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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED JUNE 30, 1998

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

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER 000-23725

BNC MORTGAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0661303
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1063 MCGAW AVENUE, IRVINE, CALIFORNIA 92614-5532
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)

(949) 260-6000
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS

COMMON STOCK, PAR VALUE $0.001

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].

The aggregate market value of the voting stock held by non-affiliates of
Registrant, as of September 14, 1998, was $28,352,292, based upon the closing
price of Registrant's Common Stock on that date. For purposes of this
disclosure, shares of common stock held by directors and executive officers of
Registrant are assumed to be "held by affiliates"; this assumption is not to be
deemed to be an admission by such persons that they are affiliates of
Registrant.

As of September 14, 1998, Registrant had outstanding 5,729,779 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III, Items 10, 11, 12 and 13 is
incorporated by reference to BNC Mortgage, Inc's. proxy statement which will be
filed with the Commission not more than 120 days after June 30, 1998.

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BNC MORTGAGE, INC.

TABLE OF CONTENTS
TO FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1998

PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 38
Item 3. Legal Proceedings........................................... 38
Item 4. Submission of Matters to a Vote of Security Holders......... 38

PART II
Item 5. Market for Registrant's Common Equity and Related 39
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition 41
and Results of Operations.................................
Item 7A. Quantitative and Qualitative Disclosures about Market 46
Risk......................................................
Item 8. Financial Statements and Supplementary Data................. 46
Item 9. Changes in and Disagreements With Accountants on Accounting 46
and Financial Disclosure..................................

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and 46
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 47

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 47
8-K.......................................................
Signatures.................................................. 48

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BNC MORTGAGE, INC.

PART I

ITEM 1. BUSINESS

This Report contains certain "forward-looking statements" which represent
the Company's expectations or beliefs, including, but not limited to, statements
concerning industry performance and the Company's operations, performance,
financial condition, prospects, growth and strategies. For this purpose, any
statements contained in this Report except for historical information may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate," or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors,
including those described in the "Risk Factors" section and elsewhere in this
Report.

GENERAL

BNC Mortgage, Inc. ("BNC" or the "Company"), is a specialty finance company
engaged in the business of originating, purchasing and selling, on a whole loan
basis for cash, non-conforming and, to a lessor extent, conforming, residential
mortgage loans secured by one-to-four family residences. The term "non-
conforming loans" as used herein means (i) subprime loans, which are loans made
to borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment, income
qualification, credit history or a desire to receive funding on an expedited
basis and (ii) non-conforming loan products for primarily high credit borrowers
whose credit scores equal or exceed levels required for the sale or exchange of
their mortgage loans through the Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC"), but where the loan itself
fails to meet conventional mortgage guidelines, such as the principal balance
exceeds the maximum loan limit of $227,150 or the loan structure documentation
does not conform to agency requirements. The Company's loans are made primarily
to refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. The Company has three divisions: (i) a
wholesale subprime division which has relationships with approximately 3,200
approved independent loan brokers and which to date has accounted for
substantially all of the Company's total loan originations, (ii) a wholesale
prime division which originates conforming loans that meet FNMA, FHLMC and other
conventional mortgage guidelines and non-conforming loan products which are not
subprime loans, and (iii) a retail division which markets loans directly to
homeowners.

Since it commenced operations in August 1995, the Company has experienced
significant growth in loan originations, with approximately $788.5 million of
originations in 42 states during fiscal year 1998 compared to $532.6 million of
originations in 33 states and $200.0 million in 21 states during years ended
June 30, 1997 and 1996, respectively. This growth in originations has produced
annual net earnings of $7.2 million in 1998 compared to annual net earnings of
$7.5 million and $417,000 in 1997 and 1996, respectively.

The Company currently sells substantially all of its mortgage loans through
whole loan sales resulting in cash gain on sale of mortgage loans. For the year
ended June 30, 1998 and the years ended June 30, 1997 and 1996, the Company had
mortgage loans sales of $744.4 million, $519.9 million and $156.6 million,
respectively, with resulting cash gain on sale of mortgage loans of $30.4
million, $21.9 million and $4.2 million, respectively.

For the year ended June 30, 1998, 96.6% of the loans originated by the
Company were subprime loans. Substantially all loans originated by the Company
are secured by a first priority mortgage on the subject property. During the
year ended June 30, 1998, less than 1% the principal balance of the loans
originated were secured by second priority mortgages; none of such loans were
originated for the years ended June 30, 1997 or 1996. The Company's core
borrower base consists of individuals who do not qualify for traditional "A"
credit because their credit history, income or other factors cause them not to
conform to standard agency lending

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criteria. Even though substantially all of the loans originated by the Company
for the year ended June 30, 1998 were subprime loans during the years ended June
30, 1998, 1997 and 1996, approximately 62.2%, 57.5% and 51.6% of the principal
balance of the subprime loans originated by the Company, respectively, were to
borrowers with a Company risk classification of "A+" or "A-" while the remainder
were to borrowers with a Company risk classification of "B," "C+," "C" or "C-,"
respectively, representing approximately 37.8%, 42.5% and 48.4% of the total
principal amount of loans originated by the Company. Borrowers with a Company
risk classification of "A+" or "A-" have a very good credit history within the
last 12 to 24 months with minor late payments allowed on a limited basis.
Borrowers with a "B" Company risk classification generally have good credit
within the last 12 months with some late payments. Borrowers with a "C+" risk
classification have some significant derogatory credit in the past 12 months
while those in the "C" category have frequent derogatory consumer credit.
Borrowers with a Company risk classification of "C-" have numerous derogatory
credit items up to and including a bankruptcy in the most recent 12 month
period. During each of the years ended June 30, 1998, 1997 and 1996,
approximately 3.7%, 3.9% and 2.7% of the principal balance of the subprime loans
originated by the Company were to borrowers with a Company risk classification
of "C-." For a tabular presentation of the Company's loan production by borrower
risk classification, see "Loan Production by Borrower Risk Classification."

The Company believes that its primary strengths are (i) the experience of
its management, account executives and staff in the non-conforming lending
industry, which enhances the Company's ability to establish and maintain
long-term relationships with mortgage brokers, (ii) its service oriented sales
culture whereby the Company strives to respond quickly and efficiently to
customer needs and market demands, (iii) its operating philosophy to create
stable and deliberate loan origination growth by utilizing consistent and
prudent underwriting guidelines designed to produce mortgage products readily
saleable in the secondary market and (iv) its availability to manage and control
operating costs in order for it to remain a low cost originator. The Company
enters into a mortgage broker agreement with each of its independent mortgage
brokers. For a description of the contractual nature of the Company's
relationships with its independent mortgage brokers, see "-- Mortgage Loan
Originations -- Wholesale Subprime Division".

GROWTH & OPERATING STRATEGY

The Company's growth and operating strategy is based upon the following key
elements:

Whole Loan Sales for Cash. The Company sells substantially all of its
originated mortgage loans monthly for cash, historically at a premium over the
principal balance of the mortgage loans. The Company enhances earnings and cash
flows from whole loan sales by tailoring the composition of its whole loan pools
to meet the investment preferences of specific buyers. This strategy, as opposed
to securitizations, in which a residual interest in future payments on the loans
is retained, provides certain benefits. The Company receives cash revenue,
rather than recognizing non-cash revenue attributable to residual interests, as
is the case in securitizations, thereby avoiding the risk of having to adjust
revenue in future periods to reflect a lower realization on residual interests
because actual prepayments or defaults exceeded levels assumed at the time of
securitization. By selling its originated loans, the Company also reduces its
exposure to default risk (other than certain first payment defaults) and the
prepayment risk normally inherent in a mortgage lender's business. Management
believes that the cash received in loan sales provides the Company greater
flexibility and operating leverage than a traditional portfolio lender, which
holds the loans it originates, by allowing the Company to generate income
through interest on loans held for sale and gain on loans sold. This strategy of
frequent loan sales has been an important factor in generating the Company's
earnings, creating cash flow to fund operations, decreasing the need for other
forms of financing and reducing the level of interest rate and default risk
borne by the Company.

Continuing Growth of Subprime Wholesale Production. The Company intends to
continue the growth of its Wholesale Subprime Division through greater
penetration in existing markets and selective geographic expansion. Greater
market penetration is expected to be accomplished through additional sales
personnel to existing origination locations in order to provide continued high
levels of service to brokers to increase loan origination and further the basis
for repeat business, referral and other future lending opportunities. For each
of the years ended June 30, 1998, 1997 and 1996, the Company's loan originations
primarily were in
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California, Illinois, Florida, Hawaii, Utah, Wisconsin, Colorado, Massachusetts,
Maryland, Oregon, Washington, Ohio and Indiana. The Company will seek to improve
and enhance relationships with mortgage brokers by continuing to (i) improve
response times to loan applications, (ii) streamline wholesale origination and
funding activities and (iii) provide a broad selection of attractive product
offerings. The Company anticipates that short-term geographic expansion will
focus on the development of lending operations in Texas, Pennsylvania, Virginia,
Tennessee, Arizona, New Mexico and Nevada. Management intends to focus further
expansion on those geographic regions which it believes represent the most
attractive markets for the Company's products.

Continuing Growth of Wholesale Prime Production. The Company established a
Wholesale Prime Division in 1998 to originate conforming mortgage loans that
meet FNMA, FHLMC and other conventional mortgage guidelines and non-conforming
loans which are not subprime loans. The Company's strategy focus is on
originating loans using the same marketing strategies as its Wholesale Subprime
Division. The division's operations are coordinated at the Company's executive
offices, and to a lesser extent, at its local sales offices. The Company
operates under the name Heritage National Mortgage, Inc. and is primarily
focused on establishing a California operation, with the goal of becoming a
national wholesale lender.

Continuing Growth of Retail Production. The Company established a retail
loan center to originate mortgage loans, under the name, Simple Mortgage USA,
Inc. The retail division is being developed to originate loans directly from
borrowers using various marketing telemarketing and advertising methods,
including an Internet based lead generator. The Company's Internet address is
www.simpleusa.com.

Expanding Product Offerings. The Company frequently reviews and tailors its
products and pricing for competitiveness, as well as introducing new products to
meet the needs of its borrowers and brokers, expand its customer base and
diversify its product mix. The Company utilizes long-term relationships with
mortgage loan brokers to quickly and efficiently tailor existing products or
introduce new products to satisfy its broker and consumer product needs. Also,
the Company attempts to anticipate changing demands and formulate new products
accordingly. Examples of recently introduced products include loans with higher
loan-to-value ratios for borrowers with good credit histories (see "-- Product
Types"). The Company believes that these mortgage products enable the Company to
increase loan production from brokers who have customers seeking such products
and from borrowers identified through the Company's retail marketing efforts.

Low Cost Originator of Mortgage Loans. The Company's success has been due
in part on its ability to manage and control operating costs. The Company has
established a low-cost origination network. For the years ended June 30, 1998,
1997 and 1996, the Company's cost to originate averaged 3.4%, 3.1% and 3.0% of
loan volume, respectively. Wholesale expansion strategy; the Company initially
penetrates a market with a limited number of employees to recruit brokers for
the Company's wholesale network. The Company typically opens an office in a
market only after it achieves a minimum loan volume. By utilizing this strategy,
the Company believes it can maintain lower overhead expenses compared with
companies utilizing a more extensive branch office system. In addition, the
Company has the flexibility to expand or contract its operations quickly in
response to local demand.

Securitization Flexibility. While a substantial majority of the Company's
mortgage loan originations will continue to be sold through whole loan sales in
cash transactions, the Company may in the future sell a portion of its loans
through securitizations. The ability to conduct securitizations may provide the
Company with the flexibility to take advantage of favorable pricing
differentials between the securitization and whole loan sales markets that may
exist from time to time. The Company may seek to enhance earnings by
securitizing loans with characteristics which the securitization market
considers most favorable. The percentage of loans, if any, sold through
securitizations will be based on economic conditions, secondary market
conditions and available financial resources.

The Company intends to utilize its primary strengths and growth and
operating strategy to remain competitive in the mortgage industry. Increased
competition in the mortgage industry could have the effect of (i) lowering gains
that may be realized on loan sales, (ii) reducing an individual company's volume
of loan originations and sales, (iii) increasing demand for experienced
personnel increasing the likelihood such personnel will be recruited by
competitors and (iv) lowering the industry standard for underwriting guidelines

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as competitors attempt to increase or maintain market share in the face of
increased competition. In the past, certain of these factors have caused the
revenues and net income of many participants in the mortgage industry, including
the Company, to fluctuate from quarter to quarter.

MORTGAGE LOAN ORIGINATIONS

The Company originates mortgage loans through its Wholesale and Retail
Divisions. The Wholesale Divisions originate loans through a network of
independent mortgage brokers and the Retail Division solicits loans directly
from prospective borrowers.

The following table sets forth selected information relating to total
mortgage loan originations during the periods shown:

YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage loan originations:
Wholesale Subprime Division principal balance.............. $750,406 $507,250 $199,963
Wholesale Prime Division principal balance................. 26,716 -- --
Retail Division principal balance.......................... 11,357 7,451 --
Small Commercial principal balance(1)...................... -- 17,920 --
-------- -------- --------
$788,479 $532,621 $199,963
======== ======== ========
Number of mortgage loans................................... 7,897 5,425 1,988
Average principal balance per loan......................... $ 100 $ 98 $ 101
Weighted average initial loan-to-value ratio(2)............ 74.4% 69.3% 68.5%
Weighted average fixed interest rate....................... 10.2% 10.5% 10.7%
Weighted average adjustable interest rate.................. 9.7% 9.2% 8.6%
Weighted average fixed/adjustable interest rate............ 9.6% 9.5% 10.0%
"A+" and "A-" loans as a percentage of total subprime
mortgage loans originated(3)............................. 66.1% 57.5 51.6%

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(1) The Company discontinued the origination of small commercial loans in April
1997.

(2) Determined by dividing the amount of the loan by the lesser of the purchase
price or the appraised value of the mortgaged property at origination.

(3) Based on initial principal balance, and excludes conforming loans, and
non-conforming loans which are not subprime loans originated by the
Wholesale Prime Division.

Substantially all mortgage loans originated by the Company are secured by a
first priority mortgage on the subject property and for the year ended June 30,
1998, less than 1% of the principal balance of the mortgage loans originated
were secured by second priority mortgages; none of such mortgage loans were
originated for the years ended June 30, 1997 and 1996.

WHOLESALE SUBPRIME DIVISION

Historically, the Company's primary source of mortgage loans has been its
Wholesale Subprime Division, which maintains relationships with approximately
3,200 independent mortgage brokers which, during the year ended June 30, 1998,
originated mortgage loans in 42 states. During the years ended June 1997 and
1996, the Company had approximately 1,830 and 620 approved brokers and
originated loans in 33 and 21 states, respectively. At June 30, 1998, the
Company's wholesale subprime division had 45 origination locations and employed
96 account executives who service mortgage brokers. The states in which the
Company had origination locations at June 30, 1998 were California, Illinois,
Florida, Hawaii, Utah, Wisconsin, Oregon, Massachusetts, Maryland, Colorado,
Indiana, Ohio, Washington, Idaho, Missouri, Michigan, Georgia, South Carolina,
Rhode Island, Oklahoma, Pennsylvania, Tennessee, Texas, North Carolina and
Minnesota. The Wholesale Subprime Division funded $750.4 millions in loans, or
95.2%, of the Company's total mortgage loan

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production during the year ended June 30, 1998. During the year ended June 30,
1998, the Company's 10 largest producing brokers originated approximately 9.7%
of the Company's mortgage loans, with the largest broker accounting for
approximately 1.5%.

Mortgage loan brokers act as intermediaries between property owners and the
Company in arranging mortgage loans. The Company enters into a mortgage broker
agreement with each of its independent mortgage brokers. Pursuant to the
agreement, the Company and the mortgage broker establish a non-exclusive
relationship whereby the mortgage broker will, from time to time and at its
option, submit completed mortgage loan application packages from the general
public to the Company for funding consideration and facilitate the closing of
mortgage loan application packages approved for funding by the Company. The
broker's role is to identify the applicant, assist in completing the loan
application form, gather necessary information and documents and serve as the
Company's liaison with the borrower through the lending process. The Company
reviews and underwrites the applications submitted by the broker, approves or
denies the application, sets the interest rate and other terms of the loan and,
upon acceptance by the borrower and satisfaction of all conditions imposed by
the Company, funds the loan. Because brokers conduct their own marketing and
employ their own personnel to obtain loan applications and maintain contact with
borrowers, originating loans through the Wholesale Subprime Division allows the
Company to increase its loan volume without incurring the higher marketing,
labor and other overhead costs associated with increased retail originations.
The Company has no obligation to pay a mortgage broker any sum owed to the
mortgage broker by a borrower, nor does the Company have any obligation to pay a
mortgage broker any sum with respect to accounts of any mortgage loan
application package which the Company does not fund and close.

Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The loan is logged-in for
Federal Real Estate Procedures Settlement Act of 1974, as amended ("RESPA") and
other regulatory compliance purposes, underwritten and, in most cases,
conditionally approved or denied within 24 hours of receipt. Because mortgage
brokers generally submit individual loan files to several prospective lenders
simultaneously, the Company attempts to respond to each application as quickly
as possible. If approved, a "conditional approval" will be issued to the broker
with a list of specific conditions to be met (for example, credit verifications
and independent third-party appraisals) and additional documents to be supplied
prior to the funding of the loan. The originating account executive and a
production assistant will work directly with the submitting mortgage broker to
collect the requested information and to meet the underwriting conditions and
other requirements. In most cases, the Company funds loans within 15 to 40 days
after approval of the loan application. All independent mortgage brokers who
submit loan applications to the Company must be registered or licensed as
required by the jurisdiction in which they operate and must be approved by the
Company. The Company audits 100% of its brokers on an annual basis in order to
confirm possession of a current license, updated financials on file and any
changes in broker staff or address.

The Company believes that an important element in developing, maintaining
and expanding its independent mortgage broker relationships is to provide a high
level of product knowledge and customer service to its brokers. Each account
executive receives training prior to being assigned to a territory which, in
most cases, includes experience in the loan production department so that the
account executive will be familiar with all phases of loan origination and
production. This training enables the account executive to quickly review a loan
application in order to identify the borrower's probable risk classification and
then assist the broker in identifying the appropriate product for the borrower,
thereby enhancing the likelihood that the loan will be approved at the rate and
on the terms anticipated by the borrower. After a loan package is submitted to
the Company, the account executive and a production assistant provide assistance
to the broker to complete the loan transaction. Account executives are
compensated based on the number and the dollar volume of loans funded.

WHOLESALE PRIME DIVISION

The Company established a Wholesale Prime Division during the quarter ended
March 1998 to originate, purchase and sell mortgage loans primarily made to high
credit quality borrowers. The Company considers "high credit quality borrowers"
to be those whose credit scores equal or exceed levels required for the sale or

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exchange of their mortgage loans through FNMA or FHLMC. The division originates
a variety of mortgage loans including (i) loans which qualify for inclusion in
guarantee programs sponsored by FNMA or FHLMC, (ii) non-conforming mortgage
loans that do not meet agency guidelines, such as the principal balance exceeds
the maximum loan limit of $227,150, or the loan structure or documentation does
not conform to the agency's requirements, or (iii) other niche loan products.

The Company believes that an important element in development, and
expanding its service to independent mortgage brokers is the ability to offer
conventional mortgage loan products and non-conforming loans which are not
subprime loans as well as its subprime products.

At June 30, 1998, the Company employed seven account executives who service
mortgage brokers located primarily in Southern California. During the year ended
June 30, 1998, through its wholesale prime division, the Company originated
approximately $26.7 million in loans, or 3.4%, of its Company's total mortgage
loan production.

The Company has sold its prime loans during the year on a serviced released
basis for cash to various investors, and originated substantially all of its
loans through independent mortgage loan brokers.

