortgage servicing transfer practices. It also prohibits the payment
or receipt of kickbacks or referral fees in connection with the performance of
settlement services. In addition, beginning with loans originated in 1994, an
annual report must be filed with the Department of Housing and Urban Development
pursuant to HMDA, which requires the collection and reporting of statistical
data concerning loan transactions.

Regulation of Sub-prime Automobile Lending

Consumer Corp.'s automobile lending activities are subject to various
federal and state consumer protection laws, including TILA, ECOA, FCRA, the
Federal Fair Debt Collection Practices Act, the Federal Trade Commission Act,
the Federal Reserve Board's Regulations B and Z, and state motor vehicle retail
installment sales acts and other similar laws that regulate the origination and
collection of consumer receivables and impact Consumer Corp.'s business. These
laws, among other things, (i) require Consumer Corp. to obtain and maintain
certain licenses and qualifications; (ii) limit the finance charges, fees and
other charges on the contracts purchased; (iii) require Consumer Corp. to
provide specific disclosures to consumers; (iv) limit the terms of the
contracts; (v) regulate the credit application and evaluation process; (vi)
regulate certain servicing and collection practices; and (vii) regulate the
repossession and sale of collateral. These laws impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may give
rise to defenses to the payment of the consumer's obligation. In addition,
certain of the laws make the assignee of a consumer installment contract liable
for the violations of the assignor.

Each dealer agreement contains representations and warranties by the dealer
that, as of the date of assignment, the dealer has complied with all applicable
laws and regulations with respect to each contract. The dealer is obligated to
indemnify Consumer Corp. for any breach of any of the representations and
warranties and to repurchase any non-conforming contracts. Consumer Corp.
generally verifies dealer compliance with usury laws, but does not audit a
dealer's full compliance with applicable laws. There can be no assurance that
Consumer Corp. will detect all dealer violations or that individual dealers will
have the financial ability and resources either to repurchase contracts or
indemnify Consumer Corp. against losses. Accordingly, failure by dealers to
comply with applicable laws, or with their representations and warranties under
the dealer agreement, could have a material adverse effect on Consumer Corp.

If a borrower defaults on a contract, Consumer Corp., as the servicer of
the contract, is entitled to exercise the remedies of a secured party under the
Uniform Commercial Code (the "UCC"), which typically includes the right to
repossession by self-help unless such means would constitute a breach of peace.
The UCC and other state laws regulate repossession and sales of collateral by
requiring reasonable notice to the borrower of the date, time and place of any
public sale of collateral, the date after which any private sale of the
collateral may be held and the borrower's right to redeem the financed vehicle
prior to any such sale, and by providing that any such sale must be conducted in
a commercially reasonable manner.

COMPETITION

All of the business lines in which the Company operates are highly
competitive. Some of the Company's principal competitors in certain of its
businesses are substantially larger and better capitalized than the Company.
Because of these resources, these companies may be better able than the Company
to obtain new customers for mortgage or other loan production, to acquire
Portfolio Assets, to pursue new business opportunities or to survive periods of
industry consolidation.

The Company encounters significant competition in its mortgage banking
business. Mortgage Corp. competes with other mortgage banking companies,
mortgage and servicing brokers, commercial banks, savings associations, credit
unions, other financial institutions and various other lenders. A number of
these competitors have substantially greater financial resources and greater
operating efficiencies. Customers distinguish between product and service
providers in the industries in which Mortgage Corp. operates for

S-48
<PAGE> 49

various reasons, including convenience in obtaining the product or service,
overall customer service, marketing and distribution channels and pricing
(primarily in the form of prevailing interest rates). Competition for Mortgage
Corp. is particularly affected by fluctuations in interest rates. During periods
of rising interest rates, competitors of Mortgage Corp. who have locked into
lower borrowing costs may have a competitive advantage. During periods of
declining rates, competitors may solicit Mortgage Corp.'s customers to refinance
their loans.

The Company believes that it is one of the largest, independent,
full-service companies in the distressed asset business. There are, however, no
published rankings available, because many of the transactions that would be
used for ranking purposes are with private parties. Generally, there are three
aspects of the distressed asset business: due diligence, principal activities,
and servicing. The Company is a major participant in all three areas, whereas
certain of its competitors (including certain securities and banking firms) have
historically competed primarily as portfolio purchasers, as they have
customarily engaged other parties to conduct due diligence on potential
portfolio purchases and to service acquired assets, and certain other
competitors (including certain banking and other firms) have historically
competed primarily as servicing companies.

The Company believes that its ability to acquire Portfolios for its own
account and through Acquisition Partnerships will be an important aspect of the
Company's overall future growth. Acquisitions of Portfolios are often based on
competitive bidding, which involves the danger of bidding too low (which
generates no business), or bidding too high (which could win the Portfolio at an
economically unattractive price).

The sub-prime automobile finance market is highly fragmented and very
competitive. There are numerous financial services companies serving, or capable
of serving, this market, including traditional financial institutions such as
banks, savings and loans, credit unions, and captive finance companies owned by
automobile manufacturers, and other non-traditional consumer finance companies,
many of which have significantly greater financial and other resources than the
Company.

The Company also encounters significant competition in its other
businesses. Within the Home Equity Loan securitization businesses, access to and
the cost of capital are critical to the Company's ability to compete. Many of
the Company's competitors have superior access to capital sources and can
arrange or obtain lower cost of capital for customers.

PROPERTIES

As of March 31, 1998, the Company maintained 101 offices in the United
States, including 26 offices in Texas and 18 offices in California, and a
presence in Paris, France, Mexico City, Mexico and Asia. The Company leases all
its offices. The Company leases its current headquarters building in Waco, Texas
from a related party under a noncancellable operating lease, which expires
December 2001.

LEGAL PROCEEDINGS

Periodically, the Company and its subsidiaries and affiliates are parties
to or otherwise involved in legal proceedings arising in the normal course of
business, such as claims to enforce liens, claims involved in servicing real
property loans and other issues incident to the Company's business. The Company
does not believe that there is any proceeding threatened or pending against it
or its subsidiaries or affiliates which, if determined adversely, would have a
material adverse effect on the consolidated financial position, results of
operations or liquidity of the Company.

EMPLOYEES

The Company had 1,407 employees as of March 31, 1998. No employee is a
member of a labor union or party to a collective bargaining agreement. The
Company believes that its employee relations are good.

S-49
<PAGE> 50

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information concerning the directors
and executive officers, and certain key employees, of the Company as of July 15,
1998.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
James R. Hawkins................. 62 Chairman of the Board and Chief Executive Officer
C. Ivan Wilson................... 70 Vice Chairman of the Board
James T. Sartain................. 49 President, Chief Operating Officer and Director
Rick R. Hagelstein............... 51 Executive Vice President, Director of Subsidiary Operations
and Director
Matt A. Landry, Jr............... 55 Executive Vice President, Chief Administrative Officer and
Director
Richard J. Gillen................ 57 Managing Director of Mortgage Finance and Director
Richard E. Bean.................. 54 Director
Bart A. Brown, Jr................ 66 Director
Donald J. Douglass............... 66 Director
David W. MacLennan............... 38 Director
Thomas E. Smith.................. 40 Director
Terry R. DeWitt.................. 40 Senior Vice President of the Company and President of
Commercial Corp.
G. Stephen Fillip................ 46 Senior Vice President of the Company and President of
Servicing Corp.
Joe S. Greak..................... 49 Senior Vice President, Tax Director and Secretary
Ronald E. Hames.................. 51 Senior Vice President, Information Technology of Servicing
Corp.
James C. Holmes.................. 41 Senior Vice President and Treasurer
Kathy McNair..................... 48 Senior Vice President, Credit Administration
Gary H. Miller................... 38 Senior Vice President and Chief Financial Officer
Jim W. Moore..................... 47 Senior Vice President of the Company and President of
Consumer Corp.
Richard J. Vander Woude.......... 43 Senior Vice President and General Counsel
OTHER KEY EMPLOYEES
James H. Aronoff................. 41 Chairman of the Board and Chief Executive Officer of
Capital Corp.
Thomas R. Brower................. 39 President and Chief Executive Officer of Funding Corp.
Scot A. Foith.................... 31 Executive Vice President and Director of Operations of
Funding Corp.
Christopher J. Morrissey......... 44 President and Chief Operating Officer of Capital Corp.
</TABLE>

JAMES R. HAWKINS has been Chairman of the Board and Chief Executive Officer
of the Company since the Merger, and was Chairman of the Board and Chief
Executive Officer of J-Hawk from 1976 to the Merger.

C. IVAN WILSON has been Vice Chairman of the Board of the Company since the
Merger, and was Chairman, President and Chief Executive Officer of Mercantile
Bank, N.A., Corpus Christi, Texas, a national banking organization, from June
1996 to February 1998. Mr. Wilson was Chairman of the Board and Chief Executive
Officer of FCBOT from 1991 to the Merger. Prior to 1991, Mr. Wilson was the
Chief Executive Officer of FirstCity, Texas -- Corpus Christi, one of FCBOT's
banking subsidiaries.

JAMES T. SARTAIN has been President, Chief Operating Officer and a Director
of the Company since the Merger, and was President and Chief Operating Officer
of J-Hawk from 1988 to the Merger.

S-50
<PAGE> 51

RICK R. HAGELSTEIN has been Executive Vice President and Director of
Subsidiary Operations of the Company since November 1996 and a Director of the
Company since the Merger. From the Merger to November 1996, Mr. Hagelstein was
Executive Vice President and Chief Credit Officer of the Company, and was
Executive Vice President and Chief Credit Officer of J-Hawk from 1990 to the
Merger. From 1988 to 1990, Mr. Hagelstein was Executive Vice President of ASK
Corporation, a manufacturer of solar energy devices. Mr. Hagelstein was a member
of the Portfolio Committee of the Trust, which committee administers the Trust,
from the Merger to April 1998.

MATT A. LANDRY, JR. has been Executive Vice President and Chief
Administrative Officer of the Company since November 1996, and was Executive
Vice President and Chief Financial Officer of the Company from the Merger to
November 1996. Mr. Landry has been a Director of the Company since the Merger.
Mr. Landry was Executive Vice President and Chief Financial Officer of J-Hawk
from 1992 to the Merger. From 1988 to 1992, Mr. Landry was President and Chief
Operating Officer and a director of AmWest Savings Association, a savings and
loan association (and a predecessor to First American Bank, S.S.B., a state
savings bank). From 1989 to 1992, Mr. Landry was also a director of First
American Bank, a state chartered commercial bank.

RICHARD J. GILLEN has been the Managing Director of Mortgage Finance and a
Director of the Company since July 1997. Mr. Gillen has also been the Chairman
of the Board of Mortgage Corp. since 1987 and the President and Chief Executive
Officer of Mortgage Corp. since 1983. Mr. Gillen has served on several
committees of the Mortgage Bankers Association of America, and served as
President of the Texas Mortgage Bankers Association in 1997.

RICHARD E. BEAN has been a Director of the Company since the Merger and has
been Executive Vice President and Chief Financial Officer of Pearce Industries,
Inc. ("Pearce") since 1976. Pearce, through its subsidiaries, markets a variety
of oilfield equipment and machinery. Mr. Bean has also been a member of the
Portfolio Committee of the Trust since the Merger. Prior to the Merger, Mr. Bean
was Chairman of the FCBOT's Official Committee of Equity Security Holders.

BART A. BROWN, JR. has been a Director of the Company since the Merger and
has been President, Chief Executive Officer and a director of Main Street and
Main Incorporated since December 1996. Main Street is the largest franchisee of
the T.G.I. Friday's restaurant chain with 47 locations. From April 1996 until
December 1996, Mr. Brown was a consultant with Investcorp International, N.A.
("Investcorp"). From August 1995 until joining Investcorp, Mr. Brown was
Chairman and Chief Executive Officer of Color Tile, Inc., an Investcorp-owned
company. Prior to joining Color Tile, Inc., Mr. Brown was Chief Executive
Officer of The Circle K Corporation from 1991 to 1993, and served as Chairman of
that company from June 1990 until August 1995. Mr. Brown is a director of
Factory Card Outlet Corp. and Edison Brothers Stores, Inc.

DONALD J. DOUGLASS has been a Director of the Company since the Merger and
has been Chairman and Chief Executive Officer of Alamo Group, Inc. ("Alamo")
since 1969. Alamo, through its subsidiaries, designs and markets a variety of
mowing equipment, replacement parts and other products. Prior to the Merger, Mr.
Douglass was a member of FCBOT's Official Committee of Equity Security Holders.

DAVID W. MACLENNAN has been a Director of the Company since the Merger and
has been employed by subsidiaries of Cargill, Incorporated since 1991. From 1993
to February 1996, Mr. MacLennan was a Vice President of Cargill Financial, a
wholly owned subsidiary of Cargill, Incorporated that is engaged primarily in
the investment of proprietary funds and in the proprietary trading of financial
instruments and assets. From February 1996 to August 1997, Mr. MacLennan was the
Managing Director of Cargill Financial Markets, PLC in London. Since August
1997, Mr. MacLennan has been Chief Financial Officer of Cargill Financial.

THOMAS E. SMITH has been a Director of the Company since July 1997 and the
President of High Island Oil Corporation since 1991. From 1992 to July 1997, Mr.
Smith was a director of Mortgage Corp., and from 1991 to 1992 Mr. Smith was a
director of American Mortgage Company, Inc., which merged with Harbor in 1992.
Mr. Smith serves on the Board of Consolidated Graphics Corporation.

TERRY R. DEWITT has been Senior Vice President responsible for due
diligence and investment evaluation for the Company since the Merger. Mr. DeWitt
held the same position with J-Hawk from 1992 to the Merger.

S-51
<PAGE> 52

Mr. DeWitt has been the President of Commercial Corp. since January 1998. From
1991 to 1992, Mr. DeWitt was Senior Vice President of the First National Bank of
Central Texas, a national banking association, and, from 1989 to 1991, was
President of the First National Bank of Goldthwaite, a national banking
association.

G. STEPHEN FILLIP has been Senior Vice President of the Company since the
Merger and the President of Servicing Corp. since January 1998. Mr. Fillip was
Senior Vice President of J-Hawk from 1991 to the Merger. From 1989 to 1991, Mr.
Fillip was Executive Vice President and Chief Credit Officer of BancOne, Texas,
N.A. (Waco), a national banking association.

JOE S. GREAK has been Senior Vice President, Tax Director and Secretary of
the Company since the Merger. Mr. Greak was the Tax Manager of FCBOT from 1993
to the Merger. From 1992 to 1993, Mr. Greak was the Tax Manager of New First
City -- Houston, N.A. Prior thereto, he was Senior Vice President and Tax
Director of First City, Texas -- Houston, N.A.

RONALD E. HAMES has been Senior Vice President, Information Technology of
Servicing Corp. since the Harbor Merger. Mr. Hames was Senior Vice President and
Chief Financial Officer of Harbor from 1992 to 1997.