The following table sets forth selected information relating to a wholesale
loan originations during the periods shown:

YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)

WHOLESALE SUBPRIME DIVISION
Principal balance.......................................... $750,406 $507,250 $199,963
Average principal balance per loan......................... $ 99 $ 96 $ 101
Weighted average initial loan-to-value ratio............... 74.4% 69.5% 68.5%
Weighted average interest rate............................. 9.7% 9.6% 9.4%
Occupancy:
Owner occupied........................................... 87.7% 85.1% 86.6%
Non-owner occupied....................................... 12.3% 14.9% 13.4%

YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)

WHOLESALE PRIME DIVISION
Principal balance.......................................... $ 26,716 -- --
Average principal balance per loan......................... $ 142 -- --
Weighted average initial loan-to-value ratio............... 72.8% --
Weighted average interest rate............................. 7.6% -- --
Occupancy:
Owner occupied........................................... 90.4% -- --
Non-owner................................................ 9.6% -- --

RETAIL DIVISION

The Company's Retail Division, which markets mortgage loans directly to
homeowners, began operations in March 1996. The Company operates the Retail
Division, which as of June 30, 1998, consisted of 31 persons, including 13
account executives, to further diversify loan production sources and to capture
origination fees typically collected by retail brokers. By creating a direct
relationship with the borrower, retail lending provides a sustainable loan
origination franchise, offering greater control over the lending process while
generating loan origination fees to offset the higher costs of retail lending.
The cash gain on sales of retail loans is generally greater than the cash gain
on sales of broker-sourced loans because, unlike in the case of broker-sourced
originations, a third party does not share in the fees and points paid by the
borrower. The Company's Retail Division offers the same products as those of its
Wholesale Divisions.

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The Company, while maintaining its focus on its Wholesale Divisions, has
recently formulated a low cost retail marketing strategy designed to produce
growth in its Retail Division. The Company's strategy focuses on loan
originations from borrowers through telemarketing and advertising coordinated by
its retail sales staff primarily at the Company's executive offices and, to a
lesser extent, at local sales offices. This focus on centralization enables the
Company to conduct its retail operations with less overhead than a retail
business that operates exclusively through a sales office network. The Company
originated through its Retail Division approximately $11.3 million, or 1.4%, and
$7.4 million, or 1.4%, of the Company's total mortgage loan production during
the years ended June 30, 1998 and 1997, respectively.

The following table sets forth selected information relating to retail loan
originations during the periods shown:

YEAR ENDED JUNE 30,
----------------------------
1998 1997 1996(1)
------- ------ -------
(DOLLARS IN THOUSANDS)

RETAIL DIVISION
Principal balance........................................... $11,357 $7,451 --
Average principal balance per loan.......................... 84 83 --
Weighted average initial loan-to-value ratio................ 73.3% 70.1% --
Weighted average interest rate.............................. 9.1% 9.6% --
Occupancy:
Owner occupied............................................ 93.1% 87.8% --
Non-owner occupied........................................ 6.9% 12.2% --

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(1) The retail division initiated operations in March 1996.

PRODUCT TYPES

The Company primarily offers subprime loans and, to a lessor extent,
conforming mortgage products and non-conforming loans which are not subprime
loans.

Subprime Mortgages:

The Company offers both fixed-rate and adjustable-rate subprime loans, as
well as subprime loans with an interest rate that is initially fixed for a
period of time and subsequently converts to an adjustable-rate. Most of the
adjustable-rate loans originated by the Company are offered at a low initial
rate, sometimes referred to as a "teaser" rate. At each interest rate adjustment
date, the Company adjusts the rate, subject to certain limitations on the amount
of any single adjustment, until the rate charged equals the fully indexed rate.
The Company's subprime borrowers fall into six subprime risk classifications and
products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification (see "-- Underwriting"). The Company offers a
wide variety of interest rate and points paid combinations on many of its
products so that customers may elect to pay higher points at closing to secure a
lower rate over the life of the loan or pay a higher interest rate and reduce or
eliminate points payable at closing. The interest rate on the Company's subprime
adjustable rate mortgages is typically tied to six-month LIBOR and the Company
offers 1.0% or 1.5% semi-annual interest rate caps and 6.5% or 7.0% life caps.
The Company sets subprime mortgage loan coupons and fees after considering
several factors, including the borrower's credit rating, the loan-to-value ratio
of the property, the state in which the loan was originated and competitive and
market conditions. The Company's maximum subprime loan amounts are generally
$500,000 with a loan-to-value ratio of up to 90%. The Company does, however,
offer larger subprime loans with lower loan-to-value ratios on a case-by-case
basis, and also offers products that permit a loan-to-value ratio of up to 90%
for selected borrowers with a Company risk classification of "A+" or "A-".
Subprime loans originated by the Company for the year ended June 30, 1998, 1997
and 1996 had an average principal balance per loan of $99,845, $98,179 and
$100,585, respectively, and a weighted average initial loan-to-value ratio of
74.3%, 69.3% and 68.5%, respectively. Unless prohibited by state law or
otherwise waived by the Company upon the payment by the related borrower of
higher origination fees and a higher interest rate,

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the Company generally imposes a prepayment penalty on the borrower.
Approximately 58.0%, 58.1% and 51.2% of the subprime loans the Company
originated during the years ended June 30, 1998, 1997 and 1996, respectively,
provided for the payment by the borrower of a prepayment charge in limited
circumstances on certain full or partial prepayments. The Company's current
subprime products are as follows:

Standard Products:

2-Year or 5-Year Fixed/Adjustable Rate Programs -- A 30-year fully
amortized program with the initial interest rate fixed for the first two or five
years of the loan. Beginning with the 25th or 61st monthly payment, the loan
converts to an adjustable rate, LIBOR-indexed loan. There is no rate cap on the
first adjustment (at conversion). Thereafter, all interest rate caps apply as
described in the LIBOR loan product.

6-Month LIBOR Adjustable -- An adjustable rate first mortgage program
indexed to six-month LIBOR, featuring a semi-annual interest rate cap of
1.0% - 1.5%, and a life cap of 6.5% - 7.0%. This product is fully amortized over
a 30-year life.

15- or 30-Year Fixed Rate Program -- A fixed rate first mortgage loan
program fully amortized over a 15- or 30-year period.

All of the standard mortgage products have prepayment penalties (where
legally allowed) for a period of one to five years.

Other Products:

90% LTV First Mortgage Loan -- A 30-year fully amortized adjustable rate or
fixed rate program. The adjustable rate program is indexed to LIBOR featuring a
semi-annual interest rate cap of 1.0% and a life cap of 6.5%. This product is
limited to the A+ and A- credit risk categories.

Second Mortgage Program -- Fixed rate amortizing and fixed rate with
balloon payments are offered. This product is limited to the A+ through B credit
risk, with a maximum combined loan-to-value ratio equal to 100%. Underwriting
guidelines are similar to that of the Company's standard products.

125% LTV Program -- A fixed rate first or second mortgage with an initial
loan-to-value ratio of up to 125% with terms ranging from five to 25 years
limited to borrowers with good credit histories. The use of loan proceeds is
limited to debt consolidation, home improvements and/or asset purchases.
Underwriting guidelines are primarily credit score and mortgage history driven.

Prime Mortgages:

The Company offers both fixed rate and adjustable rate conforming loan
programs that meet the guidelines for purchase by government sponsored entities,
such as FNMA and FHLMC, which guarantee mortgage backed securities and permanent
investors in mortgage backed securities secured by or representing an ownership
interest in such mortgage loans and loans that fail to satisfy the criteria to
be a conforming loan for one or more reasons.

These loan products can be categorized as follows:

Conforming Mortgage Loans -- These mortgage loans satisfy the underwriting
criteria for sale or exchange through one of the Agencies.

Non-conforming Mortgage Loans which are not Subprime Loans -- These
mortgage loans fail to satisfy the criteria to be an Agency mortgage loans for
one or more reasons. Certain of these mortgage loans ("Jumbos") generally meet
the Agency criteria but exceed the maximum loan size (currently $227,150 for
single family, one-unit mortgage loans in the continental United States). Jumbos
are generally eligible for sale to one of the national privately-sponsored
mortgage conduits.

Certain other non-conforming mortgage loans may fail to satisfy other
elements of the Agency underwriting criteria, such as those relating to
documentation, employment history, income verification, loan-to-value ratios,
qualifying ratios or borrower net worth. The Company refers to this category of
mortgage loans

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generally as Alternative A ("ALT A") mortgage loans. The Company focuses on an
applicant's credit score, in conjunction with other factors, in underwriting its
ALT A mortgage loans. While some ALT A mortgage loans exceed the maximum loan
size eligible for sale through one of the Agencies, many have principal balances
within the Agency limits.

Second Mortgage Loans -- Second mortgage loans are generally secured by
second liens on the related property. The mortgage loans can take the form of a
home equity line of credit ("HELOC") or a closed-end loan. Both types of home
equity mortgage loans are designed primarily for high credit quality borrowers
and are underwritten according to the Company's criteria for second-lien
mortgage loans. These mortgage loans are originated in some instances in
conjunction with the Company's origination of a first-lien mortgage loan on the
related property.

The following table sets forth selected information relating to loan
originations by product type for the periods indicated:

YEAR ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)

Subprime Mortgages:
2-Year Fixed............ $539,934 68.5% 5,220 $103,436 9.7% 6.2% 75.4%
6-Month LIBOR
Adjustable............ 100,601 12.8 816 123,286 9.7% 6.3% 74.8%
30-Year Fixed........... 83,079 10.5 1,136 73,133 10.2% -- 71.1%
5-Year Fixed............ 22,537 2.9 211 106,810 9.3% 6.3% 71.8%
15-Year Fixed........... 11,825 1.5 231 51,191 10.2% -- 65.1%
CLTV125/2ndTD........... 3,787 0.4 95 39,863 13.5% -- 35.5%
-------- ----- -----
Subtotal............ 761,763 96.6 7,709 98,815 9.7% -- 74.4%
-------- ----- -----
Prime Mortgages(3):
Non-conforming.......... 15,957 2.0 84 189,964 7.8% -- 74.6%
Conforming.............. 10,119 1.3 85 119,047 7.1% -- 73.4%
2nd TD.................. 640 0.1 19 33,684 10.9% -- 16.8%
-------- ----- -----
Subtotal............ 26,716 3.4 188 142,106 7.6% -- 72.8%
-------- ----- -----
$788,479 100.0% 7,897 99,845 9.7% 6.2% 74.4%
======== ===== =====

YEAR ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE MARGIN RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)

Subprime Mortgages:
2-Year Fixed............ $289,549 54.4% 2,838 $102,027 9.5% 6.4% 70.5%
6-Month LIBOR
Adjustable............ 110,870 20.8 1,066 104,005 9.2% 6.5% 70.2%
30-Year Fixed........... 74,162 13.9 1,011 73,355 10.5% -- 66.1%
5-Year Fixed............ 30,379 5.7 286 106,221 9.2% 6.5% 67.4%
15-Year Fixed........... 9,741 1.8 198 49,198 10.6% -- 62.6%
Small Commercial(4)..... 17,920 3.4 26 689,231 9.8% -- 63.8%
-------- ----- -----
$532,621 100.0% 5,425 98,179 9.6% 6.4% 69.3%
======== ===== =====

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YEAR ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE MARGIN RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)

Subprime Mortgages:
2-Year Fixed............ $ 61,141 30.6% 592 $103,280 10.0% 5.5% 67.6%
6-Month LIBOR
Adjustable............ 96,866 48.4 901 107,509 8.6% 5.9% 70.6%
30-Year Fixed........... 29,993 15.0 371 80,843 10.7% -- 65.4%
5-Year Fixed............ 10,020 5.0 94 106,595 10.0% 5.7% 64.9%
15-Year Fixed........... 1,943 1.0 30 64,764 10.7% -- 65.6%
-------- ----- -----
$199,963 100.0% 1,988 100,585 9.4% 5.7% 68.5%
======== ===== =====

- ---------------
(1) Each fixed rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest at
the adjustable rate adjust every six months to a new rate through the term
of the loan. The weighted average interest rate for loans bearing interest
at an adjustable rate is the weighted average of the rates of such loans
during the initial six month period. Loans bearing interest at the
fixed/adjustable rate bear interest at a fixed rate for an initial period
commencing on the date of funding (e.g., two years or five years) and
thereafter adjust to new rates every six months for the remaining term of
the loans. The weighted average interest rate for loans bearing interest at
a fixed/adjustable rate is the weighted average of the rates of such loans
during the initial period.

(2) The margin for a loan is a fixed amount set for the life of the loan, which
when added to the index (as described below) determines the interest rate on
the loan (subject to interest rate floors, ceilings and caps). The index
used by the Company is the six-month LIBOR, as published each Monday in the
Wall Street Journal. Fixed rate loans have no margin because such loans are
not tied to an index.

(3) The Company's Wholesale Prime Division commenced operations in March 1998.
The division originates loans products for primarily high credit quality
borrowers whose credit scores equal or exceed levels required for the sale
or exchange of their mortgage loans through FNMA or FHLMC.

(4) The Company discontinued the origination of small commercial loans in April
1997.

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GEOGRAPHIC CONCENTRATION

The following table sets forth aggregate dollar amounts and the percentage
of all loans originated by the Company by state for the periods shown:

FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
ORIGINATED ORIGINATIONS ORIGINATED ORIGINATIONS ORIGINATED ORIGINATIONS
---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)

California............ $236,735 30.0% $196,526 36.9% $107,063 53.6%
Illinois.............. 130,780 16.6 55,351 10.4 13,741 6.9
Florida............... 70,758 9.0 28,597 5.4 7,430 3.7
Hawaii................ 46,740 5.9 63,868 12.0 12,021 6.0
Utah.................. 30,459 3.9 20,486 3.8 6,934 3.5
Wisconsin............. 29,176 3.7 22,174 4.2 5,251 2.6
Colorado.............. 27,386 3.5 24,102 4.5 14,693 7.3
Massachusetts......... 25,904 3.3 6,277 1.2 -- --
Maryland.............. 24,701 3.1 5,010 0.9 -- --
Oregon................ 22,647 2.9 21,123 4.0 12,420 6.2
Washington............ 23,079 2.9 9,495 1.8 9,564 4.8
Ohio.................. 17,442 2.2 19,938 3.7 2,472 1.2
Indiana............... 17,180 2.2 12,757 2.4 -- --
Missouri.............. 14,669 1.9 10,712 2.0 27 0.0
Idaho................. 12,526 1.6 8,314 1.6 2,246 1.1
Michigan.............. 9,700 1.2 2,353 0.4 -- --
Other(1).............. 48,597 6.1 25,538 4.8 6,101 3.1
-------- ----- -------- ----- -------- ------
$788,479 100.0% $532,621 100.0% $199,963 100.0%
======== ===== ======== ===== ======== ======

- ---------------
(1) Except for Texas which accounted for 1.3% for the year ended June 30, 1996,
no other state accounted for greater than 1.0%.

QUALITY CONTROL AND UNDERWRITING

The Company has separate and distinct quality controls and underwriting for
each of its Wholesale Subprime Division and Wholesale Prime Division.

WHOLESALE SUBPRIME DIVISION QUALITY CONTROL

The Company has implemented a subprime loan quality control process
designed to ensure sound lending practices and compliance with the Company's
policies and procedures. Prior to the funding of a subprime loan, the Company
performs a "pre-funding quality control audit" which consists of the
verification of a borrower's credit and employment, utilizing automated services
and verbal verifications.

Properties underlying the potential subprime mortgage loans are appraised
by an appraiser selected by the submitting broker. Every independent appraisal
is reviewed by the Company's chief subprime appraiser (the "Chief Subprime
Appraiser"), other Company appraisers or by another independent appraiser
approved by the Company's Chief Subprime Appraiser to confirm the adequacy of
the property as collateral prior to funding.

Subsequent to funding, the Company's quality assurance department audits
100% of all subprime closed loans. The department performs a review of
documentation for compliance with established underwriting guidelines and
lending procedures along with independent appraisal reviews and
recertifications. All funding documents are reviewed for accuracy, completeness
and adherence to corporate, state and federal require-

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ments. As a part of this audit process, deficiencies are reported to the
Company's senior management to determine trends and the need for additional
training of Company personnel.

UNDERWRITING

The Company originates its subprime mortgage loans in accordance with the
underwriting criteria (the "Underwriting Guidelines") described below. The
subprime loans the Company originates generally do not satisfy underwriting
standards such as those utilized by FNMA and FHLMC; therefore, the Company's
subprime loans are likely to result in rates of delinquencies and foreclosures
that are higher, and may be substantially higher, than those rates experienced
by portfolios of mortgage loans underwritten in a more traditional manner. The
Subprime Underwriting Guidelines are intended to evaluate the credit history of
the potential borrower, the capacity of the borrower to repay the subprime
mortgage loan, the value of the real property and the adequacy of such property
as collateral for the proposed loan. Based upon the underwriter's review of the
subprime loan application and related data and application of the Underwriting
Guidelines, the loan terms, including interest rate and maximum loan-to-value,
are determined.

The Company employs experienced underwriters and the Company's chief
subprime underwriter (the "Chief Subprime Underwriter") must approve the hiring
of all underwriters, including those located in the regional offices and branch
locations. The Company's underwriters are required to have had either
substantial underwriting experience with a consumer finance company or other
subprime or non-conforming lender or substantial experience with the Company in
other aspects of the subprime or non-conforming mortgage finance industry before
becoming part of the Company's underwriting department. As of June 30, 1998, the
Company employed 44 underwriters with an average of approximately five years of
non-conforming mortgage lending experience. All underwriters participate in
ongoing training, including regular supervisory critiques of each underwriter's
work. The Company believes that its experienced underwriting personnel have the
ability to analyze the specific characteristics of each loan application and
make appropriate credit judgments.

The underwriting appraisal staff reviews the value of the underlying
collateral based on a full appraisal completed by pre-approved qualified
licensed independent appraisers. All appraisers are required to conform to the
Uniform Standards of Professional Appraisal Practice adopted by the Appraisal
Standards Board of the Appraisal Foundation. In addition, every independent
appraisal is reviewed by the Company's Chief Subprime Appraiser, other Company
appraisers or by another independent appraiser approved by the Company's Chief
Subprime Appraiser to confirm the adequacy of the property as collateral.

The Underwriting Guidelines include three levels of applicant documentation
requirements, referred to as the "Full Documentation," "Lite Documentation" and
"Stated Income Documentation" programs. Under each of the programs, the Company
reviews the applicant's source of income, calculates the amount of income from
sources indicated on the loan application or similar documentation, reviews the
credit history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed, and reviews the property. In determining the
ability of the applicant to repay the loan, the Company's underwriters use (i) a
qualifying rate that is equal to the stated interest rate on fixed-rate subprime
loans, (ii) the initial interest rate on subprime loans which provide for two,
three or five years of fixed payments before the initial interest rate
adjustment, or (iii) one percent above the initial interest rate on other
adjustable-rate subprime loans. The Underwriting Guidelines require that
subprime mortgage loans be underwritten in a standardized procedure which
complies with applicable federal and state laws and regulations and requires the
Company's underwriters to be satisfied that the value of the property being
financed, as indicated by an appraisal and the appraisal review. In general, the
maximum loan amount for subprime mortgage loans originated under the programs is
$500,000; however, larger subprime loans may be approved on a case-by-case
basis. The Underwriting Guidelines permit one-to-four family residential
property subprime loans to have loan-to-value ratios at origination of generally
up to 80%, or up to 90% for borrowers in the Company's highest credit grade
categories, depending on, among other things, the purpose of the mortgage loan,
a borrower's credit history, repayment ability and debt service-to-income ratio,
income documentation, as well as the type and use of the property.

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Under the Full Documentation program, applicants are generally required to
submit two written forms of verification of stable income for at least 12
months. Under the Lite Documentation program, one such form of verification is
required for six months. Under the Stated Income Documentation program, an
applicant may be qualified based upon monthly income as stated on the subprime
mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that with respect to salaried employees there be a
telephone verification of the applicant's employment. Verification of the source
of funds required to be deposited by the applicant into escrow in the case of a
purchase money loan is generally required under the Full Documentation program
guidelines and on all purchase loans where the loan-to-value ratio is greater
than 80%. No such verification is required under any of the programs where the
loan-to-value ratio is less than 80%. The maximum loan-to-value ratio is reduced
by 5% to 10% for the Lite Documentation and Stated Income Documentation
programs. The level of documentation percentages of subprime loan originations
are as follows:

YEAR ENDED JUNE 30,
-----------------------
1998 1997 1996
----- ----- -----

Full........................................................ 56.2% 50.5% 50.9%
Stated Income............................................... 43.1 48.8 49.1
Lite........................................................ 0.7 0.7 --
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====

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The Company's categories and criteria for grading the credit history of
potential borrowers is set forth in the table below. Generally, borrowers in
lower credit grades are less likely to satisfy the repayment obligations of a
subprime mortgage loan and, therefore, are subjected to lower loan-to-value
ratios and are charged higher interest rates and loan origination fees. Subprime
Loans made to lower credit grade borrowers, including credit-impaired borrowers,
entail a higher risk of delinquency and may result in higher losses than loans
made to borrowers who use conventional mortgage sources. The Company believes
that the amount of equity present in the collateral securing its subprime loans
generally mitigates these risks.

UNDERWRITING GUIDELINES(1)

A+ RISK A- RISK B RISK C+ RISK C RISK
----------------- ----------------- ----------------- ----------------- -----------------

Existing Mortgage One 30-day late Maximum of two Maximum of four Maximum six 30- Unlimited number
payment in the 30-day late 30-day late day late of 30-day and 60-
last 12 months. payments in the payments within payments; or, day late payments
last 12 months. the last 12 four 30-days, one and a maximum of
months allowed if 60-day and one one 120-day late
LTV is greater 90-day late payment within
than 80%. Maximum payment in the the last 12
four 30-day late last 12 months if months. There may
payments; or, two LTV is 75% or be a current
30-day late less. less. Maximum notice of
payments and one five 30-day late default, however
60-day late payments and no the maximum
payment in the 60-day late delinquency
last 12 months if payments if LTV cannot exceed 120
LTV is 80% or is greater than days.
less. 75%. Maximum six
30-day payments
if LTV is greater
than 65% and loan
is under the
Stated Income
Documentation
program.
Other Credit Very good to Very good credit Generally good Some significant Frequent
excellent credit history within credit within the derogatory credit derogatory
within the last the last 12 last 12 months. in the past 12 consumer credit.
24 months. Minor months. Minor Some late months. Collections and
late payments late payments payments (not Generally, chargeoffs may
(not more than 30 (not more than 60 more than 90 collections and remain open after
days) may be days) may be days) may be chargeoffs not funding.
allowed on a allowed on a allowed. more than $2,000
limited basis. limited basis. may remain open
after closing.
Bankruptcy filings Generally, no Generally, no Generally, no Chapter 7 Chapter 7
bankruptcy bankruptcy bankruptcy bankruptcy must Bankruptcy must
filings in the filings in the filings in the have been have been
last two years. last two years. last two years. discharged at discharged at
least 12 months least six months
prior to prior to
application. application.
Chapter 13 Chapter 13
Bankruptcy must Bankruptcy must
have been filed have been filed
for at least 24 for at least 18
months and months and
borrower must borrower must
have paid have paid
according to the according to the
Chapter 13 Plan. Chapter 13 Plan.
Chapter 13 Chapter 13
Bankruptcy must Bankruptcy must
be paid or be paid or
discharged at discharged at
closing. closing.
Debt service-to- 45% 45% to 90% LTV 45% to 85% LTV 50% to 80% LTV 60%
income ratio 50% to 80% LTV 50% to 80% LTV 55% to 75% LTV
55% to 75% LTV 60% to 70% LTV
Minimum LTV(2) 90% 90% 85% 80% 70%

C- RISK
-----------------

Existing Mortgage Unlimited 30- and
60-day late
payments and a
maximum of one
150-day late
payment if LTV is
greater than 65%,
maximum one
180-day late
payment if LTV is
less than 65%.
Delinquencies
more than 180
days may be
allowed if LTV is
less than 60%.
Other Credit Significant
credit defaults.
Collections and
chargeoffs may
remain open after
closing.
Bankruptcy filings Current
Bankruptcy.
Bankruptcy
allowed on a case
by case basis;
Bankruptcy must
be paid or
discharged at
closing.
Debt service-to- 60%
income ratio
Minimum LTV(2) 70%

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

(1) The letter grade applied to each risk classification reflects the Company's
internal standards and does not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means loan-to-value.

(2) The maximum LTV set forth in the table is for borrowers providing Full
Documentation. The LTV is reduced for Lite Documentation and Stated Income
Documentation, if applicable.

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The Company evaluates its Underwriting Guidelines on an ongoing basis and
periodically modifies the Underwriting Guidelines to reflect the Company's
current assessment of various issues related to an underwriting analysis. In
addition, the Company adopts underwriting guidelines appropriate to new loan
products, such as those offered by the Retail Division. The conventional
mortgage loans and second mortgage loans, including 125% loan-to-value loans,
offered by the Retail Division are underwritten to the standards of the intended
buyers thereof and utilize information not considered by the Company in its
Subprime Underwriting Guidelines, including credit scores.

Exceptions. As described above, the Company uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis,
the Company's underwriters may determine that the prospective borrower warrants
a risk category upgrade, a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception or an exception from certain requirements
of a particular risk category (collectively called an "upgrade" or an
"exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, including among others: low
loan-to-value ratio; pride of ownership; stable employment; and the length or
residence in the subject property. Accordingly, the Company may classify certain
mortgage loan applications in a more favorable risk category than other mortgage
loan applications that, in the absence of such compensating factors, would only
satisfy the criteria of a less favorable risk category.

Wholesale Prime Division Quality Control. Underwriting. The Company
originates its conforming and nonconforming loans in accordance with the certain
underwriting standards to achieve the quality of mortgages required by either
the agencies or its secondary market investors.

The Company generally performs a pre-funding audit on each mortgage loan.
This audit includes a review for compliance with applicable underwriting program
guidelines and accuracy of the credit report and telephone verification of
employment. The Company performs a post-funding quality control review on a
minimum of 10% of the mortgage loans originated or acquired for complete
re-verification of employment, income and liquid assets used to qualify for such
mortgage loan. Such review also includes procedures intended to detect evidence
of fraudulent documentation and/or imprudent activity during the processing,
funding or selling of the mortgage loan. Verification of occupancy and
applicable information is made by regular mail, or by an independent inspection
company.

One- to-four-family residential properties are appraised by qualified
independent appraisers who are approved by the Company. All appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and must be
on forms acceptable to FNMA and FHLMC. As part of the Company's pre-funding
quality control procedures, either field or desk appraisal reviews are obtained
on 10% of all mortgage loans.

Underwriting. Mortgage loan applications must be approved by the Company's
underwriters in accordance with its underwriting criteria, including credit
scores, loan-to-value ratios, borrower income qualifications, investor
requirements, necessary mortgage insurance coverages and property appraisal
requirements. Mortgage loan applications are assigned to an underwriter at the
Company based upon the size and complexity of the mortgage loan and the
underwriter's experience level.

Conforming mortgage loans originated for sale to the Agencies must satisfy
the underwriting standards for one of the programs sponsored by such entities.
All other mortgage loans originated by the Company (including ALT A loans and
home equity loans) are underwritten by the Company according to its credit,
appraisal and underwriting standards. Such underwriting standards are applied to
evaluate the prospective borrower's credit standing and repayment ability and
the value and adequacy of the mortgaged property as collateral. These standards,
which are summarized below, are applied in accordance with applicable federal
and state laws and regulations. Exceptions to the underwriting standards are
permitted when compensating factors are present, and/or prior approval by its
secondary market investors.

The Company's underwriting standards for purchase money or rate/term
refinance mortgage loans secured by one- to two-family primary residences
generally allow loan-to-value ratios at origination of up to 95% for mortgage
loans with original principal balances of up to $400,000, up to 90% for mortgage
loans

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18

secured by one- to four-family primary residences with original principal
balances of up to $500,000 and up to 80% for mortgage loans with original
principal balances up to $650,000. The loan-to-value ratio for super jumbos
generally may not exceed 60%. For cash-out refinance mortgage loans, the maximum
loan-to-value ratio generally is 80%, and the maximum "cash out" amount
permitted is based in part on the original amount of the related mortgage loan.

The Company's underwriting standards for mortgage loans secured by
investment properties generally allow loan-to-value ratios at origination of up
to 90% for mortgage loans with original principal balances up to $300,000 on no
cash-out and purchase transactions. On a cash-out refinance mortgage loan, the
loan-to-value is reduced up to 80% with an original principal balance up to
$300,000. The Company's underwriting standards permit mortgage loans secured by
investment properties to have higher original principal balances if they have
lower loan-to-value ratios at origination.

For each mortgage loan secured by a first lien with a loan-to-value ratio
at origination exceeding 80%, the Company generally requires a private mortgage
insurance policy insuring a portion of the balance of the mortgage loan. In
certain circumstances, however, the Company does not require private mortgage
insurance on mortgage loans with principal balances up to $500,000 that have
loan to value ratios exceeding 80% but less than or equal to 90%. All
residences, except cooperative and certain high-rise condominium dwellings, are
eligible for this program. Each qualifying mortgage loan will be made at an
interest rate that is higher than the rate would be if the loan-to-value ratio
was 80% or less or if private mortgage insurance was obtained.

In determining whether a prospective borrower has sufficient monthly income
available (i) to meet the borrower's monthly obligation on the proposed mortgage
loan and (ii) to meet monthly housing expenses and other financial obligations,
including the borrower's monthly obligations on the proposed mortgage loan, the
Company generally considers, when required by the applicable documentation
program, the ratio of such amounts to the proposed borrower's acceptable monthly
gross income. Such ratios vary depending on a number of underwriting criteria,
including loan-to-value ratios, and are determined on a loan-by-loan basis.

The Company also examines a prospective borrower's credit report.
Generally, each credit report provides a credit score for the borrower. Credit
scores generally are available from three major credit bureaus: TRW, Equifax and
Trans Union. The Company attempts to obtain for each borrower a credit score
from each credit bureau. If three credit scores are obtained, the Company
applies the middle score of the primary wage earner. If two scores are obtained,
the Company applies the lower score of the primary wage earner. These scores
estimate, on a relative basis, which mortgage loans are most likely to default
in the future. Lower scores imply higher default risk relative to a higher
score. Credit scores are empirically derived from historical credit bureau data
and represent a numerical weighing of a borrower's credit characteristics over a
two-year period. A credit score is generated through the statistical analysis of
a number of credit-related characteristics or variables. Common characteristics
include number of credit lines, payment history, past delinquencies, severity of
delinquencies, current levels of indebtedness, types of credit and length of
credit history. Attributes are the specific values of each characteristic. A
scorecard (the model) is created with weights or points assigned to each
attribute. An individual mortgage loan applicant's credit score is derived by
summing together the attribute weights for that applicant. Generally, the
Wholesale Prime Division does not originate mortgages where the borrower's
credit score is less than 620.

The Company originates and acquires mortgage loans under one of five
documentation programs: full documentation, alternative documentation, limited
documentation, no ratio loan documentation and no income/no asset verification.

Under the full documentation program, the prospective borrower's
employment, income and assets are verified through written and telephonic
communications. Alternative documentation provides for alternative methods of
employment verification generally using W-2 forms or pay stubs. Generally, under
a full documentation program, a prospective borrower is required to have a
minimum credit score of 620.

Under the limited documentation program, certain credit underwriting
documentation concerning income or income verification and/or employment
verification is waived. The limited documentation program underwriting places
more emphasis on the value of the mortgaged property as collateral and other
assets of the

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borrower than on credit underwriting. Mortgage loans underwritten using the
limited documentation program are limited to borrowers with credit histories
that demonstrate an established ability to repay indebtedness in a timely
fashion. Under the limited documentation program, a prospective borrower is
required to have a minimum credit score of 620. Mortgage loans originated and
acquired with limited documentation include cash-out refinance loans, super
jumbos and mortgage loans secured by investor-owned properties. Permitted
maximum loan-to-value ratios (including secondary financing) under the limited
documentation program, which range up to 80%, are more restrictive than mortgage
loans originated with full documentation or alternative documentation.

Under the no ratio loan documentation program, income ratios for the
prospective borrower are not calculated. Mortgage loans underwritten using the
no ratio loan documentation program have loan-to-value ratios less than or equal
to 80% and meet the standards for the limited documentation program. A minimum
credit score of 660 is required for this program.

Under the no income/no asset verification program, credit underwriting
documentation concerning income, employment verification and asset verification
is waived and income ratios are not calculated. Under the no income/no asset
verification program, emphasis is placed on the value and adequacy of the
mortgaged property as collateral and credit history rather than on verified
income and assets of the borrower. Mortgage loans underwritten under no
income/no asset verification are limited to borrowers with excellent credit
histories. Generally, a minimum credit score of 680 is required.

Exceptions. On a case-by-case basis, the Company's underwriters may
determine that the prospective borrower warrants an exception from its
underwriting guidelines. Such exceptions may include a debt service-to-income
ratio exception, a loan-to-value exception or an exception from certain
documenation requirements of a particular mortgage loan program. An exception
may generally be allowed if the application reflects certain compensating
factors, including among others: a high credit score; a low loan-to-value ratio;
cash reserves; stable employment; and the length of residence in the subject
property. Accordingly, the Company may classify certain mortgage loan
applications into a more extensive documentation program than other mortgage
loan applications that, in the absence of such compensating factors, would only
satisfy the criteria of a less extensive documenation program and may fund
mortgage loans that do not satisfy all of the criteria discussed above for any
particular documentation program.

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LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION

The following tables set forth information concerning the Company's loan
production by borrower risk classification for the years ended June 30, 1998,
1997 and 1996.

YEAR ENDED JUNE 30, 1998
-------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)

Subprime Loans:
Adjustable Rate (6-Month LIBOR):
A+................................. $ 42,320 42.1% 286 9.1% 5.6% 76.0%
A-................................. 22,249 22.1 169 9.5% 6.2% 78.3%
B.................................. 20,170 20.0 179 9.8% 6.5% 75.0%
C+................................. 6,308 6.3 62 10.6% 6.9% 69.9%
C.................................. 4,424 4.4 51 11.2% 7.5% 67.1%
C-................................. 5,130 5.1 69 12.5% 7.7% 62.1%
-------- ----- -----
$100,601 100.0% 816 9.7% 6.3% 74.8%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+................................. $239,460 42.6% 1,870 8.9% 5.86% 77.6%
A-................................. 123,913 22.0 1,133 9.6% 6.18% 77.3%
B.................................. 126,007 22.4 1,348 9.9% 6.31% 73.9%
C+................................. 38,283 6.8 543 10.9% 6.93% 69.8%
C.................................. 13,517 2.4 227 12.3% 7.44% 64.4%
C-................................. 21,211 3.8 309 12.8% 7.58% 61.3%
-------- ----- -----
$562,391 100.0% 5,430 9.6% 6.2% 75.3%
======== ===== =====
Fixed Rate (15-Year; 30-Year):
A+ $ 41,513 43.7% 501 9.4% -- 71.5%
A-................................. 21,256 22.4 294 10.1% -- 71.5%
B.................................. 20,195 21.3 313 10.7% -- 71.2%
C+................................. 7,137 7.5 152 11.5% -- 66.0%
C.................................. 1,940 2.0 50 13.2% -- 59.4%
C-................................. 2,943 3.1 58 13.5% -- 59.4%
-------- ----- -----
$ 94,984 100.0% 1,368 10.20% -- 70.4%
======== ===== =====
Other:
Prime Mortgage Loans(3)............ $ 26,716 87.6% 188 7.60% -- 72.8%
LTV125 Mortgage Loans.............. 3,787 12.4 95 13.5% -- 35.5%
-------- ----- -----
$ 30,503 100.0% 283 8.3% -- 70.4%
======== ===== =====
$788,479 7,897 9.7% 6.2% 74.4%
======== =====

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remaining term of the loans. The weighted average interest rate for loans
bearing interest at a fixed/adjustable rate is the weighted average of the
rates of such loans during the initial period.

(2) The margin for a loan is a fixed amount set for the life of the loan, which
when added to the Index (as described below) determines the interest rate on
the loan (subject to interest rate floors, ceiling and caps). The index used
by the Company is the six-month LIBOR, as published each Monday in The Wall
Street Journal. Fixed rate loans have no margin because such loans are not
tied to an index.

(3) The Company's Wholesale Prime Division commenced operations in the quarter
ended March 1998. In general, the credit guidelines for prime mortgage loans
exceeds the credit ratings for the Company's subprime mortgage loan, and the
borrower's credit scores equal or exceed levels required for the sale or
exchange of their mortgage loans through FNMA or FHLMC.

YEAR ENDED JUNE 30, 1997
-------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)

Adjustable Rate (6-Month LIBOR):
A+................................. $ 21,238 19.1% 181 8.0% 6.0% 71.4%
A-................................. 32,913 29.7 280 8.5% 6.2% 72.6%
B.................................. 24,915 22.5 236 9.0% 6.6% 72.4%
C+................................. 16,481 14.9 179 10.0% 6.7% 68.8%
C.................................. 9,398 8.5 114 10.9% 7.3% 63.0%
C-................................. 5,925 5.3 76 12.7% 8.0% 59.3%
-------- ----- -----
$110,870 100.0% 1,066 9.2% 6.5% 70.2%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+................................. $116,138 36.4% 927 8.5% 6.1% 71.8%
A-................................. 82,402 25.8 708 9.2% 6.2% 71.9%
B.................................. 60,570 18.9 613 9.7% 6.5% 71.0%
C+................................. 32,031 10.0 416 10.8% 6.9% 67.3%
C.................................. 16,790 5.2 271 11.9% 7.2% 63.6%
C-................................. 11,997 3.7 189 12.4% 7.6% 57.7%
-------- ----- -----
$319,928 100.0% 3,124 9.5% 6.4% 70.2%
======== ===== =====
Fixed Rate (15-Year; 30-Year):
A+................................. $ 26,249 31.2% 299 9.6% -- 64.2%
A-................................. 27,110 32.3 347 10.1% -- 66.4%
B.................................. 14,980 17.9 225 10.9% -- 68.3%
C+................................. 8,529 10.2 177 11.8% -- 66.9%
C.................................. 4,373 5.2 107 13.2% -- 63.5%
C-................................. 2,662 3.2 54 13.6% -- 57.9%
-------- ----- -----
$ 83,903 100.0% 1,209 10.5% -- 65.7%
======== ===== =====
Small Commercial(3)................ $ 17,920 26 9.8% -- 63.8%
======== =====
$532,621 5,425 9.6% 6.4% 69.3%
======== =====

remaining term of the loans. The weighted average interest rate for loans
bearing interest at a fixed/adjustable rate is the weighted average of the
rates of such loans during the initial period.

(2) The margin for a loan is a fixed amount set for the life of the loan, which
when added to the index (as described below) determines the interest rate on
the loan (subject to interest rate floors, ceiling and caps). The index used
by the Company is the six-month LIBOR, as published each Monday in The Wall
Street Journal. Fixed rate loans have no margin because such loans are not
tied to an index.

(3) The Company discontinued the origination of small commercial loans in April
1997.

YEAR ENDED JUNE 30, 1996
-------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)

Adjustable Rate (6-Month LIBOR):
A+................................. $ 5,788 6.0% 48 7.8% 5.6% 69.1%
A-................................. 44,400 45.8 389 8.1% 5.5% 72.3%
B.................................. 24,967 25.8 237 8.6% 6.1% 71.8%
C+................................. 11,932 12.3 125 9.5% 6.4% 68.1%
C.................................. 7,809 8.1 76 10.0% 6.5% 64.4%
C-................................. 1,970 2.0 26 10.9% 6.8% 58.9%
-------- ----- -----
$ 96,866 100.0% 901 8.6% 5.9% 70.6%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+................................. $ 12,530 17.6% 117 9.14% 4.9% 65.8%
A-................................. 21,899 30.8 197 9.6% 5.2% 6.74%
B.................................. 19,717 27.7 171 10.1% 5.8% 70.1%
C+................................. 8,680 12.2 105 10.8% 6.1% 66.9%
C.................................. 5,960 8.4 66 11.0% 6.3% 64.3%
C-................................. 2,375 3.3 30 12.5% 6.7% 58.6%
-------- ----- -----
$ 71,161 100.0% 686 10.0% 5.6% 67.2%
======== ===== =====
Fixed Rate (15-Year; 30-Year):
A+................................. $ 1,121 3.5% 11 10.3% -- 70.3%
A-................................. 17,469 54.7 200 10.2% -- 65.6%
B.................................. 7,263 22.7 91 10.9% -- 66.6%
C+................................. 3,483 10.9 54 12.0% -- 66.5%
C.................................. 1,590 5.0 26 12.2% -- 61.2%
C-................................. 1,010 3.2 19 13.1% -- 50.9%
-------- ----- -----
$ 31,936 100.0% 401 10.7% -- 65.3%
======== ===== =====
$199,963 1,988 9.4% 5.7% 68.5%
======== =====

caps). The index used by the Company is the six-month LIBOR, as published each
Monday in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.