JAMES C. HOLMES has been Senior Vice President and Treasurer of the Company
since the Merger. Mr. Holmes held the same positions with J-Hawk from 1991 to
the Merger. From 1988 to 1991, Mr. Holmes was a Vice President of MBank, Waco, a
national banking association.

KATHY MCNAIR has been Senior Vice President, Credit Administration of the
Company since the Merger. Ms. McNair held the same position with a wholly owned
subsidiary of J-Hawk from 1992 to the Merger. From 1990 to 1992, Ms. McNair was
a Vice President of Investors Savings Bank, a savings and loan association, and
from 1988 to 1990, Ms. McNair was a Vice President of Old Kent Bank Southwest, a
state chartered bank.

GARY H. MILLER has been Senior Vice President and Chief Financial Officer
of the Company since November 1996. Mr. Miller served as Senior Vice President
and Controller of the Company from the Merger to November 1996, and held the
same position with J-Hawk from 1994 to the Merger. From 1990 to 1994, Mr. Miller
was a senior manager of Jaynes, Reitmeier, Boyd & Therrell, P.C., an independent
public accounting firm. From 1988 to 1990, Mr. Miller was a Vice President of
NCNB Texas National Bank, a national banking association.

JIM W. MOORE has been Senior Vice President of the Company since November
1996 and President of Consumer Corp. since January 1998. Mr. Moore served as
Senior Vice President and Manager of Assets of the Company from the Merger to
November 1996, and held the same position with J-Hawk from 1992 to the Merger.
From 1990 to 1992, Mr. Moore was a management consultant for MBank, Waco, a
national banking association, and from 1988 to 1990, Mr. Moore was President and
a Director of Central Texas Savings and Loan, a savings and loan association.

RICHARD J. VANDER WOUDE has been Senior Vice President and General Counsel
of the Company since January 1998. Mr. Vander Woude was a partner in the law
firm of Vander Woude & Istre, Waco, Texas from 1992 through 1997.

JAMES H. ARONOFF has been Chairman of the Board and Chief Executive Officer
of Capital Corp. since August 1997. Mr. Aronoff has fifteen years of experience
in the mortgage banking business, and from 1993 to 1997 was a Managing Director
of Fixed Income Structured Finance at Nomura Securities, International, Inc.

THOMAS R. BROWER has been President and Chief Executive Officer of Funding
Corp. since September 1997. From 1995 to 1997, he was President of The Brower
Group, a sub-prime automobile finance company. Mr. Brower has over fifteen years
of experience in the automotive industry, and was named Man of the Year in 1995
by the Association of Finance and Insurance Professionals.

SCOT A. FOITH has been Executive Vice President and Director of Operations
of Funding Corp. since September 1997. From 1995 to 1997, he was Executive Vice
President of The Brower Group. Mr. Foith has nine years of experience in the
sub-prime finance business.

S-52
<PAGE> 53

CHRISTOPHER J. MORRISSEY has been President and Chief Operating Officer of
Capital Corp. since August 1997. Mr. Morrissey has fifteen years of experience
in the mortgage banking business, and from 1994 to 1997 was a Managing Director
of Fixed Income Structured Finance at Nomura Securities, International, Inc.

CERTAIN TERMS OF THE SERIES A PREFERRED STOCK

The following description of certain terms of the Series A Preferred Stock
supplements the description of the general terms and provisions of the preferred
stock of the Company set forth under the heading "Description of Preferred
Stock" in the accompanying Prospectus. The Series A Preferred Stock is a series
of the Optional Preferred Stock, $0.01 par value, of the Company, which Optional
Preferred Stock may be issued from time to time in one or more classes or series
with such rights, preferences and limitations as are determined by the Company's
Board of Directors. The description of certain provisions of the Series A
Preferred Stock set forth below does not purport to be complete and is subject
to and qualified in its entirety by reference to the Certificate of Designations
(the "Certificate of Designations") relating to the Series A Preferred Stock,
copies of which may be obtained from the Company.

GENERAL

The Series A Preferred Stock offered hereby is a series consisting of up to
1,000,000 shares, which number may be increased or decreased from time to time
by the Company's Board of Directors. The Series A Preferred Stock, upon issuance
against full payment of the purchase price therefor, will be fully paid and
nonassessable. The shares of Series A Preferred Stock shall have a liquidation
preference of $100.00 per share. The liquidation preference is not necessarily
indicative of the price at which the Series A Preferred Stock will actually
trade after issuance. The holders of Series A Preferred Stock have no preemptive
rights.

RANK

The Series A Preferred Stock shall rank prior to the Company's Common Stock
and to all other classes and series of equity securities of the Company now or
hereafter authorized, issued or outstanding, other than any classes or series of
equity securities of the Company ranking on a parity with or senior to the
Series A Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company. The Company's authorized Special
Preferred Stock and Adjusting Rate Preferred Stock shall each rank senior to the
Series A Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the Company. As of the date of this Prospectus
Supplement, there were outstanding 849,777 shares of the Special Preferred Stock
and 1,073,704 shares of the Adjusting Rate Preferred Stock. The Company is
required to redeem all of the 849,777 outstanding shares of the Company's
Special Preferred Stock on September 30, 1998. The Series A Preferred Stock
shall be junior to all outstanding debt of the Company.

DIVIDENDS

Holders of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors of the Company, out of funds
of the Company legally available therefor, an annual cash dividend payable
quarterly, at the rate of % per annum (equivalent to $ per share of
Series A Preferred Stock per annum). Dividends on the Series A Preferred Stock
shall be cumulative from the date of initial issuance and payable quarterly, in
respect of the preceding fiscal quarter, on the fifteenth of January, April,
July and October, in each year, commencing on January 15, 1999. Each declared
dividend shall be payable to holders of record as they appear on the stock books
of the Company at the close of business on such record dates, not more than 60
days nor less than 10 days preceding the payment dates thereof, as shall be
determined by the Company's Board of Directors. Dividends payable for any
partial dividend period shall be calculated on the basis of a 360-day year of
twelve 30-day months. The Series A Preferred Stock shall not participate in
dividends with the Common Stock.

If dividends are not paid in full upon the Series A Preferred Stock and any
other stock of the Company ranking on a parity with the Series A Preferred Stock
as to dividends, all dividends declared upon shares of

S-53
<PAGE> 54

Series A Preferred Stock and such other stock will be declared pro rata so that
in all cases the amount of dividends declared per share on the Series A
Preferred Stock and such other stock shall bear to each other the same ratio
that accumulated and unpaid dividends per share on the shares of Series A
Preferred Stock and such other stock bear to each other. Except as set forth in
the preceding sentence, unless full cumulative dividends on the Series A
Preferred Stock shall have been paid, dividends (other than in Common Stock,
other stock ranking junior to the Series A Preferred Stock and rights to acquire
the foregoing) may not be paid or declared and set aside for payment and other
distributions may not be made upon the Common Stock or on any other stock of the
Company ranking junior to or on a parity with the Series A Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Company ranking
junior to or on a parity with the Series A Preferred Stock as to dividends be
redeemed, purchased or otherwise acquired for any consideration by the Company
(except for repurchases from directors, employees and consultants and except by
conversion into or exchange for stock of the Company ranking junior to the
Series A Preferred Stock as to dividends). Accrued but unpaid dividends shall
not bear interest.

The amount, timing and payment of future dividends on the Series A
Preferred Stock will be subject to business conditions, the earnings and
financial condition of the Company and its subsidiaries, and the judgment of the
Company's Board of Directors. The payment of dividends on the Series A Preferred
Stock is also subject to certain restrictions under the corporate law of the
State of Delaware. See "Risk Factors -- Right of Series A Preferred Stock to
Liquidation Preference; Restrictions on Dividends and Redemption."

VOTING RIGHTS

Except as described below, or except as otherwise from time to time
required by applicable law, the holders of the Series A Preferred Stock will
have no voting rights.

If dividends on the Series A Preferred Stock have not been paid for six
quarterly periods, then the holders of the Series A Preferred Stock and of any
class or series of preferred stock having similar voting rights then exercisable
(the "Voting Parity Preferred Stock") shall have the exclusive right, voting as
a single class without regard to series, to elect two directors of the Company.
Such two directors shall be in addition to the number of directors constituting
the Company's Board of Directors immediately prior to the accrual of that right.
Such voting right of the Series A Preferred Stock shall continue until such time
as all cumulative dividends accumulated on the Series A Preferred Stock shall
have been paid in full at which time the voting right of the holders of the
Series A Preferred Stock shall terminate, subject to revesting in the event that
dividends on the Series A Preferred Stock shall have not been paid for six
additional quarterly periods. The Company's Adjusting Rate Preferred Stock
qualifies as Voting Parity Preferred Stock.

The voting right described above may be exercised initially either at a
special meeting of the holders of the Series A Preferred Stock and Voting Parity
Preferred Stock (if any), called as provided in the Certificate of Designations,
or at any annual meeting of stockholders held for the purpose of electing
directors, and thereafter at each successive annual meeting. The directors
elected by the holders of the Series A Preferred Stock shall serve until the
next annual meeting or until their respective successors shall be elected and
shall qualify; provided, however, that when the right of the holders of the
Series A Preferred Stock to elect directors shall terminate, the terms of office
of all persons so elected by the holders of the Series A Preferred Stock shall
terminate, and the number of directors of the Company shall thereupon be such
number as may be provided in accordance with the Certificate of Incorporation
and By-laws of the Company.

The approval of 66 2/3% of the outstanding shares of the Series A Preferred
Stock shall be required in order to (i) create or issue or increase the
authorized number of shares of any class or classes or series of stock ranking
prior to the Series A Preferred Stock either as to dividends or upon
liquidation, dissolution or winding up of the Company (provided, that the
foregoing shall not affect the status of any stock ranking senior as to
dividends or upon liquidation, dissolution or winding up of the Company, which
was issued by the Company prior to the issuance of any shares of Series A
Preferred Stock); (ii) amend, alter or repeal any of the provisions of the
Certificate of Incorporation (including the Certificate of Designations) so as
to materially and adversely affect the preferences, special rights or powers of
the Series A Preferred Stock; or (iii) authorize any reclassification of the
Series A Preferred Stock. Notwithstanding the foregoing, no consent of the
holders

S-54
<PAGE> 55

of the Series A Preferred Stock shall be required for (a) the creation of any
indebtedness of any kind of the Company; (b) the creation or issuance, or
increase or decrease in the amount, of any class or series of stock of the
Company not ranking prior as to dividends or upon liquidation, dissolution or
winding up of the Company to the Series A Preferred Stock (including Parity
Preferred Stock); (c) any increase or decrease in the amount of authorized
Common Stock or any increase, decrease or change in the par value thereof or in
any other terms thereof; or (d) any increase or decrease in the authorized
amount of preferred stock issuable by the Board of Directors in series.

REDEMPTION

The shares of Series A Preferred Stock may be redeemed for cash at the
option of the Company, in whole or from time to time in part, at any time on or
after September 30, 2004, on at least 15 but not more than 60 days' prior notice
mailed to the holders of the shares to be redeemed, at the redemption prices per
share of Series A Preferred Stock set forth in the table below during the
12-month periods beginning October 15 of the years indicated, together in each
case with an amount equal to all dividends (whether or not earned or declared)
accumulated and unpaid to the date fixed for redemption.

<TABLE>
<CAPTION>
REDEMPTION PRICE
(AS A PERCENTAGE DOLLAR
BEGINNING OF LIQUIDATION EQUIVALENT
OCTOBER 15, PREFERENCE) PER SHARE
----------- ---------------- ----------
<S> <C> <C>
2004........................................................ % $
2005........................................................ %
2006 and thereafter......................................... 100% 100.00
</TABLE>

The Series A Preferred Stock is subject to mandatory redemption on
September 30, 2008 at a redemption price of $100.00 per share, together with
accumulated and unpaid dividends thereon.

On and after the date fixed for redemption, provided that the redemption
price (including, any accrued and unpaid dividends to but excluding the date
fixed for redemption) has been duly paid or provided for, dividends shall cease
to accrue on the Series A Preferred Stock called for redemption, such shares
shall no longer be deemed to be outstanding, and all rights of the holders of
such shares as stockholders of the Company shall cease, except the right to
receive the monies payable upon such redemption, without interest thereon, upon
surrender of the certificates evidencing such shares.

LIQUIDATION RIGHTS

The amount that the holders of shares of Series A Preferred Stock shall be
entitled to receive in the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, shall be $100.00 per share of
Series A Preferred Stock (the "liquidation preference") plus an amount per share
of Series A Preferred Stock equal to all dividends (whether or not earned or
declared) accumulated and unpaid thereon to the date of final distribution.

In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, before any payment or distribution of the
assets of the Company (whether from capital, surplus or earnings) shall be made
to or set apart for the holders of junior stock on account of such liquidation,
dissolution or winding up, the holders of the shares of Series A Preferred Stock
shall be entitled to receive the liquidation preference with respect thereto
plus an amount equal to all dividends (whether or not earned or declared)
accumulated and unpaid thereon to the date of final distribution to such
holders. Such holders shall not be entitled to any further payment. If, upon any
liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
Series A Preferred Stock shall be insufficient to pay in full the preferential
amount described above and the liquidation payments with respect to any other
shares of stock ranking, as to liquidation, dissolution or winding up, on a
parity with the Series A Preferred Stock, then such assets, or the proceeds
thereof, shall be distributed among

S-55
<PAGE> 56

the holders of shares of Series A Preferred Stock and any such other stock
ratably in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were paid in full. Neither a consolidation
or merger of the Company with or into any other corporation, nor a sale or
transfer of all or any part of the Company's assets for cash or securities,
shall be considered a liquidation, dissolution or winding up of the Company.

The right of the Company, and the rights of its creditors and stockholders
(including holders of the Series A Preferred Stock), to participate in the
distribution of the assets of any subsidiary of the Company upon any
liquidation, dissolution, winding up or reorganization of such subsidiary, or
otherwise, will be subject to the prior claims of creditors of such subsidiary.

CONVERTIBILITY

The holders of shares of Series A Preferred Stock shall not have any rights
to convert such shares into shares of any other class or series of capital stock
of the Company.

SINKING FUND

No sinking fund will be established for the retirement or redemption of
shares of Series A Preferred Stock.

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom Keefe, Bruyette & Woods, Inc., is acting as representative (the
"Representative"), have severally agreed to purchase from the Company the
following respective number of shares of Series A Preferred Stock at the initial
public offering price less the underwriting discounts set forth on the cover
page of this Prospectus Supplement.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Keefe, Bruyette & Woods, Inc. ..............................
Piper Jaffray Inc. .........................................
-------
Total............................................. 800,000
=======
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, and that the
Underwriters will purchase all of the Series A Preferred Stock offered hereby if
any of such shares are purchased.