TECHNOLOGY

The Company utilizes computer technology to maximize its loan originations.
The Company has established a wide area network and is in the process of linking
most of the Company's account executives to the Company's computer systems.
Through this network, it is expected that an account executive will receive
daily status reports regarding pending loans so that he or she can direct
efforts to those cases that require attention to complete the processing.
Certain account executives, who are not on the network, receive the same data by
daily fax communication. The Company has established an Internet website through
which brokers and interested parties may access information about the Company's
Retail Division and its products. In addition, the Company has reserved the
domain name for the Company's main website, which is currently under
development. The Company's website addresses are http://www.simpleusa.com and
http://www.bncmortgage.com.

The Company makes extensive use of computer technology in its underwriting
process. Each loan application file is computerized so that it can be accessed
immediately by the appropriate persons, thereby eliminating delay that would be
caused by not having physical access to the file.

The Company has performed a review of its internal systems to identify and
resolve the effect of Year 2000 software issues on the integrity and reliability
of the Company's financial and operational systems. Based on this review,
management believes that its internal systems are substantially compliant with
the Year 2000 issues. In addition, the Company is also communicating with its
principal service providers to ensure Year 2000 issues will not have an adverse
impact on the Company. Based upon its internal review and communications with
external service providers, the Company believes that the costs of achieving
Year 2000 compliance will not have a material adverse impact on the Company's
business, operations or financial condition.

FINANCING AND SALE OF LOANS

Warehouse Facility

Since August 1995, the Company has funded its business primarily through a
warehouse line of credit with DLJ Mortgage Capital, Inc. ("DLJ") under which it
has borrowed money to finance the origination of loans. The current warehouse
line of credit with DLJ, the "DLJ Facility" provides a $150.0 million warehouse
line of credit to the Company. Borrowings under the DLJ Facility bear an
interest rate of the federal funds rate plus 50 basis points until March 1999
and, thereafter, the federal funds rate plus 100 basis points. The interest rate
is subject to increase based on the length of time loans are held by the
Company, and that DLJ receives a security interest on all loans, and other
rights in connection therewith, originated by the Company. Any loan not
purchased by DLJ is not allowed to remain subject to the warehouse line for more
than nine months. The term of the DLJ Facility is until March 2000.

The DLJ Facility further provides that DLJ does not have the exclusive
right to purchase loans from the Company, Company has no obligation to sell any
loans to DLJ, and DLJ has no obligation to purchase any loans from the Company.
Furthermore, DLJ has agreed to provide the Company with up to $5.0 million of
financing through March 10, 1999, for subordinated "interest-only" securities to
the extent they are retained by the Company in connection with any future
securitizations of loans originated by the Company. Advances will be made only
to the extent the Company does not have sufficient cash, in excess of reasonable
reserves, to fund the retention of such securities. The Company is currently
negotiating with other lenders to obtain additional warehouse lines of credit at
interest rates and terms that are consistent with management's objectives.

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24

Loan Sales

The Company follows a strategy of selling for cash substantially all of its
loan originations through loan sales in which the Company disposes of its entire
economic interest in the loans for a cash price that represents a premium over
the principal balance of the loans sold. The Company sold $744.4 million, $519.9
million and $156.6 million of loans through loan sales during the years ended
June 30, 1998, 1997 and 1996, respectively. Loan sales are typically made
monthly. The Company did not sell any loans directly through securitizations
during these periods.

DLJ has purchased, and it is contemplated that it may continue to purchase,
loans under the master loan purchase agreement with a view towards
securitization or other resale transactions in the secondary mortgage market.
Since substantially all of the loans historically purchased by DLJ under the
master repurchase agreement have been resold by DLJ to institutional purchasers
generally within 48 hours of the initial purchase from the Company, DLJ has
agreed to allow the Company to assist it in the marketing of loans so resold by
DLJ. Prior to the purchase of the loans by DLJ under the master loan purchase
agreement, the Company undertakes a process to identify the institutional
purchasers who will immediately buy the subject loans from DLJ. This program
utilizes a competitive bidding process typically involving two to four potential
purchasers (including Wall Street firms, financial institutions and conduits,
along with other institutional purchasers) who in most cases have purchased
similar resold loans from DLJ in the past. The successful bidder is committed to
a minimum quantity of loans at a determined price, and is generally granted the
option to purchase more than the minimum quantity at a negotiated price. DLJ
then agrees to pay the Company the determined price, minus a certain number of
basis points, which represents DLJ's fees. Under the master loan purchase
agreement, DLJ will receive no fees in connection with any such purchases
through March 10, 1999 and 12.5 basis points through March 10, 2000. As a result
of this agreement, Management is able to directly control the sales process of
its loans in an effort to obtain more favorable pricing and other terms. A
successful bidder is not obligated to purchase loans other than those to which
its bid applies. For the years ended June 30, 1998, 1997 and 1996, an aggregate
of $2.2 million, $2.1 million and $1.8 million, respectively, was paid to DLJ as
fees pursuant to the Master Loan Purchase Agreement.

The Master Loan Purchase Agreement, along with the DLJ Facility, terminates
on March 10, 2000, or may be terminated earlier by DLJ upon an event of default
by the Company, including the occurrence of any proceeding adversely affecting
the Company's ability to perform its obligations to DLJ, a material breach by
the Company of any related agreement with DLJ or a material adverse change in
the Company's business. The Master Loan Purchase Agreement may also be
terminated by DLJ if the Company merges, sells substantially all of its assets
or fails to meet certain financial criteria as agreed to by DLJ and the Company.

The Company, DLJ and a major investment bank have negotiated an agreement
whereby the Company will agree to sell (through DLJ) and the bank will agree to
purchase, for a period of four months commencing in April 1998, substantially
all of Company's adjustable rate, conventional first lien subprime mortgage
loans. It is anticipated that the aggregate principal balance of all of the
mortgage loans delivered pursuant to the commitment will be approximately $280
million. It is anticipated that the Company (through DLJ) will agree that the
mortgage loans will have certain characteristics, including, but not limited to,
mortgage loan interest rate, terms of payments and prepayments, achievement of
certain credit grades, and that the majority of the properties subject to the
loans will be located in California, Illinois and Florida.

Cash gain on sale of mortgage loans represented 68.6%, 66.7% and 51.5% of
the Company's total revenues for the years ended June 30, 1998, 1997 and 1996,
respectively. The Company maximizes its cash gain on sale of mortgage loan
revenue by closely monitoring institutional purchasers' requirements and
focusing on originating the types of loans that meet those requirements and for
which institutional purchasers tend to pay higher rates. During the years ended
June 30, 1998, 1997 and 1996, the Company sold loans to DLJ having an aggregate
principal balance of $727.1 million, $473.7 million and $153.2 million,
respectively.

Loan sales are made to DLJ on a non-recourse basis pursuant to the Master
Loan Purchase Agreement containing customary representations and warranties by
the Company regarding the underwriting criteria and the origination process. The
Company is required to provide similar representations and warranties to those
institutional purchasers to whom DLJ sells the subject loans. The Company,
therefore, may be required to
24
25

repurchase or substitute loans in the event of a breach of its representations
and warranties. In addition, the Company sometimes commits to repurchase or
substitute a loan if a payment default occurs within the first month following
the date the loan is funded. The Company is also required in some cases to
repurchase or substitute a loan if the loan documentation is alleged to contain
fraudulent misrepresentations made by the borrower. Any claims asserted against
the Company in the future by its loan purchasers may result in liabilities or
legal expenses that could have a material adverse effect on the Company's
results of operations and financial condition. In addition, any material
repurchase or substitution may have an adverse effect on the market for and
pricing of the Company's loans. Since the Company commenced operations in August
1995 through June 30, 1998, the Company has not been obligated to repurchase or
substitute any loan sold to DLJ due to breaches of representations and
warranties, fraudulent misrepresentations or borrower default in the first
month. During such period, the Company had repurchased loans with an aggregate
principal balance of $253,000 from other institutional purchasers.

Securitization Capability

While the Company has not sold loans directly through securitizations, part
of the Company's loan sale strategy may include the sale of loans directly
through securitizations in the future if management determines that such sales
are more beneficial. Management has significant securitization experience in
that several members were involved in securitization prior to their employment
with the Company.

Typically in a securitization, the issuer aggregates mortgages into a real
estate mortgage investment conduit trust. The regular interests or the senior
tranches of the trust are investment grade. While the issuer generally retains
the residual interests in the trust, it immediately sells the regular interests
and generally uses the proceeds to repay borrowings that were used to fund or
purchase the loans in the securitized pool. The holders of the regular interests
are entitled to receive scheduled principal collected on the pool of securitized
loans and interest at the pass-through interest rate on the certificate balance
for such interests. The residual interests represent the subordinated right to
receive cash flows from the pool of securitized loans after payment of the
required amounts to the holders of the regular interests and the cost associated
with the securitization. The issuer recognizes non-cash revenue relating to the
residual interest at the time of the securitization.

SUB-SERVICING

While the Company currently sells substantially all of the mortgage loans
it originates servicing released (meaning the Company does not retain the
servicing rights to such loans), it is required to service the loans from the
date of funding through the date of sale. Since the Company conducts whole loan
sales monthly, the Company currently does not have a substantial servicing
portfolio. Nonetheless, the Company currently contracts for the sub-servicing of
all mortgage loans it originates through the date of sale and is subject to
risks associated with inadequate or untimely services. To the extent that the
Company decides to retain servicing rights in the future or conduct
securitizations, it currently intends to contract for the sub-servicing of such
mortgage loans, which would expose it to more substantial risks associated with
contracted sub-servicing. In such event, it is expected that many of the
Company's borrowers will require notices and reminders to keep their mortgage
loans current and to prevent delinquencies and foreclosures. A substantial
increase in the Company's delinquency rate or foreclosure rate could adversely
affect its ability to access profitably the capital market for its financing
needs, including any future securitizations.

Any of the Company's sub-servicing agreements with its third-party
sub-servicers are expected to provide that if the Company terminates the
agreement without cause (as defined in the agreement), the Company may be
required to pay the third-party sub-servicer a fee. Depending upon the size of
the Company's loan portfolio sub-serviced at any point in time, the termination
penalty that the Company would be obligated to pay upon termination without
cause, may be substantial.

INTEREST RATE RISK MANAGEMENT

The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the

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26

Company under its warehouse facilities or for securities issued in any future
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated until the
closing of the sale or securitization of such loans.

Since the Company historically has retained loans for a short period of
time pending sale, it has not engaged in hedging activities to date. However, in
the future the Company may hedge its variable-rate mortgage loans and any
interest-only and residual certificates retained in connection with any future
securitizations with hedging transactions which may include forward sales of
mortgage loans or mortgage-backed securities, interest rate caps and floors and
buying and selling of futures and options on futures. The nature and quantity of
hedging transactions will be determined by the Company's management based on
various factors, including market conditions and the expected volume of mortgage
loan originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur losses
after accounting for its hedging activities.

COMPETITION

The Company faces intense competition in the business of originating and
selling mortgage loans. The Company's competitors in the industry include other
consumer finance companies, mortgage banking companies, commercial banks, credit
unions, thrift institutions, credit card issuers and insurance finance
companies. Many of these entities are substantially larger and have considerably
greater financial, technical and marketing resources than the Company. With
respect to other mortgage banking and specialty finance companies, there are
many larger companies that focus on the same types of mortgage loans with which
the Company directly competes for product. From time to time, one or more of
these companies may be dominant in the origination and sale of non-conforming
and conforming mortgage loans. In addition, many financial services
organizations that are much larger than the Company have formed national loan
origination networks offering loan products that are substantially similar to
the Company's loan programs. Competition among industry participants can take
many forms, including convenience in obtaining a loan, customer service,
marketing and distribution channels, amount and term of the loan, loan
origination fees and interest rates. In addition, the current level of gains
realized by the Company and its competitors on the sale of non-conforming loans
could attract additional competitors into this market. Additional competition
may lower the rates the Company can charge borrowers, thereby potentially
lowering gain on future loan sales and future securitizations. The Company may
in the future also face competition from, among others, government-sponsored
entities which may enter the non-conforming mortgage market. Existing or new
loan purchase programs may be expanded by FNMA, FHLMC, or Government National
Mortgage Association ("GNMA") to include non-conforming mortgages, particularly
those in the "Alt A" category, which constitute a significant portion of the
Company's loan production. For example, in August 1998, the FHLMC has announced
that it has entered, on a limited basis, the non-conforming market (not
including subprime loans). Entries of such government-sponsored entities into
the non-conforming market may have an adverse effect on loan yields on mortgage
loans originated by the Company and reduce or eliminate premiums on loan sales.
To the extent any of these competitors significantly expand their activities in
the Company's market, the Company could be materially adversely affected.
Fluctuations in interest rates and general economic conditions may also affect
the Company's competition. During periods of rising rates, competitors that have
locked in low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans.

REGULATION

The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations of,
and examinations by, various federal, state and local government authorities.
These rules impose obligations and restrictions on the Company's loan
origination, credit activities and secured transactions. In addition, these
rules limit the interest rates, finance charges and other fees the Company may
assess, mandate extensive disclosure to the Company's customers, prohibit
discrimination and impose multiple qualification and licensing obligations on
the Company. Failure to comply

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27

with these requirements may result in, among other things, loss of approved
status, 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. Management believes that
the Company is in compliance with these rules and regulations in all material
respects.

The Company's 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 the Company can charge on its
loans. The Company's lending activities are also subject to various federal
laws, including the Truth-in-Lending Act, Homeownership and Equity Protection
Act of 1994, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act.

The Company is subject to certain disclosure requirements under the
Truth-in-Lending Act ("TILA") and Regulation Z promulgated under TILA. 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 the Company. In addition, TILA gives
consumers, among other things, a right to rescind loan transactions in certain
circumstances if the lender fails to provide the requisite disclosure to the
consumer.

With respect to its conforming lending activities, lenders such as the
Company are required annually to submit to FNMA and FHLMC audited financial
statements, and each regulatory activity has its own financial requirements. The
Company's affairs are also subject to examination by FNMA and FHLMC at any time
to assure compliance with the applicable regulations, policies and procedures.

The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which makes certain amendments to TILA.
The High Cost Mortgage Act 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 percent points higher
than United States Treasury securities of comparable maturity ("Covered Loans").
The High Cost Mortgage Act imposes additional disclosure requirements on lenders
originating Covered Loans. In addition, it prohibits lenders from, among other
things, 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 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 High Cost Mortgage Act also
restricts, among other things, certain balloon payments and negative
amortization features.

The Company is also required to comply with the Equal Credit Opportunity
Act of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the
Fair Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act
of 1975, as amended, and the Home Mortgage Disclosure Act of 1975, as amended.
ECOA prohibits creditors from discriminating against applicants on the basis of
race, color, sex, age, religion, national origin or marital status. Regulation B
restricts creditors from requesting certain types of information from loan
applicants. The Fair Credit Reporting Act, as amended, requires lenders, among
other things, to supply an applicant with certain information if the lender
denied the applicant credit. RESPA mandates certain disclosure 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 1997, the Company must file an annual report with HUD pursuant to
the Home Mortgage Disclosure Act, which requires the collection and reporting of
statistical data concerning loan transactions.

In October 1997, the Department of Housing and Urban Development ("HUD")
issued proposed regulations regarding the treatment and disclosure of fees
charged and collected by mortgage brokers providing certain safe harbors for the
payment of fees by lenders to mortgage brokers and setting forth standards to
determine whether payments to mortgage brokers violate RESPA. Whether such
regulations will be adopted and the form and content of any final regulations is
unknown.

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In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.

Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations which,
if adopted, could impact the Company. There can be no assurance that these
proposed laws, rules and regulations, or other such laws, rules or regulations,
will not be adopted in the future which could make compliance much more
difficult or expensive, restrict the Company's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Company, or otherwise adversely affect the business or prospects of
the Company.

EMPLOYEES

At June 30, 1998, the Company employed 422 persons. None of the Company's
employees is subject to a collective bargaining agreement. The Company believes
that its relations with its employees are satisfactory.

RISK FACTORS

LIMITED HISTORY OF OPERATIONS LIMITS PRIOR PERFORMANCE AS AN INDICATOR OF FUTURE
PERFORMANCE

The Company commenced operations in August 1995 and began originating loans
in October 1995. Although the Company has been profitable for each fiscal period
presented herein and has experienced substantial growth in mortgage loan
originations and total revenues, there can be no assurance that the Company will
be profitable in the future or that these rates of growth will be sustainable or
indicative of future results. Furthermore, the Company has recently begun
originating conforming loans and non-conforming loans which are not subprime
loans. This is a new type of product and market in which the Company is
entering. There can be no assurance that the Company will be profitable and
there may be certain risks and uncertainties in which the Company is unfamiliar.
Any decline in future profitability or growth rates may adversely affect the
market for the Company's Common Stock which could result in volatility or a
decline in its market price.

Since it commenced operations in August 1995, the Company's growth in
originating loans has been significant. In light of this growth, the historical
financial performance of the Company may be of limited relevance in predicting
future performance. Since the Company historically has sold substantially all
loans originated on a whole loan basis, it has not tracked the performance of
its loans in the secondary market and thus is unable to determine the history of
loan losses associated with such loans. If a material portion of such loans
result in loan losses to the holders thereof, the market for and pricing of the
Company's loans could be adversely affected, which could materially lower
revenues for a subject reporting period.

NO ASSURANCE OF PLANNED GROWTH; INABILITY OF THE COMPANY TO GROW COULD ADVERSELY
AFFECT THE COMPANY'S OPERATING RESULTS

The Company's total revenues and net income have grown significantly since
inception, primarily due to increased mortgage loan origination and sales
activities. The Company intends to continue to pursue a growth strategy for the
foreseeable future. Since the Company expects recent higher levels of mortgage
broker compensation, which reduce the cash gain on sale of mortgage loans, to
continue for the year ending June 30, 1999 and possibly thereafter, the Company
believes that its future operating results will depend largely upon its ability
to expand its mortgage origination and sales activities, and, in particular,
increased penetration in existing markets. While the Company plans to continue
its growth of loan originations through the expansion of its Wholesale Divisions
and Retail Division, these plans require additional personnel and assets. To
date, the Company has had a relative lack of experience in retail originations,
having only originated $18.7 million through its Retail Division from the
inception of the division in March 1996 through June 30, 1998. There can be no
assurance that the Company will be able to successfully expand and operate such
divisions and programs

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profitably. It also is expected that such expansion plans will result in a
substantial increase in operating expenses in the short-run. Furthermore, since
management expects that there will be a time lag between the expenditure of such
monies and the receipt of any revenues from such expansion efforts, the
Company's results of operations may be adversely affected in the short-run.
There can be no assurance that the Company will anticipate and respond
effectively to all of the changing demands that its expanding operations will
have on the Company's management, information and operating systems, and the
failure to adapt its systems could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will successfully achieve its planned expansion or,
if achieved, that the expansion will result in profitable operations.

RISK OF VARIATIONS IN QUARTERLY OPERATING RESULTS

Several factors affecting the Company's business can cause significant
variations in its quarterly results of operations. In particular, variations in
the volume of the Company's loan originations, the differences between the
Company's costs of funds and the average interest rates of originated loans, the
inability of the Company to complete significant loan sales transactions in a
particular quarter, and problems generally affecting the mortgage loan industry
can result in significant increases or decreases in the Company's revenues from
quarter to quarter. A delay in closing a particular loan sale transaction during
a particular quarter would postpone recognition of cash gain on sale of loans.
In addition, delays in closing a particular loan sale transaction would also
increase the Company's exposure to interest rate fluctuations by lengthening the
period during which its variable rate borrowings under its warehouse facilities
are outstanding. If the Company were unable to sell a sufficient number of its
loans at a premium in a particular reporting period, the Company's revenues for
such period would decline, resulting in lower net income and possibly a net loss
for such period, which could have a material adverse effect on the Company's
results of operations and financial condition.

DISCONTINUANCE OF EXCLUSIVE ARRANGEMENTS WITH DLJ COULD ADVERSELY AFFECT THE
COMPANY'S OPERATING RESULTS

The Company commenced operations in August 1995 and prior to its initial
public offering in March 1998 has benefitted from its relationship with DLJ.
Since commencement of operations, DLJ has provided the Company with a warehouse
line of credit to fund loan production which has been the only financing
facility the Company used prior to its initial public offering. The Company is
substantially dependent upon its access to warehouse lines of credit and other
lending facilities in order to fund loan originations.

The DLJ Facility provides the Company with a $150.0 million line of credit
and expires in March 2000. The interest rate of the DLJ Facility during the
first 12 months bears interest at the federal funds rate plus 50 basis points
until March 1999 and thereafter the rate will be the federal funds rate plus 100
basis points. It is expected that the DLJ Facility will not be extended beyond
the modified term. The Company is seeking to obtain additional and alternative
sources of financing on favorable terms to decrease its reliance on DLJ. While
the Company is currently negotiating with other lenders to obtain additional
warehouse lines of credit, the Company currently has no financing commitment for
such lines of credit. Any failure by DLJ to continue to provide financing under
the DLJ Facility or the Company's failure to obtain adequate funding under any
additional or alternative facilities, on favorable terms or otherwise, could
cause the Company to curtail loan origination activities, which would result in
a decline in revenues, the effect of which could have a material adverse effect
on the Company's operations.

In addition, under the Company's master loan purchase agreement with DLJ,
since the Company commenced business, DLJ has purchased substantially all of the
Company's loan production through whole loan sales. Gain on sales of loans
represents the primary source of the Company's revenues and net income. The
Company relies almost entirely on proceeds from loan sales to generate cash for
repayment of borrowings under the Company's warehouse facilities. There can be
no assurance that DLJ will continue to purchase loans originated by the Company
or will be willing to purchase such loans on terms under which it had
historically purchased the Company's loans. The Company intends to sell loan
production to DLJ and other institutional purchasers in the secondary market.
While the Company has historically assisted DLJ in identifying purchasers of
those loans purchased by DLJ under the Master Loan Purchase Agreement, there
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can be no assurance that the Company would be successful in identifying other
institutional purchasers or in negotiating favorable terms for such loan sales.
The failure by the Company to timely sell its loans would expose the Company to
interest rate fluctuations and greater risks of borrower defaults and
bankruptcies, fraud losses and special hazard losses. The failure of the Company
to negotiate favorable terms for its loan sales would adversely affect the
Company's revenues.

SUBSTANTIAL DEPENDENCE ON WHOLESALE BROKERS

The Company depends largely on independent mortgage brokers, financial
institutions and mortgage bankers for its originations of mortgage loans.
Substantially all of the independent mortgage brokers with whom the Company does
business deal with multiple loan originators for each prospective borrower.
Mortgage loan originators, including the Company, compete for business based
upon pricing, service, loan fees and costs and other factors. The Company's
competitors also seek to establish relationships with such independent mortgage
brokers, financial institutions and mortgage bankers, none of whom is
contractually obligated to continue to do business with the Company. In
addition, the Company expects the volume of wholesale loans that it originates
to increase which will depend in large part on maintaining and expanding its
relationships with its independent mortgage brokers. The Company's future
results may become increasingly exposed to fluctuations in the volume and cost
of its wholesale loans resulting from competition from other originators and
purchasers of such loans, market conditions and other factors.

SUBSTANTIAL RISKS RELATED TO LENDING TO LOWER CREDIT GRADE BORROWERS

The Company's primary focus is lending in the subprime mortgage banking
industry, which means that the Company focuses the substantial portion of its
marketing efforts on borrowers who may be unable to obtain mortgage financing
from conventional mortgage sources. Approximately 3.7% of the total principal
amount of subprime loans originated by the Company during the year ended June
30, 1998 were to borrowers with a Company risk classification of "C-," which
includes borrowers with numerous derogatory credit items up to and including a
bankruptcy in the most recent 12-month period. In addition, for the year ended
June 30, 1998, approximately 43.1% of the Company's total subprime loan
originations were made under its "Stated Income Documentation" program pursuant
to which the Company does not require any income documentation. As a result, the
Company does not independently verify in writing the accuracy of the stated
income of such borrowers on their mortgage loan applications which may subject
the Company to a greater risk of borrower misrepresentations. Also, an
undeterminable percentage of the Company's subprime loans and non-conforming
loans are made based on exceptions to the Company's underwriting guidelines; any
exception may cause a borrower to be placed in a more favorable borrower risk
classification and thereby be provided loan terms which such borrower may not
have qualified for absent such exception. Loans made to such borrowers generally
entail a higher risk of delinquency and higher losses than loans made to
borrowers who utilize conventional mortgage sources. Delinquencies, foreclosures
and losses generally increase during economic slowdowns or recessions. Further,
any material decline in real estate values increase the loan-to-value ratios of
loans previously made by the Company, thereby weakening collateral coverage and
increasing the possibility of a loss in the event of a borrower default. Any
sustained period of increased delinquencies, foreclosures or losses after the
loans are sold could adversely affect the pricing of the Company's future loan
sales and the ability of the Company to sell its loans in the future. In the
past, certain of these factors have caused revenues and net income of many
participants in the mortgage industry, including the Company, to fluctuate from
quarter to quarter. See "Business -- Underwriting."

SUBSTANTIAL COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO ORIGINATE,
SELL OR FINANCE MORTGAGE LOANS

As an originator of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions and finance companies. Many of these entities are
substantially larger and have more capital and other resources than the Company.
With respect to other mortgage banking and specialty finance companies, there
are many larger companies that focus on the same types of mortgage loans with
which the Company directly competes for product. From time to time, one

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or more of these companies may be dominant in the origination and sale of
mortgage loans. In addition, many financial services organizations that are much
larger than the Company have formed national loan origination networks offering
loan products that are substantially similar to the Company's loan programs.

Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest rates.
If the Company is unable to remain competitive in these areas, the volume of the
Company's loan originations may be materially adversely affected as borrowers
seek out other lenders for their financing needs. Lower originations may have an
adverse effect on the Company's ability to negotiate and obtain sufficient
financing under warehouse lines of credit upon acceptable terms. Furthermore,
the current level of gains realized by the Company and its competitors on the
sale of the type of loans they originate and purchase is attracting and may
continue to attract additional competitors into this market with the possible
effect of lowering gains that may be realized on the Company's loan sales.
Establishing a broker-sourced loan business typically requires a substantially
smaller commitment of capital and personnel resources than a direct-sourced loan
business. This relatively low barrier to entry permits new competitors to enter
the broker-sourced loan market quickly, particularly existing direct-sourced
lenders which can draw upon existing branch networks and personnel in seeking to
sell products through independent brokers. Competition may be affected by
fluctuations in interest rates and general economic conditions. During periods
of rising rates, competitors which have locked in low borrowing costs may have a
competitive advantage.

Increased competition could have the possible effects of (i) lowering gains
that may be realized on the Company's loan sales, (ii) reducing the volume of
the Company's loan originations and loan sales, (iii) increasing the demand for
the Company's experienced personnel and the potential that such personnel will
be recruited by the Company's competitors, and (iv) lowering the industry
standard for non-conforming underwriting guidelines (i.e., providing for higher
loan-to-value ratios) as competitors attempt to increase or maintain market
share in the face of increased competition. In the past, certain of these
factors have caused revenues and net income of many participants in the mortgage
industry, including the Company, to fluctuate from quarter to quarter.

There can be no assurance that the Company will be able to continue to
compete successfully in the markets it serves. Inability to compete successfully
would have a material adverse effect on the Company's results of operations and
financial condition.

RISK OF COMPETITION IN NEW MARKETS

As the Company expands into new geographic markets, it may face competition
from lenders with established positions in these locations. There can be no
assurance that the Company will be able to successfully compete with such
established lenders, the effect of which may have a material adverse effect on
the Company's results of operations and financial condition.

RISK OF COMPETITION FROM GOVERNMENT-SPONSORED ENTITIES

In the future, the Company may also face competition from, among others,
government-sponsored entities which may enter the non-conforming mortgage
market. Existing or new loan purchase programs may be expanded by the FNMA,
FHLMC, or GNMA to include non-conforming mortgages, particularly those in the
"Alt A" category, which constitute a significant portion of the Company's loan
production. For example, in August 1998, FHLMC announced that it has entered, on
a limited basis, the non-conforming mortgage market (not including subprime
loans). Entries of such government-sponsored entities into the non-conforming
market may have an adverse effect on loan yields on mortgage loans originated by
the Company and reduce or eliminate premiums on loan sales.

GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT COMPANY OPERATIONS

The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining real estate values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and
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increases the loan-to-value ratios of loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. To the extent that the loan-to-value ratios of
prospective borrowers' home equity collateral do not meet the Company's
underwriting criteria, the volume of loans originated by the Company could
decline. Further, delinquencies, foreclosures and losses generally increase
during economic slowdowns or recessions. Because of the Company's focus on
borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment, income
qualification or credit history or a desire to receive funding on an expedited
basis, the actual rates of delinquencies, foreclosures and losses on such loans
could be higher under adverse economic conditions than those currently
experienced in the mortgage lending industry in general. Any sustained period of
such increased delinquencies, foreclosures or losses could adversely affect the
pricing of the Company's loan sales whether through whole loan sales or future
securitizations. A decline in loan origination volumes could have a material
adverse effect on the Company's operations and financial condition.

CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT NET INCOME AND PROFITABILITY

Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Company's ability to earn a spread between
interest received on its loans held for sale and rates paid on warehouse lines.
The Company's profitability may be adversely affected during any period of
unexpected or rapid change in interest rates due to the fact that the Company
does not currently hedge its portfolio of mortgage loans held for sale. A
substantial and sustained increase in interest rates could adversely affect the
Company's ability to originate loans. Also, a significant decline in interest
rates could increase the level of loan prepayments and require the Company to
write down the value of the interest-only and residual certificates retained in
any future securitizations, thereby adversely impacting earnings.

Adjustable-rate mortgage loans originated by the Company amounted to $100.6
million and $110.9 million in principal amount during the years ended June 30,
1998 and 1997, respectively. Substantially all such adjustable-rate mortgage
loans included a "teaser" rate, i.e., an initial interest rate significantly
below the fully indexed interest rate at origination. Although these loans are
underwritten at 1.0% above the initial or start rate at origination, borrowers
may encounter financial difficulties as a result of increases in the interest
rate over the life of the loan, which may adversely impact the performance of
the Company's loans in the secondary market. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's future loan sales and the ability of the
Company to sell its loans in the future.

ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS

Lawsuits have been filed against several mortgage lenders, not including
the Company, alleging that such lenders have made certain payments to
independent mortgage brokers in violation of RESPA. These lawsuits have
generally been filed on behalf of a purported nationwide class of borrowers
alleging that payments made by a lender to a broker in addition to payments made
by the borrower to a broker are prohibited by RESPA and are therefore illegal.
If these cases are resolved against the lenders, it may cause an industry-wide
change in the way independent mortgage brokers are compensated. The Company's
broker compensation programs permit such payments. The Company makes such
payments in the ordinary course of business. Due to competitive conditions,
these payments have increased in recent periods, which adversely affected the
Company's cash gain on sale of mortgage loans for the year ended June 30, 1998.
Management expects this increased level of payments to continue for the year
ending June 30, 1999 and possibly thereafter. Although the Company believes that
its broker compensation programs comply with all applicable laws and are
consistent with long-standing industry practice and regulatory interpretations,
in the future new regulatory interpretations or judicial decisions may require
the Company to change its broker compensation practices. Such a change may have
a material adverse effect on the Company and the entire mortgage lending
industry.

POTENTIAL ADVERSE EFFECT OF REPRESENTATIONS AND WARRANTIES IN LOAN SALES

the origination process. The Company is required to provide similar
representations and warranties to those institutional purchasers to whom DLJ
sells the subject loans. The Company, therefore, may be required to repurchase
or substitute loans in the event of a breach of a representation or warranty to
DLJ or the institutional purchaser, any misrepresentation during the mortgage
loan origination process or, in some cases, upon any fraud or first payment
default on such mortgage loans. In an environment of rapid whole loan sales, the
Company may not have substitute loans which are not previously committed for
sale readily available in which case the Company would be required to effect a
repurchase. During the years ended June 30, 1998 and 1997, the Company
repurchased $75,000 and $178,000 of loans, respectively; no loans were
repurchased during the year ended June 30, 1996. There can be no assurance that
such repurchase levels will not substantially increase in future periods. Any
claims asserted against the Company in the future by its loan purchasers may
result in liabilities or legal expenses that could have a material adverse
effect on the Company's results of operations and financial condition. In
addition, any material repurchase or substitution of loans may have an adverse
effect on the market for and pricing of the Company's loans.

DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL

The Company's growth and development to date have been largely dependent
upon the services of Evan R. Buckley, the Company's Chief Executive Officer, and
Kelly W. Monahan, the Company's President and Chief Financial Officer. The loss
of Messrs. Buckley's or Monahan's services for any reason could have a material
adverse effect on the Company. The Company does not maintain key person life
insurance on the lives of any of its employees. In addition, the Company's
future success will require it to recruit additional key personnel, including
additional sales and marketing personnel. The Company believes that its future
success also substantially depends on its ability to attract, retain and
motivate highly skilled employees, who are in great demand. There can be no
assurance that the Company will be successful in doing so.

SUBSTANTIAL RISKS ASSOCIATED WITH FUTURE SECURITIZATIONS

The Company may in the future sell loans through securitizations which
involve substantial risks, including the following:

Inability to Securitize Mortgage Loans. The Company anticipates that it may
in the future acquire and accumulate mortgage loans until a sufficient quantity
has been acquired for securitization. There can be no assurance that the Company
will be successful in securitizing mortgage loans. During the accumulation
period, the Company will be subject to risks of borrower defaults and
bankruptcies, fraud losses and special hazard losses. In the event of any
default under mortgage loans held by the Company, the Company will bear the risk
of loss of principal to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the mortgage loan. Also during
the accumulation period, the costs of financing the mortgage loans through
warehouse lines of credit or reverse repurchase agreements could exceed the
interest income on the mortgage loans. It may not be possible or economical for
the Company to complete the securitization of all mortgage loans that it
acquires, in which case the Company will continue to hold the mortgage loans and
bear the risks of borrower defaults and special hazard losses.

Potential Recourse Against Company in Securitizations. To the extent that
the Company engages in securitizations, the Company intends to transfer loans
originated by the Company to a trust in exchange for cash, "interest-only" and
residual certificates issued by the trust. The trustee will have recourse to the
Company with respect to the breach of standard representations or warranties
made by the Company at the time such loans are transferred, the effect of which
may have a material adverse effect on the Company's results of operations and
financial condition.

Value of Interest-only, Principal-only, Residual Interest and Subordinated
Securities Subject to Fluctuation. To the extent that the Company engages in
securitizations, the Company's assets will likely include "interest-only,"
"principal-only," residual interest and subordinated securities, which will be
valued by the Company in accordance with SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." The
Company will record its retained interest in securitizations (including
"interest-only," "principal-only" and subordinated securities) as investments
classified as trading securities.

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Realization of these "interest-only," "principal-only," residual interest and
subordinated securities in cash is subject to the timing and ultimate
realization of cash flows associated therewith, which is in turn effected by the
prepayment and loss characteristics of the underlying loans. The Company will
estimate future cash flows from these "interest-only," "principal-only,"
residual interest and subordinated securities and will value such securities
with assumptions that it believes to be consistent with those that would be
utilized by an unaffiliated third-party purchaser. If actual experience differs
from the assumptions used in the determination of the asset value, future cash
flows and earnings could be negatively impacted, and the Company could be
required to reduce the value of its "interest-only," "principal-only," residual
interest and subordinated securities in accordance with SFAS 125. The value of
such securities can fluctuate widely and may be extremely sensitive to changes
in discount rates, projected mortgage loan prepayments and loss assumptions.

Risks Regarding Hedging. In the future the Company may hedge its
variable-rate mortgage loans and any interest-only and residual certificates
retained in connection with any future securitizations with hedging transactions
which may include forward sales of mortgage loans or mortgage-backed securities,
interest rate caps and floors and buying and selling of futures and options on
futures. Hedging techniques involving the use of derivative financial
investments are highly complex and may prove volatile. The financial futures
contracts and options thereon in which the Company may invest are subject to
periodic margin calls that would result in additional costs to the Company. If a
hedging instrument utilized by the Company were found to be legally
unenforceable, the Company's portfolio of loans held for sale would be exposed
to interest rate fluctuations which could materially and adversely affect the
Company's business and results of operations. Additionally, hedging strategies
have significant transaction costs. The nature and quantity of hedging
transactions will be determined by the Company's management based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur losses
after accounting for its hedging activities.

COMPANY PERFORMANCE MAY BE AFFECTED BY CONTRACTED SUB-SERVICING

While the Company currently sells substantially all of the mortgage loans
it originates servicing released, it is required to service the loans from the
date of funding through the date of sale. Since the Company conducts whole loan
sales monthly, the Company currently does not have a substantial servicing
portfolio. Nonetheless, the Company currently contracts for the sub-servicing of
all mortgage loans it originates through the date of sale and is subject to
risks associated with inadequate or untimely services. To the extent that the
Company decides to retain servicing rights in the future or conduct
securitizations, it currently intends to contract for the sub-servicing of such
mortgage loans, which would expose it to more substantial risks associated with
contracted sub-servicing. In such event, it is expected that many of the
Company's borrowers will require notices and reminders to keep their mortgage
loans current and to prevent delinquencies and foreclosures. A substantial
increase in the Company's delinquency rate or foreclosure rate could adversely
affect its ability to access profitably the capital markets for its financing
needs, including any future securitizations.

The Company intends to subcontract with sub-servicers to service the
mortgage loans for any of its public securitizations. With respect to such
mortgage loans, the related pooling and servicing agreements would permit the
Company to be terminated as master servicer under specific conditions described
in such agreements, which generally include the failure to make payments,
including advances, within specific time periods. Such termination would
generally be at the option of the trustee but not at the option of the Company.
If, as a result of a sub-servicer's failure to perform adequately, the Company
were terminated as master servicer of a securitization, the value of any
servicing rights held by the Company would be adversely impacted. In addition,
if a new sub-servicer were selected with respect to any such securitization, the
change
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in sub-servicing may result in greater delinquencies and losses on the related
loans, which would adversely impact the value of any "interest-only,"
"principal-only," residual interest and subordinated securities held by the
Company in connection with such securitization.

CONCENTRATION OF OPERATIONS MAY ADVERSELY AFFECT COMPANY OPERATIONS

Approximately 30.0%, 36.9% and 53.6% of the dollar volume of loans
originated by the Company during the years ended June 30, 1998, 1997 and 1996,
respectively, were secured by properties located in California. No other state
contained properties securing more than 10% of the dollar volume of loans
originated by the Company during such periods, other than Illinois which
accounted for 16.6% and 10.4% for the years ended June 30, 1998 and 1997,
respectively, and Hawaii which accounted for 12.0% for the year ended June 30,
1997. Although the Company has a growing independent broker network outside of
California, the Company is likely to continue to have a significant amount of
its loan originations in California for the foreseeable future, primarily
because California represents a significant portion of the national mortgage
marketplace. Consequently, the Company's results of operations and financial
condition are dependent upon general trends in the California economy and its
residential real estate market. The California economy experienced a slowdown or
recession in recent years that has been accompanied by a sustained decline in
the California real estate market. Residential real estate market declines may
adversely affect the values of the properties securing loans such that the
principal balances of such loans will equal or exceed the value of the mortgaged
properties. Reduced collateral value will adversely affect the volume of the
Company's loans as well as the pricing of the Company's mortgage loans and the
Company's ability to sell its loans.

In addition, California historically has been vulnerable to certain natural
disaster risks, such as earthquakes and erosion-caused mudslides, which are not
typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact borrowers' ability to repay
mortgage loans made by the Company, any sustained period of increased
delinquencies or defaults could adversely affect the pricing of the Company's
future loan sales and the ability of the Company to sell its loans. The
existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations and financial condition.