The Company has been advised by the Representative that the Underwriters
propose to offer the Series A Preferred Stock to the public at the public
offering price set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealer may re-allow, a discount not
in excess of $ per share to certain other dealers. After the initial public
offering of the Series A Preferred Stock, the public offering price and other
selling terms may be changed by the Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the federal securities laws, or to
contribute to payments the Underwriter may be required to make in respect
thereof.

In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Series A
Preferred Stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid for or purchase Series A Preferred Stock for the purpose of
stabilizing its market price. The Underwriters also may create a short position
for the account of the Underwriters by selling more Series A Preferred Stock in
connection with the offering than

S-56
<PAGE> 57

they are committed to purchase from the Company, and in such case may purchase
Series A Preferred Stock in the open market following completion of the offering
to cover all or a portion of such short position. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the offering) for the account of other
Underwriters, the selling concession with respect to the Series A Preferred
Stock that is distributed in the offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Series A Preferred Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if they are undertaken, they may be discontinued at any time.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of, or any effect that the
transactions described above may have on, the price of the Series A Preferred
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representative will engage in such transactions or, once
commenced, will not be discontinued without notice.

Prior to the offering, there has been no public market for the Series A
Preferred Stock. Consequently, the initial public offering price of the Series A
Preferred Stock was determined by negotiations between the Company and the
Representative. The shares of Series A Preferred Stock are new securities with
no established trading market. The Underwriters have advised the Company that
they intend to make a market in the shares of Series A Preferred Stock. The
Underwriters will have no obligation to make a market in the shares of the
Series A Preferred Stock, however, and may cease market making activities, if
commenced, at any time without notice. No assurance can be given as to the
liquidity of the trading market for the shares of the Series A Preferred Stock.

The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

LEGAL MATTERS

The validity of the issuance of the Series A Preferred Stock offered hereby
will be passed upon for the Company by Weil, Gotshal & Manges LLP, Houston,
Texas. Certain legal matters with respect to such securities will be passed upon
for the Underwriters by Patton Boggs LLP, Washington, D.C.

S-57
<PAGE> 58

[FIRSTCITY LOGO]
---------------------

$250,000,000
DEBT SECURITIES PREFERRED STOCK COMMON STOCK
---------------------

FirstCity Financial Corporation, a Delaware corporation (the "Company"),
may issue from time to time, together or separately, (1) its debt securities
(the "Debt Securities"), which may be either senior ("Senior Securities") or
subordinated ("Subordinated Securities") and which may be convertible into or
exchangeable for shares of common stock, par value $0.01 per share, of the
Company (the "Common Stock"), shares of preferred stock, par value $0.01 per
share, of the Company (the "Preferred Stock"), or other Debt Securities; (2)
Preferred Stock, which may be convertible into or exchangeable for shares of
Common Stock, shares of Preferred Stock or Debt Securities and (3) Common Stock,
including Common Stock issuable upon the conversion or exchange of Debt
Securities or Preferred Stock offered hereunder, to the extent such Debt
Securities or Preferred Stock are, by their terms, convertible into or
exchangeable for shares of Common Stock, in amounts, at prices and on terms to
be determined by market conditions at the time of offering thereof. The Debt
Securities, Preferred Stock and Common Stock are collectively referred to herein
as the "Offered Securities."

The Offered Securities may be issued in one or more series or issuances and
will be limited to $250,000,000 in aggregate public offering price (or its
equivalent, based on the applicable exchange rate, to the extent Debt Securities
are issued for one or more foreign currencies or currency units). The Offered
Securities may be sold for U.S. dollars, or any foreign currency or currencies
or currency units, and the principal of, and any premium or interest on, the
Debt Securities may be payable in U.S. dollars, or any foreign currency or
currencies or currency units.

The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered are set forth in the accompanying Prospectus
Supplement (the "Prospectus Supplement"), including, where applicable, (1) in
the case of Debt Securities, the specific designation, aggregate principal
amount, authorized denomination, initial offering price, maturity, premium (if
any), interest rate (which may be fixed or floating), time of and method of
calculating the payment of interest, if any, the currency in which principal,
premium, if any, and interest, if any, are payable, any redemption or sinking
fund terms, any terms for the conversion into or exchange for shares of Common
Stock or Preferred Stock or other Debt Securities, terms of subordination of
Subordinated Securities, and other specific terms; (2) in the case of Preferred
Stock, the specific designation, any dividend, liquidation, redemption, sinking
fund, voting or other rights, time of payment of dividends, any terms for the
conversion into or exchange for shares of Common Stock or shares of Preferred
Stock or Debt Securities, the initial offering price and other specific terms;
and (3) in the case of the Common Stock, the initial offering price. The
Prospectus Supplement will also contain information, where applicable, about
certain United States Federal income tax considerations relating to, and any
listing on a securities exchange of, the Offered Securities covered by the
Prospectus Supplement.
---------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------

The Offered Securities will be sold directly, through agents, dealers or
underwriters as designated from time to time, or through a combination of such
methods. If any agents of the Company or any dealers or underwriters are
involved in the sale of the Offered Securities in respect of which this
Prospectus is being delivered, the names of such agents, dealers or underwriters
and any applicable agent's commission, dealer's purchase price or underwriter's
discount will be set forth in or may be calculated from the Prospectus
Supplement. The net proceeds to the Company from such sale will be the purchase
price less such commission in the case of an agent, the purchase price in the
case of a dealer, or the public offering price less such discount in the case of
an underwriter and less, in each case, other attributable issuance expenses. See
"Plan of Distribution."

The date of this Prospectus is July 17, 1998.
<PAGE> 59

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files reports, proxy and information statements and
other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities that
the Commission maintains at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at 7 World Trade Center,
13th Floor, New York, New York 10048, and 500 West Madison Street, Chicago,
Illinois 60661. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the Commission at the principal offices of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains a site on the World Wide Web at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
Offered Securities. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and regulations
of the Commission. Statements made in this Prospectus concerning the contents of
any documents referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description, and
each such statement shall be deemed qualified in its entirety by such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission under the
Exchange Act are hereby incorporated by reference into this Prospectus: (a) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997; (b) the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998; (c) the Company's Current Reports on Form 8-K filed with
the Commission on April 29, 1998 and July 6, 1998; and (d) the description of
the Company's Common Stock contained in the Company's Form 8-A Registration
Statement filed with the Commission on July 25, 1995 (File No. 0-26500), as
amended by the Company's Form 8-A/A filed with the Commission on August 25, 1995
and the Company's Form 8-A/A No. 2 filed with the Commission on September 6,
1995, including any amendment or report filed for the purpose of updating such
description.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Offered Shares offered hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the respective dates of filing of such documents.

Any statement or information contained herein or in any document all or
part of which is incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement or information contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement or information. Any such
statement or information so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.

The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated herein by reference (other
than certain exhibits to such documents). Requests for such copies should be
directed to Gary H. Miller, Senior Vice President and Chief Financial Officer,
FirstCity Financial Corporation, 6400 Imperial Drive, Waco, Texas 76712,
telephone number (254) 751-1750.

2
<PAGE> 60

THE COMPANY

The Company is a diversified financial services company headquartered in
Waco, Texas with over 90 offices throughout the United States and a presence in
France, Asia and Mexico. The Company began operations in 1986 as a specialty
financial services company focused on acquiring and resolving distressed loans
and other assets purchased at a discount relative to the aggregate unpaid
principal balance of the loans or the appraised value of the other assets ("Face
Value"). To date, the Company has acquired, for its own account and through
various affiliated partnerships, pools of assets or single assets (collectively
referred to as "Portfolio Assets" or "Portfolios") with a Face Value of
approximately $3.0 billion. In 1996, the Company adopted a growth strategy to
diversify and expand its financial services business. To implement its growth
strategy, the Company has acquired or established several businesses in the
financial services industry, building upon its core strength and expertise as
one of the earliest participants in the business of acquiring and resolving
distressed financial assets and other assets. The Company's servicing expertise,
which it has developed largely through the resolution of distressed assets, is a
cornerstone of its growth strategy. Today the Company is engaged in three
principal businesses: (i) residential and commercial mortgage banking, which is
operated through FirstCity Financial Mortgage Corporation ("Mortgage Corp.") and
FC Capital Corporation ("Capital Corp."); (ii) Portfolio Asset acquisition and
resolution, which is operated through FirstCity Commercial Corporation
("Commercial Corp."); and (iii) consumer lending, which is operated through
FirstCity Consumer Lending Corporation ("Consumer Corp.").

Unless the context otherwise requires, references in this Prospectus and in
the Prospectus Supplement to the "Company" and "FirstCity" shall mean FirstCity
Financial Corporation, a Delaware corporation, and its subsidiaries and
predecessors. References to the Company for periods prior to July 3, 1995 refer
to the Company's predecessor, J-Hawk Corporation ("J-Hawk").

RISK FACTORS

In addition to the other information contained in this Prospectus and the
Prospectus Supplement and incorporated herein by reference, prospective
investors in any of the Offered Securities should carefully consider the
following risk factors.

RISKS ASSOCIATED WITH RAPID GROWTH AND ENTRY INTO NEW BUSINESSES

Following the Company's acquisition by merger (the "Merger") of First City
Bancorporation of Texas, Inc. ("FCBOT"), the Company embarked upon a strategic
diversification of its business. Previously, the Company had been engaged
primarily in the Portfolio Asset acquisition and resolution business. The
Company has recently entered the residential and commercial mortgage banking
business and the consumer lending business through a combination of acquisitions
and the start-up of new business ventures. The entry of the Company into these
new businesses has resulted in increased demands on the Company's personnel and
systems. The development and integration of the new businesses requires the
investment of additional capital and the continuous involvement of senior
management. The Company also must manage a variety of businesses with differing
markets, customer bases, financial products, systems and managements. An
inability to develop, integrate and manage its businesses could have a material
adverse effect on the Company's financial condition, results of operations and
business prospects. The Company's ability to support and manage continued growth
is dependent upon, among other things, its ability to attract and retain senior
management for each of its businesses, to hire, train, and manage its workforce
and to continue to develop the skills necessary for the Company to compete
successfully in its existing and new business lines. There can be no assurance
that the Company will successfully meet all of these challenges.

3
<PAGE> 61

CONTINUING NEED FOR FINANCING

General. The successful execution of the Company's business strategy
depends on its continued access to financing for each of its major operating
subsidiaries. In addition to the need for such financing, the Company must have
access to liquidity to invest as equity or subordinated debt to meet the capital
needs of its subsidiaries. Liquidity is generated by the cash flow to the
Company from subsidiaries, access to the public debt and equity markets and
borrowings incurred by the Company. The Company's access to the capital markets
is affected by such factors as changes in interest rates, general economic
conditions, and the perception in the capital markets of the Company's business,
results of operations, leverage, financial condition and business prospects. In
addition, the Company's ability to issue and sell common equity (including
securities convertible into, or exercisable or exchangeable for, common equity)
is limited as a result of the tax laws relating to the preservation of the net
operating loss carryforwards ("NOLs") available to the Company as a result of
the Merger. There can be no assurance that the Company's funding relationships
with commercial banks, investment banks and financial services companies that
have previously provided financing for the Company and its subsidiaries will
continue past their respective current maturity dates. The majority of the
credit facilities to which the Company and its subsidiaries are parties have
short-term maturities. If the Company and its subsidiaries are unable to extend
the terms of such credit facilities prior to their maturity and the Company or
its subsidiaries cannot find alternative funding sources on satisfactory terms,
or at all, the Company's financial condition, results of operations and business
prospects would be materially adversely affected.

Each of the Company and its major operating subsidiaries has its own source
of debt financing. In certain circumstances, a default by the Company or any of
its major operating subsidiaries in respect of indebtedness owed to a third
party constitutes a default under the Company's revolving credit facility. The
credit facilities to which the Company's major operating subsidiaries are party
do not contain similar cross-default or cross-acceleration provisions. Although
the Company intends to continue to segregate the debt obligations of each such
subsidiary, there can be no assurance that its existing financing sources will
continue to agree to such arrangements or that alternative financing sources
that would accept such arrangements would be available. In the event the
Company's major operating subsidiaries are compelled to accept cross-guarantees,
or cross-default or cross-acceleration provisions in connection with their
respective credit facilities, financial difficulties experienced by one of the
Company's subsidiaries could adversely impact the Company's other subsidiaries.

Dependence on Warehouse Financing. As is customary in the mortgage banking
and consumer lending businesses, the Company's subsidiaries depend upon
warehouse credit facilities with financial institutions or institutional lenders
to finance the origination and purchase of loans on a short-term basis pending
sale or securitization. Implementation of the Company's business strategy
requires the continued availability of warehouse credit facilities, and may
require increases in the permitted borrowing levels under such facilities. There
can be no assurance that such financing will be available on terms satisfactory
to the Company. The inability of the Company to arrange additional warehouse
credit facilities, to extend or replace existing facilities when they expire or
to increase the capacity of such facilities may have a material adverse effect
on the Company's financial condition, results of operations and business
prospects.

RISKS OF SECURITIZATION

Significance of Securitization. The Company believes that it will become
increasingly dependent upon its ability to securitize residential mortgage loans
to borrowers who have significant equity in their homes and who generally do not
satisfy the more rigid underwriting standards of the traditional residential
mortgage lending market (referred to herein as "Home Equity Loans"), sub-prime
automobile loans and other loans to efficiently finance the volume of assets
expected to be generated. Accordingly, adverse changes in the secondary market
for such loans could impair the Company's ability to originate, purchase and
sell loans on a favorable or timely basis. Any such impairment could have a
material adverse effect upon the Company's financial condition, results of
operations and business prospects. Proceeds from the securitization of
originated and acquired loans are required to be used to repay borrowings under
warehouse credit facilities, thereby making such facilities available to finance
the origination and purchase of additional loan assets. There can be no
assurance that, as the Company's volume of loans originated or purchased
increases and other new products

4
<PAGE> 62

available for securitization increases, the Company will be able to securitize
its loan production efficiently. An inability to efficiently securitize its loan
production could have a material adverse effect on the Company's financial
condition, results of operations and business prospects.

Securitization transactions may be affected by a number of factors, some of
which are beyond the Company's control, including, among other things, the
adverse financial condition of, or developments related to, some of the
Company's competitors, conditions in the securities markets in general, and
conditions in the asset-backed securitization market. The Company's
securitizations typically utilize credit enhancements in the form of financial
guaranty insurance policies in order to achieve enhanced credit ratings. Failure
to obtain insurance company credit enhancement could adversely affect the timing
of, or ability of the Company to effect, securitizations. In addition, the
failure to satisfy rating agency requirements with respect to loan pools would
adversely impact the Company's ability to effect securitizations.

Contingent Risks. Although the Company intends to sell substantially all of
the Home Equity Loans, sub-prime automobile loans and other consumer loans that
it originates or purchases, the Company retains some degree of credit risk on
substantially all loans sold. During the period in which loans are held pending
sale, the Company is subject to various business risks associated with the
lending business, including the risk of borrower default, the risk of
foreclosure and the risk that a rapid increase in interest rates would result in
a decline in the value of loans to potential purchasers. The Company expects
that the terms of its securitizations will require it to establish deposit
accounts or build over-collateralization levels through retention of
distributions otherwise payable to the holders of subordinated interests in the
securitization. The Company also expects to be required to commit to repurchase
or replace loans that do not conform to the representations and warranties made
by the Company at the time of sale.