REAL PROPERTY WITH ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR THE COMPANY

In the course of its business, the Company may acquire real property
securing loans that are in default. There is a risk that hazardous substances or
waste, contaminants, pollutants or sources thereof could be discovered on such
properties after acquisition by the Company. In such event, the Company might be
required to remove such substances from the affected properties at its sole cost
and expense. The cost of such removal may substantially exceed the value of the
affected properties or the loans secured by such properties. There can be no
assurance that the Company would have adequate remedies against the prior owners
or other responsible parties, or that the Company would not find it difficult or
impossible to sell the affected real properties either prior to or following any
such removal, the effect of which may have a material adverse effect on the
Company's results of operations and financial condition.

COMPANY SUBJECT TO EXTENSIVE LEGISLATIVE AND REGULATORY RISKS

The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subjected
to various laws and judicial and administrative decisions imposing requirements
and restrictions on a substantial portion of its operations. The Company's
consumer lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"),
the Fair Credit Reporting Act of 1970, as amended, RESPA and Regulation X, the
Fair Housing Act, the Home Mortgage Disclosure Act and the Federal Debt
Collection Practices ACT, as well as other federal and state statutes and
regulations affecting the Company's activities. The Company is also subject to
the rules and regulations of and examinations by the Department of Housing and
Urban Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
35
36

obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.

With respect to its confirming lending activities, lenders such as the
Company are required annually to submit to FNMA and FHLMC audited financial
statements, and each regulatory activity has its own financial requirements. The
Company's affairs are also subject to examination by FNMA and FHLMC at any time
to assure compliance with the applicable regulations, policies and procedures.

In October 1997, HUD issued proposed regulations regarding the treatment
and disclosure of fees charged and collected by mortgage brokers providing
certain safe harbors for the payment of fees by lenders to mortgage brokers and
setting forth standards to determine whether payments to mortgage brokers
violate RESPA. Whether such regulations will be adopted and the form and content
of any final regulations is unknown.

The Company is subject to licensing by state authorities. In addition, any
person who acquires more than 10% of the Company's stock will become subject to
certain state licensing regulations requiring such person periodically to file
certain financial and other information. If any person holding more than 10% of
the Company's stock refuses to adhere to such filing requirements, the Company's
existing licensing arrangements could be jeopardized. The loss of required
licenses could have a material adverse effect on the Company's results of
operations and financial condition.

Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.

Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantage of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.

POSSIBLE NEED FOR ADDITIONAL EQUITY FINANCING

The Company's primary operating cash requirements include the funding or
payment of (i) loan originations, (ii) interest expense incurred on borrowings
under warehouse lines of credit, (iii) income taxes, (iv) capital expenditures
and (v) other operating and administrative expenses. The Company funds these
cash requirements primarily through warehouse lines of credit and whole loan
sales. In addition, if the Company conducts securitizations, it would require
liquidity to fund its investments in "interest-only" and residual certificates
and for fees and expenses incurred with securitizations. The Company's ability
to implement its business strategy will depend upon its ability to establish
alternative long-term financing arrangements with parties other than DLJ and
obtain sufficient financing under warehouse facilities upon acceptable terms.
There can be no assurance that such financing will be available to the Company
on favorable terms, if at all. If such financing were not available or the
Company's capital requirements exceed anticipated levels, then the Company would
be required to obtain additional equity financing which would dilute the
interests of stockholders who invest in this Offering. The Company cannot
presently estimate the amount and timing of additional equity financing
requirements because such requirements are tied to, among other things, the

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37

growth of the Company. If the Company were unable to raise such additional
capital, its results of operations and financial condition would be adversely
affected.

ANY FUTURE ACQUISITIONS OF OTHER SPECIALTY FINANCE COMPANIES, OTHER FINANCE OR
MORTGAGE COMPANIES OR ASSETS MAY HAVE ADVERSE EFFECTS ON THE COMPANY'S BUSINESS

The Company may, from time to time, engage in the acquisition of other
specialty finance companies, other finance or mortgage companies or portfolios
of loan assets. Any acquisition made by the Company may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt and
the amortization of expenses related to goodwill and other intangible assets,
any of which could have a material adverse effect on the Company's business and
results of operations. The Company also may experience difficulties in the
assimilation of the operations, services, products and personnel related to
acquired companies or loan portfolios, an inability to sustain or improve the
historical revenue levels of acquired companies, the diversion of management's
attention from ongoing business operations and the potential loss of key
employees of such acquired companies. The Company currently has no formal
agreements with regard to any potential acquisition and there can be no
assurance that future acquisitions, if any, will be consummated.

SIGNIFICANT INFLUENCE OF CURRENT MANAGEMENT

The officers and directors of the Company beneficially own 32% of the
outstanding Common Stock of the Company. As a result, the Company's current
management through its stock ownership and otherwise is able to exert
significant influence over the business and affairs of the Company.

POSSIBLE VOLATILITY OF STOCK PRICE

The trading price of the Company's Common Stock has been in the past and
could be in the future subject to significant fluctuations in response to
variations in quarterly operating results, changes in analysts' estimates,
general conditions in the speciality finance industry and other factors. For
example, on April 20, 1998 the price per share was $14.125 and on August 31,
1998 it was $6.125. In addition, for example, companies engaging in
securitizations record non-cash gain on sale of mortgage loans from the revenue
expected to be obtained from retained residual interests in future payments on
the loans. Realization of cash from these residual interests is subject to the
timing and ultimate realization of cash flows associated therewith, which in
turn is affected by the prepayment and loss characteristics of the underlying
loans. Several specialty finance companies recently have been required to
"write-down" the value of their retained interests, and therefore reduce or
eliminate reported earnings, largely as a result of a higher than anticipated
level of prepayments on the underlying loans which has materially adversely
affected their stock prices. Stock prices of other specialty finance companies
that utilize more conservative assumptions in recording non-cash gain on sale
and those, such as the Company, that sell whole loans for cash and do not engage
in material securitization activities, also have been adversely impacted by
these developments. There can be no assurance the future market price of the
Company's Common Stock will not be adversely impacted by the results of
operation of, and market reactions to, other specialty finance companies.
Furthermore, in September 1998, the Company initiated a stock repurchase program
pursuant to which it has, as of September 14, 1998, repurchased 146,200 shares
of Common Stock ranging from $7.00 to $7.125 per share.

The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock or
debt securities. The actual or perceived effect of such offerings, the timing of
which cannot be predicted, may be the dilution of the book value or earnings per
share of the Common Stock outstanding, which may result in the reduction of the
market price of the Common Stock.

ANTI-TAKEOVER EFFECT OF DELAWARE LAW

The Company is a Delaware corporation and as such is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
In general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning more than 15% or more of the Company's outstanding

37
38

voting stock) from engaging in a "business combination" with the Company for
three years following the date that person became an interested stockholder
unless the business combination is approved in a prescribed manner. This statute
could make it more difficult for a third party to acquire control of the
Company.

ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT HOLDERS OF COMMON STOCK

The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. Although at present the Company has no plans to issue any of
the Preferred Stock, the Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the Common
Stock. The issuance of Preferred Stock under certain circumstances could have
the effect of delaying or preventing a change in control of the Company.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF THE
COMPANY'S COMMON STOCK

The sales of substantial amounts of the Company's Common Stock in the
public market or the prospect of such sales could materially and adversely
affect the market price of the Common Stock. As of September 14, 1998, the
Company had outstanding 5,729,779 shares of Common Stock. Shares of Common Stock
held by affiliates are restricted in nature and are saleable to the extent
permitted pursuant to Rule 144 under the Securities Act. The Company's 1997
Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan")
authorizes the grant of options to purchase, and awards of, 800,000 shares; of
this amount, options to acquire 163,265 shares of Common Stock have been granted
at a per share exercise price of $6.10; options to acquire 447,402 shares of
Common Stock have been granted at a per share exercise of $9.50 and 12,500
options to acquire shares of Common Stock have been granted at a per share
exercise price of $11.00. The Company intends to register under the Securities
Act shares reserved for issuance pursuant to the Stock Option Plan. In addition,
in connection, with the Company's initial public offering, the representatives
of the underwriters were sold Representatives' Warrants evidencing the right to
purchase from the Company up to 317,319 shares of Common Stock at an exercise
price of $10.45 per share. The holders of the Representatives' Warrants are
entitled to certain registration rights.

ITEM 2. PROPERTIES

The Company's executive and administrative offices are located at 1063
McGaw Avenue, Irvine, California 92614, which consists of approximately 54,768
square feet. The lease on the premises expires on November 30, 2002 and the
current monthly rent is approximately $71,200.

The Company also leases space for its other offices. As of June 30, 1998,
these facilities aggregate approximately 50,043 square feet, with monthly
aggregate base rental of approximately $70,300. The terms of these leases vary
as to duration and rent escalation provisions. In general, the leases expire
between October 1998 and March 2003 and provide for rent escalations tied to
either increases in the lessor's operating expenses or fluctuations in the
consumer price index in the relevant geographical area.

ITEM 3. LEGAL PROCEEDINGS

The Company occasionally becomes involved in litigation arising from the
normal course of business. Management believes that any liability with respect
to pending legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.

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

No matters were submitted to a vote of the Company's security holders
during the quarter ended June 30, 1998.

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39

PART II

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

In March 10, 1998 the Company's common stock began trading under the symbol
BNCM on the Nasdaq National Market. The initial public offering of 3,173,196
shares of common stock at $9.50 per share on March 10, 1998. On March 11, 1998,
the underwriters purchased an additional 475,979 shares of common stock at a
price of $9.50 per share following their exercise of the over allotment option,
resulting in a total of 3,649,175 shares sold in the initial public offering
(the "Offering"). The Company received net proceeds of $16,199,000 from the
Offering. As of June 30, 1998 of these proceeds, approximately $4.05 million was
used to fund loan originations, and the remaining balance has been invested in
short term investments.

In connection with the Offering, warrants were issued to the
representatives of the underwriters to purchase up to 317,319 additional shares
of common stock at an exercise price of $10.45 per share, exercisable over a
period of four years, commencing one year from March 10, 1998. As of June 30,
1998, the Company had 5,729,779 shares of common stock outstanding.

On September 1, 1998, the Company's Board of Directors authorized the
Company to repurchase up to $2 million of the Company's common stock, in open
market purchases from time to time at the discretion of the Company's
management. As of September 14, 1998, the Company had repurchased 146,200 shares
of common stock at a cost of $1,040,908.

The follow table sets forth the range of high and low closing sale prices
of the Company's Common Stock for the periods indicated:

1998 HIGH LOW
---- ------- -------

Quarter ended: March 31, 1998............................... $13.125 $11.625
Quarter ended: June 30, 1998................................ $14.125 $10.625

No dividends have been paid on the Company's common stock. The Company does
not anticipate paying dividends in the near future. Any decision made by the
Company's Board of Directors to pay dividends in the future will depend upon the
Company's future earnings, capital requirements, financial condition and other
factors deemed relevant by the Company's Board of Directors.

On September 14, 1998, the Company had approximately 17 stockholders of
record, (including holders who are nominees for an undetermined number of
beneficial owners) of its Common Stock.

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40

ITEM 6. SELECTED FINANCIAL DATA

The following selected statement of operations data and balance sheet data
are derived from consolidated financial statements of the Company. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and related notes and other financial information included herein.
The Company was formed on May 2, 1995 and began operations in August 1995. For
the period of May 2, 1995 through June 30, 1995, the Company did not have any
revenue and recorded start-up costs of $10,000. Selected statement of operations
data and balance sheet data are not presented for the period May 2, 1995 through
June 30, 1995, as the operations were not material.

YEAR ENDED JUNE 30,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)

STATEMENT OF OPERATIONS DATA
Revenues:
Gain on sale of mortgage loans....................... $ 30,458 $ 21,855 $ 4,240
Loan origination income.............................. 5,399 5,473 1,978
Interest income...................................... 7,860 5,182 1,960
Other Income......................................... 676 250 52
-------- -------- --------
Total revenues............................... 44,393 32,760 8,230
-------- -------- --------
Expenses:
Employees' salaries and commissions.................. 18,828 11,052 3,624
General and administrative expenses.................. 8,028 5,543 2,400
Interest expense..................................... 5,486 3,693 1,452
-------- -------- --------
Total expenses............................... 32,342 20,288 7,476
-------- -------- --------
Income before taxes.................................... 12,051 12,472 754
Income tax expense..................................... 4,815 4,930 337
-------- -------- --------
Net income............................................. $ 7,236 $ 7,542 $ 417
======== ======== ========
Net income per share:
Basic................................................ $ 1.55 $ 1.80 $ 0.14
======== ======== ========
Diluted.............................................. $ 1.51 $ 1.80 $ 0.14
======== ======== ========
Shares used in computing net income per share:
Basic................................................ 4,654 4,187 2,892
======== ======== ========
Diluted.............................................. 4,796 4,187 2,892
======== ======== ========
OPERATING STATISTICS
Loan originations:
Mortgage loan originations............................. $788,479 $532,621 $199,963
Whole loan sales....................................... $744,365 $519,909 $156,559
Average initial principal balance per loan............. $ 100 $ 98 $ 101
Gain on sale as a percentage of whole loan sales....... 4.1% 4.2% 2.7%

AS OF JUNE 30
------------------------------------
1998 1997 1996
-------- -------- --------

BALANCE SHEET DATA
Cash and cash equivalents.............................. $ 25,890 $ 8,268 $ 2,452
Restricted cash........................................ 638 -- --
Mortgage loans held for sale........................... 98,717 55,145 42,723
Total assets........................................... 130,555 65,713 46,352
Warehouse line of credit............................... 96,022 54,625 42,723
Total liabilities...................................... 99,704 56,509 44,506
Total stockholders' equity............................. 30,851 9,204 1,846

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

The following discussion and analysis of the financial condition, results
of operations and liquidity and capital resources should be read in conjunction
with the Company's consolidated financial statements and notes included in Item
14 of this 10-K.

GENERAL

BNC Mortgage, Inc. is a specialty finance company engaged in the business
of originating, purchasing and selling, on a whole loan basis for cash,
non-conforming and, to a lessor extent conforming, residential mortgage loans
secured by one-to-four family residences. The term "non-conforming loans" as
used herein means (i) subprime loans, which are loans made to borrowers who are
unable or unwilling to obtain mortgage financing from conventional mortgage
sources, whether for reasons of credit impairment, income qualification or
credit history or a desire to receive funding on an expedited basis and (ii)
non-conforming loan products for primarily high credit borrowers whose credit
scores equal or exceed levels required for the sale or exchange of their
mortgage loans through FNMA and FHLMC, but where the loan itself fails to meet
conventional mortgage guidelines, such as the principal balance exceeds the
maximum loan limit of $227,150 or the loan structure documentation does not
conform to agency requirements. The Company's loans are made primarily to
refinance existing mortgages, consolidate other debt, finance home improvements,
education and other similar needs, and, to a lesser extent, to purchase single
family residences. The Company has three divisions: (i) a wholesale subprime
division which has relationships with approximately 3,200 approved independent
loan brokers and which to date has accounted for substantially all of the
Company's total loan originations, (ii) a wholesale prime division which
originates conforming loans that meet FNMA, FHLMC and other conventional
mortgage guidelines and non-conforming loan products which are not subprime
loans, and (iii) a retail division which markets loans directly to homeowners.
Substantially all of the Company's mortgage loan originations are sold in the
secondary market through loan sales in which the Company disposes of its entire
economic interest in the loans including the related servicing rights for cash.
As a result of this strategy, the Company receives cash revenue, rather than
recognizing non-cash revenue attributable to residual interests in future loan
payments on the loan, as is the case with securitizations.

The following table shows the Company's mortgage loan originations,
mortgage loan sales, cash gain on sale of mortgage loans and origination
locations with account executives for the periods indicated:

YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage loan originations......................... $788,479 $532,621 $199,963
Mortgage loan sales................................ $744,365 $519,909 $156,559
Gain on sale of mortgage loans..................... $ 30,458 $ 21,855 $ 4,240
Origination locations at end of period............. 53 38 19

Revenues are derived primarily from cash gain on sales of loans and
interest income from loans held for sale. The major components of the Company's
revenues are (i) the volume of loans originated, (ii) the premium over principal
amount received in loan sales, (iii) origination points received or paid, (iv)
origination fees received and (v) the differential between the interest rate on
borrowings under revolving warehouse credit facilities and the interest rate of
loans held for sale. Cash gain on sale of mortgage loans is affected by, among
other things, borrower credit risk classification, loan-to-value ratio, interest
rate and margin of the loans. Revenues increased 36% and 298% for the years
ended June 30 1998 and 1997, respectively.

The major components of expenses are employees' salaries and commissions,
general and administrative, and interest. Employees' salaries and commissions,
for the years ended June 30, 1998, 1997 and 1996 accounted for 58%, 54% and 48%
of total expenses, respectively. Employees' salaries and commissions are
primarily related to the loan origination volume because the Company's sales
force is compensated on a commission basis in addition to salaries. Total
expenses were $32.3 million, $20.3 million and $7.5 million for the years ended
June 30, 1998, 1997 and 1996, respectively.

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42

The Company's net income decreased to $7.2 million for the year ended June
30, 1998 compared to $7.5 million and $0.4 million for years ended June 30, 1997
and 1996, respectively.

Increased competition in the mortgage industry could have the effect of (i)
lowering gains that may be realized on loan sales through lower cash premiums
paid for loans or an increase in demand for yield spread premium paid to the
mortgage brokers, (ii) reducing an individual company's volume of loan
originations and sales, (iii) increasing demand for experienced personnel
increasing the likelihood such personnel will be recruited by competitors and
(iv) lowering the industry standard for underwriting guidelines as competitors
attempt to increase or maintain market share in the face of increased
competition. In the past, certain of these factors have caused the revenues and
net income of many participants in the mortgage industry, including the Company,
to fluctuate from quarter to quarter.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997

Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:

YEAR ENDED JUNE 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)

Gain on sale of mortgage loans.............................. $30,458 $21,855
Loan origination income..................................... 5,399 5,473
Interest income............................................. 7,860 5,182
Other income................................................ 676 250
------- -------
$44,393 $32,760
======= =======

The increase in revenues was due primarily to increased mortgage loan
originations and cash gain on sales of mortgage loans. Mortgage loan
originations increased $255.9 million to $788.5 million for the year ended June
30, 1998 from $532.6 million for the year ended June 30, 1997.

Cash gain on sale of mortgage loans increased $8.6 million to $30.5 million
for the year ended June 30, 1998 from $21.9 million for the year ended June 30,
1997. The increase was due primarily to a $224.5 million increase in mortgage
loan sales to $744.3 from $519.9 million for the years ended June 30, 1998 and
1997, respectively. The weighted average cash gain on sale was 4.1% for the year
ended June 30, 1998 and 4.2% for the year ended June 30, 1997. There can be no
assurance that the Company will recognize comparable levels of cash gain on sale
of mortgage loans in future periods. The Company makes yield spread premium
payments to its mortgage broker customers in the ordinary course of business.
Due to competitive conditions, these payments have increased in recent periods,
which adversely affected the Company's cash gain on sale of mortgage loans for
the year ended June 30, 1998.

Loan origination income decreased to $5.4 million for the year ended June
30, 1998 from $5.5 million for the year ended June 30, 1997. As a percentage of
total revenues, loan origination income for the year ended June 30, 1998
decreased to 12.2% as compared to 16.7% for the year ended June 30, 1997. This
decrease was a result of competitive conditions as management was required to
lower the amount of origination points and fees charged on its loan products to
satisfy mortgage broker and consumer demands.

Interest income increased $2.7 million to $7.9 million for the year ended
June 30, 1998 from $5.2 million for the year ended June 30, 1997. This increase
is due to an increase in loan originations during the period.

Other income, which is composed of investment income, prepayment penalties
and late charges, increased to $676,000 for the year ended June 30, 1998 as
compared to $250,000 for the year ended June 30, 1997 largely as a result of
interest received on the net proceeds from the Offering completed March 10,
1998.

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Expenses. The following table sets forth the components of the Company's
expenses for the years indicated:

YEAR ENDED JUNE 30,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)

Employees' salaries and commissions......................... $18,828 $11,052
General and administrative expenses......................... 8,028 5,543
Interest expense............................................ 5,486 3,693
------- -------
$32,342 $20,288
======= =======

Total expenses increased to $32.3 million for the year ended June 30, 1998
from $20.3 for the year ended June 30, 1997. This increase is related to
geographical expansion to 53 origination locations at June 30, 1998 from 38 at
June 30, 1997, and to an increase in mortgage loan originations.

Employee salaries and commissions increased $7.8 million to $18.8 million
during the year ended June 30, 1998 from $11.0 million for the year ended June
30, 1997. This increase is due primarily to an increase in the number of
origination locations, geographical expansion and the related increase in
mortgage loan originations.

General and administrative expenses increased $2.5 million to $8.0 million
for the year ended June 30, 1998 from $5.5 million for the year ended June 30,
1997. This increase is due primarily to an increase in the number of origination
locations and the related increase in mortgage loan originations.

Interest expense increased $1.8 million to $5.5 million for the year ended
June 30, 1998 from $3.7 million for the year ended June 30, 1997 and is
attributable to the higher levels of warehouse borrowing as a result of the
increase in mortgage loan originations.

It is expected that the Company's expansion plans including the retail and
conforming wholesale divisions will result in an increase in operating expenses
in the short-term. Furthermore, management expects that there will be a lag time
between the incurrence of such expense and the receipt of any revenues from such
expansion efforts, and the results of operations may be adversely affected in
the short-term.

YEAR ENDED JUNE 30, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996

Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:

YEAR ENDED JUNE 30
-----------------------
1997 1996
---------- ---------
(DOLLARS IN THOUSANDS)

Gain on sale of mortgage loans.............................. $21,855 $4,240
Loan origination income..................................... 5,473 1,978
Interest income............................................. 5,182 1,960
Other income................................................ 250 52
------- ------
$32,760 $8,230
======= ======

Revenues increased to $32.8 million for the year ended June 30, 1997 from
$8.2 million for the year ended June 30, 1996, largely due to increased mortgage
loan originations and cash gain on sale of mortgage loans.

The increase in mortgage loan originations was due to both increased
production from existing branches and expansion into new markets. Origination
location increased to 38 at June 30, 1997 from 19 at June 30, 1996.

Cash gain on sale of mortgage loans increased $17.7 million to $21.9
million in the year ended June 30, 1997 from $4.2 million for the year ended
June 30, 1996. The increase was due primarily to the $332.7 million

43
44

increase in mortgage loan originations for the year ended June 30, 1997 compared
to the year ended June 30, 1996. Total loans of $519.9 million and $156.6
million were sold during the period ended June 30, 1997 and 1996 with a weighted
average cash gain on sale of 4.2% and 2.7%, respectively.

Loan origination income increased to $5.5 million for the year ended June
30, 1997 from $2.0 million for the year ended June 30, 1996, due to increased
mortgage loan originations.

Interest income increased $3.2 million to $5.2 million for the year ended
June 30, 1997 from $2.0 million in the year ended June 30, 1996 due to a higher
balance of loans held for sale as a result of the increase in mortgage loan
origination.

Other income increased to $250,000 for the year ended June 30, 1997 as
compared to $52,000 for the year ended June 30, 1996 largely as a result of
increased mortgage loan originations and an increase in cash and cash
equivalents.

Expenses. The following table sets forth the components of the Company's
expenses for the period indicated:

YEAR ENDED JUNE 30,
-----------------------
1997 1996
---------- ---------
(DOLLARS IN THOUSANDS)

Employees' salaries and commissions......................... $11,052 $3,624
General and administrative expenses......................... 5,543 2,400
Interest expense............................................ 3,693 1,452
------- ------
$20,288 $7,476
======= ======

Expenses increased to $20.3 million for the year ended June 30, 1997 from
$7.5 million of the year ended June 30, 1996, due to the cost of geographical
expansion and in large part to increased compensation and other personnel costs
related to the 166% increase in mortgage loan originations. Expenses for the
year ended June 30, 1996 included a litigation reserve of $200,000 relating to
potential exposure from a lawsuit against the Company which was settled through
payment during the year ended June 30, 1997.

Employees salaries and commissions increased $7.4 million to $11.1 million
in the year ended June 30, 1997 from $3.6 million for the year ended June 30,
1996, primarily due to the increase in employees to 257 at June 30, 1997 from
148 at June 30, 1996 and increases in commissions paid to employees.

General and administrative expense increased $3.1 million to $5.5 million
for the year ended June 30, 1997 from $2.4 million in the year ended June 30,
1996. The increase was due to the expansion of the Company's loan origination
network and related increase in mortgage loan originations.

Interest expense increased $2.2 million for the year ended June 30, 1997
from $1.5 million in the year ended June 30, 1996, due to greater borrowings to
fund the increased mortgage loan originations.

DISCLOSURE ABOUT MARKET RISK

The Company's earnings can be affected significantly by the movement of
interest rates, which is the primary component of market risk to the Company.
The interest rate risk affects the value of the mortgage loans held for sale,
net interest income earned on its mortgage inventory, interest income earned on
idle cash, interest expense and cash gain on sale of mortgage loans.

The Company currently sells its loan production monthly on a whole loan
basis for cash.

As it relates to lending activities, the Company originates mortgage loans,
which are generally presold through forward loan sales commitments. However,
between the time that the loan is originated and sold to the ultimate investor,
the Company earns interest income. The loans are funded through the use of the
DLJ warehouse line of credit and the interest charged by DLJ is generally priced
based upon short-term interest rates. Therefore, the net interest income that is
earned by the Company is generally dependent upon the spread between long-term
mortgage rates and short-term mortgage interest rates.

44
45

The Company currently does not maintain a trading portfolio. As a result,
the Company is not exposed to market risk as it relates to trading activities.
The majority of the Company's loan portfolio is held for sale which requires the
Company to perform quarterly market valuations of its portfolio in order to
properly record the portfolio at the lower of cost or market. Therefore, the
Company continually monitors the interest rates of its loan portfolio as
compared to prevalent interest rates in the market.

The Company currently does not enter into any hedging activities as it
currently sells its loan production on a monthly basis and the prohibitive cost
versus the benefit of any hedging.

Based on the information available and the interest environment as of June
30, 1998, the Company believes that a 100 basis point increase in long-term
interest rates over a twelve month period, with all else being constant, would
have an adverse effect on the pricing for the Company's whole loan sales.
Therefore, the Company believes that its net income could be adversely affected
in the range of $1.3 to $2.5 million. However, the Company believes that a 100
basis point decrease in long-term interest rates over a twelve-month period may
not result in a similar increase in the level of its net income. These estimates
are limited by the fact that they are performed at a particular point in time
and incorporate many other factors and thus should not be used as a forecast.
Therefore, there can be no assurance that the amount of such decrease would not
substantially vary from these estimates.

YEAR 2000

LIQUIDITY AND CAPITAL RESOURCES

The Company's sources of cash flow include cash gain on sale of mortgage
loans, origination income, net interest income and borrowings. The Company sells
its mortgage loans generally on a monthly basis to generate cash for operations.
The Company's uses of cash in the short-term include the funding of mortgage
loan originations, payment of interest, repayment of amounts borrowed under
warehouse lines of credit, operating and administrative expenses, start-up costs
for new origination locations, income taxes and capital expenditures. Long-term
uses of cash may also include the funding of securitization activities and
selective acquisitions of other specialty finance companies or portfolios of
loan assets. The Company currently has no formal agreements with regard to any
potential acquisition and there can be no assurance that future acquisitions, if
any, will be consummated. Capital expenditures totaled $1.4 million and $448,000
for the years ended June 30, 1998 and 1997, respectively. Capital expenditures
were primarily comprised of furniture, fixtures and equipment software and
leasehold improvements.

Cash and cash equivalents were $25.9 million and $8.3 million at June 30,
1998 and 1997, respectively. The Company invests its cash in short-term
investments maintaining flexibility for funding of loan originations and
strategic opportunities. In March, 1998 the Company concluded its initial public
offering and received net proceeds of $16,199,000 from the Offering. As of June
30, 1998, of these proceeds, approximately $4.05 million was used to fund loan
originations, and the remaining balance has been invested in short-term
investments.

On September 1, 1998, the Company's Board of Directors authorized the
Company to repurchase up to $2 million of the Company's common stock in open
market purchases from time to time at the discretion of the Company's
management. As of September 14, 1998, the Company had repurchased 146,200 shares
of Common Stock at a cost of $1,040,908.

The Company funds its operations through cash reserves, loan sales, net
earnings and a revolving warehouse credit facility with the DLJ Facility, under
which it borrows money to finance the origination of mortgage loans. As of June
30, 1998, the DLJ Facility provides borrowings up to $150.0 million and

45
46

terminates on March 16, 2000. The DLJ Facility bears interest at a rate of the
federal funds rate plus 50 basis points through March 16, 1999 and thereafter,
the federal funds rate plus 100 basis points. It is expected that the DLJ
Facility will not be extended beyond the term. The Company is currently
negotiating with other lenders to obtain additional warehouse lines of credit
with interest rates and terms that are consistent with management's objectives.
The Company repays borrowings with proceeds of its loan sales.

During the years ended June 30, 1998 and 1997, the Company used cash of
$788.5 million and $532.6 million, respectively, for new loan originations.
During the same periods, the Company received cash proceeds from the sale of
loans of $744.9 million and $519.9 million, respectively, representing the
principal balance of loans sold. The Company received cash proceeds from the
premiums on such sale of loans of $30.5 million and $21.9 million respectively,
for the years ended June 30, 1998 and 1997, respectively.

The Company's ability to continue to originate loans is dependent upon a
number of factors, including the borrower credit risk classification,
loan-to-value ratios and interest rates, general economic conditions, warehouse
facility interest rates and governmental regulations.

Recently Issued Accounting Considerations.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company has
determined that this Statement will not have a significant impact on its
financial position or results of operations for fiscal 1999.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is contained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Disclosure About Market Risk," incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Consolidated Financial Statements beginning on Page F-1 of this Annual
Report on Form 10-K

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is set forth in the Company's
definitive Proxy Statement (the "Proxy Statement"), which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is set forth in the Proxy Statement,
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities and Exchange Act of 1934 and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is forth in the Proxy Statement,
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and is incorporated
herein by reference.

46
47

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is set forth in the Proxy Statement,
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the to Regulation 14A under the Securities Exchange Act of
1934 and is incorporated herein by reference.

PART IV

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

(a) The following documents are filed as part of this report:

1. Consolidated Financial Statements -- See "Index to Consolidated
Financial Statements"

2. Exhibits -- See "Exhibit Index"

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year ended June 30, 1998.

47
48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Irvine,
State of California on September 28, 1998.

BNC MORTGAGE, INC.

By: /s/ EVAN R. BUCKLEY
------------------------------------
Evan R. Buckley
Chairman of the Board,
Chief Executive Officer,
Secretary and Director

POWER OF ATTORNEY

We, the undersigned Officers and Directors of BNC Mortgage, Inc. do hereby
constitute and appoint Evan R. Buckley and Kelly W. Monahan, or either of them,
our true and lawful attorneys and agents, to do any and all acts and things in
our names in the capacities indicated below, which said attorneys and agents, or
either of them may deem necessary or advisable to enable said corporation to
comply with the Securities Act of 1934, and as amended, and any rules,
regulations, and requirements of the Securities and Exchange Commission, in
connection with this Report, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments to this Report; and we do
hereby ratify and confirm all that the said attorneys and agents, or either of
them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ EVAN R. BUCKLEY Chairman of the Board, September 28, 1998
- -------------------------------------------------------- Chief Executive Officer,
Evan R. Buckley Secretary and Director

/s/ KELLY W. MONAHAN President, Chief September 28, 1998
- -------------------------------------------------------- Financial Officer and
Kelly W. Monahan Director

/s/ KEITH C. HONIG Director September 28, 1998
- --------------------------------------------------------
Keith C. Honig

/s/ JOSEPH R. TOMKINSON Director September 28, 1998
- --------------------------------------------------------
Joseph R. Tomkinson

48
49

EXHIBIT INDEX

(a) Exhibits

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

2.1* Agreement of Reorganization and Plan of Merger
3.1* Certificate of Incorporation of BNC Mortgage, Inc., a Delaware
corporation
3.2* Bylaws of BNC Mortgage, Inc., a Delaware corporation
4.1* Specimen Stock Certificate
10.1* Office Lease, as amended, between the Registrant and Shuwa Investments
Corporation dated June 15, 1997
10.2* 1997 Stock Option Plan and form of agreements
10.3* Form of Indemnification Agreement
10.4* Employment Agreement between the Registrant and Evan R. Buckley
10.5* Employment Agreement between the Registrant and Kelly W. Monahan
10.6 (a)* Letter Agreement, dated October 22, 1997, from DLJ Mortgage
Capital, Inc. to the Registrant.
(b) Commitment Letter, dated March 16, 1998, addressed to the
Registrant from DLJ Mortgage Capital, Inc.
(c) Whole Loan Financing Facility, dated March 16, 1998, between
the Registrant and DLJ Mortgage, Inc.
(d) Promissory Note, by the Registrant made in favor of DLJ
Mortgage Capital, Inc.
(f)* Whole Loan Financing Program Tri-Party Custody Agreement,
dated September 26, 1995, among Registrant and DLJ Mortgage
Capital, Inc. and Bankers Trust Company
(g) Master Mortgage Loan Purchase Agreement, dated March 16,
1998, between the Registrant and DLJ Mortgage Capital, Inc.
(h)* Form of Subordinate Certificate Financing Agreement between
the Registrant and DLJ Mortgage Capital, Inc.
10.7 Representative's Warrant, dated March 16, 1998, issued by the Registrant
to CIBC Oppenheimer Corp.
10.8 Representative's Warrant, dated March 16, 1998, issued by the Registrant
to Piper Jaffray Inc.
11.1 Statement re: Computation of Per Share Earnings
21.1 Subsidiaries
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule

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

* Incorporated by reference to, and all such exhibits have the corresponding
exhibit number filed as part of the Registration Statement on Form S-1, as
amended (File No. 333-38651) filed with the Securities and Exchange Commission
on October 24, 1997.

49
50

BNC MORTGAGE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors.............................. F-2
Consolidated Balance Sheet as of June 30, 1998 and 1997..... F-3
Consolidated Statement of Income for the Years Ended June
30, 1998, 1997 and 1996................................... F-4
Consolidated Statement of Stockholders' Equity for the Years
Ended
June 30, 1998, 1997 and 1996.............................. F-5
Consolidated Statement of Cash Flows for Years Ended June
30, 1998, 1997 and 1996................................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1
51

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
BNC Mortgage, Inc.

We have audited the accompanying consolidated balance sheet of BNC
Mortgage, Inc. as of June 30, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BNC
Mortgage, Inc. at June 30, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Orange County, California
September 14, 1998

F-2
52

BNC MORTGAGE, INC.

CONSOLIDATED BALANCE SHEET

ASSETS

JUNE 30,
---------------------------
1998 1997
------------ -----------

Cash and cash equivalents................................... $ 25,890,000 $ 8,268,000
Restricted cash............................................. 638,000 --
Mortgage loans held for sale................................ 98,717,000 55,145,000
Property and equipment, net................................. 1,533,000 609,000
Deferred income taxes....................................... 2,131,000 1,154,000
Notes receivable from officers.............................. 100,000 --
Other assets................................................ 1,546,000 537,000
------------ -----------
Total assets...................................... $130,555,000 $65,713,000
============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line-of-credit.................................. $ 96,022,000 $54,625,000
Accounts payable and accrued liabilities.................. 2,880,000 1,358,000
Income taxes payable...................................... 802,000 526,000
------------ -----------
Total liabilities................................. 99,704,000 56,509,000
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 50,000,000
Issued and outstanding shares -- none in 1998 and 1997.... -- --
Series A preferred stock, $0.001 par value:
Authorized shares -- 1,000
Issued and outstanding shares -- none in 1998 and 160 in
1997................................................... -- 1,575,000
Series A common stock, voting, no par value:
Authorized shares -- 2,886,598
Issued and outstanding shares -- none in 1998 and
2,886,598 in 1997...................................... -- --
Series B common stock, nonvoting, no par value:
Authorized shares -- 1,237,113
Issued and outstanding shares -- none in 1998 and
1,237,113 in 1997...................................... -- 7,000
Common stock, voting $0.001 par value:
Authorized Shares -- 50,000,000
Issued and outstanding shares 5,875,979 in 1998 and none
in 1997................................................ 6,000 --
Additional paid in capital................................ 16,193,000 --
Retained earnings......................................... 14,652,000 7,622,000
------------ -----------
Total stockholders' equity........................ 30,851,000 9,204,000
------------ -----------
Total liabilities and stockholders' equity........ $130,555,000 $65,713,000
============ ===========

See accompanying notes.
F-3
53

BNC MORTGAGE, INC.

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED JUNE 30,
----------------------------------------
1998 1997 1996
----------- ----------- ----------

Revenues:
Gain on sale of mortgage loans....................... $30,458,000 $21,855,000 $4,240,000
Loan origination income.............................. 5,399,000 5,473,000 1,978,000
Interest income...................................... 7,860,000 5,182,000 1,960,000
Other income......................................... 676,000 250,000 52,000
----------- ----------- ----------
Total revenues............................. 44,393,000 32,760,000 8,230,000
----------- ----------- ----------
Expenses:
Employees' salaries and commissions.................. 18,828,000 11,052,000 3,624,000
General and administrative expenses.................. 8,028,000 5,543,000 2,400,000
Interest expense..................................... 5,486,000 3,693,000 1,452,000
----------- ----------- ----------
Total expenses............................. 32,342,000 20,288,000 7,476,000
----------- ----------- ----------
Income before income taxes........................... 12,051,000 12,472,000 754,000
Income tax expense................................... 4,815,000 4,930,000 337,000
----------- ----------- ----------
Net income........................................... $ 7,236,000 $ 7,542,000 $ 417,000
=========== =========== ==========
Basic earnings per share............................. $ 1.55 $ 1.80 $ 0.14
=========== =========== ==========
Diluted earnings per share........................... $ 1.51 $ 1.80 $ 0.14
=========== =========== ==========

See accompanying notes.
F-4
54

BNC MORTGAGE INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SERIES A PREFERRED STOCK SERIES A COMMON STOCK SERIES B COMMON STOCK COMMON STOCK
------------------------- ---------------------- --------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------------- ----------- ------- ---------- ------- --------- ------

Balance at June 30,
1995................ 25 $ 250,000 1,443,299 $-- -- $ -- -- $ --
Issuance of
preferred stock... 135 1,325,000 -- -- -- -- -- --
Issuance of common
stock............. -- -- 1,443,299 -- 1,072,165 2,000 -- --
Cash dividends on
preferred stock... -- -- -- -- -- -- -- --
Net income.......... -- -- -- -- -- -- -- --
---- ----------- ---------- -- ---------- ------- --------- ------
Balance at June 30,
1996................ 160 1,575,000 2,886,598 -- 1,072,165 2,000 -- --
Issuance of common
stock............. -- -- -- -- 185,567 6,000 -- --
Repurchase of common
shares............ -- -- -- -- (20,619) (1,000) -- --
Cash dividends on
preferred stock... -- -- -- -- -- -- -- --
Net Income.......... -- -- -- -- -- -- -- --
---- ----------- ---------- -- ---------- ------- --------- ------
Balance at June 30,
1997................ 160 1,575,000 2,886,598 -- 1,237,113 7,000 -- --
Issuance of common
stock (less cost
of $455,599)...... -- -- -- -- -- -- 5,875,979 6,000
Repurchase of common
shares............ -- -- -- -- (1,237,113) (7,000) -- --
Repurchase of
preferred shares.. (160) (1,575,000) (2,886,598) -- -- -- -- --
Cash dividends on
preferred stock... -- -- -- -- -- -- -- --
Net income.......... -- -- -- -- -- -- -- --
---- ----------- ---------- -- ---------- ------- --------- ------
Balance at June 30,
1998................ -- $ -- -- $-- -- $ -- 5,875,979 $6,000
==== =========== ========== == ========== ======= ========= ======