Retained Risks of Securitized Loans. The Company makes various
representations with respect to the loans that it securitizes. With respect to
acquired loans, the Company's representations rely in part on similar
representations made by the originators of such loans when they were purchased
by the Company. In the event of a breach of its representations, the Company may
be required to repurchase or replace the related loan using its own funds. While
the Company may have a claim against the originator in the event of a breach of
any of these representations made by the originators, the Company's ability to
recover on any such claim will be dependent on the financial condition of the
originator. There can be no assurance that the Company will not experience a
material loss in respect of any of these contingencies.

Performance Assumptions. The future net income of certain of the Company's
subsidiaries will be highly dependent on realizing securitization gains on the
sale of loans. Such gains will be dependent largely upon the estimated present
values of the subordinated interests expected to be derived from the
transactions and retained by the Company. Management makes a number of
assumptions in determining the estimated present values for the subordinated
interests. These assumptions include, but are not limited to, prepayment speeds,
default rates and subsequent losses on the underlying loans, and the discount
rates used to present value the future cash flows. All of the assumptions are
subjective. Varying the assumptions can have a material effect on the present
value determination in one securitization as compared to any other. Subsequent
events will cause the actual occurrences of prepayments, losses and interest
rates to be different from the assumptions used for such factors at the time of
the recognition of the sale of the loans. The effect of the subsequently
occurring events could cause a re-evaluation of the carrying values of the
previously estimated values of the subordinated interests and excess spreads and
such adjustment could be material.

Because the subordinated interests to be retained by such subsidiaries
represent claims to future cash flow that are subordinated to holders of senior
interests, such subsidiaries retain a significant portion of the risk of whether
the full value of the underlying loans may be realized. In addition, holders of
the senior interests may have the right to receive certain additional payments
on account of principal in order to reduce the balance of the senior interests
in proportion to the credit enhancement requirements of any particular
transaction. Such payments for the benefit of the senior interest holders will
delay the payment, if any, of excess cash flow to such subsidiaries as the
holder of the subordinated interests.

5
<PAGE> 63

IMPACT OF CHANGING INTEREST RATES

Because most of the Company's borrowings are at variable rates of interest,
the Company will be impacted by fluctuations in interest rates. The Company
monitors the interest rate environment and employs hedging strategies designed
to mitigate certain effects of changes in interest rates when the Company deems
such strategies appropriate. However, certain effects of changes in interest
rates, such as increased prepayments of outstanding loans, cannot be mitigated.
Fluctuations in interest rates could have a material adverse effect on the
Company's financial condition, results of operations and business prospects.

Among other things, a decline in interest rates could result in increased
prepayments of outstanding loans, particularly on loans in the servicing
portfolio of Mortgage Corp. The value of servicing rights is a significant asset
of Mortgage Corp. As prepayments of serviced mortgages increase, the value of
such servicing rights (as reflected on the Company's balance sheet) declines,
with a corresponding reduction in income as a result of the impairment of the
value of mortgage servicing rights. Although to date the impact of such effect
has largely been mitigated by increased production of mortgages from
refinancings during periods of declining interest rates, there can be no
assurance that new mortgage production will be sufficient to mitigate such
effect in the future. Absent a level of new mortgage production sufficient to
mitigate the effect of mortgage loan prepayments, the future revenue and
earnings of the Company will be adversely affected. In addition to prepayment
risks, during periods of declining interest rates, Mortgage Corp. experiences
higher levels of borrowers who elect not to close on loans for which they have
applied because they tend to find loans at lower interest rates. If Mortgage
Corp. has entered into commitments to sell such a loan on a forward basis and
the prospective borrower fails to close, Mortgage Corp. must nevertheless meet
its commitment to deliver the contracted for loans at the promised yields.
Mortgage Corp. will incur a loss if it is required to deliver loans to an
investor at a committed yield higher than current market rates. A substantial
and sustained decline in interest rates also may adversely impact the amount of
distressed assets available for purchase by the Company. The value of the
Company's interest-earning assets and liabilities may be directly affected by
the level of and fluctuations in interest rates, including the valuation of any
residual interests in securitizations that would be severely impacted by
increased loan prepayments resulting from declining interest rates.

Conversely, a substantial and sustained increase in interest rates could
adversely affect the ability of the Company to originate loans and could reduce
the gains recognized by the Company upon their securitization and sale.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on
mortgage and other loans held pending sale and the interest paid by the Company
for funds borrowed under the Company's warehouse credit facilities or otherwise.

CREDIT IMPAIRED BORROWERS

The Company's sub-prime borrowers generally are unable to obtain credit
from traditional financial institutions due to factors such as an impaired or
poor credit history, low income or another adverse credit event. The Company is
subject to various risks associated with these borrowers, including, but not
limited to, the risk that the borrowers will not satisfy their debt service
obligations and that the realizable value of the assets securing their loans
will not be sufficient to repay the borrowers' debt. While the Company believes
that the underwriting criteria and collection methods it employs enable it to
identify and control the higher risks inherent in loans made to such borrowers,
and that the interest rates charged compensate the Company for the risks
inherent in such loans, no assurance can be given that such criteria or methods,
or such interest rates, will afford adequate protection against, or compensation
for, higher than anticipated delinquencies, foreclosures or losses. The actual
rate of delinquencies, foreclosures or losses could be significantly accelerated
by an economic downturn or recession. Consequently, the Company's financial
condition, results of operations and business prospects could be materially
adversely affected. The Company has established an allowance for loan losses
through periodic earnings charges and purchase discounts on acquired receivables
to cover anticipated loan losses on the loans currently in its portfolio. No
assurance can be given, however, that loan losses in excess of the allowance
will not occur in the future or that additional provisions will not be required
to provide for adequate allowances in the future.

6
<PAGE> 64

AVAILABILITY OF PORTFOLIO ASSETS

The Portfolio Asset acquisition and resolution business is affected by
long-term cycles in the general economy. In addition, the volume of domestic
Portfolio Assets available for purchase by investors such as the Company has
generally declined since 1993 as large pools of distressed assets acquired by
governmental agencies in the 1980s and early 1990s have been resolved or sold.
The Company cannot predict its future annual acquisition volume of Portfolio
Assets. Moreover, future Portfolio Asset purchases will depend on the
availability of Portfolios offered for sale, the availability of capital and the
Company's ability to submit successful bids to purchase Portfolio Assets. The
acquisition of Portfolio Assets has become highly competitive in the United
States. This may require the Company to acquire Portfolio Assets at higher
prices thereby lowering profit margins on the resolution of such Portfolios.
Under certain circumstances, the Company may choose not to bid for Portfolio
Assets that it believes cannot be acquired at attractive prices. As a result of
all the above factors, Portfolio Asset purchases, and the revenue derived from
the resolution of Portfolio Assets, may vary significantly from quarter to
quarter.

AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS

The Company believes that, as a result of the Merger, approximately $596
million of NOLs were available to the Company to offset future taxable income as
of December 31, 1995. Since December 31, 1995, the Company estimates that it has
generated an additional $12 million in NOLs. Accordingly, as of December 31,
1997, the Company estimates that it had approximately $608 million of NOLs
available to offset future taxable income. In accordance with the terms of
Financial Accounting Standards Board Statement Number 109 (relating to
accounting for income taxes), the Company has established a future utilization
equivalent to approximately $87.7 million of the total $608 million of NOLs,
which equates to a $30.6 million deferred tax asset on the Company's books and
records. However, because the Company's position in respect of its NOLs is based
upon factual determinations and upon legal issues with respect to which there is
uncertainty and because no ruling has been obtained from the Internal Revenue
Service (the "IRS") regarding the amount or availability of the NOLs to the
Company, there can be no assurance that the IRS will not challenge the amount or
availability of the Company's NOLs and, if challenged, that the IRS will not be
successful in disallowing the entire amount of the Company's NOLs, with the
result that the Company's $30.6 million deferred tax asset would be reduced or
eliminated.

Assuming that the $608 million in NOLs is available to the Company, the
entire amount of such NOLs may be carried forward to offset future taxable
income of the Company until the tax year 2005. Thereafter, the NOLs begin to
expire. The ability of the Company to utilize such NOLs will be severely limited
if there is a more than 50% ownership change of the Company during a three-year
testing period within the meaning of section 382 of the Internal Revenue Code of
1986, as amended (the "Tax Code"). There can be no assurance that future
transactions, alone or in combination, including the issuance of Offered
Securities, will not result in a more than 50% ownership change of the Company
and a limitation of the Company's utilization of such NOLs.

If the Company were unable to utilize its NOLs to offset future taxable
income, it would lose significant competitive advantages that it now enjoys.
Such advantages include, but are not limited to, the Company's ability to offset
non-cash income recognized by the Company in connection with certain
securitizations, to generate capital to support its expansion plans on a
tax-advantaged basis, to offset its and its consolidated subsidiaries' pre-tax
income, and to have access to the cash flow that would otherwise be represented
by payments of federal tax liabilities.

For a more detailed discussion of these and other tax considerations,
including certain tax considerations relating to transactions undertaken in
connection with the Merger, see "Certain Federal Income Tax Considerations."

ASSUMPTIONS UNDERLYING PORTFOLIO ASSET PERFORMANCE

The purchase price and carrying value of Portfolio Assets acquired by
Commercial Corp. is determined largely by estimating expected future cash flows
from such assets. The Company develops and revises such

7
<PAGE> 65

estimates based on its historical experience and current market conditions, and
based on the discount rates that the Company believes are appropriate for the
assets comprising the Portfolios. In addition, many obligors on Portfolio Assets
have impaired credit, with risks associated with such obligors similar to the
risks described in respect of borrowers under "-- Credit Impaired Borrowers." If
the amount and timing of actual cash flows is materially different from
estimates, the Company's financial condition, results of operations and business
prospects could be materially adversely affected.

GENERAL ECONOMIC CONDITIONS

Periods of economic slowdown or recession, or declining demand for
residential or commercial real estate, automobile loans or other commercial or
consumer loans may adversely affect the Company's business. Economic downturns
may reduce the number of loan originations by the Company's mortgage banking,
consumer and commercial finance businesses and negatively impact its
securitization activity and generally reduce the value of the Company's assets.
In addition, periods of economic slowdown or recession, whether general,
regional or industry-related, may increase the risk of default on mortgage loans
and other loans and could have a material adverse effect on the Company's
financial condition, results of operations and business prospects. Such periods
also may be accompanied by declining values of homes, automobiles and other
property securing outstanding loans, thereby weakening collateral coverage and
increasing the possibility of losses in the event of default. Significant
increases in homes or automobiles for sale during recessionary economic periods
may depress the prices at which such collateral may be sold or delay the timing
of such sales. There can be no assurance that there will be adequate markets for
the sale of foreclosed homes or repossessed automobiles. Any material
deterioration of such markets could reduce recoveries from the sale of
collateral.

Such economic conditions could also adversely affect the resolution of
Portfolio Assets, lead to a decline in prices or demand for collateral
underlying Portfolio Assets, or increase the cost of capital invested by the
Company and the length of time that capital is invested in a particular
Portfolio. All or any one of these events could decrease the rate of return and
profits to be realized from such Portfolio and materially adversely affect the
Company's financial condition, results of operations and business prospects.

RISK OF DECLINING VALUE OF COLLATERAL

The value of the collateral securing mortgage loans, automobile and other
consumer loans and loans acquired for resolution, as well as real estate or
other acquired distressed assets, is subject to various risks, including
uninsured damage, change in location or decline in value caused by use, age or
market conditions. Any material decline in the value of such collateral could
adversely affect the financial condition, results of operations and business
prospects of the Company.

GOVERNMENT REGULATION

Many aspects of the Company's business are subject to regulation,
examination and licensing under various federal, state and local statutes and
regulations that impose requirements and restrictions affecting, among other
things, the Company's loan originations, credit activities, maximum interest
rates, finance and other charges, disclosures to customers, the terms of secured
transactions, collection, repossession and claims handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. The Company believes it is currently
in compliance in all material respects with applicable regulations, but there
can be no assurance that the Company will be able to maintain such compliance.
Failure to comply with, or changes in, these laws or regulations, or the
expansion of the Company's business into jurisdictions that have adopted more
stringent regulatory requirements than those in which the Company currently
conducts business, could have an adverse effect on the Company by, among other
things, limiting the interest and fee income the Company may generate on
existing and additional loans, limiting the states in which the Company may
operate or restricting the Company's ability to realize on the collateral
securing its loans.

8
<PAGE> 66

The mortgage banking industry in particular is highly regulated. Failure to
comply with any of the various state and federal laws affecting the industry,
all of which are subject to regular modification, may result in, among other
things, demands for indemnification or mortgage loan repurchases, certain rights
of rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability. Furthermore, currently
there are proposed various laws, rules and regulations which, if adopted, could
materially affect the Company's business. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations
will not be adopted in the future that will make compliance more difficult or
expensive, restrict the Company's ability to originate, purchase, service or
sell loans, further limit or restrict the amount of commissions, interest and
other charges earned on loans originated, purchased, serviced or sold by the
Company, or otherwise have a material adverse effect on the Company's financial
condition, results of operations and business prospects.

Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. The reduction or elimination of these tax benefits may
lessen the demand for residential mortgage loans and Home Equity Loans, and
could have a material adverse effect on the Company's financial condition,
results of operations and business prospects.

ENVIRONMENTAL LIABILITIES

The Company, through its subsidiaries and affiliates, acquires real
property in its Portfolio Asset acquisition and resolution business, and
periodically acquires real property through foreclosure of mortgage loans that
are in default. There is a risk that properties acquired by the Company could
contain hazardous substances or waste, contaminants or pollutants. The Company
may be required to remove such substances from the affected properties at its
expense, and the cost of such removal may substantially exceed the value of the
affected properties or the loans secured by such properties. Furthermore, the
Company may not have adequate remedies against the prior owners or other
responsible parties to recover its costs, either as a matter of law or
regulation, or as a result of such prior owners' financial inability to pay such
costs. The Company may find it difficult or impossible to sell the affected
properties either prior to or following any such removal.

COMPETITION

All of the businesses in which the Company operates are highly competitive.
Some of the Company's principal competitors are substantially larger and better
capitalized than the Company. Because of their resources, these companies may be
better able than the Company to obtain new customers for mortgage or other loan
production, to acquire Portfolio Assets, to pursue new business opportunities or
to survive periods of industry consolidation. Access to and the cost of capital
are critical to the Company's ability to compete. Many of the Company's
competitors have superior access to capital sources and can arrange or obtain
lower cost of capital, resulting in a competitive disadvantage to the Company
with respect to such competitors.

In addition, certain of the Company's competitors may have higher risk
tolerances or different risk assessments, which could allow these competitors to
establish lower margin requirements and pricing levels than those established by
the Company. In the event a significant number of competitors establish pricing
levels below those established by the Company, the Company's ability to compete
would be adversely affected.

RISKS ASSOCIATED WITH FOREIGN OPERATIONS

The Company has acquired, and manages and resolves, Portfolio Assets
located in France and is actively pursuing opportunities to purchase additional
pools of distressed assets in France, other areas of Western Europe, Asia and
Mexico. Foreign operations are subject to various special risks, including
currency translation risks, currency exchange rate fluctuations, exchange
controls and different political, social and legal and regulatory environments
within such foreign markets. To the extent future financing in foreign
currencies is unavailable at reasonable rates, the Company would be further
exposed to currency translation risks, currency exchange rate fluctuations and
exchange controls. In addition, earnings of foreign operations may be subject to
foreign income taxes that reduce cash flow available to meet debt service
requirements and other

9
<PAGE> 67

obligations of the Company, which may be payable even if the Company has no
earnings on a consolidated basis. Any or all of the foregoing could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.

DEPENDENCE ON INDEPENDENT MORTGAGE BROKERS

The Company depends in large part on independent mortgage brokers for the
origination and purchase of mortgage loans. A substantial portion of the loans
originated by Mortgage Corp., and all of the Home Equity Loans originated by
Capital Corp., are currently originated by independent mortgage brokers or
otherwise acquired from third parties. These independent mortgage brokers deal
with multiple lenders for each prospective borrower. The Company competes with
these lenders for the independent brokers' business based on a number of
factors, including price, service, loan fees and costs. The Company's financial
condition, results of operations and business prospects could be adversely
affected by changes in the volume and profitability of mortgage loans resulting
from, among other things, competition with other lenders and purchasers of such
loans.

Class action lawsuits have been filed against a number of mortgage lenders,
including Mortgage Corp., alleging that such lenders have violated the federal
Real Estate Settlement Procedures Act of 1974 by making certain payments to
independent mortgage brokers. If these cases are resolved against the lenders,
it may cause an industry-wide change in the way independent mortgage brokers are
compensated. Such changes may have a material adverse effect on the Company's
results of operations, financial condition and business prospects.

DEPENDENCE ON AUTOMOBILE DEALERSHIP RELATIONSHIPS

The ability of the Company to expand into new geographic markets and to
maintain or increase its volume of automobile loans is dependent upon
maintaining and expanding the network of franchised automobile dealerships from
which it purchases contracts. Increased competition, including competition from
captive finance affiliates of automobile manufacturers, could have a material
adverse effect on the Company's ability to maintain or expand its dealership
network.

LITIGATION

Industry participants in the lending business from time to time are named
as defendants in litigation involving alleged violations of federal and state
consumer protection or other similar laws and regulations. A judgment against
the Company in connection with any such litigation could have a material adverse
effect on the Company's financial condition, results of operations and business
prospects.

RELATIONSHIP WITH AND DEPENDENCE UPON CARGILL

The Company's relationship with Cargill Financial Services Corporation
("Cargill Financial") is significant in a number of respects. Cargill Financial,
a subsidiary of Cargill, Incorporated, a privately held, multi-national
agricultural company, provides equity and debt financings for many of the
investment entities (each such entity, an "Acquisition Partnership") formed by
the Company and one or more co-investors to acquire Portfolio Assets. Cargill
Financial owns approximately 2.7% of the Company's outstanding Common Stock, and
a Cargill Financial designee, David W. MacLennan, serves as a director of the
Company. The Company believes its relationship with Cargill Financial
significantly enhances the Company's credibility as a purchaser of Portfolio
Assets and facilitates its ability to expand into other businesses and foreign
markets. Although management believes that the Company's relationship with
Cargill Financial is excellent, there can be no assurance that such relationship
will continue in the future. Absent such relationship, the Acquisition
Partnerships would be required to find alternative sources for the financing
that Cargill Financial has historically provided. There can be no assurance that
such alternative financing would be available. Any termination of such
relationship could have a material adverse effect on the Company's financial
condition, results of operations and business prospects.

10
<PAGE> 68

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the efforts of its senior executive officers,
particularly James R. Hawkins (Chairman and Chief Executive Officer), James T.
Sartain (President and Chief Operating Officer), Rick R. Hagelstein (Executive
Vice President and Director of Subsidiary Operations), Matt A. Landry, Jr.
(Executive Vice President and Chief Administrative Officer) and Richard J.
Gillen (Managing Director of Mortgage Finance). The Company is also dependent on
several of the key members of management of each of its operating subsidiaries,
many of whom were instrumental in developing and implementing the business
strategy for such subsidiaries. The inability or unwillingness of one or more of
these individuals to continue in his present role could have a material adverse
effect on the Company's financial condition, results of operations and business
prospects. Except for Mr. Gillen, none of the senior executive officers has
entered into an employment agreement with the Company. There can be no assurance
that any of the foregoing individuals will continue to serve in his current
capacity or for what time period such service might continue. The Company does
not maintain key person life insurance for any of its senior executive officers
other than Mr. Gillen.

INFLUENCE OF CERTAIN SHAREHOLDERS

The directors and executive officers of the Company collectively
beneficially own approximately 30.9% of the Common Stock. Although there are no
agreements or arrangements with respect to voting such Common Stock among such
persons except as described below, such persons, if acting together, may
effectively be able to control any vote of shareholders of the Company and
thereby exert considerable influence over the affairs of the Company. James R.
Hawkins, the Chairman of the Board and Chief Executive Officer of the Company,
is the beneficial owner of approximately 11.5% of the outstanding Common Stock.
James T. Sartain, President and Chief Operating Officer of the Company, and
ATARA I, Ltd. ("ATARA"), an entity associated with Rick R. Hagelstein, Executive
Vice President and Director of Subsidiary Operations of the Company,
beneficially own approximately 4.3% and 4.1% of the outstanding Common Stock,
respectively. In addition, Cargill Financial owns approximately 2.7% of the
Common Stock. Mr. Hawkins, Mr. Sartain, Cargill Financial and ATARA are parties
to a shareholder voting agreement (the "Shareholder Voting Agreement"). Under
the Shareholder Voting Agreement, Mr. Hawkins, Mr. Sartain and ATARA are
required to vote their shares in favor of Cargill Financial's designee for
director of the Company, and Cargill Financial is required to vote its shares in
favor of one or more of the designees of Messrs. Hawkins and Sartain and ATARA.
ATARA, Cargill Financial and Messrs. Hawkins and Sartain are the beneficial
owners of an aggregate of 22.5% of the outstanding Common Stock and are able to
exert considerable influence over the affairs of the Company. Richard J. Gillen,
Managing Director of Mortgage Finance, and Ed Smith are the beneficial owners of
7.8% and 7.2%, respectively, of the Common Stock. As a result, Messrs. Gillen
and Smith may be able to exert influence over the affairs of the Company and if
their shares are combined with the holdings of Messrs. Hawkins and Sartain and
the shares held by ATARA, will have effective control of the Company. There can
be no assurance that the interests of management or the other entities and
individuals named above will be aligned with the Company's other shareholders.

RELIANCE ON SYSTEMS; YEAR 2000 ISSUES

The Company's computer systems are integral to the operation of its
businesses. There can be no assurance that these systems will continue to be
adequate to support the Company's growth. A failure of the Company's computer
systems, including a failure of data integrity or accuracy, could have a
material adverse effect on the Company's financial condition, results of
operations and business prospects.

Although the Company maintains its own computer systems for a significant
portion of its operations, the Company is substantially dependent on the
services of third-party servicers in its mortgage banking and Portfolio Asset
acquisition and resolution businesses. The Company has been informed by such
servicers that, although they intend to make the necessary modifications to
their computer systems, the computer systems operated by them are not yet year
2000 compliant. In addition, the Company interacts electronically with several
government agencies, including FHLMC, FNMA, FHA, FMHA and GNMA, whose computer
systems are not yet year 2000 compliant. There can be no assurance that such
third parties and government

11
<PAGE> 69

agencies will make the necessary modifications to their respective computer
systems to enable proper processing of transactions relating to the year 2000
and beyond. Any failure by such entities to timely correct year 2000 issues
could have a material adverse effect on the Company's financial condition,
results of operations and business prospects.

ANTI-TAKEOVER CONSIDERATIONS

The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and by-laws contain a number of provisions
relating to corporate governance and the rights of shareholders. Certain of
these provisions may be deemed to have a potential "anti-takeover" effect to the
extent they are utilized to delay, defer or prevent a change of control of the
Company by deterring unsolicited tender offers or other unilateral takeover
proposals and compelling negotiations with the Company's Board of Directors
rather than non-negotiated takeover attempts even if such events may be in the
best interests of the Company's shareholders. The Certificate of Incorporation
also contains certain provisions restricting the transfer of its securities that
are designed to prevent ownership changes that might limit or eliminate the
ability of the Company to use its NOLs. See "Description of Common Stock."

PERIOD TO PERIOD VARIANCES

The Company recognizes revenue from Portfolio Assets and Acquisition
Partnerships based on proceeds realized from the resolution of the Portfolio
Assets, which proceeds have historically varied significantly and likely will
continue to vary significantly from period to period. Consequently, the
Company's period to period revenue and net income have historically varied, and
are likely to continue to vary, correspondingly. Such variances, alone or with
other factors, such as conditions in the economy or the financial services
industries or other developments affecting the Company, may result in
significant fluctuations in the reported earnings of the Company and in the
trading prices of the Company's securities, particularly the Common Stock.

TAX, MONETARY AND FISCAL POLICY CHANGES

The Company originates and acquires financial assets, the value and income
potential of which are subject to influence by various state and federal tax,
monetary and fiscal policies in effect from time to time. The nature and
direction of such policies are entirely outside the control of the Company, and
the Company cannot predict the timing or effect of changes in such policies.
Changes in such policies could have a material adverse effect on the Company's
financial condition, results of operations and business prospects.

RATIO OF EARNINGS TO FIXED CHARGES
AND EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS

The following table sets forth the Company's and its consolidated
subsidiaries' ratios of earnings to fixed charges and ratios of earnings to
combined fixed charges and preferred stock dividends for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges........................... 1.30x 2.22x 1.47x 1.74x 1.61x 1.23x 1.67x
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends......................... 1.18x 1.82x 1.29x 1.42x 1.41x 1.23x 1.67x
</TABLE>

For purposes of computing the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends, "earnings"
consist of income from continuing operations before federal income

12
<PAGE> 70

taxes and fixed charges, less undistributed income of less than
fifty-percent-owned entities. "Fixed charges" consist of interest expense.

USE OF PROCEEDS

Unless otherwise specified in the Prospectus Supplement, the net proceeds
from the sale of the Offered Securities will be used for general corporate
purposes, including repayment of borrowings, redemption of outstanding
securities, working capital, capital expenditures and acquisitions. Additional
information on the use of net proceeds from the sale of the Offered Securities
is set forth in the Prospectus Supplement relating to such Offered Securities.

DESCRIPTION OF DEBT SECURITIES

The following description of the terms of the Debt Securities summarizes
certain general terms and provisions of the Debt Securities to which any
Prospectus Supplement may relate. The particular terms of the Debt Securities
and the extent, if any, to which such general provisions may apply to any series
of Debt Securities will be described in the Prospectus Supplement relating to
such series.

The Debt Securities are to be issued under one or more Indentures
(collectively, the "Indenture") between the Company and a trustee selected by
the Company, which trustee shall be named in a Prospectus Supplement (the
"Trustee"). The following statements are subject to the detailed provisions of
the Indenture, a copy of which is filed as an exhibit to the Registration
Statement. Wherever any particular provisions of the Indenture or terms defined
therein are referred to, such provisions and terms are incorporated by reference
as a part of the statements made herein and such statements are qualified in
their entirety by such references. Defined terms used but not otherwise defined
herein shall have the meanings ascribed to them in the Indenture.

GENERAL

The Debt Securities may be either Senior Securities or Subordinated
Securities and will be secured or unsecured. The Indenture does not limit the
amount of Debt Securities which may be issued thereunder and Debt Securities may
be issued thereunder up to the aggregate principal amount which may be
authorized from time to time by the Company. Debt Securities will be issued from
time to time and offered on terms determined by market conditions at the time of
sale.

The Senior Securities will be secured or unsecured and will rank on a
parity with all other unsubordinated indebtedness of the Company. To the extent
provided in the Prospectus Supplement relating thereto, the Company may be
required to secure Senior Securities equally and ratably with other Debt (as
defined in the Indenture) with respect to which the Company elects or is
required to provide security. The Subordinated Securities will be secured or
unsecured and will be subordinated and junior to all "Senior Indebtedness'
(which for this purpose includes any Senior Securities) to the extent set forth
in the applicable supplemental Indenture and the Prospectus Supplement relating
to such series.

The Debt Securities may be issued in one or more series with the same or
various maturities at par, at a premium or at a discount. Any Debt Securities
bearing no interest or interest at a rate which at the time of issuance is below
market rates will be sold at a discount (which may be substantial) from their
stated principal amount. Federal income tax consequences and other special
considerations applicable to any such substantially discounted Debt Securities
will be described in the Prospectus Supplement relating thereto.

Reference is made to the Prospectus Supplement for the following terms of
the Debt Securities offered hereby: (i) the designation, aggregate principal
amount and authorized denominations of such Debt Securities; (ii) the percentage
of their principal amount at which such Debt Securities will be issued; (iii)
the date or dates on which the Debt Securities will mature; (iv) the rate or
rates (which may be fixed or floating) per annum at which the Debt Securities
will bear interest, if any, or the method of determining such rate or rates; (v)
the date or dates on which any such interest will be payable, the date or dates
on which payment of

13
<PAGE> 71

any such interest will commence and the Regular Record Dates for such Interest
Payment Dates; (vi) whether such Debt Securities are Senior Securities or
Subordinated Securities; (vii) whether such Debt Securities are secured or
unsecured; (viii) the terms of any mandatory or optional redemption (including
any provisions for any sinking, purchase or other analogous fund) or repayment
option; (ix) the currency, currencies or currency units for which the Debt
Securities may be purchased and the currency, currencies or currency units in
which the principal thereof, any premium thereon and any interest thereon may be
payable; (x) if the currency, currencies or currency units for which the Debt
Securities may be purchased or in which the principal thereof, any premium
thereon and any interest thereon may be payable is at the election of the
Company or the purchaser, the manner in which such election may be made; (xi) if
the amount of payments on the Debt Securities is determined with reference to an
index based on one or more currencies or currency units, changes in the price of
one or more securities or changes in the price of one or more commodities, the
manner in which such amounts may be determined; (xii) the extent to which any of
the Debt Securities will be issuable in temporary or permanent global form, or
the manner in which any interest payable on a temporary or permanent Global
Security will be paid; (xiii) the terms and conditions upon which conversion or
exchange of the Debt Securities into or for Common Stock, Preferred Stock or
other Debt Securities will be effected, including the conversion price or
exchange ratio, the conversion or exchange period and any other conversion or
exchange provisions; (xiv) information with respect to book-entry procedures, if
any; (xv) a discussion of certain Federal income tax, accounting and other
special considerations, procedures and limitations with respect to the Debt
Securities; and (xvi) any other specific terms of the Debt Securities not
inconsistent with the Indenture.