TOTAL
ADDITIONAL PAID IN RETAINED STOCKHOLDER'S
CAPITAL EARNINGS EQUITY
------------------ ----------- --------------

Balance at June 30,
1995................ $ -- $ (10,000) $ 240,000
Issuance of
preferred stock... -- -- 1,325,000
Issuance of common
stock............. -- -- 2,000
Cash dividends on
preferred stock... -- (138,000) (138,000)
Net income.......... -- 417,000 417,000
----------- ----------- -----------
Balance at June 30,
1996................ -- 269,000 1,846,000
Issuance of common
stock............. -- -- 6,000
Repurchase of common
shares............ -- -- (1,000)
Cash dividends on
preferred stock... -- (189,000) (189,000)
Net Income.......... -- 7,542,000 7,542,000
----------- ----------- -----------
Balance at June 30,
1997................ -- 7,622,000 9,204,000
Issuance of common
stock (less cost
of $455,599)...... 16,193,000 -- 16,199,000
Repurchase of common
shares............ -- (131,000) (138,000)
Repurchase of
preferred shares.. -- -- (1,575,000)
Cash dividends on
preferred stock... -- (75,000) (75,000)
Net income.......... -- 7,236,000 7,236,000
----------- ----------- -----------
Balance at June 30,
1998................ $16,193,000 $14,652,000 $30,851,000
=========== =========== ===========

See accompanying notes.
F-5
55

BNC MORTGAGE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------

OPERATING ACTIVITIES

Net income.................................... $ 7,236,000 $ 7,542,000 $ 417,000
Adjustment to reconcile net income to net cash
used in operating activities:
Depreciation................................ 486,000 250,000 77,000
Origination of mortgage loans held for
sale..................................... (788,479,000) (532,621,000) (199,963,000)
Sales and principal repayments of mortgage
loans held for sale...................... 745,275,000 520,600,000 157,240,000
Deferred loan origination fees.............. (368,000) (401,000) --
Change in other assets...................... (1,009,000) (338,000) (199,000)
Change in accounts payable and accrued
liabilities.............................. 1,522,000 479,000 879,000
Change in income taxes payable.............. 276,000 (378,000) 904,000
Change in deferred income taxes............. (977,000) (587,000) (567,000)
------------- ------------- -------------
Net cash used in operating activities......... (36,038,000) (5,454,000) (41,212,000)
------------- ------------- -------------
INVESTING ACTIVITIES
Capital expenditures.......................... (1,410,000) (448,000) (488,000)
Purchase of Simple Mortgage USA, Inc.......... (100,000) -- --
------------- ------------- -------------
Net cash used in investing activities......... (1,510,000) (448,000) (488,000)
------------- ------------- -------------
FINANCING ACTIVITIES
Payment of dividends on preferred stock....... (75,000) (189,000) (138,000)
Repurchase of preferred shares................ (1,575,000) -- --
Repurchase of common shares................... (138,000) (1,000) --
Proceeds from issuance of common stock........ 16,199,000 6,000 2,000
Increase in restricted cash................... (638,000) -- 1,325,000
Change in warehouse line of credit............ 41,397,000 11,902,000 42,723,000
------------- ------------- -------------
Net cash provided by financing activities..... 55,170,000 11,718,000 43,912,000
------------- ------------- -------------
Net increase in cash and cash equivalents..... 17,622,000 5,816,000 2,212,000
Cash and cash equivalents at beginning of the
year........................................ 8,268,000 2,452,000 240,000
------------- ------------- -------------
Cash and cash equivalents at end of the
year........................................ $ 25,890,000 $ 8,268,000 $ 2,452,000
============= ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................. $ 5,468,000 $ 3,693,000 $ 1,452,000
============= ============= =============
Taxes paid.................................... $ 5,515,164 $ 5,351,000 $ --
============= ============= =============

See accompanying notes.
F-6
56

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND BASIS OF PRESENTATION

The Company is a specialty finance company engaged in the business of
originating, purchasing and selling non-conforming, and to a lesser extent,
conforming residential mortgage loans secured by one-to-four family residences.
The Company's loans are made to owners of single family residence who typically
use the loan proceeds for purposes such as refinancing existing mortgages, debt
consolidation, financing of home improvements, education and other similar
needs, and, to a lesser extent, to purchase residences. The Company originates
loans through its wholesale division, which originates mortgage loans through
approved independent loan brokers, and through its retail division, which
markets loans directly to homeowners. The Company currently sells all of its
mortgage loans to institutional purchasers such as investment banks, real estate
investment trusts and other large mortgage bankers for cash through whole loan
sales.

In connection with the Company's March 10, 1998 initial public offering,
the Company reincorporated in Delaware. Further to the reincorporation, the
existing California corporation was merged into a newly formed Delaware
corporation pursuant to which each outstanding share of Class A and Class B
common stock of the existing California corporation was exchanged for
4,123.71134 shares of $.001 par value common stock of the new Delaware
corporation. The certificate of incorporation of the new Delaware corporation
authorized 50,000,000 shares of common stock and 50,000,000 shares of preferred
stock. In November 1997, the Company redeemed all shares of Series A Preferred
Stock for $1,575,000.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company include the accounts
of the Company and all of its wholly owned subsidiaries. All significant
intercompany transactions and balances are eliminated.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of the consolidated financial statements of the Company
requires management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of the date of
the financial statements. Therefore, actual results could differ from those
estimates.

MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are stated at the lower of cost or aggregate
market value. Market value is determined by purchase commitments from investors
and prevailing market prices.

LOAN ORIGINATION FEES

Loan origination fees and certain direct loan origination costs for
mortgage loans held for sale are deferred until the related loans are sold.

GAIN ON SALE OF MORTGAGE LOANS HELD FOR SALE

Gains or losses on the sale of mortgage loans held for sale are recognized
at the date of sale.

CASH AND CASH EQUIVALENTS

The Company accounts for all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.

F-7
57

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment, consisting primarily of computer hardware and
software, is stated at cost, net of accumulated depreciation and amortization.
Depreciation is provided using the straight line method over their estimated
useful lives of three years.

RECENTLY ISSUED ACCOUNTING STANDARD

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company has
determined that this Statement will not have a significant impact on its
financial position or results of operations for fiscal 1999.

INCOME TAXES

The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109
requires the use of the asset and liability method of accounting for taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under FAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.

NET INCOME PER SHARE

As of June 30, 1998, the Company adopted Statement No. 128, Earnings Per
Share, and restated all prior period earnings per share (EPS) data, as required.
Statement No. 128 replaced the presentation of primary and fully diluted EPS
pursuant to APB Opinion No. 15, Earnings Per Share, with the presentation of
basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding for the period and the
dilutive effect, if any, of stock options and warrants outstanding for the
period.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values presented in Note 6 are estimates of the fair values of the
financial instruments at a specific point in time using available market
information and appropriate valuation methodologies. These estimates are
subjective in nature and involve uncertainties and significant judgment in the
interpretation of current market data. Therefore, the fair values presented are
not necessary indicative of amounts the Company could realize or settle
currently.

2. MORTGAGE LOANS HELD FOR SALE

Mortgage loans held for sale are collateralized by first and second trust
deeds on underlying real properties and are used as collateral for the Company's
borrowings. Approximately 30% of these properties are located in California.
Mortgage loans held for sale include net deferred origination fees of $769,000
and $401,000 at June 30, 1998 and 1997, respectively.

Subsequent to June 30, 1998, substantially all of the mortgage loans were
sold to DLJ pursuant to the Master Mortgage Loan Purchase Agreement.

F-8
58

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30:

1998 1997
---------- ---------

Leasehold improvements...................................... $ 251,000 $ --
Furniture and fixtures...................................... 171,000 --
Office equipment............................................ 1,685,000 840,000
Software.................................................... 239,000 96,000
---------- ---------
2,346,000 936,000
Less accumulated depreciation............................... (813,000) (327,000)
---------- ---------
$1,533,000 $ 609,000
========== =========

4. INCOME TAXES

Income tax expense for the years ended June 30, 1998, 1997 and 1996 are
summarized as follows:

1998 1997 1996
---------- ---------- ---------

Current:
Federal...................................... $4,747,000 $4,119,000 $ 749,000
State........................................ 1,045,000 1,398,000 155,000
---------- ---------- ---------
5,792,000 5,517,000 904,000
Deferred:
Federal...................................... (1,020,000) (603,000) (504,000)
State........................................ 43,000 16,000 (63,000)
---------- ---------- ---------
(977,000) (587,000) (567,000)
---------- ---------- ---------
$4,815,000 $4,930,000 $ 337,000
========== ========== =========

The reconciliation of income tax expense at the U.S. federal statutory tax
rate to the income tax expense for the years ended June 30, 1998 1997, and 1996
are as follows:

1998 1997 1996
---------- ---------- --------

Tax computed at the statutory rate.............. $4,218,000 $4,365,000 $272,000
State income tax, net of federal income tax
benefit....................................... 708,000 665,000 61,000
Other........................................... (111,000) (100,000) 4,000
---------- ---------- --------
Income tax expense.............................. $4,815,000 $4,930,000 $337,000
========== ========== ========

F-9
59

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The components of the Company's deferred income tax assets and liabilities
as of June 30, 1998 and 1997 are as follows:

1998 1997
---------- ----------

Deferred tax assets (liabilities):
Depreciation.............................................. $ 21,000 $ (16,000)
State income taxes........................................ 371,000 479,000
Reserve for loan repurchases.............................. 234,000 263,000
Accrued vacation.......................................... 195,000 104,000
Accrued compensation...................................... 183,000 --
Litigation reserve........................................ 15,000 15,000
Mark-to-market adjustments................................ 1,786,000 491,000
Deferred loan fees........................................ (682,000) (186,000)
Other accrued liabilities................................. 8,000 4,000
---------- ----------
Total deferred tax assets......................... $2,131,000 $1,154,000
========== ==========

5. WAREHOUSE LINE-OF-CREDIT

The Company has entered into a warehouse line of credit agreement with DLJ,
which provides for borrowings up to $150,000,000 with interest payable monthly
at the Federal Funds rate plus 50 basis points, (7.0%). The interest rate
increases to Federal Funds rate plus 100 basis points at March 16, 1999. At June
30, 1998 and 1997, borrowings under this line of $96,022,000 and $54,625,000 are
collateralized by mortgage loans held for sale. The Agreement provides that the
amount borrowed under the facility can exceed the maximum amount available from
time to time as the Company's production increases so as to enable the Company
to continue to fund mortgage loans without delay or interruption. The
line-of-credit matures and is subject to renewal on March 16, 2000. The weighted
average interest rate for the fiscal year ended June 30, 1998 was 6.4%.

Additionally, DLJ has agreed to provide the Company with up to $5.0 million
of financing through March 16, 1999 for subordinated "interest-only" securities
to the extent they are retained by the Company in connection with any future
securitizations of loans originated by the Company.

6. FINANCIAL INSTRUMENTS

The following describes the methods and assumptions used by the Company in
estimating fair value:

Mortgage loans held for sale -- Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and investor
commitments to purchase loans on a service-released basis. Warehouse
line-of-credit -- Fair value is estimated using rates currently available to the
Company for debt with similar terms and remaining maturities.

The carrying values and the estimated fair values of the Company's
financial instruments for which it is practical to calculate a fair value are as
follows:

JUNE 30, 1998 JUNE 30, 1997
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ------------ ----------- -----------

Mortgage loans held for
sale....................... $98,717,000 $102,948,000 $55,145,000 $56,816,000
Warehouse line-of-credit..... 96,022,000 96,022,000 54,625,000 54,625,000

F-10
60
BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. RELATED PARTY TRANSACTION

In July 1997, the Company loaned an aggregate of $250,000 to two officers
of the Company. The loans accrue interest monthly at the Federal Funds rate and
are due upon the sale of common stock. As of June 30, 1998, one loan remained
outstanding with a principal balance of $100,000. Interest income of $5,000 was
recorded related to this note for the year ended June 30, 1998.

For the year ended June 30, 1997, the Company sold $5.8 million of mortgage
loans to Impac Funding Corporation ("IFC"), a company of which Joseph R.
Tomkinson, a director of the Company, is the Chief Executive Officer, a director
and a significant common shareholder. In addition, the Company entered into a
$50 million optional delivery master commitment to sell non-conforming mortgage
loans to IFC.

During the years ended June 30, 1998, 1997, and 1996 the Company sold loans
to DLJ having an aggregate principal balance of $727.0 million, $473.7 million
and $153.2 million, respectively, pursuant to a Master Loan Purchase Agreement.
In connection with such sales, the Company paid fees to DLJ of $2.2 million,
$2.1 million and $1.8 million for the years ended June 30, 1998, 1997 and 1996,
respectively.

On June 1, 1998, the Company acquired Simple Mortgage USA, Inc. ("Simple
USA") from Evan R. Buckley, Chairman and Chief Executive Officer of the Company.
The Company paid $258,000 for Simple USA, which had a book value of $245,000. At
the time of acquisition, Simple USA had $238,000 in cash and had no employees.
The purchase price included a cash payment of $100,000 and the forgiveness of a
note payable to the Company of $150,000 and accrued interest of $8,000. The
excess of the purchase price over the book value was charged to operations in
fiscal 1998.

8. COMMITMENTS AND CONTINGENCIES

Forward Loan Sales Commitments

The Company has entered into a forward loan sale contract with an
investment bank under which it has committed to deliver $280 million in loans
originated during the period from April 1998 to July 1998. At June 30, 1998,
$143,730,581 in loans had been delivered under this commitment and the balance
was delivered subsequent to year end. The price received under the commitment
includes adjustments for the actual weighted average coupons, weighted average
margins and prepayment terms of the loans sold.

In June 1998, the Company entered into a $50 million optional delivery
master commitment to sell certain nonconforming mortgage loans at current market
rates to "IFC". The forward sales commitment is for a 12 month period and
provides an option to increase the commitment to $100 million. The Company paid
a commitment fee of $63,000 which was recorded as an asset and will be amortized
as the loans are sold into the commitment. At June 30, 1998, no loans had been
sold under this commitment.

Repurchase Obligation

The Company engages in bulk loan sales pursuant to agreements that
generally require the Company to repurchase or substitute loans in the event of
a breach of a representation or warranty made by the Company to the loan
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or first payment default on such mortgage
loans. A reserve for potential repurchases of $500,000 and $503,000 at June 30,
1998 and 1997, respectively, is included in accounts payable and accrued
liabilities.

Leases

The Company's executive and administrative offices are occupied under a
noncancelable operating lease which expires in 2002 with aggregate monthly
payments of approximately $71,200. The lease agreement requires the Company to
maintain a refundable letter of credit to the lessor in the amount of $600,000.
Cash deposited into an escrow to secure the letter of credit and accrued
interest thereon is classified as restricted cash on the balance sheet.

F-11
61

BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's loan offices are occupied under noncancelable operating
leases which expire between October 1998 and March 2003 and provide for rent
escalations tied to either increases in the lessor's operating expenses or
fluctuations in the consumer price index in the relevant geographical area. The
minimum annual rental payments under these operating leases is as follows:

1999..................................................... 1,560,000
2000..................................................... 1,426,000
2001..................................................... 1,121,000
2002..................................................... 910,000
2003..................................................... 384,000
Thereafter............................................... --
----------
$5,401,000
==========

Rent expense for the years ended June 30, 1998, 1997 and 1996 was
$1,293,000, $597,000 and $169,000, respectively.

9. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 50,000,000 shares of Preferred Stock
in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than the
rights of the Common Stock.

WARRANTS

In connection with the initial public offering, the Company issued warrants
to purchase 317,319 shares of Common Stock at an exercise price per share equal
to $10.45. The warrants are exercisable over a period of four years, commencing
one year from March 10, 1998.

401(K) PLAN

The Company adopted a 401(k) savings plan (the "401(k) Plan") effective on
July 1, 1996. Eligible employees may participate in the 401(k) Plan.
Participants in the 401(k) Plan may defer compensation in an amount not in
excess of the annual statutory limit ($10,000 in 1998). The Company may make
matching contributions in the amount determined annually by the Board of
Directors. Matching contributions if any, vest after three years. Contributions
made for the years ended June 30, 1998 and 1997 were $74,000 and $37,000,
respectively.

10. STOCK OPTION PLAN

In October 1997, the Company adopted the 1997 Stock Option, Deferred Stock
and Restricted Stock Plan (the Stock Option Plan), which provides for a
committee of the Board of Directors (the Committee) to authorize the grant of
incentive stock options, nonqualified stock options, deferred stock, restricted
stock, stock appreciation rights and limited stock appreciation rights awards to
any officer or key employee of the Company. The Stock Option Plan authorizes the
grant of options to purchase, and awards of, an aggregate of 800,000 shares.
Incentive stock options are granted at a price not less than 100% (110% in the
case of incentive stock options granted to an employee who is deemed to own in
excess of 10% of the outstanding common stock) of the fair market value of the
shares of common stock at the time the option is granted. Incentive stock
options and nonqualified stock options become exercisable according to the terms
of the grant made by the Committee and remain exercisable until their specified
expiration date.

F-12
62
BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has issued nonqualified stock options to an employee for the
purchase of 163,265 shares of common stock at $6.10 per share. The options vest
ratably over a three year period beginning on October 1, 1997. The difference
between the fair market value of the common stock on the date of grant and the
exercise price of the options of $555,000 is being recorded as compensation
expense over the vesting period of the options. For the year ended June 30,
1998, compensation expense related to these options was $139,000.

The Company has issued nonqualified stock options to the non-employee board
members for the purchase of 24,000 shares of common stock at $9.50, the fair
value at the date of grant. The options vest ratably over a two year period
beginning on March 10, 1998.

The Company has issued incentive stock options for the purchase of 435,902
shares of common stock at $9.50 - $11.00 per share. The options vest ratably
over a three year period beginning on March 10, 1998.

The following summarizes stock option activity under the Company's stock
plan for the year ended June 30, 1998:

WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------

Options outstanding at beginning of fiscal year...... -- $ --
Option granted..................................... 623,167 $8.64
Options exercised.................................. -- --
Options cancelled.................................. (1,274) $9.50
-------
Options outstanding at end of fiscal year............ 621,893 $8.64
=======
Exercise price:
Per share for options exercised during fiscal
year............................................ n/a

OPTIONS
JUNE 30, 1998
--------------

Per share for options outstanding at end of fiscal year..... $6.10 - $11.00
Weighted average fair value of options granted
Nonqualified stock options................................ 5.32
Incentive stock options................................... 3.01
Weighted average contractual life of option outstanding (in
years).................................................... 9.58

As of June 30, 1998, no outstanding options were exercisable. Options
available for future grants under the plans were 178,107 as of June 30, 1998.

The Company currently follows Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its stock options. Under APB 25, when the exercise price of the
Company's employee stock options are equal to the underlying stock on the date
of grant, no compensation expense is recognized. The Company intends to follow
the provisions of APB 25 for future years.

Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS
123), and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:

1998
----

Expected life (years)....................................... 6
Interest rate............................................... 4.72%
Volatility.................................................. 0.31
Dividend yield.............................................. 0.00%

F-13
63
BNC MORTGAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

The estimated stock-based compensation cost calculated using the
assumptions indicated totaled $151,000 for the year ended June 30, 1998. The pro
forma net income resulting from the increased compensation cost was $7,085,000
($1.48 per share) for the year ended June 30, 1998.

11. SIGNIFICANT CUSTOMERS

The Company has entered into a number of transactions with two financial
companies which each account for more than 10% of the Company's loan sales.
These transactions include a whole loan agreement, under which the financial
companies agree to periodically purchase certain loans from the Company. During
the years ended June 30, 1998, 1997 and 1996, the Company sold a total of $744.4
million, $519.9 million and 156.6 million respectively of loans to these
investors under these agreements and recognized gross cash gains on sales of
approximately $30.5 million, $21.9 million and 4.2 million, respectively.

12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

YEAR ENDED JUNE 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------

Numerator
Net income....................................... $7,236,000 $7,542,000 $ 417,000
========== ========== ==========
Denominator
Shares used in computing basic earnings per
share......................................... 4,653,836 4,186,662 2,892,000
Effect of stock options treated as equivalents
under the treasury stock method............... 142,392 -- --
---------- ---------- ----------
Denominator for diluted earnings per share....... 4,796,228 4,186,662 2,892,000
========== ========== ==========
Basic earnings per share......................... $ 1.55 $ 1.80 $ 0.14
========== ========== ==========
Diluted earnings per share....................... $ 1.51 $ 1.80 $ 0.14
========== ========== ==========

13. SUBSEQUENT EVENTS

F-14
64

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------

- ---------------
* Incorporated by reference to, and all such exhibits have the corresponding
exhibit number filed as part of the Registration Statement on Form S-1, as
amended (File No. 333-38651) filed with the Securities and Exchange Commission
on October 24, 1997.