If any of the Debt Securities are sold for one or more foreign currencies
or foreign currency units or if the principal of, premium, if any, or any
interest on any series of Debt Securities is payable in one or more foreign
currencies or foreign currency units, the restrictions, elections, Federal
income tax consequences, specific terms and other information with respect to
such issue of Debt Securities and such currencies or currency units will be set
forth in the Prospectus Supplement relating thereto.

Unless otherwise specified in the Prospectus Supplement, the principal of,
any premium on, and any interest on the Debt Securities will be payable, and the
Debt Securities will be transferable, at the Corporate Trust Office of the
Trustee specified in the applicable Indenture, provided that payment of
interest, if any, may be made at the option of the Company by check mailed on or
before the payment date, first class mail, to the address of the person entitled
thereto as it appears on the registry books of the Company or its agent.

Unless otherwise specified in the Prospectus Supplement, the Debt
Securities will be issued only in fully registered form and in denominations of
$1,000 and any integral multiple thereof. No service charge will be made for any
transfer or exchange of any Debt Securities, but the Company may, except in
certain specified cases not involving any transfer, require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.

GLOBAL SECURITIES

The Debt Securities of a series may be issued, in whole or in part, in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a depositary (the "Depositary") identified in the Prospectus Supplement
relating to such series. Global Securities may be issued only in fully
registered form and in either temporary or permanent form. Unless and until it
is exchanged in whole or in part for the individual Debt Securities represented
thereby, a Global Security may not be transferred except as a whole by the
Depositary for such Global Security to a nominee of such Depositary or by a
nominee of such Depositary to such Depositary or another nominee of such
Depositary or by the Depositary or any nominee of such Depositary to a successor
Depositary or any nominee of such successor.

The specific terms of the depositary arrangement with respect to a series
of Debt Securities will be described in the Prospectus Supplement relating to
such series. The Company anticipates that the following provisions will
generally apply to depositary arrangements.

Upon the issuance of a Global Security, the Depositary for such Global
Security or its nominee will credit, on its book entry registration and transfer
system, the respective principal amounts of the individual

14
<PAGE> 72

Debt Securities represented by such Global Security to the accounts of persons
that have accounts with such Depositary. Such accounts shall be designated by
the dealers, underwriters or agents with respect to such Debt Securities or by
the Company if such Debt Securities are offered and sold directly by the
Company. Ownership of beneficial interests in a Global Security will be limited
to persons that have accounts with the applicable Depositary ("participants") or
persons that may hold interests through participants. Ownership of beneficial
interests in such Global Security will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the applicable
Depositary or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.

So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Security will not be entitled to have any of the individual Debt Securities of
the series represented by such Global Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture governing such Debt Securities.

Payments of principal of, any premium on, and any interest on, individual
Debt Securities represented by a Global Security registered in the name of a
Depositary or its nominee will be made to the Depositary or its nominee, as the
case may be, as the registered owner of the Global Security representing such
Debt Securities. Neither the Company, the Trustee for such Debt Securities, any
Paying Agent, nor the Security Registrar for such Debt Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Global
Security for such Debt Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.

The Company expects that the Depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium or interest in
respect of a permanent Global Security representing any of such Debt Securities,
immediately will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Security for such Debt Securities as shown on the records of such
Depositary or its nominee. The Company also expects that payments by
participants to owners of beneficial interests in such Global Security held
through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name." Such payments will be
the responsibility of such participants.

If the Depositary for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depositary and a successor depositary is not
appointed by the Company within 90 days, the Company will issue individual Debt
Securities of such series in exchange for the Global Security representing such
series of Debt Securities. In addition, the Company may at any time and in its
sole discretion, subject to any limitations described in the Prospectus
Supplement relating to such Debt Securities, determine not to have any Debt
Securities of a series represented by one or more Global Securities and, in such
event, will issue individual Debt Securities of such series in exchange for the
Global Security or Securities representing such series of Debt Securities.
Further, if the Company so specifies with respect to the Debt Securities of a
series, an owner of a beneficial interest in a Global Security representing Debt
Securities of such series may, on terms acceptable to the Company, the Trustee
and the Depositary for such Global Security, receive individual Debt Securities
of such series in exchange for such beneficial interests, subject to any
limitations described in the Prospectus Supplement relating to such Debt
Securities. In any such instance, an owner of a beneficial interest in a Global
Security will be entitled to physical delivery of individual Debt Securities of
the series represented by such Global Security equal in principal amount to such
beneficial interest and to have such Debt Securities registered in its name.
Individual Debt Securities of such series so issued will be issued in
denominations, unless otherwise specified by the Company, of $1,000 and integral
multiples thereof.

15
<PAGE> 73

SENIOR SECURITIES

The Senior Securities will be direct, secured or unsecured obligations of
the Company, and will constitute Senior Indebtedness (in each case as defined in
the applicable supplemental Indenture) ranking on a parity with all other
unsubordinated indebtedness of the Company.

SUBORDINATED SECURITIES

The Subordinated Securities will be direct, secured or unsecured
obligations of the Company. The obligations of the Company pursuant to the
Subordinated Securities will be subordinate in right of payment to the extent
set forth in the Indenture and the applicable supplemental Indenture to all
Senior Indebtedness (including all Senior Securities) (in each case as defined
in the applicable supplemental Indenture). Except to the extent otherwise set
forth in a Prospectus Supplement, the Indenture does not contain any restriction
on the amount of Senior Indebtedness that the Company may incur.

The terms of the subordination of a series of Subordinated Securities,
together with the definition of Senior Indebtedness related thereto, will be as
set forth in the applicable supplemental Indenture and the Prospectus Supplement
relating to such series.

The Subordinated Securities will not be subordinated to indebtedness of the
Company that is not Senior Indebtedness, and the creditors of the Company that
do not hold Senior Indebtedness will not benefit from the subordination
provisions described herein. In the event of the bankruptcy or insolvency of the
Company before or after maturity of the Subordinated Securities, such other
creditors would rank pari passu with holders of the Subordinated Securities,
subject, however, to the broad equity powers of the Federal bankruptcy court
pursuant to which such court may, among other things, reclassify the claims of
any series of Subordinated Securities into a class of claims having a different
relative priority with respect to the claims of such other creditors or any
other claims against the Company.

COVENANTS

The Indenture contains certain covenants that will be applicable (unless
waived or amended) so long as any of the Debt Securities are outstanding, unless
stated otherwise in the Prospectus Supplement.

CONSOLIDATION, MERGER, SALE OR CONVEYANCE

The Indenture provides that the Company may not consolidate with or merge
into any other Person or convey or transfer its properties and assets
substantially as an entirety to any Person, unless (i) the successor Person
shall be a corporation or partnership organized and existing under the laws of
the United States or any State thereof or the District of Columbia, and shall
expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, the due and punctual payment of
the principal of, any premium on, and any interest on, all the outstanding Debt
Securities and the performance of every covenant in the Indenture on the part of
the Company to be performed or observed; (ii) immediately after giving effect to
such transaction, no Event of Default, and no event which, after notice or lapse
of time or both, would become an Event of Default, shall have happened and be
continuing; and (iii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance or transfer and such supplemental Indenture
comply with the foregoing provisions relating to such transaction. In case of
any such consolidation, merger, conveyance or transfer, such successor Person
will succeed to and be substituted for the Company as obligor on the Debt
Securities, with the same effect as if it had been named in the Indenture as the
Company.

EVENTS OF DEFAULT; WAIVER AND NOTICE THEREOF; DEBT SECURITIES IN FOREIGN
CURRENCIES

As to any series of Debt Securities, an Event of Default is defined in the
Indenture as (a) default for 30 days in payment of any interest on the Debt
Securities of such series; (b) default in payment of principal of or any premium
on the Debt Securities of such series at maturity; (c) default in payment of any
sinking or purchase fund or analogous obligation, if any, on the Debt Securities
of such series; (d) default by the

16
<PAGE> 74

Company in the performance of any other covenant or warranty contained in the
Indenture for the benefit of such series which shall not have been remedied by
the end of a period of 60 days after notice is given as specified in the
Indenture; (e) certain events of bankruptcy, insolvency and reorganization of
the Company; and (f) to the extent set forth in the applicable supplemental
Indenture and Prospectus Supplement, certain defaults under other Debt.

A default under one series of Debt Securities will not necessarily be a
default under another series. Any additions, deletions or other changes to the
Events of Default that will be applicable to a series of Debt Securities will be
described in the Prospectus Supplement relating to such series of Debt
Securities.

The Indenture provides that (i) if an Event of Default described in clause
(a), (b), (c), (d) or (f) above (if the Event of Default under clause (d) is
with respect to less than all series of Debt Securities then outstanding) shall
have occurred and be continuing with respect to any series, either the Trustee
or the holders of not less than 25% in aggregate principal amount of the Debt
Securities of such series then outstanding (each such series acting as a
separate class) may declare the principal (or, in the case of Original Issue
Discount Securities, the portion thereof specified in the terms thereof) of all
outstanding Debt Securities of such series and the interest accrued thereon, if
any, to be due and payable immediately and (ii) if an Event of Default described
in clause (d) or (f) above (if the Event of Default under clause (d) is with
respect to all series of Debt Securities then outstanding) shall have occurred
and be continuing, either the Trustee or the holders of at least 25% in
aggregate principal amount of all Debt Securities then outstanding (treated as
one class) may declare the principal (or, in the case of Original Issue Discount
Securities, the portion thereof specified in the terms thereof) of all Debt
Securities then outstanding and the interest accrued thereon, if any, to be due
and payable immediately, but upon certain conditions such declarations may be
annulled and past defaults (except for defaults in the payment of principal of,
any premium on, or any interest on, such Debt Securities and in compliance with
certain covenants) may be waived by the holders of a majority in aggregate
principal amount of the Debt Securities of such series then outstanding. If an
Event of Default described in clause (e) occurs and is continuing, then the
principal amount (or, in the case of Debt Securities originally issued at a
discount, such portion of the principal amount as may be specified in the terms
hereof) of all the Debt Securities then outstanding and all accrued interest
thereon shall become and be due and payable immediately, without any declaration
or other act by the Trustee or any other Holder.

Under the Indenture the Trustee must give to the holders of each series of
Debt Securities notice of all uncured defaults known to it with respect to such
series within 90 days after such a default occurs (the term default to include
the events specified above without notice or grace periods); provided that,
except in the case of default in the payment of principal of, any premium on, or
any interest on, any of the Debt Securities, or default in the payment of any
sinking or purchase fund installment or analogous obligations, the Trustee shall
be protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interests of the holders of the Debt
Securities of such series.

No holder of any Debt Securities of any series may institute any action
under the Indenture unless (a) such holder shall have given the Trustee written
notice of a continuing Event of Default with respect to such series; (b) the
holders of not less than 25% in aggregate principal amount of the Debt
Securities of such series then outstanding shall have requested the Trustee to
institute proceedings in respect of such Event of Default; (c) such holder or
holders shall have offered the Trustee such reasonable indemnity as the Trustee
may require; (d) the Trustee shall have failed to institute an action for 60
days thereafter and (e) no inconsistent direction shall have been given to the
Trustee during such 60-day period by the holders of a majority in aggregate
principal amount of Debt Securities of such series.

The holders of a majority in aggregate principal amount of the Debt
Securities of any series affected and then outstanding will have the right,
subject to certain limitations, to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to such series of Debt
Securities. The Indenture provides that, in case an Event of Default shall occur
and be continuing, the Trustee, in exercising its rights and powers under the
Indenture, will be required to use the degree of care of a prudent man in the
conduct of his own affairs. The Indenture further provides that the Trustee
shall not be required to expend or risk its own funds or otherwise incur any
financial

17
<PAGE> 75

liability in the performance of any of its duties under the Indenture unless it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is reasonably assured to it.

The Company must furnish to the Trustee within 120 days after the end of
each fiscal year a statement signed by one of certain officers of the Company to
the effect that a review of the activities of the Company during such year and
of its performance under the Indenture and the terms of the Debt Securities has
been made, and, to the best of the knowledge of the signatories based on such
review, the Company has complied with all conditions and covenants of the
Indenture or, if the Company is in default, specifying such default.

If any Debt Securities are denominated in a coin or currency other than
that of the United States, then for the purposes of determining whether the
holders of the requisite principal amount of Debt Securities have taken any
action as herein described, the principal amount of such Debt Securities shall
be deemed to be that amount of United States dollars that could be obtained for
such principal amount on the basis of the spot rate of exchange into United
States dollars for the currency in which such Debt Securities are denominated
(as evidenced to the Trustee by an Officers' Certificate) as of the date the
taking of such action by the holders of such requisite principal amount is
evidenced to the Trustee as provided in the Indenture.

If any Debt Securities are Original Issue Discount Securities, then for the
purposes of determining whether the holders of the requisite principal amount of
Debt Securities have taken any action herein described, the principal amount of
such Debt Securities shall be deemed to be the portion of such principal amount
that would be due and payable at the time of the taking of such action upon a
declaration of acceleration of maturity thereof.

MODIFICATION OF THE INDENTURE

The Company and the Trustee may, without the consent of the holders of the
Debt Securities, enter into indentures supplemental to the Indenture for, among
others, one or more of the following purposes: (i) to evidence the succession of
another corporation to the Company, and the assumption by such successor of the
Company's obligations under the Indenture and the Debt Securities of any series;
(ii) to add covenants of the Company, or surrender any rights of the Company,
for the benefit of the holders of Debt Securities of any or all series; (iii) to
cure any ambiguity, omission, defect or inconsistency in such Indenture; (iv) to
establish the form or terms of any series of Debt Securities, including any
Subordinated Securities; (v) to evidence and provide for the acceptance of any
successor Trustee with respect to one or more series of Debt Securities or to
facilitate the administration of the trusts thereunder by one or more trustees
in accordance with such Indenture; and (vi) to provide any additional Events of
Default.

With certain exceptions, the Indenture or the rights of the holders of the
Debt Securities may be modified by the Company and the Trustee with the consent
of the holders of a majority in aggregate principal amount of the Debt
Securities of each series affected by such modification then outstanding, but no
such modification may be made without the consent of the holder of each
outstanding Debt Security affected thereby which would (i) change the maturity
of any payment of principal of, or any premium on, or any installment of
interest on any Debt Security, or reduce the principal amount thereof or the
interest or any premium thereon, or change the method of computing the amount of
principal thereof or interest thereon on any date or change any place of payment
where, or the coin or currency in which, any Debt Security or any premium or
interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the maturity thereof (or, in the
case of redemption or repayment, on or after the redemption date or the
repayment date, as the case may be), or (ii) reduce the percentage in principal
amount of the outstanding Debt Securities of any series, the consent of whose
holders is required for any such modification, or the consent of whose holders
is required for any waiver of compliance with certain provisions of the
Indenture or certain defaults thereunder and their consequences provided for in
the Indenture, or (iii) modify any of the provisions of certain Sections of the
Indenture, including the provisions summarized in this paragraph, except to
increase any such percentage or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of each
outstanding Debt Security affected thereby.

18
<PAGE> 76

DISCHARGE AND DEFEASANCE

Unless otherwise set forth in the applicable Prospectus Supplement, the
Company can discharge or defease its obligations with respect to any series of
Debt Securities as set forth below.

The Company may discharge all of its obligations (except those set forth
below) to holders of any series of Debt Securities issued under any Indenture
that have not already been delivered to the Trustee for cancellation and that
have either become due and payable, or are by their terms due and payable within
one year (or scheduled for redemption within one year), by irrevocably
depositing with the Trustee cash or U.S. Government Obligations (as defined in
such Indenture), or a combination thereof, as trust funds in an amount certified
to be sufficient to pay when due the principal of, premium, if any, and
interest, if any, on all outstanding Debt Securities of such series and to make
any mandatory sinking fund payments, if any, thereon when due.

Unless otherwise provided in the applicable Prospectus Supplement, the
Company may also elect at any time to (a) defease and be discharged from all of
its obligations (except those set forth below) to holders of any series of Debt
Securities issued under each Indenture ("defeasance") or (b) be released from
all of its obligations with respect to certain covenants applicable to any
series of Debt Securities issued under each supplemental Indenture ("covenant
defeasance"), if, among other things: (i) the Company irrevocably deposits with
the Trustee cash or U.S. Government Obligations, or a combination thereof, as
trust funds in an amount certified to be sufficient to pay when due the
principal of, premium, if any, and interest, if any, on all outstanding Debt
Securities of such series and to make any mandatory sinking fund payments, if
any, thereon when due and such funds have been so deposited for 91 days; (ii)
such deposit will not result in a breach or violation of, or cause a default
under, any agreement or instrument to which the Company is a party or by which
it is bound; and (iii) the Company delivers to the Trustee an opinion of counsel
to the effect that the holders of such series of Debt Securities will not
recognize income, gain or loss for Federal income tax purposes as a result of
such defeasance or covenant defeasance and that defeasance or covenant
defeasance will not otherwise alter the Federal income tax treatment of such
holders' principal and interest payments, if any, on such series of Debt
Securities.

DESCRIPTION OF PREFERRED STOCK

The following is a description of certain general terms and provisions of
the Preferred Stock. The particular terms of any series of Preferred Stock will
be described in the applicable Prospectus Supplement. If so indicated in a
Prospectus Supplement, the terms of any such series may differ from the terms
set forth below.

The Board of Directors of the Company (the "Board of Directors") is
authorized, without action by the holders of Common Stock, to issue up to
98,000,000 shares of Optional Preferred Stock in one or more classes or series.
Prior to issuance of shares of each series, the Board of Directors is required
by the Delaware General Corporation Law (the "DGCL") and the Company's
Certificate of Incorporation to adopt resolutions and file a Certificate of
Designations (the "Certificate of Designations") with the Secretary of State of
the State of Delaware, fixing for each such series the designations, powers,
preferences and rights of the shares of such series and the qualifications,
limitations and restrictions thereof, including, but not limited to, dividend
rights, dividend rate or rates, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences as are permitted by the DGCL. The Board
of Directors could authorize the issuance of shares of Preferred Stock with
terms and conditions that could have the effect of discouraging a takeover or
other transaction, which holders of some, or a majority, of such shares might
believe to be in their best interests or in which holders of some, or a
majority, of such shares might receive a premium for their shares over the
then-market price of such shares.

Subject to limitations prescribed by the DGCL, the Board of Directors is
authorized to fix the number of shares constituting each series of Preferred
Stock and the designations and powers, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof, including such provisions as may be desired concerning voting,
redemption, dividends, dissolution or the distribution of

19
<PAGE> 77

assets, conversion or exchange, and such other subjects or matters as may be
fixed by resolution of the Board of Directors or duly authorized committee
thereof. The Preferred Stock offered hereby will, upon issuance and full payment
of the purchase price therefor, be fully paid and nonassessable and will not
have, or be subject to, any preemptive or similar rights.

Reference is made to the Prospectus Supplement relating to the series of
Preferred Stock being offered for the specific terms thereof, including: (i) the
title and stated value of such Preferred Stock; (ii) the number of shares of
such Preferred Stock offered, the liquidation preference per share and the
purchase price of such Preferred Stock; (iii) the dividend rate(s), period(s)
and/or payment date(s) or method(s) of calculation thereof applicable to such
Preferred Stock; (iv) whether dividends shall be cumulative or non-cumulative
and, if cumulative, the date from which dividends on such Preferred Stock shall
accumulate; (v) the procedures for any auction and remarketing, if any, for such
Preferred Stock; (vi) the provisions for a sinking fund, if any, for such
Preferred Stock; (vii) the provisions for redemption, if applicable, of such
Preferred Stock; (viii) any listing of such Preferred Stock on any securities
exchange; (ix) the terms and conditions, if applicable, upon which such
Preferred Stock will be convertible into Common Stock, including the conversion
price (or manner of calculation thereof) and conversion period; (x) voting
rights, if any, of such Preferred Stock; (xi) a discussion of any material
and/or special Federal income tax considerations applicable to such Preferred
Stock; (xii) the relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up of the
affairs of the Company; (xiii) any limitations on issuance of any series of
Preferred Stock ranking senior to or on a parity with such series of Preferred
Stock as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of the Company, and (xv) any other specific terms,
preferences, rights, limitations or restrictions of such Preferred Stock.

Unless otherwise specified in the applicable Prospectus Supplement, the
shares of each series of Preferred Stock will upon issuance rank junior to the
Company's Special Preferred Stock and Adjusting Rate Preferred Stock with
respect to divided rights and rights upon liquidation, dissolution or winding up
of the Company. At the close of business on July 15, 1998, there were
outstanding 849,777 shares of the Special Preferred Stock and 1,073,704 shares
of the Adjusting Rate Preferred Stock.

Unless otherwise specified in the applicable Prospectus Supplement, the
transfer agent and registrar for each series of Preferred Stock will be American
Stock Transfer & Trust Company, whose principal offices are located at 40 Wall
Street, New York, New York 10005.

DESCRIPTION OF COMMON STOCK

The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the DGCL and the Certificate of
Incorporation. The Company is presently authorized to issue 100,000,000 shares
of Common Stock, par value $0.01 per share. At the close of business on July 15,
1998, an aggregate of 8,260,622 shares of Common Stock were outstanding.

The holders of shares of Common Stock are entitled to one vote for each
share on all matters submitted to a vote of common stockholders. Except as
otherwise provided by law or by the Certificate of Incorporation (including all
rights of holders of the Company's outstanding series of preferred stock to vote
on certain matters under certain circumstances) or by the by-laws of the
Company, the holders of shares of Common Stock exclusively possess the voting
power for the election of directors and for all other purposes. Except as
otherwise provided by law, the Certificate of Incorporation or the by-laws of
the Company, the vote of the holders of at least a majority of the outstanding
shares of Common Stock who are present, in person or by proxy, at a meeting at
which a quorum is present is required to take action. There is no provision in
the Certificate of Incorporation for cumulative voting with respect to the
election of directors of the Company. Directors of the Company are elected by a
plurality of the votes of the shares entitled to vote in the election of
directors. Each share of Common Stock is entitled to participate equally in
dividends, when, as and if declared by the board of directors of the Company,
and in the distribution of net assets in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, subject in
all cases to any prior rights of outstanding shares of preferred stock of the
Company. The shares of Common Stock have no preemptive or

20
<PAGE> 78

conversion rights, redemption rights or sinking fund provisions and are not
subject to calls, assessments or rights of redemption by the Company.

As set forth in the Certificate of Incorporation, subject to certain
limited exceptions (including the prior approval of the board of directors of
the Company), during the period (the "Restricted Transfer Period") beginning on
July 3, 1995 (the "Effective Date") and ending on the earlier of (1) the
expiration of 15 years after the Effective Date and (2) the first day of the
taxable year of the Company to which no Tax Benefits (as such term is defined
below) may be carried forward by the Company, the shares of Common Stock may not
be sold or otherwise transferred to any transferee (including a group acting in
concert) who directly or indirectly owns 4.75% or more of the outstanding shares
of the Common Stock or any other class of securities of the Company similarly
restricted or, after giving effect to the sale or transfer, would directly or
indirectly own more than 4.75% of the outstanding shares of the Common Stock or
any other class of securities of the Company similarly restricted. In addition,
any transfer of Common Stock by a transferor who directly or indirectly owns or
is treated as owning 5% or more of the outstanding shares of the Common Stock
shall be void ab initio and shall not be effective to transfer any of such
shares of Common Stock to the purported transferee. "Tax Benefits" is defined as
net operating loss carryovers, capital loss carryovers, general business credit
carryovers, alternative minimum tax carryovers, foreign tax credit carryovers
and any net unrealized built-in losses.

The Company is a Delaware corporation and is subject to Section 203
("Section 203") of the DGCL. In general, Section 203 will prevent an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) of the Company from engaging in a
"business combination" (as therein defined) with the Company for three years
following the date such person became an interested stockholder, unless (i)
before such person became an interested stockholder, the Board of Directors
approved the business combination in question, or the transaction which resulted
in such person becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the interested stockholder becoming such, the
interested stockholder owns at least 85% of the voting stock of the Company
outstanding at the time such transaction commenced (excluding stock held by
directors who are also officers of the Company and by employee stock plans that
do not provide employees with rights to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer); or
(iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the Board of Directors and
authorized at a meeting of stockholders by the affirmative vote of the holders
of not less than 66 2/3% of the outstanding voting stock of the Company not
owned by the interested stockholder. Under Section 203, the restrictions
described above do not apply to certain business combinations proposed by an
interested stockholder following the announcement (or notification) of one of
certain extraordinary transactions involving the Company and a person who had
not been an interested stockholder during the preceding three years or who
became an interested stockholder with the approval of the Board of Directors,
and which transactions are approved or not opposed by a majority of the members
of the Board of Directors then in office who were directors prior to any person
becoming an interested stockholder during the previous three years or were
recommended for election or elected to succeed such directors by a majority of
such directors.

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, whose principal offices are located at 40 Wall Street,
New York, New York 10005.

21
<PAGE> 79

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

THE FOLLOWING DISCUSSION IS A SUMMARY OF CERTAIN OF THE SIGNIFICANT FEDERAL
INCOME TAX CONSIDERATIONS IN RESPECT OF THE COMPANY AND THE OFFERED SECURITIES.
NO LEGAL OPINIONS WILL BE RENDERED WITH RESPECT TO SUCH CONSIDERATIONS AND NO
RULINGS HAVE BEEN REQUESTED FROM THE IRS. THE FOLLOWING DISCUSSION DOES NOT
ADDRESS ANY ASPECT OF STATE AND LOCAL TAXATION, INCLUDING, WITHOUT LIMITATION,
THE EFFECT OF STATE LAW LIMITATIONS ON THE USE OF THE COMPANY'S NOLS.

THIS SUMMARY IS BASED ON THE TAX CODE, TREASURY REGULATIONS PROMULGATED AND
PROPOSED THEREUNDER, JUDICIAL DECISIONS AND PUBLISHED ADMINISTRATIVE RULES AND
PRONOUNCEMENTS OF THE IRS AS IN EFFECT ON THE DATE HEREOF OR, IN THE CASE OF THE
TAX CONSEQUENCES OF THE MERGER AND RELATED TRANSACTIONS, ON THE DATE OR DATES
THEREOF. CHANGES IN SUCH RULES OR NEW INTERPRETATIONS THEREOF MAY HAVE
RETROACTIVE EFFECT AND COULD THEREFORE SIGNIFICANTLY AFFECT THE TAX CONSEQUENCES
DESCRIBED BELOW.

CERTAIN TAX CONSEQUENCES OF THE MERGER

The Merger. On July 3, 1995, J-Hawk merged with and into FCBOT. The Company
believes that the Merger constituted a tax-free reorganization under the Tax
Code. Therefore, no gain or loss was recognized by J-Hawk as a result of the
reorganization and the initial tax basis of the Company in the acquired assets
was the same as it was in the hands of J-Hawk immediately prior to the
reorganization. The Company did not obtain any rulings from the IRS or any legal
opinions from counsel with respect to any tax aspects of the Merger and there
can be no assurance that the Company's position will be sustained.

The Spin-off. Prior to, and in anticipation of, the consummation of the
Merger, J-Hawk formed Combined Financial Corporation ("Combined Financial"), to
which it transferred certain of its assets and assigned certain of its
indebtedness, and then distributed the stock of Combined Financial to its
shareholders (the "Spin-off"). The Company believes that the transfer of these
assets from J-Hawk to Combined Financial and the distribution of the Combined
Financial stock by J-Hawk to its shareholders constituted a tax free spin-off
under section 355 of the Tax Code. However, no private letter ruling from the
IRS or opinion of counsel to that effect was sought or obtained, and there can
be no assurance that the Company's position will be sustained. If the Company's
position is sustained, then no gain or loss would be recognized by J-Hawk as a
result of the Spin-off. If the Company's position is not sustained, gain or loss
would be recognized in an amount equal to the difference between the fair market
value of the assets transferred to Combined Financial and their adjusted tax
basis at the time of the transfer, and any tax liability incurred by J-Hawk on
the Spin-off would be inherited by the Company as a consequence of the Merger.
Although the Company believes that there was not any significant gain realized
as a result of the consummation of the Spin-off, it is possible that the IRS
could contend both that the Spin-off was taxable to J-Hawk and that the value of
the assets transferred was greater than the value assigned to such assets by
J-Hawk. In such event, there might be taxable gain incurred by J-Hawk in
connection with the Spin-off that would be inherited by the Company, which gain
could not be offset by the Company's NOLs.

22
<PAGE> 80

Net Operating Loss Carryforwards Generally. The Company believes that, as a
result of the Merger, approximately $596 million of NOLs were available to the
Company to offset future taxable income as of December 31, 1995. Since December
31, 1995, the Company estimates that it has generated an additional $12 million
in NOLs. Accordingly, as of December 31, 1997, the Company estimates that it had
approximately $608 million of NOLs available to offset future taxable income. In
this regard, the Tax Code provides that, for tax years beginning before August
6, 1997, a net operating loss for a taxable year may be carried back to offset
income in each of the three taxable years preceding the taxable year of such
loss and carried forward to each of the fifteen taxable years following the
taxable year of the loss. Under this provision of the Tax Code, the entire $608
million of the Company's NOLs may be carried forward to offset future taxable
income until the tax year 2005, subject to the discussion below. Thereafter, the
Company's NOLs begin to expire and (assuming that the Company has not previously
utilized any of its NOLs) the amount available to offset future taxable income
would be reduced as set forth below opposite the applicable tax year:

<TABLE>
<CAPTION>
AMOUNT OF EXPIRING AMOUNT OF
NOLS AS OF END OF REMAINING
TAX YEAR PRIOR TAX YEAR NOLS AVAILABLE
-------- ------------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
2006.................................................. $ 68,147 $539,853
2007.................................................. 192,885 346,968
2008.................................................. 153,611 193,357
2009.................................................. 12,980 180,377
2010.................................................. 99,566 80,811
2011.................................................. 68,811 12,000
2012.................................................. -- 12,000
</TABLE>

The amount of the foregoing NOLs is based upon factual and legal issues
with respect to which there can be no certainty. No ruling has been obtained
from the IRS regarding the amount or availability of the NOLs. The amount and
availability of such NOLs is therefore subject to audit and adjustment by the
IRS and it is possible that such NOLs could be significantly less than the
amounts set forth above.

Utilization of Net Operating Loss Carryforwards and other Tax Attributes
under Tax Code Sections 382, 383 and 384. In general, whenever there is a more
than 50% ownership change of a corporation during a three-year testing period,
the ownership change rules in section 382 of the Tax Code limit the
corporation's utilization of pre-change NOLs on an annual basis following the
ownership change to the product of the fair market value of the stock of the
corporation immediately before the ownership change and the "long-term tax
exempt rate" then in effect (which is an interest rate published monthly by the
IRS). A more than 50% ownership change occurs when the percentage of stock of
the corporation owned by one or more five-percent shareholders has increased by
more than 50 percentage points (determined by value) over the lowest percentage
of the corporation's stock owned by the same shareholders during the three-year
testing period. In any given year, the annual limitation imposed by section 382
may be increased by certain built-in gains realized after, but accruing
economically before, the ownership change and by the carryover of unused section
382 limitations from prior years. Pursuant to section 383 of the Tax Code, the
principles of section 382 similarly apply to certain other tax attributes (such
as general business credits, minimum tax credits, foreign tax credits and
capital loss carryovers).

The harsh effect of the ownership change rules of section 382 may be
ameliorated by an exception that applies in the case of federal bankruptcy
reorganizations. Under the so-called "section 382(l)(5) bankruptcy exception" to
section 382, if the reorganization results in an exchange by qualifying
creditors and stockholders of their claims and interests for at least 50% of the
debtor corporation's stock (determined by vote and value), then the general
ownership change rules will not apply. Instead, the debtor corporation will be
subject to a different tax regime under which NOLs are not limited on an annual
basis but are reduced by (i) the amount of interest deductions claimed during
the three taxable years preceding the date of the reorganization, and during the
part of the taxable year prior to and including the reorganization, in respect
of debt of the corporation converted into stock in the reorganization, and (ii)
in the case of a title 11 case filed on or before December 31, 1994 (such as
that of the Company), 50% of the excess of the amount of debt of the

23
<PAGE> 81

corporation (other than indebtedness for interest included in clause (i))
satisfied with stock in an exchange to which the former stock-for-debt exception
from the realization of discharge of indebtedness income applied over the value
of the stock so issued. Moreover, if the section 382(l)(5) bankruptcy exception
applies, section 382(l)(5)(D) provides that any further more than 50% ownership
change (as defined in section 382(g) of the Tax Code) of the debtor within a
two-year period will result in forfeiture of all of the debtor's NOLs incurred
through the date of such second ownership change.

The Company believes that a more than 50% ownership change occurred as a
result of the Merger. However, because of the application of the section
382(l)(5) bankruptcy exception, the Company believes that the general ownership
change rules of section 382 did not apply to limit the utilization of the
Company's NOLs. In addition, none of the mandatory reductions in the amount of
NOLs required by the section 382(l)(5) bankruptcy exception applied.
Accordingly, the Company believes that section 382 did not limit, or otherwise
reduce, the NOLs that existed at the time of the Merger and, therefore,
approximately $596 million of NOLs were available to the Company to offset
future taxable income as of December 31, 1995. In addition, the Company believes
that it has not experienced a more than 50% ownership change (as defined in
section 382(g) of the Tax Code) since the prior ownership change that occurred
as a result of the Merger and, therefore, that the Company's NOLs have not been
forfeited under section 382(l)(5)(D) and are not otherwise subject to an annual
limitation imposed by section 382. In order to prevent such a future change in
ownership, the Company's Certificate of Incorporation contains certain transfer
restrictions on the Company's capital stock, including the Common Stock. See
"Description of Common Stock." The Company also believes that section 383 did
not apply to limit the Company's utilization of certain other tax attributes
(such as general business credits, minimum tax credits, foreign tax credits and
capital loss carryovers).

Aside from sections 382 and 383, section 384 of the Tax Code provides that,
if the assets of a corporation are acquired by another corporation in a
reorganization described in subparagraphs (A), (C) or (D) of section 368(a)(1)
of the Tax Code, any built-in gain in the acquired assets that is recognized
(i.e., the "recognized built-in gain") during the five-year period beginning on
the acquisition date (i.e., the "recognition period") may not be offset by any
preacquisition loss (including NOLs and possible built-in losses). For purposes
of applying this rule, the term "recognized built-in gain" means any gain
recognized during the recognition period on the disposition of any asset except
to the extent that it is established by the acquiring corporation that (1) such
asset was not held on the acquisition date or (2) such gain exceeds the excess
(if any) of the fair market value of such asset on the acquisition date over the
adjusted tax basis of such asset on such date. Moreover, any item of income
which is properly taken into account for any recognition period taxable year but
which is attributable to periods before the acquisition date will be treated as
a recognized built-in gain for the taxable year in which it is properly taken
into account. The amount of the recognized built-in gains for any recognition
period taxable year cannot exceed the "net unrealized built-in gain" (as defined
in section 382(h) of the Tax Code) immediately before the acquisition date,
reduced by the recognized built-in gains for the prior years ending in the
recognition period which (but for the application of this rule) would have been
offset by preacquisition losses.

The Company has taken the position that the Merger was a reorganization
described in section 368(a)(1)(G) of the Tax Code and, therefore, section 384
does not apply to limit the Company's ability to use its NOLs to offset any
built-in gain that may be inherent in the assets acquired from J-Hawk. Based
upon a private letter ruling issued to another taxpayer, the Company believes
that the IRS may take a contrary position. If the IRS were successful in
challenging the Company's position, the Company would not be able to use its
NOLs to offset any such recognized built-in gains. The Company believes,
however, that even if its position with respect to section 384 is not sustained
in a dispute with the IRS, the amount of any built-in gain that may be inherent
in the assets acquired from J-Hawk and subject to section 384 will not have a
material adverse effect on the Company's consolidated financial position or
results of operations. In addition to potentially applying to the assets
acquired from J-Hawk, section 384 will apply to limit the Company's ability to
use its NOLs to offset any built-in gain that may be inherent in the assets of
Harbor Financial Mortgage Corporation acquired by the Company, and may limit the
Company's ability to use its NOLs to offset any built-in gain which may be
inherent in the assets of other corporations acquired by the Company.

24
<PAGE> 82

Application of Tax Code Section 269. Pursuant to section 269(a) of the Tax
Code, the IRS may disallow a corporate tax benefit if the principal purpose for
(1) an acquisition of 50% or more (determined by vote or value) of the stock of
a corporation (see section 269(a)(1)) or (2) a tax-free acquisition, directly or
indirectly, of property of another corporation, which corporation was not
controlled by the acquiring corporation or its stockholders immediately prior to
such acquisition (see section 269(a)(2)), is the evasion or avoidance of federal
income tax by securing a corporate tax benefit that would not otherwise be
available. Thus, in addition to the limitations on, and reductions in, tax
attributes set forth in sections 382, 383 and 384, the IRS may assert that
section 269 authorizes it to disallow any deduction of the Company's NOLs if
section 269(a)(1) or section 269(a)(2) were to apply and the Merger is
determined to have been structured principally for tax avoidance purposes. This
determination is primarily a question of fact. In connection with a more than
50% ownership change(as defined in section 382(g) of the Tax Code) to which the
section 382(l)(5) bankruptcy exception (discussed above) applies, an acquisition
of control or property within the meaning of sections 269(a)(1) and 269(a)(2),
respectively, is presumed to be made for the principal purpose of tax avoidance
unless the corporation carries on more than an insignificant amount of an active
trade or business during and subsequent to the title 11 case.

Because certain J-Hawk shareholders owned FCBOT common stock prior to the
Merger such that former J-Hawk shareholders' aggregate ownership of FCBOT
immediately following the Merger exceeded 50%, an acquisition of control may
have occurred within the meaning of section 269(a)(1). Furthermore, even if such
an acquisition of control did not occur, section 269 may nevertheless be
rendered potentially applicable as a result of the Company's acquisition of
J-Hawk (see section 269(a)(2)). In either case, the Company does not believe
that section 269 will limit the utilization of the $596 million of NOLs
available to the Company as of December 31, 1995 because the Merger was
structured primarily for business reasons and the Company has retained and
carried on more than an insignificant amount of FCBOT's pre-bankruptcy active
trade or business. Nonetheless, there can be no assurance that the IRS will not
challenge the utilization of such NOLs under section 269 and, if challenged,
that the IRS would not be successful in disallowing all or a significant portion
of the Company's NOLs arising prior to the Merger.

CURRENT IRS AUDIT

The federal income tax returns of J-Hawk for the tax year ended December
31, 1994 and for the short tax year ended July 2, 1995 are currently being
audited by the IRS. To date, the IRS has not proposed any significant
adjustments to the tax returns as originally filed. The IRS, however, has not
completed its audit and it is possible that future adjustments to the tax
returns could be proposed. None of the Company's federal income tax returns are
currently under audit.

ALTERNATIVE MINIMUM TAX

A corporation is required to pay alternative minimum tax to the extent that
20% of the corporation's "alternative minimum taxable income" ("AMTI") exceeds
the corporation's regular tax liability for the year. AMTI is generally equal to
regular taxable income with certain adjustments. For purposes of computing AMTI,
a corporation is entitled to offset no more than 90% of its AMTI with NOLs (as
computed for alternative minimum tax purposes). Thus, if the Company is subject
to the alternative minimum tax, a federal tax of 2% (20% of the 10% of AMTI not
offset by NOLs) will apply to any net taxable income earned by the Company that
is otherwise offset by NOLs.

25
<PAGE> 83

PLAN OF DISTRIBUTION

The Company may sell the Offered Securities offered hereby (1) through
underwriters or dealers; (2) through agents; (3) directly to purchasers; or (4)
through a combination of any such methods of sale. Any such underwriter, dealer
or agent may be deemed to be an underwriter within the meaning of the Securities
Act. The Prospectus Supplement relating to the Offered Securities will set forth
their offering terms, including the name or names of any underwriters, dealers
or agents, the purchase price of the Offered Securities and the proceeds to the
Company from such sale, any underwriting discounts, commissions and other items
constituting compensation to underwriters, dealers or agents, any initial public
offering price, any discounts or concessions allowed or reallowed or paid by
underwriters or dealers to other dealers, and any securities exchanges on which
the Offered Securities may be listed.

If underwriters or dealers are used in the sale, the Offered Securities
will be acquired by the underwriters or dealers for their own account and may be
resold from time to time in one or more transactions, at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, or at prices related to such prevailing market prices, or at negotiated
prices. The Offered Securities may be offered to the public either through
underwriting syndicates represented by one or more managing underwriters or
directly by one or more of such firms. Unless otherwise set forth in the
Prospectus Supplement, the obligations of underwriters or dealers to purchase
the Offered Securities will be subject to certain conditions precedent and the
underwriters or dealers will be obligated to purchase all the Offered Securities
if any are purchased. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid by underwriters or dealers to other
dealers may be changed from time to time.

Offered Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer or
sale of the Offered Securities in respect of which this Prospectus is delivered
will be named, and any commissions payable by the Company to such agent will be
set forth, in the Prospectus Supplement. Unless otherwise indicated in the
Prospectus Supplement, any such agent will be acting on a best efforts basis for
the period of its appointment.

If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or agents to solicit offers by certain specified
institutions to purchase Offered Securities from the Company at the public
offering price set forth in the Prospectus Supplement pursuant to delayed
delivery contracts providing for payment and delivery on a specified date in the
future. Such contracts will be subject to any conditions set forth in the
Prospectus Supplement and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts. The underwriters and
other persons soliciting such contracts will have no responsibility for the
validity or performance of any such contracts.

Underwriters, dealers and agents may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
by the Company to payments they may be required to make in respect thereof. The
terms and conditions of such indemnification will be described in an applicable
Prospectus Supplement. Underwriters, dealers and agents may be customers of,
engage in transactions with, or perform services for the Company in the ordinary
course of business.

Each series of Offered Securities other than Common Stock will be a new
issue of securities with no established trading market. Any underwriters to whom
Offered Securities are sold by the Company for public offering and sale may make
a market in such Offered Securities, but such underwriters will not be obligated
to do so and may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for any Offered
Securities.

LEGAL MATTERS

The validity of the Offered Securities will be passed upon for the Company
by Weil, Gotshal & Manges LLP, Houston, Texas.

26
<PAGE> 84

EXPERTS

The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, have been incorporated herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
included in such Form 10-K, and upon the authority of said firm as experts in
accounting and auditing.

The combined financial statements of the WAMCO Partnerships as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, have been incorporated herein in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
included in such Form 10-K, and upon the authority of said firm as experts in
accounting and auditing.
---------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------

27
<PAGE> 85

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... S-3
Recent Developments................... S-11
Forward-Looking Statements............ S-11
Risk Factors.......................... S-11
Use of Proceeds....................... S-12
Capitalization........................ S-13
Selected Financial and Other
Information......................... S-14
Business.............................. S-17
Management............................ S-50
Certain Terms of the Series A
Preferred Stock..................... S-53
Underwriting.......................... S-56
Legal Matters......................... S-57
PROSPECTUS
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Risk Factors.......................... 3
Ratio of Earnings to Fixed Charges and
Earnings to Combined Fixed Charges
and Preferred Stock Dividends....... 12
Use of Proceeds....................... 13
Description of Debt Securities........ 13
Description of Preferred Stock........ 19
Description of Common Stock........... 20
Certain Federal Income Tax
Considerations...................... 22
Plan of Distribution.................. 26
Legal Matters......................... 26
Experts............................... 27
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
800,000 SHARES

[FIRSTCITY LOGO]
% CUMULATIVE PREFERRED STOCK, SERIES A
------------------------------------

PROSPECTUS SUPPLEMENT

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

KEEFE, BRUYETTE & WOODS, INC.

PIPER JAFFRAY INC.
- ------------------------------------------------------
- ------------------------------------------------------